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<SEC-DOCUMENT>0000950134-02-007202.txt : 20020614
<SEC-HEADER>0000950134-02-007202.hdr.sgml : 20020614
<ACCEPTANCE-DATETIME>20020614123442
ACCESSION NUMBER: 0000950134-02-007202
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20020331
FILED AS OF DATE: 20020614
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ANCHOR BANCORP WISCONSIN INC
CENTRAL INDEX KEY: 0000885322
STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036]
IRS NUMBER: 391726871
STATE OF INCORPORATION: WI
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20006
FILM NUMBER: 02679046
BUSINESS ADDRESS:
STREET 1: 25 WEST MAIN ST
CITY: MADISON
STATE: WI
ZIP: 53703
BUSINESS PHONE: 6082528700
MAIL ADDRESS:
STREET 1: PO BOX 7933
CITY: MADISON
STATE: WI
ZIP: 53707-7933
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>c69617e10vk.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END MARCH 31, 2002
<TEXT>
<PAGE>
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
For the fiscal year ended March 31, 2002
--------------
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 (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 $22.69 closing price of the registrant's common stock as
of May 23, 2002, the aggregate market value of the 22,579,825 shares of the
registrant's common stock deemed to be held by non-affiliates of the registrant
was: $512.3 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 7, 2002, 25,021,821 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
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 23, 2002 (Part III, Items 10 to 13)
<PAGE>
[This page intentionally left blank]
<PAGE>
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, fsb (the "Bank"). The Corporation
also has a non-banking subsidiary, Investment Directions, Inc. ("IDI"), a
Wisconsin corporation, which invests in real estate partnerships. IDI has two
subsidiaries, Nevada Investment Directions, Inc. ("NIDI") and California
Investment Directions, Inc. ("CIDI"), both of which invest in real estate held
for development and sale.
The Bank was organized in 1919 as a Wisconsin-chartered savings
institution. In July 2000, the Bank converted to a federally-chartered savings
institution, and 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"), and the FDIC. 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 Investment
Services, Inc. ("AIS"), a Wisconsin corporation, offers some investments and
credit life and disability insurance to the Bank's customers and other members
of the general public. ADPC Corporation ("ADPC"), a Wisconsin corporation, 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 of the Bank's investment portfolio (primarily
mortgage-related securities).
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, the Fox Valley in east-central Wisconsin, the Milwaukee
metropolitan area in southeastern Wisconsin, as well as contiguous counties in
Iowa and Illinois. As of March 31, 2002, the Bank conducted business from its
headquarters and main office in Madison, Wisconsin and from 53 other
full-service offices located primarily in south-central and southwest Wisconsin
and two loan origination offices.
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.
1
<PAGE>
The principal factors that are used to attract deposit accounts and
that 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.
LENDING ACTIVITIES
GENERAL. At March 31, 2002 the Bank's net loans held for investment
totaled $2.6 billion, representing approximately 74.9% of its $3.5 billion of
total assets at that date. Approximately $2.3 billion or 80.3% of the Bank's
total loans held for investment at March 31, 2002 were secured by first liens on
real 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 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.
Non-real estate loans originated by the Bank consist of a variety of
consumer loans and commercial business loans. At March 31, 2002, the Bank's
total loans held for investment included $432.7 million or 15.3% of consumer
loans and $123.5 million or 4.4% of commercial business loans.
2
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table presents information
concerning the composition of the Bank's consolidated loans held for investment
at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------
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 $ 855,437 30.33% $ 872,718 34.17% $ 1,001,408 41.24%
Multi-family residential 388,919 13.79 305,009 11.94 291,917 12.02
Commercial real estate 686,237 24.33 501,640 19.64 388,678 16.01
Construction 288,377 10.22 266,712 10.44 210,660 8.68
Land 45,297 1.61 43,849 1.72 29,232 1.20
----------- ------ ----------- ------ ----------- ------
Total mortgage loans 2,264,267 80.28 1,989,928 77.90 1,921,895 79.15
----------- ------ ----------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity 226,134 8.02 271,733 10.64 243,124 10.01
Education 130,752 4.64 130,215 5.10 136,011 5.60
Other 75,808 2.69 72,274 2.83 65,686 2.71
----------- ------ ----------- ------ ----------- ------
Total consumer loans 432,694 15.34 474,222 18.57 444,821 18.32
----------- ------ ----------- ------ ----------- ------
Commercial business loans:
Loans 121,723 4.32 90,212 3.53 61,419 2.53
Lease receivables 1,803 0.06 -- 0.00 -- 0.00
----------- ------ ----------- ------ ----------- ------
Total commercial business loans 123,526 4.38 90,212 3.53 61,419 2.53
----------- ------ ----------- ------ ----------- ------
Gross loans receivable 2,820,487 100.00% 2,554,362 100.00% 2,428,135 100.00%
====== ====== ======
Contras to loans:
Undisbursed loan proceeds (157,667) (111,298) (97,092)
Allowance for loan losses (31,065) (24,076) (24,404)
Unearned net loan fees (4,286) (3,610) (3,528)
Discount on loans purchased (215) (371) (361)
Unearned interest (6) (31) (29)
----------- ----------- -----------
Total contras to loans (193,239) (139,386) (125,414)
----------- ----------- -----------
Loans receivable, net $ 2,627,248 $ 2,414,976 $ 2,302,721
=========== =========== ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 1,061,813 47.66% $ 1,032,116 50.07%
Multi-family residential 233,984 10.50 191,580 9.29
Commercial real estate 282,980 12.70 248,365 12.05
Construction 179,189 8.04 139,314 6.76
Land 17,309 0.78 12,503 0.61
------------- ------ ----------- ------
Total mortgage loans 1,775,275 79.69 1,623,878 78.78
------------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity 214,295 9.62 220,177 10.68
Education 130,254 5.85 125,503 6.09
Other 56,590 2.54 53,867 2.61
------------- ------ ----------- ------
Total consumer loans 401,139 18.01 399,547 19.38
------------- ------ ----------- ------
Commercial business loans:
Loans 51,403 2.31 37,861 1.84
Lease receivables -- 0.00 5 0.00
------------- ------ ----------- ------
Total commercial business loans 51,403 2.31 37,866 1.84
------------- ------ ----------- ------
Gross loans receivable 2,227,817 100.00% 2,061,291 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds (87,401) (68,686)
Allowance for loan losses (24,027) (25,400)
Unearned net loan fees (4,015) (4,137)
Discount on loans purchased (792) (1,016)
Unearned interest (16) (29)
------------- -----------
Total contras to loans (116,251) (99,268)
------------- -----------
Loans receivable, net $ 2,111,566 $ 1,962,023
============= ===========
</TABLE>
4
<PAGE>
The following table shows, at March 31, 2002, the scheduled contractual
maturities of the Bank'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 $ 11,140 $ 98,976 $ 93,611 $ 38,973 $ 52,324
After one year through
five years 59,251 527,417 101,798 208,102 66,776
After five years 785,046 448,763 138,265 185,619 4,426
---------- ---------- ---------- ---------- ----------
$ 855,437 $1,075,156 $ 333,674 $ 432,694 $ 123,526
========== ========== ========== ========== ==========
Interest rate terms on amounts
due after one year:
Fixed $ 283,879 $ 252,435 $ 63,109 $ 316,920 $ 30,332
========== ========== ========== ========== ==========
Adjustable $ 560,418 $ 723,745 $ 176,954 $ 76,801 $ 40,870
========== ========== ========== ========== ==========
</TABLE>
SINGLE-FAMILY RESIDENTIAL LOANS. Historically, savings institutions,
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, 2002, $855.4 million or 30.3% 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 nor guaranteed by a federal or state agency.
