Attached files
file | filename |
---|---|
EX-10.6.C - EX-10.6.C - BANK MUTUAL CORP | c63163exv10w6wc.htm |
EX-32.2 - EX-32.2 - BANK MUTUAL CORP | c63163exv32w2.htm |
EX-32.1 - EX-32.1 - BANK MUTUAL CORP | c63163exv32w1.htm |
EX-23.1 - EX-23.1 - BANK MUTUAL CORP | c63163exv23w1.htm |
EX-31.2 - EX-31.2 - BANK MUTUAL CORP | c63163exv31w2.htm |
EX-21.1 - EX-21.1 - BANK MUTUAL CORP | c63163exv21w1.htm |
EX-31.1 - EX-31.1 - BANK MUTUAL CORP | c63163exv31w1.htm |
EX-11.E.II - EX-11.E.II - BANK MUTUAL CORP | c63163exv11wewii.htm |
EX-10.11.C.II - EX-10.11.C.II - BANK MUTUAL CORP | c63163exv10w11wcwii.htm |
EX-10.11.B.II - EX-10.11.B.II - BANK MUTUAL CORP | c63163exv10w11wbwii.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission file number: 000-31207
BANK MUTUAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin | 39-2004336 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
4949 West Brown Deer Road, Milwaukee, Wisconsin | 53223 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (414) 354-1500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value | The NASDAQ Stock Market LLC | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files.)
Yes 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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
act).
Yes o No þ
As of February 28, 2011, 45,779,443 shares of Common Stock were validly issued and outstanding.
The aggregate market value of the Common Stock (based upon the $5.68 last sale price on The NASDAQ
Global Select Market on June 30, 2010, the last trading date of the Companys second fiscal
quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned by
directors and executive officers and unallocated shares under the Employee Stock Ownership Plan;
does not constitute an admission as to affiliate status) was approximately $240 million.
Part of Form 10-K Into Which | ||
Documents Incorporated by Reference | Portions of Document are Incorporated | |
Proxy Statement for Annual Meeting of Shareholders on May 2, 2011 | Part III |
BANK MUTUAL CORPORATION
FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2010
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2010
Table of Contents
Item | Page | |||||||
Part I | ||||||||
1 | 3 | |||||||
1A | 25 | |||||||
1B | 29 | |||||||
2 | 29 | |||||||
3 | 29 | |||||||
4 | 29 | |||||||
Part II | ||||||||
5 | 30 | |||||||
6 | 32 | |||||||
7 | 34 | |||||||
7A | 59 | |||||||
8 | 63 | |||||||
9 | 105 | |||||||
9A | 105 | |||||||
9B | 107 | |||||||
Part III | ||||||||
10 | 108 | |||||||
11 | 108 | |||||||
12 | 108 | |||||||
13 | 108 | |||||||
14 | 108 | |||||||
Part IV | ||||||||
15 | 109 | |||||||
SIGNATURES | 110 | |||||||
EX-10.6.C | ||||||||
EX-10.11.B.II | ||||||||
EX-10.11.C.II | ||||||||
EX-11.E.II | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
Part I
Cautionary Statement
This report contains or incorporates by reference various forward-looking statements concerning the
Companys prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may contain words such as anticipate, believe, estimate, expect,
objective, projection and similar expressions or use of verbs in the future tense, and are
intended to identify forward-looking statements; any discussions of periods after the date for
which this report is filed are also forward-looking statements. The statements contained herein
and such future statements involve or may involve certain assumptions, risks, and uncertainties,
many of which are beyond the Companys control, that could cause the Companys actual results and
performance to differ materially from what is expected. In addition to the assumptions and other
factors referenced specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Company: general economic conditions,
including high rates of unemployment and the significant instability in credit, lending, and
financial markets; declines in the real estate market, which could further affect both collateral
values and loan activity; high unemployment and other factors which could affect borrowers ability
to repay their loans; negative developments affecting particular borrowers, which could further
adversely impact loan repayments and collection; illiquidity of financial markets and other
negative developments affecting particular investment and mortgage-related securities, which could
adversely impact the fair value of and/or cash flows from such securities; legislative and
regulatory initiatives and changes, including action taken, or that may be taken, in response to
difficulties in financial markets and/or which could negatively affect the right of creditors;
monetary and fiscal policies of the federal government; increased competition and/or
disintermediation within the financial services industry; the effects of further regulation and
consolidation within the financial services industry, including substantial changes under the
recently enacted Dodd-Frank Act; regulators increasing expectations for financial institutions
capital levels and restrictions imposed on institutions to maintain or achieve those levels;
potential changes in Fannie Mae and Freddie Mac, which could impact the home mortgage market;
changes in tax rates, deductions and/or policies; changes in FDIC premiums and other governmental
assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market
rates of interest and/or yields or rates on competing loans, investments, and sources of funds;
demand for loan or deposit products; demand for other financial services; changes in accounting
policies or guidelines; natural disasters, acts of terrorism, or developments in the war on
terrorism. Refer to Item 1A. Risk Factors, below, as well as the factors discussed in Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations,
for additional discussion.
Item 1. Business
The discussion in this section should be read in conjunction with Item 1A. Risk Factors, Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations, Item
7A. Quantitative and Qualitative Disclosures about Market Risk, and Item 8. Financial
Statements and Supplementary Data.
General
Bank Mutual Corporation (the Company) is a Wisconsin corporation headquartered in Milwaukee,
Wisconsin. The Company owns 100% of the common stock of Bank Mutual (the Bank) and currently
engages in no substantial activities other than its ownership of such stock. Consequently, the
Companys net income and cash flows are derived primarily from the Banks operations and capital
distributions. The Company is currently regulated as a savings and loan holding company by the
Office of Thrift Supervision (OTS). However, this role will be assumed by the Federal Reserve in
2011. The Companys common stock trades on The NASDAQ Global Select Market under the symbol BKMU.
The Bank was founded in 1892 and is a federally-chartered savings bank headquartered in Milwaukee,
Wisconsin. It is regulated by the OTS and its deposits are insured within limits established by
the Federal Deposit Insurance Corporation (FDIC). However, the regulation of the Bank will be
assumed by the Office of the Comptroller of the Currency (OCC) in 2011. The Banks primary
business is community banking, which includes attracting deposits from and making loans to the
general public and private businesses, as well as governmental and non-profit entities. In
addition to deposits, the Bank obtains funds through borrowings from the Federal Home Loan Bank
(FHLB) of Chicago. These funding sources are principally used to originate loans, including one-
to four-family residential loans, multi-family residential loans, commercial real estate loans,
commercial business loans and lines of credit, and consumer loans and lines of credit. From
time-to-time the Bank also purchases and/or participates in loans from third-party financial
3
Table of Contents
institutions and is an active seller of residential loans in the secondary market. It also invests
in mortgage-related and other investment securities.
The Companys principal executive office is located at 4949 Brown Deer Road, Milwaukee, Wisconsin,
53223, and its telephone number at that location is (414) 354-1500. The Companys website is
www.bankmutualcorp.com. The Company will make available through that website, free of charge, its
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practical after the Company files those reports
with, or furnishes them to, the Securities and Exchange Commission (SEC). Also available on the
Companys website are various documents relating to the corporate governance of the Company,
including its Code of Ethics and its Code of Conduct.
Market Area
At December 31, 2010, the Company had 78 banking offices in Wisconsin and one in Minnesota. At
June 30, 2010, the Company had a 1.66% market share of all deposits held by FDIC-insured
institutions in Wisconsin. The Company is the fifth largest financial institution headquartered in
Wisconsin, based on deposit market share.
The largest concentration of the Companys offices is in southeastern Wisconsin, consisting of the
Milwaukee Metropolitan Statistical Area (MSA), the Racine MSA, and the Kenosha, Wisconsin, and
Lake County, Illinois MSA. The Company has 26 offices in these MSAs. The Company has also four
offices in the Madison MSA, two offices in the Janesville/Beloit MSA, and six other offices in
communities in east central Wisconsin.
The Company also operates 21 banking offices in northeastern Wisconsin, including the Green Bay
MSA. Two of the offices in this region are near the Michigan border; therefore, the Company also
draws customers from northern Michigan. Finally, the Company has 19 offices in northwestern
Wisconsin, including the Eau Claire MSA, and one office in Woodbury, Minnesota, which is located
near the Wisconsin state border on the eastern edge of the Minneapolis-St. Paul metropolitan area.
