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ABCW > SEC Filings for ABCW > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ANCHOR BANCORP WISCONSIN INC

Form 10-Q for ANCHOR BANCORP WISCONSIN INC


8-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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"), 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.

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 September 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 4.63 percent and 9.07 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 of loan principal 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 $50.7 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 14 quarterly preferred stock dividend payments to the Treasury totaling $22.0 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 September 30, 2012, non-performing loans (consisting of loans past due more


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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 $156.5 million, $68.4 million, or 30.4 percent, below the $224.9 million at March 31, 2012. In addition, the Bank experienced a moderate increase in the level of foreclosed properties on the consolidated balance sheet. At September 30, 2012, other real estate owned was $94.9 million, compared to $88.8 million at March 31, 2012, a 6.8 percent increase. As a result, the decline in the levels of non-performing assets was less 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 $90.7 million at September 30, 2012 from $111.2 million at March 31, 2012, an 18.5 percent decrease. Net charge-offs during the three months ended September 30, 2012 were $14.8 million compared to $17.6 million for the same period in 2011. The provision for credit losses was $5.4 million for the three months ended September 30, 2012, compared to $17.1 million for the three months ended September 30, 2011. The allowance compared to total non-performing loans of 57.93 percent at September 30, 2012 compared to 49.45 percent at March 31, 2012.

Market and Industry Developments

The economic downturn that began in the middle of 2007 and continued into 2010 appears 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 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.

Until such time as the regulatory agencies issue proposed and final regulations implementing the numerous provisions of Dodd-Frank, a process that 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 second quarter ended September 30, 2012 include:

Basic and diluted (loss) per common share improved to $(0.57) for the quarter ended September 30, 2012 compared to $(0.92) for the quarter ended September 30, 2011, primarily due to a decrease of $11.8 million in the provision for credit losses;

The net interest margin decreased three basis points to 2.44% for the quarter ended September 30, 2012 from 2.47% for the quarter ended September 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 low rate environment, and to the maturity of lower rate FHLB advances during the first and second fiscal quarters of 2011;

Loans held for sale decreased $5.1 million, or 12.9% since March 31, 2012 primarily due to a concerted effort to reduce the inventory of unsold mortgages and retention of a higher percentage of originated mortgage loans in the held for investment portfolio;

Loans held for investment (net of the allowance for loan losses) decreased $198.3 million, or 9.6%, since March 31, 2012 primarily due to scheduled pay-offs and amortization and the transfer of $46.2 million to other real estate owned;


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Deposits decreased $120.5 million, or 5.3%, since March 31, 2012 primarily due to runoff of time deposits;

Total risk-based capital ratio for the Bank was 9.07% as of September 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 September 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 $68.4 million, or 30.4% to $156.5 million at September 30, 2012 from $224.9 million at March 31, 2012;

Total non-performing assets (total non-performing loans and other real estate owned) decreased $62.3 million, or 19.9%, to $251.5 million at September 30, 2012 from $313.8 million at March 31, 2012;

The provision for credit losses decreased $11.8 million, to $5.4 million for the three months ended September 30, 2012 from $17.1 million for the three months ended September 30, 2011; and

Delinquencies (loans past due 30 days or more) decreased $73.2 million or 33.1%, to $148.0 million at September 30, 2012 from $221.2 million at March 31, 2012.

Selected quarterly data are set forth in the following tables.


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                                                               Three Months Ended
                                       9/30/2012          6/30/2012          3/31/2012         12/31/2011
                                               (Dollars in thousands - except per share amounts)
Operations Data:
Net interest income                   $    16,059        $    16,399        $    15,888        $    16,014
Provision for credit losses                 5,351             (1,716 )            4,601              8,380
Non-interest income                        13,056             13,498             12,980             10,765
Non-interest expense                       32,520             31,558             28,220             30,268
Income (loss) before income tax
expense (benefit)                          (8,756 )               55             (3,953 )          (11,869 )
Income tax expense (benefit)                 (191 )               -                  -                  -
Net income (loss)                          (8,565 )               55             (3,953 )          (11,869 )
Preferred stock dividends in
arrears                                    (1,634 )           (1,610 )           (1,591 )           (1,572 )
Preferred stock discount
accretion                                  (1,853 )           (1,863 )           (1,844 )           (1,853 )
Net loss available to common
equity                                    (12,052 )           (3,418 )           (7,388 )          (15,294 )

