Attached files
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EX-32 - EXHIBIT 32 - Anchor Bancorp | ex32123110ancb.htm |
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorp | ex312123110ancb.htm |
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorp | ex311123110ancb.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 December 31, 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
|
98503
|
|
(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 February 8, 2011 there were 2,550,000, shares of common stock, $.01 par value per share, outstanding.
* At December 31, 2010, the registrant was not an operating company. The registrant 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. On January 25, 2011, the registrant completed its initial stock offering of 2,550,000 shares of common stock.
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 “Bank” from the mutual to the stock form of organization. On January 25, 2011, the Bank completed its conversion from mutual to stock form, changed its corporate title to “Anchor Bank” and became the wholly owned subsidiary of the Company. In the conversion, the Company sold an aggregate of 2,550,000 shares of common stock at a price of $10.00 per share in a subscription, community and syndicated community offering. Because the Bank’s conversion and the Company’s stock offering were consummated on January 25, 2011, the Company was not an operating company at December 31, 2010. As a result, the information presented in this quarterly report on Form 10-Q for the Bank only. For a further discussion of Anchor Bancorp’s formation and operations, see the Registration Statement (SEC Registration No. 333-154734), which includes financial statements for the year ended June 30, 2010.
Page | |
Item 1 - Financial Statements | 1 |
Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
24 |
Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 38 |
Item 4 - Controls and Procedures | 39 |
PART II - OTHER INFORMATION | |
Item 1 - Legal Proceedings | 40 |
Item 1A - Risk Factors | 40 |
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
Item 3 - Defaults Upon Senior Securities | 40 |
Item 4 – [Removed and Reserved] | 40 |
Item 5 - Other Information | 40 |
Item 6 - Exhibits | 40 |
SIGNATURES | 41 |
Item 1. Financial Statements
ANCHOR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) (Unaudited)
|
December 31,
2010
|
June 30,
2010
|
||||||
ASSETS
|
||||||||
Cash and due from banks
|
$ | 27,336 | $ | 32,831 | ||||
Investments available for sale, at fair value
|
40,868 | 48,779 | ||||||
Investments held to maturity, at amortized cost
|
8,689 | 10,035 | ||||||
Loans held for sale
|
1,834 | 3,947 | ||||||
Loans receivable, net of allowance for loan losses of $10,902
|
||||||||
and $16,788
|
355,824 | 389,411 | ||||||
Bank owned life insurance
|
17,270 | 16,920 | ||||||
Accrued interest receivable
|
1,930 | 2,158 | ||||||
Real estate owned
|
16,494 | 14,570 | ||||||
Federal Home Loan Bank “FHLB” of Seattle stock, at cost
|
6,510 | 6,510 | ||||||
Premises and equipment, net
|
13,534 | 14,435 | ||||||
Federal income tax receivable
|
2,312 | 2,336 | ||||||
Deferred tax asset, net
|
668 | 373 | ||||||
Prepaid expenses and other assets
|
2,029 | 2,524 | ||||||
Total assets
|
$ | 495,298 | $ | 544,829 | ||||
LIABILITIES AND EQUITY
|
||||||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 28,179 | $ | 28,718 | ||||
Interest-bearing
|
314,457 | 327,070 | ||||||
Total deposits
|
342,636 | 355,788 | ||||||
FHLB advances
|
98,400 | 136,900 | ||||||
Advance payments by borrowers for
taxes and insurance
|
1,457 | 1,423 | ||||||
Supplemental Executive Retirement Plan liability
|
1,921 | 1,939 | ||||||
Accounts payable and other liabilities
|
7,514 | 4,109 | ||||||
Total liabilities
|
451,928 | 500,159 | ||||||
COMMITMENTS AND CONTINGENCIES
|
||||||||
EQUITY
|
||||||||
Retained earnings
|
41,504 | 42,278 | ||||||
Accumulated other comprehensive income, net of tax
|
1,866 | 2,392 | ||||||
Total equity
|
43,370 | 44,670 | ||||||
Total liabilities and equity
|
$ | 495,298 | $ | 544,829 | ||||
See accompanying notes to consolidated financial statements.
1
ANCHOR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands) (Unaudited)
|
Three Months Ended
December 31,
|
Six Months Ended
December 31,
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest income:
|
||||||||||||||||
Loans receivable, including fees
|
$ | 5,915 | $ | 7,473 | $ | 12,350 | $ | 15,147 | ||||||||
Investments
|
86 | 107 | 174 | 230 | ||||||||||||
Mortgage-backed securities
|
550 | 783 | 1,156 | 1,670 | ||||||||||||
Total interest income
|
6,551 | 8,363 | 13,680 | 17,047 | ||||||||||||
Interest expense:
|
||||||||||||||||
Deposits
|
1,511 | 2,450 | 3,272 | 5,441 | ||||||||||||
FHLB advances
|
473 | 1,364 | 1,378 | 2,842 | ||||||||||||
Total interest expense
|
1,984 | 3,814 | 4,650 | 8,283 | ||||||||||||
Net interest income before provision for loan losses
|
4,567 | 4,549 | 9,030 | 8,764 | ||||||||||||
Provision for loan losses
|
330 | 1,216 | 1,510 | 1,582 | ||||||||||||
Net interest income after provision for loan losses
|
4,237 | 3,333 | 7,520 | 7,182 | ||||||||||||
Noninterest income
|
||||||||||||||||
Deposit service fees
|
594 | 689 | 1,264 | 1,421 | ||||||||||||
Other deposit fees
|
212 | 195 | 431 | 393 | ||||||||||||
Gain on sale of investments
|
81 | 25 | 135 | 25 | ||||||||||||
Loan fees
|
302 | 220 | 533 | 483 | ||||||||||||
Gain on sale of loans
|
95 | 230 | 188 | 828 | ||||||||||||
Other income
|
341 | 270 | 671 | 554 | ||||||||||||
Total noninterest income
|
1,625 | 1,629 | 3,222 | 3,704 | ||||||||||||
Noninterest expense
|
||||||||||||||||
Compensation and benefits
|
2,161 | 2,179 | 4,329 | 4,371 | ||||||||||||
General and administrative expenses
|
1,269 | 1,294 | 2,470 | 2,529 | ||||||||||||
Real estate owned impairment
|
791 | 1,348 | 1,287 | 1,348 | ||||||||||||
Federal Deposit Insurance Corporation “FDIC” insurance
premiums
|
312 | 450 | 625 | 900 | ||||||||||||
Information technology
|
525 | 455 | 1,012 | 924 | ||||||||||||
Occupancy and equipment
|
597 | 678 | 1,170 | 1,298 | ||||||||||||
Deposit services
|
165 | 222 | 346 | 461 | ||||||||||||
Marketing
|
146 | 107 | 275 | 214 | ||||||||||||
Loss on sale of premises and equipment
|
168 | 1 | 168 | 2 | ||||||||||||
(Gain) on sale of real estate owned
|
(146 | ) | (53 | ) | (166 | ) | (37 | ) | ||||||||
Total noninterest expense
|
5,988 | 6,681 | 11,516 | 12,010 | ||||||||||||
Loss before benefit for income tax
|
(126 | ) | (1,719 | ) | (774 | ) | (1,124 | ) | ||||||||
Provision for benefit for income tax
|
- | (2,958 | ) | - | (2,958 | ) | ||||||||||
Net Income (loss)
|
$ | (126 | ) | $ | 1,239 | $ | (774 | ) | $ | 1,834 |
See accompanying notes to consolidated financial statements.
2
ANCHOR BANCORP AND SUBSIDIARY
|
CONSOLIDATED STATEMENT OF EQUITY
|
AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands) (Unaudited)
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income ,
Net of Income
Tax
|
Total
|
||||||||||
Balance at June 30, 2010
|
$ | 42,278 | $ | 2,392 | $ | 44,670 | ||||||
Net loss
|
(774 | ) | - | (774 | ) | |||||||
Unrealized holding loss on available-for-sale
securities net of income tax benefit of $312,000
|
- | (615 | ) | (615 | ) | |||||||
Adjustment for realized gains included in
|
||||||||||||
net loss, net of income tax provision of $46,000
|
- | 89 | 89 | |||||||||
Other comprehensive loss, net of income tax
|
- | - | (1,300 | ) | ||||||||
Balance at December 31, 2010
|
$ | 41,504 | $ | 1,866 | $ | 43,370 |
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income ,
Net of Income
Tax
|
Total
|
||||||||||
Balance at June 30, 2009
|
$ | 41,858 | $ | 1,056 | $ | 42,914 | ||||||
Net income
|
1,834 | - | 1,834 | |||||||||
Unrealized holding gain on available-for-sale
securities net of income tax benefit of $137,000
|
- | 257 | 257 | |||||||||
Adjustment for realized gains included in net
|
||||||||||||
income, net of income tax provision of $8,000
|
- | 17 | 17 | |||||||||
Other comprehensive loss, net of income tax
|
- | - | 2,108 | |||||||||
Balance at December 31, 2009
|
$ | 43,692 | $ | 1,330 | $ | 45,022 |
See accompanying notes to consolidated financial statements.
