Attached files
file | filename |
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EX-31.2 - EX-31.2 - ANCHOR BANCORP WISCONSIN INC | c62812exv31w2.htm |
EX-32.2 - EX-32.2 - ANCHOR BANCORP WISCONSIN INC | c62812exv32w2.htm |
EX-32.1 - EX-32.1 - ANCHOR BANCORP WISCONSIN INC | c62812exv32w1.htm |
EX-31.1 - EX-31.1 - ANCHOR BANCORP WISCONSIN INC | c62812exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | 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
o | 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 001-34955
ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
Wisconsin | 39-1726871 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
25 West Main Street Madison, Wisconsin |
53703 | |
(Address of principal executive office) | (Zip Code) | |
(608) 252-8700
Registrants telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
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 þ No o
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
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 definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class: Common stock $.10 Par Value
Number of shares outstanding as of January 31, 2011: 21,683,304
Number of shares outstanding as of January 31, 2011: 21,683,304
ANCHOR BANCORP WISCONSIN INC.
INDEX FORM 10-Q
INDEX FORM 10-Q
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
1
Table of Contents
ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
December 31, | March 31, | ||||||||||
2010 | 2010 | ||||||||||
(In Thousands, Except Share Data) | |||||||||||
Assets |
|||||||||||
Cash and due from banks |
$ | 74,913 | $ | 42,411 | |||||||
Interest-bearing deposits |
59,605 | 469,751 | |||||||||
Cash and cash equivalents |
134,518 | 512,162 | |||||||||
Investment securities available for sale |
529,801 | 416,203 | |||||||||
Investment securities held to maturity (fair value of $31
and $40, respectively) |
31 | 39 | |||||||||
Loans, less allowance for loan losses of $157,438 at December 31, 2010
and $179,644 at March 31, 2010: |
|||||||||||
Held for sale |
37,196 | 19,484 | |||||||||
Held for investment |
2,661,991 | 3,229,580 | |||||||||
Foreclosed properties and repossessed assets, net |
69,241 | 55,436 | |||||||||
Real estate held for development and sale |
1,213 | 1,304 | |||||||||
Office properties and equipment |
30,251 | 43,558 | |||||||||
Federal Home Loan Bank stockat cost |
54,829 | 54,829 | |||||||||
Accrued interest and other assets |
61,681 | 83,670 | |||||||||
Total assets |
$ | 3,580,752 | $ | 4,416,265 | |||||||
Liabilities and Stockholders (Deficit) Equity |
|||||||||||
Deposits |
|||||||||||
Non-interest bearing |
$ | 255,595 | $ | 285,374 | |||||||
Interest bearing deposits and accrued interest |
2,588,730 | 3,267,388 | |||||||||
Total deposits and accrued interest |
2,844,325 | 3,552,762 | |||||||||
Other borrowed funds |
685,608 | 796,153 | |||||||||
Other liabilities |
60,340 | 37,237 | |||||||||
Total liabilities |
3,590,273 | 4,386,152 | |||||||||
Commitments and contingent liabilities (Note 11) |
|||||||||||
Preferred stock, $.10 par value, 5,000,000 shares authorized,
110,000 shares issued and outstanding |
87,165 | 81,596 | |||||||||
Common stock, $.10 par value, 100,000,000 shares authorized, 25,363,339 shares issued, 21,683,304 and 21,685,925 shares outstanding,
respectively |
2,536 | 2,536 | |||||||||
Additional paid-in capital |
109,133 | 109,133 | |||||||||
Retained deficit |
(92,061 | ) | (61,249 | ) | |||||||
Accumulated other comprehensive income (loss) related to AFS securities |
(16,463 | ) | 507 | ||||||||
Accumulated other comprehensive loss related to OTTI non credit issues |
(3,771 | ) | (5,906 | ) | |||||||
Total accumulated other comprehensive income (loss) |
(20,234 | ) | (5,399 | ) | |||||||
Treasury stock (3,680,035 and 3,677,414 shares, respectively), at cost |
(90,526 | ) | (90,975 | ) | |||||||
Deferred compensation obligation |
(5,534 | ) | (5,529 | ) | |||||||
Total Anchor BanCorp stockholders (deficit) equity |
(9,521 | ) | 30,113 | ||||||||
Total liabilities and stockholders (deficit) equity |
$ | 3,580,752 | $ | 4,416,265 | |||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
2
Table of Contents
ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands, Except Per Share Data) | ||||||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 36,631 | $ | 48,545 | $ | 117,461 | $ | 151,886 | ||||||||
Investment securities and Federal Home Loan Bank stock |
4,442 | 4,801 | 11,308 | 16,321 | ||||||||||||
Interest-bearing deposits |
78 | 208 | 454 | 838 | ||||||||||||
Total interest income |
41,151 | 53,554 | 129,223 | 169,045 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
10,993 | 21,278 | 40,048 | 68,451 | ||||||||||||
Other borrowed funds |
7,963 | 9,943 | 25,854 | 34,407 | ||||||||||||
Total interest expense |
18,956 | 31,221 | 65,902 | 102,858 | ||||||||||||
Net interest income |
22,195 | 22,333 | 63,321 | 66,187 | ||||||||||||
Provision for credit losses |
21,412 | 10,456 | 41,020 | 141,756 | ||||||||||||
Net interest income (loss) after provision for credit losses |
783 | 11,877 | 22,301 | (75,569 | ) | |||||||||||
Non-interest income: |
||||||||||||||||
Total other than temporary losses |
| (872 | ) | | (1,910 | ) | ||||||||||
Portion of loss recognized in other comprehensive income |
| 786 | | 1,741 | ||||||||||||
Reclassification from other comprehensive income |
(163 | ) | (260 | ) | (362 | ) | (576 | ) | ||||||||
Net impairment losses recognized in earnings |
(163 | ) | (346 | ) | (362 | ) | (745 | ) | ||||||||
Loan
servicing income (loss), net of amortization |
(416 | ) | 1,038 | 1,076 | 1,525 | |||||||||||
Credit enhancement income on mortgage loans sold |
116 | 293 | 605 | 989 | ||||||||||||
Service charges on deposits |
2,855 | 3,949 | 9,773 | 11,924 | ||||||||||||
Investment and insurance commissions |
971 | 1,070 | 2,696 | 2,672 | ||||||||||||
Net gain on sale of loans |
5,601 | 2,805 | 16,164 | 15,270 | ||||||||||||
Net gain on sale of investment securities |
1,187 | 5,783 | 7,952 | 9,396 | ||||||||||||
Net gain on sale of branches |
100 | | 7,348 | | ||||||||||||
Other revenue from real estate partnership operations |
| | 387 | 2,393 | ||||||||||||
Other |
1,435 | 1,104 | 3,434 | 2,823 | ||||||||||||
Total non-interest income |
11,686 | 15,696 | 49,073 | 46,247 | ||||||||||||
(Continued)
3
Table of Contents
ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Cont.)
(Unaudited)
Consolidated Statements of Operations (Cont.)
(Unaudited)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands, Except Per Share Data) | ||||||||||||||||
Non-interest expense: |
||||||||||||||||
Compensation |
$ | 10,396 | $ | 12,415 | $ | 31,799 | $ | 40,864 | ||||||||
Occupancy |
1,921 | 2,427 | 6,305 | 7,487 | ||||||||||||
Federal deposit insurance premiums |
1,423 | 4,300 | 9,119 | 14,486 | ||||||||||||
Furniture and equipment |
1,520 | 1,836 | 5,023 | 5,978 | ||||||||||||
Data processing |
1,627 | 1,914 | 4,981 | 5,535 | ||||||||||||
Marketing |
248 | 542 | 965 | 1,557 | ||||||||||||
Other expenses from real estate partnership operations |
32 | 211 | 547 | 3,870 | ||||||||||||
Foreclosed properties and repossessed assetsnet expense |
3,307 | 7,710 | 15,747 | 20,480 | ||||||||||||
Foreclosure cost advance impairment |
| | | 3,708 | ||||||||||||
Mortgage servicing rights recovery |
(1,611 | ) | (415 | ) | (149 | ) | (1,765 | ) | ||||||||
Legal services |
1,866 | 1,961 | 6,645 | 3,834 | ||||||||||||
Other professional fees |
767 | 1,007 | 2,877 | 3,168 | ||||||||||||
Other |
3,151 | 3,862 | 10,595 | 11,905 | ||||||||||||
Total non-interest expense |
24,647 | 37,770 | 94,454 | 121,107 | ||||||||||||
Loss before income taxes |
(12,178 | ) | (10,197 | ) | (23,080 | ) | (150,429 | ) | ||||||||
Income taxes |
| 3 | 14 | 3 | ||||||||||||
Net Loss |
(12,178 | ) | (10,200 | ) | (23,094 | ) | (150,432 | ) | ||||||||
Preferred stock dividends and discount accretion |
(1,853 | ) | (3,228 | ) | (7,622 | ) | (9,700 | ) | ||||||||
Net loss available to common equity of Anchor BanCorp |
$ | (14,031 | ) | $ | (13,428 | ) | $ | (30,716 | ) | $ | (160,132 | ) | ||||
Comprehensive loss |
$ | (35,099 | ) | $ | (20,101 | ) | $ | (37,929 | ) | $ | (155,362 | ) | ||||
Loss per common share: |
||||||||||||||||
Basic |
$ | (0.66 | ) | $ | (0.63 | ) | $ | (1.45 | ) | $ | (7.56 | ) | ||||
Diluted |
(0.66 | ) | (0.63 | ) | (1.45 | ) | (7.56 | ) | ||||||||
Dividends declared per common share |
| | | |
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
Table of Contents
ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders (Deficit) Equity
(Unaudited)
Consolidated Statements of Changes in Stockholders (Deficit) Equity
(Unaudited)
Accu- | ||||||||||||||||||||||||||||||||||||
mulated | ||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Compre- | ||||||||||||||||||||||||||||||||||||
Non- | Additional | Retained | Deferred | hensive | ||||||||||||||||||||||||||||||||
Controlling | Preferred | Common | Paid-in | Earnings | Treasury | Compensation | Income | |||||||||||||||||||||||||||||
Interest | Stock | Stock | Capital | (Deficit) | Stock | Obligation | (Loss) | Total | ||||||||||||||||||||||||||||
(Dollars in thousands except per share data) | ||||||||||||||||||||||||||||||||||||
Balance at
April 1, 2009 (as restated) |
$ | 411 | $ | 74,185 | $ | 2,536 | $ | 109,327 | $ | 131,878 | $ | (94,744 | ) | $ | (5,480 | ) | $ | (6,337 | ) | $ | 211,776 | |||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net loss |
| | | | (177,062 | ) | | | | (177,062 | ) | |||||||||||||||||||||||||
Non-credit portion of other-than-temporary impairments: |
||||||||||||||||||||||||||||||||||||
Available-for-sale securities, net of tax of $0 |
| | | | | | | (2,100 | ) | (2,100 | ) | |||||||||||||||||||||||||
Reclassification adjustment for net gains realized in income, net of tax of $0 |
| | | | | | | (11,095 | ) | (11,095 | ) | |||||||||||||||||||||||||
Reclassification adjustment for credit portion of other-than-temporary impairment realized in income, net of tax of $0 |
| | | | | | | 847 | 847 | |||||||||||||||||||||||||||
Change in net unrealized gains (losses) on available-for-sale securities net of tax of $0 |
| | | | | | | 13,286 | 13,286 | |||||||||||||||||||||||||||
Comprehensive loss |
$ | (176,124 | ) | |||||||||||||||||||||||||||||||||
Change in non-controlling interest |
(411 | ) | | | | | | | | (411 | ) | |||||||||||||||||||||||||
Dividend on preferred stock |
| | | | (5,500 | ) | | | | (5,500 | ) | |||||||||||||||||||||||||
Issuance of treasury stock |
| | | (194 | ) | (3,154 | ) | 3,769 | (49 | ) | | 372 | ||||||||||||||||||||||||
Accretion of preferred stock discount |
| 7,411 | | | (7,411 | ) | | | | | ||||||||||||||||||||||||||
Balance at March 31, 2010 |
$ | | $ | 81,596 | $ | 2,536 | $ | 109,133 | $ | (61,249 | ) | $ | (90,975 | ) | $ | (5,529 | ) | $ | (5,399 | ) | $ | 30,113 | ||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net loss |
| | | | (23,094 | ) | | | | (23,094 | ) | |||||||||||||||||||||||||
Reclassification adjustment for net gains realized in income, net of tax of $0 |
| | | | | | | (7,952 | ) | (7,952 | ) | |||||||||||||||||||||||||
Reclassification adjustment for credit portion of other-than-temporary impairment realized in income, net of tax of $0 |
| | | | | | | 362 | 362 | |||||||||||||||||||||||||||
Change in
net unrealized gains (losses) on available-for-sale securities net of tax of $0 |
| | | | | | | (7,245 | ) | (7,245 | ) | |||||||||||||||||||||||||
Comprehensive loss |
$ | (37,929 | ) | |||||||||||||||||||||||||||||||||
Dividend on preferred stock |
| | | | (2,053 | ) | | | | (2,053 | ) | |||||||||||||||||||||||||
Issuance of treasury stock |
| | | | (96 | ) | 449 | (5 | ) | | 348 | |||||||||||||||||||||||||
Accretion of preferred stock discount |
| 5,569 | | | (5,569 | ) | | | | | ||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | | $ | 87,165 | $ | 2,536 | $ | 109,133 | $ | (92,061 | ) | $ | (90,526 | ) | $ | (5,534 | ) | $ | (20,234 | ) | $ | (9,521 | ) | |||||||||||||
See accompanying Notes to Unaudited Consolidated Financial Statements
5
Table of Contents
Nine Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
(In Thousands) | ||||||||
Operating Activities |
||||||||
Net loss |
$ | (23,094 | ) | $ | (150,432 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating activities: |
||||||||
Provision for credit losses |
41,020 | 141,756 | ||||||
OREO losses, net |
7,229 | 13,705 | ||||||
Depreciation and amortization |
3,955 | 3,705 | ||||||
Amortization and accretion of investment securities, net |
2,192 | 1,873 | ||||||
Mortgage servicing rights impairment (recovery) |
(149 | ) | (1,765 | ) | ||||
Foreclosure cost advance impairment |
| 3,708 | ||||||
Cash paid due to origination of loans held for sale |
(699,518 | ) | (996,214 | ) | ||||
Cash received due to sale of loans held for sale |
697,970 | 1,137,808 | ||||||
Net gain on sales of loans |
(16,164 | ) | (15,270 | ) | ||||
Net gain on sale of investment securities |
(7,952 | ) | (9,396 | ) | ||||
(Gain) loss on sale of foreclosed properties |
(3,325 | ) | 452 | |||||
Net gain on sale of branches |
(7,348 | ) | | |||||
Net impairment losses recognized in earnings |
362 | 745 | ||||||
Stock-based compensation expense |
348 | 566 | ||||||
Capitalized improvments of OREO |
(522 | ) | | |||||
Decrease in accrued interest receivable |
3,029 | 3,311 | ||||||
Decrease in prepaid expense and other assets |
26,457 | 24,017 | ||||||
Increase (decrease) in accrued interest payable on deposits |
5,826 | (1,782 | ) | |||||
Increase (decrease) in other liabilities |
12,433 | (18,179 | ) | |||||
Decrease in non-controlling interest in real estate partnerships |
| (411 | ) | |||||
Net cash provided by operating activities |
42,749 | 138,197 | ||||||
Investing Activities |
||||||||
Proceeds from sale of investment securities |
385,209 | 391,615 | ||||||
Proceeds from maturities of investment securities |
62,825 | 49,965 | ||||||
Purchase of investment securities |
(615,458 | ) | (455,659 | ) | ||||
Principal collected on investment securities |
44,399 | 84,377 | ||||||
Net decrease in loans held for investment |
388,280 | 301,620 | ||||||
Purchases of office properties and equipment |
(1,232 | ) | (2,024 | ) | ||||
Proceeds from sales of office properties and equipment |
496 | 468 | ||||||
Proceeds from sale of foreclosed properties |
34,408 | 18,925 | ||||||
Investment in real estate held for development and sale |
91 | 13,945 | ||||||
Branch sale Royal Credit Union net of cash and cash equivalents |
(99,897 | ) | | |||||
Branch sale Nicolet net of cash and cash equivalents |
(80,256 | ) | | |||||
Net cash provided by investing activities |
118,865 | 403,232 |
(Continued)
6
Table of Contents
ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Contd)
(Unaudited)
Consolidated Statements of Cash Flows (Contd)
(Unaudited)
Nine Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
(In Thousands) | ||||||||
Financing Activities |
||||||||
Decrease in deposit accounts |
$ | (418,821 | ) | $ | (316,944 | ) | ||
Increase in advance payments by borrowers
for taxes and insurance |
(7,837 | ) | (6,916 | ) | ||||
Proceeds from borrowed funds |
15,500 | 257 | ||||||
Repayment of borrowed funds |
(128,100 | ) | (319,170 | ) | ||||
Tax benefit from stock related compensation |
| (194 | ) | |||||
Net cash used in financing activities |
(539,258 | ) | (642,967 | ) | ||||
Net decrease in cash and cash equivalents |
(377,644 | ) | (101,538 | ) | ||||
Cash and cash equivalents at beginning of period |
512,162 | 433,826 | ||||||
Cash and cash equivalents at end of period |
$ | 134,518 | $ | 332,288 | ||||
Supplementary cash flow information: |
||||||||
Cash paid or credited to accounts: |
||||||||
Interest on deposits and borrowings |
$ | 71,728 | $ | 102,470 | ||||
Income taxes |
(17,142 | ) | (29,376 | ) | ||||
Non-cash transactions: |
||||||||
Transfer of loans to foreclosed properties |
51,595 | 20,939 | ||||||
Securitization of mortgage loans held for sale to mortgage-backed
securities |
| 48,878 |
See accompanying Notes to Unaudited Consolidated Financial Statements
7
Table of Contents
ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Principles of Consolidation
The unaudited consolidated financial statements include the accounts and results of operations of
Anchor BanCorp Wisconsin Inc. (the Corporation) and its wholly-owned subsidiaries, AnchorBank fsb
(the Bank) and Investment Directions, Inc. (IDI). The Banks accounts and results of
operations include its wholly-owned subsidiaries ADPC Corporation and Anchor Investment
Corporation. Significant inter-company balances and transactions have been eliminated. The
Corporation also consolidates certain variable interest entities (joint ventures and other 50% or
less owned partnerships) to which the Corporation is the primary beneficiary.
Note 2 Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the unaudited consolidated financial statements have been included.
In preparing the unaudited consolidated financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the amounts reported in the unaudited
consolidated financial statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation of foreclosed real
estate, mortgage servicing rights and deferred tax assets, and the fair value of investment
securities. The results of operations and other data for the three- and nine-month periods ended
December 31, 2010 are not necessarily indicative of results that may be expected for the fiscal
year ending March 31, 2011. We have evaluated all subsequent events through the date of this
filing. The interim unaudited consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and related notes thereto included
in the Corporations Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
The Corporations investment in real estate held for investment and sale includes 50% owned real
estate partnerships which are considered variable interest entities which are consolidated by the
entity that will absorb a majority of the entitys expected losses, receives a majority of the
entitys expected residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity.
Certain prior period accounts have been reclassified to conform to the current period
presentations. The April 1, 2009 stockholders equity has been restated to reflect $2.4 million of
FDIC premium that should have been expensed in prior years. The reclassifications had no impact on
the prior years consolidated net loss.
8
Table of Contents
Note 3 Significant Risks and Uncertainties
Regulatory Agreements
On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease
and Desist (the Corporation Order and the Bank Order, respectively, and together, the Orders)
by the Office of Thrift Supervision (the OTS).
The Corporation Order requires the Corporation to notify, and in certain cases to obtain the
permission of, the OTS prior to: (i) declaring, making or paying any dividends or other capital
distributions on its capital stock, including the repurchase or redemption of its capital stock;
(ii) incurring, issuing, renewing or rolling over any debt, increasing any current lines of credit
or guaranteeing the debt of any entity; (iii) making certain changes to its directors or senior
executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement
related to compensation or benefits with any of its directors or senior executive officers; and (v)
making any golden parachute payments or prohibited indemnification payments. The Corporation
developed and submitted to the OTS a three-year cash flow plan, which must be reviewed at least
quarterly by the Corporations management and board for material deviations between the cash flow
plans projections and actual results (the Variance Analysis Report). Within thirty days
following the end of each quarter, the Corporation is required to provide the OTS its Variance
Analysis Report for that quarter. These reports have been submitted.
The Bank Order requires the Bank to notify, or in certain cases obtain the permission of, the OTS
prior to (i) increasing its total assets in any quarter in excess of an amount equal to net
interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or
renewing any brokered deposits; (iii) making certain changes to its directors or senior executive
officers; (iv) entering into, renewing, extending or revising any contractual arrangement related
to compensation or benefits with any of its directors or senior executive officers; (v) making any
golden parachute or prohibited indemnification payments; (vi) paying dividends or making other
capital distributions on its capital stock; (vii) entering into certain transactions with
affiliates; and (viii) entering into third-party contracts outside the normal course of business.
The Orders also required the Bank to meet and maintain a core capital ratio equal to or greater
than 8% and a total risk-based capital ratio equal to or greater than 12% by December 31, 2009. The
Bank must also submit, and has submitted, to the OTS, within prescribed time periods, a written
capital restoration plan, a problem asset plan, a revised business plan, and an implementation plan
resulting from a review of commercial lending practices. The Orders also require the Bank to
review its current liquidity management policy and the adequacy of its allowance for loan and lease
losses.
On August 31, 2010, the OTS approved the Capital Restoration Plan submitted by the Bank, although
the approval included a Prompt Corrective Action Directive (PCA). The only new requirement of
the PCA is that the Bank shall obtain prior written approval from the Regional Director before
entering into any contract or lease for the purchase or sale of real estate or of any interest
therein, except for contracts entered into in the ordinary course of business for the purchase or
sale of real estate owned due to foreclosure (REO) where the contract does not exceed $3.5
million and the sales price of the REO does not fall below 85% of the net carrying value of the
REO.
At March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, the Bank had a core
capital ratio of 3.73%, 4.08%, 4.36% and 4.43%, respectively, and a total risk-based capital ratio
of 7.32%, 7.63%, 8.14% and 8.37%, respectively, each below the required capital ratios set forth
above. Without a waiver by the OTS or amendment or modification of the Orders, the Bank could be
subject to further regulatory action. All customer deposits remain fully insured to the highest
limits set by the FDIC.
The description of each of the Orders and the corresponding Stipulation and Consent to Issuance of
Order to Cease and Desist were previously filed as Exhibits to the Corporations Annual Report on
Form 10-K for the fiscal year ended March 31, 2009.
Going Concern
The Corporation and the Bank continue to diligently work with their financial and professional
advisors in seeking qualified sources of outside capital, and in achieving compliance with the
requirements of the Orders. The
9
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Corporation and the Bank continue to consult with the OTS and FDIC
on a regular basis concerning the Corporations and Banks proposals to obtain outside capital and
to develop action plans that will be acceptable to federal regulatory authorities, but there can be
no assurance that these actions will be successful, or that even if one or more of the
Corporations and Banks proposals are accepted by the Federal regulators, that these proposals
will be successfully implemented. While the Corporations management continues to exert maximum
effort to attract new capital, significant operating losses in fiscal 2008, 2009 and 2010,
significant levels of criticized assets and low levels of capital raise substantial doubt as to the
Corporations ability to continue as a going concern. If the Corporation and Bank are unable to
achieve compliance with the requirements of the Orders, or implement an acceptable capital
restoration plan, and if the Corporation and Bank cannot otherwise comply with such commitments and
regulations, the OTS or FDIC could force a sale, liquidation or federal conservatorship or
receivership of the Bank.
The Corporation and the Bank have submitted a capital restoration plan stating that the Corporation
intends to restore the capital position of the Bank. On August 31, 2010, the OTS accepted this
plan.
Further, the Corporation entered into an amendment dated April 29, 2010 (Amendment No. 6) to the
Amended and Restated Credit Agreement (Credit Agreement) with U.S. Bank NA, as described in Note
14, which established new financial covenants. Under the terms of the Credit Agreement, the Agent
and the lenders have certain rights, including the right to accelerate the maturity of the
borrowings if all covenants are not complied with. As of December 31, 2010, the Corporation was in
compliance with the financial and non-financial covenants contained in the Credit Agreement, as
amended, although there is no guarantee that the Corporation will remain in compliance with the
covenants. As of the date of this filing, the Corporation does not have sufficient cash on hand to
reduce the outstanding borrowings to zero. There can be no assurance that we will be able to raise
sufficient capital or have sufficient cash on hand to reduce the outstanding borrowings to zero by
May 31, 2011, which may limit our ability to fund ongoing operations.
Credit Risks
While the Corporation has devoted, and will continue to devote, substantial management resources
toward the resolution of all delinquent, impaired and nonaccrual loans, no assurance can be made
that managements efforts will be successful. These conditions also raise substantial doubt as to
the Corporations ability to continue as a going concern. The continuing recession and the
decrease in valuations of real estate have had a significant adverse impact on the Corporations
consolidated financial condition and results of operations. As reported in the accompanying
unaudited interim consolidated financial statements, the Corporation has incurred a net loss of
$12.2 million and $23.1 million for the three and nine months ended December 31, 2010,
respectively. Stockholders equity decreased from $30.1 million or 0.68% of total assets at March
31, 2010 to a deficit of $9.5 million at December 31, 2010. At December 31, 2010, the Banks
risk-based capital is considered adequately capitalized for regulatory purposes. However, the
Banks risk-based capital and Tier 1 capital ratios are below the target levels of the Bank Order
dated June 26, 2009. The provision for credit losses was $21.4 million for the three months ended
December 31, 2010, which has reduced the Corporations net interest income. The Corporations net
interest income will continue to be impacted by the level of non-performing assets and the
Corporation expects additional losses into the next fiscal year.