Competition
The Company faces significant competition in attracting deposits, making loans, and selling other
financial products and services. Wisconsin has many banks, savings banks, savings and loan
associations, and tax-exempt credit unions, which offer the same types of banking products and
services as the Company. The Company also faces competition from other types of financial service
companies, such as mortgage brokerage firms, finance companies, insurance companies, brokerage
firms, and mutual funds. As a result of electronic commerce, the Company also competes with
financial service providers outside of Wisconsin.
Many of the Companys competitors have greater resources and/or offer services that the Company
currently does not provide. For example, the Company does not offer trust services. However, the
Company does offer mutual fund investments, tax-deferred annuities, credit life and disability
insurance, property and casualty insurance, brokerage services, and investment advisory services
through a subsidiary, BancMutual Financial & Insurance Services, Inc.
Lending Activities
General At December 31, 2010, the Companys total loans receivable was $1.3 billion or 51.1% of
total assets. The Companys loan portfolio consists primarily of mortgage loans, which includes
loans secured by one- to four-family residences, multi-family properties, and commercial real
estate properties, as well as construction and development loans secured by the same types of
properties and land. To a lesser degree, the loan portfolio includes consumer loans consisting
principally of home equity lines of credit, fixed and adjustable rate home equity loans, student
loans, and automobile loans. Finally, the Companys loan portfolio also contains commercial
business loans. The nature, type, and terms of loans originated or purchased by the Company are
subject to federal and state laws and regulations. The Company has no significant concentrations
of loans to particular borrowers or to borrowers engaged in similar activities. The Companys real
estate loans are primarily secured by properties located in its primary market areas, as previously
described. For specific information related to the Companys loans receivable for the periods
covered by this report, refer to Financial ConditionLoans Receivable in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Residential Mortgage Lending The Company originates and purchases first mortgage loans secured
by one- to four-family properties. At December 31, 2010, the Companys portfolio of these types of
loans was $531.9 million
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Table of Contents
or 37.9% of its gross loans receivable. Most of these loans are owner-occupied; however, the
Company also originates first mortgage loans secured by second homes, seasonal homes, and
investment properties.
The Company originates primarily conventional fixed rate residential mortgage loans and adjustable
rate residential mortgage (ARM) loans with maturity dates up to 30 years. Such loans generally
are underwritten to Federal National Mortgage Association (Fannie Mae) standards. In general,
ARM loans are retained by the Company in its loan portfolio. Fixed rate mortgage loans are
generally sold in the secondary market without recourse, although the Company typically retains the
servicing rights to such loans. From time-to-time, the Company may elect to retain in its loan
portfolio conventional fixed rate loans with maturities of up to 15 years, as well as certain loans
with maturities up to 30 years. As a result of market competition in recent years, the Company has
generally not charged loan origination fees.
The Company also originates jumbo single family mortgage loans in excess of the Fannie Mae
maximum loan amount, which was $417,000 for single family homes in its primary market areas in
2010. Fannie Mae has higher limits for two-, three- and four-family homes. The Company retains
certain fixed rate jumbo mortgage loans, as well as all ARM jumbo mortgage loans, in its portfolio.
The Company also originates loans under programs administered by the State Veterans Administration
(State VA), the Wisconsin Housing and Economic Development Authority (WHEDA), the U.S.
Department of Agriculture (USDA) Guaranteed Rural Housing Program, and the Federal Housing
Administration (FHA). Loans originated under State VA, WHEDA, and USDA programs are not held by
the Company in its loan portfolio, although the Company retains the servicing rights for such
loans. In the case of FHA loans, the Company receives a fee for its origination services, but does
not retain the loan or the servicing rights.
From time-to-time the Company also originates fixed rate and adjustable rate mortgage loans under
special programs for low- to moderate-income households and first-time home buyers. These programs
are offered for Community Reinvestment Act (CRA) purposes and are retained by the Company in its
loan portfolio. Among the features of these programs are lower down payments, no mortgage
insurance, and generally less restrictive requirements for qualification compared to the Companys
conventional one- to four-family mortgage loans. These loans generally have maturities up to 30
years.
ARM loans pose credit risks different from the risks inherent in fixed rate loans, primarily
because as interest rates rise, the underlying payments from the borrowers increase, which
increases the potential for payment default. At the same time, the marketability and/or value of
the underlying property may be adversely affected by higher interest rates. ARM loans originated
by the Company are typically adjusted by a maximum of 200 basis points per adjustment period. The
adjustments are usually annual, after the initial interest rate lock period. The Company
originates ARM loans with lifetime caps set at 6% above the origination rate. Monthly payments of
principal and interest are adjusted when the interest rate adjusts. The Company does not offer ARM
loans with negative amortization. The Company currently utilizes the monthly average yield on
United States treasury securities, adjusted to a constant maturity of one year (constant maturity
treasury index) as the index to determine the interest rate payable upon the adjustment date of
ARM loans. Some of the ARM loans are granted with conversion options that provide terms under
which the borrower may convert the mortgage loan to a fixed rate mortgage loan for a limited period
early in the term (normally in the first five years) of the ARM loan. The terms at which the ARM
loan may be converted to a fixed rate loan are established at the date of loan origination and are
set to allow the Company to sell the loan into the secondary market upon conversion. The Company
no longer originates ARM loans on an interest-only basis (whereby the borrower pays interest-only
during the initial interest rate lock period). The Companys remaining investment in interest-only
ARM loans does not constitute a material portion of its overall loan portfolio.
The volume and types of ARM loans the Company originates have been affected by the level of market
interest rates, competition, consumer preferences, and the availability of funds. ARM loans are
susceptible to early prepayment during periods of lower interest rates as borrowers refinance into
fixed rate loans.
Residential mortgage loan originations are solicited from real estate brokers, builders, existing
customers, community groups, other referral sources, and residents of the local communities located
in the Companys primary market areas through its loan origination staff. The Company also
advertises its residential mortgage loan products through local media, direct customer
communications, and its website. Most residential mortgage loans are processed under the Fannie
Mae alternative documentation programs. For alternative documentation loans, the Company requires
applicants to complete a Fannie Mae loan application and requests income, asset and debt
information from the
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Table of Contents
borrower. In addition to obtaining outside vendor credit reports on all borrowers, the Company
also looks at other information to ascertain the creditworthiness of the borrower. In most
instances, the Company utilizes Fannie Maes Desktop Underwriter automated underwriting process.
Loans that are processed under the alternative documentation program conform to secondary market
standards and generally may be sold on the secondary market. Loans originated under Fannie Mae
alternative documentation program should not be confused with Alt-A loans or no documentation
loans (i.e., no doc loans). No doc loans, as the name implies, do not require verification of
employment; instead, the customers stated income is used in the underwriting decision. The
Company does not offer Alt-A or no doc loans, nor does it originate or purchase subprime loans.
The Company requires an appraisal of the real estate that secures a residential mortgage loan,
which must be performed by a certified appraiser approved by the board of directors. Prior to
2009, however, the Company used a streamlined process in certain circumstances on existing mortgage
loans that were refinanced or modified with the Company. In such instances, the Company relied on
the original appraisal. A title insurance policy is required for all real estate first mortgage
loans. Evidence of adequate hazard insurance and flood insurance, if applicable, is required prior
to closing. Borrowers are required to make monthly payments to fund principal and interest (except
for interest-only ARM mortgage loans, which the Company no longer originates) as well as private
mortgage insurance and flood insurance, if applicable. With some exceptions for lower
loan-to-value ratio loans, borrowers are also generally required to escrow in advance for real
estate taxes. If borrowers with loans having a lower loan-to-value ratio want to handle their own
taxes and insurance, an escrow waiver fee is charged. With respect to escrowed real estate taxes,
the Company generally makes this disbursement directly to the borrower as obligations become due.
The Companys staff underwriters review all pertinent information prior to making a credit decision
on an application. All recommendations to deny are reviewed by a designated senior officer of the
Company, in addition to staff underwriters, prior to the final disposition of the application. The
Companys lending policies generally limit the maximum loan-to-value ratio on single family
mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property. This limit is lower for loans secured by two-, three-, and
four-family homes. Loans above 80% loan-to-value ratios are subject to private mortgage insurance
to reduce the Companys exposure to less than 80% of value, except for certain low to moderate
income loan program loans.
In addition to servicing the loans in its own portfolio, the Company continues to service most of
the loans that it sells to Fannie Mae and other third-party investors (loans serviced for
others). Servicing mortgage loans, whether for its own portfolio or for others, includes such
functions as collecting monthly principal and interest payments from borrowers, maintaining escrow
accounts for real estate taxes and insurance, and making certain payments on behalf of borrowers.
