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<SEC-DOCUMENT>0000950137-04-004761.txt : 20040610
<SEC-HEADER>0000950137-04-004761.hdr.sgml : 20040610
<ACCEPTANCE-DATETIME>20040610111824
ACCESSION NUMBER: 0000950137-04-004761
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20040331
FILED AS OF DATE: 20040610
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: 04857425
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>c85670e10vk.txt
<DESCRIPTION>ANNUAL REPORT
<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, 2004
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 Identification No.)
of incorporation or organization)
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]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). [X]
As of September 30, 2003, the aggregate market value of the 20,314,873
shares of the registrant's common stock deemed to be held by non-affiliates of
the registrant was $477.0 million, based upon the closing price of $23.48 per
share of common stock as reported by the Nasdaq Stock Market, National Market
System on such date. 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 4, 2004, 22,983,200 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 27, 2004 (Part III, Items 10 to 13).
<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 ("FHLB") of Chicago, 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 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; and 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).
The Corporation maintains a web site at www.anchorbank.com. All the
Corporation's filings under the Exchange Act are available through that web
site, free of charge, including copies of Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports, on the date that the Corporation files those materials with, or
furnishes them to, the SEC.
CAUTIONARY FACTORS
This Form 10-K contains or incorporates by reference various
forward-looking statements concerning the Corporation's prospects that are based
on the current expectations or beliefs of management. Forward-looking statements
may also be made by the Corporation from time to time in other reports and
documents as well as oral presentations. When used in written documents or oral
statements, the words "anticipate," "believe," "estimate," "expect," "objective"
and similar expressions and verbs in the future tense, are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; increased competition and
other effects of deregulation and consolidation of the financial
1
<PAGE>
services industry; monetary and fiscal policies of the federal government;
deposit flows; disintermediation; the cost of funds; general market rates of
interest; interest rates or investment returns on competing investments; demand
for loan products; demand for financial services; changes in accounting policies
or guidelines; general economic developments; acts of terrorism and developments
in the war on terrorism; and changes in the quality or composition of loan and
investment portfolios. See also the factors regarding future operations
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below, particularly those under the caption "Risk
Factors."
MARKET AREA
The Bank's primary market area consists of the metropolitan area of
Madison, Wisconsin, the suburban communities of Dane County, Wisconsin,
south-central 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, 2004, the Bank conducted business from its
headquarters and main office in Madison, Wisconsin and from 56 other
full-service offices located primarily in south-central and southwest Wisconsin
and two loan origination offices.
COMPETITION
The Bank encounters strong competition in attracting both loan and deposit
customers. Such competition includes banks, savings institutions, mortgage
banking companies, credit unions, finance companies, mutual funds, insurance
companies and brokerage and investment banking firms. The Bank's market area
includes branches of several commercial banks that are substantially larger in
terms of loans and deposits. Furthermore, tax exempt credit unions operate in
most of the Bank's market area and aggressively price their products and
services to a large portion of the market. The Corporation's profitability
depends upon the Bank's continued ability to successfully maintain and increase
market share.
The origination of loans secured by real estate is the Bank's primary
business and principal source of profits. If customer demand for real estate
loans decreases, the Bank's income could be affected because alternative
investments, such as securities, typically earn less income than real estate
secured loans. Customer demand for loans secured by real estate could be reduced
by a weaker economy, an increase in unemployment, a decrease in real estate
values, or an increase in interest rates.
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, 2004, the Bank's net loans held for investment
totaled $3.1 billion, representing approximately 80.5% of its $3.8 billion of
total assets at that date. Approximately $2.6 billion, or 78.7%, of the Bank's
total loans held for investment at March 31, 2004 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, 2004, the Bank's
total loans held for investment included $544.0 million, or 16.5%, of consumer
loans and $156.6 million, or 4.8%, 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,
--------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------
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 $ 748,216 22.75% $ 724,900 24.44% $ 855,437 30.33%
Multi-family residential 521,646 15.86 474,678 16.00 388,919 13.79
Commercial real estate 801,841 24.38 747,682 25.20 686,237 24.33
Construction 392,713 11.94 331,338 11.17 288,377 10.22
Land 123,823 3.76 47,951 1.62 45,297 1.61
---------- ------ ---------- ------ ---------- -------
Total mortgage loans 2,588,239 78.70 2,326,549 78.43 2,264,267 80.28
---------- ------ ---------- ------ ---------- -------
Consumer loans:
Second mortgage and home equity 290,139 8.82 269,990 9.10 226,134 8.02
Education 191,472 5.82 166,507 5.61 130,752 4.64
Other 62,353 1.90 66,150 2.23 75,808 2.69
---------- ------ ---------- ------ ---------- -------
Total consumer loans 543,964 16.54 502,647 16.94 432,694 15.34
---------- ------ ---------- ------ ---------- -------
Commercial business loans:
Loans 151,873 4.62 136,090 4.59 121,723 4.32
Lease receivables 4,763 0.14 1,270 0.04 1,803 0.06
---------- ------ ---------- ------ ---------- -------
Total commercial business loans 156,636 4.76 137,360 4.63 123,526 4.38
---------- ------ ---------- ------ ---------- -------
Gross loans receivable 3,288,839 100.00% 2,966,556 100.00% 2,820,487 100.00%
Contras to loans:
Undisbursed loan proceeds (187,364) (160,724) (157,667)
Allowance for loan losses (28,607) (29,678) (31,065)
Unearned net loan fees (5,946) (4,946) (4,286)
Discount on loans purchased (103) (147) (215)
Unearned interest (7) (73) (6)
---------- ---------- ----------
Total contras to loans (222,027) (195,568) (193,239)
---------- ---------- ----------
Loans receivable, net $3,066,812 $2,770,988 $2,627,248
========== ========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------
2001 2000
---------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 872,718 34.17% $ 1,001,408 41.24%
Multi-family residential 305,009 11.94 291,917 12.02
Commercial real estate 501,640 19.64 388,678 16.01
