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| ABCW > SEC Filings for ABCW > Form 10-Q on 7-Feb-2013 | All Recent SEC Filings |
7-Feb-2013
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"), 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% and a total risk-based capital ratio equal to or greater than 12%.
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 December 31, 2012, the Bank and the Corporation had complied with all aspects of the Cease and Desist Order and the PCA, except the Bank had a tier 1 leverage ratio and a total risk-based capital ratio of 4.84% and 9.33%, 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 a Credit Agreement that matures June 30, 2013. The Corporation also has accrued but unpaid interest and fees totaling $55.5 million associated with this obligation that is due and payable at maturity.
In addition, the Corporation issued $110 million of 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 15 consecutive quarterly preferred stock dividend payments to the Treasury totaling $23.7 million, including compounding. 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 December 31, 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 December 31, 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 $146.4 million, $78.6 million, or 34.9%, below the $224.9 million at March 31, 2012. In addition, the Bank experienced a slight increase in the level of foreclosed properties on the consolidated balance sheet. At December 31, 2012, other real estate owned was $90.0 million, compared to $88.8 million at March 31, 2012, a 1.3% 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 $83.8 million at December 31, 2012 from $111.2 million at March 31, 2012, a 24.7% decrease. Net charge-offs during the three months ended December 31, 2012 were $11.7 million compared to $15.8 million for the same period in 2011. The provision for credit losses was $4.7 million for the three months ended December 31, 2012, compared to $8.4 million for the three months ended December 31, 2011. The ratio of allowance for loan losses to total non-performing loans of 57.23% at December 31, 2012 compared to 49.45% 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 for 2013. 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 was disbanded 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
• Basic and diluted (loss) per common share improved to $(0.71) for the quarter ended December 31, 2012 compared to $(0.72) for the quarter ended December 31, 2011;
• The net interest margin increased 24 basis points to 2.42% for the quarter ended December 31, 2012 from 2.18% for the quarter ended December 31, 2011 primarily due to a decline in the interest rate paid on certificates of deposit as higher cost deposits have either matured or renewed at significantly lower rates;
• Loans held for sale decreased $7.8 million, or 20.0% 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 $319.5 million, or 15.5%, since March 31, 2012 primarily due to scheduled pay-offs, amortization and the transfer of $62.0 million to other real estate owned;
• Deposits decreased $209.9 million, or 9.3%, since March 31, 2012 primarily due to runoff of time deposits;
• Total risk-based capital ratio for the Bank was 9.33% as of December 31, 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
• Total non-performing loans decreased $78.6 million, or 34.9% to $146.4 million at December 31, 2012 from $224.9 million at March 31, 2012;
• Total non-performing assets (total non-performing loans and other real estate owned) decreased $77.4 million, or 24.7%, to $236.4 million at December 31, 2012 from $313.8 million at March 31, 2012;
• The provision for credit losses decreased $3.7 million, to $4.7 million for the three months ended December 31, 2012 from $8.4 million for the three months ended December 31, 2011; and
• Delinquencies (loans past due 30 days or more) decreased $86.1 million or 38.9%, to $135.1 million at December 31, 2012 from $221.2 million at March 31, 2012.
Selected quarterly data are set forth in the following tables.