When necessary, servicing of mortgage loans also includes functions related to the collection of
delinquent principal and interest payments, loan foreclosure proceedings, and disposition of
foreclosed real estate. As of December 31, 2010, loans serviced for others amounted to $1.1
billion. These loans are not reflected in the Companys Consolidated Statements of Financial
Condition.
When the Company services loans for others, it is compensated through the retention of a servicing
fee from borrowers monthly payments. The Company pays the third-party investors an agreed-upon
yield on the loans, which is generally less than the interest agreed to be paid by the borrowers.
The difference, typically 25 basis points or more, is retained by the Company and recognized as
servicing fee income over the lives of the loans, net of amortization of capitalized mortgage
servicing rights (MSRs). The Company also receives fees and interest income from ancillary
sources such as delinquency charges and float on escrow and other funds.
Management believes that servicing mortgage loans for third parties provides a natural hedge
against other risks inherent in the Companys mortgage banking operations. For example,
fluctuations in volumes of mortgage loan originations and resulting gains on sales of such loans
caused by changes in market interest rates will be partially offset by opposite changes in the
amortization of the MSRs. These fluctuations are usually the result of actual loan prepayment
activity and/or changes in management expectations for future prepayment activity, which impacts
the amount of MSRs amortized in a given period. However, fluctuations in the recorded value of
MSRs may also be caused by valuation adjustments required to be recognized under generally accepted
accounting principles (GAAP). That is, the value of servicing rights may fluctuate because of
changes in the future prepayment assumptions or discount rates used to periodically value the MSRs.
Although management believes that most of the Companys loans that prepay are replaced by new
loans (thus preserving the future servicing cash flow), GAAP requires impairment losses resulting
from a change in future prepayment assumptions to be recorded when the change occurs. However, the
offsetting gain on the sale of the new loan, if any, cannot be recorded under GAAP until the
customer actually prepays the old loan and the new loan is sold in the secondary market. MSRs are
particularly susceptible to
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impairment losses during periods of declining interest rates during which prepayment activity
typically accelerates to levels above that which had been anticipated when the servicing rights
were originally recorded. Alternatively, in periods of increasing interest rates, during which
prepayment activity typically declines, the Company could potentially recapture through earnings
all or a portion of a previously established valuation allowance for impairment.
Consumer Loans At December 31, 2010, the Companys portfolio of consumer loans was $243.5
million or 17.4% of its gross loans receivable. Consumer loans include fixed term home equity
loans, home equity lines of credit, home improvement loans, automobile loans, recreational vehicle
loans, boat loans, deposit account loans, overdraft protection lines of credit, unsecured consumer
loans, and to a lesser extent, unsecured consumer loans through credit card programs that are
administered by third parties. In 2008 the Company ceased offering student loans through programs
guaranteed by the federal government due to a lack of profitability. Student loans that continue
to be held by the Company are administered by a third party.
The Companys primary focus in consumer lending has been the origination of loans secured by real
estate, which includes home equity loans, home improvement loans, and home equity lines of credit.
Underwriting procedures for the home equity and home equity lines of credit loans include a
comprehensive review of the loan application, an acceptable credit score, verification of the value
of the equity in the home, and verification of the borrowers income. Home equity and home
improvement loan originations are developed through the cross-sales to existing customers,
advertisements in local media, the Banks website, and from time-to-time, direct mail.
The Company originates fixed rate home equity and home improvement term loans with combined
loan-to-value ratios up to 89.9%. Pricing on fixed rate home equity and home improvement term
loans is periodically reviewed by management. Generally, loan terms are in the three to fifteen
year range in order to minimize interest rate risk. Prior to 2010 the Company also originated
variable rate home equity and home improvement term loans that had an initial fixed rate for one to
three years then adjust annually or monthly depending upon the offering, with terms of up to 20
years. The Company discontinued offering variable rate home equity and home improvement term
loans due to increased administrative burdens caused by changes in certain regulatory requirements.
The Company continues to originate home equity lines of credit. Home equity lines of credit are
variable rate loans secured by a first or second mortgage on owner-occupied one- to four-family
residences and second homes. Current interest rates on home equity lines of credit are tied to the
prime rate, adjust monthly after an initial interest rate lock period, and range from prime rate
minus 26 basis points to prime rate plus 175 basis points, depending on the loan-to-value ratio.
These loans generally have a floor of 4.99%, although loans with a combined loan-to-value ratio
greater than 80% have a floor of 6.99%. Home equity line of credit loans are made for terms up to
10 years and require minimum monthly payments.
Consumer loans generally have shorter terms and higher rates of interest than conventional mortgage
loans, but typically involve more credit risk because of the nature of the collateral and, in some
instances, the absence of collateral. In general, consumer loans are more dependent upon the
borrowers continuing financial stability, more likely to be affected by adverse personal
circumstances, and often secured by rapidly depreciating personal property such as automobiles. In
addition, various laws, including bankruptcy and insolvency laws, may limit the amount that may be
recovered from a borrower. However, such risks are mitigated to some extent in the case of home
equity loans and lines of credit. These types of loans are secured by a first or second mortgage
on the borrowers residence for which the total principal balance outstanding (including the first
mortgage) does not generally exceed 89.9% of the propertys value at the time of the loan.
The Company believes that the higher yields earned on consumer loans compensate for the increased
risk associated with such loans and that consumer loans are important to the Companys efforts to
increase the interest rate sensitivity and shorten the average maturity of its loan portfolio.
In conjunction with its consumer lending activities, the Company offers customers credit life and
disability insurance products underwritten and administered by an independent insurance provider.
The Company receives commission revenue related to the sales of these products, although such
amounts are not a material source of revenue for the Company.
Multi-family and Commercial Real Estate Loans At December 31, 2010, the Companys portfolio of
multi-family and commercial real estate loans was $495.5 million or 35.3% of its gross loans
receivable. The Companys multi-family and commercial real estate loan portfolios consist of fixed
rate and adjustable rate loans originated at prevailing market rates usually tied to various
treasury indices. This portfolio generally consists of loans secured by
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apartment buildings, office buildings, retail centers, warehouses, and industrial buildings. These
loans typically do not exceed 80% of the lesser of the purchase price or an appraisal by an
appraiser designated by us. Loans originated with balloon maturities are generally amortized on a
25 to 30 year basis with a typical balloon term of 3 to 5 years.
Loans secured by multi-family and commercial real estate are granted based on the income producing
potential of the property, the financial strength of the borrower, and the appraised value of the
property. In most cases, the Company also obtains personal guarantees from the principals
involved. The Companys approval process includes a review of the other debt obligations and
overall sources of flow available to the borrower and guarantors. The propertys net operating
income must be sufficient to cover the payments relating to the outstanding debt. The Company
generally requires an assignment of rents or leases to be assured that the cash flow from the
property will be used to repay the debt. Appraisals on properties securing multi-family and larger
commercial real estate loans are performed by independent state certified fee appraisers approved
by the board of directors. Title and hazard insurance are required as well as flood insurance, if
applicable. Environmental assessments are performed on certain multi-family and commercial real
estate loans in excess of $1.0 million, as well as all loans secured by certain properties that the
Company considers to be environmentally sensitive. In addition, an annual review is performed on
non-owner-occupied multi-family and commercial real estate loans over $1.0 million.
Loans secured by multi-family and commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential mortgage loans. Such
loans typically involve large balances to single borrowers or groups of related borrowers. Because
payments on loans secured by multi-family and commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment of such loans may be subject
to adverse conditions in the real estate market or the economy. In recent periods the Company has
noted that borrowers problems in areas unrelated to the properties that secure the Companys loans
may have an adverse impact on such borrowers ability to comply with the terms of the Companys
loans.
The Banks largest individual multi-family and commercial real estate loans, as well as its
largest individual construction and development and commercial business loans (described below),
are below the Banks legal lending limit to a single borrower, which was approximately $37.0
million at December 31, 2010. However, the Bank has an internal lending limit that is adjusted
from time-to-time and is lower than its legal lending limit.
Construction and Development Loans At December 31, 2010, the Companys portfolio of construction
and development loans was $83.5 million or 5.9% of its gross loans receivable. These loans
typically have terms of 18 to 24 months, are interest-only, and carry variable interest rates tied
to the prime rate. Disbursements on these loans are based on draw requests supported by
appropriate lien waivers. As a general matter, construction loans convert to permanent loans and
remain in the Companys loan portfolio upon the completion of the project. Development loans are
typically repaid as the underlying lots or housing units are sold. Construction and development
loans are generally considered to involve a higher degree of risk than mortgage loans on completed
properties. The Companys risk of loss on a construction and development loan is dependent largely
upon the accuracy of the initial estimate of the propertys value at completion of construction,
the estimated cost of construction, and the borrowers ability to advance additional construction
funds if necessary. In addition, in the event a borrower defaults on the loan during its
construction phase, the construction project often needs to be completed before the full value of
the collateral can be realized by the Company. Due to the economic environment, the Company
suspended development lending in 2009, although it continues to engage in construction lending when
the circumstances warrant. The Company is uncertain at this time when it will reinstate
development lending.