Construction 266,712 10.44 210,660 8.68
Land 43,849 1.72 29,232 1.20
----------- ------ ----------- ------
Total mortgage loans 1,989,928 77.90 1,921,895 79.15
----------- ------ ----------- ------
Consumer loans:
Second mortgage and home equity 271,733 10.64 243,124 10.01
Education 130,215 5.10 136,011 5.60
Other 72,274 2.83 65,686 2.71
----------- ------ ----------- ------
Total consumer loans 474,222 18.57 444,821 18.32
----------- ------ ----------- ------
Commercial business loans:
Loans 90,212 3.53 61,419 2.53
Lease receivables - 0.00 - 0.00
----------- ------ ----------- ------
Total commercial business loans 90,212 3.53 61,419 2.53
----------- ------ ----------- ------
Gross loans receivable 2,554,362 100.00% 2,428,135 100.00%
====== ======
Contras to loans:
Undisbursed loan proceeds (111,298) (97,092)
Allowance for loan losses (24,076) (24,404)
Unearned net loan fees (3,610) (3,528)
Discount on loans purchased (371) (361)
Unearned interest (31) (29)
----------- -----------
Total contras to loans (139,386) (125,414)
----------- -----------
Loans receivable, net $ 2,414,976 $ 2,302,721
=========== ===========
</TABLE>
4
<PAGE>
The following table shows, at March 31, 2004, 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
COMMERCIAL
REAL ESTATE,
SINGLE-FAMILY CONSTRUCTION COMMERCIAL
RESIDENTIAL AND LAND CONSUMER BUSINESS
LOANS LOANS LOANS LOANS
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due:
In one year or less $ 26,430 $ 320,109 $ 27,187 $ 82,342
After one year through
five years 34,257 864,660 179,228 68,734
After five years 687,529 655,254 337,549 5,560
---------- ---------- ---------- ----------
$ 748,216 $1,840,023 $ 543,964 $ 156,636
---------- ---------- ---------- ----------
Interest rate terms on amounts
due after one year:
Fixed $ 246,619 $ 338,200 $ 322,728 $ 35,524
---------- ---------- ---------- ----------
Adjustable $ 475,167 $1,181,714 $ 194,049 $ 38,770
========== ========== ========== ==========
</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, 2004, $748.2 million, or 22.8%, 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, 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, 2004, approximately $482.3 million, or 64.5%, 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"), and Wisconsin Department of Veterans
Affairs ("WDVA"). The Bank retains the right to service substantially all loans
that it sells.
5
<PAGE>
At March 31, 2004, approximately $265.9 million, or 35.5%, 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, 2004, the Bank had $521.6 million of loans
secured by multi-family residential real estate and $801.8 million of loans
secured by commercial real estate. These represented 15.9% and 24.4% 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,
2004, construction loans amounted to $392.7 million, or 11.9%, of the Bank's
total loans held for investment. Land loans amounted to $123.8 million, or 3.8%,
of the Bank's total loans held for investment at March 31, 2004.
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 and outside
construction inspectors 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, 2004, $544.0 million,
or 16.5%, 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 $290.1 million, or 8.8%, of
total loans at March 31, 2004. 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 $191.5 million, or 5.8%, of the Bank's total loans at March
31, 2004 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 index. Both the
principal amount of an education loan and interest thereon generally are
guaranteed by the Great
6
<PAGE>
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 $10.6 million of these education loans during fiscal 2004.
The remainder of the Bank's consumer loan portfolio consists of deposit
account and other secured 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 participates, currently
within a range of 42% to 45%, with a third party, Elan. At March 31, 2004, the
Bank participates in 42% of the outstanding balances and is responsible for 42%
of the losses.
The Bank is allocated 32% of the interest paid on assigned debt and 25% of
interchange income established by Visa and MasterCard. The bank also shares 33%
of annual fees paid to Elan and 30% of late payments paid to Elan. Also, account
incentive fees of $20 per card are paid to the Bank for newly established
accounts.
At March 31, 2004, the Bank's approved credit card lines amounted to $39.9
million. The total outstanding amount at March 31, 2004 is $5.7 million.
COMMERCIAL BUSINESS LOANS AND LEASES. The Bank originates loans for
commercial, corporate and business purposes, including issuing letters of
credit. At March 31, 2004, commercial business loans amounted to $156.6 million,
or 4.8%, 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 to 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, whichever is less, 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, 2004, the Bank had approximately $8.8 million
of loans that had
7
<PAGE>
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.
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,
demand for fixed-rate mortgages increases. In periods of higher interest rates,
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.
8
<PAGE>
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, 2004, the Bank was servicing $2.7 billion of
loans for others.
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, 2004, approximately $67.6 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,
-------------------------------------------------------
2004 2003 2002
-------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of year(1) $ 3,009,610 $ 2,867,007 $ 2,571,984
Loans originated for investment:
Single-family residential 118,091 99,380 18,245
Multi-family residential 146,336 168,882 188,077
Commercial real estate 644,425 524,941 344,131
Construction and land 563,012 420,231 362,507
Consumer 217,576 263,628 181,782
Commercial business 261,841 72,199 67,390
----------- ----------- -----------
Total originations 1,951,281 1,549,261 1,162,132
----------- ----------- -----------
Loans purchased for investment:
Total originations and purchases 1,951,281 1,549,261 1,162,132
Repayments (1,588,739) (1,279,077) (896,007)
Transfers of loans to held for sale (40,259) (124,115) -
----------- ----------- -----------
Net activity in loans held for
investment 322,283 146,069 266,125
----------- ----------- -----------
Loans originated for sale:
Single-family residential 1,418,781 1,757,299 1,097,655
Transfers of loans from held for investment 40,259 124,115 -
Sales of loans (1,447,257) (1,760,765) (1,068,757)
Loans converted into mortgage-backed
securities (40,259) (124,115) -
----------- ----------- -----------
Net activity in loans held for sale (28,476) (3,466) 28,898
----------- ----------- -----------
Gross loans receivable at end of
period $ 3,303,417 $ 3,009,610 $ 2,867,007
=========== =========== ===========
</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.
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
9
<PAGE>
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 amount 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 non-interest income.
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 2004 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 $973,000. The amount of
interest income attributable to these loans and included in interest income
during fiscal 2004 was $526,000.