Selected Financial Ratios (1):
Yield on interest-earning assets             3.96 %             4.22 %             4.17 %             4.09 %
Cost of funds                                1.49               1.56               1.72               1.81
Interest rate spread                         2.47               2.66               2.45               2.28
Net interest margin                          2.44               2.57               2.35               2.19
Return on average assets                    (1.26 )             0.01              (0.54 )            (1.51 )
Average equity to average assets            (1.05 )            (1.03 )            (0.94 )            (0.53 )
Non-interest expense to average
assets                                       4.77               4.56               3.89               3.69

Per Share:
Basic loss per common share           $     (0.57 )      $     (0.16 )      $     (0.35 )      $     (0.72 )
Diluted loss per common share               (0.57 )            (0.16 )            (0.35 )            (0.72 )
Dividends per common share                     -                  -                  -                  -
Book value per common share                 (6.87 )            (6.52 )            (6.57 )            (6.37 )

Financial Condition:
Total assets                          $ 2,665,455        $ 2,784,076        $ 2,789,452        $ 3,061,573
Loans receivable, net
Held for sale                              34,274             27,938             39,332             36,962
Held for investment                     1,859,473          1,959,348          2,057,744          2,165,955
Deposits                                2,144,410          2,253,135          2,264,901          2,472,681
Other borrowed funds                      467,293            476,378            476,103            538,091
Stockholders' deficit                     (36,039 )          (28,508 )          (29,550 )          (25,327 )
Allowance for loan losses                  90,678            100,477            111,215            130,926
Non-performing assets(2)                  251,461            272,942            313,765            348,077

(1) Annualized when appropriate.

(2) Non-performing assets consist of loans past due ninety days or more 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.


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                                                               Three Months Ended
                                          9/30/2011        6/30/2011        3/31/2011       12/31/2010
                                               (Dollars in thousands - except per share amounts)
Operations Data:
Net interest income                      $    18,500      $    21,520      $    21,460      $    22,314
Provision for credit losses                   17,115            3,482           10,178           21,412
Non-interest income                           16,436            9,079            7,105           12,977
Non-interest expense                          33,982           31,862           36,620           25,938
Income (loss) before income tax
expense (benefit)                            (16,161 )         (4,745 )        (18,233 )        (12,059 )
Income tax expense (benefit)                      -                10              150               -
Net income (loss)                            (16,161 )         (4,755 )        (18,383 )        (12,059 )
Preferred stock dividends in arrears,
including compounding dividends               (1,579 )         (1,536 )         (1,503 )         (1,494 )
Preferred stock discount accretion            (1,853 )         (1,863 )         (1,843 )         (1,853 )
Net loss available to common equity          (19,593 )         (8,154 )        (21,729 )        (15,406 )

Selected Financial Ratios (1):
Yield on interest-earning assets                4.41 %           4.66 %           4.57 %           4.66 %
Cost of funds                                   1.84             1.77             1.84             2.07
Interest rate spread                            2.57             2.89             2.73             2.59
Net interest margin                             2.47             2.77             2.63             2.51
Return on average assets                       (2.02 )          (0.39 )          (2.12 )          (1.31 )
Average equity to average assets               (0.20 )          (0.32 )          (0.15 )           0.41
Non-interest expense to average assets          4.24             3.69             4.18             2.64

Per Share:
Basic loss per common share              $     (0.92 )    $     (0.38 )    $     (1.02 )    $     (0.72 )
Diluted loss per common share                  (0.92 )          (0.38 )          (1.02 )          (0.72 )
Dividends per common share                        -                -                -                -
Book value per common share                    (5.81 )          (5.41 )          (5.80 )          (4.94 )

Financial Condition:
Total assets                             $ 3,197,441      $ 3,240,867      $ 3,394,825      $ 3,580,752
Loans receivable, net
Held for sale                                 45,199           16,333            7,538           37,196
Held for investment                        2,257,467        2,390,548        2,520,004        2,661,672
Deposits                                   2,593,621        2,643,072        2,699,435        2,835,238
Other borrowed funds                         537,194          547,045          659,005          682,090
Stockholders' equity (deficit)               (13,391 )         (4,990 )        (13,171 )          4,939
Allowance for loan losses                    138,347          138,740          150,122          157,438
Non-performing assets(2)                     349,472          350,418          373,352          403,364

(1) Annualized when appropriate.

(2) Non-performing assets consist of loans past due ninety days or more and on non-accrual status, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and OREO.


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RESULTS OF OPERATIONS

Overview - Three Months Ended September 30, 2012

Net results from operations for the three months ended September 30, 2012 improved $7.6 million to a net loss of $8.6 million from a net loss of $16.2 million in the prior year period. The lower net loss reported in the current quarter compared to the three-month period last year was largely due to a decrease in provision for credit losses of $11.8 million and lower non-interest expense of $1.5 million. These favorable variances were partially offset by a decrease in non-interest income of $3.4 million and lower net interest income of $2.4 million. The discussion that follows in this section provides additional details regarding these results for the quarter.