3
ANCHOR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands) (Unaudited)
|
Six Months Ended
December 31,
|
|||||||
2010
|
2009
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income (loss)
|
$ | (774 | ) | $ | 1,834 | |||
Adjustments to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
Depreciation and amortization
|
600 | 680 | ||||||
Net amortization of premiums on securities
|
50 | 111 | ||||||
Provision for loan losses
|
1,510 | 1,582 | ||||||
Real estate owned impairment
|
1,287 | 1,348 | ||||||
Deferred income taxes, net of valuation allowance
|
105 | (1,807 | ) | |||||
Income from bank owned life insurance
|
(350 | ) | (354 | ) | ||||
Originations of loans held for sale
|
(5,739 | ) | (10,553 | ) | ||||
Proceeds from sale of loans held for sale
|
11,861 | 29,375 | ||||||
Loss on sale of premises and equipment
|
168 | 2 | ||||||
Gain on sale of real estate owned
|
(166 | ) | (37 | ) | ||||
Change in operating assets and liabilities:
|
||||||||
Accrued interest receivable
|
228 | (164 | ) | |||||
Prepaid expenses, other assets, and federal income tax receivable
|
332 | (776 | ) | |||||
Supplemental Executive Retirement Plan liability
|
19 | 19 | ||||||
Accounts payable and other liabilities
|
(3,594 | ) | 729 | |||||
Net cash provided by operating activities
|
5,537 | 21,989 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds from sales and maturities of available for sale securities
|
4,035 | 13,871 | ||||||
Principal payments on mortgage-backed securities available for sale
|
3,258 | 3,345 | ||||||
Principal payments on mortgage-backed securities held to maturity
|
1,339 | 1,297 | ||||||
Net decrease in loans receivable, net
|
27,770 | 2,872 | ||||||
Proceeds from sale of real estate owned
|
4,652 | 2,646 | ||||||
Capital improvements on real estate owned
|
(166 | ) | (97 | ) | ||||
Purchase of premises, and equipment
|
(302 | ) | (129 | ) | ||||
Net cash provided by investing activities
|
40,586 | 23,805 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net decreases in deposits
|
(13,152 | ) | (73,004 | ) | ||||
Net change in advance payments by borrowers for taxes and insurance
|
34 | 77 | ||||||
Proceeds from FHLB advances
|
47,543 | 39,900 | ||||||
Repayment of FHLB advances
|
(86,043 | ) | (32,500 | ) | ||||
Net cash used in financing activities
|
(51,618 | ) | (65,527 | ) | ||||
(Continued)
See accompanying notes to consolidated financial statements.
4
ANCHOR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(dollars in thousands) (Unaudited)
|
Six Months Ended
December 31,
|
|||||||
2010
|
2009
|
|||||||
Net Change in Cash and Due From Banks
|
(5,495 | ) | (19,733 | ) | ||||
Beginning of period
|
32,831 | 42,388 | ||||||
End of period
|
$ | 27,336 | $ | 22,655 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Noncash investing activities
|
||||||||
Net loans transferred to real estate owned
|
$ | 7,532 | $ | 12,332 | ||||
Portfolio loans transferred to loans held-for-sale
|
$ | - | $ | 13,170 | ||||
Loans securitized into mortgage-backed securities
|
$ | - | $ | 5,016 | ||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 4,887 | $ | 8,594 |
See accompanying notes to consolidated financial statements.
5
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 of these Selected Notes to Consolidated Financial Statements), which was completed on January 25, 2011. The Company has no assets at December 31, 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. As a mutual savings bank, the Bank had a Board of Trustees that directed its activities. Following the conversion, the Bank’s Board of Trustees continued as a Board of Directors. For purposes of this Form 10-Q references herein to the Board of Directors also include the Board of Trustees of the Bank in its mutual form, as the context requires.
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 and six months ended December 31, 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. Certain prior year amounts have been reclassified to conform to current year presentation. The reclassifications had no impact on net income (loss) or equity.
Note 3 – Plan of Conversion and Change in Corporate Form and Subsequent Events
On January 25, 2011, in accordance with a Plan of Conversion (“Plan”) adopted by its Board of Directors and as approved by its depositors and borrower members, the Bank converted from a mutual savings bank to a stock savings bank, changed its corporate title to “Anchor Bank” and became the wholly-owned subsidiary of the Company, a bank holding company registered with the Board of Governors of the Federal Reserve System. In connection with the conversion, the Company issued an aggregate of 2,550,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $25.5 million. The cost of conversion and the issuance of capital stock was approximately $2.1 million which was deducted from the proceeds of the offering.
The Company retained 10% or $2.3 million of the net conversion proceeds and purchased 1,000 shares of the Bank’s capital stock in exchange for 90% or $21.1 million of the net conversion proceeds. The Bank intends to use this additional capital for future lending and investment activities and for general and other corporate purposes subject to regulatory limitations.
Pursuant to the Plan, the Bank’s Board of Directors adopted an employee stock ownership plan (“ESOP”) which subscribed for 4% of the common stock sold in the offering or 102,000 shares. As provided for in the Plan, the Bank established a liquidation account in the amount of retained earnings as reflected in the final prospectus. The liquidation account will be maintained for the benefits of eligible savings account holders as of June 30, 2007 and supplemental eligible account holders as of September 30, 2010 who maintain deposit accounts in the Bank
6
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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.
Note 4 – Recently Issued Accounting Pronouncements
In December 2009, the FASB issued Accounting Standards Update (ASU) 2009-16, Transfer and Servicing (Topic 860) Accounting for Transfers of Financial Assets 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.
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. The Bank adopted ASU during the quarter ended December 31, 2010. Adoption of this ASU has significantly expanded the disclosures within the consolidated financial statements.
In January 2011, the FASB issued ASI 2011-01 (Topic 310) –Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, the amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructuring in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructure will then be coordinated. Currently, the guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
7
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
.
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.
On January 25, 2011, the Bank completed its mutual to stock conversion. In connection with the conversion, the Company issued an aggregate of 2,550,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $25.5 million. The Company retained 10% or $2.3 million of the net conversion proceeds and purchased 1,000 shares of the Bank’s capital stock in exchange for 90% or $21.1 million of the net conversion proceeds. Although the Bank is “well capitalized” at December 31, 2010 based on financial statements prepared in accordance with generally accepted accounting principles in the United States and the general percentages in the regulatory guidelines, because of the deficiencies cited in the Order, we are no longer regarded as “well capitalized” for federal regulatory purposes. The Bank intends to use this additional capital for future lending and investment activities and for general and other corporate purposes pursuant to regulatory limitations included in the Order.
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 December 31, 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.
8
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Note 7 – Investments
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
|
|||||||||||||
(In thousands)
|
||||||||||||||||
December 31, 2010
|
||||||||||||||||
Investments available for sale
|
||||||||||||||||
Municipal bonds
|
$ | 2,718 | $ | 42 | $ | ( 27 | ) | $ | 2,733 | |||||||
U.S. government agency securities
|
2,999 | 100 | - | 3,099 | ||||||||||||
FHLMC mortgage-backed securities
|
32,982 | 2,054 | - | 35,036 | ||||||||||||
$ | 38,699 | $ | 2,196 | $ | (27 | ) | $ | 40,868 | ||||||||
Investments held to maturity
|
||||||||||||||||
FHLMC mortgage-backed securities
|
$ | 8,537 | $ | 551 | $ | - | $ | 9,088 | ||||||||
Municipal bonds
|
152 | - | - | 152 | ||||||||||||
$ | 8,689 | $ | 551 | $ | - | $ | 9,240 |
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
June 30, 2010
|
||||||||||||||||
Investments available for sale
|
||||||||||||||||
Municipal bonds
|
$ | 3,372 | $ | 67 | $ | (8 | ) | $ | 3,431 | |||||||
U.S. government agency securities
|
2,999 | 152 | - | 3,151 | ||||||||||||
FHLMC mortgage-backed securities
|
39,440 | 2,757 | - | 42,197 | ||||||||||||
$ | 45,811 | $ | 2,976 | $ | (8 | ) | $ | 48,779 | ||||||||
Investments held to maturity
|
||||||||||||||||
FHLMC mortgage-backed securities
|
$ | 9,880 | $ | 675 | $ | - | $ | 10,555 | ||||||||
Municipal bonds
|
155 | - | - | 155 | ||||||||||||
|
$ | 10,035 | $ | 675 | $ | - | $ | 10,710 |
9
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
At December 31, 2010 and June 30, 2010, there was one security 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 December 31, 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
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
December 31, 2010
|
||||||||||||||||||||||||
Investments
available for sale
|
||||||||||||||||||||||||
Municipal bonds
|
$ | 618 | $ | 27 | $ | - | $ | - | $ | 618 | $ | 27 | ||||||||||||
June 30, 2010
|
||||||||||||||||||||||||
Investments
available for sale
|
||||||||||||||||||||||||
Municipal bonds
|
$ | 636 | $ | 8 | $ | - | $ | - | $ | 636 | $ | 8 |
Contractual maturities of securities at December 31, 2010 are listed below. 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.