Commercial Business Loans At December 31, 2010, the Companys portfolio of commercial business
loans was $50.1 million or 3.6% of its gross loans receivable. This portfolio consists of loans to
businesses for equipment purchases, working capital term loans and lines of credit, debt
refinancing, Small Business Administration (SBA) loans, and domestic standby letters of credit.
Typically, these loans are secured by general business security agreements, owner-occupied real
estate, and personal guarantees. The Company offers variable, adjustable, and fixed rate
commercial business loans. The Company also has commercial business loans that have an initial
period where interest rates are fixed, generally one to five years, and thereafter are adjustable
based on various indices. Fixed rate loans are priced at either a margin over the yield on U.S.
Treasury issues with maturities that correspond to the maturities of the notes or to match
competitive conditions and yield requirements. Term loans are generally amortized over a three to
seven year period and line-of-credit commercial business loans generally have a term of one year
and, in the case of small lines of credit, up to five years. All borrowers having an exposure to
the Company of $500,000 or more are reviewed annually, unless it is an investment real estate loan
at which point the annual review occurs for loans over $1.0 million.
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Loan Approval Authority For one- to four-family residential loans intended for sale into the
secondary market, the Companys staff underwriters are authorized by the board of directors to
approve loans processed through the Fannie Mae Desktop Underwriter automated underwriting system up
to the Fannie Mae conforming loan limits ($417,000 for single family residential units; higher
limits for two-, three-, and four-family units and certain high-cost areas, as defined by the
Federal Housing Finance Agency or FHFA). For residential loans intended to be held in the
Companys loan portfolio, staff underwriters are authorized to approve loans processed through the
Fannie Maes automated underwriting system of $500,000 or less, provided the loan-to-value ratio is
80% or less (and up to 90% with mortgage insurance) and the loan meets other specific underwriting
criteria. All other residential loan relationships must be approved by a senior officer of the
Company.
From time-to-time the Company has delegated limited lending authority to third-party originators
under the Companys correspondent loan program whose loans are purchased by the Company. That
approval is made in conjunction with the loan receiving an approval notification from the Fannie
Mae or the Federal Home Loan Mortgage Corporation (Freddie Mac) automated underwriting systems,
as well as an approval notification from the correspondents underwriter. This lending authority
is delegated only after the Company has reviewed the quality standards of a specified number of
loan files submitted to the Company by the correspondent. For those correspondents that are
granted delegated limited lending authority, the Company continues to select for quality review a
sample of 20% of the loans submitted by the correspondent for purchase by the Company.
Consumer loan underwriters have individual approval authority for secured loans ranging from
$50,000 to $150,000 provided that the loan-to-value ratio on real estate does not exceed 80%, or
90% on personal property, and that the loan meets other specific underwriting criteria. All other
consumer loans must be approved by a senior officer. Consumer loan underwriters have individual
approval authority for unsecured loans ranging from $10,000 to $25,000 provided the loan meets
other specific underwriting criteria. All unsecured consumer loans in excess of $25,000, or not
meeting specific underwriting criteria, must be approved by a senior officer.
Certain individual lenders and senior officers in the multi-family and commercial real estate
department have lending authority of $500,000 or less for both existing and proposed construction
of multi-family and commercial real estate properties. Two senior officers together have lending
authority of $750,000 or less and three senior officers together have lending authority of
$1,000,000 or less for multi-family and commercial real estate loans. All multi-family and
commercial real estate loans over $1,000,000 require approval of the executive loan committee of
the board of directors.
Individual lenders in the commercial banking department have individual lending authority up
to$250,000 for secured commercial business loans and $50,000 for unsecured loans. Two senior
officers together have lending authority of $500,000 or less for secured commercial business loans
and $150,000 or less for unsecured loans. Three senior officers together have lending authority of
$1,000,000 or less for secured commercial business loans and $250,000 or less for unsecured loans.
All secured business loans over $1,000,000, or unsecured loans over $250,000, require approval of
the executive loan committee of the board of directors.
All loans approved by individuals and senior officers must be ratified by the executive loan
committee of the board of directors at its next meeting following the approval.
Asset Quality
General The Company has policies and procedures in place to manage its exposure to credit risk
related to its lending operations. As a matter of policy, the Company limits its lending to
geographic areas in which it has substantial familiarity and/or a physical presence. Currently,
this is limited to certain specific market areas in Wisconsin and contiguous states. In addition,
from time-to-time the Company will prohibit or restrict lending in situations in which the
underlying business operations and/or collateral exceed managements tolerance for risk. For
example, in 2008 the Company suspended the origination of loans secured by hotels, motels, resort
properties, restaurants, and bars and in 2009 suspended land development loans, as previously
noted. The Company obtains appraisals or similar estimates of value prior to the origination of
mortgage loans or other secured loans. It also manages its exposure to risk by regularly
monitoring loan payment status, conducting periodic site visits and inspections, obtaining regular
financial updates from large borrowers and/or guarantors, corresponding regularly with large
borrowers and/or guarantors, and/or updating appraisals as appropriate, among other things. These
procedures are emphasized when a borrower has failed to make scheduled loan payments, has otherwise
defaulted on the terms of the loan agreement, or when management has become aware of a significant
adverse change in the financial
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condition of the borrower, guarantor, or underlying collateral. These strategies, as well as a
continued emphasis on quality loan underwriting, maintenance of sound credit standards for new loan
originations, and annual evaluation of large credits have generally resulted in delinquency and
non-performing asset ratios below the national average, although there can be no assurances that
this will continue. For specific information relating to the Companys asset quality for the
periods covered by this report, refer to Financial ConditionAsset Quality in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Internal Risk Ratings and Classified Assets Federal regulations require thrift institutions to
classify their assets on a regular basis. Accordingly, the Company has internal policies and
procedures in place to internally evaluate risk ratings on all of its loans and certain other
assets. In general, these internal risk ratings correspond with regulatory requirements to
adversely classify problem loans and certain other assets as substandard, doubtful, or loss.
A loan or other asset is adversely classified as substandard if it is determined to involve a
distinct possibility that the Company could sustain some loss if deficiencies associated with the
loan are not corrected. A loan or other asset is adversely classified as doubtful if full
collection is highly questionable or improbable. A loan or other asset is adversely classified as
loss if it is considered uncollectible, even if a partial recovery could be expected in the future.
If an asset or portion thereof is classified as loss, the Company typically charges off such
amount. The regulations also provide for a special mention designation, described as loans or
assets which do not currently expose the Company to a sufficient degree of risk to warrant adverse
classification, but which demonstrate clear trends in credit deficiencies or potential weaknesses
deserving managements close attention (refer to the following paragraph for additional
discussion).
Loans that are not classified special mention or adversely classified as substandard, doubtful, or
loss are classified as pass or watch in accordance with the Companys internal risk rating
policy. Pass loans are generally current on contractual loan and principal payments, comply with
other contractual loan terms, and have no noticeable credit deficiencies or potential weaknesses.
Watch loans are also generally current on payments and in compliance with loan terms, but a
particular borrowers financial or operating conditions may exhibit early signs of credit
deficiencies or potential weaknesses that deserve managements close attention. Such deficiencies
and/or weaknesses typically include, but are not limited to, the borrowers financial or operating
condition, deterioration in liquidity, increased financial leverage, declines in the condition or
value of related collateral, recent changes management or business strategy, or recent developments
in the economic, competitive, or market environment of the borrower. If adverse observations noted
in these areas are not corrected, further downgrade of the loan may be warranted.
Delinquent Loans When a borrower fails to make required payments on a loan, the Company takes a
number of steps to induce the borrower to cure the delinquency and restore the loan to a current
status. In the case of one- to four-family mortgage loans, the Companys loan servicing department
is responsible for collection procedures from the 15th day of delinquency through the completion of
foreclosure. Specific procedures include a late charge notice being sent at the time a payment is
over 15 days past due with a second notice (in the form of a billing coupon) being sent before the
payment becomes 30 days past due. Once the account is 30 days past due, the Company attempts
telephone contact with the borrower. Letters are sent if contact has not been established by the
45th day of delinquency. On the 60th day of delinquency, attempts at telephone contact continue
and stronger letters, including foreclosure notices, are sent. If telephone contact cannot be
made, the Company sends either a qualified third party inspector or a loan officer to the property
in an effort to contact the borrower. When contact is made with the borrower, the Company attempts
to obtain full payment or work out a repayment schedule to avoid foreclosure of the collateral.