Net Interest Income

The following table shows the Corporation's average balances, interest, average rates, net interest margin and interest rate spread for the periods indicated. Average balances are derived from daily closing balances.


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                                                                    Three Months Ended September 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                           $ 1,797,635      $  21,293          4.74 %    $ 1,780,131      $  22,419          5.04 %
Consumer loans                               228,547          2,634          4.61          530,671          6,768          5.10
Commercial business loans                     25,125            387          6.16           46,984            750          6.39

Total loans receivable (2) (3)             2,051,307         24,314          4.74        2,357,786         29,937          5.08
Investment securities (4)                    239,741          1,510          2.52          421,895          2,946          2.79
Interest-earning deposits                    311,863            196          0.25          158,435             98          0.25
Federal Home Loan Bank stock                  28,076             25          0.36           54,829             14          0.10

Total interest-earning assets              2,630,987         26,045          3.96        2,992,945         32,995          4.41
Non-interest-earning assets                   97,957                                       210,895

Total assets                             $ 2,728,944                                   $ 3,203,840

Interest-Bearing Liabilities
Demand deposits                          $ 1,034,969            391          0.15      $   939,270            549          0.23
Regular savings                              283,054             95          0.13          257,630            103          0.16
Certificates of deposit                      880,332          2,470          1.12        1,422,138          6,075          1.71

Total deposits                             2,198,355          2,956          0.54        2,619,038          6,727          1.03
Other borrowed funds                         474,546          7,030          5.93          534,944          7,768          5.81

Total interest-bearing liabilities         2,672,901          9,986          1.49        3,153,982         14,495          1.84

Non-interest-bearing liabilities              84,561                                        56,299

Total liabilities                          2,757,462                                     3,210,281
Stockholders' deficit                        (28,518 )                                      (6,441 )

Total liabilities and stockholders'
deficit                                  $ 2,728,944                                   $ 3,203,840

Net interest income/interest rate
spread (5)                                                $  16,059          2.47 %                     $  18,500          2.57 %

Net interest-earning assets              $   (41,914 )                                 $  (161,037 )

Net interest margin (6)                                                      2.44 %                                        2.47 %

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                     0.98                                          0.95

(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.


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Net interest income decreased $2.4 million or 13.2% for the three months ended September 30, 2012, as compared to the same period in the prior year. Interest income decreased $7.0 million or 21.1% for the quarter ended September 30, 2012, compared to the same period in the prior year, primarily due to a decline in average balances in the loan and investment security portfolios and an increase in the average balance of lower yielding interest-earning deposits. Interest expense decreased $4.5 million or 31.1% for the three months ended September 30, 2012, as compared to the same period in the prior year primarily due to a reduction in certificate of deposit ("CD") average balances and the rate paid on these accounts. The net interest margin decreased to 2.44% for the three-month period ended September 30, 2012 from 2.47% for the respective period in the prior year.

Loan portfolio average balances declined $306.5 million in the quarter ending September 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 of the Corporation's capital improvement strategy to reduce risk-weighted assets by shrinking the overall size of the balance sheet. However, the Corporation has recently developed and is implementing strategies to increase profitability by slowing asset runoff to improve the net interest margin. Investment security average balances decreased $182.2 million primarily due to the sale of higher yielding holdings in fiscal 2012 for capital management purposes. The average balance of interest-earning deposits increased $153.4 million as the flow of funds from the loan and investment securities portfolios accumulated pending opportunities to reinvest at attractive risk-adjusted spreads.

The average balance of CDs decreased $541.8 million for the three months ended September 30, 2012 compared to the respective period a year ago. Likewise, the average rate paid on CDs fell by 59 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 $11.8 million for the three-month period ended September 30, 2012, as compared to the same period in the prior year. The decrease in provision for credit losses was partly due to the approximately $0.6 million impact of lower net charge-offs in the quarter ending September 30, 2012 of $14.8 million that replaced net charge-offs of $17.4 million in the quarter ending March 31, 2011 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 $156.5 million at September 30, 2012 down from $256.5 million at September 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 loan loss allowance inherently involves judgments by management as to the adequacy of the allowance, which ultimately may change. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future periods. Conversely, the provision for loan losses may decline as credit metrics such as net-charge offs and the amount of non-performing loans improve in the future.


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Non-Interest Income

The following table presents non-interest income by major category for the
periods indicated:



                                           Three Months Ended September 30,              Increase (Decrease)
                                             2012                    2011               Amount         Percent
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