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, based on a designated index.
This is generally subject to a limit of 2% per adjustment and an aggregate 6%
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, 2002, approximately $571.6 million or 66.8% of the
Bank's permanent single-family residential loans held for investment consisted
of loans with adjustable interest rates. Also, as interest rates decline,
borrowers may refinance their mortgages into fixed-rate loans thereby prepaying
the balance of the loan prior to maturity.
The Bank continues to originate long-term, fixed-rate conventional
mortgage loans. The Bank generally sells current production of these loans with
terms of 15 years or more to the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), FHLB, and other
institutional investors, while keeping some of the 10-year term loans in its
portfolio. In order to provide a full range of products to its customers, the
Bank also participates in the loan origination programs of Wisconsin Housing and
Economic Development Authority ("WHEDA"), Wisconsin Department of Veterans
Affairs ("WDVA"). The Bank retains the right to service substantially all loans
that it sells.
5
<PAGE>
At March 31, 2002, approximately $283.9 million or 33.2% of the Bank's
permanent single-family residential loans held for investment consisted of loans
that provide for fixed rates of interest. 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. The Bank
originates multi-family loans that it typically holds in its loan portfolio.
Such loans 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, 2002, the Bank had $388.9 million
of loans secured by multi-family residential real estate and $686.2 million of
loans secured by commercial real estate. These represented 13.8% and 24.3% of
the Bank's total loans held for investment, respectively. The Bank generally
limits the origination of such loans to its primary 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 hotels, 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, based on a designated index, subject
to an initial fixed-rate for a one to five year period and an annual limit
generally of 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,
2002, construction loans amounted to $288.4 million or 10.2% of the Bank's total
loans held for investment. Land loans amounted to $45.3 million or 1.6% of the
Bank's total loans held for investment at March 31, 2002.
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, 2002, $432.7
million or 15.3% of the Bank'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. Education loans are generally guaranteed by a federal
governmental agency.
The largest component of the Bank's consumer loan portfolio is second
mortgage and home equity loans, which amounted to $226.1 million or 8.0% of
total loans at March 31, 2002. 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 $130.8 million or 4.6% of the Bank's total loans at March
31, 2002 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 annually in accordance with a designated
6
<PAGE>
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 $1.3 million of these education
loans during fiscal 2002.
The remainder of the Bank'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, 2002, the Bank's
approved credit card lines and the outstanding credit pursuant to such lines
amounted to $39.7 million and $4.9 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, 2002, commercial business loans amounted to $123.5 million
or 4.4% of the Bank's total loans held for investment. The Bank'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 published index.
Substantially all of such loans are secured and backed by the personal
guarantees of the individuals of the business.
NET FEE INCOME FROM LENDING ACTIVITIES. Loan origination and commitment
fees and certain direct loan origination costs are being deferred and the net
amounts are 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 seven
regional lending offices, certain of its branch offices and two loan origination
facilities. Loans may be approved by members of the Officers' 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. For loan requests of $1.5 million or less, loan approval authority is
designated to an Officers' Loan Committee and requires at least three of the
members' signatures. Senior Loan Committee members are authorized to approve
loan requests between $1.5 million and $3.0 million and approval requires at
least three of the members' signatures. Loan requests in excess of $3.0 million
must be approved by the Board of Directors.
The Bank's general policy is to lend up to 80% of the appraised value
or purchase price 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 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, 2002, the Bank had approximately $35.6 million of loans
that had loan-to-value ratios of greater Than 80% and did not have private
mortgage insurance for the portion of the loans 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 during the
underwriting process. Appraisals are performed in accordance with federal
regulations and policies.
7
<PAGE>
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 real estate and multi-family residential
loans is reviewed on a continuing basis (annually for loans of $1.0 million or
more, and bi-annually for loans of $750,000 to $1.0 million) 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,
flood 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, FHLB and other
investors in the secondary market. 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.
The volume of loans originated and sold is reliant on a number of factors but is
most influenced by general interest rates. In periods of lower interest rates,
such as fiscal 2002, customer demand for fixed-rate mortgages increases. In
periods of higher interest rates, such as occurred in fiscal 2000, customer
demand for fixed-rate mortgages declines. 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 range from 70% to 90% of
committed amounts. The Bank also periodically has used its loans to securitize
mortgage-backed securities.
The Bank generally services all originated loans that have been sold to
other investors. This includes the collection of payments, the inspection of the
secured property, and the disbursement of certain insurance and tax
advances on behalf of borrowers. The Bank recognizes a servicing fee when the
related loan payments are received. At March 31, 2002, the Bank was servicing
$2.3 billion of loans for others.
8
<PAGE>
The Bank is not an active purchaser of 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, 2002, approximately $50.2 million of mortgage loans were being serviced for
the Bank by others.
