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EX-32 - EXHIBIT 32 - Anchor Bancorp | ex32q930101210.htm |
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorp | ex312q930101210.htm |
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorp | ex311q930101210.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
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: 001-34965
ANCHOR BANCORP
(Exact
name of registrant as specified in its charter)
Washington | 26-3356075 |
(State or other jurisdiction of incorporation | (I.R.S. Employer |
or organization) | I.D. Number) |
601 Woodland Square Loop SE, Lacey, Washington | 98530 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: | (360) 491-2250 |
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 [ ] No
[X]*
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer | [ ] | Accelerated filer | [ ] | |
Non-accelerated filer | [ ] | Smaller reporting company | [X]* |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of December 20, 2010
there were no shares of common stock, $.01 par value per share,
outstanding.
* The
issuer became subject to the filing requirements of Sections 13 and 15(d) when
its Registration Statement on Form S-1 (“Registration Statement”) was declared
effective by the Securities and Exchange Commission on November 12, 2010. The Registration
Statement included financial statements for the year ended June 30, 2010. This
Form 10-Q is being filed pursuant to Rule 13a-13 of the Securities Exchange Act
of 1934, as amended, in order to file financial statements for the first fiscal
quarter subsequent to the year reported in the Registration Statement.
ANCHOR
BANCORP
FORM
10-Q
TABLE
OF CONTENTS
PART
1 - FINANCIAL INFORMATION
Anchor
Bancorp, a Washington corporation, was formed in connection with the conversion
of Anchor Mutual Savings Bank from the mutual to the stock form of
organization. As of the date hereof, the conversion has not been
completed and Anchor Bancorp has not issued any shares of its common
stock, and has no assets or liabilities, and has not conducted any business
other than that of an organizational nature. For a further discussion
of Anchor Bancorp’s formation and operations, see the Registration Statement
(SEC Registration No. 333-154734). Based on the foregoing, the
information presented in this Form 10-Q is for Anchor Mutual Savings Bank, a
subsidiary of Anchor Bancorp.
Item 1 - Financial Statements | Page |
Consolidated
Statement of Financial Position (unaudited)
|
1 | ||
Consolidated
Statement of Operations (unaudited)
|
2 | ||
Consolidated
Statement of Comprehensive Income (Loss)
(unaudited)
|
3 | ||
Consolidated
Statement of Equity (unaudited)
|
4 | ||
Consolidated
Statement of Cash Flows (unaudited)
|
4 | ||
Selected
notes to Consolidated Financial Statements (unaudited)
|
7 |
Item
2 - Management’s Discussion and Analysis of Financial
Condition
and Results of
Operations
|
17 | ||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
Item 4 - Controls and Procedures | 28 | ||
PART II - OTHER INFORMATION | |||
Item 1 - Legal Proceedings | 29 | ||
Item 1A - Risk Factors | 29 | ||
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 29 | ||
Item 3 - Defaults Upon Senior Securities | 29 | ||
Item 4 – [Removed and Reserved] |
29
|
||
Item 5 - Other Information | 29 | ||
Item 6 - Exhibits | 29 | ||
SIGNATURES | 30 |
Item
1. Financial Statements
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
(In
thousands, except share data) (Unaudited)
|
September
30,
2010
|
June
30,
2010
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 30,216 | $ | 32,831 | ||||
Securities
available-for-sale, at fair value, amortized cost of
|
||||||||
$43,519
and $45,811
|
46,215 | 48,779 | ||||||
Securities
held to maturity, at amortized cost, fair value of
|
||||||||
$10,057
and $10,710
|
9,461 | 10,035 | ||||||
Loans
held for sale
|
1,879 | 3,947 | ||||||
Loans
receivable, net of allowance for loan losses
of $10,997
|
||||||||
and
$16,788
|
371,619 | 389,411 | ||||||
Life
insurance investment, net of surrender charges
|
17,095 | 16,920 | ||||||
Mortgage
servicing rights
|
868 | 924 | ||||||
Accrued
interest receivable
|
2,225 | 2,158 | ||||||
Real
estate owned
|
17,695 | 14,570 | ||||||
Federal
Home Loan Bank of Seattle (“FHLB”) stock, at cost
|
6,510 | 6,510 | ||||||
Property,
premises, and equipment, at cost, less
|
||||||||
accumulated
depreciation of $14,772 and $14,489
|
14,264 | 14,435 | ||||||
Deferred
tax asset, net
|
489 | 373 | ||||||
Prepaid
expenses and other assets
|
1,333 | 1,600 | ||||||
Federal
income tax receivable
|
2,312 | 2,336 | ||||||
Total
Assets
|
$ | 522,181 | $ | 544,829 | ||||
LIABILITIES
AND EQUITY
|
||||||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 29,872 | $ | 28,718 | ||||
Interest
bearing
|
329,638 | 327,070 | ||||||
Total
deposits
|
359,510 | 355,788 | ||||||
Accounts
payable and other liabilities
|
3,752 | 4,109 | ||||||
FHLB
advances
|
110,900 | 136,900 | ||||||
Supplemental
Executive Plan retirement liability
|
1,930 | 1,939 | ||||||
Advance
payments by borrowers for
|
||||||||
taxes
and insurance
|
2,247 | 1,423 | ||||||
Total
liabilities
|
478,339 | 500,159 | ||||||
EQUITY
|
||||||||
Retained
earnings
|
41,630 | 42,278 | ||||||
Accumulated
other comprehensive income, net of tax
|
2,212 | 2,392 | ||||||
Total
equity
|
43,842 | 44,670 | ||||||
TOTAL
liabilities and equity
|
$ | 522,181 | $ | 544,829 | ||||
See accompanying
notes.
1
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF OPERATIONS
(In
thousands, except share data) (Unaudited)
|
Three
Months Ended
September
30,
|
|||||||
2010
|
2009
|
|||||||
Interest
income:
|
||||||||
Loans
receivable, including fees
|
$ | 6,435 | $ | 7,674 | ||||
Investments
|
88 | 123 | ||||||
Mortgage-backed
securities
|
606 | 887 | ||||||
Total
interest income
|
7,129 | 8,684 | ||||||
Interest
expense:
|
||||||||
Deposits
|
1,761 | 2,991 | ||||||
FHLB
advances
|
905 | 1,478 | ||||||
Total
interest expense
|
2,666 | 4,469 | ||||||
Net
interest income before provision for loan losses
|
4,463 | 4,215 | ||||||
Provision
for loan losses
|
1,180 | 366 | ||||||
Net
interest income after provision for loan losses
|
3,283 | 3,849 | ||||||
Noninterest
income:
|
||||||||
Deposit
service fees
|
670 | 732 | ||||||
Other
deposit fees
|
219 | 198 | ||||||
Loan
fees
|
231 | 263 | ||||||
Gain
on sale of mortgages
|
93 | 598 | ||||||
Other
income
|
384 | 284 | ||||||
Total
noninterest income
|
1,597 | 2,075 | ||||||
Noninterest
expense:
|
||||||||
Compensation
and benefits
|
2,168 | 2,192 | ||||||
General
and administrative expenses
|
1,204 | 1,235 | ||||||
Real
estate owned reserve
|
493 | - | ||||||
FDIC
insurance premiums
|
313 | 450 | ||||||
Information
technology
|
487 | 469 | ||||||
Occupancy
and equipment
|
573 | 620 | ||||||
Deposit
services
|
181 | 239 | ||||||
Marketing
|
129 | 107 | ||||||
Loss
on sale of property, premises, and equipment
|
- | 1 | ||||||
Gain
(Loss) on sale of real estate owned
|
(20 | ) | 16 | |||||
Total
noninterest expense
|
5,528 | 5,329 | ||||||
Income(loss)
before provision (benefit) for income tax
|
(648 | ) | 595 | |||||
Provision
(Benefit) for Income Tax
|
||||||||
Current
|
(17 | ) | (75 | ) | ||||
Deferred
|
17 | 75 | ||||||
Total
provision (benefit) for income tax
|
- | -- | ||||||
Net
Income (Loss)
|
$ | (648 | ) | $ | 595 | |||
See accompanying
notes.
2
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF
COMPREHENSIVE
INCOME (LOSS)
(dollars
in thousands) (Unaudited)
|
Three
Months Ended
September
30,
|
|||||||
2010
|
2009
|
|||||||
Net
Income (Loss)
|
$ | (648 | ) | $ | 595 | |||
Other
Comprehensive Income (loss), net of income tax
|
||||||||
Unrealized
holding (loss) gain on available-for-sale securities
|
||||||||
Net
of income tax expense (benefit) of
|
||||||||
$(97)
and $334, respectively
|
(148 | ) | 648 | |||||
Adjustment
for realized gains included in net
|
||||||||
income
(loss), net of income tax provision of
|
||||||||
$22
and $0, respectively
|
(32 | ) | 0 | |||||
Other
comprehensive income (loss), net of income tax
|
(180 | ) | 648 | |||||
Comprehensive
income (loss)
|
$ | (828 | ) | $ | 1,243 |
See accompanying notes.