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,
--------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------
% 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 $ 4,887 0.16% $10,083 0.34% $17,647 0.63%
60 to 89 days 10,941 0.36 5,612 0.19 2,671 0.09
90 days and over 16,355 0.53 10,069 0.34 9,042 0.32
------- ---- ------- ---- ------- ----
Total $32,183 1.05% $25,764 0.87% $29,360 1.04%
======= ==== ======= ==== ======= ====
</TABLE>
There were five non-accrual loans with carrying values of $1.0 million or
greater at March 31, 2004. 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,
2004, 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 remained relatively
constant during the fiscal year. For additional discussion of real estate held
for development and sale that is not considered a part of non-performing assets,
see the discussion under "Subsidiaries - Investment Directions, Inc." and "-
Nevada Investment Directions, Inc." and Note 17 to the Consolidated Financial
Statements in Item 8.
10
<PAGE>
FORECLOSED PROPERTIES. At March 31, 2004, the Bank had no foreclosed
properties with a net carrying value of $1.0 million or more. Foreclosed
properties and repossessed assets increased $890,000 during the fiscal year.
This increase was not attributable to any one specific loan.
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.
At March 31, 2004, there were $31.1 million of classified assets including
non-performing assets plus other loans and assets, meeting the criteria for
classification. The criteria for the classification of assets comes from
information causing management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms and would indicate
that such loans have the potential to be included as non-accrual, past due, or
impaired (as defined in SFAS No. 114), in the future periods. However, no loss
is anticipated at this time.
As of March 31, 2004, there were no loans classified as special mention,
doubtful or loss. At March 31, 2003, substandard assets amounted to $25.1
million and no loans were classified as special mention, doubtful or loss. The
increase of $6.0 million in classified assets was attributable to the addition
of three commercial real estate loans and one commercial business loan which all
have a carrying value greater than $1.0 million. These additions were partially
offset by the removal of a commercial business loan with a carrying value
greater than $1.0 million. These loans are discussed in Item 7. Management
Discussion and Analysis under "Non-performing assets".
ALLOWANCE FOR LOAN 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 the allowance 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 the allowance
that depends on the nature of the classification and loan location of the
collateral property.
Additional discussion on the allowance for loan losses at March 31, 2004
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, 2004 and 2003,
stockholders' equity decreased $1.5 million (net of deferred income tax
receivable of $1.1 million), and increased $1.7 million (net of deferred income
tax payable of $1.1 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, 2004.
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 stock and 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,
----------------------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------------
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 $16,586 $16,586 $75,675 $ 75,823 $43,261 $43,442
Mutual fund 2,503 2,490 9,815 9,812 10,587 10,582
Corporate stock and other 9,583 10,438 10,151 11,557 11,040 11,969
------- ------- ------- -------- ------- -------
28,672 29,514 95,641 97,192 64,888 65,993
Held To Maturity:
U.S. Government and federal
agency obligations - - 2,998 3,095 7,747 7,897
Other securities - - - - - -
------- ------- ------- -------- ------- -------
- - 2,998 3,095 7,747 7,897
------- ------- ------- -------- ------- -------
Total investment securities $28,672 $29,514 $98,639 $100,287 $72,635 $73,890
======= ======= ======= ======== ======= =======
</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.
13
<PAGE>
MORTGAGE-RELATED SECURITIES
The Corporation purchases mortgage-related securities to supplement loan
production and to provide collateral for borrowings. The Corporation invests in
mortgage-related securities which are insured or guaranteed by FHLMC, FNMA, or
the Government National Mortgage Association ("GNMA") backed by FHLMC, FNMA and
GNMA mortgage-backed securities and also invests in non-agency CMO's.
At March 31, 2004, the amortized cost of the Corporation's
mortgage-related securities held to maturity amounted to $4.3 million, of which
$2.2 million are five- and seven-year balloon securities, and $2.1 million are
10-, 15- and 30-year securities. Of the total held to maturity mortgage-related
securities, $2.7 million, $1.6 million and $7,000 are insured or guaranteed by
FNMA, FHLMC and GNMA, respectively. The adjustable-rate securities included in
the above totals for March 31, 2004, are $94,000 and $307,000 for FNMA and
FHLMC, respectively.
The fair value of the Corporation's mortgage-related securities available
for sale amounted to $220.9 million at March 31, 2004, of which $473,000 are
five- and seven-year balloon securities, $220.4 million are 10-, 15- and 30-year
securities and of all of those securities, $103.8 million are adjustable-rate
securities. Of the total available for sale mortgage-related securities, $26.1
million, $90.0 million and $49.3 million are insured or guaranteed by FNMA,
FHLMC and GNMA, respectively. Of the total of available for sale
mortgage-related securities, $55.5 million are corporate securities and
therefore not insured by one of the three foregoing agencies. The
adjustable-rate securities included in the above totals for March 31, 2004, are
$181,000, $54.3 million, $46.6 million and $2.7 million for FNMA, FHLMC, GNMA
and corporate, respectively.
Mortgage-related 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, 2004, $139.5 million of the Corporation's
mortgage-related securities available for sale and $4.4 million of the
Corporation's mortgage-backed securities held to maturity were pledged to secure
various obligations of the Corporation.
The table below sets forth information regarding the amortized cost and
fair values of the Corporation's mortgage-related securities at the dates
indicated.
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available For Sale:
Agency CMO/Remic's $ 38,592 $ 38,629 $ 44,929 $ 45,082 $ 33,231 $ 33,418
Corporate CMO's 54,298 55,518 8,808 9,072 18,369 18,874
Mortgage-backed Securities 124,945 126,771 127,116 131,597 91,139 93,001
-------- -------- -------- -------- -------- --------
217,835 220,918 180,853 185,751 142,739 145,293
Held To Maturity:
Agency CMO/Remic's 68 72 2,600 2,661 5,776 5,879
Mortgage-backed Securities 4,235 4,417 60,398 63,416 134,517 135,451
-------- -------- -------- -------- -------- --------
$ 4,303 $ 4,489 $ 62,998 $ 66,077 $140,293 $141,330
-------- -------- -------- -------- -------- --------
Total Mortgage Related Securities $222,138 $225,407 $243,851 $251,828 $283,032 $286,623
======== ======== ======== ======== ======== ========
</TABLE>
14
<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 ("CMOs"), including CMOs which qualify as Real Estate Mortgage
Investment Conduits ("REMICs") under the Internal Revenue Code of 1986, as
amended ("Code"). At March 31, 2004, the Corporation's had $68,000 in
mortgage-derivative securities held to maturity. The fair value of the
mortgage-derivative securities available for sale held by the Corporation
amounted to $94.1 million at the same date.