December 31, 2010
|
Amortized
Cost
|
Fair Value
|
||||||
Investments available for sale
|
(In thousands)
|
|||||||
Due within one year
|
$ | 3,744 | $ | 3,857 | ||||
Due one to five years
|
785 | 813 | ||||||
Due five years to ten years
|
325 | 326 | ||||||
Due after ten years
|
863 | 836 | ||||||
5,717 | 5,832 | |||||||
Mortgage-backed securities
|
32,982 | 35,036 | ||||||
$ | 38,699 | $ | 40,868 | |||||
December 31, 2010
|
Amortized
Cost
|
Fair Value
|
||||||
Investments held to maturity
|
(In thousands)
|
|||||||
Due after ten years
|
$ | 152 | $ | 152 | ||||
Mortgage-backed securities
|
8,537 | 9,088 | ||||||
$ | 8,689 | $ | 9,240 |
10
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
For the three and six months ended December 31, 2010 proceeds from sales and maturities of securities available-for-sale were $2.2 million and $4.0 million, respectively compared to $13.9 million and $13.9 million respectively, for the same periods in 2009. Gross realized gains were $81,000 and $135,000, respectively, with no gross realized losses on the sale of securities available-for-sale for the three and six months ended December 31, 2010. There were $57,000 and $57,000 of gross realized gains on the sale of securities available-for-sale for the three and six months ended December 31, 2009, with gross realized losses of $33,000 and $33,000 for the same periods.
At December 31, 2010 securities with total par values of $6.6 million and total fair values of $7.0 million were pledged to secure certain public deposits. Securities with total par values of $835,000 and total fair values of $881,000 were pledged to secure certificates of deposit in excess of FDIC-insured limits. Securities with total par values of $9.0 million and total fair values of $9.5 million were pledged to secure FHLB borrowings.
Note 8 - Loans Receivable, net
Loans receivable consisted of the following:
December 31,
|
June 30, | |||||
2010
|
2010 | |||||
(In thousands)
|
||||||
Real estate:
|
||||||
One-to-four family residential
|
$ |
105,546
|
$ |
112,835
|
||
Multi-family residential
|
44,023
|
45,983
|
||||
Commercial
|
112,163
|
118,492
|
||||
Construction
|
20,045
|
36,812
|
||||
Land loans
|
7,195
|
7,843
|
||||
Total real estate
|
288,972
|
321,965
|
||||
Consumer:
|
||||||
Home equity
|
39,470
|
42,446
|
||||
Credit cards
|
7,456
|
7,943
|
||||
Automobile
|
7,083
|
8,884
|
||||
Other consumer loans
|
3,862
|
4,160
|
||||
Total consumer
|
57,871
|
63,433
|
||||
Commercial business loans
|
20,643
|
21,718
|
||||
Total loans
|
367,486
|
407,116
|
||||
Less
|
||||||
Deferred loan fees and unamortized
|
||||||
discount on purchased loans
|
760
|
917
|
||||
Allowance for loan losses
|
10,902
|
16,788
|
||||
$ |
355,824
|
$ |
389,411
|
11
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Loan Origination/Risk Management. Single Family real estate loans are originated using secondary market underwriting guidelines. We originate both fixed rate and adjustable rate loans in our residential lending program. We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs.
Multi-family and commercial real estate loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Often payments on loans secured by multi-family or commercial properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.
Multi-family and commercial real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family residential and commercial real estate loans are generally priced utilizing the applicable Federal Home Loan Bank Term Borrowing Rate plus an acceptable margin. These loans are typically amortized for up to 30 years with prepayment penalty. The maximum loan to value ratio for multi-family and commercial real estate loans is generally 80% on purchases and refinances. We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us. We require our multi-family and commercial real estate loan borrowers with outstanding balances in excess of $750,000, or loan to value in excess of 60% to submit annual financial statements and rent rolls on the subject property. The properties that fit within this profile are also inspected annually, and an inspection report and photograph are included. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by multi-family and commercial properties.
We originate construction and site development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $200,000 to $500,000. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in our primary market areas. All builders are qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 75% of the appraised market value or sales price upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. We require that builders maintain adequate insurance coverage.
We also originate land loans to individuals. Land loans are secured by first lien on the property, generally have a maximum loan to value ratio of 70% at a fixed rate of interest with a maximum amortization of thirty years.
Our consumer loans are risk priced based on credit score, loan to value and overall credit quality of the applicant. Home equity loans are made for, among other purposes, the improvement of residential properties, debt consolidation and education expenses. The majority of these loans are secured by a second deed of trust on residential property. Fixed rate terms are available up to 240 months, and our equity line of credit is a prime rate based loan with the ability to lock in portions of the line for five to 20 years. Maximum loan to values are dependent on credit worthiness and may be originated at up to 100% of collateral value.
Our commercial business lending policy includes credit file documentation and analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows,
12
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans. Repayment of our commercial business loans is often dependent on the cash flows of the borrower which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Concentrations of Credit. The Bank’s lending activity primarily occurs within the geographic areas which we serve through our branch network, generally described as southwest Washington and the greater Portland area in northwest Oregon. Our loan portfolio mix includes 40.7% in one-to-four family and multifamily residential mortgages, 30.5% in commercial real estate mortgages, 15.7% in direct consumer loans and credit cards, 5.6% in commercial and industrial business loans, 5.5% in construction loans, and 2.0% in consumer land loans as of December 31, 2010.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010
|
||
One-to-four
family
|
Multi-
Family
residential
|
Commercial
Real Estate
|
Construction
|
Land
|
Consumer
(1)
|
Commercial
Business
|
Unallocated
|
Total
|
|||
(In thousands) | |||||||||||
Allowance for loan losses:
|
|||||||||||
Ending balance
|
$ 1,350
|
$ 449
|
$ 1,769
|
$ 3,751
|
$ 273
|
$ 1,362
|
$ 1,523
|
$ 425
|
$ 10,902
|
||
Ending balance: individually
evaluated for impairment
|
496
|
11
|
22
|
3,071
|
14
|
148
|
43
|
-
|
3,805
|
||
Ending balance: collectively
evaluated for impairment
|
854
|
438
|
1,747
|
680
|
259
|
1,214
|
1,480
|
425
|
7,097
|
||
Ending balance: loans
acquired with deteriorated
credit quality
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Loans receivable:
|
|||||||||
Ending balance
|
$ 105,546
|
$44,023
|
$ 112,163
|
$ 20,045
|
$ 7,195
|
$ 57,871
|
$ 20,643
|
-
|
$ 367,486
|
Ending balance: individually
evaluated for impairment
|
12,482
|
929
|
1,116
|
11,516
|
79
|
598
|
1,784
|
-
|
28,504
|
Ending balance: collectively
evaluated for impairment
|
93,064
|
43,094
|
111,047
|
8,529
|
7,116
|
57,273
|
18,859
|
-
|
338,982
|
Ending balance: loans
acquired with deteriorated
credit quality
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1) Consumer loans include Home Equity, Credit Card, Auto and Other loans. The only type of consumer loans with an impairment are Home Equity.
13
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent and approved by Senior Management or the Classified Asset Committee to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are required to be classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC, which can order the establishment of additional loss allowances.
Early indicator loan grades are used by the Bank to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful, or loss) are subject to problem loan reporting not less than every three months.