3
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF EQUITY
(dollars
in thousands) (Unaudited)
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
(Loss),
Net
of Income
Tax
|
Total
|
||||||||||
Balance
at June 30, 2010
|
$ | 42,278 | $ | 2,392 | $ | 44,670 | ||||||
Net
loss
|
(648 | ) | (648 | ) | ||||||||
Other
comprehensive loss net
|
||||||||||||
of
income tax
|
- | (180 | ) | (180 | ) | |||||||
Balance,
September 30, 2010
|
$ | 41,630 | $ | 2,212 | $ | 43.842 |
See accompanying
notes.
4
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS
(dollars
in thousands) (Unaudited)
|
Three
Months Ended
September
30,
|
|||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss)
|
$ | (648 | ) | $ | 595 | |||
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
Depreciation
and amortization
|
308 | 343 | ||||||
Net
amortization of premiums on securities
|
25 | 30 | ||||||
Amortization,
payoffs, and provision for mortgage servicing rights
|
23 | 82 | ||||||
Provision
for loan losses
|
1,180 | 366 | ||||||
Real
estate owned impairments
|
493 | - | ||||||
Deferred
income taxes, net of valuation allowance
|
18 | 75 | ||||||
Income
from life insurance investment
|
(175 | ) | (176 | ) | ||||
(Gain)
loss on sale of loans
|
(93 | ) | (598 | ) | ||||
Gain
on sale of investments
|
(54 | ) | -- | |||||
Loss
on sale of property, premises, and equipment
|
-- | 1 | ||||||
Loss
on sale of real estate owned
|
(20 | ) | 16 | |||||
Change
in operating assets and liabilities:
|
||||||||
Accrued
interest receivable
|
70 | (21 | ) | |||||
Originations
of loans held-for-sale
|
(1,364 | ) | (9,236 | ) | ||||
Proceeds
from sale of loans held-for-sale
|
3,524 | 7,318 | ||||||
Prepaid
expenses, other assets, and federal income tax receivable
|
(272 | ) | (166 | ) | ||||
Change
in Supplemental Executive Retirement Plan liability
|
9 | 10 | ||||||
Accounts
payable and other liabilities
|
227 | 232 | ||||||
Net
cash from operating activities
|
3,251 | (1,129 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from sales and maturities of available-for-sale securities
|
1,191 | 161 | ||||||
Principal
payments on mortgage-backed securities available-for-sale
|
1,130 | 1,700 | ||||||
Principal
payments on mortgage-backed securities held-to-maturity
|
570 | 781 | ||||||
Loan
originations, net of undisbursed loan proceeds and principal
repayments
|
10,356 | 14,291 | ||||||
Proceeds
from sale of real estate owned
|
2,490 | 1,106 | ||||||
Capital
improvements on real estate owned
|
(129 | ) | (33 | ) | ||||
Purchase
of property, premises, and equipment
|
(19 | ) | (8 | ) | ||||
Net
cash from activities
|
15,589 | 17,998 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
change in advances by borrowers for taxes and insurance
|
824 | 740 | ||||||
Net
increase (decrease) in deposits
|
3,721 | (46,260 | ) | |||||
Proceeds
from FHLB advances
|
47,400 | 27,400 | ||||||
Repayment
of FHLB advances
|
(73,400 | ) | (20,000 | ) | ||||
Net
cash from financing activities
|
(21,455 | ) | (38,120 | ) | ||||
(Continued)
See accompanying
notes.
5
ANCHOR
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS (Continued)
(dollars
in thousands) (Unaudited)
|
Three
Months Ended
September
30,
|
|||||||
2010
|
2009
|
|||||||
Net
Change in Cash and Due From Banks
|
(2,615 | ) | (21,251 | ) | ||||
Cash
and Due From Banks, beginning of period
|
32,831 | 42,388 | ||||||
Cash
and Due From Banks, end of period
|
$ | 30,216 | $ | 21,137 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Noncash
investing activities
|
||||||||
Net
loans transferred to real estate owned
|
$ | 5,964 | $ | 13,568 | ||||
Originations
of mortgage servicing rights
|
$ | 23 | $ | 169 | ||||
Loans
securitized into mortgage-backed securities
|
$ | -- | $ | 5,016 | ||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 2,858 | $ | 4,617 | ||||
See accompanying
notes.
6
ANCHOR
BANCORP AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands) (Unaudited)
Note
1 - Nature of Business
Anchor
Bancorp (“Company”) was incorporated in September 2008 as the proposed
holding company for Anchor Mutual Savings Bank (“Bank”) in connection with the
Bank’s plan of conversion from mutual to stock form of ownership. (See Note 3)
The Company has no assets at September 30, 2010. The interim financial
information presented in this report includes only the interim financial
information of the Bank and its subsidiaries.
Anchor Bank is a community-based
savings bank primarily serving Western Washington through its 15 full-service
banking offices (including five Wal-Mart store locations) and one loan
production office located within Grays Harbor, Thurston, Lewis, Pierce, Mason
and Clark counties, Washington. Anchor Bank’s business consists of attracting
deposits from the public and utilizing those deposits to originate
loans.
Note
2 – Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X as
promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they
do not include all the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
financial position and results of operations for the periods presented have been
included. Operating results for the three months ended September 30, 2010,
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2011. For further information, refer to the Bank’s annual
audited consolidated financial statements and related notes for the year ended
June 30, 2010 included in the Company’s prospectus dated November 12,
2010.
Note
3 – Plan of Conversion and Change in Corporate Form
On
July 15, 2008, the Board of Directors of the Bank adopted a plan of
conversion (“Plan”) that was amended on August 31, 2010. The Plan sets forth
that the Bank proposes to convert into a stock savings bank structure with the
establishment of a stock holding company, the Company, as parent of the Bank.
The Bank will convert to the stock form of ownership, followed by the issuance
of all of the Bank’s outstanding stock to the Company. Pursuant to the Plan, the
Bank will determine the total offering value and number of shares of common
stock based upon an independent appraiser’s valuation. The stock will be priced
at $10.00 per share. In connection with the Plan, the Bank’s Board of Directors
will adopt an employee stock ownership plan (“ESOP”) which will subscribe
for 4% of the common stock sold in the offering. The Company is being organized
as a corporation incorporated under the laws of the State of Washington and will
own all of the outstanding common stock of the Bank upon completion of the
conversion.
The costs
of issuing the common stock will be deferred and deducted from the sales
proceeds of the offering. If the conversion is unsuccessful, all deferred costs
will be charged to operations. At September 30, 2010, the Bank had incurred
$254 of deferred conversion costs. The Bank had incurred deferred conversion
costs of $199 as of June 30, 2010. At the completion of the
conversion to stock form, the Bank will establish a liquidation account in the
amount of retained earnings contained in the final prospectus. The liquidation
account will be maintained for the benefits of eligible savings account holders
who maintain deposit accounts in the Bank after conversion. The conversion will
be accounted for as a change in corporate form with the historic basis of the
Bank’s assets, liabilities and equity unchanged as a result.
7
Note
4 – Recently Issued Accounting Pronouncements
The Financial Accounting Standards
Board’s (FASB’s) ASC became effective on July 1, 2009. At that date, the ASC
became the FASB’s officially recognized source of authoritative Generally
Accepted Accounting Principles (GAAP) applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and
related literature. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative.
In December, 2009, the FASB issued
Accounting Standards Update 2009-16, Transfer and Servicing (Topic
860) Accounting for Transfers
of Financial Assets (ASU) which amends ASC 860-10, Transfers and Servicing-Overall
(ASC 860-10) and adds transition paragraphs 860-10-65-3 of ASC 860-10.
ASC 860-10 requires more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets, and requires
additional disclosures. ASC 860-10 is effective for the Bank for the fiscal year
beginning July 1, 2011. The adoption of ASC 860-10 is not expected to
have a material impact on the Bank’s consolidated financial
statements.
In
January, 2010, the FASB issued ASU 2010-06, (Topic 820)-Improving Disclosures about Fair
Value Measurements. ASU 2010-06 revises two disclosure requirements
concerning fair value measurement and clarifies two others. It requires separate
presentation of significant transfers into and out of Levels 1 and 2 of the fair
value hierarchy and disclosure of the reasons for such transfers. It will also
require the presentation of purchases, sales, issuances, and settlements within
Level 3 on a gross basis rather than a net basis. The amendments also clarify
that disclosure should be disaggregated by class of asset or liability and that
disclosures about inputs and valuation techniques should be provided for both
recurring and non-recurring fair value measurements. The Bank’s disclosures
about fair value measurements are presented in Note 9. These new disclosure
requirements were adopted by the Bank during the year ended June 30, 2010, with
the exception of the requirement concerning gross presentation of Level 3
activity, which is effective for fiscal years beginning after December 15, 2010.
With respect to the portions of this ASU that were adopted during the current
period, the adoption of this standard did not have a material impact on the
Bank’s consolidated financial statements. Management does not believe that the
adoption of the remaining portion of this ASU will have a material impact on the
Bank’s consolidated financial statements.
In April 2010, FASB issued ASU
No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When
the Loan Is Part of a Pool That is Accounted for as a Single Asset,
which clarifies the accounting for acquired loans that have evidence of a
deterioration in credit quality since origination (referred to as “Subtopic
310-30 Loans”). Under this ASU, an entity may not apply troubled debt
restructuring (TDR) accounting guidance to individual Subtopic 310-30 Loans that
are part of a pool, even if the modification of those loans would otherwise be
considered a troubled debt restructuring. Once a pool is established, individual
loans should not be removed from the pool unless the entity sells, forecloses,
or writes off the loan. Entities would continue to consider whether the pool of
loans is impaired if expected cash flows for the pool change. Subtopic 310-30
Loans that are accounted for individually would continue to be subject to TDR
accounting guidance. A one-time election to terminate accounting for loans as a
pool, which may be made on a pool-by-pool basis, is provided upon adoption of
the ASU. This ASU is effective for the quarter ended September 30, 2010.