15
<PAGE>
The following table sets forth the maturity and weighted average yield
characteristics of the Corporation's mortgage-related securities at March 31,
2004, 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 $ 75 7.80% $ 625 4.74% $ 93,447 4.23% $ 94,147
Mortgage-backed securities 482 4.86 9,524 4.80 116,765 4.62 126,771
-------- -------- -------- -------- -------- -------- --------
557 5.25 10,149 4.80 210,212 4.44 220,918
-------- -------- -------- -------- -------- -------- --------
Held to Maturity:
Mortgage-derivative securities 68 5.65 - - - - 68
Mortgage-backed securities 1,781 5.82 1,053 6.25 1,401 6.39 4,235
-------- -------- -------- -------- -------- -------- --------
1,849 5.81 1,053 6.25 1,401 6.39 4,303
-------- -------- -------- -------- -------- -------- --------
Mortgage-related securities $ 2,406 5.68% $ 11,202 4.94% $211,613 4.46% $225,221
======== ======== ======== ======== ======== ======== ========
</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 principal repayments and prepayments on loan and mortgage-related
securities, maturities of investment securities, sales of loans and securities,
interest payments on loans and securities, advances from the FHLB and, from time
to time, repurchase agreements and other borrowings. Loan repayments and
interest payments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are significantly influenced by general
interest rates, economic conditions and competition. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They also may be used on a longer term basis for general business
purposes, including providing financing for lending and other investment
activities and asset/liability management strategies.
DEPOSITS. The Bank's deposit products include passbook savings accounts,
demand accounts, NOW accounts, money market deposit accounts and certificates of
deposit ranging in terms of 42 days to seven years. Included among these deposit
products are Individual Retirement Account certificates and Keogh retirement
certificates, as well as negotiable-rate certificates of deposit with balances
of $100,000 or more ("jumbo certificates").
The Bank's deposits are obtained primarily from residents of Wisconsin.
The Bank has entered into agreements with certain brokers that 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, 2004, the Bank had $285.2 million in brokered deposits.
16
<PAGE>
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, 2004.
<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>
0.00% to 2.99% $487,541 $234,592 $406,769 $ 32,188 $ 3,091 $1,164,181
3.00% to 4.99% 171,224 41,265 21,008 28,567 77,395 339,459
5.00% to 6.99% 46,968 11,707 23,692 21,142 48,833 152,342
7.00% to 8.99% - - 136 - - 136
Ledger PVA (1) - - - - - 1,767
-------- -------- -------- -------- ---------- ----------
$705,733 $287,564 $451,605 $ 81,897 $ 129,319 $1,657,885
======== ======== ======== ======== ========== ==========
</TABLE>
(1) Stemming from the Bank's purchase of Ledger Bank on November 10, 2001, 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, 2004, the Bank had $216.5 million of certificates greater
than or equal to $100,000, of which $26.4 million are scheduled to mature in
seven through twelve months and $65.7 million in over twelve 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.
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 did not utilize this source of funds during the year ended
March 31, 2004 but may 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 2004. See Note 9 to the Corporation's Consolidated Financial Statements
in Item 8 for more information on borrowings.
17
<PAGE>
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,
--------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $755,328 3.56% $554,268 4.33% $569,500 4.78%
Repurchase agreements - 0.00 - 0.00 - 0.00
Other loans payable 76,231 3.11 41,548 2.78 52,090 3.62
</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,
------------------------------------
2004 2003 2002
------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum month-end balance:
FHLB advances $192,500 $188,900 $431,296
Repurchase agreements - - 32,101
Other loans payable 76,231 52,695 52,174
Average balance:
FHLB advances 141,283 145,342 228,523
Repurchase agreements - - 8,233
Other loans payable 53,083 42,325 46,743
</TABLE>
SUBSIDIARIES
INVESTMENT DIRECTIONS, INC. IDI is a wholly owned non-banking subsidiary
of the Corporation that has invested in various limited partnerships (see Davsha
and Oakmont partnerships below) and subsidiaries funded by borrowings from the
Corporation. Because the Corporation has made substantially all of the initial
capital investment in these partnerships and as a result bears substantially all
the risks of ownership of these partnerships, such partnerships have been deemed
variable interest entities ("VIE's") subject to the consolidation requirements
of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). The application of FIN 46 results in the consolidation of
assets, liabilities, income and expense of the partnerships into Corporation's
financial statements. The portion of ownership and income that belongs to the
other partner is reflected as minority interest so there is no effect on net
income or shareholder's equity. See Item 8, Variable Interest Entities for a
detailed discussion of the financial statement effects of FIN 46. The
Corporation's investment in IDI at March 31, 2004 amounted to $4.2 million as
compared to $2.2 million at March 31, 2003. IDI had total assets of $40.4
million at March 31, 2004 and a net income of $2.5 million for fiscal 2004. This
compares to total assets of $40.9 million and a net loss of $600,000 for the
prior year ended March 31, 2003. The increase of $3.1 million in net income of
IDI is largely attributable to a $2.1 million increase in home sales from the
real estate development partnerships as well as the gain on sale of the one of
IDI's partnerships, Seville, of $2.3 million.
NEVADA INVESTMENT DIRECTIONS, INC. NIDI is a wholly owned non-banking
subsidiary of IDI formed in March 1997 that has invested in a limited
partnership, Oakmont, as a 94.12% owner (IDI being the other 5.88% owner). NIDI
was organized in the state of Nevada. IDI's investment in NIDI at March 31, 2004
amounted to
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$480,000 and $4.3 million for the prior fiscal year. For the year ended March
31, 2004, NIDI had total assets of $490,000 and a net loss of $310,000. This
compares to total assets of $4.5 million and a net loss of $220,000 for the
prior year ended March 31, 2003. Oakmont invests in a VIE, Chandler Creek, which
is subject to FIN 46 treatment. See Oakmont, below for a discussion of the
effects of FIN 46 on the financial statements of Oakmont as well as a discussion
of VIE's in Item 8.
