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| ABCW > SEC Filings for ABCW > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
Set forth below is management's discussion and analysis of the consolidated results of operations and financial condition of Anchor Bancorp Wisconsin Inc. (the "Corporation") and its wholly-owned subsidiaries, AnchorBank fsb (the "Bank") and Investment Directions Inc. ("IDI"), for the three months ended June 30, 2012, which includes information regarding significant regulatory developments and the Corporation's risk management activities, including asset/liability management strategies, sources of liquidity and capital resources. This discussion should be read in conjunction with the unaudited consolidated financial statements and supplemental data contained elsewhere in this quarterly report filed on Form 10-Q for the three-month period ending June 30, 2012.
EXECUTIVE OVERVIEW
On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease and Desist by the Office of Thrift Supervision. The Cease and Desist Order required, that, no later than December 31, 2009, the Bank meet and maintain both a tier 1 (core) capital ratio equal to or greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent.
The Cease and Desist Order also required that the Bank submit a Capital Restoration Plan along with a revised business plan to the OTS. The Bank complied with that directive on July 23, 2010 with the submission of its Revised Capital Restoration Plan (the "Plan"). On August 31, 2010, the OTS approved the Plan submitted by the Bank, although the approval included a Prompt Corrective Action Directive ("PCA").
At June 30, 2012, the Bank and the Corporation had complied with all aspects of the Cease and Desist and the PCA, except the Bank had a tier 1 leverage ratio and a total risk-based capital ratio of 4.56 percent and 8.98 percent, respectively, each below the required capital ratios set forth above.
The Corporation remains diligent in its efforts to raise outside capital to bring it in compliance with the Cease and Desist Order. The Corporation continues to make strides to improve the financial performance and efficiency of the Bank to increase the likelihood that it will be able to attract outside capital.
But the organization continues to face significant challenges. The Corporation, as the holding company of the Bank, continues to be burdened with significant senior debt and preferred stock obligations. The Corporation currently owes $116.3 million to various lenders led by U.S. Bank under the Credit Agreement that matures November 30, 2012. The Corporation also has accrued but unpaid interest and fees totaling $45.8 million associated with this obligation that is due and payable at maturity.
In addition, the Corporation issued $110 million in preferred stock in January 2009 to the United States Treasury pursuant to the Treasury's Capital Purchase Program ("CPP"). While the Bank has substantial liquidity, it is currently precluded by its regulators from paying dividends to the Corporation. As a result, and as permitted under the CPP program, the Corporation has deferred 13 quarterly preferred stock dividend payments to the Treasury totaling $20.4 million, including interest. As a result of those deferrals, Treasury had the right to appoint two additional persons to the Corporation's Board of Directors and as announced on September 30, 2011, appointed Messrs. Duane Morse and Leonard Rush to the Corporation's Board.
The Corporation has engaged and continues to work with Sandler O'Neill & Partners, L.P. as its financial advisor to assist in capital raising efforts to address its capital needs.
Credit Highlights
The Corporation has continued to see improvement in early stage and overall delinquencies during the past year. This, coupled with the Bank's ongoing efforts to aggressively work out of troubled credits, has led to a decline in the level of non-performing loans. At June 30, 2012, non-performing loans (consisting of loans past due more than 90 days, loans less than 90 days delinquent but placed on non-accrual status due to anticipated probable loss and non-accrual troubled debt restructurings) totaled $189.0 million, $35.9 million below the $224.9 million at March 31,
2012. In addition, the Bank experienced a moderate decrease in the level of foreclosed properties on the consolidated balance sheet. At June 30, 2012, other real estate owned was $84.0 million, compared to $88.8 million at March 31, 2012, a 5.5 percent decrease. As a result, the decline in the levels of non-performing assets was just slightly greater than the decline in non-performing loans. An elevated level of non-performing assets has, and will continue to have, a negative impact on net interest income and expenses related to managing the troubled loan portfolio.
The allowance for loan losses declined to $100.5 million at June 30, 2012 from $111.2 million at March 31, 2012, a 9.7 percent decrease. Net charge-offs during the three months ended June 30, 2012 were $7.9 million compared to $15.0 million for the same period in 2012. The provision for credit losses was $(1.7) million for the three months ended June 30, 2012, compared to $3.5 million for the three months ended June 30, 2011. While the balance in the allowance for loan losses declined 9.7 percent during the first quarter of fiscal 2013, the allowance compared to total non-performing loans of 53.17 percent at June 30, 2012 compared favorably to the 49.45 percent at March 31, 2012.