Adoption of this ASU is not expected to significantly impact the Bank’s
consolidated financial statements.
On July 21, 2010, the FASB issued
ASU No. 2010-20, Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses, which
requires significant new disclosures about the allowance for credit losses and
the credit quality of financing receivables. The requirements are intended to
enhance transparency regarding credit losses and the credit quality of loan and
lease receivables. Under this statement, allowance for credit losses and fair
value are to be disclosed by portfolio segment, while credit quality
information, impaired financing receivables, and nonaccrual status are to be
presented by class of financing receivable. Disclosure of the nature and extent,
the financial impact, and the segment information of troubled debt
restructurings will also be required. The disclosures are to be presented at the
level of disaggregation that management uses when assessing and monitoring the
portfolio’s risk and performance. This ASU is effective for interim and annual
reporting periods ending after December 15, 2010. Adoption of this ASU is
expected to significantly expand disclosures within the consolidated financial
statements.
8
Note 5 –Regulatory Order, Economic
Environment, and Management’s Plans
On August 12, 2009, the Bank entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist
(the “Order”) with the FDIC, and the Washington Department of Financial
Institutions, Division of Banks (“DFI”). The FDIC and DFI determined that the
Bank had engaged in unsafe or unsound banking practices. Under the terms of the
Order, the Bank cannot declare dividends without the prior written approval of
the FDIC and the DFI. Other material provisions of the Order require the Bank
to: (i) maintain specified capital and liquidity ratios and (ii) prepare and
submit progress reports to the FDIC and DFI. The Order will remain in effect
until modified or terminated by the FDIC and the DFI. The Bank has been actively
engaged in responding to the concerns raised by the FDIC order.
The Order does not restrict the Bank
from transacting its normal banking business. The Bank will serve its customers
in all areas including making loans, establishing lines of credit, accepting
deposits, and processing banking transactions. All customer deposits remain
fully insured to the highest limits set by the FDIC. The FDIC and DFI did not
impose any monetary penalties. In response to financial results for the year
ended June 30, 2010, and to address the provisions of the Order, the Bank has
developed specific plans focused on increasing liquidity, reducing nonperforming
assets, and improving capital levels.
The Bank’s first priority is to
maintain liquidity sufficient to continue to meet all obligations as they come
due. The Bank’s second priority is to reduce nonperforming assets. The Bank’s
third priority is to increase capital levels in order to offset net losses
incurred. The Bank plans to improve capital levels by managing the Bank’s asset
size and composition, reducing or maintaining operating costs, as necessary, and
obtaining additional equity financing.
As previously announced, the Bank plans
to complete a mutual to stock conversion and will offer common stock in
conjunction with the conversion. There can be no assurances that the conversion
and offering will be completed. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity, Commitments and
Capital Resources—Capital” for information regarding the Bank’s regulatory
capital requirements.
Management believes the Bank is taking
appropriate steps to comply with the Order and has the ability to maintain
capital and liquidity ratios in this challenging economic environment over the
next 12 months.
Note
6 – Supplemental Disclosure for Earning Per Share
When
presented, basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Because the mutual to
stock conversion was not completed as of September 30, 2010, per share earnings
data is not meaningful for this quarter or prior comparative periods and is
therefore not presented. Refer to registration statement for
additional information.
9
Note
7 - Investment securities
The amortized cost and estimated fair
market values of investment securities, including mortgage-backed securities,
available-for-sale, and held-to-maturity (classified by type and contractual
maturity) were as follows:
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
September 30, 2010
|
||||||||||||||||
Securities
available-for-sale
|
||||||||||||||||
Debt
securities
|
||||||||||||||||
Municipal
bonds
|
$ | 1,010 | $ | 9 | $ | - | $ | 1,019 | ||||||||
Within
1 year
|
820 | 32 | - | 852 | ||||||||||||
After
1 through 5 yr
|
675 | 23 | - | 698 | ||||||||||||
After
5 through 10 yr
|
865 | 6 | - | 871 | ||||||||||||
After
10 yr
|
- | - | - | - | ||||||||||||
U.S.
government agency securities
|
||||||||||||||||
After
1 through 5 yr
|
2,999 | 131 | - | 3,130 | ||||||||||||
FHLMC
mortgage-backed securities
|
37,150 | 2,495 | - | 39,645 | ||||||||||||
$ | 43,519 | $ | 2,696 | $ | - | $ | 46,215 | |||||||||
Securities held-to-maturity
|
||||||||||||||||
Debt
securities
|
||||||||||||||||
FHLMC
mortgage-backed securities
|
$ | 9,307 | $ | 596 | $ | - | $ | 9,903 | ||||||||
Municipal
bonds
|
||||||||||||||||
After
10 yr
|
154 | - | - | 154 | ||||||||||||
$ | 9,461 | $ | 596 | $ | - | $ | 10,057 |
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
June30, 2010
|
||||||||||||||||
Securities
available-for-sale
|
||||||||||||||||
Debt
securities
|
||||||||||||||||
Municipal
bonds
|
||||||||||||||||
Within
1 year
|
$ | 1,011 | $ | 16 | $ | -- | $ | 1,027 | ||||||||
After
1 through 5 yr
|
820 | 35 | -- | 855 | ||||||||||||
After
5 through 10 yr
|
675 | 16 | -- | 691 | ||||||||||||
After
10 yr
|
866 | -- | (8 | ) | 858 | |||||||||||
U.S.
government agency securities
|
||||||||||||||||
After
1 through 5 yr
|
2,999 | 152 | -- | 3,151 | ||||||||||||
FHLMC
mortgage-backed securities
|
39,440 | 2,757 | -- | 42,197 | ||||||||||||
$ | 45,811 | $ | 2,976 | $ | (8 | ) | $ | 48,779 | ||||||||
Securities held-to-maturity
|
||||||||||||||||
Debt
securities
|
||||||||||||||||
FHLMC
mortgage-backed securities
|
$ | 9,880 | $ | 675 | $ | -- | $ | 10,555 | ||||||||
Municipal
bonds
|
||||||||||||||||
After
10 yr
|
155 | -- | -- | 155 | ||||||||||||
$ | 10,035 | $ | 675 | $ | -- | $ | 10,710 |
10
At September 30, 2010 and June 30,
2010, zero and one securities, respectively, were in an unrealized loss position
for less than twelve months. The fair value of temporarily impaired
securities, the amount of unrealized losses, and the length of time these
unrealized losses existed as of September 30, 2010 and June 30, 2010 are as
follows:
Less
than 12 months
|
12
months or longer
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
September
30, 2010
|
||||||||||||||||||||||||
Securities
available-for-sale
|
||||||||||||||||||||||||
Debt
securities
|
||||||||||||||||||||||||
Municipal
bonds
|
|
|||||||||||||||||||||||
After
10 years
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
June
30, 2010
|
||||||||||||||||||||||||
Securities
available-for-sale
|
||||||||||||||||||||||||
Debt
securities
|
||||||||||||||||||||||||
Municipal
bonds
|
||||||||||||||||||||||||
After
10 years
|
$ | 636 | $ | 8 | $ | -- | $ | -- | $ | 636 | $ | 8 |
Expected maturities of mortgage-backed
securities may differ from contractual maturities because borrowers may have the
right to call or prepay the obligations; therefore these securities are
classified separately with no specific maturity date.
For the three months ended September
30, 2010 and September 30, 2009, proceeds from sales and maturities of
securities available-for-sale were $1.2 million and $162,
respectively. Gross realized gains were $54, and gross realized
losses were $0 on the sale of securities available-for-sale for the three months
ending September 30, 2010. Gross realized gains were $0 and gross
realized losses were $0 on the sale of securities available-for-sale for the
three months ended September 30, 2009.
At September 30, 2010 securities with
total par values of $6.3 million and total fair values of $6.4 million were
pledged to secure certain public deposits. Securities with total par values of
$864 and total fair values of $917 were pledged to secure certificates of
deposit in excess of FDIC-insured limits. Securities with total par values of
$2.8 million and total fair values of $2.8 million were pledged to secure FHLB
borrowings. At September 30, 2010 securities with total par values of $932 and a
total fair value of $926 were pledged to secure a line of credit with the
Federal Reserve Bank.