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. Gains are realized as fully
developed lots are sold to outside parties. As a result of these land sales,
Indian Palms had a deferred gain of $3.8 million as of March 31, 2004 which
compares to $820,000 as of March 31, 2003. IDI's investment in Indian Palms at
March 31, 2004 amounted to $17.3 million. IDI's investment in Indian Palms at
March 31, 2003 amounted to $21.3 million. For the year ended March 31, 2004,
Indian Palms had total assets of $24.3 million and a net loss of $800,000. This
compares to total assets of $25.5 million and a net loss of $990,000 for the
year ended March 31, 2003. As of March 31, 2004, Indian Palms had repaid a loan
of $3.2 million from another bank, which had been secured by the land and had
been outstanding at March 31, 2003.
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 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, 2004 amounted to $1.7 million compared to an investment in CIDI at March 31,
2003 of $340,000. For the year ended March 31, 2004, CIDI had total assets of
$1.8 million and net income of $410,000. This compares to total assets of
$450,000 and net income of $100,000 for the year ended March 31, 2003. Davsha
and its subsidiaries invest in VIE's which are subject to FIN 46 treatment. See
Davsha and its subsidiaries below for a discussion of the effects of FIN 46 on
the financial statements of Davsha and its subsidiaries as well as a discussion
of VIE's in Item 8.
OAKMONT. Oakmont became a wholly owned non-banking subsidiary of NIDI and
IDI in January 2000 with NIDI having a 94.12% partnership interest and IDI
having a 5.88% partnership interest. Oakmont was organized in the state of
Texas. Oakmont is a limited partner in Chandler Creek Business Park of 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 and vacant land of approximately 135
acres. The project is currently 62% leased, with one building being fully leased
and marketed for sale. Because Oakmont made substantially all of the initial
capital investment in Chandler Creek and bears substantially all the risks of
ownership, the assets, liabilities, income and expense of that partnership were
consolidated with the financial statements of Oakmont, per FIN 46. The
consolidation of partnership assets into the financial statements of Oakmont
resulted in the addition $8.7 million of partnership improvements, $7.0 million
of partnership land, $280,000 of partnership construction in progress and
$170,000 of other assets for a total addition of $16.1 million in assets. This
was offset by the addition of $7.3 million of partnership borrowings and
$160,000 of other partnership liabilities as well as the addition of minority
interest (the partnership's ownership interest) of $3.7 million. At March 31,
2004, Oakmont's investment in Chandler Creek was $4.3 million and Oakmont had
extended loans of $1.9 million to the unrelated partner in Chandler Creek. This
compares to a carrying value of $2.6 million and a loan to the unrelated partner
of $3.6 million for the prior year ended March 31, 2003. For the year ended
March 31, 2004, Oakmont had total assets of $18.1 million and a net loss of
$620,000. This compares to total assets of $6.3 million and a net loss of
$560,000 at March 31, 2003. As of March 31, 2004, Oakmont had drawn $7.3 million
in outside borrowings. IDI guarantees up to $8.4 million in borrowings for
Oakmont. This amount of outside borrowings was the same as of March 31, 2003.
DAVSHA, LLC. Davsha is a wholly owned non-banking subsidiary of IDI (80%
owned) and CIDI (20% owned). 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, 2004, Davsha had total assets of $17.2
million and net income of $3.5 million. This compares to total assets of $10.8
million and net income of $950,000 for the year ended March 31, 2003.
Davsha has six wholly owned non-banking subsidiaries, Davsha II, Davsha
III, Davsha IV, Davsha V and Davsha VI and Davsha VII. Each of these
subsidiaries formed partnerships with developers and purchased lots
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from Davsha. Since each of the six Davsha subsidiaries exercise significant
influence over the operations of their respective partnerships, the assets,
liabilities, income and expense were consolidated with the financial statements
of each of the respective Davsha's, per FIN 46. The consolidation of partnership
assets into the financial statements of Davsha's are detailed below under each
respective Davsha subsidiary. IDI guarantees up to $31.8 million in outside
borrowings for Davsha but as of March 31, 2004, Davsha had no outside
borrowings. This compares to $1.0 million of outside borrowings at March 31,
2003.
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 ("Paragon"), a
partnership formed in February 2000, to develop residential housing. Davsha's
investment in Davsha II at March 31, 2004, amounted to $1.6 million as compared
to $700,000 at March 31, 2003. For the year ended March 31, 2004, Davsha II had
total assets of $6.6 million and net income of $730,000 as compared to total
assets of $1.5 million and net income of $490,000 for the year ended March 31,
2003. The consolidation of partnership assets into the financial statements of
Davsha II resulted in the addition of $5.3 million of construction in progress
and $450,000 of partnership cash for a total addition of $5.7 million in
partnership assets. This was offset by the addition of $3.1 million of
partnership borrowings and $401,000 of other partnership liabilities as well as
the addition of minority interest (the partnership's ownership interest) of
$811,000. As of March 31, 2004, its partnership, Paragon, had drawn $3.1 million
in outside borrowings of the $5.1 million guaranteed by IDI. This compares to a
principal balance of $2.0 million at March 31, 2003.
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, 2004 amounted to $3.7 million as compared to $940,000
for the year ended March 31, 2003. Davsha III had total assets of $6.0 million
and net income of $1.6 million as compared to total assets of $5.6 million and
net income of $920,000 for the year ended March 31, 2003. The consolidation of
partnership assets into the financial statements of Davsha III resulted in the
addition of $4.9 million of construction in progress and $996,000 of other
partnership assets for a total addition of $5.9 million in partnership assets.
This was offset by the addition of $1.7 million of partnership borrowings and
$595,000 of other partnership liabilities as well as the addition of minority
interest (the partnership's ownership interest) of $1.2 million. As of March 31,
2004, Indian Palms 147 had drawn $1.7 million in outside borrowings of the $8.5
million guaranteed by IDI. This compares to a principal balance of $2.7 million
at March 31, 2003.
DAVSHA IV, LLC. Davsha IV is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha IV 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, 2004 and 2003 amounted to $2.1 million and $1.6 million, respectively.