The following table shows the Bank's consolidated total loans
originated, purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
2002 2001 2000
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 2,571,984 $ 2,429,899 $ 2,245,897
Loans originated for investment:
Single-family residential (399,695) (339,027) 75,110
Multi-family residential 188,077 42,424 50,326
Commercial real estate 344,131 273,142 194,393
Construction and land 362,507 332,145 308,192
Consumer 181,782 203,929 216,419
Commercial business 67,390 71,982 38,617
----------- ----------- -----------
Total originations 744,192 584,595 883,057
----------- ----------- -----------
Loans purchased for investment:
Single-family residential -- -- --
Multi-family residential -- 330 950
Commercial real estate -- 766 242
----------- ----------- -----------
Total purchases -- 1,096 1,192
Total originations and purchases 744,192 585,691 884,249
Repayments (478,067) (331,007) (605,348)
Transfers of loans to held for sale -- (128,456) (81,530)
----------- ----------- -----------
Net activity in loans held for investment 266,125 126,228 197,371
----------- ----------- -----------
Loans originated for sale:
Single-family residential 1,097,655 579,699 228,830
Transfers of loans from held for investment -- 128,456 81,530
Sales of loans (1,068,757) (563,842) (249,399)
Loans converted into mortgage-backed
securities -- (128,456) (74,330)
----------- ----------- -----------
Net activity in loans held for sale 28,898 15,857 (13,369)
----------- ----------- -----------
Gross loans receivable at end of period $ 2,867,007 $ 2,571,984 $ 2,429,899
=========== =========== ===========
</TABLE>
- --------------------
(1) Includes loans held for sale and loans held for investment.
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 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.
9
<PAGE>
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, the value of the
collateral, 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 2002 if
the Bank's non-accrual loans at the end of the period had been current in
accordance with their terms during the period was $626,000. The amount of
interest income attributable to these loans and included in interest income
during fiscal 2002 was $180,000.
The following table sets forth information relating to delinquent loans
of the Bank and their relation to the Bank's total loans held for investment at
the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------
% 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 $17,647 0.63% $ 7,141 0.28% $ 3,224 0.13%
60 to 89 days 2,671 0.09 716 0.03 903 0.04
90 days and over 9,042 0.32 5,047 0.20 3,614 0.15
------- ---- ------- ---- ------- ----
Total $29,360 1.04% $12,904 0.51% $ 7,741 0.32%
======= ==== ======= ==== ======= ====
</TABLE>
The $16.5 million increase in past due loans was largely due to $11.8
million of single family loans and $5.4 million of commercial real estate loans
acquired in the Ledger merger. See Note 2 to the Consolidated Financial
Statements in Item 8 for a discussion of the Ledger merger.
There was one non-accrual loan with a carrying value of $1.0 million or
greater at March 31, 2002. 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.
See also Notes 1 and 5 to the Consolidated Financial Statements in Item 8.
NON-PERFORMING REAL ESTATE HELD FOR DEVELOPMENT AND SALE. At March 31,
2002, there were no properties in non-performing real estate held for
development and sale with a carrying value greater than $1.0 million. Non-
performing real estate held for development and sale decreased $278,000 during
the fiscal year. For additional discussion of real estate held for development
and sale that is not considered a part of non-performing
10
<PAGE>
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.
FORECLOSED PROPERTIES. At March 31, 2002, the Bank had no foreclosed
properties with a net carrying value of $1.0 million or more. Foreclosed
properties and repossessed assets increased $1.2 million during the fiscal year.
This increase was largely due to a $1.0 million single family property and a
$320,000 office-warehouse. The commercial property was acquired in the Ledger
merger. See Note 2 to the Consolidated Financial Statements in Item 8 for a
discussion of the Ledger merger.
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 losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for losses in the amount of 100% of the portion of the assets
classified loss or charge off such amount.
Classified assets include non-performing assets plus other loans and
assets, 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, 2002, the Bank's classified assets consisted of $24.7
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, 2001, substandard assets amounted to $6.8 million and no loans were
classified as special mention, doubtful or loss. The increase of $17.9 million
in classified assets was largely due to the acquisition of $12.1 million of
classified assets in the Ledger merger. See Note 2 to the Consolidated Financial
Statements in Item 8 for a discussion of the Ledger merger. Also contributing to
this increase, was the addition of a $4.2 million commercial business loan to a
software consultant and a $1.0 million single family property.
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 levels of
components of the loan portfolio and the amount, type of its classified assets,
and other factors. 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.
Additional discussion on the allowance for losses at March 31, 2002 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.
11
<PAGE>
SECURITIES - GENERAL
Management determines the appropriate classification of securities at
the time of purchase. Debt 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 stockholders' equity. For the years ended March 31, 2002 and 2001,
stockholders' equity increased $520,000 (net of deferred income tax payable of
$2.3 million), and increased $3.6 million (net of deferred income tax payable of
$1.5 million), respectively, to reflect 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, 2002.
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.
12
<PAGE>
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,
--------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------------
AMORTIZED AMORTIZED AMORTIZED
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 $ 43,261 $ 43,442 $ 9,081 $ 9,219 $ 13,748 $ 13,530
Mutual fund 10,587 10,582 5,996 6,005 14,247 14,190
Corporate stock and other 11,040 11,969 7,837 6,992 8,581 7,216
--------- ---------- --------- ---------- --------- ----------
$ 64,888 $ 65,993 $ 22,914 $ 22,216 $ 36,576 $ 34,936
Held To Maturity:
U.S. Government and federal
agency obligations $ 7,747 $ 7,897 $ 33,913 $ 34,096 $ 51,270 $ 49,971
Other securities -- -- -- -- -- --
--------- ---------- --------- ---------- --------- ----------
7,747 7,897 33,913 34,096 51,270 49,971
========= ========== ========= ========== ========= ==========
Total investment securities $ 72,635 $ 73,890 $ 56,827 $ 56,312 $ 87,846 $ 84,907
========= ========== ========= ========== ========= ==========
</TABLE>
For additional information regarding the Corporation's investment
securities, see the Corporation's Consolidated Financial Statements, including
Note 3 thereto included in Item 8.
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, 2002, the amortized cost of the Corporation's
mortgage-backed securities held to maturity amounted to $134.5 million and
included $121.9 million, $11.5 million and $1.1 million which are insured or
guaranteed by FNMA, FHLMC and GNMA, respectively. The adjustable-rate securities
included in the above totals for March 31, 2002, are $500,000, $1.7 million and
$1.1 million for FNMA, FHLMC and GNMA, respectively.
The fair value of the Corporation's mortgage-backed securities
available for sale amounted to $93.0 million at March 31, 2002, of which $3.5
million are five- and seven-year balloon securities, $74.6 million are 10-, 15-
and 30-year securities and $14.8 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, 2002, $9.7 million of the Corporation's
mortgage-backed securities available for sale and $52.8 million of the
Corporation's mortgage-backed securities held to maturity were pledged to secure
various obligations of the Corporation.
13
<PAGE>
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 Corporation'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"). At March 31, 2002, the Corporation's had $5.8 million
in mortgage-derivative securities held to maturity. The fair value of the
mortgage-derivative securities available for sale held by the Corporation
amounted to $52.3 million at the same date.