11
Note
8 - Loans Receivable
Loans
receivable consisted of the following:
September
30,
2010
|
June
30,
2010
|
|||||||
(dollars in thousands) | ||||||||
Real
estate:
|
||||||||
One-to-four
family residential
|
$ | 110,892 | $ | 112,835 | ||||
Multi-family
residential
|
44,482 | 45,983 | ||||||
Commercial
|
115,887 | 118,492 | ||||||
Construction
|
23,478 | 36,812 | ||||||
Land
loans
|
7,480 | 7,843 | ||||||
Total
real estate
|
302,219 | 321,965 | ||||||
Consumer:
|
||||||||
Home
equity
|
41,601 | 42,446 | ||||||
Credit
cards
|
7,672 | 7,943 | ||||||
Automobile
|
7,953 | 8,884 | ||||||
Other
consumer loans
|
4,021 | 4,160 | ||||||
Total
consumer
|
61,247 | 63,433 | ||||||
Commercial
business loans
|
19,993 | 21,718 | ||||||
Total
loans
|
383,459 | 407,116 | ||||||
Less
|
||||||||
Deferred
loan fees and unamortized
|
||||||||
discount
on purchased loans
|
843 | 917 | ||||||
Allowance
for loan losses
|
10,997 | 16,788 | ||||||
$ | 371,619 | $ | 389,411 |
The Bank originates both adjustable and
fixed-interest-rate loans. At September 30, 2010, the composition of these
loans, less undisbursed amounts, was as follows:
Fixed
Rate
|
Adjustable
Rate
|
Total
|
||||||||||
(dollars
in thousands)
|
||||||||||||
Less
than one year
|
$ | 31,823 | $ | 32,609 | $ | 64,432 | ||||||
After
one through five years
|
95,372 | 31,031 | 126,403 | |||||||||
After
five through ten years
|
53,786 | 13,747 | 67,533 | |||||||||
After
ten years
|
106,227 | 18,864 | 125,091 | |||||||||
$ | 287,208 | $ | 96,251 | $ | 383,459 |
Adjustable rate loans have interest
rate adjustment limitations and are generally indexed to either the Treasury
bill one-year rate or the monthly weighted-average cost of funds for 12th
district institutions regulated by the Office of Thrift Supervision, as
published by the FHLB of Seattle.
Outstanding commitments to borrowers
for loans as of September 30, 2010 totaled $533. Unfunded commitments
under lines of credit as of September 30, 2010 totaled $38.9
million.
12
The
following table sets forth the activity in the allowance for loan losses account
for the respective three months periods ended:
September
30,
2010
|
September
30,
2009
|
|||||||
(dollars
in thousands)
|
||||||||
Beginning
balance
|
$ | 16,788 | $ | 24,463 | ||||
Provision
for losses
|
1,180 | 366 | ||||||
Charge-offs
|
(7,086 | ) | (3,910 | ) | ||||
Recoveries
|
115 | 35 | ||||||
$ | 10,997 | $ | 20,954 |
The following table sets forth the
activity in impaired loans:
September
30,
2010
|
June
30,
2010
|
|||||||
(dollars
in thousands)
|
||||||||
Impaired
loans without a valuation allowance
|
$ | 8,095 | $ | 8,174 | ||||
Impaired
loans with a valuation allowance
|
18,430 | 23,872 | ||||||
Total
impaired loans
|
$ | 26,525 | $ | 32,046 | ||||
Valuation
allowance related to impaired loans
|
$ | 3,714 | $ | 8,491 | ||||
Average
investment in impaired loans
|
$ | 26,524 | $ | 33,640 | ||||
Interest
income recognized on a cash basis
|
||||||||
on
impaired loans
|
$ | 291 | $ | 57 |
At September 30, 2010 loans (including
amounts committed) of $5.8 million represent real estate secured loans that have
loan-to-value ratios above supervisory guidelines.
At September 30, 2010, troubled debt
restructured loans, included in impaired loans above, totaled $14.6 million.
Restructured loans are an option that the Bank uses to minimize risk of loss.
The modifications have included items such as lowering the interest on the loan
for a period of time and extending the maturity date of the loan. These
modifications are made only when there is a reasonable and attainable workout
plan that has been agreed to by the borrower and is in the Bank’s best interest.
At September 30, 2010, there were no commitments to lend additional funds to
borrowers whose loans have been modified in troubled debt restructurings.
Nonaccrual loans totaled $6.7 million at September 30, 2010. Loans 90 days and
over past due still accruing interest were $113 at September 30,
2010.
13
Note
9 – Fair Value Measurements
Assets and liabilities measured at
fair value on a recurring basis - Assets and liabilities are considered
to be fair valued on a recurring basis if fair value is measured regularly. The
following table shows the Bank’s assets and liabilities measured at fair value
on a recurring basis (there were no transfers between Level 1 and Level 2 for
the three months ended September 30, 2010).
September
30, 2010
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Securities
available-for-sale
|
$ | -- | $ | 46,215 | $ | -- | $ | 46,215 |
June
30, 2010
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Securities
available-for-sale
|
$ | -- | $ | 48,779 | $ | -- | $ | 48,779 |
Assets measured at fair value on a
nonrecurring basis - Assets and liabilities are considered to be fair
valued on a nonrecurring basis if the fair value measurement of the instrument
does not necessarily result in a change in the amount recorded on the balance
sheet. Generally, nonrecurring valuation is the result of the application of
other accounting pronouncements that require assets or liabilities to be
assessed for impairment or recorded at the lower of cost or fair value. The
following table presents the Bank’s assets measured at fair value on a
nonrecurring basis:
September
30, 2010
|
||||||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
Total
Gains
Losses
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Impaired
loans (1)
|
$ | - | $ | - | $ | 13,491 | $ | 13,491 | $ | (3,400 | ) | |||||||||
Real
estate owned
|
$ | - | $ | - | $ | 17,695 | $ | 17,695 | $ | (12,616 | ) | |||||||||
Mortgage
servicing rights
|
$ | - | $ | 868 | $ | - | $ | 868 | $ | - | ||||||||||
Loans
held for sale (2)
|
$ | 1,879 | $ | - | $ | - | $ | 1,879 | $ | - |
(1) The
balance disclosed for impaired loans represents the impaired loans where fair
value is below cost at September 30, 2010 (unaudited). The amount
disclosed as a loss represents the specific reserve against these loans at
September 30, 2010.
(2) The
fair value is based on quoted market prices obtained from Federal Home Loan
Mortgage Corporation or from direct sales to other third parties. FHLMC quotes
are updated daily and represent prices at which loans are exchanged in high
volumes and in a liquid market.
June
30, 2010
|
||||||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
Total
Gains
Losses
|
||||||||||||||||
Impaired
loans (1)
|
$ | -- | $ | -- | $ | 16,473 | $ | 16,473 | $ | (8,187 | ) | |||||||||
Real
estate owned
|
$ | -- | $ | -- | $ | 14,570 | $ | 14,570 | $ | (8,047 | ) | |||||||||
Mortgage
servicing rights
|
$ | -- | $ | 924 | $ | -- | $ | 924 | $ | -- | ||||||||||
Loans
held for sale (2)
|
$ | 3,391 | $ | -- | $ | -- | $ | 3,391 | $ | (52 | ) |
(1) The
balance disclosed for impaired loans represents the impaired loans where fair
value is below cost at June 30, 2010 (unaudited). The amount
disclosed as a loss represents the specific reserve against these loans at June
30, 2010.
(2) The
fair value is based on quoted market prices obtained from Federal Home Loan
Mortgage Corporation or from direct sales to other third parties. FHLMC quotes
are updated daily and represent prices at which loans are exchanged in high
volumes and in a liquid market.
The fair value of impaired loans is
determined using either the fair value of collateral less estimated selling
costs. The fair value of real estate owned is estimated using the fair value of
the collateral less estimated selling costs. The fair value of
mortgage servicing rights is estimated using a model that includes observable
assumptions of prepayment speeds, discount rates, and default
rates.
14
There
were no transfers out of Level 3 for the three months ended September 30,
2010.The estimated fair values of financial instruments are as
follows:
September
30, 2010
|
June
30, 2010
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 30,216 | $ | 30,216 | $ | 32,831 | $ | 32,831 | ||||||||
Securities
available-for-sale
|
46,215 | 46,215 | 48,779 | 48,779 | ||||||||||||
Securities
held-to-maturity
|
9,461 | 10,057 | 10,035 | 10,710 | ||||||||||||
Loans
held-for-sale
|
1,879 | 1,879 | 3,947 | 3,961 | ||||||||||||
Loans
receivable
|
371,619 | 342,347 | 389,411 | 360,697 | ||||||||||||
Life
insurance investment
|
17,095 | 17,095 | 16,920 | 16,920 | ||||||||||||
Mortgage
servicing rights
|
868 | 868 | 924 | 1,183 | ||||||||||||
Accrued
interest receivable
|
2,225 | 2,225 | 2,158 | 2,158 | ||||||||||||
FHLB
stock
|
6,510 | 6,510 | 6,510 | 6,510 | ||||||||||||
Liabilities:
|
||||||||||||||||
Demand
deposits, savings and money
market
|
156,254 | 156,254 | 154,324 | 154,324 | ||||||||||||
Certificates
of deposit
|
203.256 | 202,095 | 201,464 | 200,976 | ||||||||||||
FHLB
advances
|
110,900 | 112,497 | 136,900 | 138,312 | ||||||||||||
Advance
payments by borrowers for taxes and insurance
|
2,247 | 2,247 | 1,423 | 1,423 |
Commitments to extend credit represent
the principal categories of off-balance-sheet financial instruments. The fair
values of these commitments are not material since they are for a short period
of time and are subject to customary credit terms.
The following methods and assumptions
were used to estimate the fair value of each class of financial
instrument:
Cash and due from banks - For
cash, the carrying amount is a reasonable estimate of fair value.
Securities - The estimated
fair values of investments in debt securities were based on quoted market prices
of similar securities.