14
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table represents the internally assigned grade as of December 31, 2010 by type of loans.
|
|||||||||||
Credit Exposure
|
|||||||||||
Credit Risk Profile by Internally Assigned Grade
|
|||||||||||
One-to-four
family
|
Multi-
family
|
Commercial
Real Estate
|
Construction
|
Land
|
Home
Equity
|
Credit
Card
|
Automobile
|
Other
|
Commercial
Business
|
Total
|
|
(In thousands)
|
|||||||||||
Grade:
|
|||||||||||
Pass
|
$ 86,678
|
$ 39,105
|
$ 79,873
|
$ 4,712
|
$ 5,822
|
$ 37,274
|
$ 7,034
|
$ 6,775
|
$ 3,725
|
$ 11,322
|
$ 282,320
|
Watch
|
8,709
|
1,159
|
23,077
|
853
|
123
|
1,362
|
-
|
166
|
33
|
1,344
|
36,826
|
Special Mention
|
655
|
2,745
|
-
|
1,420
|
131
|
250
|
-
|
29
|
29
|
817
|
6,076
|
|
|||||||||||
Substandard
|
9,504
|
1,014
|
9,213
|
13,060
|
1,119
|
584
|
422
|
113
|
75
|
7,160
|
42,264
|
Total
|
$ 105,546
|
$ 44,023
|
$ 112,163
|
$ 20,045
|
$ 7,195
|
$ 39,470
|
$ 7,456
|
$ 7,083
|
$ 3,862
|
$ 20,643
|
$ 367,486
|
Additionally no loans are assigned a risk rating of doubtful or loss.
|
|||||||||||
The following table represents the credit risk profile based on payment activity as of December 31, 2010 by type of loans.
|
|||||||||||
Credit Exposure
|
|||||||||||
Credit Risk Profile based on Payment Activity
|
|||||||||||
One-to-four
family
|
Multi-
family
|
Commercial
Real Estate
|
Construction
|
Land
|
Home
Equity
|
Credit
Cards
|
Automobile
|
Other
|
Commercial
Business
|
Total
|
|
(In thousands)
|
|||||||||||
Performing
|
$ 101,476
|
$ 44,023
|
$ 111,047
|
$ 9,365
|
$ 7,095
|
$ 39,034
|
$ 7,373
|
$ 7,028
|
$ 3,800
|
$ 17,819
|
$ 348,060
|
Nonperforming
|
4,070
|
-
|
1,116
|
10,680
|
100
|
436
|
83
|
55
|
62
|
2,824
|
19,426
|
Total
|
$ 105,546
|
$ 44,023
|
$ 112,163
|
$ 20,045
|
$ 7,195
|
$ 39,470
|
$ 7,456
|
$ 7,083
|
$ 3,862
|
$ 20,643
|
$ 367,486
|
15
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual when, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.
The following table represents the aging of the recorded investment in past due loans as of December 31, 2010 by type of loans.
|
|||||||||||||
30-59 Days
Past Due
|
60-89 Days
Past Due
|
Greater than 90 Days
Past Due
|
Total Past
Due
|
Current
|
Total Loans
|
Recorded
Investment
> 90 Days
and
Accruing
|
|||||||
(In thousands)
|
|||||||||||||
|
|
|
|
|
|||||||||
One-to-four family
|
$ 2,407
|
$ 1,390
|
$ 4,070
|
$ 7,867
|
$ 97,679
|
$ 105,546
|
$ -
|
||||||
Multi-family residential
|
-
|
-
|
-
|
-
|
44,023
|
44,023
|
-
|
||||||
Commercial
|
-
|
-
|
1,116
|
1,116
|
111,047
|
112,163
|
-
|
||||||
Construction
|
2,670
|
-
|
10,680
|
13,350
|
6,695
|
20,045
|
37
|
||||||
Land
|
218
|
-
|
100
|
318
|
6,877
|
7,195
|
-
|
||||||
Home Equity
|
449
|
298
|
436
|
1,183
|
38,287
|
39,470
|
-
|
||||||
Credit Cards
|
149
|
189
|
83
|
421
|
7,035
|
7,456
|
83
|
||||||
Automobile
|
135
|
29
|
55
|
219
|
6,864
|
7,083
|
-
|
||||||
Other
|
27
|
29
|
62
|
118
|
3,744
|
3,862
|
-
|
||||||
Commercial business loan
|
500
|
1,936
|
2,824
|
5,260
|
15,383
|
20,643
|
48
|
||||||
Total
|
$ 6,555
|
$ 3,871
|
$ 19,426
|
$ 29,852
|
$ 337,634
|
$ 367,486
|
$ 168
|
A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is
16
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
measured on a loan by loan basis for all loans in the portfolio except for the smaller groups of homogeneous consumer loans in the portfolio.
The following table presents loans individually evaluated for impairment by type of loans as of
|
|||
December 31, 2010
|
|||
Recorded Investments (Loan
Balance Less Charge off)
|
Unpaid Principal Balance
|
Related Allowance
|
|
WITH NO RELATED ALLOWANCE
RECORDED:
|
(in thousands) | ||
One-to-four family residential
|
$ 5,490
|
$ 5,490
|
$ -
|
Multi Family residential
|
-
|
-
|
-
|
Commercial Real Estate
|
374
|
374
|
-
|
Construction
|
4,172
|
4,172
|
-
|
Land
|
79
|
79
|
-
|
Home Equity
|
187
|
187
|
-
|
Credit Cards
|
-
|
-
|
-
|
Automobile
|
-
|
-
|
-
|
Other Consumer
|
-
|
-
|
-
|
Commercial business
|
458
|
458
|
-
|
WITH AN ALLOWANCE
RECORDED:
|
|||
One-to-four family residential
|
$ 6,992
|
$ 7,015
|
$ 496
|
Multi Family residential
|
929
|
929
|
11
|
Commercial Real Estate
|
742
|
742
|
22
|
Construction
|
7,344
|
7,344
|
3,085
|
Land
|
-
|
-
|
-
|
Home Equity
|
411
|
413
|
148
|
Credit Cards
|
-
|
-
|
-
|
Automobile
|
-
|
-
|
-
|
Other Consumer
|
-
|
-
|
-
|
Commercial business
|
1,326
|
1,326
|
44
|
Totals
|
|||
One-to-four family residential
|
$ 12,482
|
$ 12,505
|
$ 496
|
Multi Family residential
|
929
|
929
|
11
|
Commercial Real Estate
|
1,116
|
1,116
|
22
|
Construction
|
11,516
|
11,516
|
3,085
|
Land
|
79
|
79
|
-
|
Home Equity
|
598
|
600
|
148
|
Credit Cards
|
-
|
-
|
-
|
Automobile
|
-
|
-
|
-
|
Other Consumer
|
-
|
-
|
-
|
Commercial Business
|
1,784
|
1,784
|
44
|
Total
|
$ 28,504
|
$ 28,529
|
$ 3,806
|
17
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table presents the recorded investment in nonaccrual and loans past 90 days still on accrual by type of loans as of December 31, 2010.
Balance
|
|
(In thousands)
|
|
One-to-four family residential
|
$ 4,070
|
Multi Family residential
|
-
|
Commercial
|
1,116
|
Construction
|
10,680
|
Land Loans
|
100
|
Home Equity
|
436
|
Automobile
|
55
|
Credit cards
|
83
|
Other
|
62
|
Commercial business loans
|
2,824
|
Total
|
$ 19,426
|
The Bank originates both adjustable and fixed-interest-rate loans. At December 31, 2010, the composition of these loans, less undisbursed amounts, was as follows:
Fixed
Rate
|
Adjustable
Rate
|
Total
|
||||||||||
(In thousands)
|
||||||||||||
Less than one year
|
$ | 34,067 | $ | 30,201 | $ | 64,268 | ||||||
After one through five years
|
91,188 | 30,494 | 121,682 | |||||||||
After five through ten years
|
50,873 | 12,669 | 63,542 | |||||||||
After ten years
|
99,821 | 18,173 | 117,994 | |||||||||
$ | 275,949 | $ | 91,537 | $ | 367,486 |
Adjustable rate loans have interest rate adjustment limitations and are generally indexed to either the one-year Treasury bill or the monthly weighted-average cost of funds for 11th district institutions regulated by the Office of Thrift Supervision, as published by the FHLB of Seattle.
Outstanding commitments to borrowers for loans as of December 31, 2010 and June 30, 2010 totaled $716,000 and $579,000, respectively. Unfunded commitments under lines of credit as of December 31, 2010 and June 30, 2010 totaled $34.7million and $36.7million, respectively.