Market and Industry Developments
The economic turmoil that began in the middle of 2007 and continued into 2010 has appeared to have settled into a slow economic recovery in 2011 and 2012. At this time the recovery has somewhat uncertain prospects. This has been accompanied by dramatic changes in the competitive landscape of the financial services industry and a wholesale reformation of the legislative and regulatory landscape with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), which was signed into law by President Obama on July 21, 2010.
Dodd-Frank is extensive, complex and comprehensive legislation that impacts many aspects of banking organizations. Dodd-Frank is likely to negatively impact the Corporation's revenue and increase both the direct and indirect costs of doing business, as it includes provisions that could increase regulatory fees and deposit insurance assessments and impose heightened capital standards, while at the same time impacting the nature and costs of the Corporation's businesses. As a result of Dodd-Frank, the OTS ceased to be our primary regulator with the OCC now regulating the Bank and the Federal Reserve regulating the Corporation. It is unclear at this time what effect this change will have on our results of operations.
Until such time as the regulatory agencies issue proposed and final regulations implementing the numerous provisions of Dodd-Frank, a process that will extend at least over the next twelve months and may last several years, management will not be able to fully assess the impact the legislation will have on its business.
Financial Results
Results for the first quarter ended June 30, 2012 include:
• Basic and diluted (loss) per common share improved to $(0.16) for the quarter ended June 30, 2012 compared to $(0.38) per share for the quarter ended June 30, 2011, primarily due to a decrease of $5.2 million in the provision for credit losses;
• The net interest margin decreased to 2.57% for the quarter ended June 30, 2012 from 2.77% for the quarter ended June 30, 2011 primarily due to a decline in the average yield on mortgage and consumer loans as new loans and renewals are funded in today's lower rate environment, and the maturity of lower rate FHLB advances during the first quarter of 2011;
• Loans held for sale decreased $11.4 million, or 29.0% since March 31, 2012 primarily due to lower residential mortgage origination volume and retention of a significantly higher percentage of originated mortgage loans in the held for investment portfolio;
• Loans held for investment (net of the allowance for loan losses) decreased $98.5 million, or 4.8%, since March 31, 2012 primarily due to scheduled pay-offs and amortization and the transfer of $18.8 million to other real estate owned;
• Total risk-based capital ratio for the Bank was 8.98% as of June 30, 2012, compared to 8.42% at March 31, 2012. Under regulatory requirements, a bank must have a total risk-based capital ratio of 8% or greater to be considered adequately capitalized; however, the Bank's total risk based capital ratio remains below the 12% level required under the terms of the Cease and Desist Order issued by the Office of Thrift Supervision ("OTS") on June 26, 2009. (Now administered by the Federal Reserve with respect to the Corporation and the Office of the Comptroller of the Currency ("OCC") with respect to the Bank).
• Total non-performing loans decreased $35.9 million, or 16.0% to $189.0 million at June 30, 2012 from $224.9 million at March 31, 2012;
• Total non-performing assets (total non-performing loans and other real estate owned) decreased $40.9 million, or 13.0%, to $272.9 million at June 30, 2012 from $313.8 million at March 31, 2012;
• The provision for credit losses decreased $5.2 million, to a recapture of $(1.7) million for the three months ended June 30, 2012 from $3.5 million for the three months ended June 30, 2011; and
• Delinquencies (loans past due 30 days or more) decreased $40.3 million or 18.2%, to $180.9 million at June 30, 2012 from $221.2 million at March 31, 2012.
Selected quarterly data are set forth in the following tables.
Three Months Ended
6/30/2012 3/31/2012 12/31/2011 9/30/2011
(Dollars in thousands - except per share amounts)
Operations Data:
Net interest income $ 16,399 $ 15,888 $ 16,014 $ 18,500
Provision for credit losses (1,716 ) 4,601 8,380 17,115
Net gain on sale of loans 5,823 6,406 6,018 3,994
Net gain on sale of investment securities 62 217 20 5,206
Net gain on sale of branches - - - -
Other non-interest income 7,613 6,357 3,456 5,579
Non-interest expense 31,558 28,220 28,997 32,325
Income (loss) before income tax expense (benefit) 55 (3,953 ) (11,869 ) (16,161 )
Income tax expense - - - -
Net income (loss) 55 (3,953 ) (11,869 ) (16,161 )
Preferred stock dividends in arrears (1,610 ) (1,591 ) (1,572 ) (1,579 )
Preferred stock discount accretion (1,863 ) (1,844 ) (1,853 ) (1,853 )
Net loss available to common equity (3,418 ) (7,388 ) (15,294 ) (19,593 )
Selected Financial Ratios (1) :
Yield on interest-earning assets 4.22 % 4.17 % 4.09 % 4.42 %
Cost of funds 1.56 1.72 1.81 1.84
Interest rate spread 2.66 2.45 2.28 2.58
Net interest margin 2.57 2.35 2.19 2.48
Return on average assets 0.01 (0.54 ) (1.51 ) (2.02 )
Average equity to average assets (1.03 ) (0.94 ) (0.53 ) (0.20 )
Non-interest expense to average assets 4.56 3.89 3.69 4.04
Per Share:
Basic loss per common share $ (0.16 ) $ (0.35 ) $ (0.72 ) $ (0.92 )
Diluted loss per common share (0.16 ) (0.35 ) (0.72 ) (0.92 )
Dividends per common share - - - -
Book value per common share (6.52 ) (6.57 ) (6.37 ) (5.81 )
Financial Condition:
Total assets $ 2,784,076 $ 2,789,452 $ 3,061,573 $ 3,197,441
Loans receivable, net
Held for sale 27,938 39,332 36,962 45,199
Held for investment 1,959,551 2,058,008 2,166,351 2,257,905
Deposits 2,253,173 2,264,915 2,472,697 2,593,670
Other borrowed funds 476,378 476,103 538,091 537,194
Stockholders' deficit (28,508 ) (29,550 ) (25,327 ) (13,391 )
Allowance for loan losses 100,477 111,215 130,926 138,347
Non-performing assets(2) 272,942 313,765 348,077 349,472
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(1) Annualized when appropriate.