Loans held-for-sale - The fair
value of loans held-for-sale is based on quoted market prices from Federal Home
Loan Mortgage Corporation. The FHLMC quotes are updated daily and represent
prices at which loans are exchanged in high volumes and in a liquid
market.
Loans receivable - As of
September 30, 2010 and June 30, 2010, loans were priced using comparable market
statistics. The loan portfolio was segregated into various categories and a
weighted average valuation discount that approximated similar loan sales was
applied to each category.
Life insurance investment -
The carrying amount is a reasonable estimate of its fair value.
Mortgage servicing rights -
The fair value of mortgage servicing rights is estimated using a model that
includes assumptions about prepayment speeds, discount rates, and default
rates.
FHLB stock - FHLB stock is
carried at par and does not have a readily determinable fair value. Ownership of
FHLB stock is restricted to the FHLB and member institutions, and can only be
purchased and redeemed at par. Due to ongoing turmoil in the capital and
mortgage markets, the FHLB of Seattle has a risk-based
15
capital
deficiency largely as a result of write-downs on their private label
mortgage-backed securities portfolios.
Demand deposits, savings, money
market, and certificates of deposit - The fair value of the Bank’s demand
deposits, savings, and money market accounts is the amount payable on demand.
The fair value of fixed-maturity certificates is estimated using a discounted
cash flow analysis using current rates offered for deposits of similar remaining
maturities.
FHLB advances - The fair value
of the Bank’s FHLB advances was calculated using the discounted cash flow
method. The discount rate was equal to the current rate offered by the FHLB for
advances of similar remaining maturities.
Accrued interest receivable and
advance payments by borrowers for taxes and insurance - The carrying
value has been determined to be a reasonable estimate of their fair
value.
16
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements and “Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995
This
report contains forward-looking statements, which are not statements of
historical fact and often include the words “believes,” “expects,”
“anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,”
“potentially,” “probably,” “projects,” “outlook” or similar expressions or
future or conditional verbs such as “may,” “will,” “should,” “would” and
“could.” Forward-looking statements include statements with respect
to our beliefs, plans, objectives, goals, expectations, assumptions and
statements about future performance. These forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that
could cause actual results to differ materially from the results anticipated,
including, but not limited to:
|
•
|
the
credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write offs and changes in our allowance
for loan losses and provision for loan losses that may be impacted by
deterioration in the housing and commercial real estate
markets;
|
|
•
|
changes
in general economic conditions, either nationally or in our market
areas;
|
|
•
|
changes
in the levels of general interest rates, and the relative differences
between short and long term interest rates, deposit interest rates, our
net interest margin and funding
sources;
|
|
•
|
fluctuations
in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market
area;
|
|
•
|
secondary
market conditions for loans and our ability to sell loans in the secondary
market;
|
|
•
|
results
of examinations of us by the FDIC, DFI or other regulatory authorities,
including the possibility that any such regulatory authority may, among
other things, require us to increase our reserve for loan losses,
write-down assets, change our regulatory capital position or affect our
ability to borrow funds or maintain or increase deposits, which could
adversely affect our liquidity and
earnings;
|
|
•
|
our
compliance with the Order or other regulatory enforcement
actions;
|
|
•
|
legislative
or regulatory changes that adversely affect our business including the
effect of the Dodd-Frank Act, changes in regulatory policies and
principles, or the interpretation of regulatory capital or other
rules;
|
|
•
|
our
ability to attract and retain
deposits;
|
|
•
|
further
increases in premiums for deposit
insurance;
|
|
•
|
our
ability to control operating costs and
expenses;
|
|
•
|
the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in
valuation;
|
|
•
|
difficulties
in reducing risks associated with the loans on our balance
sheet;
|
|
•
|
staffing
fluctuations in response to product demand or the implementation of
corporate strategies that affect our workforce and potential associated
charges;
|
|
•
|
computer
systems on which we depend could fail or experience a security
breach;
|
|
•
|
our
ability to retain key members of our senior management
team;
|
|
•
|
costs
and effects of litigation, including settlements and
judgments;
|
|
•
|
our
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we may in the future acquire into our
operations and out ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related
thereto;
|
|
•
|
increased
competitive pressures among financial services
companies;
|
|
•
|
changes
in consumer spending, borrowing and savings
habits;
|
|
•
|
the
availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory
actions;
|
|
•
|
our
ability to pay dividends on our common
stock;
|
|
•
|
adverse
changes in the securities markets;
|
|
•
|
inability
of key third-party providers to perform their obligations to
us;
|
|
•
|
changes
in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies, or the Financial Accounting Standards
Board, including additional
guidance
|
17
|
and
interpretation on accounting issues and details of the implementation of
new accounting methods including relating to fair value accounting and
loan loss reserve requirements; and
|
|
•
|
other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and the other
risks described elsewhere in this
report.
|
Some of these and other factors are
discussed in our prospectus dated November 12, 2010 under the caption “Risk
Factors.” Such developments could have an adverse impact on our
financial position and our results of operations.
Any of the forward-looking statements
that we make in this quarterly report and in other public statements we make may
turn out to be wrong because of inaccurate assumptions we might make, because of
the factors illustrated above or because of other factors that we cannot
foresee. Because of these and other uncertainties, our actual future results may
be materially different from the results indicated by these forward-looking
statements and you should not rely on such statements. The Company undertakes no
obligation to publish revised forward-looking statements to reflect the
occurrence of unanticipated events or circumstances after the date hereof. These
risks could cause our actual results for fiscal year 2011 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect the Company’s financial condition,
liquidity and operating performance.
Background
and Overview
Anchor
Mutual Savings Bank is a Washington chartered mutual savings bank that was
organized in 1907 as a Washington state chartered savings and loan association,
converted to a federal mutual savings and loan association in 1935, and
converted to a Washington state chartered mutual savings bank in
1990. Anchor Bank is a community-based savings bank primarily serving
Western Washington through our 15 full-service banking offices (including five
Wal-Mart store locations) and one loan production office located within Grays
Harbor, Thurston, Lewis, Pierce, Mason and Clark counties, Washington. We are in
the business of attracting deposits from the public and utilizing those deposits
to originate loans and we offer a wide range of loan products to meet the
demands of our customers. Historically, lending activities have been
primarily directed toward the origination of one- to four-family residential
construction, commercial real estate and consumer loans. Since 1990,
we have also offered commercial real estate loans and multi-family loans
primarily in Western Washington. To an increasing extent in recent years,
lending activities have also included the origination of residential
construction loans through brokers, in particular within the Portland, Oregon
metropolitan area and increased reliance on non-deposit sources of
funds.
Critical
Accounting Estimates and Related Accounting Policies
Note 1 to
the consolidated financial statements in the registration statement provides a
description of critical accounting policies and significant estimates in the
financial statements that should be considered in conjunction with the reading
of this discussion and analysis.
Comparison
of Financial Condition at September 30, 2010 and June 30, 2010
General. Total assets
decreased $22.6 million, or 4.2%, to $522.2 million at September 30, 2010 from
$544.8 million at June 30, 2010. The decrease in assets during this
period was primarily a result of a $17.8 million or 4.6% decrease in loans
receivable and a $2.6 million, or 6.0%, decrease in total mortgage-backed
securities available for sale to $39.6 million at September 30, 2010 from $42.2
million at June 30, 2010. Total real estate owned increased $3.1
million, or 21.5%, to $17.7 million at September 30, 2010 from $14.6 million at
June 30, 2010 reflecting the migration of problem loans through the foreclosure
process into real estate owned. Total liabilities decreased $21.8
million or 4.4% from $478.3 million at September 30, 2010 compared to $500.2
million at June 30, 2010. The decrease in our balance sheet
facilitated our efforts to comply with the regulatory capital requirements under
the Order. Total deposits increased $3.7 million, or 1.0%, to $359.5
million at September 30, 2010 from $355.8 million at June 30, 2010. Money market
deposits increased $4.3 million or 6.0% due to our continued focus on core
deposits. Brokered deposits decreased $5.0 million or 23.0% to $16.7 million at
September 30, 2010. Our total borrowings, which consisted of FHLB
advances, decreased $26.0 million from June 30, 2010 to September 30,
18
2010. The
average cost of advances decreased from 3.75% during the year ended June 30,
2010 to 3.00% during the three months ended September 30, 2010.
Assets. For the
three months ended September 30, 2010, total assets decreased $22.6 million. The
following table details the increases and decreases in the composition of our
assets from June 30, 2010 to September 30, 2010:
Increase/(Decrease)
|
||||||||||||||||
Balance
at September 30,
2010
|
Balance
at
June
30,
2010
|
Amount
|
Percent
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Cash
and amounts due from banks
|
$ | 30,216 | $ | 32,831 | $ | (2,615 | ) | (8.0 | )% | |||||||
Mortgage-backed
securities available for
sale
|
39,645 | 42,197 | (2,552 | ) | (6.0 | ) | ||||||||||
Mortgage-backed
securities, held to
maturity
|
9,307 | 9,880 | (573 | ) | (5.8 | ) | ||||||||||
Loans
receivable, net of allowance for loan
losses
|
371,619 | 389,411 | (17,792 | ) | (4.6 | ) |
From June 30, 2010 to September 30,
2010, cash and due from banks decreased $2.6 million. This decrease
was a result of normal operations, to fund our managed decline in
borrowings.