Three Months Ended
12/31/2012 9/30/2012 6/30/2012 3/31/2012
(Dollars in thousands - except per share amounts)
Operations Data:
Net interest income $ 15,205 $ 16,059 $ 16,399 $ 15,888
Provision for credit losses 4,660 5,351 (1,716 ) 4,601
Non-interest income 11,844 13,056 13,498 12,980
Non-interest expense 34,021 32,520 31,558 28,220
Income (loss) before income tax
expense (benefit) (11,632 ) (8,756 ) 55 (3,953 )
Income tax expense (benefit) 10 (191 ) - -
Net income (loss) (11,642 ) (8,565 ) 55 (3,953 )
Preferred stock dividends in
arrears(1) (1,654 ) (1,634 ) (1,610 ) (1,591 )
Preferred stock discount
accretion (1,853 ) (1,853 ) (1,863 ) (1,844 )
Net loss available to common
equity (15,149 ) (12,052 ) (3,418 ) (7,388 )
Selected Financial Ratios (2):
Yield on interest-earning assets 3.84 % 3.96 % 4.22 % 4.17 %
Cost of funds 1.39 1.49 1.56 1.72
Interest rate spread 2.45 2.47 2.66 2.45
Net interest margin 2.42 2.44 2.57 2.35
Return on average assets (1.78 ) (1.26 ) 0.01 (0.54 )
Average equity to average assets (1.34 ) (1.05 ) (1.03 ) (0.94 )
Non-interest expense to average
assets 5.19 4.77 4.56 3.89
Per Share:
Basic loss per common share $ (0.71 ) $ (0.57 ) $ (0.16 ) $ (0.35 )
Diluted loss per common share (0.71 ) (0.57 ) (0.16 ) (0.35 )
Dividends per common share - - - -
Book value per common share (7.37 ) (6.87 ) (6.52 ) (6.57 )
Financial Condition:
Total assets $ 2,412,379 $ 2,665,455 $ 2,784,076 $ 2,789,452
Loans receivable
Held for sale 31,483 34,274 27,938 39,332
Held for investment, net 1,738,242 1,859,473 1,959,348 2,057,744
Deposits 2,055,049 2,144,410 2,253,135 2,264,901
Other borrowed funds 317,102 467,293 476,378 476,103
Stockholders' deficit (46,622 ) (36,039 ) (28,508 ) (29,550 )
Allowance for loan losses 83,761 90,678 100,477 111,215
Non-performing assets(3) 236,355 251,461 272,942 313,765
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(1) Including compounding.
(2) Annualized when appropriate.
(3) 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.
Three Months Ended
12/31/2011 9/30/2011 6/30/2011 3/31/2011
(Dollars in thousands - except per share amounts)
Operations Data:
Net interest income $ 16,014 $ 18,500 $ 21,520 $ 21,460
Provision for credit losses 8,380 17,115 3,482 10,178
Non-interest income 10,768 16,436 9,079 7,105
Non-interest expense 30,271 33,982 31,862 36,620
Income (loss) before income tax
expense (benefit) (11,869 ) (16,161 ) (4,745 ) (18,233 )
Income tax expense (benefit) - - 10 150
Net income (loss) (11,869 ) (16,161 ) (4,755 ) (18,383 )
Preferred stock dividends in
arrears(1) (1,572 ) (1,579 ) (1,536 ) (1,503 )
Preferred stock discount
accretion (1,853 ) (1,853 ) (1,863 ) (1,843 )
Net loss available to common
equity (15,294 ) (19,593 ) (8,154 ) (21,729 )
Selected Financial Ratios (2):
Yield on interest-earning assets 4.08 % 4.41 % 4.66 % 4.57 %
Cost of funds 1.81 1.84 1.77 1.84
Interest rate spread 2.27 2.57 2.89 2.73
Net interest margin 2.18 2.47 2.77 2.63
Return on average assets (1.51 ) (2.02 ) (0.39 ) (2.12 )
Average equity to average assets (0.53 ) (0.20 ) (0.32 ) (0.15 )
Non-interest expense to average
assets 3.69 4.24 3.69 4.18
Per Share:
Basic loss per common share $ (0.72 ) $ (0.92 ) $ (0.38 ) $ (1.02 )
Diluted loss per common share (0.72 ) (0.92 ) (0.38 ) (1.02 )
Dividends per common share - - - -
Book value per common share (6.37 ) (5.81 ) (5.41 ) (5.80 )
Financial Condition:
Total assets $ 3,061,573 $ 3,197,441 $ 3,240,867 $ 3,394,825
Loans receivable
Held for sale 36,962 45,199 16,333 7,538
Held for investment, net 2,165,955 2,257,467 2,390,548 2,520,004
Deposits 2,472,681 2,593,621 2,643,072 2,699,435
Other borrowed funds 538,091 537,194 547,045 659,005
Stockholders' deficit (25,327 ) (13,391 ) (4,990 ) (13,171 )
Allowance for loan losses 130,926 138,347 138,740 150,122
Non-performing assets(3) 348,077 349,472 350,418 373,352
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(1) Including compounding.
(2) Annualized when appropriate.
(3) 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.
RESULTS OF OPERATIONS
Overview - Three Months Ended December 31, 2012
Net results from operations for the three months ended December 31, 2012 improved $0.3 million to a net loss of $11.6 million from a net loss of $11.9 million in the prior year period. The lower net loss reported in the current quarter compared to the three-month period last year was due to a decrease in provision for credit losses of $3.7 million and higher non-interest income of $1.1 million. These favorable variances were partially offset by an increase in non-interest expense of $3.8 million and lower net interest income of $0.8 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.