Note 4 Summary of Significant Accounting Related to Loans Held for Investment and Allowance for
Loan Losses
Loans Held for Investment. Loans are stated at the amount of the unpaid principal, reduced by
unearned net loan fees and an allowance for loan losses. Interest on loans is accrued on the
unpaid principal balances as earned. Loans are placed on non-accrual status when they become 90
days past due or in the judgment of management the probability of collection of principal and
interest is deemed to be insufficient to warrant further accrual. Factors that management
considers include early stage delinquencies and financial difficulties of the borrower that lead
management to believe that principal and interest will not be collected in full. When a loan is
placed on non-accrual status, previously accrued but unpaid interest is deducted from interest
income. Payments received on non-accrual loans are recognized in income on a cash basis. Loans
are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable period of time,
and the ultimate collectability of the total contractual principal and interest is no longer in
doubt.
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The Corporation has defined the following segments within its loan portfolio in order to determine
its allowance for loan losses: Residential, Commercial and Industrial, Commercial Real Estate and
Consumer. The Corporation has disaggregated those segments into the following classes based on
risk characteristics: Residential, Commercial and Industrial, Land and Construction, Multi-Family,
Retail/Office and Other Commercial Real estate within the Commercial Real Estate segment and
Education and Other Consumer within the Consumer segment.
Loan Fees and Discounts. Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment to the related loans yield. The Corporation
primarily amortizes these amounts, as well as discounts on purchased loans, using the level yield
method, adjusted for prepayments, over the life of the related loans.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable and estimable losses inherent in the loan portfolio and
is based on the size and current risk characteristics of the loan portfolio; an assessment of
individual problem loans; actual and anticipated loss experience; and current economic events in
specific industries and geographical areas. These economic events include unemployment levels,
regulatory guidance, and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends, all of which may be
susceptible to significant change. Loan losses are charged off against the allowance, while
recoveries of amounts previously charged off are credited to the allowance. A provision for loan
losses is charged to net interest income based on managements periodic evaluation of the factors
previously mentioned as well as other pertinent factors. In addition, regulatory agencies
periodically review the allowance for loan losses. These agencies may require the Corporation to
make additions to the allowance for loan losses based on their judgments of collectability based on
information available to them at the time of their examination.
In determining the general allowance management has segregated the loan portfolio by collateral
type. This allows management to identify trends in borrower behavior and loss severity. A
historical loss factor is computed for each collateral type. In determining the appropriate
period of activity to use in computing the historical loss factor management considers trends in
quarterly net charge-off ratios. It is managements intention to utilize a period of activity that
it believes to be most reflective of current experience. Changes in the historical period are made
when there is a distinct change in the trend of net charge-off experience. Given the changes in the
credit market that have occurred in fiscal years 2009 and 2010, management reviewed each stratas
historical losses by quarter for any trends that would indicate a shorter look back period would be
more representative.
In addition to the historical loss factor, management considers the impact of the following
qualitative factors: changes in lending policies; procedures and practices; economic and industry
trends and conditions; experience; ability and depth of lending management; level of and trends in
past dues and delinquent loans; changes in the quality of the loan review system; changes in the
value of the underlying collateral for collateral dependent loans; changes in credit concentrations
and portfolio size; and other external factors such as legal and regulatory. In determining the
impact, if any, of an individual qualitative factor, management compares the current underlying
facts and circumstances surrounding a particular factor with those in the historical periods,
adjusting the historical loss factor based on changes in the qualitative factor. Management will
continue to analyze the qualitative factors on a quarterly basis, adjusting the historical loss
factor both as necessary, to a factor we believe is appropriate for the probable and inherent risk
of loss in its portfolio.
Specific allowance allocations are established for probable losses resulting from analysis
developed through specific allocations on individual loans and are based on a regular analysis of
impaired loans. A loan is considered impaired when it is probable that the Corporation will be
unable to collect all contractual principal and interest due according to the terms of the loan
agreement. Impaired loans include non-accrual and restructured loans exclusive of smaller
homogeneous loans such as home equity, installment, and 1-4 family residential loans. The fair
value of impaired loans is determined based on the present value of expected future cash flows
discounted at the loans effective interest rate, the market price of the loan, or the fair value
of the underlying collateral less costs to sell, if the loan is
collateral dependent. Cash collections on impaired loans are credited to the loan receivable
balance and no interest income is recognized on those loans until the principal balance is current.
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On a monthly basis, adversely classified loans are analyzed to determine the amount to be charged
off to the allowance. Commercial charge-offs are recorded when available information indicates
that specific loans, or portions of loans, are uncollectible. Any portion of the recorded
investment deemed uncollectible in a collateral-dependent loan (including capitalized accrued
interest, net deferred loan fees or costs and unamortized premium or discount) in excess of the
fair value of the collateral is considered a confirmed loss and is charged against the allowance.
Residential loans are charged off at the time funds are received by an approved short sale,
information is obtained regarding the property that shows an insufficient value and the borrower
has not made a payment in a significant amount of time or the foreclosure sale is complete and the
loan is being reclassified to OREO. Consumer loans are charged off based on various criteria
including: foreclosure sale is complete and there are no surplus proceeds available based on recent
valuation, a recent valuation shows no surplus for the Bank, collateral is repossessed or sold and
deficiency is realized, information is received indicating the collateral has little or no value,
and for unsecured notes on or before reaching 150 days past due or the month following notice of
discharge for a Chapter 7 Bankruptcy.
Reserve for Unfunded Commitments. The reserve for unfunded commitments is determined using the
overall loss factor of the associated loan and is applied to unfunded commitments of performing
loans. A provision for unfunded commitments is charged to the
provision for credit losses based on
managements periodic evaluation of the factors previously mentioned as well as other pertinent
factors. The reserve for unfunded commitments is included in other liabilities on the Consolidated
Statement of Financial Condition.
Note 5 Recent Accounting Pronouncements
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures About
Fair Value Measurements. ASU 2010-06 requires expanded disclosures related to fair value
measurements including (i) the amounts of significant transfers of assets or liabilities between
Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for
transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with
significant transfers disclosed separately, (iii) the policy for determining when transfers between
levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of
assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information
about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair
value measurement disclosures should be provided for each class of assets and liabilities (rather
than major category), which would primarily be a subset of assets or liabilities within a line item
in the statement of financial position and (ii) companies should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair
value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances
and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be
required for the Corporation beginning January 1, 2011. The remaining disclosure requirements and
clarifications made by ASU 2010-06 became effective for the Corporation on January 1, 2010.
FASB ASC Topic 860, Transfers and Servicing. New authoritative accounting guidance under ASC
Topic 860, Transfers and Servicing, amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a qualifying special-purpose entity and changes the
requirements for derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC Topic 860 was effective April 1, 2010 and did not have
an impact on the Corporations consolidated financial statements.
ASU No. 2010-11, Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit
Derivatives. ASU 2010-11 clarifies that the only form of an embedded credit derivative that is
exempt from embedded derivative bifurcation requirements are those that relate to the subordination
of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative
feature in a form other than such subordination may need to separately account for the embedded
credit derivative feature. The provisions
12
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of ASU 2010-11 were effective for the Corporation on July
1, 2010 and did not have a significant impact on the Corporations financial statements.
ASU No. 2010-20, Receivables (Topic 830) Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 requires entities to provide
disclosures designed to facilitate financial statement users evaluation of (i) the nature of
credit risk inherent in the entitys portfolio of financing receivables, (ii) how that risk is
analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and
reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by
portfolio segment, the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses, and class of financing receivable, which is primarily
a disaggregation of portfolio segment. The required disclosures include, among other things, a
rollforward of the allowance for credit losses as well as information about modified, impaired,
non-accrual and past due loans and credit quality indicators. ASU 2010-20 was effective for the
Corporations financial statements as of December 31, 2010, as it relates to disclosures required
as of the end of a reporting period. Disclosures that relate to activity during a reporting period
will be required for the Corporations financial statements that include periods beginning on or
after January 1, 2011. In January 2011, the FASB issued ASU No. 2011-01 Receivables (Topic 310):
Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No.
2010-20 which defers the effective date of the loan modification disclosures.
Note 6 Investment Securities
The amortized cost and fair values of investment securities are as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
At December 31, 2010: |
||||||||||||||||
Available-for-sale: |
||||||||||||||||
U.S. government and federal agency obligations |
$ | 7,740 | $ | 112 | $ | | $ | 7,852 | ||||||||
Corporate stock and other |
1,152 | 99 | (104 | ) | 1,147 | |||||||||||
Agency CMOs and REMICs |
365 | 17 | | 382 | ||||||||||||
Non-agency CMOs |
54,163 | 437 | (3,874 | ) | 50,726 | |||||||||||
Residential
agency mortgage-backed securities |
6,513 | 285 | (13 | ) | 6,785 | |||||||||||
GNMA securities |
480,102 | 1,462 | (18,655 | ) | 462,909 | |||||||||||
$ | 550,035 | $ | 2,412 | $ | (22,646 | ) | $ | 529,801 | ||||||||
Held-to-maturity: |
||||||||||||||||
Residential
agency mortgage-backed securities |
$ | 31 | $ | | $ | | $ | 31 | ||||||||
$ | 31 | $ | | $ | | $ | 31 | |||||||||
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Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
At March 31, 2010: |
||||||||||||||||
Available-for-sale: |
||||||||||||||||
U.S. government and federal agency obligations |
$ | 51,029 | $ | 49 | $ | (47) | $ | 51,031 | ||||||||
Corporate stock and other |
1,176 | 72 | (50) | 1,198 | ||||||||||||
Agency CMOs and REMICs |
1,393 | 20 | | 1,413 | ||||||||||||
Non-agency CMOs |
91,140 | 550 | (6,323) | 85,367 | ||||||||||||
Residential
agency mortgage-backed securities |
14,907 | 593 | (60) | 15,440 | ||||||||||||
GNMA securities |
261,957 | 1,226 | (1,429) | 261,754 | ||||||||||||
$ | 421,602 | $ | 2,510 | $ | (7,909) | $ | 416,203 | |||||||||
Held-to-maturity: |
||||||||||||||||
Residential agency mortgage-backed securities |
$ | 39 | $ | 1 | $ | | $ | 40 | ||||||||
$ | 39 | $ | 1 | $ | | $ | 40 | |||||||||
The table below shows the Corporations gross unrealized losses and fair value of investments,
aggregated by investment category and length of time that individual investments have been in a
continuous unrealized loss position at December 31, 2010 and March 31, 2010.
At December 31, 2010 | ||||||||||||||||||||||||
Unrealized loss position | Unrealized loss position | |||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Corporate stock and other |
$ | | $ | | $ | 48 | $ | (104 | ) | $ | 48 | $ | (104 | ) | ||||||||||
Non-agency CMOs |
5,532 | (25 | ) | 23,555 | (3,849 | ) | 29,087 | (3,874 | ) | |||||||||||||||
Residential
agency mortgage-backed
securities |
963 | (13 | ) | | | 963 | (13 | ) | ||||||||||||||||
GNMA securities |
387,356 | (18,655 | ) | | | 387,356 | (18,655 | ) | ||||||||||||||||
$ | 393,851 | $ | (18,693 | ) | $ | 23,603 | $ | (3,953 | ) | $ | 417,454 | $ | (22,646 | ) | ||||||||||
At March 31, 2010 | ||||||||||||||||||||||||
Unrealized loss position | Unrealized loss position | |||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of Securities | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
US government and federal
agency obligations |
$ | 4,000 | $ | (47 | ) | $ | | $ | | $ | 4,000 | $ | (47 | ) | ||||||||||
Corporate stock and other |
51 | (13 | ) | 50 | (37 | ) | 101 | (50 | ) | |||||||||||||||
Non-agency CMOs |
4,244 | (37 | ) | 43,029 | (6,286 | ) | 47,273 | (6,323 | ) | |||||||||||||||
Residential
agency mortgage-backed
securities |
1,336 | (60 | ) | | | 1,336 | (60 | ) | ||||||||||||||||
GNMA securities |
138,996 | (1,429 | ) | | | 138,996 | (1,429 | ) | ||||||||||||||||
$ | 148,627 | $ | (1,586 | ) | $ | 43,079 | $ | (6,323 | ) | $ | 191,706 | $ | (7,909 | ) | ||||||||||
The tables above represent fifty (50) investment securities at December 31, 2010 compared to
forty-three (43) at March 31, 2010 that, due to the current interest rate environment and other
factors not relating to credit, have declined in value.
14
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Management evaluates securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. In estimating
other-than-temporary impairment losses on investment securities, management considers many factors
which include: (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and
ability of the Corporation to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. In analyzing an issuers financial condition,
management considers whether the securities are issued by the federal government or its agencies,
whether downgrades by bond rating agencies have occurred, and industry analysts reports.
To determine if an other-than-temporary impairment exists on a debt security, the Corporation first
determines if (a) it intends to sell the security or (b) it is more likely than not that it will be
required to sell the security before its anticipated recovery. If either of the conditions are
met, the Corporation will recognize an other-than-temporary impairment in earnings equal to the
difference between the securitys fair value and its adjusted cost basis. If neither of the
conditions are met, the Corporation determines (a) the amount of the impairment related to credit
loss and (b) the amount of the impairment due to all other factors. The difference between the
present values of the cash flows expected to be collected and the amortized cost basis is the
credit loss. The credit loss is the portion of the other-than-temporary impairment that is
recognized in earnings and is a reduction to the cost basis of the security. The portion of total
impairment related to all other factors is included in other comprehensive income (loss).
The Corporation utilizes a discounted cash flow model in the determination of fair value which is
used in the calculation of other-than-temporary impairments on non-agency Collateralized Mortgage
Obligations (CMOs). This model is also used to determine the portion of the other-than-temporary
impairment that is due to credit losses, and the portion that is due to all other factors. On
securities with other-than-temporary impairment, the difference between the present value of the
cash flows expected to be collected and the amortized cost basis of the debt security is the credit
loss.
To estimate fair value of non-agency CMOs, the Corporation discounted its best estimate of expected
cash flows after credit losses at rates ranging from 5.0% to 12.0%. The rates utilized are based
on the risk free rate equivalent to the remaining average life of the security, plus a spread for
normal liquidity and a spread to reflect the uncertainty of the cash flow estimates. The
Corporation benchmarks its fair value results to a pricing service and monitors the market for
actual trades. The Corporation includes these inputs in its derivation of the discount rates used
to estimate fair value. There are no payments in kind allowed on these non-agency CMOs.
The significant inputs used for calculating the credit loss portion of securities with other than
temporary impairment (OTTI) include prepayment assumptions, loss severities, original FICO
scores, historical rates of delinquency, percentage of loans with limited underwriting, historical
rates of default, original loan-to-value ratio, aggregate property location by metropolitan
statistical area, original credit support, current credit support, and weighted-average maturity.
The discount rates used to establish the net present value of expected cash flows for purposes of
determining OTTI ranged from 5.0% to 7.5%. The rates used equate to the effective yield implicit
in the security at the date of acquisition for the bonds for which the Corporation has not in the
past incurred OTTI. For the bonds for which the Corporation has previously recorded OTTI, the
discount rate used equates to the accounting yield on the security as of the valuation date.
Default rates were calculated separately for each category of underlying borrower based on
delinquency status (i.e. current, 30 to 59 days delinquent, 60 to 89 days delinquent, 90+ days
delinquent, and foreclosure balances) of the loans as of December 1, 2010. These balances were
entered into a loss migration model to calculate projected default rates, which are benchmarked
against results that have recently been experienced by
other major servicers on non-agency CMOs with similar attributes. The projected default rates used
in the model ranged from 2.8% to 11.8%.
Based on the Corporations impairment testing as of December 31, 2010, 14 non-agency CMOs with a
fair value of $27.2 million and an adjusted cost of $31.0 million were other-than-temporarily
impaired compared to 15 non-agency CMOs with a fair value of $34.8 million and an adjusted cost
basis of $40.7 million as of March 31, 2010. The portion of the other-than-temporary impairment
due to credit of $163,000 and $362,000 was included in earnings for the three and nine month
periods ending December 31, 2010. These other-than-temporary impairments were all additional
credit losses on existing OTTI securities.
15
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The cumulative unrealized losses on the securities with other-than-temporary impairment were $5.9
million at December 31, 2010 and $7.8 million at March 31, 2010. The difference between the total
unrealized losses of $5.9 million and the credit loss of $2.1 million, or $3.8 million at December
31, 2010, was included in accumulated other comprehensive income. All of the Corporations
other-than-temporary impaired debt securities are non-agency CMOs. On a cumulative basis,
other-than-temporary impairments related to credit loss by year of vintage were $1.4 million for
2007, $317,000 for 2006, $349,000 for 2005 and $25,000 prior to 2005.
The Corporation has $18.7 million in unrealized losses on long-term GNMA securities as of December
31, 2010 due to increases in interest rates and factors other than
credit during the most recent quarter. GNMA securities are guaranteed
by the U.S. Government. The
Corporation has reviewed this portfolio for other-than-temporary impairment and has concluded that
no OTTI exists and that the unrealized losses are properly classified in accumulated other
comprehensive income.
The following table is a rollforward of the amount of other-than-temporary impairment related to
credit losses that have been recognized in earnings for which a portion of an other-than-temporary
impairment was recognized in other comprehensive income for the three and nine months ended
December 31, 2010 and 2009 (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
December 31, 2010 | December 31, 2009 | December 31, 2010 | December 31, 2009 | |||||||||||||
Beginning balance of the amount of OTTI related to
credit losses |
$ | 1,964 | $ | 1,203 | $ | 1,889 | $ | 805 | ||||||||
The credit portion of OTTI not previously recognized |
| 86 | | 168 | ||||||||||||
Additional increases to the amount related to the
credit loss
for which OTTI was previously recognized |
163 | 260 | 362 | 576 | ||||||||||||
Credit portion of OTTI previously recognized for
securities sold during the period |
| | (124 | ) | | |||||||||||
Ending balance of the amount of OTTI related to
credit losses |
$ | 2,127 | $ | 1,549 | $ | 2,127 | $ | 1,549 | ||||||||
The cost of investment securities sold is determined using the specific identification method.
Sales of investment securities available for sale are summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands) | ||||||||||||||||
Proceeds from sales |
$ | 82,490 | $ | 243,545 | $ | 385,209 | $ | 391,615 | ||||||||
Gross gains on sales |
1,187 | 5,783 | 7,952 | 9,396 | ||||||||||||
Gross losses on sales |
| | | | ||||||||||||
Net gain on sales |
$ | 1,187 | $ | 5,783 | $ | 7,952 | $ | 9,396 | ||||||||
At December 31, 2010 and March 31, 2010, investment securities available-for-sale with a fair
value of approximately $419.1 million and $301.2 million, respectively, were pledged to secure
deposits, borrowings and for other purposes as permitted or required by law.
The fair value of investment securities by contractual maturity at December 31, 2010 are shown
below. Actual maturities may differ from contractual maturities because issuers have the right to
call or prepay obligations with or without call or prepayment penalties. Investment securities
subject to six-month and twelve-month calls were zero and $500,000, respectively, as of December
31, 2010.
16
Table of Contents
After 1 | After 5 | |||||||||||||||||||
Year | Years | |||||||||||||||||||
Within 1 | through 5 | through 10 | Over Ten | |||||||||||||||||
Year | Years | Years | Years | Total | ||||||||||||||||
Available-for-sale, at fair value: |
||||||||||||||||||||
U.S. government and federal
agency obligations |
$ | 3,700 | $ | 4,152 | $ | | $ | | $ | 7,852 | ||||||||||
Corporate stock and other |
| | | 1,147 | 1,147 | |||||||||||||||
Agency CMOs and REMICs |
| | | 382 | 382 | |||||||||||||||
Non-agency CMOs |
| 29 | 9,666 | 41,031 | 50,726 | |||||||||||||||
Residential
agency mortgage-backed securities |
| 590 | 907 | 5,288 | 6,785 | |||||||||||||||
GNMA secrurities |
| | 718 | 462,191 | 462,909 | |||||||||||||||
Total |
$ | 3,700 | $ | 4,771 | $ | 11,291 | $ | 510,039 | $ | 529,801 | ||||||||||
Held-to-maturity, at fair value: |
||||||||||||||||||||
Residential agency mortgage-backed securities |
$ | | $ | 7 | $ | 24 | $ | | $ | 31 | ||||||||||
Total |
$ | | $ | 7 | $ | 24 | $ | | $ | 31 | ||||||||||
$ | 3,700 | $ | 4,778 | $ | 11,315 | $ | 510,039 | $ | 529,832 | |||||||||||
Held-to-maturity, at cost: |
||||||||||||||||||||
Residential
agency mortgage-backed securities |
$ | | $ | 7 | $ | 24 | $ | | $ | 31 | ||||||||||
17
Table of Contents
Note 7 Loans Receivable
Loans receivable held for investment consist of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Residential |
$ | 685,536 | $ | 775,520 | ||||
Commercial and Industrial |
112,568 | 169,050 | ||||||
Land and Construction |
268,358 | 333,503 | ||||||
Multi-Family |
456,210 | 535,905 | ||||||
Other Commercial Real Estate |
290,828 | 361,202 | ||||||
Retail/office |
449,408 | 551,512 | ||||||
Other Consumer |
300,752 | 378,385 | ||||||
Education |
286,489 | 331,475 | ||||||
2,850,149 | 3,436,552 | |||||||
Contras to loans: |
||||||||
Undisbursed loan proceeds* |
(27,076 | ) | (23,334 | ) | ||||
Allowance for loan losses |
(157,438 | ) | (179,644 | ) | ||||
Unearned loan fees |
(3,536 | ) | (3,898 | ) | ||||
Net discount on loans purchased |
(5 | ) | (8 | ) | ||||
Unearned interest |
(103 | ) | (88 | ) | ||||
(188,158 | ) | (206,972 | ) | |||||
$ | 2,661,991 | $ | 3,229,580 | |||||
* | Undisbursed loan proceeds are funds to be disbursed upon a draw request approved by the Bank. |
At December 31, 2010, loans receivable with a carrying value of approximately $909.7 million of
mortgage loans and $135.5 million of education loans were pledged to secure deposits, borrowings
and for other purposes as permitted or required by law.
A summary of the activity in the allowance for loan losses follows:
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||
Allowance at beginning of period |
$ | 156,186 | $ | 170,664 | $ | 179,644 | $ | 137,165 | ||||||||
Provision |
21,691 | 10,456 | 40,213 | 141,756 | ||||||||||||
Charge-offs |
(23,467 | ) | (17,131 | ) | (68,257 | ) | (116,792 | ) | ||||||||
Recoveries |
3,028 | 505 | 5,838 | 2,365 | ||||||||||||
Allowance at end of period |
$ | 157,438 | $ | 164,494 | $ | 157,438 | $ | 164,494 | ||||||||
18
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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 (in
thousands):
Commercial | Commercial | |||||||||||||||||||
Residential | and Industrial | Real Estate | Consumer | Total | ||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Ending balance |
$ | 24,554 | $ | 15,461 | $ | 113,627 | $ | 3,796 | $ | 157,438 | ||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Ending allowance balance attributable to
loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 9,815 | $ | 5,159 | $ | 33,434 | $ | 428 | $ | 48,837 | ||||||||||
Collectively evaluated for impairment |
14,738 | 10,302 | 80,193 | 3,368 | 108,602 | |||||||||||||||
Total ending allowance balance |
$ | 24,554 | $ | 15,461 | $ | 113,627 | $ | 3,796 | $ | 157,438 | ||||||||||
Loans: |
||||||||||||||||||||
Loans individually evaluated |
$ | 73,872 | $ | 21,448 | $ | 296,275 | $ | 31,323 | $ | 422,918 | ||||||||||
Loans collectively evaluated |
611,664 | 91,120 | 1,168,529 | 555,918 | 2,427,231 | |||||||||||||||
Total ending gross loans balance |
$ | 685,536 | $ | 112,568 | $ | 1,464,804 | $ | 587,241 | $ | 2,850,149 | ||||||||||
The provision for credit losses reflected on the consolidated statements of operations
includes the provision for loan losses and the provision for unfunded commitment losses as follows:
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||
Provision for loan losses |
$ | 21,691 | $ | 10,456 | $ | 40,213 | $ | 141,756 | ||||||||
Provision for unfunded commitment losses |
(279 | ) | | 807 | | |||||||||||
Provision for credit losses |
$ | 21,412 | $ | 10,456 | $ | 41,020 | $ | 141,756 | ||||||||
The Corporation has discontinued the practice of placing loans on interest reserve and as of
December 31, 2010, an insignificant balance remains. For these loans, no payments are typically
received from the borrower since accumulated interest is added to the principal of the loan through
the interest reserve. As of December 31, 2010, no impaired loans are on interest reserve.
At December 31, 2010, the Corporation has identified $422.9 million of loans as impaired which
includes performing troubled debt restructurings. At March 31, 2010, impaired loans were $479.8
million. A loan is identified as impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according to the contractual terms
of the loan agreement and thus are placed on non-accrual status. Interest income on impaired loans
is recognized on a cash basis. The average carrying amount is calculated on an annual basis based
on quarter end balances. The following table presents loans individually evaluated for impairment
by class of loans as of December 31, 2010 (in thousands):
19
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Average | Interest | |||||||||||||||||||
Carrying | Unpaid Principal | Associated | Carrying | Income | ||||||||||||||||
Amount | Balance | Allowance | Amount | Recognized | ||||||||||||||||
With no specific allowance recorded: |
||||||||||||||||||||
Residential |
$ | 29,405 | $ | 29,405 | $ | N/A | $ | 34,781 | $ | 401 | ||||||||||
Commercial and Industrial |
7,213 | 7,213 | N/A | 12,063 | 265 | |||||||||||||||
Land and Construction |
43,076 | 43,076 | N/A | 49,800 | 255 | |||||||||||||||
Multi-Family |
36,740 | 36,740 | N/A | 41,665 | 253 | |||||||||||||||
Retail/Office |
37,289 | 37,289 | N/A | 45,388 | 385 | |||||||||||||||
Other Commercial Real Estate |
32,480 | 32,480 | N/A | 39,805 | 572 | |||||||||||||||
Education |
24,011 | 24,011 | N/A | 28,582 | | |||||||||||||||
Other Consumer |
405 | 405 | N/A | 841 | 39 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Residential |
34,652 | 44,467 | 9,815 | 44,031 | 672 | |||||||||||||||
Commercial and Industrial |
9,076 | 14,235 | 5,159 | 14,349 | 341 | |||||||||||||||
Land and Construction |
25,750 | 33,414 | 7,664 | 34,147 | 287 | |||||||||||||||
Multi-Family |
21,914 | 29,747 | 7,833 | 30,009 | 514 | |||||||||||||||
Retail/Office |
37,033 | 48,341 | 11,308 | 48,726 | 1,463 | |||||||||||||||
Other Commercial Real Estate |
28,558 | 35,188 | 6,630 | 35,467 | 1,036 | |||||||||||||||
Other Consumer |
6,479 | 6,907 | 428 | 6,967 | 122 | |||||||||||||||
Total |
||||||||||||||||||||
Residential |
64,057 | 73,872 | 9,815 | 78,812 | 1,073 | |||||||||||||||
Commercial and Industrial |
16,289 | 21,448 | 5,159 | 26,412 | 606 | |||||||||||||||
Land and Construction |
68,826 | 76,490 | 7,664 | 83,947 | 542 | |||||||||||||||
Multi-Family |
58,654 | 66,487 | 7,833 | 71,674 | 767 | |||||||||||||||
Retail/Office |
74,322 | 85,630 | 11,308 | 94,114 | 1,848 | |||||||||||||||
Other Commercial Real Estate |
61,038 | 67,668 | 6,630 | 75,272 | 1,608 | |||||||||||||||
Education |
24,011 | 24,011 | | 28,582 | | |||||||||||||||
Other Consumer |
6,884 | 7,312 | 428 | 7,808 | 161 | |||||||||||||||
Total Impaired Loans |
$ | 374,081 | $ | 422,918 | $ | 48,837 | $ | 466,621 | $ | 6,605 | ||||||||||
The carrying amount above represents the unpaid principal balance less the associated
allowance. The average carrying amount is the annual average calculated based upon the ending
quarterly balances. The interest income recognized is the fiscal year to date interest income
recognized on a cash basis.