Mortgage-backed securities decreased
$3.1 million to $49.0 million at September 30, 2010 from $52.1 million at June
30, 2010. During the three months ended September 30, 2010, no fixed rate
mortgage-backed securities were securitized by us through Freddie Mac. We
securitize and sell mortgage loans to manage interest rate sensitivity and
capital requirements, supplement loan originations and provide
liquidity. During the three months ended September 30, 2010, we sold
$1.2 million in securities compared to $16.2 million in securities for the year
ended June 30, 2010.
Loans receivable, net, decreased $17.8
million to $371.6 million at September 30, 2010 from $389.4 million at June 30,
2010 primarily as a result of the continuation of our focus to decrease loans
receivable as well as declines from loan repayments and the increase in real
estate owned. During the three months ended September 30, 2010, $6.0 million of
non-performing loans were transferred to real estate owned. During the three
months ended September 30, 2010, our construction loans decreased $13.3 million
and our commercial real estate loans decreased $4.1 million.
19
Deposits. Deposits
increased $3.7 million, or 1.0%, to $359.5 million at September 30, 2010 from
$355.8 million at June 30, 2010. A significant portion of the
increase was in money market deposits which increased $4.3 million and retail
certificates of deposit which increased $6.8 million. The increases
are related to our focus on increasing retail deposits and reducing our reliance
on wholesale funds. Between September 30, 2009 and September 30, 2010
we reduced our brokered certificates of deposit $48.6 million or 74.4% as part
of our strategy to comply with the Order. During the three months ended
September 30, 2010 we continued to reduce our brokered certificates of deposit
which decreased $5.0 million during this period.
The following table details the
changes in deposit accounts:
Increase/(Decrease)
|
||||||||||||||||
Balance
at September 30,
2010
|
Balance
at
June
30,
2010
|
Amount
|
Percent
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Noninterest-bearing
demand deposits
|
$ | 29,872 | $ | 28,718 | $ | 1,154 | 4.0 | % | ||||||||
Interest-bearing
demand deposits
|
21,047 | 25,483 | (4,436 | ) | (17.4 | ) | ||||||||||
Money
market accounts
|
74,624 | 70,367 | 4,257 | 6.0 | ||||||||||||
Savings
deposits
|
30,711 | 29,756 | 955 | 3.2 | ||||||||||||
Certificates
of deposit
|
||||||||||||||||
Retail
certificates
|
186,517 | 179,739 | 6,778 | 3.8 | ||||||||||||
Brokered
certificates
|
16,739 | 21,725 | (4,986 | ) | (23.0 | ) | ||||||||||
Total
deposit accounts
|
$ | 359,510 | $ | 355,788 | $ | 3,722 | 1.0 | % |
Borrowings. FHLB
advances decreased $26.0 million, or 19.0%, to $110.9 million at September 30,
2010 from $136.9 million at June 30, 2010. The decrease in borrowings was
related to our continued focus on reducing our reliance on wholesale
deposits.
Equity. Total
equity decreased $828 or 1.9%, to $43.8 million at September 30, 2010 from $44.7
million at June 30, 2010. The decrease was related to our net loss of
($648) and ($180) in other comprehensive loss.
Comparison
of Operating Results for the Three Months ended September 30, 2010 and September
30, 2009
General. Net loss
for the three months ended September 30, 2010 was $(648) compared to net income
of $595 for the three months ended September 30, 2009.
Net Interest
Income. Net interest income increased $248 or 5.9%, to $4.5
million for the three months ended September 30, 2010, from $4.2 million for the
three months ended September 30, 2009. The increase in net interest income was
primarily attributable to the increase of our net interest margin.
Our net interest margin increased 88
basis points to 3.66% for the three months ended September 30, 2010, from 2.78%
for the same period of the prior year. The cost of interest-bearing liabilities
decreased 87 basis points to 2.36% for the three months ended September 30, 2010
compared to 3.23% for the same period of the prior year primarily due to a lower
cost of FHLB borrowings and certificates of deposit. The decline was
related to the repricing of our FHLB borrowings, money market accounts and
certificates of deposit to lower current rates and a $5.0 million decline in
brokered certificates of deposit during the three months ended September 30,
2010.
The cost of borrowed funds from the
FHLB decreased to 3.0% during the three months ended September 30, 2010 from
4.44% for the same period of the prior year. The following table sets
forth the results of balance sheet growth and changes in interest rates to our
net interest income. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate). Changes attributable to both rate and volume, which cannot be
segregated, are allocated proportionately to the changes in rate and
volume.
20
Three
Months Ended September 30, 2010
Compared
to Three Months Ended
September 30,
2009
|
||||||||||||
Increase
(Decrease) Due to
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
(in
thousands)
|
||||||||||||
Interest-earning
assets:
|
||||||||||||
Loans
receivable, net
|
$ | 181 | $ | (1,420 | ) | $ | (1,239 | ) | ||||
Mortgage-backed
securities
|
18 | (299 | ) | (281 | ) | |||||||
Investment
securities, FHLB stock
and
cash and due from banks
|
(25 | ) | (10 | ) | (35 | ) | ||||||
Total
net change in income on interest-earning assets
|
$ | 174 | $ | (1,729 | ) | $ | (1,555 | ) | ||||
|
||||||||||||
Interest-bearing
liabilities:
|
||||||||||||
Savings
deposits
|
$ | -- | $ | 2 | $ | 2 | ||||||
Interest-bearing
demand deposits
|
(16 | ) | (2 | ) | (18 | ) | ||||||
Money
market accounts
|
(194 | ) | (203 | ) | (397 | ) | ||||||
Certificates
of deposit
|
(350 | ) | (467 | ) | (817 | ) | ||||||
FHLB
advances
|
(435 | ) | (138 | ) | (573 | ) | ||||||
Total
net change in expense on interest-bearing liabilities
|
(995 | ) | (808 | ) | (1,803 | ) | ||||||
Total
increase in net interest income
|
$ | 1,169 | $ | (921 | ) | $ | 248 |
Interest Income. Total
interest income for the three months ended September 30, 2010 decreased $1.6
million, or 17.9%, to $7.1 million, from $8.7 million for the three months ended
September 30, 2009. The decrease during the period was primarily attributable to
the decline in net loans receivable over the last year.
The following table compares detailed
average earning asset balances, associated yields, and resulting changes in
interest income for the three months ended September 30, 2010 and
2009:
Three
Months Ended September 30,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Yield
|
Average
Balance
|
Yield
|
(Decrease)
in Interest and Dividend Income from 2009
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Loans
receivable, net (1)
|
$ | 394,221 | 6.53 | % | $ | 483,638 | 6.35 | % | $ | (1,239 | ) | |||||||||
Mortgage-backed
securities
|
47,773 | 5.07 | 72,109 | 4.92 | (281 | ) | ||||||||||||||
Investment
securities
|
6,525 | 4.29 | 9,057 | 4.37 | (29 | ) | ||||||||||||||
FHLB
stock
|
6,510 | -- | 6,510 | -- | -- | |||||||||||||||
Cash
and due from banks
|
32,315 | 0.22 | 34,020 | 0.28 | (6 | ) | ||||||||||||||
Total
interest-earning assets
|
$ | 487,344 | 5.85 | % | $ | 605,334 | 5.48 | % | $ | (1,555 | ) |
(1)
Average loans receivable includes non performing loans and does not include net
deferred loan fees. Interest income
does not include non-accrual loans.
Interest
Expense. Interest expense decreased $1.8 million, or 40.3%, to
$2.7 million for the three months ended September 30, 2010 from $4.5 million for
the three months ended September 30, 2009 primarily due to a decline in our cost
of funds. The average balance of total interest-bearing liabilities
decreased $101.9 million, or 18.4%, to $450.9 million for the three months ended
September 30, 2010 from $552.8 million for the three months ended September 30,
2009. The decrease was primarily a result of a $51.3 million decline due to
repricing in the
21
portfolio
and to a lesser extent, a $37.8 million decrease in money market accounts as a
result of a money market account promotion that ended on August 31,
2009.
As a result of general market rate
decreases along with the reduction in outstanding brokered certificates of
deposits, the average cost of funds for total interest-bearing liabilities
decreased 87 basis points to 2.36% for the three months ended September 30, 2010
compared to 3.23% for the three months ended September 30, 2009.
The following table details average
balances, cost of funds and the change in interest expense for the three months
ended September 30, 2010 and 2009:
Three
Months Ended September 30,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Cost
|
Average
Balance
|
Cost
|
(Decrease)
in Interest Expense from 2008
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Savings
deposits
|
$ | 30,264 | 0.77 | % | $ | 29,109 | 0.77 | % | $ | 2 | ||||||||||
Interest-bearing
demand deposits
|
22,352 | 0.30 | 23,847 | 0.59 | (18 | ) | ||||||||||||||
Money
market deposits
|
71,895 | 1.07 | 109,698 | 2.15 | (397 | ) | ||||||||||||||
Certificates
of deposit
|
205,682 | 2.90 | 256,985 | 3.60 | (817 | ) | ||||||||||||||
FHLB
advances
|
120,733 | 3.00 | 133,200 | 4.44 | (573 | ) | ||||||||||||||
Total
interest-bearing liabilities
|
$ | 450,926 | 2.36 | % | $ | 552,839 | 3.23 | % | $ | (1,803 | ) |
Provision for Loan
Losses. In connection with its analysis of the loan portfolio
for the three months ended September 30, 2010, management determined that a
provision for loan losses of $1.2 million was required for the three months
ended September 30, 2010, compared to a provision for loan losses of $366
established for the three months ended September 30, 2009. The $814 increase in
the provision reflects the continued weakness in both the general economy and
real estate market and an updated appraisal on a loan secured by a construction
loan on a mini storage facility that was $1.3 million less than the amount of
the loan. Non-performing assets were $26.7 million or 5.1% of total
assets at September 30, 2010, compared to $56.5 million, or 9.2% of total assets
at September 30, 2009. Management considers the allowance for loan
losses at September 30, 2010 to be adequate to cover probable losses inherent in
the loan portfolio based on the assessment of the above-mentioned factors
affecting the loan portfolio. While management believes the estimates and
assumptions used in its determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the
amount of our allowance for loan losses is subject to review by bank regulators,
as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.