Allowance for Possible Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well
18
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.
Our methodology for analyzing the allowance for loan losses consists of two components: formula and specific allowances. The formula allowance is determined by applying an estimated loss percentage to various groups of loans. The loss percentages are generally based on various historical measures such as the amount and type of classified loans, past due ratios and loss experience, which could affect the collectability of the respective loan types.
The specific allowance component is created when management believes that the collectability of a specific large loan, such as a real estate, multi-family or commercial real estate loan, has been impaired and a loss is probable. The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the amount of actual loan charge-offs, net of recoveries.
The following table sets forth the activity in the allowance for loan losses account for the respective three and six month periods ended:
For the Three Months Ended
December 31,
|
For the Six Months Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance
|
$ | 10,997 | $ | 20,954 | $ | 16,788 | $ | 24,463 | ||||||||
Provision for losses
|
330 | 1,216 | 1,510 | 1,582 | ||||||||||||
Charge-offs
|
(458 | ) | (3,033 | ) | (7,544 | ) | (6,943 | ) | ||||||||
Recoveries
|
33 | 35 | 148 | 70 | ||||||||||||
$ | 10,902 | $ | 19,172 | $ | 10,902 | $ | 19,172 |
Loans (including amounts committed) represent real estate secured loans that have loan-to-value ratios above supervisory guidelines totaled $5.7 million and $7.4 million for the periods ending December 31, 2010 and June 30, 2010, respectively.
At December 31, 2010, troubled debt restructured loans, included in impaired loans above, totaled $14.4 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 December 31, 2010, there were no commitments to lend additional funds to borrowers whose loans have been modified in troubled debt restructurings. Nonaccrual loans totaled $19.4 million and $20.6 million at December 31, 2010 and June 30, 2010, respectively. Average investment in impaired loans was $27.5 million and $33.6 million at December 30, 2010 and June 30, 2010, respectively. Interest income recognized on a cash basis on impaired loans was $319,000 and $57,000 for the periods ending December 31, 2010 and June 30, 2010, respectively.
19
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
A summary of our real estate owned for the six months ended December 31, 2010 and 2009 as follows:
Six Months Ended |
Six Months Ended
|
|||||||
December 31, 2010
|
December 31, 2009 | |||||||
Amount | Amount | |||||||
(In thousands) | ||||||||
Balance at the beginning of the
period
|
$ | 14,570 | $ | 2,990 | ||||
Loans transferred to REO
|
7,532 | 12,332 | ||||||
Capitalized improvements
|
166 | 97 | ||||||
Impairment
|
(1,287 | ) | (1,348 | ) | ||||
Dispositions of REO
|
(4,486 | ) | ( 2,646 | ) | ||||
Balance at the end of the period
|
$ | 16,494 | $ | 11,426 |
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 during the six months ended December 31, 2010).
December 31, 2010
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Municipal bonds
|
$ | - | $ | 2,733 | $ | - | $ | 2,733 | ||||||||
U.S. government agency securities
|
- | 3,099 | - | 3,099 | ||||||||||||
FHLMC mortgage-backed securities
|
- | 35,036 | - | 35,036 | ||||||||||||
June 30, 2010
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Municipal bonds
|
$ | - | $ | 3,431 | $ | - | $ | 3,431 | ||||||||
U.S. government agency securities
|
- | 3,151 | - | 152 | ||||||||||||
FHLMC mortgage-backed securities
|
- | 42,197 | - | 42,197 |
20
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Assets and liabilities 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:
December 31, 2010
|
||||||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
Total Gains
(Losses)
|
||||||||||||||||
(In thousands)
|
||||||||||||||||||||
Impaired loans (1)
|
$ | - | $ | - | $ | 15,466 | $ | 15,466 | $ | (3,805 | ) | |||||||||
Real estate owned (2)
|
- | - | 16,494 | 16,494 | (12,173 | ) | ||||||||||||||
Loans held for sale (3)
|
1,834 | - | - | 1,834 | - |
(1) The balance disclosed for impaired loans represents the impaired loans where fair value is below cost at December 31, 2010. The amount disclosed as a loss represents the specific reserve against these loans at December 31, 2010.
(2) The losses in the real estate owned property represents write downs that exist as of December 31, 2010.
(3) The fair value is based on quoted market prices obtained from Federal Home Loan Mortgage Corporation (“FHLMC”) 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)
|
||||||||||||||||
(In thousands)
|
||||||||||||||||||||
Impaired loans (1)
|
$ | - | $ | - | $ | 16,473 | $ | 16,473 | $ | (8,187 | ) | |||||||||
Real estate owned (2)
|
- | - | 16,570 | 14,570 | (8,047 | ) | ||||||||||||||
Loans held for sale (3)
|
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. The amount disclosed as a loss represents the specific reserve against these loans at June 30, 2010.
(2) The losses in the real estate owned property represents write downs that exist as of June 30, 2010.
(3) The fair value is based on quoted market prices obtained from Federal Home Loan Mortgage Corporation (“FHLMC”) 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 impaired loans amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral.
The real estate owned amount above represents impaired real estate that has been adjusted to fair value. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.
21
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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.
There were no transfers out of Level 3 during the six months ended December 31, 2010. The estimated fair values of financial instruments are as follows:
December 31, 2010
|
June 30, 2010
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Assets:
|
||||||||||||||||
Cash and due from banks
|
$ | 27,336 | $ | 27,336 | $ | 32,831 | $ | 32,831 | ||||||||
Investments available for sale
|
40,868 | 40,868 | 48,779 | 48,779 | ||||||||||||
Investments held to maturity
|
8,689 | 9,240 | 10,035 | 10,710 | ||||||||||||
Loans held for sale
|
1,834 | 1,856 | 3,947 | 3,961 | ||||||||||||
Loans receivable, net
|
355,824 | 328,243 | 389,411 | 360,697 | ||||||||||||
Bank owned life insurance
|
17,270 | 17,270 | 16,920 | 16,920 | ||||||||||||
Accrued interest receivable
|
1,930 | 1,930 | 2,158 | 2,158 | ||||||||||||
FHLB stock
|
6,510 | 6,510 | 6,510 | 6,510 | ||||||||||||
Liabilities:
|
||||||||||||||||
Demand deposits, savings and money
market
|
153,598 | 152,585 | 154,324 | 154,324 | ||||||||||||
Certificates of deposit
|
189,038 | 187,405 | 201,464 | 200,976 | ||||||||||||
FHLB advances
|
98,400 | 99,439 | 136,900 | 138,312 | ||||||||||||
Advance payments by borrowers for
taxes and insurance
|
1,457 | 1,457 | 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.
22
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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.
Investments - 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 FHLMC. The FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market. For impaired loans, the fair value was based on the face amount of the collateral.
Loans receivable, net - As of December 31, 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. For impaired loans the fair value was based on the collateral less estimated selling costs.
Bank owned life insurance - The carrying amount is a reasonable estimate of its fair value.
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 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 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.
23
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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;
|
24
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
|
•
|
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 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 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. Effective January 25, 2011, the Bank converted from mutual to stock form. 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.
25
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Comparison of Financial Condition at December 31, 2010 and June 30, 2010
General. Total assets decreased $49.5 million, or 9.1%, to $495.3 million at December 31, 2010 from $544.8 million at June 30, 2010. The decrease in assets during this period was primarily a result of a $33.6 million or 8.6% decrease in loans receivable to $355.8 million from $389.4 million, and a $7.9 million, or 16.2%, decrease in securities available for sale to $40.9 million from $48.8 million. Total real estate owned increased $1.9 million, or 13.2%, to $16.5 million at December 31, 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 $48.2 million or 9.6% to $451.9 million at December 31, 2010 from $500.2 million at June 30, 2010. Total deposits decreased $13.2 million, or 3.7%, to $342.6 million at December 31, 2010 from $355.8 million at June 30, 2010. Brokered certificates of deposit decreased $16.7 million or 77.0% while FHLB advances decreased $38.5 million or 28.1% to $98.4 million at December 31, 2010 from $136.9 million at June 30, 2010. These decreases were due to our continued focus to replace wholesale deposits and borrowings with core deposits.