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
2002, 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 FIVE 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:
Mortgage-derivative securities $ -- 0.00% $ 433 6.97% $ 51,860 6.36% $ 52,293
Mortgage-backed securities 3,999 6.13 24,750 6.61 64,251 6.29 93,000
-------- ---- -------- ---- -------- ---- --------
3,999 6.13 25,183 6.62 116,111 6.32 145,293
-------- ---- -------- ---- -------- ---- --------
Held to Maturity:
Mortgage-derivative securities 143 6.62 3,708 6.23 1,925 6.00 5,776
Mortgage-backed securities 16,939 5.89 17,733 6.51 99,845 6.45 134,517
-------- ---- -------- ---- -------- ---- --------
17,082 5.89 21,441 6.46 101,770 6.44 140,293
-------- ---- -------- ---- -------- ---- --------
Mortgage-related securities $ 21,081 5.94% $ 46,624 6.55% $217,881 6.38% $285,586
======== ==== ======== ==== ======== ==== ========
</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 4 thereto, included in Item 8.
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.
14
<PAGE>
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 provide funds for
a specified fee. While brokered deposits are a good source of funds, they are
market rate driven and thus inherently have more liquidity and interest rate
risk. To mitigate this risk, the Bank's liquidity policy limits the amount of
brokered deposits to 10% of assets and to the total amount of borrowings. At
March 31, 2002, the Bank had $268.9 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 amount and maturities of the Bank's
certificates of deposit at March 31, 2002.
<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>
1.00% to 2.99% $ 86,932 $ 181,862 $ 33,350 $ 20 $ - $ 302,164
3.00% to 4.99% 385,964 97,228 208,661 43,139 26,869 761,861
5.00% to 6.99% 360,704 47,352 48,043 58,568 43,804 558,471
7.00% to 8.99% 8,043 486 740 - 160 9,429
9.00% to 10.99% - - 43 - - 43
Ledger PVA (1) - - - - - 4,956
--------- --------- ---------- ----------- -------- ----------
$ 841,643 $ 326,928 $ 290,837 $ 101,727 $ 70,833 $1,636,924
========= ========= ========== =========== ======== ==========
</TABLE>
(1) Ledger Present Value Adjustment (PVA) stems from the Bank's purchase of
Ledger Bank on November 10, 2001, and an adjustment was made to the market
values of certificate of deposit and core deposit accounts. The market value of
certificate of deposit accounts was determined by discounting cash flows using
current deposit rates for the remaining contractual maturity. The market value
of core deposits (checking, money market and passbook accounts) was determined
using discounted cash flows with estimated decay rates.
At March 31, 2002, the Bank had $203.8 million of certificates greater
than or equal to $100,000, of which $96.8 million are scheduled to mature within
three months, $40.1 million in over three months through six months, $38.4
million in over six months through 12 months and $28.5 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. The Bank has pledged a substantial
portion of its loans receivable and all of its investment in FHLB stock as
collateral for these advances. A portion of the Bank's mortgage-related
securities has also been pledged as collateral.
15
<PAGE>
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 utilized this source of funds during the year ended March
31, 2002 and may continue to do so in the future.
The Corporation has a short-term line of credit used in part to fund
IDI's partnership interests and investments in real estate held for development
and sale. This line of credit also funds other Corporation needs. The interest
is based on LIBOR (London InterBank Offering Rate), and is payable monthly and
each draw has a specified maturity. The final maturity of the line of credit is
in October 2002. See Note 8 to the Corporation's Consolidated Financial
Statements in Item 8 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,
-------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 569,500 4.78% $ 669,896 6.05% $ 649,046 5.73%
Repurchase agreements - 0.00 27,948 5.32 92,413 6.03
Other loans payable 52,090 3.62 42,754 7.33 15,400 7.24
</TABLE>
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,
--------------------------------------
2002 2001 2000
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum month-end balance:
FHLB advances $431,296 $498,446 $378,450
Repurchase agreements 32,101 116,551 92,413
Other loans payable 52,174 43,015 15,400
Average balance:
FHLB advances 228,523 455,828 324,366
Repurchase agreements 8,233 83,310 59,756
Other loans payable 46,743 35,224 9,669
</TABLE>
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly owned non-banking
subsidiary of the Corporation that has invested in various limited partnerships
and subsidiaries funded by borrowings from the Corporation. The Corporation's
investment in IDI at March 31, 2002 amounted to $2.9 million as compared to $3.2
million for the year ended March 31, 2001. IDI had total assets of $38.6 million
and net income of $950,000. This compares to total assets of $37.5 million and a
net loss of $2.7 million for the prior year ended March 31, 2001. The increase
in income is largely attributable to income from the sale of homes at the Davsha
subsidiary, a subsidiary of IDI.
16
<PAGE>
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 such as Oakmont. NIDI was organized in the state of Nevada. IDI's
investment in NIDI at March 31, 2002 amounted to $4.5 million, unchanged from
the prior year. For the year ended March 31, 2002, NIDI had total assets of $4.9
million and net income of $36,000. This compares to total assets of $4.7 million
and net income of $68,000 for the prior year ended March 31, 2001.
OAKMONT. Oakmont became a wholly owned non-banking subsidiary of NIDI
and IDI in January 2000. Oakmont was organized in the state of Texas. Oakmont is
a limited partner in Chandler Creek Business Park Round Rock Texas, a joint
venture partnership formed to develop an industrial park located in Round Rock,
Texas. The office park consists of four office warehouse buildings totaling
163,000 square feet. The project is currently in the lease up stage and is also
being marketed for sale. At March 31, 2002, Chandler Creek had a carrying value
at Oakmont of $3.1 million, and Oakmont had extended $2.0 million to the
unrelated partner in Chandler Creek. This compares to a carrying value of $3.2
million and a loan to the partner of $1.7 million for the prior year ended March
31, 2001. For the year ended March 31, 2002, Oakmont had total assets of $5.2
million and a net loss of $200,000. This compares to total assets of $4.9
million and a net loss of $150,000 at March 31, 2001.
S&D INDIAN PALMS, LTD. Indian Palms is a wholly owned non-banking
subsidiary of IDI organized in the state of California which owns a golf resort
and land for residential lot development in California. Indian Palms sells land
to Davsha who in turn sells land to its subsidiaries and subsequently to its
real estate partnerships for lot development. As a result of these land sales,
Indian Palms had a deferred gain of $960,000 as of March 31, 2002. Gains will be
realized as fully developed lots are sold to outside parties. IDI's investment
in Indian Palms at March 31, 2002 amounted to ($2,640,000). IDI's investment in
Indian Palms at March 31, 2001 amounted to ($724,000). For the year ended March
31, 2002, Indian Palms had total assets of $31.9 million and a net loss of $2.7
million. This compares to total assets of $28.9 million and a net loss of $1.4
million for the year ended March 31, 2001. Indian Palms has borrowed $5.2
million from another bank, which is secured by the land.