22
The
following table details activity and information related to the allowance for
loan losses for the three months ended September 30, 2010 and 2009.
The
provision for loan losses is impacted by the types of loans and the risk factors
associated with each loan type in the Bank’s portfolio. As the Bank increases
its commercial and commercial real estate loan portfolios, the Bank anticipates
it will increase its allowance for loan losses based upon the higher risk
characteristics associated with commercial loans compared with one- to four-
family residential loans, which have historically comprised the majority of the
Bank’s loan portfolio.
Three
Months Ended
September
30,
|
||||||||
2010
|
2009
|
|||||||
(dollars
in thousands)
|
||||||||
Provision
for loan losses
|
$ | 1,180 | $ | 366 | ||||
Net
charge-offs
|
6,971 | 3,875 | ||||||
Allowance
for loan losses
|
10,997 | 20,954 | ||||||
Allowance
for loan losses as a percentage of gross loans receivable at the end
of the period
|
2.9 | % | 4.4 | % | ||||
Nonaccrual
and 90 days or more past due loans
|
$ | 8,924 | $ | 44,339 | ||||
Allowance
for loan losses as a percentage of nonperforming loans at the end of
the period
|
123.2 | % | 47.3 | % | ||||
Nonaccrual
and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
2.3 | % | 9.4 | % | ||||
Total
loans
|
$ | 383,459 | $ | 473,016 |
Noninterest
Income. Noninterest income decreased $478 or 23.0%, to $1.6
million for the three months ended September 30, 2010 from $2.1 million for the
three months ended September 30, 2009. The following table provides a
detailed analysis of the changes in the components of noninterest
income:
Three
Months Ended
September
30,
|
Increase
(decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Deposit
services fees
|
$ | 670 | $ | 732 | $ | (62 | ) | (8.5 | )% | |||||||
Other
deposit fees
|
219 | 198 | 21 | 10.6 | ||||||||||||
Loan
fees
|
231 | 263 | (32 | ) | (12.2 | ) | ||||||||||
Profit
(loss) on sale of loans
|
93 | 598 | (505 | ) | (84.4 | ) | ||||||||||
Other
income
|
384 | 284 | 100 | 35.2 | ||||||||||||
Total
noninterest income
|
$ | 1,597 | $ | 2,075 | $ | (478 | ) | (23.0 | )% |
Noninterest income decreased during the
three months ended September 30, 2010 primarily as a result of the decrease of
loans sold in the secondary market and there was a sale in August 2009 of $13.2
million in single family loans that resulted in a gain of $331with no comparable
gain during the three months ended September 30, 2010.
23
Noninterest
Expense. Noninterest expense increased $199, or 3.7%, to $5.5
million for the three months ended September 30, 2010 from $5.3 million for the
three months ended September 30, 2009. The following table provides
an analysis of the changes in the components of noninterest
expense:
Three
Months Ended
September
30,
|
Increase
(decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Compensation
and benefits
|
$ | 2,168 | $ | 2,192 | $ | (24 | ) | (1.1 | )% | |||||||
General
and administrative
expenses
|
1,204 | 1,235 | (31 | ) | (2.5 | ) | ||||||||||
Real
estate owned impairment
|
493 | -- | 493 | N/A | ||||||||||||
FDIC
Insurance premium
|
313 | 450 | (137 | ) | (30.4 | ) | ||||||||||
Information
technology
|
487 | 469 | 18 | 3.8 | ||||||||||||
Occupancy
and equipment
|
573 | 620 | (47 | ) | (7.6 | ) | ||||||||||
Deposit
services
|
181 | 239 | (58 | ) | (24.3 | ) | ||||||||||
Marketing
|
129 | 107 | 22 | 20.6 | ||||||||||||
Net
loss on sale of REO
|
(20 | ) | 16 | (36 | ) | (225.0 | ) | |||||||||
Loss
on sale of property,
premises
and equipment
|
-- | 1 | (1 | ) | N/A | |||||||||||
Total
noninterest expense
|
$ | 5,528 | $ | 5,329 | $ | 199 | 3.7 | % |
Major components of the increase in
noninterest expense include:
Our real estate owned reserve increased
$493 for the three months ended September 30, 2010 as we established this
reserve a result of the decline in real estate owned values due to the continued
weakness in the housing market.
Our efficiency ratio, which is the
percentage of noninterest expense to net interest income plus noninterest
income, was 91.2% for the three months ended September 30, 2010 compared to
84.7% for the three months ended September 30, 2009. The increase in efficiency
ratio was primarily attributable to the decrease in fee income and the increase
in expenses. By definition, a lower efficiency ratio would be an indication that
we are more efficiently utilizing resources to generate net interest income and
other fee income.
Provision (benefit) for Income
Tax. There was no impact for a tax benefit for income tax for
the three months ended September 30, 2010 or for the comparable period in
2009. As a result of prior adjustments, there was no tax provision or
benefit in either period and consequently our combined federal and state
effective income tax rate for both periods was 0%.
Deferred tax assets are deferred tax
liabilities attributable to deductible temporary differences and
carryforwards. After the deferred tax asset has been measured using
the applicable enacted tax rate and provisions of the enacted tax law, it is
then necessary to assess the need for a valuation allowance. A
valuation allowance is needed when, based on the weight of the available
evidence, it is more likely than not that some portion of the deferred tax asset
will not be realized. As required by generally accepted accounting
principles, available evidence is weighted heavily on cumulative losses with
less weight placed on future projected profitability. Realization of
the deferred tax asset is dependent on whether there will be sufficient future
taxable income of the appropriate character in the period during which
deductible temporary differences reverse or within the carryback and
carryforward periods available under tax law. Based upon the
available evidence, our valuation allowance was $3.3 million and $5.1 million at
September 30, 2010 and September 30, 2009, respectively.
24
Compliance
with the Order
On August 12, 2009, Anchor Bank became
subject to the Order, issued with its consent, by the FDIC and DFI. The Order is
a formal corrective action pursuant to which Anchor Bank has agreed to take
certain measures in the areas of capital, loan loss allowance determination,
risk management, liquidity management, board oversight and monitoring of
compliance, and imposes certain operating restrictions on Anchor
Bank. Management and the board of trustees have been taking action
and implementing programs to comply with the requirements of the
Order. Information regarding Anchor Bank’s compliance with the Order
is included in “Risk Factors -- Cease and Desist Order” in the
prospectus.
Liquidity,
Commitments and Capital Resources
Liquidity. We are required to
have enough cash flow in order to maintain sufficient liquidity to ensure a safe
and sound operation. Historically, we have maintained cash flow above the
minimum level believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. On a monthly basis, we review
and update cash flow projections to ensure that adequate liquidity is
maintained.
Our primary sources of funds are from
customer deposits, loan repayments, loan sales, investment payments, maturing
investment securities and advances from the FHLB of Seattle. These funds,
together with retained earnings and equity, are used to make loans, acquire
investment securities and other assets, and fund continuing operations. While
maturities and the scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by the
level of interest rates, economic conditions and competition.
We believe that our current liquidity
position is sufficient to fund all of our existing commitments. At
September 30, 2010, the total approved loan origination commitments outstanding
amounted to $533. At the same date, unused lines of credit were
$38.4 million.
For purposes of determining our
liquidity position, we use a concept of basic surplus, which is derived from the
total of available for sale investments, as well as other liquid assets, less
short-term liabilities. Our board of directors has established a
target range for basic surplus of 5% to 7%. During the quarter ended
September 30, 2010, our average basic surplus was 9.51%.
Liquidity management is both a daily
and long-term function of business management. Excess liquidity is generally
invested in short-term investments such as overnight deposits or mortgage-backed
securities. On a longer-term basis, we maintain a strategy of investing in
various lending products. We use our sources of funds primarily to
meet ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, to fund loan commitments and to maintain our portfolio of
mortgage-backed securities and investment securities.
Certificates of deposit scheduled to
mature in one year or less at September 30, 2010 totaled $97.7 million with
$10.7 million of that amount in brokered deposits. Management’s policy is to
generally maintain deposit rates at levels that are competitive with other local
financial institutions. Based on historical experience, we believe that a
significant portion of maturing deposits will remain with Anchor Bank. In
addition, we had the ability at
September
30, 2010 to borrow an additional $25.5 million from the FHLB of
Seattle.
We measure our liquidity based on our
ability to fund our assets and to meet liability obligations when they come due.