Many borrowers pay before the agreed upon payment deadline and it is not necessary to start a
foreclosure action. The collection procedures and guidelines as outlined by Fannie Mae, Freddie
Mac, State VA, WHEDA, and Guaranteed Rural Housing are followed by the Company.
The collection procedures for consumer loans, excluding student loans and credit card loans,
include sending periodic late notices to a borrower once a loan is 5 to 15 days past due depending
upon the grace period associated with a loan. The Company attempts to make direct contact with a
borrower once a loan becomes 30 days past due. If collection activity is unsuccessful, the Company
may pursue legal remedies itself, refer the matter to legal counsel for further collection effort,
seek foreclosure or repossession of the collateral (if any), or charge-off the loan. All student
loans are serviced by a third party, which guarantees its servicing to comply with all U.S.
Department of Education guidelines. The Companys student loan portfolio is guaranteed under
programs sponsored by the U.S. government. Credit card loans are serviced by a third party
administrator.
The collection procedures for multi-family, commercial real estate, and commercial business loans
include sending periodic late notices to a borrower once a loan is past due. The Company attempts
to make direct contact with a borrower once a loan becomes 15 days past due. The Companys
managers of the multi-family and commercial real
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estate loan areas review loans 10 days or more delinquent on a regular basis. If collection
activity is unsuccessful, the Company may refer the matter to legal counsel for further collection
effort. After 90 days, loans that are delinquent are typically proposed for repossession or
foreclosure. Legal action requires the approval of the executive loan committee of the board of
directors.
In working with delinquent borrowers, if the Company cannot develop a repayment plan that
substantially complies with the original terms of the loan agreement, the Companys practice has
been to pursue foreclosure or repossession of the underlying collateral. As a matter of practice,
the Company does not restructure or modify troubled loans in a manner that results in a loss under
accounting rules. Furthermore, the Company does not generally reclassify restructured or modified
loans as performing loans if such loans were non-performing prior to the restructuring or
modification.
The Companys policies require that management continuously monitor the status of the loan
portfolio and report to the board of directors on a monthly basis. These reports include
information on classified loans, delinquent loans, restructured or modified loans, allowance for
loan losses, and foreclosed real estate.
Non-Accrual Policy With the exception of student loans that are guaranteed by the U.S.
government, the Company generally stops accruing interest income on loans when interest or
principal payments are 90 days or more in arrears or earlier when the future collectibility of such
interest or principal payments may no longer be certain. In recent periods, the Company has
experienced an increase in loans that meet the latter designation. In such cases, borrowers have
often been able to maintain a current payment status, but are experiencing financial difficulties
and/or the properties that secure the loans are experiencing increased vacancies, declining lease
rates, and/or delays in unit sales. In such instances, management may stop accruing interest
income on the loans even though the borrowers are current with respect to all contractual payments.
Although the Company may no longer accrue interest on these loans, the Company may continue to
record periodic interest payments received on such loans in interest income provided the borrowers
remain current on the loans and provided, in the judgment of management, the Companys net recorded
investment in the loans are deemed to be collectible. The Company designates loans on which it
stops accruing interest income as non-accrual loans and establishes a reserve for outstanding
interest that was previously credited to income. All loans on non-accrual are considered to be
impaired. The Company returns a non-accrual loan to accrual status when factors indicating
doubtful or uncertain collection no longer exist. In general, non-accrual loans are also
adversely classified as substandard or doubtful in accordance with the Companys internal risk
rating policy.
Foreclosed Properties and Repossessed Assets In the case of loans secured by real estate,
foreclosure action generally starts when the loan is between the 90th and 120th day of delinquency
following review by a senior officer and the executive loan committee of the board of directors.
If, based on this review, the Company determines that repayment of a loan is solely dependent on
the liquidation of the collateral, the Company will typically seek the shortest redemption period
possible, thus waiving its right to collect any deficiency from the borrower and/or guarantor.
Depending on whether the Company has waived this right and a variety of other factors outside the
Companys control (including the legal actions of borrowers to protect their interests), an
extended period of time could transpire between the commencement of a foreclosure action by the
Company and its ultimate receipt of title to the property.
When the Company ultimately obtains title to the property through foreclosure or deed in lieu of
foreclosure, it transfers the property to foreclosed properties and repossessed assets on the
Companys Consolidated Statements of Financial Condition. In cases in which a borrower has
surrendered control of the property to the Company or has otherwise abandoned the property, the
Company may transfer the property to foreclosed properties as an in substance foreclosure prior
to actual receipt of title. Foreclosed properties and repossessed assets are adversely classified
as substandard or doubtful in accordance with the Companys internal risk rating policy.
Marketing of foreclosed real estate begins immediately following the Company taking title to the
property. The marketing is usually undertaken by a realtor knowledgeable with the particular
market. Mortgage insurance claims are filed if the loan had mortgage insurance coverage. The
property is marketed after an appraisal is obtained and any mortgage insurance claims are filed.
Foreclosed real estate properties are initially recorded at the lower of the recorded investment in
the loan or fair value. Thereafter, the Company carries foreclosed real estate at fair value less
estimated selling costs (typically 5% to 10%). Foreclosed real estate is inspected periodically.
Additional outside appraisals are obtained as deemed necessary or appropriate. Additional
write-downs may occur if the property value deteriorates further after it is acquired. These
additional write-downs are charged to the Companys results of operations as they occur.
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In the case of loans secured by assets other than real estate, action to repossess the underlying
collateral generally starts when the loan is between the 90th and 120th day of delinquency
following review by management. The accounting for repossessed assets is similar to that described
for real estate, above.
Loan Charge-Offs The Company typically records loan charge-offs at foreclosure, repossession, or
liquidation and/or when the loan is otherwise deemed uncollectible. The amount of the charge-off
will depend on the fair market value of the underlying collateral, if any, and may be zero if the
fair market value exceeds the loan amount. All charge-offs are recorded as a reduction to
allowance for loan losses. All charge-off activity is reviewed by the board of directors.
Allowance for Loan Losses The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses inherent in the loan portfolio and is based on
factors such as the size and current risk characteristics of the portfolio, an assessment of
individual problem loans and pools of homogenous loans within the portfolio, and actual loss,
delinquency, and/or risk rating experience within the portfolio. The Company also considers
current economic conditions and/or events in specific industries and geographical areas, including
unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors,
to include regulatory guidance. Finally, as appropriate, the Company also considers individual
borrower circumstances and the condition and fair value of the loan collateral, if any. For
additional information relating to the Companys allowance for loan losses for the periods covered
by this report, refer to Results of OperationsProvision for Loan Losses and Financial
ConditionAsset Quality in Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Determination of the allowance is inherently subjective as it requires significant management
judgment and estimates, including the amounts and timing of expected future cash flows on loans,
the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans
based on historical loss experience, changes in risk characteristics of the loan portfolio, and
consideration of current economic trends, all of which may be susceptible to significant change.
Higher rates of loan defaults than anticipated would likely result in a need to increase provisions
in future years. Also, increases in the Companys multi-family, commercial real estate,
construction and development, and commercial business loan portfolios, could result in a higher
allowance for loan losses as these loans typically carry a higher risk of loss. Finally, various
regulatory agencies, as an integral part of their examination processes, periodically review the
Companys loan and foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. One or more of these agencies, specifically the
OTS, may require the Company to increase the allowance for loan losses or the valuation allowance
for foreclosed real estate based on their judgments of information available to them at the time of
their examination, thereby adversely affecting the Companys results of operations. As a result of
applying management judgment, it is possible that there may be periods when the amount of the
allowance and/or its percentage to total loans or non-performing loans may decrease even though
non-performing loans may increase.
Periodic adjustments to the allowance for loan loss are recorded through provision for loan losses
in the Companys Consolidated Statements of Income. Actual losses on loans are charged off
against the allowance when the loan is deemed uncollectible. In the case of loans secured by real
estate, this typically occurs when the Company receives title to the property as a result of a
formal foreclosure proceeding, receipt of a deed in lieu of foreclosure, or when, in the judgment
of management, an in-substance foreclosure has occurred. For loans that are not secured by real
estate, charge-off typically occurs when the collateral is repossessed. Unsecured loans are
charged off when the loan is determined to be uncollectible. Recoveries of loan amounts previously
charged off are credited to the allowance as received. Management reviews the adequacy of the
allowance for loan losses on a monthly basis. The board of directors reviews managements
judgments related to the allowance for loan loss on at least a quarterly basis.