CALIFORNIA INVESTMENT DIRECTIONS, INC. CIDI is a wholly owned
non-banking subsidiary of IDI formed in April 2000 to purchase and hold the
general partnership interest in S&D Indian Palms and a minority interest in
Davsha, LLC. CIDI was organized in the state of California. IDI's investment in
CIDI at March 31, 2002 amounted to $214,000 compared to an investment in CIDI at
March 31, 2001 of ($114,000). For the year ended March 31, 2002, CIDI had total
assets of $290,000 and net income of $160,000. This compares to total assets of
($12,000) and a net loss of $115,000 for the year ended March 31, 2001.
DAVSHA, LLC. Davsha is a wholly owned non-banking subsidiary of IDI and
CIDI. Davsha was organized in the state of California where it purchased land
from Indian Palms and develops residential housing for sale. For the year ended
March 31, 2002, Davsha had total assets of $12.3 million and net income of $1.5
million. This compares to total assets of $11.3 million and a net loss of
$758,000 for the year ended March 31, 2001.
Davsha has three wholly owned non-banking subsidiaries, Davsha II,
Davsha III and Davsha IV. Each of these subsidiaries formed partnerships with
developers and purchased lots from Davsha. Also, Davsha has borrowed $4.1
million from another bank for further lot development, which is secured by the
lots.
DAVSHA II, LLC. Davsha II is a wholly owned non-banking subsidiary of
Davsha formed in April 2000. Davsha II was organized in the state of California.
Davsha II is a limited partner in Paragon Indian Palms Associates, a partnership
formed in February 2000, to develop residential housing. Davsha's investment in
Davsha II at March 31, 2002, amounted to $210,000 as compared to $50,000 at
March 31, 2001. For the year ended March 31, 2002, Davsha II had total assets of
$1.7 million and net income of $160,000 as compared to total assets of $1.5
million and a net loss of $132,000 for the year ended March 31, 2001. Paragon
has $3.2 million in outside borrowings guaranteed by IDI.
DAVSHA III, LLC. Davsha III is a wholly owned non-banking subsidiary of
Davsha formed in February 2001. Davsha III was organized in the state of
California and is a limited partner in Indian Palms 147, LLC., a partnership
formed in February 2001 to develop residential housing. Davsha's investment in
Davsha III at March 31, 2002 amounted to $20,000 as compared to $600 for the
year ended March 31, 2001. Davsha III had total assets
17
<PAGE>
of $3.2 million and net income of $20,000 as compared to total assets of $37,000
and a net loss of $400 for the year ended March 31, 2001. Indian Palms 147 has
$4.4 million in outside borrowings guaranteed by IDI.
DAVSHA IV, LLC. Davsha IV is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha III was organized in the state of California
and is a limited partner in DH Indian Palms I, LLC., a partnership formed in
July 2001 to develop residential housing. Davsha's investment in Davsha IV at
March 31, 2002, amounted to ($20,000). For the year ended March 31, 2002, Davsha
IV had total assets of $1.5 million and a net loss of $20,000. DH Indian Palms I
had $1.8 million in outside borrowings guaranteed by IDI at March 31, 2002.
Together, IDI, NIDI, CIDI, Indian Palms, Davsha, Davsha II, Davsha III,
Davsha IV, and Oakmont 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 $760,000 and non-performing real estate held for development and
sale of $70,000, the segment represents $46.2 million of total assets for that
category. For further discussion of the real estate held for development and
sale segment, see Note 15 to the Corporation's Consolidated Financial Statements
in Item 8.
In fiscal 2002, IDI's non-subsidiary partnership located in Tampa Bay,
Florida sold 50% of its interest to a Florida developer. IDI transferred a
portion of its interest and now owns a 50% interest in Dune Golfers Club, LLC
and Dune Development, LLC with the developer. Dune Golfers Club is the golf
operation and Dune Development owns the residential lots. Dune Development plans
to develop the lots for sale. IDI also transferred its remaining interest into
IDI Holdings, LLC Florida and IDI Commercial, LLC Florida. IDI Holdings holds
50% of Seville Development Holdings, LLC, the owner of the undeveloped land and
golf course real estate. At present, no plans have been made to develop the
land. Some tracts may be sold in the future. IDI Commercial holds 50% of Parkway
98 Holdings, LLC, the owner of all the undeveloped commercial and multi-family
real estate. It plans to develop these parcels in the future.
As of March 31, 2002, IDI's total investment in the Florida project is
$3.8 million. This compares to $6.5 million for the prior year ended March 31,
2001. The project reported a net loss of $225,000 for the year ended March 31,
2002 as compared to a net loss of $580,000 for the year ended March 31, 2001. As
a result of the changes in ownership interest and reorganization, the Florida
project had a deferred gain of $820,000 as of March 31, 2002. This gain will be
realized as lots are developed and sold. IDI holds three lines of credit with
the Florida operation totaling $340,000 as of March 31, 2002 as compared to $1.6
million in notes as of March 31, 2001. This represents a $1.3 million reduction
of debt from the prior year, also resulting from the changes in organization of
the Florida project. IDI has also funded $340,000 to their partner in this
project.
The balance of assets at IDI includes loans to finance the acquisition
and development of property for various partnerships and subsidiaries. At March
31, 2002, IDI had extended $19.3 million to Indian Palms, $4.3 million to
Davsha, $1.3 million to Davsha II, $730,000 to Davsha III, and $200,000 to CIDI
as compared to $23.8 million to Indian Palms, $1.8 million to Davsha, and $1.2
million to Davsha II at March 31, 2001. These amounts are eliminated in
consolidation.
At March 31, 2002, the Corporation had extended $32.4 million to IDI to
fund various partnership and subsidiary investments. This represents a decrease
of $2.5 million from borrowings of $34.9 million at March 31, 2001. These
amounts are eliminated in consolidation.
At March 31, 2002, the Corporation had extended $250,000 to NIDI to
fund various partnership investments. NIDI had borrowings from the Corporation
of $190,000 as of March 31, 2001. These amounts are eliminated in consolidation.
At March 31, 2002, IDI had a general valuation allowance of $650,000 as
compared to an allowance of $675,000 for the prior year ended March 31, 2001. As
of March 31, 2002 and March 31, 2001, there have been no charge-offs for any of
the partnerships or subsidiaries within IDI. Per management review, it was
determined that the allowance be decreased by $25,000.