The following is additional information regarding impaired loans.
At December 31, | At March 31, | |||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(In Thousands) | ||||||||||||||||
Loans and troubled debt restructurings
on non-accrual status |
$ | 334,123 | $ | 399,936 | $ | 227,814 | $ | 104,058 | ||||||||
Troubled debt restructurings accrual |
$ | 88,795 | $ | 79,891 | $ | | $ | | ||||||||
Troubled debt restructurings non-accrual (1) |
$ | 9,760 | $ | 44,578 | $ | 61,460 | $ | 400 | ||||||||
Loans past due ninety days or more and
still accruing |
$ | | $ | | $ | | $ | |
(1) | Troubled debt restructurings non-accrual are included in the total loans and troubled debt restructurings on non-accrual status above |
20
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All troubled debt restructurings are classified as impaired loans. Troubled debt
restructurings may be on either accrual or nonaccrual status based upon the performance of the
borrower and managements assessment of collectability. Loans deemed nonaccrual may return to
accrual status after six consecutive months of performance in accordance with the terms of the
restructuring. Additionally, they may be considered not impaired after twelve consecutive months
of performance in accordance with the terms of the restructuring agreement.
The Corporation is currently committed to lend approximately $1.1 million in additional funds on
these impaired loans in accordance with the original terms of these loans; however, the Corporation
is not legally obligated to, and will not, disburse additional funds on any loans while in
nonaccrual status. All of the $1.1 million in unused funds on impaired loans relate to
non-performing loans. The Corporation monitors these loans on a regular basis and will only lend
additional funds on impaired loans if warranted.
The Corporation experienced declines in the current valuations for real estate collateral
supporting portions of its loan portfolio throughout fiscal year 2010 and into the third quarter of
fiscal year 2011, as reflected in recently received appraisals. Currently, $374.8 million or
approximately 85% of the outstanding balance of impaired loans secured by real estate have recent
appraisals (i.e. within one year). This includes $43.4 million of
loans under $500,000 that do not require an appraisal under Bank
policy. In some cases, the Bank does not require updated appraisals.
These instances include when the loan (i) is fully reserved; (ii) has a small balance and rather
than being individually evaluated for impairment, is included in a homogenous pool of loans; (iii)
uses a net present value of future cash flows to measure impairment; or (iv) has an SBA guaranty.
If real estate values continue to decline, the Corporation may have to increase its allowance for
loan losses as updated appraisals are received.
The following table presents the aging of the recorded investment in past due loans as of December
31, 2010 by class of loans (in thousands):
30-59 Days Past | 60-89 Days Past | Greater than 90 | ||||||||||||||
Due | Due | Days | Total Past Due | |||||||||||||
Residential |
$ | 5,635 | $ | 5,988 | $ | 58,247 | $ | 69,869 | ||||||||
Commercial and Industrial |
362 | 993 | 12,395 | 13,750 | ||||||||||||
Land and Construction |
5,983 | 1,796 | 55,168 | 62,947 | ||||||||||||
Multi-Family |
2,907 | 1,773 | 50,233 | 54,913 | ||||||||||||
Retail/Office |
13,965 | 2,047 | 46,450 | 62,463 | ||||||||||||
Other Commercial Real Estate |
407 | 861 | 29,914 | 31,181 | ||||||||||||
Education |
15,620 | 7,242 | 24,011 | 46,874 | ||||||||||||
Other Consumer |
2,126 | 1,241 | 6,789 | 10,156 | ||||||||||||
$ | 47,004 | $ | 21,942 | $ | 283,206 | $ | 352,153 | |||||||||
Total delinquencies (loans past due 30 days or more) at March 31, 2010 were $373.2 million.
The Corporation has experienced stabilization in delinquencies since March 31, 2010. The
Corporation has no loans past due 90 days or more that are still accruing interest.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation, public information and current economic trends, among
other factors. For all loans other than consumer and residential, the Corporation analyzes loans
individually by classifying the loans as to credit risk and assesses the probability of collection
for each type of class. This analysis includes loans with an outstanding balance greater than
$500,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This
analysis is performed on a monthly basis. The Corporation uses the following definitions for risk
ratings:
21
Table of Contents
Pass. Loans classified as pass represent assets that are evaluated and are performing under the stated terms. Pass rated assets are analyzed by the pay capacity of the obligator, current net worth of the obligator and/or by the value of the loan collateral | |||
Watch. Loans classified as watch possess potential weaknesses that require management attention, but do not yet warrant adverse classification. While the status of an asset put on this list may not technically trigger their classification as Substandard or Non-Accrual, it is considered a proactive way to identify potential issues and address them before the situation deteriorates further and does result in a loss for the Bank. | |||
Substandard. Loans classified as substandard are inadequately protected by the current net worth, paying capacity of the obligor, or by the collateral pledged. Substandard assets must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain a loss if the deficiencies are not corrected. | |||
Non-Accrual. Loans classified as non-accrual have the weaknesses of those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that fall into this class are deemed collateral dependent and an individual impairment is performed on all relationships greater than $500,000. Loans in this category are allocated a specific reserve if the collateral does not support the outstanding loan balance or charged off if deemed uncollectible. |
As of December 31, 2010, and based on the most recent analysis performed, the risk category of
loans by class of loans is as follows (in thousands):
Pass | Watch | Substandard | Non-Accrual | Total | ||||||||||||||||
Commercial and Industrial: |
$ | 45,857 | $ | 27,619 | $ | 25,543 | $ | 13,548 | $ | 112,568 | ||||||||||
Commercial Real Estate: |
||||||||||||||||||||
Land and Construction |
76,320 | 37,121 | 87,703 | 67,214 | 268,358 | |||||||||||||||
Multi-Family |
303,538 | 40,327 | 57,331 | 55,015 | 456,210 | |||||||||||||||
Retail/Office |
231,294 | 55,568 | 100,263 | 62,283 | 449,408 | |||||||||||||||
Other |
118,993 | 76,237 | 60,736 | 34,862 | 290,828 | |||||||||||||||
$ | 776,002 | $ | 236,871 | $ | 331,577 | $ | 232,923 | $ | 1,577,373 | |||||||||||
Residential and consumer loans are managed on a pool basis due to their homogeneous nature.
Loans that are delinquent 90 days or more are considered non-accrual. The following table presents
the recorded investment in residential and consumer loans based on payment activity as of December
31, 2010 (in thousands):
Pass | Non-Accrual | Total | ||||||||||
Residential: |
$ | 615,570 | $ | 69,966 | $ | 685,535 | ||||||
Consumer |
||||||||||||
Education |
262,653 | 24,011 | 286,664 | |||||||||
Other Consumer |
293,354 | 7,223 | 300,577 | |||||||||
$ | 1,171,577 | $ | 101,200 | $ | 1,272,776 | |||||||
22
Table of Contents
Note 8 Foreclosed Properties and Repossessed Assets
Real estate acquired by foreclosure, real estate acquired by deed in lieu of foreclosure and other
repossessed assets are held for sale and are initially recorded at fair value at the date of
foreclosure less estimated selling expenses. At the date of foreclosure, any write down to fair
value less estimated selling costs is charged to the allowance for loan losses. Subsequent to
foreclosure, valuations are periodically performed and a valuation allowance is established if fair
value less estimated selling costs exceeds the carrying value. Costs relating to the development
and improvement of the property may be capitalized; holding period costs and subsequent changes to
the valuation allowance are charged to expense.
A summary of the activity in foreclosed properties and repossessed assets is as follows (in
thousands):
Nine months ended | Year ended | |||||||
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Balance at beginning of period |
$ | 55,436 | $ | 52,563 | ||||
Additions |
51,595 | 61,090 | ||||||
Capitalized improvements |
522 | | ||||||
Valuations/write-offs |
(7,229 | ) | (18,129 | ) | ||||
Sales |
(31,083 | ) | (40,088 | ) | ||||
Balance at end of period |
$ | 69,241 | $ | 55,436 | ||||
The amounts above are net of a valuation allowance of $14.3 million and $16.6 million at
December 31, 2010 and March 31, 2010, respectively, recognized during the holding period for
declines in fair value subsequent to the foreclosure or acceptance of deed in lieu of foreclosure.
During the nine months ended December 31, 2010, net expense from REO operations was $15.7 million,
consisting of $6.8 million of valuation adjustments and write offs, $3.3 million of net gain on
sales, $8.2 million of foreclosure cost expense and $4.0 million of net expenses from operations.
Note 9 Regulatory Capital
The following summarizes the Banks capital levels and ratios at December 31, 2010 and March 31,
2010 and those required by the OTS:
23
Table of Contents
Minimum Required | ||||||||||||||||||||||||
Minimum Required | to be Well | |||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Actual | Adequacy Purposes | OTS Requirements | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
At December 31, 2010 |
||||||||||||||||||||||||
Tier 1 capital (to adjusted tangible assets) |
$ | 159,730 | 4.43 | % | $ | 108,216 | 3.00 | % | $ | 180,360 | 5.00 | % | ||||||||||||
Risk-based capital (to risk-based assets) |
189,653 | 8.37 | 181,308 | 8.00 | 226,634 | 10.00 | ||||||||||||||||||
Tangible capital (to tangible assets) |
159,730 | 4.43 | 54,108 | 1.50 | N/A | N/A | ||||||||||||||||||
At March 31, 2010: |
||||||||||||||||||||||||
Tier 1 capital (to adjusted tangible assets) |
$ | 164,932 | 3.73 | % | $ | 132,696 | 3.00 | % | $ | 221,159 | 5.00 | % | ||||||||||||
Risk-based capital (to risk-based assets) |
201,062 | 7.32 | 219,751 | 8.00 | 274,689 | 10.00 | ||||||||||||||||||
Tangible capital (to tangible assets) |
164,932 | 3.73 | 66,348 | 1.50 | N/A | N/A |
In June 2009, the Bank consented to the issuance of a Cease and Desist Order with the OTS
which requires, among other things, capital requirements in excess of the generally applicable
minimum requirements. The Banks official regulatory reporting capital levels as reported for the
fiscal quarters ended September 30, 2010 and December 31, 2010 were 8.14% and 8.37%, respectively.
Under OTS requirements, a bank is deemed adequately capitalized with a risk-based capital level of
8.0% or greater. In a letter from the OTS dated July 9, 2010, the OTS referenced the Banks
undercapitalized status as of March 31, 2010.
The following table reconciles the Banks stockholders equity to regulatory capital at December
31, 2010 and March 31, 2010:
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(In Thousands) | ||||||||
Stockholders equity of the Bank |
$ | 140,910 | $ | 165,043 | ||||
Less: Intangible assets |
| (4,092 | ) | |||||
Disallowed servicing assets |
(1,414 | ) | (1,418 | ) | ||||
Accumulated other comprehensive (income) loss |
20,234 | 5,399 | ||||||
Tier 1 and tangible capital |
159,730 | 164,932 | ||||||
Plus: Allowable general valuation allowances |
29,923 | 36,130 | ||||||
Risk-based capital |
$ | 189,653 | $ | 201,062 | ||||
24
Table of Contents
Note 10 Earnings Per Share
Basic earnings per share for the three and nine months ended December 31, 2010 and 2009 has been
determined by dividing net income available to common shareholders for the respective periods by
the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares outstanding plus
the effect of dilutive securities. The effects of dilutive securities are computed using the
treasury stock method.
Three Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Numerator: |
||||||||
Numerator for basic and diluted earnings
per shareloss available to common
stockholders |
$ | (14,031 | ) | $ | (13,428 | ) | ||
Denominator: |
||||||||
Denominator for basic earnings per
shareweighted-average shares |
21,253 | 21,205 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options |
| | ||||||
Management Recognition Plans |
| | ||||||
Denominator for diluted earnings per
shareadjusted weighted-average
shares and assumed conversions |
21,253 | 21,205 | ||||||
Basic earnings (loss) per common share |
$ | (0.66 | ) | $ | (0.63 | ) | ||
Diluted earnings (loss) per common share |
$ | (0.66 | ) | $ | (0.63 | ) | ||
Nine Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Numerator: |
||||||||
Numerator for basic and diluted earnings
per shareloss available to common
stockholders |
$ | (30,716 | ) | $ | (160,132 | ) | ||
Denominator: |
||||||||
Denominator for basic earnings per
shareweighted-average shares |
21,252 | 21,168 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options |
| | ||||||
Management Recognition Plans |
| | ||||||
Denominator for diluted earnings per
shareadjusted weighted-average
shares and assumed conversions |
21,252 | 21,168 | ||||||
Basic earnings (loss) per common share |
$ | (1.45 | ) | $ | (7.56 | ) | ||
Diluted earnings (loss) per common share |
$ | (1.45 | ) | $ | (7.56 | ) | ||
25
Table of Contents
At December 31, 2010, approximately 474,000 stock options were excluded from the calculation of
diluted earnings per share because they were anti-dilutive. The U.S. Treasurys warrants to
purchase approximately 7.4 million shares at an exercise price of $2.23 were not included in the
computation of diluted earnings per share because the warrants exercise price was greater than the
average market price of common stock and was, therefore, anti-dilutive. Because of their
anti-dilutive effect, the shares that would be issued if the U.S.
Treasurys Senior Preferred Stock were converted into common stock are not included in the computation of diluted earnings per
share for the three and nine months ended December 31, 2010 and 2009.
Note 11 Commitments and Contingent Liabilities
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and financial guarantees which involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent of involvement and
exposure to credit loss the Corporation has in particular classes of financial instruments. The
Corporation uses the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Since many of the commitments are expected to expire
without being drawn upon, the total committed amounts do not necessarily represent future cash
requirements.
Financial instruments whose contract amounts represent credit risk are as follows (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Commitments to extend credit: |
$ | 10,077 | $ | 20,796 | ||||
Unused lines of credit: |
||||||||
Home equity |
119,139 | 142,044 | ||||||
Credit cards |
34,158 | 37,360 | ||||||
Commercial |
17,591 | 42,968 | ||||||
Letters of credit |
20,790 | 25,393 | ||||||
Credit enhancement under the Federal |
||||||||
Home Loan Bank of Chicago Mortgage |
||||||||
Partnership Finance Program |
21,602 | 21,602 | ||||||
IDI borrowing guarantees-unfunded |
435 | 393 |
Commitments to extend credit are in the form of a loan in the near future. Unused lines of credit
are agreements to lend to a customer as long as there is no violation of any condition established
in the contract and may be drawn upon at the borrowers discretion. Letters of credit commit the
Corporation to make payments on behalf of customers when certain specified future events occur.
Commitments and letters of credit primarily have fixed expiration dates or other termination
clauses and may require payment of a fee. As some such commitments expire without being drawn upon
or funded by the Federal Home Loan Bank of Chicago (FHLB) under the Mortgage Partnership Finance
Program, the total commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customers creditworthiness on a case-by-case basis. With the exception
of credit card lines of credit, the Corporation primarily extends credit only on a secured basis.
Collateral obtained varies, but consists primarily of single-family residences and income-producing
commercial properties. Fixed-rate loan commitments expose the Corporation to a certain amount of
interest rate risk if market rates of interest substantially increase during the commitment period.
At December 31, 2010, the Corporation has $807,000 of reserves on unfunded commitments, unused
lines of credit and letters of credit classified in other liabilities. The Corporation intends to
fund commitments through current liquidity.
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The IDI borrowing guarantees-unfunded represent the Corporations commitment through its IDI
subsidiary to guarantee the borrowings of the related real estate investment partnerships, which
are included in the consolidated financial statements.
Except for the above-noted commitments to originate and/or sell mortgage loans in the normal course
of business, the Corporation and the Bank have not undertaken the use of off-balance-sheet
derivative financial instruments for any purpose.
In the ordinary course of business, there are legal proceedings against the Corporation and its
subsidiaries. Management considers that the aggregate liabilities, if any, resulting from such
actions would not have a material, adverse effect on the consolidated financial position of the
Corporation.
Note 12 Fair Value of Financial Instruments
Disclosure of fair value information about financial instruments, for which it is practicable to
estimate that value, is required whether or not recognized in the consolidated balance sheets. In
cases where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instruments. Certain financial
instruments with a fair value that is not practicable to estimate and all non-financial instruments
are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not necessarily represent the underlying value of the Corporation.
The Corporation, in estimating its fair value disclosures for financial instruments, used the
following methods and assumptions:
Cash and cash equivalents and accrued interest: The carrying amounts reported in the consolidated
balance sheets approximate those assets and liabilities fair values.
Investment securities: Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. For securities in inactive markets, fair values are based on
discounted cash flow or other valuation models.
Loans receivable: The fair values for loans held for sale are based on outstanding sale
commitments or quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. For variable-rate loans held for
investment that reprice frequently and with no significant change in credit risk, fair values are
based on carrying values. The fair value of fixed-rate residential mortgage loans held for
investment, commercial real estate loans, commercial and industrial loans, rental property mortgage
loans and consumer and other loans and leases are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to borrowers of similar
credit quality. For construction loans, fair values are based on carrying values due to the
short-term nature of the loans.
Federal Home Loan Bank stock: The carrying amount of FHLB stock approximates its fair value as it
can only be redeemed to the FHLB at its par value.
Deposits: The fair values disclosed for negotiable order of withdrawal accounts, passbook accounts
and variable rate insured money market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The fair values of fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation that applies current
interest rates being offered on certificates of deposit to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit.
Other Borrowed Funds: The fair values of the Corporations borrowings are estimated using
discounted cash flow analysis, based on the Corporations current incremental borrowing rates for
similar types of borrowing arrangements.
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Off-balance-sheet instruments: Fair values of the Corporations off-balance-sheet instruments
(lending commitments and unused lines of credit) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements, the counterparties
credit standing and discounted cash flow analyses. The fair value of these off-balance-sheet items
approximates the recorded amounts of the related fees and is not material at December 31, 2010 and
March 31, 2010.
The carrying amounts and fair values of the Corporations financial instruments consist of the
following (in thousands):
December 31, 2010 | March 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 134,518 | $ | 134,518 | $ | 512,162 | $ | 512,162 | ||||||||
Investment securities available for sale |
529,801 | 529,801 | 416,203 | 416,203 | ||||||||||||
Investment securities held to maturity |
31 | 31 | 39 | 40 | ||||||||||||
Loans held for sale |
37,196 | 37,236 | 19,484 | 19,622 | ||||||||||||
Loans held for investment |
2,661,991 | 2,643,408 | 3,229,580 | 3,278,903 | ||||||||||||
Federal Home Loan Bank stock |
54,829 | 54,829 | 54,829 | 54,829 | ||||||||||||
Accrued interest receivable |
17,129 | 17,129 | 20,159 | 20,159 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
2,840,206 | 2,802,107 | 3,543,799 | 3,513,254 | ||||||||||||
Other borrowed funds |
685,608 | 707,744 | 796,153 | 783,326 | ||||||||||||
Accrued interest payableborrowings |
17,758 | 17,758 | 7,088 | 7,088 | ||||||||||||
Accrued interest payabledeposits |
4,119 | 4,119 | 8,963 | 8,963 |
Accounting guidance for fair value establishes a framework for measuring fair value and
expands disclosures about fair value measurements. It defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
In determining the fair value, the Corporation uses various valuation methods including market,
income and cost approaches. Based on these approaches, the Corporation utilizes assumptions that
market participants would use in pricing the asset or liability, including assumptions about risk
and the risks inherent in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable inputs. The Corporation uses valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
Based on observability of the inputs used in the valuation techniques, the Corporation is required
to provide the following information according to the fair value hierarchy. The fair value
hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value are classified and disclosed in one of the
following three categories:
| Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. | ||
| Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. | ||
| Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable assumptions and projections in determining the fair value assigned to such assets. |
28
Table of Contents
Fair Value on a Recurring Basis
The following table presents the financial instruments carried at fair value as of December 31,
2010 and March 31, 2010, by the valuation hierarchy (as described above) (in thousands):
December 31, 2010 | Fair Value Measurements Using | |||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available for sale debt securities: |
||||||||||||||||
U.S. Government and federal agency obligations |
$ | 7,852 | $ | | $ | 7,852 | $ | | ||||||||
Agency CMOs and REMICs |
382 | | 382 | | ||||||||||||
Non-agency CMOs |
50,726 | | | 50,726 | ||||||||||||
Residential
agency mortgage-backed securities |
6,785 | | 6,785 | | ||||||||||||
GNMA securities |
462,909 | | 462,909 | | ||||||||||||
Corporate bonds |
1,099 | 599 | 500 | | ||||||||||||
Available for sale equity securities: |
||||||||||||||||
Financial services |
48 | 48 | | | ||||||||||||
Total assets at fair value |
$ | 529,801 | $ | 647 | $ | 478,428 | $ | 50,726 | ||||||||
March 31, 2010 | Fair Value Measurements Using | |||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available for sale debt securities: |
||||||||||||||||
U.S. Government and federal agency obligations |
$ | 51,031 | $ | | $ | 51,031 | $ | | ||||||||
Agency CMOs and REMICs |
1,413 | | | 1,413 | ||||||||||||
Non-agency CMOs |
85,367 | | | 85,367 | ||||||||||||
Residential
agency mortgage-backed securities |
15,440 | | | 15,440 | ||||||||||||
GNMA securities |
261,754 | | | 261,754 | ||||||||||||
Corporate bonds |
1,097 | 572 | 525 | | ||||||||||||
Available for sale equity securities: |
||||||||||||||||
Financial services |
101 | 101 | | | ||||||||||||
Total assets at fair value |
$ | 416,203 | $ | 673 | $ | 51,556 | $ | 363,974 | ||||||||
An independent pricing service is used to price available-for-sale U.S. Government and federal
agency obligations, agency CMOs and Real Estate Mortgage Investments (REMICs), residential
mortgage-backed securities, GNMA securities and corporate bonds using a market data model under
Level 2. The significant inputs used to price GNMA securities include coupon rates of 1.88% to
5.50%, durations of 0.4 to 9.0 years and PSA prepayment speeds of 167 to 448.
The Corporation had 99.8% of its non-agency CMOs valued by an independent pricing service that used
a discounted cash flow model that uses Level 3 inputs in accordance with accounting guidance. The
significant inputs used by the model include observable inputs of 30 to 59 day delinquency of 0% to 6.0%, 60 to 89 day
delinquency of 0% to 3.7%, 90 plus day delinquency of 0% to 9.4%, loss severity of 23.4% to 59.2%,
coupon rates of 4.5% to 7.5% and current credit support of 0% to
23.1% and unobservable inputs of conditional repayment rates of 5.0% to
29.7% and discount rates of 4.0%
to 12.0%.
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The following is a reconciliation of assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) (in thousands):
Year Ended | ||||||||||||||||||||
March 31, 2010 | ||||||||||||||||||||
Nine Months Ended December 31, 2010 | Investment | |||||||||||||||||||
Residential agency | Securities | |||||||||||||||||||
Agency CMOs and | mortgage- | Available | ||||||||||||||||||
REMICs | Non-agency CMOs | backed securities | GNMA securities | for Sale | ||||||||||||||||
Balance at beginning of period |
$ | 1,413 | $ | 85,367 | $ | 15,440 | $ | 261,754 | $ | 407,301 | ||||||||||
Total gains (losses) (realized/unrealized) |
||||||||||||||||||||
Included in earnings |
| 1,994 | (5 | ) | (1,327 | ) | 7,253 | |||||||||||||
Included in other comprehensive income |
6 | 1,293 | 491 | 6,232 | 1,786 | |||||||||||||||
Included in
earnings as other than temporary impairment |
| (362 | ) | | | (1,084 | ) | |||||||||||||
Purchases |
| | 17,058 | 92,879 | 437,141 | |||||||||||||||
Securitization of mortgage loans |
| | | | ||||||||||||||||
held for sale to mortgage-related securities |
| | | | 48,878 | |||||||||||||||
Principal repayments |
(663 | ) | (15,708 | ) | (1,395 | ) | (7,168 | ) | (104,331 | ) | ||||||||||
Sales |
| (21,858 | ) | | | (432,970 | ) | |||||||||||||
Transfers out of level 3 |
(756 | ) | | (31,589 | ) | (352,370 | ) | | ||||||||||||
Balance at end of period |
$ | | $ | 50,726 | $ | | $ | | $ | 363,974 | ||||||||||
There were no transfers in or out of Level 1 during the nine months ended December 31, 2010.
The Corporation transferred its mortgage related securities to Level 3 in the past due to the fact
that they were in an illiquid market. Transfers between levels are reflected as of the end of the
quarter. During the nine months ended December 31, 2010, the Corporation transferred $756,000 of
agency CMOs and REMICs, $31.6 million of residential mortgage-backed securities, and $352.4 million
of Government National Mortgage Association (GNMA) securities from Level 3 to Level 2 due to the
receipt of additional information about the inputs used to value securities previously classified
as Level 3. All non-agency CMOs remained in Level 3 as of December 31, 2010.
Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The following table presents
such assets carried on the consolidated balance sheet by caption and by level within the fair value
hierarchy as of December 31, 2010 and March 31, 2010 (in thousands):
December 31, 2010 | Fair Value Measurements Using | |||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans |
$ | 163,462 | $ | | $ | | $ | 163,462 | ||||||||
Loans held for sale |
33,660 | | | 33,660 | ||||||||||||
Mortgage servicing rights |
7,674 | | | 7,674 | ||||||||||||
Foreclosed properties and repossessed assets |
69,241 | | | 69,241 | ||||||||||||
Total assets at fair value |
$ | 274,037 | $ | | $ | | $ | 274,037 | ||||||||
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March 31, 2010 | Fair Value Measurements Using | |||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans |
$ | 149,802 | $ | | $ | | $ | 149,802 | ||||||||
Loans held for sale |
4,752 | | 4,752 | | ||||||||||||
Mortgage servicing rights |
7,000 | | | 7,000 | ||||||||||||
Foreclosed properties and repossessed assets |
55,436 | | | 55,436 | ||||||||||||
Total assets at fair value |
$ | 216,990 | $ | | $ | 4,752 | $ | 212,238 | ||||||||
The Corporation does not record impaired loans at fair value on a recurring basis. However,
some loans are considered impaired and an allowance for loan losses is established. The specific
reserves for collateral dependent impaired loans are based on the fair value of the collateral less
estimated costs to sell. The fair value of collateral is usually determined based on appraisals. In
some cases, adjustments were made to the appraised values due to various factors including age of
the appraisal, age of comparables included in the appraisal, and known changes in the market and in
the collateral. When significant adjustments were based on unobservable inputs, the resulting fair
value measurement has been categorized as a Level 3 measurement.
Loans held for sale
primarily consist of the current origination of certain fixed-rate mortgage
loans and certain adjustable-rate mortgage loans and are carried at lower of cost or fair value,
determined on a loan level basis. These loans are valued individually
based upon quoted market prices and the amount of any gross loss is recorded as a mark to market change in loans held for
sale. Fees received from the borrower and direct costs to originate
the loan are deferred and recorded as an adjustment of the sales price.
Mortgage servicing rights are recorded as an asset when loans are sold to third parties with
servicing rights retained. The cost allocated to the mortgage servicing rights retained has been
recognized as a separate asset and is initially recorded at fair value and amortized in proportion
to, and over the period of, estimated net servicing revenues. The carrying value of these assets
is reviewed for impairment on a monthly basis using a lower of carrying value or fair value
methodology. The fair value of the servicing rights is determined by estimating the present value
of future net cash flows, taking into consideration market loan prepayment speeds, discount rates,
servicing costs and other economic factors. For purposes of measuring impairment, the rights are
stratified based on predominant risk characteristics of the underlying loans which include product
type (i.e., fixed or adjustable) and interest rate bands. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights on a loan-by-loan basis exceed their
fair value.
Foreclosed properties and repossessed assets, upon initial recognition, are measured and reported
at fair value less estimated costs to sell through a charge-off to the allowance for loan losses
based upon the fair value of the foreclosed asset. The fair value of foreclosed properties and
repossessed assets, upon initial recognition, is estimated using Level 3 inputs based on fair value
less estimated costs to sell. Foreclosed properties and repossessed assets are re-measured at fair
value after initial recognition through the use of a valuation allowance on foreclosed assets.
Note 13 Income Taxes
The Corporation accounts for income taxes on the asset and liability method. Deferred tax assets
and liabilities are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes, computed using enacted tax
rates. We have maintained significant net deferred tax assets for deductible temporary
differences, the largest of which relates to our allowance for loan losses. For income tax return
purposes, only net charge-offs on uncollectible loan balances are deductible, not the provision for
loan losses. Under generally accepted accounting principles, a valuation allowance is required to
be recognized if it is more likely than not that a deferred tax asset will not be realized. The
determination of the realizability of the deferred tax assets is highly subjective and dependent
upon judgment concerning managements evaluation of both positive and negative evidence, the
forecasts of future income, applicable tax planning strategies, and assessments of the current and
future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Positive evidence includes the
existence of taxes paid
31
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in available carryback years as well as the probability that taxable income
will be generated in future periods while negative evidence includes significant losses in the
current year or cumulative losses in the current and prior two years as well as general business
and economic trends. At December 31, 2010 and March 31, 2010, we determined that a valuation
allowance relating to our deferred tax asset was necessary. This determination was based largely
on the negative evidence represented by the losses in the current and prior fiscal years caused by
the significant loan loss provisions associated with our loan portfolio. In addition, general
uncertainty surrounding future economic and business conditions have increased the potential
volatility and uncertainty of our projected earnings. Therefore, a valuation allowance of $136.8
million at December 31, 2010 and $118.6 million at March 31, 2010 was recorded to offset net
deferred tax assets that exceed the Corporations carryback potential.
The significant components of the Corporations deferred tax assets (liabilities) are as follows
(in thousands):
At December 31, | At March 31 | |||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
Deferred tax assets: |
||||||||||||||||
Allowances for loan losses |
$ | 66,968 | $ | 79,035 | $ | 58,442 | $ | 15,081 | ||||||||
Other loss reserves |
1,901 | 2,182 | 4,822 | 269 | ||||||||||||
Federal NOL carryforwards |
57,658 | 35,102 | | | ||||||||||||
State NOL carryforwards |
13,881 | 10,794 | 3,604 | 631 | ||||||||||||
Unrealized gains/(losses) |
8,033 | 2,131 | 2,695 | (738 | ) | |||||||||||
Other |
(3,731 | ) | 6,947 | 11,773 | 9,045 | |||||||||||
Total deferred tax assets |
144,710 | 136,191 | 81,336 | 24,288 | ||||||||||||
Valuation allowance |
(136,007 | ) | (118,600 | ) | (49,981 | ) | (997 | ) | ||||||||
Adjusted deferred tax assets |
8,703 | 17,591 | 31,355 | 23,291 | ||||||||||||
Deferred tax liabilities: |
||||||||||||||||
FHLB stock dividends |
(3,976 | ) | (3,976 | ) | (3,997 | ) | (4,022 | ) | ||||||||
Mortgage servicing rights |
(9,859 | ) | (9,312 | ) | (6,094 | ) | (4,888 | ) | ||||||||
Purchase accounting |
(319 | ) | (2,933 | ) | (3,348 | ) | (4,713 | ) | ||||||||
Other |
5,451 | (1,370 | ) | (1,714 | ) | (1,513 | ) | |||||||||
Total deferred tax liabilities |
(8,703 | ) | (17,591 | ) | (15,153 | ) | (15,136 | ) | ||||||||
Net deferred tax assets |
$ | | $ | | $ | 16,202 | $ | 8,155 | ||||||||
The Corporation is subject to U.S. federal income tax as well as income tax of state
jurisdictions. The tax years 2007-2009 remain open to examination by the Internal Revenue Service
and certain state jurisdictions while the years 2006-2009 remain open to examination by certain
other state jurisdictions.
Income tax expense includes $14,000 of franchise taxes for the nine month period ended December 31,
2010. The effective tax rate was 0% and 0.06% for the three-and nine-month periods ended December
31, 2010, respectively, due to a $14.8 million and $18.2 million valuation allowance charge in the
respective periods. This rate compared to 0.03% and 0% for the same respective periods last year.
The Corporation recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of December 31, 2010 and March 31, 2010, the Corporation has not recognized any
accrued interest and penalties related to uncertain tax positions.
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Note 14 Credit Agreement
The Corporation owes $116.3 million to various lenders led by U.S. Bank under the Amended and
Restated Credit Agreement dated June 9, 2008, as amended (the Credit Agreement) among the
Corporation, the lenders from time to time a party thereto, and U.S. Bank National Association, as
administrative agent for such lenders, or the Agent. The Corporation is currently in default of the Credit Agreement as a result of failure to
make a principal payment on March 2, 2009. On April 29, 2010, the Corporation entered into
Amendment No. 6 (the Amendment) to the Credit Agreement. Under the Amendment, the Agent and the
lenders agree to forbear from exercising their rights and remedies against the Corporation until
the earliest to occur of the following: (i) the occurrence of any event of default (other than a
failure to make principal payments on the outstanding balance under the Credit Agreement or other
existing defaults); or (ii) May 31, 2011. Notwithstanding the agreement to forbear, the Agent may
at any time, in its sole discretion, take any action reasonably necessary to preserve or protect
its interest in the stock of the Bank, IDI or any other collateral securing any of the obligations
against the actions of the Corporation or any third party without notice to or the consent of any
party.
The Amendment also provides that the outstanding balance under the Credit Agreement shall bear
interest equal to a Base Rate of 0% per annum and deferred rate of 12%. Interest accruing on the
Loan is due on the earlier of (i) the date the Loans are paid in full or (ii) the maturity date.
At December 31, 2010, the Corporation had accrued interest payable related to the Credit agreement
of $15.5 million and accrued amendment fee payable related to the Credit Agreement of $4.7 million.
Within two business days after the Corporation has knowledge of an event, the CFO shall submit a
statement of the event together with a statement of the actions which the Corporation proposes to
take to the Agent. An event may include:
| Any event which, either of itself or with the lapse of time or the giving of notice or both, would constitute a Default under the Credit Agreement; | ||
| A default or an event of default under any other material agreement to which the Corporation or Bank is a party; or | ||
| Any pending or threatened litigation or certain administrative proceedings. |
Within fifteen (15) days after the end of each month, the Corporations president or vice president
shall submit a certificate indicating whether the Corporation is in compliance with the following
financial covenants:
| The Bank shall maintain a Tier 1 Leverage Ratio of not less than (i) 3.75% at all times during the period from April 29, 2010 through May 31, 2010, (ii) 3.85% at all times during the period from June 1, 2010 through August 31, 2010, (iii) 3.90% at all times during the period from September 1, 2010 through November 30, 2010 and (iv) 3.95% at all times thereafter. | ||
| The Bank shall maintain a Total Risk Based Capital ratio of not less than (i) 7.10% at all times during the period from April 29, 2010 through May 31, 2010, (ii) 7.35% at all times during the period from June 1, 2010 through August 31, 2010, (iii) 7.60% at all times during the period from September 1, 2010 through November 30, 2010 and (iv) 7.65% at all times thereafter. | ||
| The ratio of Non-Performing Loans to Gross Loans shall not exceed (i) 14.50% at any time during the period from April 29, 2010 through May 31, 2010, (ii) 13.00% at any time during the period from June 1, 2010 through September 30, 2010, (iii) 12.50% at any time during the period from October 1, 2010 through November 30, 2010, (iv) 12.00% at any time during the period from December 1, 2010 through March 31, 2011, (v) 11.00% at any time during the period from April 1, 2011 through April 30, 2011 and (vi) 10.00% at all times thereafter. |
The total outstanding balance under the Credit Agreement as of December 31, 2010 was $116.3
million. These borrowings are shown in the Corporations consolidated financial statements as
other borrowed funds. The Amendment provides that the Corporation must pay in full the outstanding
balance under the Credit Agreement on the earlier of the Corporations receipt of net proceeds of a
financing transaction from the sale of equity securities in an amount not less than $116.3 million
or May 31, 2011.
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The Credit Agreement and the Amendment also contain customary representations, warranties,
conditions and events of default for agreements of such type. At December 31, 2010, the
Corporation was in compliance with all covenants contained in the Credit Agreement, as amended on
April 29, 2010. Under the terms of the Credit Agreement, as amended on April 29, 2010, the Agent
and the Lenders have certain rights, including the right to accelerate the maturity of the
borrowings if all covenants are not complied with. Currently, no such action has been
taken by the Agent or the Lenders. However, the default creates significant uncertainty related to
the Corporations operations.
Note 15 Temporary Liquidity Guarantee Program
In October 2008, the Secretary of the United States Department of the Treasury invoked the systemic
risk exception of the FDIC Improvement Act of 1991 and the FDIC announced the Temporary Liquidity
Guarantee Program (the TLGP). The TLGP provides a guarantee, through the earlier of maturity or
June 30, 2012, of certain senior unsecured debt issued by participating Eligible Entities
(including the Corporation) between October 14, 2008 and June 30, 2009. The Bank signed a master
agreement with the FDIC on December 5, 2008 for issuance of bonds under the program. As of
December 31, 2010, the Bank had $60.0 million of bonds issued under the program out of the $88.0
million that the Bank is eligible to issue. The bonds, which are scheduled to mature on February
11, 2012, bear interest at a fixed rate of 2.74% which is due semi-annually.
Note 16 Capital Purchase Program
Pursuant to the Capital Purchase Program (CPP), the U.S. Treasury, on behalf of the U.S.
government, purchased the Corporations preferred stock, along with warrants to purchase the
Corporations common stock. The preferred stock has a dividend rate of 5% per year, until the fifth
anniversary of Treasurys investment and a dividend of 9% thereafter. During the time the U.S.
Treasury holds securities issued pursuant to this program, the Corporation is required to comply
with certain provisions regarding executive compensation and corporate governance. Participation
in the CPP also imposes certain restrictions upon the Corporations dividends to common
shareholders and stock repurchase activities. The Corporation elected to participate in the CPP and
received $110 million. The Corporation has deferred seven dividend payments on the Series B
Preferred Stock held by the U.S. Treasury. The Corporation discontinued the accrual of dividends
during the quarter ended September 30, 2010 in connection with the sixth deferred dividend payment.
The U.S. Treasury now has the right to appoint two individuals to the board because the
Corporation has deferred six dividend payments, although to date they have not done so. Instead,
the U.S. Treasury has an observer present at quarterly board meetings.
Note 17 Branch Sales
On June 25, 2010, the Corporation completed the sale of eleven branches located in Northwest
Wisconsin to Royal Credit Union headquartered in Eau Claire, Wisconsin. Royal Credit Union assumed
approximately $171.2 million in deposits and acquired $61.8 million in loans and $9.8 million in
office properties and equipment. The net gain on the sale was $5.0 million. The net gain included
a $3.9 million write off core deposit intangible that was required when designated core deposits
were sold in this transaction.
On July 23, 2010, the Corporation completed the sale of four branches located in Green Bay,
Wisconsin and surrounding communities to Nicolet National Bank headquartered in Green Bay,
Wisconsin. Nicolet National Bank assumed $105.1 million in deposits and acquired $24.8 million in
loans and $0.4 million in office properties and equipment. The net gain on the sale was $2.3
million.
Note 18 ESOP Termination
On December 1, 2010, the Corporation announced that it received preliminary approval from the
Internal Revenue Service to terminate the Employee Stock Ownership Plan (ESOP). Participants of
the ESOP were notified that they had several options for distributing their shares and cash from
the ESOP including in-kind distribution to a qualified retirement plan, in-kind distribution to
them personally, cash distribution to a qualified retirement plan and a lump sum cash distribution
to them personally. The termination of the ESOP caused no recourse to the Corporation.
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ANCHOR BANCORP WISCONSIN INC.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Set forth below is managements discussion and analysis of the consolidated results of operations
and financial condition of Anchor Bancorp Wisconsin Inc. (the Corporation) and its wholly-owned
subsidiaries, AnchorBank fsb (the Bank) and Investment Directions Inc., for the nine months ended
December 31, 2010, which includes information on significant regulatory developments and the
Corporations risk management activities, including asset/liability management strategies, sources
of liquidity and capital resources. This discussion should be read in conjunction with the
unaudited consolidated financial statements and supplemental data contained elsewhere in this
quarterly report filed on Form10-Q for the nine-month period ending December 31, 2010.
EXECUTIVE OVERVIEW
In July 2010, the Office of Thrift Supervision granted conditional approval of the Banks Capital
Restoration Plan (Plan). In conjunction with this approval, the Bank executed a Stipulation and
Consent to a Prompt Corrective Action Directive dated August 31, 2010, with the OTS. The Plan
included two sets of assumptions for continuing to improve the Banks capital levels, one based on
obtaining capital from an outside source and one which reflects the results of the Banks ongoing
initiatives in the absence of an external capital infusion. Management has defined a strategy of
improving the financial performance and efficiency of the Bank, while in parallel seeking outside
sources of capital.
In 2010, management conducted a strategic business review of its core businesses, branch footprint
and supporting operations, and developed a plan to reduce and better leverage the balance sheet and
strengthen the capital base. Beginning in 2010 and during fiscal 2011, management has been
executing against this plan, and has reduced the size of the Bank approximately 20% since March 31,
2010, while increasing the amount of net interest income by 19%. Total assets have been reduced
from $4.4 billion at March 31, 2010, to $3.6 billion at December 31, 2010, while the amount of net
interest income generated actually increased from $18.6 million for the three months ended March
31, 2010 to $18.8 million, $22.3 million and $22.2 million during the quarters ended June 30, 2010,
September 30, 2010 and December 31, 2010, respectively.
In June 2010, the Bank sold eleven branches in Northwestern Wisconsin to Royal Credit Union, and in
July sold its four Green Bay area branches to Nicolet National Bank. As detailed below in
Financial Highlights, loans receivable decreased $549.9 million, or 16.9%, since March 31, 2010,
driven by scheduled pay-offs and amortizations with limited new originations, the branch sales, and
transfers of loans to foreclosed properties as part of proactive workout and collection efforts.
These deliberate actions, as well as the sale of a portion of the education loan portfolio,
determined to be low yielding while requiring capital to support, drove the decrease in total
assets.
Net interest income increased from $18.6 million to $22.2 million for the quarters ended March 31,
2010 and December 31, 2010, respectively. While there has been an increase in yield on earning
assets of 10 basis points, from 4.56% at March 31, 2010 to 4.66% at December 31, 2010, cost of
funds has been reduced 62 basis points, from 2.69% to 2.07% in the same period, which significantly
impacted net interest income. As part of its pricing strategy, the Bank repriced certain deposit
products to better align with current market conditions, which resulted in improved margins.
Other non-interest income improved due to sales of mortgage loans in the secondary market and
investment security gains realized. Favorable earnings were generated during the nine months ended
December 31, 2010 through the sale of mortgage loans in the secondary market on a flow basis, where
current interest rates favorably impacted the gain on sale. Investment security gains of $8.0
million were realized in the nine months ended December 31, 2010, and second and third quarter
expense levels also reflect full quarters of savings resulting from comprehensive business reviews
conducted earlier in the year in order to reduce staffing, overhead and other operating expenses.
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The Corporation continues to be engaged, along with our advisor, Sandler ONeill and Partners, in
active discussions with potential investors for additional capital infusion, and in achieving
compliance with the additional regulatory directives imposed by the Office of Thrift Supervision.
On a consolidated basis, the Corporations stockholders deficit at December 31, 2010 is $9.5
million, and as discussed below in Liquidity and Capital
Resources, presently the Corporation (on an unconsolidated basis) does not have sufficient
liquidity to meet its short-term obligations, which include the approximately $116.3 million in
outstanding debt that our lender could accelerate and demand payment for upon the expiration of the
amended Credit Agreement on May 31, 2011, and $110 million of Series B Preferred Stock and
dividends and interest. While the Corporations interest charges on its amended Credit Agreement
and other borrowed funds, and provision for credit losses at the Bank continued to result in a net
loss available to common equity during the quarter and nine months ended December 31, 2010, the
core earnings generating net interest income have remained strong and reflect the realized benefits
of the strategic actions noted above. Management continues to focus on efficiency of the balance
sheet, operating expense levels and maintaining its adequately capitalized position. An essential
element for the conditional approval of the Plan during 2010 was the Banks ability to attain
adequately capitalized (8.0% or greater Total Risk Based Capital) status as of July 31, 2010.
Based on the Banks internal financial reporting, a total Risk-Based Capital level of 8.05% was
achieved as of July 31, 2010. The Bank achieved capital levels of 8.37% at December 31, 2010 and
8.14% at September 30, 2010. Under OTS requirements, a bank is considered adequately capitalized
with a risk-based capital level of 8.0% or greater.
Credit Highlights
Credit Quality The Corporation has seen early stage and overall delinquencies continue to
stabilize in the third quarter of fiscal 2011. At December 31, 2010, non-performing loans
decreased $65.8 million to $334.1 million since March 31, 2010. Total non-performing assets
decreased $52.0 million to $403.4 million at December 31, 2010 from March 31, 2010. The provision
for credit losses decreased $100.7 million for the nine months ended December 31, 2010 from $141.8
million for the nine months ended December 31, 2009. Total delinquencies decreased $21.0 million
to $352.2 since March 31, 2010.
Recent Market and Industry Developments
The economic turmoil that began in the middle of 2007 and continued through 2008 and 2009 has now
settled into a slow economic recovery in 2010 and 2011. At this time the recovery has somewhat
uncertain prospects. This has been accompanied by dramatic changes in the competitive landscape of
the financial services industry and a wholesale reformation of the legislative and regulatory
landscape with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank), which was signed into law by President Obama on July 21, 2010.
Dodd-Frank is extensive, complex and comprehensive legislation that impacts many aspects of banking
organizations. Dodd-Frank is likely to negatively impact the Corporations revenue and increase
both the direct and indirect costs of doing business, as it includes provisions that could increase
regulatory fees and deposit insurance assessments and impose heightened capital standards, while at
the same time impacting the nature and costs of the Corporations businesses. In addition, the
legislation calls for the dissolution of our primary regulator, the OTS. The OTS is scheduled to
cease operation as of July 21, 2011, although that date could be delayed under certain
circumstances. At such time as the OTS goes out of existence, regulation of the Bank will be
assumed by The Office of the Controller of the Currency, with the Federal Reserve becoming the
Corporations primary regulator.
Until such time as the regulatory agencies issue proposed and final regulations implementing the
numerous provisions of Dodd-Frank, a process that will extend at least over the next twelve months
and may last several years, management will not be able to fully assess the impact the legislation
will have on its business.
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Financial Highlights
Highlights for the third quarter ended December 31, 2010 include:
| Diluted loss per common share increased to $(0.66) for the quarter ended December 31, 2010 compared to $(0.63) per share for the quarter ended December 31, 2009, primarily due to a $11.0 million increase in the provision for credit losses; | ||
| The net interest margin increased to 2.51% for the quarter ended December 31, 2010 compared to 2.05% for the quarter ended December 31, 2009; | ||
| Loans receivable decreased $549.9 million, or 16.9%, since March 31, 2010 primarily due to scheduled pay-offs and amortization, the sale of branches which resulted in a decrease of $86.6 million, the transfer of $51.6 million to foreclosed properties as well as the sale of $24 million in student loans; | ||
| Deposits and related accrued interest payable decreased $708.4 million, or 19.9%, since March 31, 2010; | ||
| Book value per common share was $(5.51) at December 31, 2010 compared to $(3.68) at March 31, 2010 and $(2.66) at December 31, 2009; | ||
| Total non-performing assets (consisting of loans past due more than ninety days, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and foreclosed properties and repossessed assets) decreased $52.0 million, or 11.4%, to $403.4 million at December 31, 2010 from $455.4 million at March 31, 2010; | ||
| Total non-performing loans (consisting of loans past due more than 90 days, loans less than 90 days delinquent but placed on non-accrual status due to anticipated probable loss and non-accrual troubled debt restructurings) decreased $65.8 million, or 16.5% to $334.1 million at December 31, 2010 from $399.9 million at March 31, 2010; | ||
| Provision for credit losses decreased $100.7 million, or 71.1%, to $41.0 million for the nine months ended December 31, 2010 from $141.8 million for the nine months ended December 31, 2009. The Corporation has made significant enhancements to risk management practices; and | ||
| Delinquencies (loans past due 30 days or more) decreased $21.0 million or 5.6%, to $352.2 million at December 31, 2010 from $373.2 million at March 31, 2010. |
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Selected quarterly data are set forth in the following tables.