The Company maintains general allowances for loan loss against certain homogenous pools of loans.
These pools generally consist of smaller one- to four-family, multi-family, commercial real estate,
consumer, and commercial business loans that do not warrant individual review due to their size.
In addition, pools may also consist of larger multi-family, commercial real estate, and commercial
business loans that have not been individually identified as impaired by management. Certain of
these pools, such as the one- to four-family and consumer loan pools, are further segmented
according to the nature of the collateral that secures the loans. For example, the consumer loan
pool is segmented by collateral type, such as loans secured by real estate, loans secured by
automobiles, and loans secured by other collateral. The various loan pools are further segmented
by managements internal risk rating of the loans. Management has developed factors for each pool
or segment based on the historical loss experience of each pool or segment, recent delinquency
performance, internal risk ratings, and consideration of current economic trends,
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in order to determine what it believes is an appropriate level for the general allowance. Given
the significant amount of management judgment involved in this process there could be significant
variation in the Companys allowance for loan losses and provision for loan losses from period to
period.
The Company maintains specific allowances for loan loss against individual loans that have been
identified by management as impaired. These loans are generally larger loans, but management may
also establish specific allowances against smaller loans from time-to-time. The allowance for loan
loss established against these loans is based on one of two methods: (1) the present value of the
future cash flows expected to be received from the borrower, discounted at the loans effective
interest rate, or (2) the fair value of the loan collateral, if the loan is considered to be
collateral dependent. In the Companys experience, loss allowances using the first method have
been rare. In working with problem borrowers, if the Company cannot develop a repayment plan that
substantially complies with the original terms of the loan agreement, the Companys practice has
been to pursue foreclosure or repossession of the underlying collateral. As a matter of practice,
the Company does not restructure troubled loans in a manner that results in a loss under the first
method. As a result, most loss allowances are established using the second method because the
related loans have been deemed collateral dependent by management.
Management considers loans to be collateral dependent when, in its judgment, there is no source of
repayment for the loan other than the ultimate sale or disposition of the underlying collateral.
Factors management considers in making this determination typically include, but are not limited
to, the length of time a borrower has been delinquent with respect to loan payments, the nature and
extent of the financial or operating difficulties experienced by the borrower, the performance of
the underlying collateral, the availability of other sources of cash flow or net worth of the
borrower and/or guarantor, and the borrowers immediate prospects to return the loan to performing
status. In some instances, because of the facts and circumstances surrounding a particular loan
relationship, there could be an extended period of time between managements identification of a
problem loan and a determination that it is probable that such loan is or will become collateral
dependent. Based on recent experience, however, management has noted the length of time shorten
between when a loan is classified as non-performing and when it is consider to be collateral
dependent. In managements view, this development is attributable to the deterioration in
commercial real estate markets during 2009 and 2010. Management believes this is a trend that will
continue as long as economic conditions and/or commercial real estate values remain depressed.
When a loan becomes collateral dependent, management measures impairment based on the estimated
fair value of the underlying collateral. Such estimates are based on managements judgment or,
when considered appropriate, on an updated appraisal or similar evaluation. Updated appraisals are
also typically obtained on or about the time of foreclosure or repossession of the underlying
collateral. Prior to receipt of the updated appraisal, management has typically relied on the
original appraisal and knowledge of the condition of the collateral, as well as the current market
for the collateral, to estimate the Companys exposure to loss on a collateral dependent loan. In
the judgment of management, this practice was acceptable in periods of relative stability in real
estate markets. However, as a result of deterioration in commercial real estate markets during 2009
and 2010, as well as the Companys recent experience, management believes that as long as economic
conditions and/or real estate markets remain depressed updated appraisals will continue to be
obtained on collateral dependent loans earlier in the evaluation process than may have been typical
during periods of more stable real estate markets.
For collateral dependent loans, the Company records allowance for loan losses and related
provisions on each loan for which it is determined that the fair value of the collateral is less
than the carrying value of the loan balance. This is true regardless of whether the estimate of
fair value is based on an updated appraisal or on an internal management assessment.
Investment Activities
General At December 31, 2010, the Companys portfolio of securities available-for-sale was
$663.3 million or 25.6% of its total assets. The Companys board of directors reviews and approves
the Companys investment policy on an annual basis. Senior officers, as authorized by the board of
directors, implement this policy. The board of directors reviews investment activity on a monthly
basis.
The Companys investment objectives are to meet liquidity requirements and to generate a favorable
return on investments without compromising objectives relating to overall risk exposure, including
interest rate risk, credit risk, and investment portfolio concentrations. Federally-chartered
savings banks have authority to invest in various types of assets, including U.S. Treasury
obligations, securities of various federal agencies, state and municipal obligations,
mortgage-related securities, mortgage derivative securities, certain certificates of deposit of
insured banks and
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savings institutions, certain bankers acceptances, repurchase agreements, loans of federal funds,
commercial paper, mutual funds, and, subject to certain limits, corporate debt and equity
securities. From time-to-time the Company pledges eligible securities as collateral for certain
deposit liabilities, FHLB advances, and other purposes permitted or required by law.
The Companys investment policy allows the use of hedging instruments such as financial futures,
options, forward commitments, and interest rate swaps, but only with prior approval of the board of
directors. Other than forward commitments related to its sale of residential loans in the
secondary market, the Company did not have any investment hedging transactions in place at December
31, 2010. The Companys investment policy prohibits the purchase of non-investment grade bonds,
although the Company may continue to hold investments that are reduced to less than investment
grade after their purchase. Securities rated less than investment grade are required to be
adversely classified as substandard in accordance with federal guidelines (refer to Asset
QualityInternal Ratings and Classified Assets, above). The Companys investment policy also
prohibits any practice that the Federal Financial Institutions Examination Council (FFIEC)
considers to be an unsuitable investment practice. The Company does not invest in mortgage-related
securities secured by subprime loans. The Company classifies securities as trading,
held-to-maturity, or available-for-sale at the date of purchase. At December 31, 2010, all of the
Companys investment and mortgage-related securities were classified as available-for-sale. These
securities are carried at fair value with the change in fair value recorded as a component of
shareholders equity.
Investment Securities At December 31, 2010, the Companys portfolio of investment securities was
$228.0 million or 34.4% of its total portfolio of available-for-sale securities. The Companys
investment securities consist principally of U.S. government and federal agency obligations and
mutual funds. All of the Companys mutual fund investments are permissible investments under its
investment policy and applicable laws and regulations. For additional discussion related to
certain of the Companys mutual funds, refer to Results of OperationsNon-Interest Income in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Mortgage-Related Securities At December 31, 2010, the Companys portfolio of mortgage-related
securities was $435.2 million or 65.6% of its total portfolio of available-for-sale securities.
Mortgage-related securities consist principally of mortgage-backed securities (MBSs), real estate
mortgage investment conduits (REMICs), and collateralized mortgage obligations (CMOs). Most of
the Companys mortgage-related securities are directly or indirectly insured or guaranteed by
Freddie Mac, Fannie Mae, or the Government National Mortgage Association (Ginnie Mae). The
remaining securities are investment-grade, private-label CMOs. Private-label CMOs generally carry
higher credit risks and higher yields than mortgage-related securities insured or guaranteed by
agencies of the U.S. Government. For additional discussion related to certain of the Companys
private-label CMOs, refer to Financial ConditionSecurities Available-for-Sale in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Mortgage-related securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees or credit enhancements that reduce credit risk. However,
mortgage-related securities are more liquid than individual mortgage loans.
In general, mortgage-related securities issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie
Mae are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. Private-label CMOs are
weighted at no more than 100% for risk-based capital purposes, unless such securities are rated
less than investment grade, in which case they are weighted 200%. While Freddie Mac, Fannie Mae,
and Ginnie Mae securities carry a reduced credit risk as compared to non-securitized residential
mortgage loans and private-label CMOs, they remain subject to the risk of a fluctuating interest
rate environment and instability in related markets. Along with other factors, such as the
geographic distribution of the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect the value of mortgage-related securities.