Liquidity (and funding) risk occurs when funds cannot be raised at reasonable
prices, or in a reasonable time frame, to meet our normal or unanticipated
obligations. We regularly monitor the mix between our assets and our liabilities
to manage effectively our liquidity and funding requirements.
Our primary source of funds is our
deposits. When deposits are not available to provide the funds for our assets,
we use alternative funding sources. These sources include, but are not limited
to: cash management from the FHLB of Seattle, wholesale funding, brokered
deposits, federal funds purchased and dealer repurchase agreements, as well as
other short-term alternatives. Alternatively, we may also liquidate assets to
meet our funding needs. On a monthly basis, we estimate our liquidity
sources and needs for the corning three-month, six-month, and one-year time
periods. Also, we determine funding concentrations and our need for sources of
funds other than deposits. This
25
information
is used by our Asset Liability Management Committee in forecasting funding needs
and investing opportunities.
The
Company is a separate legal entity from the Bank and will have to provide for
its own liquidity to pay its operating expenses and other financial obligations.
Upon completion of the Bank’s conversion, the Company’s primary source of income
will be dividends received from the Bank. Our strategic business plan
filed with the FDIC in connection with the Order contemplates no payment of
dividends throughout the three-year period covered by the plan and we do not
expect to be permitted to pay dividends as long as the Order remains in
effect. In addition, the FDIC’s non-objection of the conversion
restricts us from making any distributions to stockholders that represent a
return of capital without the written non-objection of the FDIC Regional
Director. At September 30, 2010, the Company had no liquid
assets.
Off-Balance Sheet
Arrangements. The Bank is party to financial instruments with
off-balance sheet risk in the normal course of business in order to meet the
financing needs of the Bank’s customers. These financial instruments
generally include commitments to originate mortgage, commercial and consumer
loans, and involve to varying degrees, elements of credit and interest rate risk
in excess of amounts recognized in the consolidated balance
sheets. The Bank’s maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments. Because some commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The same credit policies are used in making commitments
as are used for on-balance sheet instruments. Collateral is required
in instances where deemed necessary.
Undisbursed balances of loans closed
include funds not disbursed but committed for construction
projects. Unused lines of credit include funds not disbursed, but
committed for, home equity, commercial and consumer lines of
credit.
Commercial letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. Those guarantees are primarily used to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
The following is a summary of
commitments and contingent liabilities with off-balance sheet risks as of
September
30, 2010:
Amount
of Commitment
Expiration
Per Period
|
||||||||
Total
Amounts
Committed
|
Due
in
One
Year
|
|||||||
|
(dollars
in thousands)
|
|||||||
Commitments
to originate loans
|
$ | 533 | $ | 533 | ||||
Lines
of Credit (1)
|
||||||||
Fixed
rate (2)
|
$ | 11,570 | $ | 11,570 | ||||
Adjustable
rate
|
$ | 26,803 | $ | 26,803 | ||||
Undisbursed
balance of loans closed
|
$ | 38,906 | $ | 38,906 | ||||
(1)
At September 30, 2010 there were no reserves for unfunded
commitments.
(2) Stand by Letters of Credit included.
|
Capital. Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to maintain a “well capitalized” institution in accordance with
regulatory standards and the Order. Anchor Bank’s total regulatory capital was
$46.4 million at September 30, 2010, or 12%, of total assets on that date. As of
September 30, 2010, we exceeded all regulatory capital requirements to be
considered well capitalized as of that date. Our regulatory capital
ratios at September 30, 2010 were as follows: Tier 1 capital 7.8%; Tier 1 (core)
risk-based capital 10.7%; and total risk-based capital 12.0%. The regulatory
capital requirements to be considered well
26
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The Company’s Board of Directors has
established an asset and liability management policy to guide management in
maximizing net interest rate spread by managing the differences in terms between
interest-earning assets and interest-bearing liabilities while maintaining
acceptable levels of liquidity, capital adequacy, interest rate sensitivity,
changes in net interest income, credit risk and profitability. The policy
includes the use of an Asset Liability Management Committee whose members
include certain members of senior management. The Committee’s purpose is to
communicate, coordinate and manage the Company’s asset/liability positions
consistent with the business plan and Board-approved policies. The Asset
Liability Management Committee meets monthly to review various areas
including:
|
•
|
economic
conditions;
|
|
•
|
interest
rate outlook;
|
|
•
|
asset/liability
mix;
|
|
•
|
interest
rate risk sensitivity;
|
|
•
|
change
in net interest income;
|
|
•
|
current
market opportunities to promote specific
products;
|
|
•
|
historical
financial results;
|
|
•
|
projected
financial results; and
|
|
•
|
capital
position.
|
The Committee also reviews current and
projected liquidity needs monthly. As part of its procedures, the Asset
Liability Management Committee regularly reviews interest rate risk by
forecasting the impact of alternative interest rate environments on net interest
income and market value of portfolio equity, which is defined as the net present
value of an institution’s existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential change in
market value of portfolio equity that is authorized by the Board of
Directors.
The rates of interest the Company earns
on assets and pays on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Loans generally have
longer maturities than deposits. Accordingly, the Company’s results of
operations, like those of other financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and the
Company’s ability to adapt to these changes is known as interest rate risk and
is the Company’s most significant market risk.
In recent years, management has
primarily have utilized the following strategies in its efforts to manage
interest rate risk:
|
•
|
increased
originations of shorter term loans and particularly, home equity loans and
commercial business loans;
|
|
•
|
structured
certain borrowings with maturities that match fund the loan portfolios;
and
|
|
•
|
securitized
single family loans to available for sale investments which generates cash
flow as well as allows the flexibility of managing interest rate risk as
well as selling the investment when
appropriate.
|
Interest rate sensitivity is measured
on a quarterly basis utilizing an internal model. Management uses various
assumptions to evaluate the sensitivity of our operations to changes in interest
rates. Although management believes these assumptions are reasonable, the
interest rate sensitivity of the Company’s assets and liabilities on net
interest income and the market value of portfolio equity could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. The assumptions used are based upon proprietary and
market data and reflect historical results and current market conditions. These
assumptions relate to interest rates,
27
prepayments,
deposit decay rates and the market value of certain assets under the various
interest rate scenarios. An independent service was used to provide market rates
of interest and certain interest rate assumptions to determine prepayments and
maturities of loans, investments and borrowings and decay rates on deposits.
Time deposits are modeled to reprice to market rates upon their stated
maturities. Management has assumed that non-maturity deposits can be maintained
with rate adjustments not directly proportionate to the change in market
interest rates.
There has
not been any material change in the market risk disclosures contained in the
Company’s prospectus dated November 12, 2010.
Item 4. Controls
and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
An evaluation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the
supervision and with the participation of the Company’s Chief Executive Officer,
Chief Financial Officer, and other members of the Company’s management team as
of the end of the period covered by this quarterly report. The
Company’s Chief Executive Officer and Chief Financial Officer concluded that as
of September 30, 2010, the Company’s disclosure controls and procedures were
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.
(b)
Changes in Internal Controls.
There have been no changes in the
Company’s internal control over financial reporting (as defined in 13a-15(f) of
the Exchange Act) that occurred during the quarter ended September 30, 2010,
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting. A number of
internal control procedures were, however, modified during the quarter in
conjunction with the Bank's internal control testing. The Company
also continued to implement suggestions from its internal auditor and
independent auditors to strengthen existing controls.
The Company intends to continually
review and evaluate the design and effectiveness of its disclosure controls and
procedures and to improve its controls and procedures over time and to correct
any deficiencies that it may discover in the future. The goal is to ensure that
senior management has timely access to all material financial and non-financial
information concerning the Company's business. While the Company
believes the present design of its disclosure controls and procedures is
effective to achieve its goal, future events affecting its business may cause
the Company to modify its disclosure controls and procedures. The
Company does not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent every error or instance of
fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.
28
PART II - OTHER
INFORMATION
Item 1. Legal
Proceedings
From time
to time, the Company is engaged in legal proceedings in the ordinary course of
business, none of which are currently considered to have a material impact on
the Company’s financial position or results of operations.
Item 1A. Risk
Factors
For
information regarding the company’s risk factors, see “Risk Factors” in the
Company’s prospectus, filed with the Securities and Exchange Commission pursuant
to Rule 424(b)(3) on November 19, 2010. As of September 30, 2010, the
risk factors of the Company have not changed materially from those disclosed in
the prospectus
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a)
|
Not
applicable.
|
Item 3. Defaults
Upon Senior Securities
Not
applicable.
Item 4. [Removed
and Reserved]
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
3.1
|
Articles
of Incorporation of the Registrant (1)
|
3.2
|
Bylaws
of the Registrant (1)
|
10.1
|
Form
of Anchor Bank Employee Severance Compensation Plan (1)
|
10.2
|
Anchor
Mutual Savings Bank Phantom Stock Plan (1)
|
10.3
|
Form
of 401(k) Retirement Plan (1)
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
______
(1)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-1
(333-154734)
|
29
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ANCHOR BANCORP | |
Date: December 20, 2010 | /s/Jerald L. Shaw |
Jerald L. Shaw | |
President and Chief Executive Officer | |
(Principal Executive Officer) | |
Date: December 20, 2010 | /s/Terri L. Degner |
Terri
L. Degner
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
30
EXHIBIT
INDEX
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
31