18
<PAGE>
ANCHOR INVESTMENT SERVICES, INC. AIS is a wholly owned subsidiary of
the Bank that offers fixed and variable annuities as well as mutual funds to its
customers and members of the general public. AIS also processes stock and bond
trades and provides credit life and disability insurance services to the Bank's
consumer and mortgage loan customers as well as some group and individual
coverage. For the year ended March 31, 2002, AIS had a net loss of $90,000 as
compared to a net profit of $125,000 for the year ended March 31, 2001. The
Bank's investment in AIS amounted to $140,000 at March 31, 2002 as compared to
$193,000 at March 31, 2001.
ADPC CORPORATION. ADPC is a wholly owned subsidiary of the Bank that
holds and develops certain of the Bank's foreclosed properties. The Bank's
investment in ADPC at March 31, 2002 amounted to $650,000 as compared to $1.3
million at March 31, 2001. The decrease in the investment in ADPC is
attributable to the sale of Normandale Lakes, a condominium project in
Minnesota, in August 2001 which had a carrying value of $260,000. ADPC recorded
a loss of $70,000 on the sale. Also, ADPC paid down its equity from accumulated
cash to the Bank in April and December of 2001. These equity pay downs totaled
$600,000. ADPC had a net loss of $50,000 for the year ended March 31, 2002 as
compared to a net loss of $191,000 for the year ended March 31, 2001.
ANCHOR INVESTMENT CORPORATION. AIC is an operating subsidiary of the
Bank that 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). The Bank also sells commercial
real estate and multi-family loans to AIC in the form of loan participations
with the Bank retaining servicing and charging a servicing fee of .125%. 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
$696.0 million at March 31, 2002 as compared to $610.2 million at March 31,
2001. AIC had net income of $27.3 million for the year ended March 31, 2002 as
compared to $23.3 million for the year ended March 31, 2001. The Bank had
outstanding notes to AIC of $151.0 million with a weighted average rate of 4.96%
as of March 31, 2002 as compared to $89.0 million at March 31, 2001, with a
weighted average rate of 9.03% and maturities during the next six months of
fiscal 2003.
EMPLOYEES
The Corporation had 740 full-time employees and 186 part-time employees
at March 31, 2002. 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.
19
<PAGE>
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.
As a unitary savings and loan holding company in existence on or before
May 4, 1999, 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.
THE BANK
The Bank is a federally chartered savings institution, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. The Bank is subject to broad 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.
REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive authority
over the operations of all insured savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The examiners may
require the Bank to provide for higher general or specific loan loss allowances.
The last regular examination of the Bank by the OTS was as of September 30,
2001.
Savings institutions are required by OTS regulations to pay assessments
to the OTS to fund the operations of the OTS. The general assessment, paid on a
semiannual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's semi-annual OTS assessment for the
six months ending June 30, 2002 was $256,000.
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 established a comprehensive
framework of activities that the entities can engage in and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies. Such policies include classification of assets, and the establishment
of adequate loan loss reserves for regulatory purposes.
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<PAGE>
QUALIFIED THRIFT LENDER REQUIREMENT. In order for the Bank to exercise
the powers granted to savings associations, it must qualify as a qualified
thrift lender ("QTL"). Under the Home Owners' Loan Act, as amended, ("HOLA") and
OTS regulations, a savings institution is required to maintain a level of
qualified thrift investments equal to at least 65% of its "portfolio assets" (as
defined by statute) on a monthly basis for nine out of 12 months per calendar
year or qualify as a domestic building and loan association as defined by the
Internal Revenue Code of 1986. The Bank has chosen to comply with the QTL test
by maintaining the required level of qualified thrift investments. Qualified
thrift investments for purposes of the QTL test consist primarily of residential
mortgages and related investments. As of March 31, 2002, the Bank was in
compliance with the QTL test.
NEW FINANCIAL SERVICES ACT. On November 12, 1999, the Financial
Services Modernization Act ("Act"), which could have a far-reaching impact on
the financial services industry, was signed into law. The intent of the law is
to increase competition in the financial services area and includes repealing
sections of the 1933 Glass-Steagal Act. The Act authorizes affiliations between
banking, securities and insurance firms and authorizes bank holding companies
and national banks to engage in a variety of new financial activities. Under the
Act, a bank holding company that qualifies as and elects to become a financial
holding company may engage in any activity stipulated by the Act under the
regulation of the Federal Reserve. The Act restricts the chartering and
transferring of unitary thrift holding companies, although it does not restrict
the operations of unitary holding companies in existence prior to May 4, 1999
that continue to meet the QTL test and control only a single savings
institution. The Corporation and the Bank presently meet these requirements. The
Act also imposes a number of consumer protections that generally greatly limit
disclosure of customer information to non-affiliated third parties.
FEDERAL REGULATIONS. The Bank is subject to federal regulations which
address various issues including, but not limited to, insurance of deposits,
capital requirements, and liquidity.
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to applicable
limits under the SAIF of the FDIC. The FDIC regulations assign institutions to a
particular capital group based on the level of an institution's capital -- "well
capitalized," "adequately capitalized," or "undercapitalized." These three
groups are then divided into three subgroups reflecting varying levels of
supervisory concern, from those institutions considered to be healthy to those
that are considered to be of substantial supervisory concern. This matrix
results in nine assessment risk classifications, with well capitalized,
financially sound, institutions paying lower rates than are paid by
undercapitalized institutions likely to pose a risk of loss to the insurance
fund absent corrective actions.
Beginning January 1, 1997, effective SAIF rates generally range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members paid
6.4 basis points to fund the Financing Corporation ("FICO"), while BIF member
institutions paid approximately 1.3 basis points. Thereafter, BIF and SAIF
members are assessed at the same rate by FICO. The FICO assessment rate for the
first quarter of 2002 was 1.82 basis points.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted
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<PAGE>
assets by multiplying each asset and off-balance sheet item by various risk
factors as determined by the OTS, which range from 0% for cash to 100% for
delinquent loans, property acquired through foreclosure, commercial loans, and
other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets. For additional discussion of regulatory
capital requirements, refer to Note 9 to the Consolidated Financial Statements
in Item 8 included herewith.
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 OTS regulations, 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,
such as the Bank, 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 payment of a dividend or a capital distribution.