Three Months Ended | ||||||||||||||||
(Dollars in thousands - except per share amounts) | 12/31/2010 | 9/30/2010 | 6/30/2010 | 3/31/2010 | ||||||||||||
Operations Data: |
||||||||||||||||
Net interest income |
$ | 22,195 | $ | 22,318 | $ | 18,808 | $ | 18,624 | ||||||||
Provision for credit losses |
21,412 | 10,674 | 8,934 | 20,170 | ||||||||||||
Net gain on sale of loans |
5,601 | 9,216 | 1,347 | 3,314 | ||||||||||||
Net gain on sale of investment securities |
1,187 | 6,653 | 112 | 1,699 | ||||||||||||
Net gain on sale of branches |
100 | 2,318 | 4,930 | | ||||||||||||
Real estate investment partnership revenue |
| | | | ||||||||||||
Other non-interest income |
4,798 | 5,533 | 7,278 | 5,493 | ||||||||||||
Real estate investment partnership cost of sales |
| | | | ||||||||||||
Non-interest expense |
24,647 | 34,112 | 35,695 | 37,093 | ||||||||||||
Income (loss) before income tax expense (benefit) |
(12,178 | ) | 1,252 | (12,154 | ) | (28,133 | ) | |||||||||
Income tax expense (benefit) |
| 14 | | (1,503 | ) | |||||||||||
Net income (loss) |
(12,178 | ) | 1,238 | (12,154 | ) | (26,630 | ) | |||||||||
(Income) loss attributable to non-controlling interest in real estate partnerships |
| | | | ||||||||||||
Preferred stock dividends and discount accretion |
(1,853 | ) | (2,401 | ) | (3,368 | ) | (3,211 | ) | ||||||||
Net loss
available to common equity of Anchor BanCorp |
(14,031 | ) | (1,163 | ) | (15,522 | ) | (29,841 | ) | ||||||||
Selected Financial Ratios (1): |
||||||||||||||||
Yield on earning assets |
4.66 | % | 4.80 | % | 4.37 | % | 4.56 | % | ||||||||
Cost of funds |
2.07 | 2.24 | 2.42 | 2.69 | ||||||||||||
Interest rate spread |
2.59 | 2.56 | 1.95 | 1.87 | ||||||||||||
Net interest margin |
2.51 | 2.45 | 1.85 | 1.77 | ||||||||||||
Return on average assets |
(1.31 | ) | 0.13 | (1.13 | ) | (2.40 | ) | |||||||||
Return on average equity |
N/A | 20.30 | (184.75 | ) | (232.27 | ) | ||||||||||
Average equity to average assets |
0.41 | 0.63 | 0.61 | 1.03 | ||||||||||||
Non-interest expense to average assets |
2.64 | 3.51 | 3.33 | 3.34 | ||||||||||||
Per Share: |
||||||||||||||||
Basic loss per common share |
$ | (0.66 | ) | $ | (0.05 | ) | $ | (0.73 | ) | $ | (1.40 | ) | ||||
Diluted loss per common share |
(0.66 | ) | (0.05 | ) | (0.73 | ) | (1.40 | ) | ||||||||
Dividends per common share |
| | | | ||||||||||||
Book value per common share |
(5.51 | ) | (3.91 | ) | (3.95 | ) | (3.68 | ) | ||||||||
Financial Condition: |
||||||||||||||||
Total assets |
$ | 3,580,752 | $ | 3,803,853 | $ | 3,998,929 | $ | 4,416,265 | ||||||||
Loans receivable, net |
||||||||||||||||
Held for sale |
37,196 | 28,744 | 24,362 | 19,484 | ||||||||||||
Held for investment |
2,661,991 | 2,839,217 | 3,040,398 | 3,229,580 | ||||||||||||
Deposits and accrued interest |
2,844,325 | 3,027,735 | 3,225,382 | 3,552,762 | ||||||||||||
Other borrowed funds |
685,608 | 704,908 | 709,359 | 796,153 | ||||||||||||
Stockholders (deficit) equity |
(9,521 | ) | 25,270 | 24,348 | 30,113 | |||||||||||
Allowance for loan losses |
157,438 | 156,186 | 166,649 | 179,644 | ||||||||||||
Non-performing assets(2) |
403,364 | 410,347 | 450,010 | 455,372 |
(1) | Annualized when appropriate. | |
(2) | Non-performing assets consist of loans past due more than ninety days, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and OREO. |
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Three Months Ended | ||||||||||||||||
(Dollars in thousands - except per share amounts) | 12/31/2009 | 9/30/2009 | 6/30/2009 | 3/31/2009 | ||||||||||||
Operations Data: |
||||||||||||||||
Net interest income |
$ | 22,333 | $ | 18,939 | $ | 24,915 | $ | 28,708 | ||||||||
Provision for credit losses |
10,456 | 60,900 | 70,400 | 56,385 | ||||||||||||
Net gain on sale of loans |
2,805 | 1,062 | 11,403 | 7,858 | ||||||||||||
Net gain on sale of investment securities |
5,783 | 2,108 | 1,505 | | ||||||||||||
Real estate investment partnership revenue |
| | | 310 | ||||||||||||
Other non-interest income |
7,033 | 7,688 | 6,712 | 7,794 | ||||||||||||
Real estate investment partnership cost of sales |
| | | 545 | ||||||||||||
Other non-interest expense |
37,695 | 43,992 | 39,272 | 49,755 | ||||||||||||
Loss before income tax expense (benefit) |
(10,197 | ) | (75,095 | ) | (65,137 | ) | (62,015 | ) | ||||||||
Income tax expense (benefit) |
3 | | | (16,147 | ) | |||||||||||
Net loss |
(10,200 | ) | (75,095 | ) | (65,137 | ) | (45,868 | ) | ||||||||
(Income) loss attributable to non-controlling interest in real estate partnerships |
| 85 | (85 | ) | (246 | ) | ||||||||||
Preferred stock dividends and discount accretion |
(3,228 | ) | (3,228 | ) | (3,244 | ) | (2,172 | ) | ||||||||
Net loss available to common equity of Anchor BanCorp |
(13,428 | ) | (78,408 | ) | (68,296 | ) | (47,794 | ) | ||||||||
Selected Financial Ratios (1): |
||||||||||||||||
Yield on earning assets |
4.92 | % | 4.62 | % | 4.80 | % | 5.22 | % | ||||||||
Cost of funds |
2.79 | 3.00 | 2.79 | 2.72 | ||||||||||||
Interest rate spread |
2.13 | 1.62 | 2.01 | 2.50 | ||||||||||||
Net interest margin |
2.05 | 1.58 | 1.99 | 2.45 | ||||||||||||
Return on average assets |
(0.89 | ) | (5.97 | ) | (4.92 | ) | (3.62 | ) | ||||||||
Return on average equity |
(64.05 | ) | (242.30 | ) | (132.26 | ) | (84.21 | ) | ||||||||
Average equity to average assets |
1.39 | 2.46 | 3.72 | 4.30 | ||||||||||||
Non-interest expense to average assets |
3.30 | 3.49 | 2.97 | 4.00 | ||||||||||||
Per Share: |
||||||||||||||||
Basic loss per common share |
$ | (0.63 | ) | $ | (3.71 | ) | $ | (3.23 | ) | $ | (2.26 | ) | ||||
Diluted loss per common share |
(0.63 | ) | (3.71 | ) | (3.23 | ) | (2.26 | ) | ||||||||
Dividends per common share |
| | | | ||||||||||||
Book value per common share |
(2.66 | ) | (1.70 | ) | 1.71 | 4.70 | ||||||||||
Financial Condition: |
||||||||||||||||
Total assets |
$ | 4,453,975 | $ | 4,634,619 | $ | 5,236,909 | $ | 5,272,110 | ||||||||
Loans receivable, net |
||||||||||||||||
Held for sale |
35,640 | 28,904 | 115,340 | 161,964 | ||||||||||||
Held for investment |
3,383,246 | 3,506,464 | 3,641,708 | 3,896,439 | ||||||||||||
Deposits and accrued interest |
3,598,185 | 3,739,997 | 3,987,906 | 3,923,827 | ||||||||||||
Other borrowed funds |
759,479 | 759,479 | 1,041,049 | 1,078,392 | ||||||||||||
Stockholders equity |
52,243 | 73,370 | 146,918 | 211,365 | ||||||||||||
Allowance for loan losses |
164,494 | 170,664 | 139,455 | 137,165 | ||||||||||||
Non-performing assets(2) |
379,526 | 485,020 | 219,495 | 308,366 |
(1) | Annualized when appropriate. | |
(2) | Non-performing assets consist of loans past due more than ninety days, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, non-accrual troubled debt restructurings and OREO. |
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RESULTS OF OPERATIONS
Overview
Net income for the three and nine months ended December 31, 2010 decreased $2.0 million or 19.4% to
a net loss of $12.2 million from a net loss of $10.2 million and increased $127.3 million or 84.6%
to a net loss of $23.1 million from a net loss of $150.4 million as compared to the respective
period in the prior year. The increase in net loss for the three-month period compared to the same
period last year was largely due to an increase in provision for credit losses of $11.0 million, a
decrease in non-interest income of $4.0 million and a decrease in net interest income of $138,000,
which were partially offset by a decrease in non-interest expense of $13.1 million. The decrease
in net loss for the nine-month period compared to the same period last year was largely due to a
decrease in provision for credit losses of $100.7 million, a decrease in non-interest expense of
$26.7 million and an increase in non-interest income of $2.8 million, which were partially offset
by a decrease in net interest income of $2.9 million.
Net Interest Income
Net interest income decreased $138,000 or 0.6% and decreased $2.9 million or 4.3% for the three and
nine months ended December 31, 2010, as compared to the respective periods in the prior year.
Interest income decreased $12.4 million or 23.2% for the three months ended December 31, 2010, as
compared to the same period in the prior year due to a decline in yields on interest earning assets
and a reduction in loan balances due to branch sales and loan pay downs. Interest expense
decreased $12.3 million or 39.3% for the three months ended December 31, 2010, as compared to the
same period in the prior year due to a reduction in deposit accounts due to branch sales, reduced
funding needs and improved pricing disciplines. Interest income decreased $39.8 million or 23.6%
for the nine months ended December 31, 2010, as compared to the same period in the prior year due
to a decline in yields on interest earning assets and a reduction in loan balances due to branch
sales and loan pay downs. Interest expense decreased $37.0 million or 35.9% for the nine months
ended December 31, 2010, as compared to the same period in the prior year due to a reduction in
deposit accounts due to branch sales, reduced funding needs and improved pricing disciplines. The
net interest margin increased to 2.51% for the three-month period ended December 31, 2010 from
2.05% for the three-month period in the prior year and increased to 2.25% for the nine-month period
ended December 31, 2010 from 1.87% for the same period in the prior year. The change in the net
interest margin reflects the decrease in cost of interest-bearing liabilities from 2.79% to 2.07%
during the three months ended December 31, 2009 and 2010, respectively. The interest rate spread
increased to 2.59% from 2.13% for the three-month period and increased to 2.35% from 1.93% for the
nine-month period ended December 31, 2010, as compared to the respective periods in the prior year.
Interest income on loans decreased $11.9 million or 24.5% and $34.4 million or 22.7%, for the three
and nine months ended December 31, 2010, as compared to the respective periods in the prior year.
These decreases were primarily attributable to a decrease of 33 basis points in the average yield
on loans to 5.23% from 5.56% for the three-month period and a decrease of 22 basis points to 5.25%
from 5.47% for the nine-month period. The decrease in the yield on loans was due to the level of
loans on non-accrual status as well as a modest decline in rates on loans. In addition, the
average balances of loans decreased $687.0 million and $721.9 million in the three months and nine
months ended December 31, 2010, respectively, as compared to the same periods in the prior year.
Interest income on investment securities decreased $359,000 or 7.5% for the three-month period and
decreased $5.0 million or 30.7% for the nine-month period ended December 31, 2010, as compared to
the respective periods in the prior year, due to security sales and the reinvestment into shorter
dated securities. This resulted in a decrease of 79 basis points in the average yield on
investment securities to 3.23% from 4.02% for the three-month period and a decrease of 108 basis
points in the average yield on investment securities to 3.38% from 4.46% for the nine-month period
ended December 31, 2010. In addition, there was a decrease of $42.1 million in the nine-month
average balance of investment securities while there was an increase of $72.9 million in the
three-month average balances. The increase in investment security
balances for the three-month period ending December 31, 2010 is
a result of the Corporations balance sheet strategy of reducing
loans and increasing lower risk-weighted investment securities. Interest income on interest-bearing deposits
decreased $130,000 and $384,000, respectively, for the three and nine months ended December 31,
2010, as compared to the respective periods in 2009, primarily due to a decrease in the average
balances as well as decreases in the average yields for the nine-month period.
Interest expense on deposits decreased $10.3 million or 48.3% and decreased $28.4 million or 41.5%,
respectively, for the three and nine months ended December 31, 2010, as compared to the respective
periods in 2009. This decrease was primarily due to improved liquidity management and pricing
disciplines which resulted in a decrease
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of 81 basis points in the weighted average cost of deposits to 1.48% from 2.29% and a decrease of
70 basis points in the weighted average cost of deposits to 1.67% from 2.37% for the three and nine
months ended December 31, 2010, as well as a decrease in the average balance of deposits and
accrued interest of $739.8 million and $661.9 million, as compared to the respective three- and
nine-month periods in the prior year. Interest expense on other borrowed funds decreased $2.0
million or 19.9% and $8.6 million or 24.9%, respectively, during the three and nine months ended
December 31, 2010, as compared to the respective periods in the prior year. The weighted average
cost of other borrowed funds decreased 67 basis points to 4.57% from 5.24% for the three-month
period and decreased 6 basis points to 4.83% from 4.89% for the nine-month period ended December
31, 2010, as compared to the respective periods last year due to an amendment fee which was being
amortized to interest expense in the prior year as well as the
maturity of higher rate FHLB borrowings. For the three-and nine-month periods ended
December 31, 2010, the average balance of other borrowed funds decreased $62.7 million and $224.4
million, respectively, as compared to the respective periods in 2009.
Provision for Credit Losses
Provision for credit losses increased $11.0 million or 104.8% for the three-month period and
decreased $100.7 million or 71.1% for the nine-month period ended December 31, 2010, as compared to
the respective periods last year. Through significant efforts in the credit area to gain a thorough
understanding of the risk within the portfolio, management evaluates a variety of qualitative and
quantitative factors when determining the adequacy of the allowance for losses. The provisions were
based on managements ongoing evaluation of asset quality and pursuant to a policy to maintain an
allowance for losses at a level which management believes is adequate to absorb probable and
inherent losses on loans as of the balance sheet date.
Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread
The tables on the following pages show the Corporations average balances, interest, average rates,
net interest margin and interest rate spread for the periods indicated. The average balances are
derived from average daily balances.
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Three Months Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest | Cost(1) | Balance | Interest | Cost(1) | |||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
Interest-Earning Assets |
||||||||||||||||||||||||
Mortgage loans |
$ | 2,115,373 | $ | 27,318 | 5.17 | % | $ | 2,579,901 | $ | 36,293 | 5.63 | % | ||||||||||||
Consumer loans |
597,321 | 7,678 | 5.14 | 749,605 | 9,433 | 5.03 | ||||||||||||||||||
Commercial business loans |
90,190 | 1,635 | 7.25 | 160,362 | 2,819 | 7.03 | ||||||||||||||||||
Total loans receivable (2) (3) |
2,802,884 | 36,631 | 5.23 | 3,489,868 | 48,545 | 5.56 | ||||||||||||||||||
Investment securities (4) |
550,732 | 4,442 | 3.23 | 477,794 | 4,801 | 4.02 | ||||||||||||||||||
Interest-bearing deposits |
126,164 | 78 | 0.25 | 333,038 | 208 | 0.25 | ||||||||||||||||||
Federal Home Loan Bank stock |
54,829 | | 0.00 | 54,829 | | 0.00 | ||||||||||||||||||
Total interest-earning assets |
3,534,609 | 41,151 | 4.66 | 4,355,529 | 53,554 | 4.92 | ||||||||||||||||||
Non-interest-earning assets |
196,071 | 217,200 | ||||||||||||||||||||||
Total assets |
$ | 3,730,680 | $ | 4,572,729 | ||||||||||||||||||||
Interest-Bearing Liabilities |
||||||||||||||||||||||||
Demand deposits |
$ | 913,605 | 666 | 0.29 | $ | 954,070 | 1,264 | 0.53 | ||||||||||||||||
Regular passbook savings |
239,180 | 122 | 0.20 | 250,920 | 189 | 0.30 | ||||||||||||||||||
Certificates of deposit |
1,817,747 | 10,205 | 2.25 | 2,505,292 | 19,825 | 3.17 | ||||||||||||||||||
Total deposits and accrued interest |
2,970,532 | 10,993 | 1.48 | 3,710,282 | 21,278 | 2.29 | ||||||||||||||||||
Other borrowed funds |
696,824 | 7,963 | 4.57 | 759,479 | 9,943 | 5.24 | ||||||||||||||||||
Total interest-bearing liabilities |
3,667,356 | 18,956 | 2.07 | 4,469,761 | 31,221 | 2.79 | ||||||||||||||||||
Non-interest-bearing liabilities |
48,022 | 39,264 | ||||||||||||||||||||||
Total liabilities |
3,715,378 | 4,509,025 | ||||||||||||||||||||||
Stockholders equity |
15,302 | 63,704 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 3,730,680 | $ | 4,572,729 | ||||||||||||||||||||
Net interest income/interest rate spread (5) |
$ | 22,195 | 2.59 | % | $ | 22,333 | 2.13 | % | ||||||||||||||||
Net interest-earning assets |
$ | (132,747 | ) | $ | (114,232 | ) | ||||||||||||||||||
Net interest margin (6) |
2.51 | % | 2.05 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities |
0.96 | 0.97 | ||||||||||||||||||||||
(1) | Annualized | |
(2) | For the purpose of these computations, non-accrual loans are included in the daily average loan amounts outstanding. | |
(3) | Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual status during the period indicated. | |
(4) | Average balances of securities available-for-sale are based on amortized cost. | |
(5) | Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities and is represented on a fully tax equivalent basis. | |
(6) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
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Nine Months Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest | Cost(1) | Balance | Interest | Cost(1) | |||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
Interest-Earning Assets |
||||||||||||||||||||||||
Mortgage loans |
$ | 2,231,967 | $ | 87,316 | 5.22 | % | $ | 2,753,635 | $ | 113,642 | 5.50 | % | ||||||||||||
Consumer loans |
643,440 | 24,590 | 5.10 | 767,899 | 29,764 | 5.17 | ||||||||||||||||||
Commercial business loans |
108,110 | 5,555 | 6.85 | 183,853 | 8,480 | 6.15 | ||||||||||||||||||
Total loans receivable (2) (3) |
2,983,517 | 117,461 | 5.25 | 3,705,387 | 151,886 | 5.47 | ||||||||||||||||||
Investment securities (4) |
446,360 | 11,308 | 3.38 | 488,416 | 16,321 | 4.46 | ||||||||||||||||||
Interest-bearing deposits |
259,617 | 454 | 0.23 | 459,167 | 838 | 0.24 | ||||||||||||||||||
Federal Home Loan Bank stock |
54,829 | | 0.00 | 54,829 | | 0.00 | ||||||||||||||||||
Total interest-earning assets |
3,744,323 | 129,223 | 4.60 | 4,707,799 | 169,045 | 4.79 | ||||||||||||||||||
Non-interest-earning assets |
222,801 | 251,304 | ||||||||||||||||||||||
Total assets |
$ | 3,967,124 | $ | 4,959,103 | ||||||||||||||||||||
Interest-Bearing Liabilities |
||||||||||||||||||||||||
Demand deposits |
$ | 919,427 | 2,462 | 0.36 | $ | 948,146 | 3,967 | 0.56 | ||||||||||||||||
Regular passbook savings |
244,848 | 413 | 0.22 | 246,178 | 535 | 0.29 | ||||||||||||||||||
Certificates of deposit |
2,025,921 | 37,173 | 2.45 | 2,657,762 | 63,949 | 3.21 | ||||||||||||||||||
Total deposits and accrued interest |
3,190,196 | 40,048 | 1.67 | 3,852,086 | 68,451 | 2.37 | ||||||||||||||||||
Other borrowed funds |
713,113 | 25,854 | 4.83 | 937,506 | 34,407 | 4.89 | ||||||||||||||||||
Total interest-bearing liabilities |
3,903,309 | 65,902 | 2.25 | 4,789,592 | 102,858 | 2.86 | ||||||||||||||||||
Non-interest-bearing liabilities |
42,374 | 37,716 | ||||||||||||||||||||||
Total liabilities |
3,945,683 | 4,827,308 | ||||||||||||||||||||||
Stockholders equity |
21,441 | 131,795 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 3,967,124 | $ | 4,959,103 | ||||||||||||||||||||
Net interest income/interest rate spread (5) |
$ | 63,321 | 2.35 | % | $ | 66,187 | 1.93 | % | ||||||||||||||||
Net interest-earning assets |
$ | (158,986 | ) | $ | (81,793 | ) | ||||||||||||||||||
Net interest margin (6) |
2.25 | % | 1.87 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities |
0.96 | 0.98 | ||||||||||||||||||||||
(1) | Annualized | |
(2) | For the purpose of these computations, non-accrual loans are included in the daily average loan amounts outstanding. | |
(3) | Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual status during the period indicated. | |
(4) | Average balances of securities available-for-sale are based on amortized cost. | |
(5) | Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities and is represented on a fully tax equivalent basis. | |
(6) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
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Non-Interest Income
Non-interest income decreased $4.0 million or 25.5% to $11.7 million and increased $2.8 million or
6.1% to $49.1 million for the three and nine months ended December 31, 2010, respectively, as
compared to $15.7 million and $46.2 million for the respective periods in 2009. The decrease for
the three-month period ended December 31, 2010 was primarily due to lower gains on sale of
investment securities of $4.6 million. In addition, loan servicing income decreased $1.5 million
due to increased amortization of mortgage servicing rights in the current period, service charges
on deposits decreased $1.1 million due to less fee income being collected as the result of a
decline in deposits, credit enhancement income decreased $177,000 and investment and insurance
commissions decreased $99,000 for the three-month period ended December 31, 2010, as compared to
the respective period in the prior
year. These decreases were partially offset by an increase in net gain on sale of loans of $2.8
million as a result of increased refinancing activity. In addition, other non-interest income
increased $331,000, net impairment losses recognized in earnings increased $183,000 and net gain on
sale of branches increased $100,000 due to the sale of eleven branches in Northwest Wisconsin in
the current year.
The increase for the nine-month period ended December 31, 2010 was primarily due to the increase in
net gain on sale of branches of $7.3 million as a result of the sale of 11 branches in Northwest
Wisconsin and the sale of four branches in Northeast Wisconsin in the current year. In addition,
net gain on sale of loans increased $894,000 due to an increase in refinancing activity, other
non-interest income increased $611,000 primarily due to increased lending fee income, net
impairment losses recognized in earnings decreased $383,000 and investment and insurance
commissions increased $24,000. These increases were partially offset by a decrease in service
charges on deposits of $2.2 million due to less fee income being collected as the result of a
decline in deposits, a decrease in other revenue from real estate operations of $2.0 million due to
the fact that we sold the majority of the real estate segment in September 2009, a decrease in net
gain on sale of investment securities of $1.4 million due to the repositioning of the investment
securities portfolio in the prior year, a decrease in loan servicing income of $449,000 due to
increased amortization of mortgage servicing rights in the current period and a decrease in credit
enhancement income of $384,000 for the nine-month period ended December 31, 2010, as compared to
the respective period in the prior year.
Non-Interest Expense
Non-interest expense decreased $13.1 million or 34.7% to $24.6 million and decreased $26.7 million
or 22.0% to $94.5 million for the three and nine months ended December 31, 2010, respectively, as
compared to $37.7 million and $121.1 million for the respective periods in 2009. The decrease for
the three-month period was primarily due to a decrease of $4.4 million in net expense from
foreclosed properties and repossessed assets due to a decline in the provision for real estate
owned (REO) losses. In addition, federal deposit insurance premiums decreased $2.9 due to a more
favorable FDIC risk rating, compensation expense decreased $2.0 million due to branch sales and
down-sizing, other non-interest expense decreased $711,000 primarily due to a decrease in lending
operations and appraisal fee expenses, occupancy expense decreased $506,000, furniture and
equipment expense decreased $316,000, marketing expense decreased $294,000, data processing expense
decreased $287,000, other professional fees decreased 240,000, other expenses from real estate
operations decreased $179,000 due to the fact that we sold the majority of the real estate segment
in September 2009 and legal services decreased $95,000 for the three months ended December 31,
2010, as compared to the same period in the prior year. These decreases were partially offset by a
recovery of mortgage servicing rights impairment of $1.2 million
due to changes in interest rates for the three months ended
December 31, 2010, as compared to the same period in the prior year.
The decrease for the nine-month period was primarily due to a decrease of $9.1 million in
compensation expense due to branch sales and staff reductions. In addition, federal deposit
insurance premiums decreased $5.4 million due to a special assessment in the prior year as well as
a more favorable FDIC riak rating, net expense from foreclosed property and repossessed assets
decreased $4.7 million due to a decline in the provision for REO losses, foreclosure cost
impairment decreased $3.7 million due to no new impairment in the current year, other expenses from
real estate operations decreased $3.3 million due to the fact that we sold the majority of the real
estate segment in September 2009, other non-interest expense decreased $1.3 million, occupancy
expense decreased $1.2 million, furniture and equipment expense decreased $955,000, marketing
expense decreased $592,000, data processing expense decreased $554,000 and other professional fees
decreased $291,000. These decreases were partially offset by an increase in legal services expense
of $2.8 million primarily due to higher foreclosure activity and a decrease in
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mortgage servicing
rights recovery of $1.6 million due to a change in interest
rates in
the current year for the nine months ended December 31, 2010, as compared to the same period in the
prior year.
Income Taxes
Income tax expense includes $14,000 of franchise taxes for the nine month period ended December 31,
2010. The effective tax rate was 0% and 0.06% for the three- and nine-month periods ended December
31, 2010 and 0.03% and 0% for the three and nine months ended December 31, 2009, respectively. A
full valuation allowance has been recorded on the net deferred tax asset due to the uncertainty of
the Corporation to create sufficient taxable income in the near future to fully utilize it.
FINANCIAL CONDITION
During the nine months ended December 31, 2010, the Corporations assets decreased by $835.5
million from $4.42 billion at March 31, 2010 to $3.58 billion at December 31, 2010. The majority
of this decrease was attributable to a decrease of $377.6 million in cash and cash equivalents, a
decrease of $549.9 million in loans receivable as well as a decrease of $22.0 million in accrued
interest and other assets, which were partially offset by a $113.6 million increase in investment
securities available for sale.
Total loans (including loans held for sale) decreased $549.9 million during the nine months ended
December 31, 2010. Activity for the period consisted of (i) sales of one to four family loans to
the Fannie Mae of $611.3 million, (ii) loans sold as part of the branch sales of $86.6 million,
(iii) principal repayments and other adjustments (the majority of which are undisbursed loan
proceeds) of $576.1 million, (iv) transfer to foreclosed properties and repossessed assets of $51.6
million and (v) originations and refinances of $775.8 million.
Investment securities (both available for sale and held to maturity) increased $113.6 million
during the nine months ended December 31, 2010 as a result of purchases of $615.5 million, which
were partially offset by sales and maturities of $448.0 million, principal repayments of $44.4
million and fair value adjustments and net amortization of $9.5 million in this period.
Investment securities are subject to inherent risks based upon the future performance of the
underlying collateral (i.e., mortgage loans) for these securities. Among these risks are
prepayment risk, interest rate risk and credit risk. Should general interest rate levels decline,
the mortgage-related securities portfolio would be subject to (i) prepayments as borrowers
typically would seek to obtain financing at lower rates, (ii) a decline in interest income received
on adjustable-rate mortgage-related securities, and (iii) an increase in fair value of fixed-rate
mortgage-related securities. Conversely, should general interest rate levels increase, the
mortgage-related securities portfolio would be subject to (i) a longer term to maturity as
borrowers would be less likely to prepay their loans, (ii) an increase in interest income received
on adjustable-rate mortgage-related securities, (iii) a decline in fair value of fixed-rate
mortgage-related securities, (iv) a decline in fair value of adjustable-rate mortgage-related
securities to an extent dependent upon the level of interest rate increases, the time period to the
next interest rate repricing date for the individual security and the applicable periodic (annual
and/or lifetime) cap which could limit the degree to which the individual security could reprice
within a given time period, and (v) should default rates and loss severities increase on the
underlying collateral of mortgage-related securities, the Corporation may experience credit losses
that need to be recognized in earnings as an other-than-temporary impairment.
Federal Home Loan Bank (FHLB) stock remained constant during the nine months ended December 31,
2010. The Corporation views its investment in the FHLB stock as a long-term investment.
Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery
of the par value rather than recognizing temporary declines in value. This treatment is consistent
with industry practice. The determination of whether a decline affects the ultimate recovery is
influenced by criteria such as: 1) the significance of the decline in net assets of the FHLBs as
compared to the capital stock amount and length of time a decline has persisted; 2) impact of
legislative and regulatory changes on the FHLB and 3) the liquidity position of the FHLB.