For the year ended March 31, 2004, Davsha IV had total assets of $6.2 million
and net income of $904,000. This compares to total assets of $420,000 and net
income of $220,000 for the year ended March 31, 2003. The consolidation of
partnership assets into the financial statements of Davsha IV resulted in the
addition of $5.3 million of construction in progress, $675,000 of partnership
cash and $84,000 of other partnership assets for a total addition of $6.1
million in partnership assets. This was offset by the addition of $3.3 million
of partnership borrowings and $687,000 of other partnership liabilities as well
as the addition of minority interest (the partnership's ownership interest) of
$380,000. DH Indian Palms I had drawn $3.3 million in outside borrowings of the
$20.1 million guaranteed by IDI at March 31, 2004. This compares to a principal
balance of $1.7 million at March 31, 2003.
DAVSHA V, LLC. Davsha V is a wholly owned non-banking subsidiary of Davsha
formed in July 2001. Davsha V was organized in the state of California and is a
limited partner in Villa Santa Rosa, LLC, a partnership formed in July 2002 to
develop residential housing. Davsha's investment in Davsha V at March 31, 2004
amounted to $3.0 million as compared to $1.2 million at March 31, 2003. For the
year ended March 31, 2004, Davsha V had total assets of $12.3 million and net
income of $570,000 as compared to total assets of $470,000 and a net loss of
$1,000 at March 31, 2003. The consolidation of partnership assets into the
financial statements of Davsha V resulted in the addition of $11.7 million of
construction in progress and $108,000 of other partnership assets for a total
addition of $11.8 million in partnership assets. This was offset by the addition
of $5.5 million of partnership borrowings and $435,000 of other partnership
liabilities as well as the addition of minority interest (the
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partnership's ownership interest) of $461,000. Villa Santa Rosa had drawn $5.5
million in outside borrowings of the $12.5 million guaranteed by IDI at March
31, 2004 as compared to a principal balance of $3.3 million at March 31, 2003.
DAVSHA VI, LLC. Davsha VI is a wholly owned non-banking subsidiary of
Davsha formed in July 2001. Davsha VI was organized in the state of California
and is a limited partner in Bellasara, LLC, a partnership formed in July 2002 to
develop residential housing. Davsha's investment in Davsha VI at March 31, 2004
amounted to $1.8 million as compared to $520,000 at March 31, 2003. For the year
ended March 31, 2004, Davsha VI had total assets of $7.7 million and net income
of $345,000 as compared to total assets of $(290,000) and a net loss of $1,000
for March 31, 2003. The consolidation of partnership assets into the financial
statements of Davsha VI resulted in the addition of $7.7 million of construction
in progress for a total addition of $7.7 million in partnership assets. This was
offset by the addition of $4.7 million of partnership borrowings and $462,000 of
other partnership liabilities as well as the addition of minority interest (the
partnership's ownership interest) of $184,000. Bellasara had drawn $4.7 million
in outside borrowings of the total of $12.7 guaranteed by IDI at March 31, 2004
as compared to a principal balance of $2.6 million at March 31, 2003.
DAVSHA VII, LLC. Davsha VII is a wholly owned non-banking subsidiary of
Davsha formed in September, 2003. Davsha VII was organized in the state of
California and is a limited partner in La Vista Grande 121, LLC, a partnership
formed in June 2003 to develop residential housing. Davsha's investment in
Davsha VII at March 31, 2004 amounted to $(7,000). For the year ended March 31,
2004, Davsha VII had total assets of $2.2 million and a net loss of $7,000. IDI
guaranteed $4.5 million on behalf of La Vista Grande, however as of March 31,
2004, La Vista Grande had not drawn on its outside borrowings. It is anticipated
that development activities will commence in fiscal 2005, at which time, the
construction in progress, other partnership assets, partnership borrowings,
other partnership liabilities, and minority interest in equity and income of the
partnership, created from this activity, will be consolidated in accordance with
FIN 46.
Together, IDI, NIDI, CIDI, Indian Palms, Davsha, Davsha II, Davsha III,
Davsha IV, Davsha V, Davsha VI, Davsha VII and Oakmont represent the real estate
investment segment of the Corporation's business. At March 31, 2004, the
majority of this segment is categorized as real estate held for development and
sale on the Corporation's consolidated financial statements. Net of
non-performing real estate held for development and sale of $2.4 million, the
segment has $80.1 million of total assets consisting of construction in
progress, vacant land, improvements, other partnership assets and partnership
cash as well as the net investment in wholly-owned real estate investment
subsidiaries of $39.7 million. Other partnership assets are reported in other
assets and partnership cash is reported in cash. Reported in other borrowings
are partnership borrowings of $23.0 million and reported in other liabilities
are partnership liabilities of $5.2 million. Minority interest of the
partnerships is reported as a mezzanine item below liabilities and above
stockholders' equity. The components of income from operations of the real
estate investment subsidiaries that are consolidated in accordance with FIN 46
are reported in real estate investment partnership revenue, real estate
investment partnership cost of sales, other expenses from real estate
partnership operations, and minority interest in net income of real estate
partnership operations. Net income of IDI's wholly owned subsidiary, Indian
Palms (which is not subject to FIN 46 treatment) is reported in other revenue
(expense) from real estate operations. At March 31, 2003, the Corporation had a
specific reserve of $650,000 that had been established for probable and
reasonably estimatable declines in the property value of the golf course land at
the Indian Palms subsidiary's golf course operation. It was determined during
the fiscal year that this reserve was no longer necessary and it was taken back
into income. Therefore, as of March 31, 2004, there are no specific reserves for
the real estate investment segment. For further discussion of the real estate
held for development and sale segment, see Note 17 to the Corporation's
Consolidated Financial Statements in Item 8.
During the fiscal year ended March 31, 2004, IDI sold its investment in a
Tampa, Florida project that included an interest in a golf operation and
residential lots for a gain of $2.3 million. IDI's investment in the project was
$4.3 million at March 31, 2003. The project had reported net income of $9,000
for the year ended March 31, 2003 and had a deferred gain of $810,000 for the
same period, which was realized in the sale. As a part of the sale of this
project, the buyers borrowed $4.5 million from IDI. The principal balance of
this commercial loan was $3.1 million at March 31, 2004.
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The balance of assets at IDI includes loans to finance the acquisition and
development of property for various partnerships and subsidiaries. At March 31,
2004, IDI had extended $17.7 million to Indian Palms, $7.4 million to Davsha,
$559,000 to CIDI and $2.3 million to Oakmont as compared to $19.3 million to
Indian Palms, $6.0 million to Davsha, $390,000 to Davsha II, $720,000 to Davsha
III, $190,000 to CIDI and $1.8 million to Oakmont at March 31, 2003. These
amounts are eliminated in consolidation.