LIQUIDITY. In December 2000, legislation was enacted that removed the
provision that authorized the Director of the OTS to establish a liquidity
requirement of any amount within the range of 4% to 10% of a savings
association's average daily balance of net withdrawable deposits plus short-term
borrowings depending upon economic conditions and the deposit flows of member
institutions. In revising the OTS Regulations to conform with the recent
legislation, the OTS removed the specific liquidity requirement but adopted a
rule that requires each savings association and service corporation to maintain
sufficient liquidity to ensure its safe and sound operation. At March 31, 2002,
the Bank believes that it was in compliance with these liquidity requirements.
The Bank's liquidity ratio was 17.16% at March 31, 2002.
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, 2002, the Bank
was in compliance with these requirements. The OTS has permitted these reserves
to be used to satisfy liquidity requirements. 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.
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<PAGE>
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Bank is required to comply with Sections 23A and 23B of the Federal
Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates.
Generally, Section 23A limits the extent to which the insured institution or its
subsidiaries may engage in certain covered transactions with an affiliate to an
amount equal to 10% of such institution's capital and surplus, place an
aggregate limit on all such transactions with affiliates to an amount equal to
20% of such capital and surplus, and Section 23B requires that all such covered
transactions and certain additional transactions be on terms substantially the
same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guaranty and similar other types of
transactions. Exemptions from 23A or 23B may be granted only by the FRB. The
Corporation has not been significantly affected by such restrictions or
transactions with affiliates.
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 members (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, 2002, the Bank owned $53.3 million in FHLB stock,
which is in compliance with this requirement. The Bank received dividends on its
FHLB stock for fiscal 2002 of $2.6 million as compared to $2.7 million for
fiscal 2001.
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.
23
<PAGE>
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 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, 2002, the Bank's bad debt reserves for
tax purposes totaled approximately $46.1 million. (See Note 11 to the
Consolidated Financial Statements for additional discussion).
STATE
Under current law, the state of Wisconsin imposes a corporate franchise
tax of 7.9% on the separate taxable incomes of the members of the Corporation's
consolidated income tax group except AIC and NIDI, both located in Nevada.
Presently, the income of AIC and NIDI are only subject to taxation in Nevada,
which currently does not impose a corporate income or franchise tax.
ITEM 2. PROPERTIES
At March 31, 2002, The Bank conducted its business from its
headquarters and main office at 25 West Main Street, Madison, Wisconsin and 53
other full-service offices and two lending only offices. The Bank owns 38 of its
full-service offices, leases the land on which three such offices are located,
and leases the remaining 13 full-service offices. In addition, the Bank leases
its two loan-origination facilities. The leases expire between 2002 and 2016.
The aggregate net book value at March 31, 2002 of the properties owned or
leased, including headquarters, properties and leasehold improvements, was $22.5
million. See Note 6 to the Corporation's Consolidated Financial Statements,
included as Item 8, for information regarding the premises and equipment.
24
<PAGE>
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, 2002, 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,
National Market. The trading symbol is "ABCW ". As of March 31, 2002, there were
approximately 2,900 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 2002 and 2001.
<TABLE>
<CAPTION>
CASH
QUARTER ENDED HIGH LOW DIVIDEND
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 2002 $ 21.750 $ 17.040 $ 0.083
December 31, 2001 18.240 15.270 0.083
September 30, 2001 18.510 14.910 0.083
June 30, 2001 15.900 13.060 0.075
March 31, 2001 16.750 12.875 0.075
December 31, 2000 16.188 14.000 0.075
September 30, 2000 17.000 14.688 0.075
June 30, 2000 16.750 13.688 0.070
</TABLE>
For information regarding restrictions on the payments of dividends by
the Bank, see "Item 1. Business -- Regulation -- Limitations on Dividends and
Other Capital Distributions" in this report.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
AT OR FOR YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Earnings per share:
Basic $ 1.59 $ 1.19 $ 0.80 $ 1.26 $ 1.06
Diluted 1.55 1.16 0.78 1.19 1.01
Interest income 225,701 228,647 202,594 194,807 187,392
Interest expense 128,454 148,096 119,393 114,535 110,893
Net interest income 97,247 80,551 83,201 80,272 76,499
Provision for loan losses 2,485 945 1,306 1,017 1,250
Non-interest income 21,615 13,503 14,390 22,019 15,882
Non-interest expenses 59,531 51,450 61,187 52,426 49,279
Income taxes 20,479 14,682 15,596 18,607 15,507
Net income 36,367 26,977 19,502 30,241 26,345
Total assets 3,507,076 3,127,474 2,911,152 2,663,718 2,517,080
Investment securities 73,740 56,129 86,206 87,722 80,460
Mortgage-related securities 285,586 379,159 300,519 258,489 254,389
Loans receivable held for
investment, net 2,627,248 2,414,976 2,302,721 2,111,566 1,962,023
Deposits 2,553,987 2,119,320 1,897,369 1,835,416 1,710,980
Notes payable to FHLB 569,500 669,896 649,046 517,695 508,145
Other borrowings 52,090 70,702 107,813 55,264 55,765
Stockholders' equity $ 277,512 $ 219,612 $ 217,215 $ 220,287 $ 202,868
Shares outstanding 24,950,258 22,814,923 24,088,147 23,832,165 23,791,787
Book value per share
at end of period $11.12 $9.63 $9.02 $9.24 $8.53
Dividends paid per share 0.32 0.30 0.25 0.20 0.16
Dividend payout ratio 20.28% 24.79% 31.25% 15.48% 15.09%
Yield on earning assets 7.15 7.89 7.56 7.68 7.94
Cost of funds 4.29 5.31 4.79 4.84 5.01
Interest rate spread 2.86 2.58 2.77 2.84 2.93
Net interest margin 3.08 2.78 3.10 3.15 3.23
Return on average assets 1.11 0.88 0.71 1.16 1.08
Return on average equity 14.89 12.48 8.92 14.44 13.24
Average equity to average assets 7.45 7.09 7.97 8.04 8.15
</TABLE>
26
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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, 2002 and 2001
GENERAL. Net income increased $9.4 million to $36.4 million in
fiscal 2002 from $27.0 million in fiscal 2001. The primary component of this
increase in earnings for fiscal 2002, as compared to fiscal 2001, was an
increase of $15.2 million in net interest income after the provision for loan
losses. In addition, non-interest income increased $8.1 million. These increases
were partially offset by an increase in non-interest expense of $8.1 million and
an increase in tax expense of $5.8 million. The returns on average assets and
average stockholders' equity for fiscal 2002 were 1.11% and 14.89%,
respectively, as compared to .88% and 12.48%, respectively, for fiscal 2001.