The FHLB of Chicago filed an SEC Form 10-Q on November 10, 2010, announcing its financial results
for its third quarter ended September 30, 2010. The FHLB of Chicago reported net income for the
third quarter of $117 million,
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compared to a net loss of $150 million for the same period in the
previous year. This $267 million increase in net income was due to a $176 million increase in
derivatives and hedging activities income and a $93 million reduction in the credit portion of
other-than-temporary impairment charges. Retained earnings at September 30, 2010 was $967 million,
or an increase of $259 million from December 31, 2009. The FHLB of Chicago reported that they are
in compliance with all of their regulatory capital requirements as of the filing date of their
10-Q. The FHLB Chicago is under a cease and desist order that precludes any capital stock
repurchases or redemptions without the approval of the OS Director. It did not pay any dividends
in 2009 or during the first three quarters of 2010. On February 1, 2011, the Corporation received
a notice from the FHLB of Chicago that its Board of Directors has approved a 10 basis point
dividend for the fourth quarter of 2010, subject to approval by their regulator. The Corporation
has concluded that its investment in the FHLB Chicago is not impaired as of this date. However,
this estimate could change in the near term by the following: 1) significant other than temporary
impairment losses are
incurred on mortgage-backed securities (MBSs) causing a significant decline in their regulatory
capital status; 2) the economic losses resulting from credit deterioration on MBSs increases
significantly and 3) capital preservation strategies being utilized by the FHLB become ineffective.
Foreclosed properties and repossessed assets increased $13.8 million to $69.2 million at December
31, 2010 from $55.4 million at March 31, 2010 due to (i) transfers in of $51.6 million and (ii)
capitalized improvements of $522,000. These increases were partially offset by (i) sales of $29.6
million, (ii) additional write downs of various properties of $6.8 million and (iii) payments
received of $2.0 million.
Net deferred tax assets were zero at December 31, 2010 and March 31, 2010 due to a valuation
allowance on the entire balance. The valuation allowance is necessary as the recovery of the net
deferred asset is not more likely than not. It is uncertain if the Corporation can generate taxable
income in the near future. An increase in the valuation allowance of $18.2 million was placed on
the deferred tax asset during the nine months ended December 31, 2010.
Total liabilities decreased $795.9 million during the nine months ended December 31, 2010. This
decrease was largely due to a $708.4 million decrease in deposits and accrued interest of which
$276.3 million was due to the branch sales and the remainder was due to deposit runoff and a $110.5
million decrease in other borrowed funds due to the payoff of FHLB advances offset by a $23.1
million increase in other liabilities. Brokered deposits totaled $92.2 million or approximately
3.2% of total deposits at December 31, 2010 and $173.5 million or approximately 4.9% of total
deposits at March 31, 2010, and primarily mature within one to five years.
Stockholders equity decreased $39.6 million during the nine months ended December 31, 2010 as a
net result of (i) comprehensive loss of $37.9 million and (ii) accrual of dividends on preferred
stock of $2.1 million. These decreases were partially offset by the issuance of shares for
management and benefit plans of $348,000.
REGULATORY DEVELOPMENTS
Temporary Liquidity Guarantee Program
In October 2008, the Secretary of the United States Department of the Treasury (Treasury) invoked
the systemic risk exception of the FDIC Improvement Act of 1991 and the FDIC announced the
Temporary Liquidity Guarantee Program (the TLGP). The TLGP provides a guarantee, through the
earlier of maturity or June 30, 2012, of certain senior unsecured debt issued by participating
Eligible Entities (including the Corporation) between October 14, 2008 and October 31, 2009. The
maximum amount of FDIC-guaranteed debt a participating Eligible Entity (including the Corporation)
may have outstanding is 125% of the entitys senior unsecured debt that was outstanding as of
September 30, 2008 that was scheduled to mature on or before October 31, 2009. The ability of
Eligible Entities (including the Corporation) to issue guaranteed debt under the TLGP expired on
October 31, 2009. As of October 31, 2009, the Corporation had no senior unsecured debt outstanding
under the TLGP. The Corporation and the Bank signed a master agreement with the FDIC on December
5, 2008 for issuance of bonds under the program. The Corporation does not have any unsecured debt,
thus must file for an exemption to be able to issue bonds under this program. The Bank is eligible
to issue up to $88 million as of December 31, 2010. As of December 31, 2010, the Bank had $60.0
million of bonds issued.
Another aspect of the TLGP, also established by the FDIC in October 2008, is the transaction
account guarantee program (TAG Program) under which the FDIC fully guaranteed all
non-interest-bearing transaction accounts until December 31, 2009, for FDIC-insured institutions
that agreed to participate in the program. The TAG Program applies to all personal and business
checking deposit accounts that do not earn interest at participating institutions. The TAG Program
was subsequently extended, until December 31, 2010, with an assessment of between 15 and 25 basis
points after January 1, 2010. The assessment depends upon an institutions risk profile and is
assessed quarterly on balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 for insured depository institutions that have not opted out of
this component of the TLGP. The Corporation opted to participate in this component of the TLPG.
The Dodd-Frank Act has extended unlimited deposit insurance to non-interest-bearing transaction
accounts until December 31, 2012.
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Emergency Economic Stabilization Act of 2008
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008
(EESA), giving Treasury authority to take certain actions to restore liquidity and stability to
the U.S. banking markets. Based upon its authority in the EESA, a number of programs to implement
EESA have been announced. Those programs include the following:
| Capital Purchase Program (CPP). Pursuant to this program, Treasury, on behalf of the US government, purchased preferred stock, along with warrants to purchase common stock, from certain financial institutions, including bank holding companies, savings and loan holding companies and banks or savings associations not controlled by a holding company. The investment has a dividend rate of 5% per year, until the fifth anniversary of Treasurys investment and a dividend of 9% thereafter. During the time Treasury holds securities issued pursuant to this program, participating financial institutions will be required to comply with certain provisions regarding executive compensation and corporate governance. Participation in CPP also imposes certain restrictions upon an institutions dividends to common shareholders and stock repurchase activities. The Corporation elected to participate in the CPP and received $110 million pursuant to the program. | |
| Temporary Liquidity Guarantee Program (TLGP). TLGP includes both (i) a debt guarantee component, whereby the FDIC will guarantee until June 30, 2012, the senior unsecured debt issued by eligible financial institutions between October 14, 2008 and October 31, 2009; and (ii) an account transaction guarantee component, whereby the FDIC will insure 100% of non-interest bearing deposit transaction accounts held at eligible financial institutions, such as payment processing accounts, payroll accounts and working capital accounts through December 31, 2009. The deadline for opting out of TLGP was December 5, 2008. The Corporation elected not to opt out of TLGP. | |
| Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDIC temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The EESA provides that the basic deposit insurance limit will return to $100,000 after December 31, 2013. The Dodd-Frank Act has made the $250,000 maximum permanent. |
The American Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into
law. Included among the many provisions in ARRA are restrictions affecting financial institutions
who are participants in CPP. ARRA provides that during the period in which any obligation under
CPP remains outstanding (other than obligations relating to outstanding warrants), CPP recipients
are subject to appropriate standards for executive compensation and corporate governance which were
set forth in an interim final rule regarding standards for Compensation and Corporate Governance,
issued by Treasury and effective on June 15, 2009 (the Interim Final Rule). Among the executive
compensation and corporate governance provisions included in ARRA and the Interim Final Rule are
the following:
an incentive compensation clawback provision to cover senior executive officers (defined
in this instance and below to mean the named executive officers for whom compensation disclosure
is provided in the Corporations proxy statement) and the next twenty most highly compensated
employees;
a prohibition on certain golden parachute payments to cover any payment related to a
departure for any reason (with limited exceptions) made to any senior executive officer (as defined
above) and the next five most highly compensated employees;
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a limitation on incentive compensation paid or accrued to the five most highly compensated
employees of the financial institution, subject to limited exceptions for pre-existing arrangements
set forth in written employment contracts executed on or prior to February 11, 2009, and certain
awards of restricted stock which may not exceed 1/3 of annual compensation, are subject to a two
year holding period and cannot be transferred until Treasurys preferred stock is redeemed in full;
a requirement that the Corporations chief executive officer and chief financial officer
provide in annual securities filings, a written certification of compliance with the executive
compensation and corporate governance provisions of the Interim Final Rule;
an obligation for the compensation committee of the board of directors to evaluate with the
Corporations chief risk officer certain compensation plans to ensure that such plans do not
encourage unnecessary or excessive risks or the manipulation of reported earnings;
a requirement that companies adopt a Corporation-wide policy regarding excessive or luxury
expenditures; and
a requirement that companies permit a separate, non-binding shareholder vote to approve the
compensation of executives.
ARRA also empowers Treasury with the authority to review bonus, retention, and other compensation
paid to senior executive officers that have received CPP assistance to determine if the
compensation was inconsistent with the purposes of ARRA or CPP, or otherwise contrary to the public
interest and, if so, seek to negotiate reimbursements. The provision of ARRA will apply to the
Corporation until it has redeemed the securities sold to Treasury under the CPP.
In addition, companies who have issued preferred stock to Treasury under CPP are now permitted to
redeem such investments at any time, subject to consultation with banking regulators. Upon such
redemption, the warrants may be immediately liquidated by Treasury.
Dodd-Frank Act
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act), which significantly changes the regulation of financial
institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting
large and small financial institutions alike, including several provisions that will profoundly
affect how community banks, thrifts, and smaller bank and thrift holding companies, such as the
Corporation, will be regulated in the future. Among other things, these provisions abolish the OTS
and transfer its functions to the other federal banking agencies, relax rules regarding interstate
branching, allow financial institutions to pay interest on business checking accounts, change the
scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift
holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection
as an independent entity within the Federal Reserve, which will be given the authority to
promulgate consumer protection regulations applicable to all entities offering consumer financial
services or products, including banks. Additionally, the Dodd-Frank Act includes a series of
provisions covering mortgage loan origination standards affecting, among other things, originator
compensation, minimum repayment standards, and pre-payments. The Dodd-Frank Act contains numerous
other provisions affecting financial institutions of all types, many of which may have an impact on
the operating environment of the Corporation in substantial and unpredictable ways. Consequently,
the Dodd-Frank Act is likely to affect our cost of doing business, it may limit or expand our
permissible activities, and it may affect the competitive balance within the financial services
industry and market areas. The nature and extent of future legislative and regulatory changes
affecting financial institutions, including as a result of the Dodd-Frank Act, is very
unpredictable at this time. The Corporations management is actively reviewing the provisions of
the Dodd-Frank Act, many of which are phased-in over the next several months and years, and
assessing its probable impact on the business, financial condition, and results of operations of
the Corporation. However, the ultimate effect of the Dodd-Frank Act on the financial services
industry in general, and the Corporation in particular, is uncertain at this time.
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OTS Order to Cease and Desist
On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease
and Desist (the Corporation Order and the Bank Order, respectively, and together, the Orders)
by the OTS.
The Corporation Order requires that the Corporation notify, and in certain cases receive the
permission of, the OTS prior to: (i) declaring, making or paying any dividends or other capital
distributions on its capital stock, including the repurchase or redemption of its capital stock;
(ii) incurring, issuing, renewing or rolling over any debt, increasing any current lines of credit
or guaranteeing the debt of any entity; (iii) making certain changes to its directors or senior
executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement
related to
compensation or benefits with any of its directors or senior executive officers; and (v) making any
golden parachute payments or prohibited indemnification payments. The Corporations board was also
required to develop and submit to the OTS a three-year cash flow plan by July 31, 2009, which must
be reviewed at least quarterly by the Corporations management and board for material deviations
between the cash flow plans projections and actual results (the Variance Analysis Report).
Lastly, within thirty days following the end of each quarter, the Corporation is required to
provide the OTS its Variance Analysis Report for that quarter. The Corporation has complied with
each of these requirements as of December 31, 2010.
The Bank Order requires that the Bank notify, or in certain cases receive the permission of, the
OTS prior to (i) increasing its total assets in any quarter in excess of an amount equal to net
interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or
renewing any brokered deposits; (iii) making certain changes to its directors or senior executive
officers; (iv) entering into, renewing, extending or revising any contractual arrangement related
to compensation or benefits with any of its directors or senior executive officers; (v) making any
golden parachute or prohibited indemnification payments; (vi) paying dividends or making other
capital distributions on its capital stock; (vii) entering into certain transactions with
affiliates; and (viii) entering into third-party contracts outside the normal course of business.
The Orders also required that the Bank meet and maintain both a core capital ratio equal to or
greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent.
The Bank must also submit, and has submitted, to the OTS, within prescribed time periods, a written
capital contingency plan, a problem asset plan, a revised business plan, and an implementation plan
resulting from a review of commercial lending practices. The Orders also required the Bank to
review its current liquidity management policy and the adequacy of its allowance for loan and lease
losses.
At March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, the Bank had a core
capital ratio of 3.73%, 4.08%, 4.36% and 4.43%, respectively, and a total risk-based capital ratio
of 7.32%, 7.63%, 8.14% and 8.37%, respectively, each below the required capital ratios set forth
above All customer deposits remain fully insured to the highest limits set by the FDIC.
The description of each of the Orders and the corresponding Stipulation and Consent to Issuance of
Order to Cease and Desist were previously filed attached as Exhibits to the Corporations Annual
Report on Form 10-K for the fiscal year ended March 31, 2009.
Capital Restoration Plan
In July, 2010, the Bank received conditional approval of its Capital Restoration Plan (the Plan)
from the OTS. In conjunction with this approval, the Board of Directors of the Corporation executed
a Stipulation and Consent to a Prompt Corrective Action Directive (the Directive) dated August
31, 2010, with the OTS. The Plan included two sets of assumptions for continuing to improve the
Banks capital levels, one based on obtaining capital from an outside source and one which reflects
the results of the Banks ongoing initiatives in the absence of an external capital infusion. An
essential element for the conditional approval of the Plan was the Banks ability to attain
adequately capitalized (8.0% or greater Total Risk Based Capital) status as of July 31, 2010.
Based on the Banks internal financial reporting, a Total Risk Based Capital level of 8.05% was
achieved as of July 31, 2010. As of December 31, 2010, Total Risk-Based capital was 8.37%.
In addition to requiring compliance with the Plan, the Directive imposes certain other operating
requirements and restrictions, most of which were also part of the voluntary Orders entered into
with the OTS in June 2009.
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RISK MANAGEMENT
The Bank encounters risk as part of the normal course of our business and designs risk management
processes to help manage these risks. This Risk Management section describes the Banks risk
management philosophy, principles, governance and various aspects of its risk management program.
Risk Management Philosophy
The Banks risk management philosophy is to manage to an overall level of risk while still allowing
it to capture opportunities and optimize shareholder value. However, due to the overall state of
the economy and the elevated risk in the loan portfolio, its risk profile does not currently meet
our desired risk level. The Bank is working toward reducing the overall risk level to a more
desired risk profile.
Risk Management Principles
Risk management is not about eliminating risks, but about identifying and accepting risks and then
working to effectively manage them so as to optimize shareholder value. It includes, but is not
limited to the following:
| Designed to only take risks consistent with the Banks strategy and within its capability to manage, | ||
| Practice disciplined capital and liquidity management, | ||
| Help ensure that risks and earnings volatility are appropriately understood and measured, | ||
| Avoid excessive concentrations, and | ||
| Help support external stakeholder confidence. |
Although the Board as a whole is responsible primarily for oversight of risk management, committees
of the Board may provide oversight to specific areas of risk with respect to the level of risk and
risk management structure. The Bank uses management level risk committees to help ensure that
business decisions are executed within our desired risk profile. Management provides oversight for
the establishment and implementation of new risk management initiatives, review risk profiles and
discuss key risk issues. In 2009, the Bank hired a new Chief Risk Officer in charge of overseeing
credit risk management. Our internal audit department performs an independent assessment of the
internal control environment and plays a critical role in risk management, testing the operation of
the internal control system and reporting findings to management and to the Audit Committee of the
Board.
Credit Risk Management
Credit risk represents the possibility that a customer, counterparty or issuer may not perform in
accordance with contractual terms. Credit risk is inherent in the financial services business and
results from extending credit to customers, purchasing investment securities and entering into
certain guarantee contracts. Credit risk is one of the most significant risks facing the Bank.
In addition to credit policies and procedures and setting portfolio objectives for the level of
credit risk, the Bank has established guidelines for problem loans, acceptable levels of total
borrower exposure and other credit measures. In 2010 and fiscal year-to-date 2011, management has
continued to focus on loss mitigation and maximization of recoveries in the Banks non-performing
assets portfolios. Over time, the Bank will return to management of portfolio returns through
discrete portfolio investments within approved risk tolerances.
The Bank seeks to achieve credit portfolio objectives by maintaining a customer base that is
diverse in borrower exposure and industry types. Corporate Credit personnel are responsible for
loan underwriting and approval processes to help ensure that newly approved loans meet policy and
portfolio objectives.
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The Risk Management group is responsible for monitoring credit risk. Internal Audit also provides
an independent assessment of the effectiveness of the credit risk management process. The Bank also
manages credit risk in accordance with regulatory guidance.
Non-Performing Loans
The composition of non-performing loans is summarized as follows for the dates indicated:
December 31, 2010 | March 31, 2010 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||
Non- | Performing | Percent of | Non- | Performing | Percent of | |||||||||||||||||||
Performing | Loans | Total Loans | Performing | Loans | Total Loans | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Single-family residential |
$ | 74,646 | 22.3 | % | 2.62 | % | $ | 52,765 | 13.2 | % | 1.54 | % | ||||||||||||
Multi-family residential |
53,516 | 16.0 | % | 1.88 | % | 60,485 | 15.1 | % | 1.76 | % | ||||||||||||||
Commercial real estate |
102,139 | 30.6 | % | 3.58 | % | 131,730 | 32.9 | % | 3.83 | % | ||||||||||||||
Construction and land |
60,103 | 18.0 | % | 2.11 | % | 97,240 | 24.3 | % | 2.83 | % | ||||||||||||||
Consumer |
7,223 | 2.2 | % | 0.25 | % | 5,154 | 1.3 | % | 0.15 | % | ||||||||||||||
Education |
24,011 | 7.2 | % | 0.84 | % | 30,864 | 7.7 | % | 0.90 | % | ||||||||||||||
Commercial business |
12,485 | 3.7 | % | 0.43 | % | 21,698 | 5.4 | % | 0.63 | % | ||||||||||||||
Total Non-Performing Loans |
$ | 334,123 | 100.0 | % | 11.72 | % | $ | 399,936 | 100.0 | % | 11.64 | % | ||||||||||||
The following is a summary of non-performing loan activity for the nine months ended December
31, 2010 (in thousands):
Non-performing | ||||||||||||||||||||||||||||||||||||
Non-performing | Transferred | loan balance | Remaining | |||||||||||||||||||||||||||||||||
loan balance | to Accrual | Transferred | December 31, | balance of | ALLL | |||||||||||||||||||||||||||||||
Loan Category | April 1, 2010 | Additions | Status | to OREO | Paid Down | Charged Off | 2010 | loans | Allocated | |||||||||||||||||||||||||||
Single-family residential |
$ | 52,765 | $ | 71,447 | $ | (24,213 | ) | $ | (8,990 | ) | $ | (5,473 | ) | $ | (10,890 | ) | $ | 74,646 | $ | 614,598 | $ | 25,095 | ||||||||||||||
Multi-family residential |
60,485 | 36,369 | (25,147 | ) | (2,132 | ) | (8,289 | ) | (7,770 | ) | 53,516 | 466,807 | 21,745 | |||||||||||||||||||||||
Commercial real estate |
131,730 | 57,585 | (33,775 | ) | (15,639 | ) | (13,272 | ) | (24,490 | ) | 102,139 | 580,078 | 61,730 | |||||||||||||||||||||||
Construction and land |
97,240 | 26,316 | (19,325 | ) | (12,450 | ) | (19,243 | ) | (12,435 | ) | 60,103 | 202,263 | 21,040 | |||||||||||||||||||||||
Consumer |
5,154 | 7,369 | (2,713 | ) | (191 | ) | (727 | ) | (1,669 | ) | 7,223 | 293,087 | 3,484 | |||||||||||||||||||||||
Education |
30,864 | | | | (6,853 | ) | | 24,011 | 262,653 | 314 | ||||||||||||||||||||||||||
Commercial business |
21,698 | 13,960 | (10,602 | ) | (78 | ) | (6,850 | ) | (5,643 | ) | 12,485 | 96,540 | 24,030 | |||||||||||||||||||||||
Total |
$ | 399,936 | $ | 213,046 | $ | (115,775 | ) | $ | (39,480 | ) | $ | (60,707 | ) | $ | (62,897 | ) | $ | 334,123 | $ | 2,516,026 | $ | 157,438 | ||||||||||||||
Non-performing loans (consisting of loans past due more than 90 days, loans less than 90 days
delinquent but placed on non-accrual status due to anticipated probable loss and non-accrual
troubled debt restructurings) decreased $65.8 million during the nine months ended December 31,
2010. Non-performing assets decreased $52.0 million to $403.4 million at December 31, 2010 from
$455.4 million at March 31, 2010 and increased as a percentage of total assets to 11.26% from
10.31% at such dates, respectively.
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The interest income that would have been recorded during the nine months ended December 31, 2010 if
the Banks non-performing loans at the end of the period had been current in accordance with their
terms during the period was $14.3 million. The amount of interest income attributable to these
loans and included in interest income during the nine months ended December 31, 2010 was $6.6
million.
Non-Performing Assets
The composition of non-performing assets is summarized as follows for the dates indicated:
At December 31, | At March 31, | |||||||
2010 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Total non-accrual loans |
$ | 324,363 | $ | 355,358 | ||||
Troubled debt restructurings non-accrual (2) |
9,760 | 44,578 | ||||||
Other real estate owned (OREO) |
69,241 | 55,436 | ||||||
Total non-performing assets |
$ | 403,364 | $ | 455,372 | ||||
Total non-performing loans to total loans (1) |
11.72 | % | 11.64 | % | ||||
Total non-performing assets to total assets |
11.26 | 10.31 | ||||||
Allowance for loan losses to total loans (1) |
5.52 | 5.23 | ||||||
Allowance for loan losses to total non-performing loans |
47.12 | 44.92 | ||||||
Allowance for loan and foreclosure losses to total non-performing assets |
42.59 | 43.03 |
(1) | Total loans are gross loans receivable before the reduction for loans in process, unearned interest and loan fees and the allowance from loans losses. | |
(2) | Troubled debt restructurings non-accrual represent non-accrual loans that were modified in a troubled debt restructuring less than six months prior to the period end date or have not performed in accordance with the modified terms for at least six months. |
Loans modified in a troubled debt restructuring due to rate or term concessions that are
currently on non-accrual status will remain on non-accrual status for a period of at least six
months. If after six months, or a period sufficient to demonstrate the willingness and ability of
the borrower to perform under the modified terms, the borrower has made payments in accordance with
the modified terms, the loan is returned to accrual status but retains its status as a troubled
debt restructuring. The designation as a troubled debt restructuring is removed in years after the
restructuring if both of the following conditions exist: (a) the restructuring agreement specifies
an interest rate equal to or greater than the rate that the creditor was willing to accept at the
time of restructuring for a new loan with comparable risk and (b) the loan is not impaired based on
the terms specified by the restructuring agreement.
The decrease in loans considered troubled debt restructurings non-accrual of $34.8 million to
$9.8 million at December 31, 2010, from $44.6 million at March 31, 2010 is a result of a
significant loan relationship whose restructuring term ended or moved to REO. As time passes and
borrowers continue to perform in accordance with the restructured loan terms, management expects a
portion of this balance to be returned to accrual status.
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The following is a summary of non-performing asset activity for the nine months ended December 31,
2010 (in thousands):
Past due 90 days | ||||||||||||||||||||
and Still | Total Non- | Other Real | Total Non- | |||||||||||||||||
Accruing | performing | Estate Owned | performing | |||||||||||||||||
Non-accrual | Interest | Loans | (OREO) | Assets | ||||||||||||||||
Balance at April 1, 2010 |
$ | 399,936 | $ | | $ | 399,936 | $ | 55,436 | $ | 455,372 | ||||||||||
Additions |
213,046 | | 213,046 | 12,637 | 225,683 | |||||||||||||||
Transfers: |
| |||||||||||||||||||
Nonaccrual to OREO |
(39,480 | ) | | (39,480 | ) | 39,480 | | |||||||||||||
Returned to accrual status |
(115,775 | ) | | (115,775 | ) | | (115,775 | ) | ||||||||||||
Sales |
| | | (29,592 | ) | (29,592 | ) | |||||||||||||
Charge-offs/Loss |
(62,897 | ) | | (62,897 | ) | (6,763 | ) | (69,660 | ) | |||||||||||
Payments |
(60,707 | ) | | (60,707 | ) | (1,957 | ) | (62,664 | ) | |||||||||||
Balance at December 31, 2010 |
$ | 334,123 | $ | | $ | 334,123 | $ | 69,241 | $ | 403,364 | ||||||||||
Loan Delinquencies Less than 90 Days
The following table sets forth information relating to the Corporations past due loans that were
less than 90 days delinquent at the dates indicated.
At December 31, | At March 31, | |||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(In Thousands) | ||||||||||||||||
30 to 59 days |
$ | 47,004 | $ | 64,593 | $ | 64,862 | $ | 66,617 | ||||||||
60 to 89 days |
21,942 | 60,369 | 29,858 | 12,928 | ||||||||||||
Total |
$ | 68,946 | $ | 124,962 | $ | 94,720 | $ | 79,545 | ||||||||
Loans delinquent less than 90 days decreased $38.1 million to $68.9 million at December 31,
2010 from $107.0 million at March 31, 2010 as a result of increased monitoring and loss mitigation
efforts. Delinquencies have begun to stabilize.