Assets. Total assets decreased $49.5 million at December 31, 2010 from June 30, 2010. The following table details the increases and decreases in the composition of our assets from June 30, 2010 to December 31, 2010:
Increase/(Decrease)
|
||||||||||||||||
Balance at
December 31,
2010
|
Balance at
June 30,
2010
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Cash and due from banks
|
$ | 27,336 | $ | 32,831 | $ | (5,495 | ) | (16.7 | )% | |||||||
Investments available for sale
|
40,868 | 48,779 | (7,911 | ) | (16.2 | ) | ||||||||||
Investments held to maturity
|
8,689 | 10,035 | (1,346 | ) | (13.4 | ) | ||||||||||
Loans receivable, net
|
355,824 | 389,411 | (33,587 | ) | (8.6 | ) |
Cash and due from banks decreased $5.5 million at December 31, 2010 from June 30, 2010. This decrease was a result of normal operations, to fund our managed decline in wholesale funds.
Securities available for sale decreased $7.9 million to $40.9 million at December 31, 2010 from $48.8 million at June 30, 2010. The decrease in this portfolio was primarily the result of sales and maturities of securities of $4.6 million and contractual repayments of $3.3 million. Securities held-to-maturity decreased $1.3 million due to contractual repayments.
Loans receivable, net, decreased $33.6 million to $355.8 million at December 31, 2010 from $389.4 million at June 30, 2010. The construction loan portfolio decreased $16.8 million due to loan repayments and the transfer of loans to real estate owned. Our commercial loan real estate portfolio decreased $6.3 million as a result of our continued focus to decrease this loan portfolio.
Non performing assets remained essentially unchanged at $36.0 million at December 31, 2010 as compared to $35.2 million at June 30, 2010. Non accrual loans decreased $1.2 million as these loans moved into real estate owned. Total non-current loans including non-accrual loans increased $1.4 million to $29.9 million at December 31, 2010 from $28.5 million at June 30, 2010.
Deposits. Deposits decreased $13.2 million, or 3.7%, to $342.6 million at December 31, 2010 from $355.8 million at June 30, 2010. A significant portion of the decrease was in brokered certificates of deposit which decreased $16.7 million and a $6.1 million decrease in interest-bearing demand deposits. These decreases were offset by increases in our money market accounts of $4.9 million and retail certificates of deposit of $4.3 million.
26
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table details the changes in deposit accounts:
Increase/(Decrease)
|
||||||||||||||||
Balance at
December 31,
2010
|
Balance at
June 30,
2010
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Noninterest-bearing demand deposits
|
$ | 28,179 | $ | 28,718 | $ | (539 | ) | (1.9 | )% | |||||||
Interest-bearing demand deposits
|
19,340 | 25,483 | (6,143 | ) | (24.1 | ) | ||||||||||
Money market accounts
|
75,314 | 70,367 | 4,947 | 7.0 | ||||||||||||
Savings deposits
|
30,765 | 29,756 | 1,009 | 3.4 | ||||||||||||
Certificates of deposit
|
||||||||||||||||
Retail certificates
|
184,039 | 179,739 | 4,300 | 2.4 | ||||||||||||
Brokered certificates
|
4,999 | 21,725 | (16,726 | ) | (77.0 | ) | ||||||||||
Total deposit accounts
|
$ | 342,636 | $ | 355,788 | $ | (13,152 | ) | (3.7 | )% |
Borrowings. FHLB advances decreased $38.5 million, or 28.1%, to $98.4 million at December 31, 2010 from $136.9 million at June 30, 2010. The decrease was related to our continued focus on reducing our reliance on outside borrowings and our emphasis on retail deposits.
Equity. Total equity decreased $1.3 million or 2.9% to $43.4 million at December 31, 2010 from $44.7 million at June 30, 2010. The decrease was related to a decrease in retained earnings of $774,000 and a decrease in other accumulated comprehensive income, net of tax of $526,000.
Comparison of Operating Results for the Three and Six Months ended December 31, 2010 and 2009
General. Net loss for the three months ended December 31, 2010 was $126,000 compared to net income of $1.2 million for the three months ended December 31, 2009. For the six months ended December 31, 2010 the net loss was $774,000 compared to net income of $1.8 million for the comparable period in 2009.
Net Interest Income. Net interest income remained relatively unchanged at $4.6 million for the three months ended December 31, 2010, compared to $4.5 million for the three months ended December 31, 2009. For the six month period ended December 31, 2010 net interest income increased $266,000 or 3.0%, to $9.0 million from $8.8 million for the six months ended December 31, 2009.
Our net interest margin increased 63 basis points to 3.89% for the three months ended December 31, 2010, from 3.26% for the same period of the prior year. The average cost of interest-bearing liabilities decreased 111 basis points to 1.84% for the three months ended December 31, 2010 compared to 2.95% 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 an $11.8 million decline in brokered certificates of deposit during the three months ended December 31, 2010.
27
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table sets forth the results of balance sheet decreases and changes in interest rates to our net interest income for the three months ended December 31, 2010 compared to the same period in 2009. 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.
Three Months Ended December 31,
2010
Compared to Three Months Ended
December 31, 2009
|
||||||||||||
Increase (Decrease) Due to
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
(In thousands)
|
||||||||||||
Interest-earning assets:
|
||||||||||||
Loans receivable, including fees
|
$ | (192 | ) | $ | (1,366 | ) | $ | (1,558 | ) | |||
Mortgage-backed securities
|
(48 | ) | (185 | ) | (233 | ) | ||||||
Investment securities, FHLB stock
and cash and due from banks
|
(48 | ) | 27 | (21 | ) | |||||||
Total net change in income on interest-earning assets
|
$ | (288 | ) | $ | (1,524 | ) | $ | (1,812 | ) | |||
|
||||||||||||
Interest-bearing liabilities:
|
||||||||||||
Savings deposits
|
$ | 0 | $ | 4 | $ | 4 | ||||||
Interest-bearing demand deposits
|
(13 | ) | (7 | ) | (20 | ) | ||||||
Money market accounts
|
(31 | ) | (20 | ) | (51 | ) | ||||||
Certificates of deposit
|
(473 | ) | (399 | ) | (872 | ) | ||||||
FHLB advances
|
(579 | ) | (312 | ) | (891 | ) | ||||||
Total net change in expense on interest-bearing liabilities
|
(1,096 | ) | (734 | ) | (1,830 | ) | ||||||
Total increase in net interest income
|
$ | 808 | $ | (790 | ) | $ | 18 |
For the six months ended December 31, 2010 our net interest margin increased 72 basis points to 3.73% for the six months ended December 31, 2010, from 3.01% for the same period in 2009. The average cost of interest-bearing liabilities decreased 98 basis points to 2.11% for the six months ended December 31, 2010 compared to 3.09% for the same period of the prior year. This decrease is primarily as a result of a 177 basis point decrease in the average cost of FHLB borrowings due to a decrease in the balance of FHLB borrowings between periods and a 83 basis point decrease in the average cost of certificates of deposit due to the decline in brokered certificates of deposit during the six months ended December 31, 2010.
28
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table sets forth the results of balance sheet decreases and changes in interest rates to our net interest income for the six months ended December 31, 2010 compared to the same period in 2009.
Six Months Ended December 31, 2010
Compared to Six Months Ended
December 31, 2009
|
||||||||||||
Increase (Decrease) Due to
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
(In thousands)
|
||||||||||||
Interest-earning assets:
|
||||||||||||
Loans receivable, net
|
$ | (123 | ) | $ | (2,674 | ) | $ | (2,797 | ) | |||
Mortgage-backed securities
|
(71 | ) | (443 | ) | (514 | ) | ||||||
Investment securities, FHLB stock
and cash and due from banks
|
(75 | ) | 19 | (56 | ) | |||||||
Total net change in income on interest-earning assets
|
$ | (269 | ) | $ | (3,098 | ) | $ | (3,367 | ) | |||
|
||||||||||||
Interest-bearing liabilities:
|
||||||||||||
Savings deposits
|
$ | (1 | ) | $ | 7 | $ | 6 | |||||
Interest-bearing demand deposits
|
(29 | ) | (9 | ) | (38 | ) | ||||||
Money market accounts
|
(256 | ) | (192 | ) | (448 | ) | ||||||
Certificates of deposit
|
(829 | ) | (860 | ) | (1,689 | ) | ||||||
FHLB advances
|
(1000 | ) | (464 | ) | (1,464 | ) | ||||||
Total net change in expense on interest-bearing liabilities
|
(2,115 | ) | (1,518 | ) | (3,633 | ) | ||||||
Total increase in net interest income
|
$ | 1,846 | $ | (1,580 | ) | $ | 266 |
Interest Income. Total interest income for the three months ended December 31, 2010 decreased $1.8 million, or 21.7%, to $6.6 million, from $8.4 million for the three months ended December 31, 2009. The decrease during the period was primarily attributable to the decline in net loans receivable over the last year.