During fiscal 2004, IDI invested in a heavy industrial battery charger
manufacturer, Power Designers, Inc., that had commercial loans with the Bank in
the amount of $479,000. The notes were written off at the Bank level and IDI
restructured the borrowing into an investment which represented IDI's initial
investment in Power Designers. The level of borrowings determines the ownership
interest in Power Designers, Inc. such that, for every $25,000 advanced under
the line of credit, IDI gains an additional .455% of ownership interest up to a
maximum ownership level of 58.0%. As of March 31, 2004, IDI had extended lines
of credit of $800,000, of a maximum line of credit of $1.6 million, to Power
Designers for operations and production which resulted in an ownership interest
of 44.0% of Power Designers by IDI.
At March 31, 2004, the Corporation had extended $34.5 million to IDI to
fund various partnership and subsidiary investments. This represents an increase
of $500,000 from borrowings of $34.0 million at March 31, 2003. These amounts
are eliminated in consolidation.
At March 31, 2004, the Corporation had extended $2,000 to NIDI to fund
various partnership investments. NIDI had borrowings from the Corporation of
$140,000 as of March 31, 2003. These amounts are eliminated in consolidation.
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, 2004, AIS had net income of $31,000 as
compared to a net loss of $70,000 for the year ended March 31, 2003. The Bank's
investment in AIS amounted to $95,000 at March 31, 2004 as compared to $60,000
at March 31, 2003.
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, 2004 amounted to $425,000 as compared to $350,000 at March
31, 2003. ADPC had net income of $75,000 for the year ended March 31, 2004 as
compared to net income of $5,000 for the year ended March 31, 2003.
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
$647.1 million at March 31, 2004 as compared to $720.0 million at March 31,
2003. AIC had net income of $19.2 million for the year ended March 31, 2004 as
compared to $23.9 million for the year ended March 31, 2003. The Bank had
outstanding notes to AIC of $151.0 million with a weighted average rate of 4.00%
as of March 31, 2004 as compared to $151.0 million at March 31, 2003, with a
weighted average rate of 4.39% with maturities during the next six months of
fiscal 2004. See Note 14, Commitments and Contingent Liabilities for further
discussion of state tax audits and proposed tax law changes and their effect on
the Corporation and AIC.
EMPLOYEES
The Corporation had 784 full-time employees and 172 part-time employees at
March 31, 2004. The Corporation promotes equal employment opportunity and
considers its relationship with its employees to be good. The employees are not
represented by a collective bargaining unit.
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REGULATION
Set forth below is a brief description of certain laws and regulations
that 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.
GENERAL
The Bank is a federally chartered stock savings association whose primary
regulator is the OTS. The FDIC under the SAIF insures its deposits up to
applicable limits. The Bank is currently subject to extensive regulation,
examination and supervision by the OTS as its chartering agency, and by the FDIC
as its deposit insurer. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and must obtain regulatory
approval prior to entering into certain transactions such as mergers with or
acquisitions of, other depository institutions and opening or acquiring branch
offices.
The OTS currently conducts periodic examinations to assess the Bank's
compliance with various regulatory requirements. In addition, the FDIC has the
right to perform examinations of the Bank should the OTS or the FDIC determine
the Bank is in a weakened financial condition or a failure is foreseeable. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit 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, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
THE CORPORATION
The Corporation is deemed a unitary savings and loan holding company
within the meaning of Section 10(O) of the Homeowners' Loan Act ("HOLA"). The
Corporation is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. The Corporation is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commissions ("SEC") under the federal securities
laws.
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."
Any change in these laws and regulations, whether by the OTS, the FDIC,
the SEC, or through legislation, could have a material adverse impact on the
Bank and the Corporation and their operations and shareholders.
FEDERAL REGULATION OF THE BANK
GENERAL. As a federally chartered, SAIF-insured savings bank, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments must comply with federal statutory and regulatory
requirements. This federal regulation establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the SAIF, the FDIC, and the depositors. This regulatory structure
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves.
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The OTS regularly examines the Bank and issues a report of its examination
findings to the board of directors. The Bank's relationship with its depositors
and borrowers is also regulated by federal law, especially in such matters as
the ownership of savings accounts and the form and content of the Bank's
mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into transactions such as mergers with or acquisitions of other
financial institutions. Any change in such regulations, whether by the OTS, the
FDIC or the United States Congress, could have a material adverse affect on the
Bank and its operations.
QUALIFIED THRIFT LENDER REQUIREMENT. Federal savings associations must
meet a qualified thrift lender test or they become subject to operating
restrictions. Until recently, the chief restriction was the elimination of
borrowing rights from the savings association's Federal Home Loan Bank. However,
with the passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999
by Congress, the failure to maintain qualified thrift lender status will not
affect the Bank's borrowing rights with the FHLB of Chicago. Notwithstanding
these changes, the Bank anticipates that it will maintain an appropriate level
of investments consisting primarily of residential mortgages, mortgage backed
securities and other mortgage-related investments, and otherwise qualify as
qualified thrift lenders. The required percentage of these mortgage-related
investments is 65% of portfolio assets. Portfolio assets are all assets minus
goodwill and other intangible assets, property used by the institution in
conducting its business and liquid assets equal to 20% of total assets.
Compliance with the qualified thrift lender test is determined on a monthly
basis in nine out of every twelve months.
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 those paid by
undercapitalized institutions, which are likely to pose a risk of loss to the
insurance fund absent corrective actions.
An institution's assessment rate depends on the capital category to which
it is assigned. Assessment rates for deposit insurance currently range from 0
basis points to 27 basis points. The capital and supervisory subgroup to which
an institution is assigned by the FDIC is confidential and may not be disclosed.
A bank's rate of deposit insurance assessments will depend upon the category or
subcategory to which the bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
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), certain mortgage servicing rights and certain
investments. Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock, 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, adjusted for unrealized gains and
losses on certain available-for-sale securities.
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 assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which
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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 10 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.
The OTS rules regarding capital distributions define the term "capital
distribution" as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. The definition
specifically excludes dividends consisting only of a savings association's
shares or rights to purchase shares, and payments that a mutual savings
association is required to make under the terms of a deposit instrument.