Deposit Liabilities
At December 31, 2010, the Companys deposit liabilities were $2.1 billion or 80.2% of its total
liabilities and equity. The Company offers a variety of deposit accounts having a range of
interest rates and terms for both retail and business customers. The Company currently offers
regular savings accounts (consisting of passbook and statement savings accounts), interest-bearing
demand accounts, non-interest-bearing demand accounts, money market accounts, and certificates of
deposit. The Company also offers IRA time deposit accounts and health savings accounts. When the
Company determines its deposit rates, it considers rates offered by local competitors, rates on
U.S. Treasury
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securities, rates on other sources of funds such as FHLB advances, and its deposit pricing model,
which identifies the profitability of deposits at various price levels. For additional
information, refer to Financial ConditionDeposit Liabilities in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Deposit flows are significantly influenced by general and local economic conditions, changes in
prevailing interest rates, pricing of deposits, and competition. The Companys deposits are
primarily obtained from the market areas surrounding its bank offices. The Company relies
primarily on competitive rates, quality service, and long-standing relationships with customers to
attract and retain these deposits. From time to time the Company has used third-party brokers and
a nationally-recognized reciprocal deposit gathering network to obtain wholesale deposits. As of
December 31, 2010, the Company did not have any brokered deposits outstanding and had less than
$500,000 in reciprocal deposits outstanding.
Borrowings
At December 31, 2010, the Companys borrowed funds were $149.9 million or 5.8% of its total
liabilities and equity. The Company borrows funds to finance its lending, investing, operating,
and, when active, stock repurchase activities. Substantially all of its borrowings take the form
of advances from the FHLB of Chicago and are on terms and conditions generally available to member
institutions. The Companys FHLB borrowings typically carry fixed rates of interest, have stated
maturities, and are generally subject to significant prepayment penalties if repaid prior to their
stated maturity. In addition, certain of the Companys advances have redemption features that
permit the FHLB of Chicago to redeem the advances at its option on a quarterly basis. The Company
prepaid a significant portion of its outstanding advances from the FHLB of Chicago in December 2010
and incurred a substantial penalty as a result of the prepayment (refer to Results of
OperationsNon-Interest Expense in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, for additional discussion).
The Company has pledged one- to four-family mortgage loans and certain multi-family mortgage loans
and available-for-sale securities as blanket collateral for these advances and future advances.
For additional information regarding the Companys outstanding advances from the FHLB of Chicago as
of December 31, 2010, refer to Financial ConditionBorrowings in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Shareholders Equity
At December 31, 2010, the Companys shareholders equity was $313.0 million or 12.1% of its total
liabilities and equity. Although the Company is not required to maintain minimum capital at the
consolidated level, the Bank is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS and the FDIC. The Banks objective is to maintain its
regulatory capital in an amount sufficient to be classified in the highest regulatory category
(i.e., as a well capitalized institution). At December 31, 2010, the Bank exceeded all
regulatory minimum requirements, as well as the amount required to be classified as a well
capitalized institution. For additional discussion relating to regulatory capital standards refer
to Regulation and Supervision of the BankRegulatory Capital Requirements and Prompt
Corrective Action, below. For additional information related to the Companys equity and the
Banks regulatory capital for the periods covered by this report, refer to Financial
ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, as well as Note 8. Shareholders Equity in Item 8.
Financial Statements and Supplementary Data.
In 2011, the Company itself will become subject to regulatory capital requirements at the
consolidated level. Although rules relating to these new capital requirements have not been
issued, management believes the rules will be substantially the same as the Bank and will not have
a significant impact on the Company, its financial condition or results of operations. However,
there can be no assurances. Refer to Regulation and Supervision of the BankRegulatory Capital
Requirements, below, for additional discussion.
The Company has paid quarterly cash dividends since its initial stock offering, which was in
November 2000. However, there can be no assurance that the Company will be able to continue the
payment of dividends in the future or that the level of dividends will not be further reduced. The
payment of dividends in the future is discretionary with the Companys board of directors and will
depend on the Companys operating results and financial condition, regulatory limitations, tax
considerations, and other factors. Furthermore, the Companys ability to pay dividends is highly
dependent on the Banks ability to pay dividends to the Company. Banking regulators and lawmakers
have become increasingly concerned with the levels of capital adequacy of financial institutions.
Even though the Bank
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exceeds all current regulatory standards and believes that it is well capitalized, the regulators
increasingly strict interpretation and enforcement of existing and new requirements, and the Banks
operating results, may affect the level of capital required to be maintained by the Bank and/or the
percentage of income, if any, that may be used for dividends to the Company. This may affect the
Companys ability to pay dividends to its shareholders. For additional information, refer to
Regulation and Supervision of the BankDividend and Other Capital Distribution Limitations,
below.
From time to time, the Company has repurchased shares of its common stock, and these repurchases
have had the effect of reducing the Companys capital; further repurchases will continue to have
the same effect. The Company regularly reviews its capital position, market conditions, and the
cost of funds to determine whether share repurchases are appropriate. However, as with the
payment of dividends above, the repurchase of common stock is discretionary with the Companys
board of directors and will depend on a variety of factors, including market conditions for the
Companys stock, the financial condition of the Company and the Bank, and actions by banking
regulators the affect the ability of the Bank to pay dividends to the parent company. The
Companys ability to repurchase its common stock may be affected by these actions. The Company
does not have a current stock repurchase program. For additional information, refer to Regulation
and Supervision of the BankDividend and Other Capital Distribution Limitations, below.
Subsidiaries
BancMutual Financial & Insurance Services, Inc. (BMFIS), a wholly-owned subsidiary of the Bank,
provides investment, brokerage, and insurance services to the Banks customers and the general
public. Investment services include tax-deferred and tax-free investments, mutual funds, and
government securities. Personal insurance, business insurance, life and disability insurance,
mortgage protection products, and investment advisory services are also offered by BMFIS.
Certain of BMFISs brokerage and investment advisory services are provided through an operating
agreement with a third-party, registered broker-dealer.
Mutual Investment Corporation (MIC), a wholly-owned subsidiary of the Bank, owns and manages
investment and mortgage-related securities. First Northern Investment Inc. (FNII), a
wholly-owned subsidiary of the Bank, also owns and manages investment and mortgage-related
securities, as well a small number of one- to four-family mortgage loans.
MC Development LTD (MC Development), a wholly-owned subsidiary of the Bank, is involved in land
development and sales. It owns five parcels of undeveloped land totaling 15 acres in Brown Deer,
Wisconsin. In addition, in 2004, MC Development established Arrowood Development LLC with an
independent third party to develop approximately 300 acres in Oconomowoc, Wisconsin. In the
initial transaction, the third party purchased approximately one-half interest in that land, all of
which previously had been owned by MC Development. There are currently no efforts underway to
further develop either of these two properties.
Savings Financial Corporation (SFC) was 50% owned by the Bank and 50% owned by another financial
institution. SFC was originally formed to originate, sell, and service indirect automobile,
recreational vehicle, and boat loans. Certain of these loans were purchased by the Bank. In 2006
the Bank discontinued the purchase of loans from SFC; SFC was dissolved in 2010.
In addition, the Bank has four wholly-owned subsidiaries that are inactive, but are reserved for
possible future use in related or other areas.
Employees
At December 31, 2010, the Company employed 682 full time and 82 part time associates. Management
considers its relations with its associates to be good.
Regulation and Supervision
General
The Company is a Wisconsin corporation registered with the OTS as a unitary savings and loan
holding company. The Company files reports with the OTS and is subject to regulation and
examination by the OTS. As a Wisconsin corporation, the Company is subject to the provisions of
the Wisconsin Business Corporation Law, and as a public
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company, it is subject to regulation by the SEC. The Bank is a federally-chartered savings bank
and is also subject to OTS requirements as well as those of the FDIC. Any change in these laws and
regulations, whether by the OTS, the FDIC, or through legislation, could have a material adverse
impact on the Company, the Bank, and the Companys shareholders. As noted below, it is expected
that in 2011 the OTS will be combined with the OCC, which will become the Banks primary regulator.
The Federal Reserve will also become the Companys primary regulator.
Certain current laws and regulations applicable to the Company and the Bank, including coming
changes to the identity and structure of their primary federal banking regulators and other
consequences of recent legislation, are summarized below. These summaries do not purport to be
complete and are qualified in their entirety by reference to such laws and regulations.
Financial Services Industry Legislation and Related Actions
In response to instability in the U.S. financial system, lawmakers and federal banking agencies
have taken various actions intended to stabilize the financial system and housing markets, and to
strengthen U.S. financial institutions.