Impaired Loans
At December 31, 2010, the Corporation has identified $422.9 million of loans as impaired which
includes performing troubled debt restructurings. At March 31, 2010, impaired loans were $479.8
million. A loan is identified as impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according to the contractual terms
of the loan agreement and thus are placed on non-accrual status. The following table presents
loans individually evaluated for impairment by class of loans as of December 31, 2010 (in
thousands):
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Average | Interest | |||||||||||||||||||
Carrying | Unpaid Principal | Associated | Carrying | Income | ||||||||||||||||
Amount | Balance | Allowance | Amount | Recognized | ||||||||||||||||
With no specific allowance
recorded: |
||||||||||||||||||||
Residential |
$ | 29,405 | $ | 29,405 | $ | N/A | $ | 34,781 | $ | 401 | ||||||||||
Commercial and Industrial |
7,213 | 7,213 | N/A | 12,063 | 265 | |||||||||||||||
Land and Construction |
43,076 | 43,076 | N/A | 49,800 | 255 | |||||||||||||||
Multi-Family |
36,740 | 36,740 | N/A | 41,665 | 253 | |||||||||||||||
Retail/Office |
37,289 | 37,289 | N/A | 45,388 | 385 | |||||||||||||||
Other Commercial Real Estate |
32,480 | 32,480 | N/A | 39,805 | 572 | |||||||||||||||
Education |
24,011 | 24,011 | N/A | 28,582 | | |||||||||||||||
Other Consumer |
405 | 405 | N/A | 841 | 39 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Residential |
34,652 | 44,467 | 9,815 | 44,031 | 672 | |||||||||||||||
Commercial and Industrial |
9,076 | 14,235 | 5,159 | 14,349 | 341 | |||||||||||||||
Land and Construction |
25,750 | 33,414 | 7,664 | 34,147 | 287 | |||||||||||||||
Multi-Family |
21,914 | 29,747 | 7,833 | 30,009 | 514 | |||||||||||||||
Retail/Office |
37,033 | 48,341 | 11,308 | 48,726 | 1,463 | |||||||||||||||
Other Commercial Real Estate |
28,558 | 35,188 | 6,630 | 35,467 | 1,036 | |||||||||||||||
Other Consumer |
6,479 | 6,907 | 428 | 6,967 | 122 | |||||||||||||||
Total |
||||||||||||||||||||
Residential |
64,057 | 73,872 | 9,815 | 78,812 | 1,073 | |||||||||||||||
Commercial and Industrial |
16,289 | 21,448 | 5,159 | 26,412 | 606 | |||||||||||||||
Land and Construction |
68,826 | 76,490 | 7,664 | 83,947 | 542 | |||||||||||||||
Multi-Family |
58,654 | 66,487 | 7,833 | 71,674 | 767 | |||||||||||||||
Retail/Office |
74,322 | 85,630 | 11,308 | 94,114 | 1,848 | |||||||||||||||
Other Commercial Real Estate |
61,038 | 67,668 | 6,630 | 75,272 | 1,608 | |||||||||||||||
Education |
24,011 | 24,011 | | 28,582 | | |||||||||||||||
Other Consumer |
6,884 | 7,312 | 428 | 7,808 | 161 | |||||||||||||||
Total Impaired Loans |
$ | 374,081 | $ | 422,918 | $ | 48,837 | $ | 466,621 | $ | 6,605 | ||||||||||
The carrying amount above represents the unpaid principal balance less the associated
allowance. The average carrying amount is the annual average calculated on the ending quarterly
balances. The interest income recognized is the fiscal year to date interest income recognized on
a cash basis.
The following is additional information regarding impaired loans.
At December 31, | At March 31, | |||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(In Thousands) | ||||||||||||||||
Loans and
troubled debt restructurings on non-accrual status |
$ | 334,123 | $ | 399,936 | $ | 227,814 | $ | 104,058 | ||||||||
Troubled debt restructurings accrual |
$ | 88,795 | $ | 79,891 | $ | | $ | | ||||||||
Troubled debt restructurings non-accrual (1) |
$ | 9,760 | $ | 44,578 | $ | 61,460 | $ | 400 | ||||||||
Loans past due ninety days or more and
still accruing |
$ | | $ | | $ | | $ | |
(1) | Troubled debt restructurings non-accrual are included in the total loans and troubled debt restructurings on non-accrual status above |
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Allowances for Loan and Lease Losses
Like all financial institutions, we must maintain an adequate allowance for loan losses. The
allowance for loan losses is established through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when we believe that repayment of the
principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance
is an amount that we believe will be adequate to absorb probable losses on existing loans that may
become uncollectible, based on evaluation of the collectability of loans and prior credit loss
experience, together with the other factors discussed in the critical accounting policies.
Our allowance for loan loss methodology incorporates several quantitative and qualitative risk
factors used to establish the appropriate allowance for loan loss at each reporting date.
Quantitative factors include our historical loss experience, peer group experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, other factors, and
information about individual loans including the borrowers sensitivity to interest rate movements.
Qualitative factors include the economic condition of our operating markets and the state of
certain industries. Specific changes in the risk factors are based on perceived risk of similar
groups of loans classified by collateral type, purpose and terms. Statistics on local trends,
peers, and an internal six quarter loss history are also incorporated into the allowance. Due to
the credit concentration of our loan portfolio in real estate secured loans, the value of
collateral is heavily dependent on real estate values in Wisconsin and surrounding states. While
management uses the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other conditions. In
addition, the OTS, as an integral part of their examination processes, periodically reviews the
Banks allowance for loan losses, and may recommend adjustments to the allowance. Management
periodically reviews the assumptions and formula used in determining the allowance and makes
adjustments if required to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components even though the entire allowance is
available to cover losses on any loan. The specific allowance relates to impaired loans. For such
loans, an allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan are lower than the carrying value of that loan,
pursuant to ASC 450-20 Loss Contingencies. The general allowance covers non-impaired loans and is
based on historical loss experience adjusted for the various qualitative and quantitative factors
listed above, pursuant to ASC 450-20 and other related regulatory guidance. Loans graded
substandard and below are individually examined closely to determine the appropriate loan loss
reserve. The Bank maintains a reserve for unfunded commitments which is classified in other
liabilities.
The following table summarizes the activity in our allowance for loan losses for the period
indicated.
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars In Thousands) | (Dollars In Thousands) | |||||||||||||||
Allowance at beginning of period |
$ | 156,186 | $ | 170,664 | $ | 179,644 | $ | 137,165 | ||||||||
Provision |
21,691 | 10,456 | 40,213 | 141,756 | ||||||||||||
Charge-offs |
(23,467 | ) | (17,131 | ) | (68,257 | ) | (116,792 | ) | ||||||||
Recoveries |
3,028 | 505 | 5,838 | 2,365 | ||||||||||||
Allowance at end of period |
$ | 157,438 | $ | 164,494 | $ | 157,438 | $ | 164,494 | ||||||||
Total loan charge-offs were $23.5 million and $17.1 million for the three months ending
December 31, 2010 and 2009, respectively. Total loan charge-offs for the three months ended
December 31, 2010 increased $6.4 million from the prior fiscal year, while the charge-offs for the
nine months ended December 31, 2010 decreased $48.5 million. Recoveries increased $2.5 million
during the three months ended December 31, 2010 from the prior fiscal year.
The provision for loan losses increased $11.2 million to $21.7 million for the three months ending
December 31, 2010 compared to $10.5 million for the three months ended December 31, 2009. The
increase in the provision for
loan losses is the result of managements ongoing evaluation of the loan portfolio. Management considered the
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change in non-performing loans to total loans to 11.72% at December 31, 2010 from 11.64% at
March 31, 2010 as well as the change in total non-performing assets to total assets to 11.26% at
December 31, 2010 from 10.31% at March 31, 2010 in determining the provision for loan losses.
Although some ratios have increased, these increases are primarily a result of a decrease in the
loan portfolio and not an increase in the amount of non-performing loans. The amount of
non-performing loans have decreased in the current quarter and fiscal year to date.
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 (in
thousands):
Commercial | Commercial | |||||||||||||||||||
Residential | and Industrial | Real Estate | Consumer | Total | ||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Ending balance |
$ | 24,554 | $ | 15,461 | $ | 113,627 | $ | 3,796 | $ | 157,438 | ||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Ending allowance balance attributable to
loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 9,815 | $ | 5,159 | $ | 33,434 | $ | 428 | $ | 48,837 | ||||||||||
Collectively evaluated for impairment |
14,738 | 10,302 | 80,193 | 3,368 | 108,602 | |||||||||||||||
Total ending allowance balance |
$ | 24,554 | $ | 15,461 | $ | 113,627 | $ | 3,796 | $ | 157,438 | ||||||||||
Loans: |
||||||||||||||||||||
Loans individually evaluated |
$ | 73,872 | $ | 21,448 | $ | 296,275 | $ | 31,323 | $ | 422,918 | ||||||||||
Loans collectively evaluated |
611,664 | 91,120 | 1,168,529 | 555,918 | 2,427,231 | |||||||||||||||
Total ending gross loans balance |
$ | 685,536 | $ | 112,568 | $ | 1,464,804 | $ | 587,241 | $ | 2,850,149 | ||||||||||
The allowance process is analyzed regularly, with modifications made if needed, and those
results are reported four times per year to the Banks Board of Directors. Although management
believes that the December 31, 2010 allowance for loan losses is adequate based upon the current
evaluation of loan delinquencies, non-performing assets, charge-off trends, economic conditions and
other factors, there can be no assurance that future adjustments to the allowance will not be
necessary. Management also continues to pursue all practical and legal methods of collection,
repossession and disposal, and adheres to high underwriting standards in the origination process in
order to continue to improve asset quality. Determination as to the classification of assets and
the amount of valuation allowances is subject to review by the OTS, which can recommend the
establishment of additional general or specific loss allowances.
Foreclosed Properties and Repossessed Assets
Foreclosed properties and repossessed assets (also known as other real estate owned or OREO)
increased $13.8 million during the nine months ended December 31, 2010. Individual properties
included in OREO at December 31, 2010 with a recorded balance in excess of $1 million are listed
below:
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Carrying | ||||||
Value | ||||||
Description | Location | (in thousands) | ||||
Vacant land |
Illinois | $ | 6,375 | |||
Condo units with additional land |
Central Wisconsin | 6,126 | ||||
Condominium and retail complex |
Southeast Wisconsin | 4,401 | ||||
Retail/office building |
Central Wisconsin | 3,433 | ||||
Commercial building and vacant land |
Southern Wisconsin | 2,725 | ||||
Condo units |
Northwest Wisconsin | 2,487 | ||||
Condo units |
Minnesota | 2,069 | ||||
Single family and vacant land |
South Central Wisconsin | 1,950 | ||||
Commercial building |
Central Wisconsin | 1,820 | ||||
Community Based Residential Facility |
Northeast Wisconsin | 1,743 | ||||
Vacant land |
Southeast Wisconsin | 1,530 | ||||
Commercial building |
Southeast Wisconsin | 1,008 | ||||
Other properties individually less than $1
million |
33,574 | |||||
$ | 69,241 | |||||
Certain properties were transferred to OREO at a value that was based upon a discounted cash
flow of the property upon completion of the project. Factors that were considered include the cost
to complete a project, absorption rates and projected sales of units. The appraisal received at
the time the loan was made is no longer considered applicable and therefore the properties are
analyzed on a periodic basis to determine the current net realizable value.
Foreclosed properties are recorded at fair value with charge-offs, if any, charged to the allowance
for loan losses upon transfer to foreclosed property. Subsequent decreases in the valuation of
foreclosed properties are recorded as a write-down of the foreclosed property with a corresponding
charge to expense or to the valuation allowance. The fair value is primarily based on appraisals,
discounted cash flow analysis (the majority of which is based on current occupancy and lease rates)
and pending offers. On a quarterly basis, the Corporation reviews its carrying values of its OREO
properties and makes appropriate adjustments based upon updated appraisals or market analysis
including recent sales or broker opinion. For appraisals received over one year ago, management
relies on broker and market analysis.
Liquidity Risk Management
Liquidity risk is the risk of potential loss if the Corporation were unable to meet its funding
requirements at a reasonable cost. The Corproration manages liquidity risk at the bank and holding
company to help ensure that it can obtain cost-effective funding to meet current and future
obligations.
The largest source of liquidity on a consolidated basis is the deposit base that comes from retail
and corporate banking businesses. Other borrowed funds come from a diverse mix of short and
long-term funding sources. Liquid assets and unused borrowing capacity from a number of sources are
also available to maintain liquidity position.
Liquidity and Capital Resources
On an unconsolidated basis, the Corporations sources of funds include dividends from its
subsidiaries, including the Bank, interest on its investments and returns on its real estate held
for sale. As a condition of the Cease and Desist Order with the OTS and the receipt of funding
from Treasury through the CPP, the Bank is currently not allowed to pay dividends to the
Corporation. The Banks primary sources of funds are payments on loans and securities, deposits
from retail and wholesale sources, FHLB advances and other borrowings. The Bank is currently
prohibited from obtaining new brokered CDs per the terms and conditions of the Cease and Desist
Order. It has also been granted access to the Fed fund line with the Federal Reserve Bank of
Chicagos discount window in 2010. In addition as of December 31, 2010, the Corporation had
outstanding borrowings from the FHLB of $500.8 million, out of our maximum borrowing capacity of
$800.0 million, from the FHLB at this time.
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On January 30, 2009, as part of Treasurys CPP, the Corporation entered into a Letter Agreement
with Treasury. Pursuant to the Securities Purchase Agreement Standard Terms (the Securities
Purchase Agreement) the Corporation issued the UST 110,000 shares of the Corporations Fixed Rate
Cumulative Perpetual Preferred Stock, Series B (the Preferred Stock), having a liquidation amount
per share of $1,000, for a total purchase price of $110,000,000. The Preferred Stock will pay
cumulative compounding dividends at a rate of 5% per year for the first five years following
issuance and 9% per year thereafter. The Corporation has deferred the payment of dividends during
the quarters ending June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30,
2010, September 30, 2010 and December 31, 2010. Because the Corporation deferred the quarterly
dividend payment six times, the Corporations Board must, according to its Articles of
Incorporation, as amended pursuant to the Corporations participation in CPP, automatically expand
by two members and Treasury (or the then current holder of the preferred stock) may elect two
directors at the next annual meeting and at every subsequent annual meeting
until the dividend is paid in full. As of the date of this filing, Treasury has not appointed any
directors. Instead, Treasury has an observer present at quarterly board meetings. The Corporation
may not redeem the Preferred Stock during the first three years following issuance except with the
proceeds from one or more qualified equity offerings. After three years, the Corporation may redeem
shares of the Preferred Stock for the per share liquidation amount of $1,000 plus any accrued and
unpaid dividends.
As long as any Preferred Stock is outstanding, the Corporation may pay dividends on its Common
Stock, $.10 par value per share (the Common Stock), and redeem or repurchase its Common Stock,
provided that all accrued and unpaid dividends for all past dividend periods on the Preferred Stock
are fully paid. Prior to the third anniversary of the Treasurys purchase of the Preferred Stock,
unless Preferred Stock has been redeemed or the Treasury has transferred all of the Preferred Stock
to third parties, the consent of the Treasury will be required for the Corporation to increase its
Common Stock dividend or repurchase its Common Stock or other equity or capital securities, other
than in connection with benefit plans consistent with past practice and certain other circumstances
specified in the Securities Purchase Agreement. The Preferred Stock will be non-voting except for
class voting rights on matters that would adversely affect the rights of the holders of the
Preferred Stock.
As a condition to participating in the CPP, the Corporation issued and sold to the Treasury a
warrant (the Warrant) to purchase up to 7,399,103 shares of the Corporations Common Stock, at an
initial per share exercise price of $2.23, for an aggregate purchase price of approximately
$16,500,000. The term of the Warrant is ten years. Exercise of the Warrant was subject to the
receipt by the Corporation of shareholder approval which was received at the 2009 annual meeting of
shareholders. The Warrant provides for the adjustment of the exercise price should the Corporation
not receive shareholder approval, as well as customary anti-dilution provisions. Pursuant to the
Securities Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to
any shares of Common Stock issued upon exercise of the Warrant.
The terms of the Treasurys purchase of the preferred securities include certain restrictions on
certain forms of executive compensation and limits on the tax deductibility of compensation we pay
to executive management. The Corporation invested the proceeds of the sale of Preferred Stock and
Warrant in the Bank as Tier 1 capital.
At December 31, 2010, the Bank had outstanding commitments to originate loans of $10.1 million and
commitments to extend funds to, or on behalf of, customers pursuant to lines and letters of credit
of $191.7 million. Scheduled maturities of certificates of deposit for the Bank during the twelve
months following December 31, 2010 amounted to $1.47 billion. Scheduled maturities of borrowings
during the same period totaled $143.3 million for the Bank and $124.8 million for the Corporation.
Management believes adequate resources are available to fund all Bank commitments to the extent
required. For more information regarding the Corporations borrowings, see Credit Agreement
section below.
The Corporation previously participated in the Mortgage Partnership Finance Program of the FHLB of
Chicago (MPF Program). Pursuant to the credit enhancement feature of the MPF Program, the
Corporation has retained a secondary credit loss exposure in the amount of $21.6 million at
December 31, 2010 related to approximately $647.4 million of residential mortgage loans that the
Corporation has originated as agent for the FHLB. Under the credit enhancement, the FHLB is liable
for losses on loans up to one percent of the original delivered loan balances in each pool. The
Corporation is then liable for losses over and above the first position up to a contractually
agreed-upon maximum amount in each pool that was delivered to the Program. The Corporation receives
a monthly fee for
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this credit enhancement obligation based on the outstanding loan balances. Based
on historical experience, the Corporation does not anticipate that any credit losses through the
MPF Program will be incurred under the credit enhancement obligation. The MPF Program was
discontinued in 2008 in its present format and the Corporation no longer funds loans through the
MPF Program.
The Bank has entered into agreements with certain brokers that will provide deposits obtained from
their customers at specified interest rates for an identified fee, or so called brokered
deposits. At December 31, 2010, the Bank had $92.2 million of brokered deposits. At December 31,
2010, the Bank was under a Cease and Desist Order with the OTS which limits the Banks ability to
accept, renew or roll over brokered deposits without prior approval of the OTS.
Under federal law and regulation, the Bank is required to meet certain tangible, core and
risk-based capital requirements. Tangible capital primarily consists of stockholders equity minus
certain intangible assets. Core capital primarily consists of tangible capital plus qualifying
intangible assets. The risk-based capital requirements presently address credit risk related to
both recorded and off-balance sheet commitments and obligations. The OTS requirement for the core
capital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all but the most
highly-rated financial institutions.
The Cease and Desist Orders also required no later than December 31, 2009, that the Bank meet and
maintain both a core capital ratio equal to or greater than 8% and a total risk-based capital ratio
equal to or greater than 12%. The Bank was required to submit to the OTS, and has submitted, a
written capital contingency plan, a problem asset plan, a revised business plan, and an
implementation plan resulting from a review of commercial lending practices. The Orders also
required the Bank to review its current liquidity management policy and the adequacy of its
allowance for loan and lease losses. The Bank has completed these reviews.
At March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, the Bank had a core
capital ratio of 3.73%, 4.08%, 4.36% and 4.43%, respectively, and a total risk-based capital ratio
of 7.32%, 7.63%, 8.14% and 8.37%, respectively, each below the required capital ratios set forth
above. As a result, the OTS may take additional significant regulatory action against the Bank and
Corporation which could, among other things, materially adversely affect the Corporations
shareholders. All customer deposits remain fully insured to the highest limits set by the FDIC.
The OTS may grant extensions to the timelines established by the Orders.
Our ability to meet our short-term liquidity and capital resource requirements may be subject to
our ability to obtain additional debt financing and equity capital. We may increase our capital
resources through offerings of equity securities (possibly including common shares and one or more
classes of preferred shares), commercial paper, medium-term notes, securitization transactions
structured as secured financings, and senior or subordinated notes.
The following summarizes the Banks capital levels and ratios and the levels and ratios required by
the OTS at December 31, 2010 and March 31, 2010:
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Minimum Required | ||||||||||||||||||||||||
Minimum Required | to be Well | |||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Actual | Adequacy Purposes | OTS Requirements | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
At December 31, 2010 |
||||||||||||||||||||||||
Tier 1 capital (to adjusted tangible assets) |
$ | 159,730 | 4.43 | % | $ | 108,216 | 3.00 | % | $ | 180,360 | 5.00 | % | ||||||||||||
Risk-based capital (to risk-based assets) |
189,653 | 8.37 | 181,308 | 8.00 | 226,634 | 10.00 | ||||||||||||||||||
Tangible capital (to tangible assets) |
159,730 | 4.43 | 54,108 | 1.50 | N/A | N/A | ||||||||||||||||||
At March 31, 2010: |
||||||||||||||||||||||||
Tier 1 capital (to adjusted tangible assets) |
$ | 164,932 | 3.73 | % | $ | 132,696 | 3.00 | % | $ | 221,159 | 5.00 | % | ||||||||||||
Risk-based capital (to risk-based assets) |
201,062 | 7.32 | 219,751 | 8.00 | 274,689 | 10.00 | ||||||||||||||||||
Tangible capital (to tangible assets) |
164,932 | 3.73 | 66,348 | 1.50 | N/A | N/A |
The following table reconciles the Banks stockholders equity to regulatory capital at
December 31, 2010 and March 31, 2010:
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(In Thousands) | ||||||||
Stockholders equity of the Bank |
$ | 140,910 | $ | 165,043 | ||||
Less: Intangible assets |
| (4,092 | ) | |||||
Disallowed servicing assets |
(1,414 | ) | (1,418 | ) | ||||
Accumulated other comprehensive income |
20,234 | 5,399 | ||||||
Tier 1 and tangible capital |
159,730 | 164,932 | ||||||
Plus: Allowable general valuation allowances |
29,923 | 36,130 | ||||||
Risk-based capital |
$ | 189,653 | $ | 201,062 | ||||
The Corporation is a separate and distinct legal entity from our subsidiaries, including the
Bank. As a holding company without independent operations, the Corporations liquidity (on an
unconsolidated basis) is primarily dependent upon the Corporations ability to raise debt or equity
capital from third parties and the receipt of dividends from the Bank and its other non-bank
subsidiaries. We receive substantially all of our revenue from dividends from the Bank. These
dividends are the principal source of funds to pay dividends on our preferred and
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common stock and
interest and principal on our debt. The Corporation is currently in default under its Amended and
Restated Credit Agreement with its primary lender, and has deferred dividend payments on the Series
B Preferred Stock held by Treasury. Various federal and/or state laws and regulations limit the
amount of dividends that the Bank may pay us. Additionally, if the Banks earnings are not
sufficient to make dividend payments to us while maintaining adequate capital levels, our ability
to make dividend payments to our preferred and common shareholders will be negatively impacted. As
a result of recent regulatory actions, the Corporations principal operating subsidiary, the Bank,
is prohibited from paying any dividends or making any loans to the Corporation, despite the
existence of positive liquidity at the Bank. At December 31, 2010, the Corporations cash and cash
equivalents, on an unconsolidated basis amounted to $1.3 million. Presently, the Corporation (on
an unconsolidated basis) does not have sufficient liquidity to meet its short-term obligations,
which include the approximately $116.3 million in outstanding debt that our lender could accelerate
and demand payment for upon the expiration of Amendment No. 6 to the Amended and Restated Credit
Agreement on May 31, 2011, and $110 million of Series B Preferred Stock and dividends and interest.
Credit Agreement
On April 29, 2010, the Corporation entered into Amendment No. 6 (the Amendment) to the Amended
and Restated Credit Agreement, dated as of June 9, 2008, the Credit Agreement, among the
Corporation, the lenders from time to time a party thereto, and U.S. Bank National Association, as
administrative agent for such lenders, or the Agent. The Corporation owes $116.3 million to
various lenders led by U.S. Bank under the Credit Agreement. The Corporation is currently in
default of the Credit Agreement as a result of failure to make a principal payment on March 2,
2009.
Under the Amendment, the Agent and the lenders agree to forbear from exercising their rights and
remedies against the Corporation until the earliest to occur of the following: (i) the occurrence
of any event of default (other than a failure to make principal payments on the outstanding balance
under the Credit Agreement or other existing defaults); or (ii) May 31, 2011. Notwithstanding the
agreement to forbear, the Agent may at any time, in its sole discretion, take any action reasonably
necessary to preserve or protect its interest in the stock of the Bank, Investment Directions, Inc.
or any other collateral securing any of the obligations against the actions of the Corporation or
any third party without notice to or the consent of any party.
The Amendment also provides that the outstanding balance under the Credit Agreement shall bear
interest equal to a base rate of 0% per annum and a deferred rate of 12%. Interest accruing on the
Loan is due on the earlier of (i) the date the Loans are paid in full or (ii) the Maturity Date.
Within two business days after the Corporation has knowledge of an event, the CFO shall submit a
statement of the event together with a statement of the actions which the Corporation proposes to
take to the Agent. An event may include:
| Any event which, either of itself or with the lapse of time or the giving of notice or both, would constitute a Default under the Credit Agreement; | ||
| A default or an event of default under any other material agreement to which the Corporation or Bank is a party; or | ||
| Any pending or threatened litigation or certain administrative proceedings. |
Within fifteen (15) days after the end of each month, the Corporations president or vice president
shall submit a certificate indicating whether the Corporation is in compliance with the following
financial covenants:
| The Bank shall maintain a Tier 1 Leverage Ratio of not less than (i) 3.75% at all times during the period from April 29, 2010 through May 31, 2010, (ii) 3.85% at all times during the period from June 1, 2010 through August 31, 2010, (iii) 3.90% at all times during the period from September 1, 2010 through November 30, 2010 and (iv) 3.95% at all times thereafter. | ||
| The Bank shall maintain a Total Risk Based Capital ratio of not less than (i) 7.10% at all times during the period from April 29, 2010 through May 31, 2010, (ii) 7.35% at all times during the period from June 1, |
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2010 through August 31, 2010, (iii) 7.60% at all times during the period from September 1, 2010 through November 30, 2010 and (iv) 7.65% at all times thereafter. | |||
| The ratio of Non-Performing Loans to Gross Loans shall not exceed (i) 14.50% at any time during the period from April 29, 2010 through May 31, 2010, (ii) 13.00% at any time during the period from June 1, 2010 through September 30, 2010, (iii) 12.50% at any time during the period from October 1, 2010 through November 30, 2010, (iv) 12.00% at any time during the period from December 1, 2010 through March 31, 2011, (v) 11.00% at any time during the period from April 1, 2011 through April 30, 2011 and (vi) 10.00% at all times thereafter. |
The total outstanding balance under the Credit Agreement as of December 31, 2010 was $116.3
million. These borrowings are shown in the Corporations consolidated financial statements as
other borrowed funds. The Amendment provides that the Corporation must pay in full the outstanding
balance under the Credit Agreement on the earlier of the Corporations receipt of net proceeds of a
financing transaction from the sale of equity securities in an amount not less than $116.3 million
or May 31, 2011.