Under the revised OTS rules, capital distributions also include a savings
association's payment to repurchase, redeem, retire or otherwise acquire any of
its shares or other ownership interests, any payment to repurchase, redeem or
otherwise acquire debt instruments included in its total capital, and any
extension of credit to finance an affiliate's acquisition of those shares or
interests. Additionally, a capital distribution includes any direct or indirect
payment of cash or other property to owners or affiliates made in connection
with a corporate restructuring. The revised rule also defines as a capital
distribution any transaction the OTS or FDIC determines, by order or regulation,
to be in substance a distribution of capital. Because more than one year has
passed since the Corporation's formation, under the revised rules the
Corporation generally no longer needs specific OTS approval to repurchase its
shares; however, share repurchases still must be made in a prudent manner and
amount under a "safety and soundness" analysis.
A final category of capital distribution under the revised OTS rules is
any other distribution charged against a savings association's capital accounts
if the savings association would not be well capitalized following the
distribution. As such, the revised capital distribution rules of the OTS do not
apply to capital distributions by wholly owned operating subsidiaries of savings
associations. This is true because generally, for reporting purposes, the
accounts of a wholly-owned subsidiary are consolidated with those of the parent
savings association and any distributions by such subsidiary would not affect
the capital levels of the parent savings association.
For regulatory capital purposes, where the consolidated subsidiary is not
wholly owned, the balance sheet account "minority interests in the equity
accounts of subsidiaries that are fully consolidated" may be included in Tier I
capital and total capital if certain conditions are met. Distributions by such
consolidated subsidiaries to shareholders other than the savings association
reduce the cited balance sheet account and, therefore, reduce capital.
Consequently, distributions by subsidiaries that are not wholly owned by the
savings association are subject to the revised OTS capital distribution rules if
the savings association will not be well capitalized following the distribution.
The revised OTS rule generally requires all savings associations to file a
notice or an application for approval before making a capital distribution. A
savings association must file an application if the association is not eligible
for expedited treatment under the application processing rules of the OTS, the
total amount of all capital distributions including the proposed capital
distribution, for the applicable calendar year would exceed an amount
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equal to the savings association's net income for that year to date plus the
savings association's retained net income for the preceding two years, or the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the savings association and the OTS,
or the FDIC, or a condition imposed on the savings association in an
OTS-approved application notice.
A savings association must file a notice whenever an application is not
required under the above standards and any of the following criteria is
satisfied:
- - the savings association will not be at least adequately capitalized
following the capital distribution; or
- - the capital distribution would reduce the amount of, or retire any part of
the savings association's common or preferred stock, or retire any part of
debt instruments such as notes or debentures included in the savings
association's capital; or
- - the savings association is a subsidiary of a savings and loan holding
company.
If neither the savings association nor the proposed capital distribution
meet any of the criteria listed in the previous paragraph, the savings
association is not required to file a notice or an application before making a
capital distribution.
Under the revised rule, the OTS will review a savings association's notice
or application and may disapprove a notice or deny an application if the OTS
makes any of the following determinations:
- - the savings association will be undercapitalized, significantly
undercapitalized, or critically undercapitalized under the prompt
corrective action regulations of the FDIC, as adopted by the OTS, following
the capital distribution;
- - the proposed capital distribution raises safety and soundness concerns, or
- - the proposed capital distribution violates a prohibition contained in any
statute, regulation, agreement between the savings association and the OTS
(or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice.
Because the Bank is a subsidiary of a savings and loan holding company, it
must file a notice as described above.
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, 2004,
the Bank believes that it was in compliance with these liquidity requirements.
The Bank's liquidity ratio was 5.60% at March 31, 2004.
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, 2004, 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.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. A bank's loans to its
executive officers, directors, any owner of more than 10% of its stock (each, an
insider) and any of certain entities affiliated with any such person (an
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insider's related interest) are subject to the conditions and limitations
imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve
Board's Regulation O thereunder. Under these restrictions, the aggregate amount
of the loans to any insider's related interests may not exceed the loans-to-one
borrower limit applicable to national banks, which is comparable to the
loans-to-one-borrower limit applicable to the Bank's loans. All loans by a bank
to all insiders and insiders' related interests may not exceed the bank's
unimpaired capital and unimpaired surplus. With certain exceptions, loans to an
executive officer, other than loans for the education of the officer's children
and certain loans secured by the officer's residence, may not exceed the greater
of $25,000 or 2.5% of the Bank's unimpaired capital and unimpaired surplus, but
in no event more than $100,000. Regulation O also requires that any proposed
loan to an insider or a related interest of that insider be approved in advance
by a majority of the board of directors of the Bank, with any interested
director not participating in the voting, if such loan, when aggregated with any
existing loans to that insider and the insider's related interests, would exceed
either $500,000 or the greater of $25,000 or 5% of the Bank's unimpaired capital
and surplus. Generally, such loans must be made on substantially the same terms
as, and follow credit underwriting procedures that are no less stringent than,
those that are prevailing at the time for comparable transactions with other
persons and must not present more than a normal risk of collectability.
An exception is made for extensions of credit made pursuant to a benefit
or compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs that administer 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 in an amount equal to the greatest of $500, 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 20% of its outstanding advances.
The FHLB of Chicago also imposes various limitations on advances made to member
banks, which limitations relate to the amount and type of collateral, the amount
of advances and other items. At March 31, 2004, the Bank owned $87.3 million in
FHLB stock, which is in compliance with this requirement. The Bank received
dividends on its FHLB stock for fiscal 2004 of $5.6 million as compared to $3.2
million for fiscal 2003.
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.
ACQUISITIONS AND MERGERS. Under the federal Bank Merger Act, any merger of
the Bank - with or into another institution would require the approval of the
OTS, or the primary federal regulator of the resulting entity if it is not an
OTS-regulated institution.
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of it
affiliates or not obtain services of a competitor of the institution.
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UNIFORM REAL ESTATE LENDING STANDARDS. Pursuant to the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), the federal banking agencies
adopted uniform regulations prescribing standards for extensions of credit that
are secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate.
Under the joint regulations adopted by the federal banking agencies, all insured
depository institutions must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures, and documentation,