The following tables compare detailed average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended December 31, 2010 and 2009:
Three Months Ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Yield
|
Average
Balance
|
Yield
|
(Decrease) in
Interest and
Dividend
Income from
2009
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Loans receivable, net (1)
|
$ | 376,306 | 6.29 | % | $ | 460,513 | 6.49 | % | $ | (1,558 | ) | |||||||||
Mortgage-backed securities
|
46,636 | 4.72 | 61,028 | 5.13 | (233 | ) | ||||||||||||||
Investments
|
6,480 | 4.20 | 9,054 | 4.24 | (28 | ) | ||||||||||||||
FHLB stock
|
6,510 | - | 6,510 | - | - | |||||||||||||||
Cash and due from banks
|
33,494 | 0.21 | 21,549 | 0.20 | 7 | |||||||||||||||
Total interest-earning assets
|
$ | 469,426 | 5.58 | % | $ | 558,654 | 5.99 | % | $ | (1,812 | ) |
(1) |
Average loans receivable includes non performing loans and does not include net deferred loan fees.
Interest income does not include non-accrual loans.
|
29
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
For the six months ended December 31, 2010 total interest income decreased $3.4 million, or 19.8%, to $13.7 million, from $17.0 million for the six months ended December 31, 2009. The decrease was primarily the result of a $83.3 million decrease in the average balance of loans receivable during the period. The decrease in the average balance of loans receivable was a part of the strategy employed by the Bank.
The following tables compare detailed average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended December 31, 2010 and 2009:
Six Months Ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Yield
|
Average
Balance
|
Yield
|
(Decrease) in
Interest and
Dividend
Income from
2009
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Loans receivable ,including fees
|
$ | 388,751 | 6.35 | % | $ | 472,075 | 6.42 | % | $ | (2,797 | ) | |||||||||
Mortgage-backed securities
|
48,907 | 4.73 | 66,569 | 5.02 | (514 | ) | ||||||||||||||
Investments
|
6,612 | 4.20 | 9,056 | 4.31 | (56 | ) | ||||||||||||||
FHLB stock
|
6,510 | - | 6,510 | - | - | |||||||||||||||
Cash and due from banks
|
33,718 | 0.21 | 27,784 | 0.25 | - | |||||||||||||||
Total interest-earning assets
|
$ | 484,498 | 5.65 | % | $ | 581,994 | 5.86 | % | $ | (3,367 | ) |
(1)
|
Average loans receivable includes non performing loans, does not include net deferred loan fees.
|
Interest Expense. Interest expense decreased $1.8 million, or 48.0%, to $2.0 million for the three months ended December 31, 2010 from $3.8 million for the three months ended December 31, 2009 primarily due to a decline in our cost of funds. The average balance of total interest-bearing liabilities decreased $86.7 million, or 16.8%, to $431.0 million for the three months ended December 31, 2010 from $517.8 million for the three months ended December 31, 2009. The decrease was primarily a result of a $34.2 million decline due a decrease in average retail certificates of deposits, a decrease in $11.8 million of average brokered deposits, and a $31.3 million average decrease in FHLB advances.
30
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
The following table details average balances, cost of funds and the change in interest expense for the three months ended December 31, 2010 and 2009:
Three Months Ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Cost
|
Average
Balance
|
Cost
|
(Decrease) in
Interest
Expense from
2009
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Savings deposits
|
$ | 30,782 | 0.77 | % | $ | 28,571 | 0.77 | % | $ | 4 | ||||||||||
Interest-bearing demand deposits
|
21,192 | 0.30 | 26,277 | 0.55 | (20 | ) | ||||||||||||||
Money market deposits
|
76,064 | 1.03 | 82,635 | 1.19 | (51 | ) | ||||||||||||||
Certificates of deposit
|
197,433 | 2.51 | 243,387 | 3.47 | (872 | ) | ||||||||||||||
FHLB advances
|
105,572 | 1.79 | 136,900 | 3.99 | (891 | ) | ||||||||||||||
Total interest-bearing liabilities
|
$ | 431,043 | 1.84 | % | $ | 517,770 | 2.95 | % | $ | (1,830 | ) |
For the six months ended December 31, 2010 interest expense decreased $3.6 million, or 43.9%, to $4.7 million for the six months ended December 31, 2010 from $8.3 million for the six months ended December 31, 2009 primarily due to a decline in our cost of funds. The average cost of interest-bearing liabilities decreased 98 basis points to 2.11% for the six months ended December 31, 2010 compared to 3.09% for the same period of the prior year. The decrease was primarily a result of a 177 basis point decrease in the average cost of FHLB borrowings due to a decrease in the balance of FHLB borrowings between periods and a 83 basis point decrease in the average cost of certificates of deposit due to the decline in brokered certificates of deposit during the six months ended December 31, 2010.
The following table details average balances, cost of funds and the change in interest expense for the six months ended December 31, 2010 and 2009:
Six Months Ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
Increase/
|
||||||||||||||||||
Average
Balance
|
Cost
|
Average
Balance
|
Cost
|
(Decrease) in
Interest
Expense from
2009
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Savings deposits
|
$ | 30,532 | 0.77 | % | $ | 28,840 | 0.77 | % | $ | 6 | ||||||||||
Interest-bearing demand deposits
|
21,989 | 0.30 | 25,062 | 0.57 | (38 | ) | ||||||||||||||
Money market deposits
|
73,999 | 1.05 | 96,167 | 1.74 | (448 | ) | ||||||||||||||
Certificates of deposit
|
201,540 | 2.71 | 250,186 | 3.54 | (1,689 | ) | ||||||||||||||
FHLB advances
|
112,981 | 2.44 | 135,050 | 4.21 | (1,464 | ) | ||||||||||||||
Total interest-bearing liabilities
|
$ | 441,041 | 2.11 | % | $ | 535,305 | 3.09 | % | $ | (3,633 | ) |
Provision for Loan Losses. In connection with its analysis of the loan portfolio management determined that a provision for loan losses of $330,000 was required for the three months ended December 31, 2010, compared to the $1.2 million provision for loan losses established for the three months ended December 31, 2009. Non-performing loans were $19.4 million or 3.9% of total assets at December 31, 2010, compared to $40.4 million, or
31
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
7.4% of total assets at December 31, 2009. The provision for loan losses for the six months ended December 31, 2010 was $1.5 million a decrease of $72,000 from the $1.6 million provision for loan losses for the six months ended December 31, 2009. Management considers the allowance for loan losses at December 31, 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.
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.
The following table details activity and information related to the allowance for loan losses at and for the six months ended December 31, 2010 and 2009.
At or For the Six Months
Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Provision for loan losses
|
$ | 1,510 | $ | 1,582 | ||||
Net charge-offs
|
$ | 7,396 | $ | 6,873 | ||||
Allowance for loan losses
|
$ | 10,902 | $ | 19,172 | ||||
Allowance for loan losses as a percentage of gross loans receivable at the end
of the period
|
3.0 | % | 4.2 | % | ||||
Nonaccrual and 90 days or more past due loans
|
$ | 19,426 | $ | 40,389 | ||||
Allowance for loan losses as a percentage of nonperforming loans at the end of
the period
|
56.1 | % | 47.5 | % | ||||
Nonaccrual and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
5.3 | % | 8.8 | % | ||||
Total loans
|
$ | 367,486 | $ | 457,632 |
32
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Noninterest Income. Noninterest income remained relatively unchanged during the three months ended December 31, 2010 and 2009. The following tables provide a detailed analysis of the changes in the components of noninterest income for the three months ended December 31, 2010 compared to the same period in 2009:
Three Months Ended
December 31,
|
Increase (decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Deposit services fees
|
$ | 594 | $ | 689 | $ | (95 | ) | (13.7 | )% | |||||||
Other deposit fees
|
212 | 195 | 17 | 8.8 | ||||||||||||
Gain on sale of investments
|
81 | 25 | 56 | 224.0 | ||||||||||||
Loan fees
|
302 | 220 | 82 | 37.3 | ||||||||||||
Gain on sale of loans
|
95 | 230 | (135 | ) | (58.7 | ) | ||||||||||
Other income
|
341 | 270 | 71 | 26.3 | ||||||||||||
Total noninterest income
|
$ | 1,625 | $ | 1,629 | $ | (4 | ) | (0.3 | )% |
The decrease in the amount of gain on the sale of loans was the result of a lower volume of loans sold into the secondary market during the three months ended December 31, 2010 compared to the three months ended December 31, 2009. The decrease in deposit services fees is related to our branch closures, and a decrease in ATM fee income.