The Credit Agreement and the Amendment also contain customary representations, warranties,
conditions and events of default for agreements of such type. At December 31, 2010, the
Corporation was in compliance with all covenants contained in the Credit Agreement, as amended on
April 29, 2010. Under the terms of the Credit Agreement, as amended on April 29, 2010, the Agent
and the Lenders have certain rights, including the right to accelerate the maturity of the
borrowings if all covenants are not complied with. Currently, no such action has been taken by the
Agent or the Lenders. However, the default creates significant uncertainty related to the
Corporations operations.
Market Risk Management Overview
Market risk is the risk of a loss in earnings or economic value due to adverse movements in market
factors such as interest rates, credit spreads, foreign exchange rates, and equity prices. We are
exposed to market risk primarily by our involvement in, among others, traditional banking
activities of taking deposits and extending loans.
Asset/Liability Management
The primary function of asset and liability management is to provide liquidity and maintain an
appropriate balance between interest-earning assets and interest-bearing liabilities within
specified maturities and/or repricing dates. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or repricing date, and
is commonly referred to as the interest rate gap (the gap). A positive gap exists when there are
more assets than liabilities maturing or repricing within the same time frame. A negative gap
occurs when there are more liabilities than assets maturing or repricing within the same time
frame. During a period of rising interest rates, a negative gap over a particular period would
tend to adversely affect net interest income over such period,
while a positive gap over a particular period would tend to result in an increase in net interest
income over such period.
The Banks strategy for asset and liability management is to maintain an interest rate gap that
minimizes the impact of interest rate movements on the net interest margin. As part of this
strategy, the Bank sells substantially all new originations of long-term, fixed-rate, single-family
residential mortgage loans in the secondary market, and invests in adjustable-rate or medium-term,
fixed-rate, single-family residential mortgage loans, medium-term mortgage-related securities and
consumer loans, which have shorter terms to maturity and higher interest rates than single-family
mortgage loans.
The Bank also originates multi-family residential and commercial real estate loans, which have
adjustable or floating interest rates and/or shorter terms to maturity than conventional
single-family residential loans. Long-term, fixed-rate, single-family residential mortgage loans
originated for sale in the secondary market are committed for sale at the time the interest rate is
locked with the borrower. As such, these loans involve little interest rate risk to the Bank.
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The calculation of a gap position requires management to make a number of assumptions as to when an
asset or liability will reprice or mature. Management believes that its assumptions approximate
actual experience and considers them reasonable, although the actual amortization and repayment of
assets and liabilities may vary substantially. The Banks cumulative net gap position at December
31, 2010 has not changed significantly since March 31, 2010. See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Asset/Liability Management in the
Corporations Annual Report on Form 10-K for the year ended March 31, 2010.
Compliance Risk Management
Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss
resulting from the Corporations failure to comply with regulations and standards of good banking
practice. Activities which may expose the Corporation to compliance risk include, but are not
limited to, those dealing with the prevention of money laundering, privacy and data protection,
community reinvestment initiatives, fair lending challenges and employment and tax matters.
Strategic and/or Reputation Risk Management
Strategic and/or reputation risk represents the risk of loss due to impairment of reputation,
failure to fully develop and execute business plans, failure to assess current and new
opportunities in business, markets and products and any other event not identified in the defined
risk types mentioned previously. Mitigation of the various risk elements that represent strategic
and/or reputation risk is achieved through initiatives to help the Corporation better understand
and report on the various risks.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements are prepared by applying certain accounting policies.
Certain of these policies require management to make estimates and strategic or economic
assumptions that may prove inaccurate or be subject to variations that may significantly affect the
reported results and financial position for the period or in future periods. Some of the more
significant policies are as follows:
Fair Value Measurements
Management must use estimates, assumptions, and judgments when assets and liabilities are required
to be recorded at, or adjusted to reflect, fair value. This includes the initial measurement at
fair value of the assets acquired and liabilities assumed in acquisitions qualifying as business
combinations under GAAP. The valuation of both financial and nonfinancial assets and liabilities
in these transactions requires numerous assumptions and estimates and the use of third-party
sources including appraisers and valuation specialists.
Assets and liabilities carried at fair value inherently result in a higher degree of financial
statement volatility. Assets and liabilities measured at fair value on a recurring basis include
available for sale securities. Fair values and the information used to record valuation
adjustments for certain assets and liabilities are based on either quoted market prices or are
provided by other independent third-party sources, when available. When such third-party
information is not available, fair value is estimated primarily by using cash flow and other
financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of
these areas could materially impact future financial condition and results of operations.
Declines in the fair value of held-to-maturity and available-for-sale securities below their
amortized cost that are deemed to be other than temporary due to credit loss are reflected in
earnings as realized losses. In estimating other-than-temporary impairment losses on investment
securities, management considers many factors which include: (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
To determine if an other-than-temporary impairment exists on a debt security, the Corporation first
determines if (a) it intends to sell the security or (b) it is more likely than not that it will be
required to sell the security before its anticipated recovery. If either of the conditions are
met, the Corporation will recognize an other-than-temporary impairment in earnings equal to the
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difference between the fair value of the security and its adjusted cost. If neither of the
conditions are met, the Corporation determines (a) the amount of the impairment related to credit
loss and (b) the amount of the impairment due to all other factors. The difference between the
present values of the cash flows expected to be collected and the amortized cost basis is the
credit loss. The credit loss is the amount of the other-than-temporary impairment that is
recognized in earnings and is a reduction to the cost basis of the security. The amount of total
impairment related to all other factors is included in other comprehensive income (loss).
Allowances for Loan Losses
The allowance for loan losses is a valuation allowance for probable and inherent losses incurred in
the loan portfolio. Management maintains allowances for loan and lease losses and unfunded loan
commitments and letters of credit at levels that we believe to be adequate to absorb estimated
probable credit losses incurred in the loan portfolio. The adequacy of the allowances is determined
based on periodic evaluations of the loan and lease portfolios and other relevant factors. The
allowance is comprised of both a specific component and a general component. Even though the
entire allowance is available to cover losses on any loan, specific allowances are provided on
impaired loans pursuant to accounting standards. The general allowance is based on historical loss
experience, adjusted for qualitative and environmental factors. At least quarterly, management
reviews the assumptions and methodology related to the general allowance in an effort to update and
refine the estimate.
In determining the general allowance management has segregated the loan portfolio by collateral
type. By doing so they are better able to identify trends in borrower behavior and loss severity.
For each collateral type, they compute a historical loss factor. In determining the appropriate
period of activity to use in computing the historical loss factor they look at trends in quarterly
net charge-off ratios. It is managements intention to utilize a period of activity that it
believes to be most reflective of current experience. Changes in the historical period are made
when there is a distinct change in the trend of net charge-off experience. Given the changes in the
credit market that have occurred in fiscal years 2009 and 2010, management reviewed each stratas
historical losses by quarter for any trends that would indicate a shorter look back period would be
more representative.
In addition to the historical loss factor, management considers the impact of the following
qualitative factors: changes in lending policies, procedures and practices, economic and industry
trends and conditions, experience, ability and depth of lending management, level of and trends in
past dues and delinquent loans, changes in the quality of the loan review system, changes in the
value of the underlying collateral for collateral dependent loans, changes in credit concentrations
and portfolio size and other external factors such as legal and regulatory. In determining the
impact, if any, of an individual qualitative factor, management compares the current underlying
facts and circumstances surrounding a particular factor with those in the historical periods,
adjusting the historical loss factor in a directionally consistent manner with changes in the
qualitative factor. Management will continue to analyze the qualitative factors on a quarterly
basis, adjusting the historical loss factor both up and down, to a factor we believe is appropriate
for the probable and inherent risk of loss in its portfolio.
Specific allowances are determined as a result of our impairment process. When a loan is
identified as impaired it is evaluated for loss using either the fair value of collateral method or
the present value of cash flows method. If the present value of expected cash flows or the fair
value of collateral exceeds the Banks carrying value of the loan no loss is anticipated and no
specific reserve is established. However, if the Banks carrying value of the loan is greater than
the present value of expected cash flows or fair value of collateral a specific reserve is
established. In either situation, loans identified as impaired are excluded from the calculation
of the general reserve.
The Corporation regularly obtains updated appraisals for real estate collateral dependent loans for
which it calculates impairment based on the fair value of collateral. Loans having an unpaid
principal balance of $500,000 or less in a homogenous pool of assets do not require an impairment
analysis therefore updated appraisals are not obtained until the foreclosure or sheriff sale
occurs. Due to certain limitations, including, but not limited to, the availability of qualified
appraisers, the time necessary to complete acceptable appraisals, the availability of comparable
market data and information, and other considerations, in certain instances current appraisals are
not readily available. The fair value of impaired loans for which current and acceptable
appraisals are not available is approximately $48.1 million based on the Corporations best
estimate of fair value, discounted at various rates depending on the collateral type. The
Corporation discounts these appraisals an additional 10% and 20% for all non-land loans and
unimproved land loans, respectively.
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Collateral dependent loans are considered to be non-performing at such time that they become ninety
days past due or a probable loss is expected. At the time a loan is determined to be
non-performing it is downgraded per the Corporations loan rating system, it is placed on
non-accrual, and an allowance consistent with the Corporations historical experience for similar
substandard loans is established. Within ninety days of this determination a comprehensive
analysis of the loans is completed, including ordering new appraisals, where necessary, and an
adjustment to the estimated allowance is recognized to reflect the fair value of the loan based on
the underlying collateral or the discounted cash flows. Until such date at which an updated
appraisal is obtained, when deemed necessary, the Corporation applies discounts to the existing
appraisals in estimating the fair value of collateral. These discounts are 25 percent on
commercial real estate and 35 percent on unimproved land if the appraisal is over one year old.
These discount percentages are based on actual experience over the past twelve month period. If
the appraisal is within one year, the Corporation applies a discount of 15 percent. The
Corporation believes these discounts reflect market factors, the locations in which the collateral
is located and the estimated cost to dispose.
Management considers the allowance for loan losses at December 31, 2010 to be at an acceptable
level. Although they believe that they have established and maintained the allowance for loan
losses at an adequate level, changes may be necessary if future economic and other conditions
differ substantially from the current environment. Although they use the best information
available, the level of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. To the extent actual outcomes differ from our
estimates, additional provision for credit losses may be required that would reduce future
earnings.
Foreclosure
Real estate acquired by foreclosure or by deed in lieu of foreclosure and other repossessed assets,
upon initial recognition, is recorded at fair value, less estimated selling expenses. Each parcel
of real estate owned is appraised within six months of the time of acquisition of such property and
periodically thereafter. At the date of foreclosure any write down to fair value less estimated
selling costs is charged to the allowance for loan losses. Costs relating to the development and
improvement of the property are capitalized; holding period costs and subsequent changes to the
valuation allowance are charged to expense. Foreclosed properties and repossessed assets are
re-measured at fair value after initial recognition through the use of a valuation allowance on
foreclosed assets. The value may be adjusted based on a new appraisal or as a result of an
adjustment to the sale price of the property.
Mortgage Servicing Rights
Mortgage servicing rights are established on loans that are originated and subsequently sold with
servicing retained. A portion of the loans book basis is allocated to mortgage servicing rights
at the time of sale. The fair value of mortgage servicing rights is the present value of estimated
future net cash flows from the servicing relationship using current market participant assumptions
for prepayments or defaults, servicing costs and other factors. As the
loans are repaid and net servicing revenue is earned, mortgage servicing rights are amortized into
expense. Net servicing revenues are expected to exceed this amortization expense. However, if
actual prepayment experience or defaults exceed what was originally anticipated, net servicing
revenues may be less than expected and mortgage servicing rights may be impaired. Mortgage
servicing rights are carried at the lower of amortized cost or fair value.
Income Taxes
The Corporation provides for federal income taxes with a deferred tax liability or deferred tax
asset computed by applying the current statutory tax rates to net taxable or deductible differences
between the tax basis of an asset or liability and its reported amount in the consolidated
financial statements that will result in taxable or deductible amounts in future periods. The
Corporation regularly reviews the carrying amount of its deferred tax assets to determine if the
establishment of a valuation allowance is necessary. If based on the available evidence, it is
more likely than not that all or a portion of the Corporations deferred tax assets will not be
realized in future periods, a deferred tax valuation allowance would be established. Consideration
is given to various positive and negative factors that could affect the realization of the deferred
tax assets.
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In evaluating this available evidence, management considers, among other things, historical
financial performance, expectation of future earnings, the ability to carry back losses to recoup
taxes previously paid, length of statutory carry forward periods, experience with operating loss
and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals
of temporary differences. Significant judgment is required in assessing future earning trends and
the timing of reversals of temporary differences. The Corporations evaluation is based on
current tax laws as well as managements expectations of future performance.
As a result of its evaluation, the Corporation has recorded a full valuation allowance on its net
deferred tax asset.
Revenue Recognition
The Corporation derives net interest and noninterest income from various sources, including:
| Lending, | ||
| Securities portfolio, | ||
| Asset management and fund servicing, | ||
| Customer deposits, | ||
| Loan servicing, and | ||
| Sale of loans and securities. |
The Corporation also earns fees and commissions from issuing loan commitments, standby letters of
credit and financial guarantees, selling various insurance products, providing treasury management
services and participating in certain capital markets transactions. Revenue earned on
interest-earning assets including the accretion of fair value adjustments on discounts for
purchased loans is recognized based on the effective yield of the financial instrument.
The timing and amount of revenue that is recognized in any period is dependent on estimates,
judgments, assumptions and contractual terms. Changes in these factors can have a significant
impact on revenue recognized in any period due to changes in products, market conditions or
industry norms.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and Section 27A of the Securities Act. Any statements about our
expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These statements are often, but
not always, made through the use of words or phrases such as anticipate, estimate, plans,
projects, continuing, ongoing, expects, management believes, we believe, and similar
words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties
that could cause actual results to differ materially from those expressed in them. Our actual
results could differ materially from those anticipated in such forward-looking statements as a
result of several factors more fully described under the caption Risk Factors and elsewhere in
this report as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
Factors that could affect actual results include but are not limited to;
(i) | general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan and lease losses or a reduced demand for credit or fee-based products and services; | ||
(ii) | soundness of other financial institutions with which the Corporation and the Bank engage in transactions; | ||
(iii) | competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; | ||
(iv) | changes in technology; | ||
(v) | deterioration in commercial real estate, land and construction loan portfolios resulting in increased loan losses; |
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(vi) | uncertainties regarding our ability to continue as a going concern; | ||
(vii) | our ability to address our own liquidity problems; | ||
(viii) | demand for financial services, loss of customer confidence, and customer deposit account withdrawals; | ||
(ix) | our ability to pay dividends; | ||
(x) | changes in the quality or composition of the Banks loan and investment portfolios and allowances for loan loss; | ||
(xi) | unprecedented volatility in the market and fluctuations in the value of our common stock; | ||
(xii) | dilution of existing shareholders as a result of possible future transaction; | ||
(xiii) | uncertainties about the Corporation and the Banks Cease and Desist Orders with OTS; | ||
(xiv) | uncertainties about our ability to raise sufficient new capital in a timely manner in order to increase the Banks regulatory capital ratios; | ||
(xv) | changes in the conditions of the securities markets, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans; | ||
(xvi) | increases in Federal Deposit Insurance Corporation premiums due to market developments and regulatory changes; changes in accounting principles, policies or guidelines; | ||
(xvii) | uncertainties regarding our investment in the common stock of the Federal Home Loan Bank of Chicago; | ||
(xviii) | delisting of the Corporations common stock from Nasdaq; | ||
(xix) | significant unforeseen legal expenses; | ||
(xx) | uncertainties about market interest rates; | ||
(xxi) | security breaches of our information systems; | ||
(xxii) | acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, severe weather, natural disasters, acts of war; | ||
(xxiii) | environmental liability for properties to which we take title; | ||
(xxiv) | expiration of Amendment No. 6 to our Amended and Restated Credit Agreement on May 31, 2011; | ||
(xxv) | uncertainties about our ability to obtain regulatory approval and finalize transactions to sell several branch locations; | ||
(xxvi) | uncertainties relating to the Emergency Economic Stabilization Act or 2008, the American Recovery and Reinvestment Act of 2009, the implementation by the U.S. Department of the Treasury and federal banking regulators of a number of programs to address capital and liquidity issues in the banking system and additional programs that will apply to us in the future, all of which may have significant effects on us and the financial services industry; | ||
(xxvii) | changes in the U.S. Department of the Treasurys Capital Purchase Program; | ||
(xxviii) | changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries; | ||
(xxix) | monetary and fiscal policies of the U.S. Department of the Treasury; | ||
(xxx) | implications of the Dodd-Frank Act; and | ||
(xxxi) | challenges relating to recruiting and retaining key employees. |
In addition, to the extent that we engage in acquisition transactions, such transactions may result
in large one-time charges to income, may not produce revenue enhancements or cost savings at levels
or within time frames originally anticipated and may result in unforeseen integration difficulties.
These factors should be considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements. All forward-looking statements are necessarily only
estimates of future results, and there can be no assurance that actual results will not differ
materially from expectations, and, therefore, you are cautioned not to place undue reliance on such
statements. Any forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this report. Further, any forward-looking statement speaks only as of
the date on which it is made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
The Corporation does not undertake and specifically disclaims any obligation to update any forward-looking
statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of
such statements.
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Item 3 Quantitative and Qualitative Disclosures About Market Risk. |
The Corporations market rate risk has not materially changed from March 31, 2010. See Item 7A in the Corporations Annual Report on Form 10-K for the year ended March 31, 2010. See also Asset/Liability Management in Part I, Item 2 of this report. |
Item 4 Controls and Procedures. |
Internal Control over Financial Reporting |
In our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, the Corporation identified a material weakness in its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) related to the following: |
The Corporations chief executive officer and interim principal accounting officer concluded that the Corporation did not maintain effective entity level controls to ensure that the financial statements were prepared in accordance with generally accepted accounting principles by the time our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 was issued. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. |
Changes in Internal Control Over Financial Reporting |
There has been no change in the Corporations internal control over financial reporting ((as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Corporations most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporations internal control over financial reporting. |
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Part II Other Information
Item 1 Legal Proceedings. |
The Corporation is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management of the Corporation to be immaterial to the financial condition and results of operations of the Corporation. |
Item 1A Risk Factors. |
We are subject to a number of risks which may potentially impact our business, financial condition, results of operations and liquidity. As a financial services institution, certain elements of risk are inherent in all of our transactions and are present in every business decision we make. Thus, we encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. |
The following risk factors are added to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ending March 31, 2010. In general, each of these risk factors, including the ones added below, presents the risk of a material impact on our results of operations or financial condition, in addition to other possible consequences described therein. |
The impact of the recently enacted Dodd-Frank Act is still uncertain, but it may increase our costs of doing business and could result in restrictions on certain products and services we offer. |
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) which significantly changes the financial regulatory landscape and will affect the operating activities of financial institutions and their holding companies as well as others. Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years, in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional operating costs. |
For example, the Dodd-Frank Act requires the adoption of new capital regulations within the next 18 months. The regulations are required to be, at a minimum, as stringent as current capital and leverage requirements and, may limit the use of subordinated debt or similar instruments such as trust preferred securities to meet capital requirements. The new regulations or other regulatory actions could require us to raise additional capital depending on our business activities, asset mix, growth plans and results of operation. The Dodd-Frank Act also provides that certain financial institutions will be required to conduct annual stress tests in accordance with regulations to be adopted. The testing will require resources and increase our compliance costs. |
In other provisions, the Dodd-Frank Act increases the regulation of derivatives and hedging transactions. The regulations are expected to impose additional reporting and monitoring requirements, require higher capital and margin requirements and require that certain trades be executed through clearinghouses. We do not expect these provisions to have a material impact on the Corporation. |
With respect to deposit insurance, the Dodd-Frank Act broadens the base for FDIC insurance assessments which we expect will increase our FDIC insurance premiums and permanently increases the deposit insurance limit to $250,000 per depositor. Under the Dodd-Frank Act, the FDIC will insure the full balance of non-interest bearing transaction accounts through January 1, 2013, replacing the transaction account guarantee program at the end of calendar 2010. The Dodd-Frank Act also repeals the prohibition on banks payment of interest on demand deposit accounts |
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of commercial clients beginning one year from the date of enactment, and the market impact of this change is not yet known. |
Another significant aspect of the Dodd-Frank Act that will affect us is the creation of a new Bureau of Consumer Financial Protection with broad powers to supervise and enforce consumer protection laws. The Bureau will have broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit unfair, deceptive or abusive acts and practices. |
In addition, the Dodd-Frank Act calls for the dissolution of our primary regulator, the OTS. The OTS is scheduled to cease operation as of July 21, 2011, although that date could be delayed under certain circumstances. At such time as the OTS goes out of existence, regulation of the Bank will be assumed by the Office of the Controller of the Currency, with the Federal Reserve becoming the Corporations primary regulator. The impact of this change on our operations is not yet known. |
No assurance can be given as to the ultimate effect that the Dodd-Frank Act or any of its provisions will have on our business, financial condition and results of operations, the financial services industry or the economy. |
Our regional concentration makes us particularly at risk for changes in economic conditions in our primary market. |
Our business is primary located in Wisconsin. Thus, we are particularly vulnerable to adverse changes in economic conditions in Wisconsin and the Midwest more generally. |
Our asset valuations include observable inputs and may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect our results of operations or financial condition. |
We must use estimates, assumptions and judgments when financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, we estimate fair value primarily by using cash flows and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying inputs, factors, assumptions or estimates in any of the areas underlying our estimates could materially impact our future financial condition and results of operations. |
During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be more difficult to value certain of our assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented credit and equity market conditions and interest rates could materially impact the valuation of assets as reported within our consolidated financial statements, and the period-to-period changes in value could vary significantly. |
Lenders may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition. |
When we sell mortgage loans, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to the purchaser about the mortgage |
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loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud. Likewise, we are required to repurchase or substitute mortgage loans if we breach a representation or warranty in connection with our securitizations. While we have taken steps to enhance our underwriting policies and procedures, there can be no assurance that these steps will be effective or reduce risk associated with loans sold in the past. To date, the volume of repurchases has been insignificant. If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and financial condition will be adversely affected. |
Our liquidity is largely dependent upon our ability to receive dividends from our subsidiary bank, which accounts for most of our revenue and could affect our ability to pay dividends, and we may be unable to enhance liquidity from other sources. |
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Additionally, if our subsidiaries earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to make dividend payments to our preferred and common shareholders will be negatively impacted. The Bank is currently precluded from paying dividends to us. |
The infusion of outside capital may dilute the Corporations equity and may adversely affect the market price of the Corporations common stock. |
In connection with our effort to raise qualified sources of outside capital, strengthen our balance sheet and improve our financial performance, the Corporation may issue additional common stock or preferred securities, including securities convertible or exchangeable for, or that represent the right to receive, common stock. The market price of the Corporations common stock could decline as a result of sales of a large number of shares of common stock, preferred stock or similar securities in the market. The issuance of additional capital stock would dilute the ownership interest of the Corporations existing shareholders. |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds. |
As of December 31, 2010, the Corporation does not have a stock repurchase plan in place. |
Item 3 | Intentionally Left Blank |
Item 4 | Removed and Reserved. |
Item 5 | Other Information. |
On November 5, 2010, the Corporation and American Stock Transfer & Trust Company, LLC entered into a shareholder rights agreement (the Rights Agreement) designed to reduce the likelihood that the Corporation will experience an ownership change (as defined under U.S. federal income tax laws) by (i) discouraging any person or group of affiliated or associated persons from becoming a beneficial owner of 5% or more of our Common Stock (an Acquiring |
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Person) and (ii) discouraging any Acquiring Person from acquiring additional shares of the Common Stock. In general, an ownership change will occur if there is a cumulative change in the Corporations ownership by 5% shareholders (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. There is no guarantee, however, that the Rights Plan will prevent the Corporation from experiencing an ownership change. The purpose of the Rights Agreement is to protect the Corporations ability to use certain tax assets, such as net operating loss carryforwards and built-in losses (the Tax Assets), to offset future income. A corporation that experiences an ownership change will primarily be subject to an annual limitation on certain of its pre-ownership change Tax Assets in an amount generally equal to the equity value of the corporation immediately before the ownership change subject to certain adjustments, multiplied by the long-term tax-exempt rate. As a result, the Corporations use of the Tax Assets in the future would be significantly limited if it were to experience an ownership change. |
Pursuant to the Rights Agreement, the Corporations Board of Directors declared a dividend distribution of one preferred stock purchase right for each share of common stock outstanding at the close of business on November 22, 2010. The rights will be distributable to holders of record of the Corporations common stock as of November 22, 2010, as well as to holders of shares of the Corporations common stock issued after that date, but would only be exercisable in accordance with the terms of the Rights Agreement. The adoption of the Rights Agreement has no impact on the results of operations, consolidated balance sheet or net income (loss) per share. The rights may be dilutive to earnings per share in the future dependent upon the results of operations and market value of the Corporations common stock outstanding. |
The above summary does not purport to be complete and is qualified in its entirety by the full text of the Rights Agreement, which was filed as Exhibit 4.3 to the Corporations Current Report on Form 8-K, filed on the date hereof. For more information on the Rights Agreement, see the Current Report on Form 8-K and Registration Statement on Form 8-A, each filed on the date hereof and incorporated herein by reference. |
Item 6 | Exhibits. |
The following exhibits are filed with this report: |
Exhibit 31.1
|
Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included herein as an exhibit to this Report. | |
Exhibit 31.2
|
Certification of Interim Principal Accounting Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included as an exhibit to this Report. | |
Exhibit 32.1
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report. | |
Exhibit 32.2
|
Certification of the Interim Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report. |
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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 WISCONSIN INC.
Date: February 7, 2011 | By: | /s/ Chris Bauer | ||
Chris Bauer, President and Chief Executive Officer |
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Date: February 7, 2011 | By: | /s/ Mark D. Hayman | ||
Mark D. Hayman, Interim Principal Accounting Officer |
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