(2) Non-performing assets consist of loans past due more than ninety days and on non-accrual status, loans past due due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and OREO.
Three Months Ended
6/30/2011 3/31/2011 12/31/2010 9/30/2010
(Dollars in thousands - except per share amounts)
Operations Data:
Net interest income $ 21,520 $ 21,460 $ 22,314 $ 22,418
Provision for credit losses 3,482 10,178 21,412 10,674
Net gain on sale of loans 1,173 1,600 5,601 9,216
Net gain on sale of investment securities 1,136 709 1,187 6,653
Net gain on sale of branches - 2 100 2,318
Other non-interest income 5,618 4,479 4,798 5,533
Non-interest expense 30,710 36,305 24,647 34,112
Income (loss) before income tax expense (benefit) (4,745 ) (18,233 ) (12,059 ) 1,352
Income tax expense (benefit) 10 150 - 14
Net income (loss) (4,755 ) (18,383 ) (12,059 ) 1,338
Preferred stock dividends in arrears (1,536 ) (1,503 ) (1,494 ) (1,352 )
Preferred stock discount accretion (1,863 ) (1,843 ) (1,853 ) (1,853 )
Net loss available to common equity (8,154 ) (21,729 ) (15,406 ) (1,867 )
Selected Financial Ratios (1):
Yield on interest-earning assets 4.66 % 4.57 % 4.66 % 4.80 %
Cost of funds 1.77 1.84 2.07 2.24
Interest rate spread 2.89 2.73 2.59 2.56
Net interest margin 2.77 2.63 2.51 2.45
Return on average assets (0.39 ) (2.12 ) (1.31 ) 0.13
Return on average equity N/M N/M N/M 20.30
Average equity to average assets (0.32 ) (0.15 ) 0.41 0.63
Non-interest expense to average assets 3.69 4.18 2.64 3.51
Per Share:
Basic loss per common share $ (0.38 ) $ (1.02 ) $ (0.72 ) $ (0.09 )
Diluted loss per common share (0.38 ) (1.02 ) (0.72 ) (0.09 )
Dividends per common share - - - -
Book value per common share (5.41 ) (5.80 ) (4.94 ) (3.31 )
Financial Condition:
Total assets $ 3,240,867 $ 3,394,825 $ 3,580,752 $ 3,803,853
Loans receivable, net
Held for sale 16,333 7,538 37,196 28,744
Held for investment 2,390,987 2,520,367 2,661,991 2,839,217
Deposits 2,643,099 2,699,433 2,835,245 3,017,498
Other borrowed funds 547,045 659,005 682,090 700,539
Stockholders' (deficit) equity (4,990 ) (13,171 ) 4,939 39,611
Allowance for loan losses 138,740 150,122 157,438 156,186
Non-performing assets(2) 375,201 396,981 403,364 410,347
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(1) Annualized when appropriate.
(2) Non-performing assets consist of loans past due more than ninety days and on non-accrual status, loans past due due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and OREO.
RESULTS OF OPERATIONS
Overview
Net results from operations for the three months ended June 30, 2012 improved $4.7 million to net income of $0.1 million from a net loss of $4.8 million in the prior year period. The swing to modest net income from the net loss reported for the three-month period last year was largely due to a decrease in provision for credit losses of $5.2 million and higher non-interest income of $4.3 million. These favorable variances were partially offset by a decrease in net interest income of $5.1 million. The discussion that follows in this section provides additional details regarding these results.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread
The tables on the following page show the Corporation's average balances, interest, average rates, net interest margin and interest rate spread for the periods indicated. The average balances are derived from average daily balances.