For the six months ended December 31, 2010 noninterest income decreased $482,000 or 13.0%, to $3.2 million from $3.7 million for the same period in 2009.
The following tables provide a detailed analysis of the changes in the components of noninterest income for the six months ended December 31, 2010 compared to the same period in 2009:
Six Months Ended
December 31,
|
Increase (decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Deposit services fees
|
$ | 1,264 | $ | 1,421 | $ | (157 | ) | (11.0 | )% | |||||||
Other deposit fees
|
431 | 393 | 38 | 9.7 | ||||||||||||
Gain on the sale of investments
|
135 | 25 | 110 | 440.0 | ||||||||||||
Loan fees
|
533 | 483 | 50 | 10.4 | ||||||||||||
Gain on sale of loans
|
188 | 828 | (640 | ) | (77.2 | ) | ||||||||||
Other income
|
671 | 554 | 117 | 21.1 | ||||||||||||
Total noninterest income
|
$ | 3,222 | $ | 3,704 | $ | (482 | ) | (13.0 | )% |
Noninterest income decreased $482,000 during the six months ended December 31, 2010 from the same period in 2009 primarily as a result of a $640,000 decrease in gains on the sales of loan. There was a sale in August 2009 of $13.2 million in single family loans that resulted in a gain of $331,000 with no comparable gain during the six months ended December 31, 2010.
33
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
Noninterest Expense. Noninterest expense decreased $693,000, or 10.4%, to $6.0 million for the three months ended December 31, 2010 from $6.7 million for the three months ended December 31, 2009. The following tables provide an analysis of the changes in the components of noninterest expense for the three months ended December 31, 2010 and 2009:
Three Months Ended
December 31,
|
Increase (decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Compensation and benefits
|
$ | 2,161 | $ | 2,179 | $ | (18 | ) | (0.8 | )% | |||||||
General and administrative
expenses
|
1,269 | 1,294 | (25 | ) | (1.9 | ) | ||||||||||
Real estate owned impairment
|
791 | 1,348 | (557 | ) | (41.3 | ) | ||||||||||
FDIC Insurance premium
|
312 | 450 | (138 | ) | (30.6 | ) | ||||||||||
Information technology
|
525 | 455 | 70 | 15.4 | ||||||||||||
Occupancy and equipment
|
597 | 678 | (81 | ) | (11.9 | ) | ||||||||||
Deposit services
|
165 | 222 | (57 | ) | (25.7 | ) | ||||||||||
Marketing
|
146 | 107 | 39 | 36.4 | ||||||||||||
Loss on sale of premises and
equipment
|
168 | 1 | 167 | 16700.0 | ||||||||||||
(Gain) on sale of real estate
owned
|
(146 | ) | (53 | ) | (93 | ) | (175.5 | ) | ||||||||
Total noninterest expense
|
$ | 5,988 | $ | 6,681 | $ | (693 | ) | (10.4 | )% |
Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 96.7% for the three months ended December 31, 2010 compared to 108.1% for the three months ended December 31, 2009. The improvement in the efficiency ratio was primarily attributable to the decrease in noninterest expense of $693,000 due primarily to decreases of $557,000 in real estate owned impairment and $138,000 in FDIC insurance premium.
The following tables provide an analysis of the changes in the components of noninterest expense for the six months ended December 31, 2010 and 2009:
Six Months Ended
December 31,
|
Increase (decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Compensation and benefits
|
$ | 4,329 | $ | 4,371 | $ | (42 | ) | (1.0 | )% | |||||||
General and administrative
expenses
|
2,470 | 2,529 | (59 | ) | (2.3 | ) | ||||||||||
Real estate owned impairment
|
1,287 | 1,348 | (61 | ) | (4.5 | ) | ||||||||||
FDIC Insurance premium
|
625 | 900 | (275 | ) | (30.6 | ) | ||||||||||
Information technology
|
1,012 | 924 | 88 | 9.5 | ||||||||||||
Occupancy and equipment
|
1,170 | 1,298 | (128 | ) | (9.9 | ) | ||||||||||
Deposit services
|
346 | 461 | (115 | ) | (24.9 | ) | ||||||||||
Marketing
|
275 | 214 | 61 | 28.5 | ||||||||||||
Loss on sale of premises, and
equipment
|
168 | 2 | 166 | 8300.0 | ||||||||||||
(Gain) on sale of real estate
owned
|
(166 | ) | (37 | ) | (129 | ) | 348.6 | |||||||||
Total noninterest expense
|
$ | 11,516 | $ | 12,010 | $ | (494 | ) | (4.1 | )% |
34
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
For the six months ended December 31, 2010 noninterest expense decreased $494,000 or 4.1%, to $11.5 million from $12.0 million for the six months ended December 31, 2009. FDIC insurance premiums expense decreased $275,000 due to lower balances in our deposit accounts as the Bank reduced its brokered certificate of deposits. Gain on sale of real estate owned also increased $129,000 during the period. As a result of our branch closures occupancy expense decreased $128,000.
Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 94.0% for the six months ended December 31, 2010 compared to 96.3% for the six months ended December 31, 2009.
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 $3.2 million and $2.8 million at December 31, 2010 and December 31, 2009, respectively.
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 directors 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 Note 3 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q and “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 December 31, 2010, the total approved loan origination commitments outstanding amounted to $716,000. At the same date, unused lines of credit were $34.7 million.
35
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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%. For the three and six months ended December 31, 2010, our average basic surplus was 8.2% and 8.9%, respectively, which indicates we exceed the liquidity standard.
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 December 31, 2010 totaled $79.4 million with $5.0 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 December 31, 2010 to borrow an additional $520,000 from the FHLB of Seattle. As of December 31, 2010 Anchor Bank had submitted loan collateral documents to FHLB of Seattle in the amount of $209.4 million of which $184.4 million had been reviewed as of January 19, 2011 by FHLB and accepted as eligible collateral. The borrowing capacity of the loan collateral was $118.3 million and when combined with the borrowing capacity of securities collateral, created a total borrowing capacity of $127.3 million. Anchor’s available credit as of January 19, 2011 was $28.9 million based on a borrowing capacity of $127.3 million less current outstanding balance of $98.4 million.
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 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 December 31, 2010, the Company had no liquid assets.
Commitments and 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
36
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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
December 31, 2010:
Amount of Commitment
Expiration Per Period
|
||||||||
Total
Amounts
Committed
|
Due in
One Year
|
|||||||
|
(In thousands)
|
|||||||
Commitments to originate loans (1)
|
$ | 716 | $ | 716 | ||||
Lines of Credit (2)
|
||||||||
Fixed rate (3)
|
$ | 10,592 | $ | 10,592 | ||||
Adjustable rate
|
$ | 24,082 | $ | 24,082 | ||||
Undisbursed balance of loans closed
|
$ | 35,390 | $ | 35,390 |
(1) | Interest rates on fixed rate loans range from 3.875% to 4.875%. |
(2) | At December 31, 2010 there were no reserves for unfunded commitments. |
(3) | Includes standby letters of credit. |
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 $46.1 million at December 31, 2010, or 8.8%, of total assets on that date. As of December 31, 2010, we exceeded all regulatory capital requirements to be considered well capitalized as of that date. Our regulatory capital ratios at December 31, 2010 were as follows: Tier 1 capital 11.1%; Tier 1 (core) risk-based capital 8.1%; and total risk-based capital 12.4%. The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively. Although we were “well capitalized” at December 31, 2010 based on financial statements prepared in accordance with generally accepted accounting principles in the United States and the general percentages in the regulatory guidelines, we are no longer regarded as “well capitalized” for federal regulatory purposes as a result of the deficiencies cited in the Order. As a result of this reclassification, our borrowing costs and terms from the Federal Reserve Board and the FHLB, as well as our FDIC deposit insurance premiums increased. For additional information, see the discussion included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
37
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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 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,
38
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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 December 31, 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 December 31, 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.
39
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) (Unaudited)
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 12, 2010. As of December 31, 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)
|
40
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: February 11, 2011 | /s/ Jerald L. Shaw |
Jerald L. Shaw | |
President and Chief Executive Officer | |
(Principal Executive Officer) | |
Date: February 11, 2011 | /s/ Terri L. Degner |
Terri L. Degner | |
Executive Vice President and | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
41
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
|
42 |