Three Months Ended December 31,
2012 2011
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
(Dollars in thousands)
Interest-Earning Assets
Mortgage loans $ 1,699,584 $ 19,769 4.65 % $ 1,973,878 $ 24,713 5.01 %
Consumer loans 207,443 2,402 4.63 269,661 2,996 4.44
Commercial business loans 23,650 374 6.33 36,569 615 6.73
Total loans receivable (2) (3) 1,930,677 22,545 4.67 2,280,108 28,324 4.97
Investment securities (4) 250,739 1,369 2.18 194,388 1,395 2.87
Interest-earning deposits 305,535 191 0.25 406,563 257 0.25
Federal Home Loan Bank stock 25,630 25 0.39 54,829 - 0.00
Total interest-earning assets 2,512,581 24,130 3.84 2,935,888 29,976 4.08
Non-interest-earning assets 110,911 209,448
Total assets $ 2,623,492 $ 3,145,336
Interest-Bearing Liabilities
Demand deposits $ 1,070,363 383 0.14 $ 966,401 467 0.19
Regular savings 288,357 99 0.14 256,466 92 0.14
Certificates of deposit 755,390 1,585 0.84 1,328,424 5,488 1.65
Total deposits 2,114,110 2,067 0.39 2,551,291 6,047 0.95
Other borrowed funds 450,826 6,858 6.08 533,800 7,915 5.93
Total interest-bearing liabilities 2,564,936 8,925 1.39 3,085,091 13,962 1.81
Non-interest-bearing liabilities 93,730 77,004
Total liabilities 2,658,666 3,162,095
Stockholders' deficit (35,174 ) (16,759 )
Total liabilities and stockholders'
deficit $ 2,623,492 $ 3,145,336
Net interest income/interest rate spread (5) $ 15,205 2.45 % $ 16,014 2.27 %
Net interest-earning assets $ (52,355 ) $ (149,203 )
Net interest margin (6) 2.42 % 2.18 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities 0.98 0.95
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(1) Annualized
(2) For the purpose of these computations, non-accrual loans are included in the 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 fair value.
(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 decreased $0.8 million or 5.1% for the three months ended December 31, 2012, as compared to the same period in the prior year. Interest income decreased $5.8 million or 19.5% for the quarter ended December 31, 2012, compared to the same period in the prior year, primarily due to a decline in average balances in the loan portfolios, partially offset by an increase in investment security average balances and a decrease in the average balance of lower yielding interest-earning deposits. Interest expense decreased $5.0 million or 36.1% for the three months ended December 31, 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 increased to 2.42% for the three-month period ended December 31, 2012 from 2.18% for the respective period in the prior year.
Loan portfolio average balances declined $349.4 million in the quarter ending December 31, 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 increased $56.4 million primarily due to the purchase of securities totaling $127.8 million since December 31, 2011, partially offset by sales, calls, maturities and principal collections in the past year. The average balance of interest-earning deposits decreased $101.0 million as the flow of funds from the loan and investment securities portfolios were used to reinvest in higher yielding investment securities and fund deposit run off.
The average balance of CDs decreased $573.0 million for the three months ended December 31, 2012 compared to the respective period a year ago. Likewise, the average rate paid on CDs fell by 81 basis points quarter over quarter. The decline in CD average balance and interest rate 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 $3.7 million for the three months ended December 31, 2012, as compared to the same period in the prior year. The decrease in provision for credit losses was primarily due a lower provision for substandard and impaired loans which is attributable to a steady quarter-over-quarter decrease in non-performing loans since March 2010. Non-performing loans totaled $146.4 million at December 31, 2012, down from $261.2 million at December 31, 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 should credit metrics such as net-charge offs and the amount of non-performing loans improve in the future.
Non-Interest Income
The following table presents non-interest income by major category for the
periods indicated:
Three Months Ended December 31, Increase (Decrease)
2012 2011 Amount Percent
(Dollars in thousands)
Net impairment losses recognized in
earnings $ (115 ) $ (156 ) $ 41 26.3 %
Loan servicing income (loss), net of
. . .
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