Three Months Ended June 30,
2012 2011
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
(Dollars In thousands)
Interest-Earning Assets
Mortgage loans $ 1,519,198 $ 18,795 4.95 % $ 1,849,237 $ 23,658 5.12 %
Consumer loans 501,032 6,065 4.84 548,617 6,956 5.07
Commercial business loans 19,727 428 8.68 69,098 1,495 8.65
Total loans receivable (2) (3) 2,039,957 25,288 4.96 2,466,952 32,109 5.21
Investment securities (4) 238,427 1,521 2.55 498,615 3,942 3.16
Interest-bearing deposits 245,474 154 0.25 82,284 52 0.25
Federal Home Loan Bank stock 33,128 28 0.34 54,829 14 0.10
Total interest-earning assets 2,556,986 26,991 4.22 3,102,680 36,117 4.66
Non-interest-earning assets 208,817 225,150
Total assets $ 2,765,803 $ 3,327,830
Interest-Bearing Liabilities
Demand deposits $ 1,011,400 549 0.22 $ 908,274 604 0.27
Regular savings 275,380 84 0.12 251,892 112 0.18
Certificates of deposit 950,943 2,958 1.24 1,521,360 6,603 1.74
Total deposits 2,237,723 3,591 0.64 2,681,526 7,319 1.09
Other borrowed funds 477,866 7,001 5.86 605,312 7,278 4.81
Total interest-bearing liabilities 2,715,589 10,592 1.56 3,286,838 14,597 1.78
Non-interest-bearing liabilities 78,830 51,804
Total liabilities 2,794,419 3,338,642
Stockholders' deficit (28,616 ) (10,812 )
Total liabilities and stockholders'
deficit $ 2,765,803 $ 3,327,830
Net interest income/interest rate
spread (5) $ 16,399 2.66 % $ 21,520 2.88 %
Net interest-earning assets $ (158,603 ) $ (184,158 )
Net interest margin (6) 2.57 % 2.77 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities 0.94 0.94
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(1) Annualized
(2) For the purpose of these computations, non-accrual loans are included in the daily average loan amounts outstanding.
(3) Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual status during the period indicated.
(4) Average balances of securities available-for-sale are based on amortized cost.
(5) Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities and is represented on a fully tax equivalent basis if applicable.
(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.
Net Interest Income
Net interest income decreased $5.1 million or 23.8% for the three months ended June 30, 2012, as compared to the respective periods in the prior year. Interest income decreased $9.1 million or 25.3% for the three months ended June 30, 2012, as compared to the same period in the prior year primarily due to a decline in average balances in the loan and investment security portfolios. Interest expense decreased $4.0 million or 27.4% for the three months ended June 30, 2012, as compared to the same period in the prior year due to a reduction in certificate of deposit ("CD") average balances and the rate paid on these accounts. The net interest margin decreased to 2.57% for the three-month period ended June 30, 2012 from 2.77% for the three-month period in the prior year.
Loan portfolio average balances declined $427.0 million in the quarter ending June 30, 2012 compared to the same period a year ago largely due to scheduled principal payments, prepayments of principal, charge-offs and transfers to OREO. New loan origination has been limited as part the Corporation's capital improvement strategy to reduce risk-weighted assets by shrinking the overall size of the balance sheet. Investment security average balances decreased $260.2 million primarily due to the sale of higher yielding holdings in fiscal 2012 for capital management purposes.
The average balance of CDs decreased $570.4 million for the three months ended June 30, 2012 as compared to the respective period a year ago. Likewise, the average rate paid on CDs fell by 50 basis points quarter over quarter. The decline in CD average balances and interest rates was largely the result of lower rates offered in the market due to reduced funding needs and improved deposit pricing disciplines.
Provision for Credit Losses
Provision for credit losses decreased $5.2 million for the three-month period ended June 30, 2012, as compared to the respective period last year. The decrease in provision for credit losses was partly due to the approximately $2.5 million impact of lower net charge-offs in the quarter ending June 30, 2012 of $7.9 million that replaced net charge-offs of $20.4 million in the quarter ending December 31, 2010 in the trailing six quarter net charge-off history used in the determination of the general component of the allowance for loan losses. In addition, the provision for credit losses attributable to substandard and impaired loans was favorably impacted by the steady quarter-over-quarter decrease in non-performing loans since March 2010. Non-performing loans totaled $189.0 million at June 30, 2012 down from $260.9 million at June 30, 2011.
Future provisions for credit losses will continue to be based upon management's assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors in order to maintain the allowance for loan losses at adequate levels to provide for probable and estimable future losses. The establishment of the amount of the . . .
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