NET INTEREST INCOME. Net interest income increased by $16.7 million
during fiscal 2002 due to a larger increase in the volume of interest-earning
assets compared to the volume of interest-bearing liabilities coupled with a
greater decrease in rates of interest-bearing liabilities as compared to the
decrease in rates of interest-earning assets. The average balances of
interest-earning assets and interest-bearing liabilities increased to $3.16
billion and $3.00 billion in fiscal 2002, respectively, from $2.90 billion and
$2.79 billion, respectively, in fiscal 2001. The ratio of average
interest-earning assets to average interest-bearing liabilities increased to
1.05% in fiscal 2002 from 1.04% in fiscal 2001. The average yield on
interest-earning assets (7.15% in fiscal 2002 versus 7.89% in fiscal 2001)
decreased, as did the average cost on interest-bearing liabilities (4.29% in
fiscal 2002 versus 5.31% in fiscal 2001). The net interest margin increased to
3.08% in fiscal 2002 from 2.78% in fiscal 2001 and the interest rate spread
increased to 2.86% from 2.58% in fiscal 2002 and 2001, respectively. The
increase in the net interest margin is reflective of a decrease in the cost of
funds, offset by a smaller decrease in yields on loans as interest rates
decreased. 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 decreases in the volume of
interest-earning liabilities increased net interest
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income in fiscal 2002 by approximately $8.5 million. In addition, there was a
$5.2 million increase in net interest income caused by the combination of rate
and rate/volume changes.
PROVISION FOR LOAN LOSSES. Provision for loan losses increased $1.5
million from $950,000 in fiscal 2001 to $2.5 million in fiscal 2002 based on
management's ongoing evaluation of asset quality. There was an increase in net
charge-offs of $2.7 million in overall loans in fiscal 2002, primarily due to
increased commercial business loan charge-offs, however the quality of the loan
portfolio continues to be good. The Corporation's allowance for loan losses
increased $7.0 million from $24.1 million at March 31, 2001 to $31.1 million at
March 31, 2002. This amount represented 1.08% of total loans at March 31, 2002,
as compared to .94% of total loans at March 31, 2001. 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 $8.1 million to
$21.6 million for fiscal 2002 compared to $13.5 million for fiscal 2001
primarily due to an increase of $5.8 million in gain on sale of loans. This
increase was largely due to the lower interest rate environment which resulted
in significantly higher levels of refinancing activity. This resulted in
increased mortgage servicing rights gains due to increased loan sales. Net
income from operations of real estate investments also increased $2.4 million
largely due to increased lot sales. Other non-interest income, which includes a
variety of loan fee and other miscellaneous fee income, also increased $1.1
million for fiscal 2002. Service charges on deposits increased $700,000
essentially due to a growth in deposits and net gain on sale of investments and
securities increased $500,000 for fiscal 2002. Partially offsetting these
increases were decreases in other categories. Loan servicing income decreased
$2.0 million due to increased amortization of mortgage servicing rights and
income from insurance commissions decreased $320,000 due to decreased sales.
NON-INTEREST EXPENSE. Non-interest expense increased $8.1 million to
$59.5 million for fiscal 2002 compared to $51.5 million for fiscal 2001 as a
result of several factors. The majority of the increase was attributed to an
increase in compensation expense of $4.1 million, largely due to an increase in
incentive compensation resulting from increased loan production. Other
non-interest expense increased $1.9 million, largely due to the partial
impairment of three securities, and increases in postage, office supplies,
retail and other expenses. In addition, furniture and equipment expense
increased $740,000 in fiscal 2002, primarily due to normal replacement costs and
increased contractual services, and data processing expense increased $700,000.
Occupancy expense increased $450,000 and marketing expense increased $130,000
during this fiscal year.
INCOME TAXES. Income tax expense increased $5.8 million for fiscal
2002 as compared to fiscal 2001. The effective tax rate for fiscal 2002 was
36.03% as compared to 35.24% for fiscal 2001. See Note 11 to the Consolidated
Financial Statements included in Item 8.
Comparison of Years Ended March 31, 2001 and 2000
GENERAL. Net income increased $7.5 million to $27.0 million in
fiscal 2001 from $19.5 million in fiscal 2000. The primary component of this
increase in earnings for fiscal 2001, as compared to fiscal 2000, was a decrease
of $9.7 million in non-interest expense. This was partially offset by a decrease
of $2.3 million in net interest income after the provision for loan losses. The
returns on average assets and average stockholders' equity for fiscal 2001 were
...88% and 12.48%, respectively, as compared to .71% and 8.92%, respectively, for
fiscal 2000.
NET INTEREST INCOME. Net interest income decreased by $2.7 million
during fiscal 2001 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 $2.90 billion and $2.79 billion in
fiscal 2001, respectively, from $2.68 billion and $2.49 billion, respectively,
in fiscal 2000. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 1.04% in fiscal 2001 from 1.07% in
fiscal 2000. The average yield on interest-earning assets (7.89% in fiscal 2001
versus 7.56% in fiscal 2000) increased, as did the average cost on
interest-bearing liabilities (5.31% in fiscal 2001 versus 4.79% in fiscal 2000).
The net interest margin decreased to 2.78% for fiscal 2001 from 3.10% for fiscal
2000 and the interest rate spread decreased to 2.58% from 2.77% for fiscal 2001
and 2000, respectively. The decrease in the net interest margin is reflective of
an increase in the cost of
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funds, offset by increased yields on loans as rates rise. 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 liabilities
decreased net interest income in fiscal 2001 by approximately $1.2 million. In
addition, there was a $1.4 million decrease in net interest income as a result
of rate and rate/volume changes.
PROVISION FOR LOAN LOSSES. Provision for loan losses decreased from
$1.3 million in fiscal 2000 to $950,000 in fiscal 2001 based on management's
ongoing evaluation of asset quality. There was a slight increase in net
charge-offs of $340,000 in overall loans in fiscal 2001, primarily due to
increased mortgage loan charge-offs, and the quality of the loan portfolio
continues to be good. The Corporation's allowance for loan losses decreased
slightly from $24.4 million at March 31, 2000 to $24.1 million at March 31,
2001. This amount represented .94% of total loans at March 31, 2001, as compared
to 1.00% of total loans at March 31, 2000. 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 $890,000 to $13.5
million for fiscal 2001 compared to $14.4 million for fiscal 2000 primarily due
to the decrease of $3.5 million in net income from operations of real estate
investments. This decrease was largely due to decreased resort and golf net
income at the partnerships and losses on the sale of four condominium units in a
development in Bloomington, Minnesota. Other non-interest income, which includes
a variety of loan fee and other miscellaneous fee income, also decreased
$120,000 for fiscal 2001. Partially offsetting these decreases were increases in
other categories. Th