Dodd-Frank Act In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act), which will significantly change the current financial institution
regulatory structure and will affect the lending, investment, trading, and operating activities of
financial institutions and their holding companies. The Dodd-Frank Act will eliminate the
Companys and the Banks current primary federal regulator, the OTS. The OCC will take over all
functions and authority from the OTS relating to federal thrifts, such as the Bank, and the Federal
Reserve will acquire supervisory and rule-making authority over all savings and loan holding
companies, such as the Company. These regulatory changes will take effect on July 21, 2011, unless
the Secretary of the Treasury opts to delay the transfer for up to an additional six months. The
change in regulators may cause further changes in the procedures and requirements discussed below.
The Dodd-Frank Act also requires the Federal Reserve to apply to savings and loan holding companies
the current leverage and risk-based capital standards that insured depository institutions must
follow, which includes consolidated capital requirements. Further, the Dodd-Frank Act has imposed
new disclosure and governance requirements on publicly-held companies, such as the Company.
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau (CFPB) with broad
powers to supervise and enforce consumer protection laws. The CFPB will have broad rule-making
authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, such as the Bank. However, institutions with $10 billion or less in assets, such as
the Bank, will be examined for CFPB compliance by their applicable bank regulators.
The Dodd-Frank Act broadens the base for FDIC insurance assessments, which will now be based on the
average consolidated total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for insured
institutions to $250,000 per depositor.
Many of these provisions are subject to rule-making procedures and studies that will be conducted
in the future, and the full effects of the Dodd-Frank Act on the Company and/or the Bank cannot yet
be determined. However, these provisions, or any other aspects of currently-proposed or future
regulatory or legislative changes to laws applicable to the financial industry, if enacted or
adopted, may impact the profitability of the Companys or the Banks business activities or change
certain of their business practices, including our ability to offer new products, obtain financing,
attract deposits, make loans, and achieve satisfactory interest spreads, and could expose the
Company to additional costs, including increased compliance costs. These changes also may require
the Company to invest significant management attention and resources to make any necessary changes
to operations in order to comply and could therefore also materially affect the Companys and the
Banks business, financial condition, and results of operations.
Troubled Assets Relief Program In 2008 Congress established the Troubled Assets Relief Program
(TARP) in an effort to restore confidence in the nations financial markets. As part of TARP,
the Department of the Treasury created a voluntary Capital Purchase Program (CPP), under which it
would purchase senior preferred equity shares of certain qualified financial institutions. It also
created a financial stability plan that, among other things, established a Capital Assistance
Program (CAP) under which financial institutions could undergo comprehensive stress tests to
evaluate their capital needs and their ability to absorb losses and continue lending. Due to the
Companys level of capitalization and overall financial and operating condition, the Company did
not participate in the CPP or the CAP.
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Regulation and Supervision of the Bank
General As a federally-chartered, FDIC-insured savings bank, the Bank is subject to extensive
regulation by the OTS and the FDIC. As a result of the Dodd-Frank Act, the powers and duties of
the OTS (including those described below) with respect to the Bank will be transferred to the OCC
on July 21, 2011, unless deferred by the Secretary of the Treasury. Lending activities and other
investments must comply with federal statutory and regulatory requirements. This federal
regulation and supervision establishes a comprehensive framework of activities in which a federal
savings bank may engage and is intended primarily for the protection of the FDIC and depositors
rather than the shareholders of the Company. This regulatory structure gives authorities extensive
discretion in connection with their supervisory and enforcement activities and examination
policies, including policies regarding the classification of assets and the establishment of
adequate loan loss reserves.
The OTS regularly examines the Bank and issues a report on its examination findings to the Banks
board of directors. The Banks relationships with its depositors and borrowers are also regulated
by federal law, especially in such matters as the ownership of savings accounts and the form and
content of the Banks loan documents.
The Bank must file reports with the OTS and the FDIC concerning its activities and financial
condition, and must obtain regulatory approvals prior to entering into transactions such as mergers
or acquisitions.
Regulatory Capital Requirements Although the Company itself is not currently required to
maintain minimum capital at the consolidated level, OTS regulations require
savings associations such as the Bank to meet three capital standards. In addition, after the
Dodd-Frank Act becomes fully effective, the Company will be required to meet substantially the same
consolidated capital standards as the Bank. The minimum standards are tangible capital equal to at
least 1.5% of adjusted total assets, core capital equal to at least 3% of adjusted total assets,
and risk-based capital equal to at least 8% of total risk-weighted assets. These capital standards
are in addition to the capital standards promulgated by the OTS under its prompt corrective action
regulations and standards required by the FDIC.
Core capital is common shareholders equity, noncumulative perpetual preferred stock, related
surplus, and non-controlling interests in the equity accounts of fully consolidated subsidiaries,
non-withdrawable accounts and pledged deposits of mutual savings associations, and qualifying
supervisory goodwill, less non-qualifying intangible assets, mortgage servicing rights, and
investments in certain non-includable subsidiaries. In the Banks case, core capital is equal to
tangible capital.
The risk-based capital standard for savings institutions requires the maintenance of total
risk-based capital of at least 8% of risk-weighted assets. Risk-based capital is comprised of core
and supplementary capital. Supplementary capital includes, among other items, cumulative perpetual
preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, up to 45% of
unrealized gains on available-for-sale equity securities with readily determinable fair values, and
the portion of the allowance for loan losses not designated for specific loan losses (the portion
is limited to a maximum of 1.25% of risk-weighted assets). Overall, supplementary capital is
limited to 100% of core capital. A savings association calculates its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure,
commercial loans, and other assets.
OTS rules require a deduction from capital for institutions that have unacceptable levels of
interest rate risk. The OTS calculates the sensitivity of an institutions net portfolio value
based on data submitted by the institution using the OTSs interest rate risk measurement model.
The amount of the interest rate risk component, if any, is deducted from an institutions total
capital in to determine if it meets its risk-based capital requirement.
The Banks objective is to maintain its regulatory capital in an amount sufficient to be classified
in the highest regulatory category (i.e., as a well capitalized institution). At December 31,
2010, the Bank exceeded all regulatory minimum requirements, as well as the amount required to be
classified as a well capitalized institution. Management also believes the Company would have
exceeded all regulatory minimum requirements at December 31, 2010, had it been subject to
consolidated capital requirements as of that date. For additional information related to the
Companys equity and the Banks regulatory capital for the periods covered by this report, refer to
Financial ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, as well as Note 8. Shareholders Equity in Item
8. Financial Statements and Supplementary Data.
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Prompt Corrective Action The FDIC has established a system of prompt corrective action to
resolve the problems of undercapitalized insured institutions. The OTS, as well as the other
federal banking regulators, adopted the FDICs regulations governing the supervisory actions that
may be taken against undercapitalized institutions. These regulations establish and define five
capital categories, in the absence of a specific capital directive, as follows:
Total Capital to Risk | Tier 1 Capital to Risk | Tier 1 Capital to | ||||||||||
Category: | Weighted Assets | Weighted Assets | Total Assets | |||||||||
Well capitalized |
³ 10 | % | ³ 6 | % | ³ 5 | % | ||||||
Adequately capitalized |
³ 8 | % | ³ 4 | % | ³ 4 | %(1) | ||||||
Under capitalized |
< 8 | % | < 4 | % | < 4 | %(2) | ||||||
Significantly undercapitalized |
< 6 | % | < 3 | % | < 3 | % | ||||||
Critically undercapitalized (3) |
(1) | ³ 3% if the bank receives the highest rating under the uniform system. | |
(2) | < 3% if the bank receives the highest rating under the uniform system. | |
(3) | Tangible assets to capital of equal to or less than 2%. |
The severity of the action authorized or required under the prompt corrective action regulations
increases as a banks capital decreases within the three undercapitalized categories. For example,
all savings associations are prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following the distribution, the savings
association would be undercapitalized. The FDIC and the OTS may restrict the growth of a savings
associations assets. An undercapitalized savings association is required to file a capital
restoration plan within 45 days of the date the savings association receives notice that it is
within any of the three undercapitalized categories; the plan must be guaranteed by the holding
company controlling the savings association. Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver or conservator for an
insured depository institution. If grounds exist for appointing a conservator or receiver, the
FDIC may require the institution to issue additional debt or stock, sell assets, be acquired, or
combine with another depository institution. The FDIC is also required to appoint a receiver or a
conservator for a critically undercapitalized institution within 90 days after it becomes
critically undercapitalized or to take other action that would better achieve the purposes of the
prompt corrective action provisions. The alternative action can be renewed for successive 90-day
periods, but if the institution continues to be critically undercapitalized for a specified period,
a receiver generally must be appointed.
Dividend and Other Capital Distribution Limitations OTS regulations govern capital distributions
by savings associations, which include cash dividends, stock repurchases, and certain other
transactions charged against the capital account. A savings association must file an application
with the OTS for approval of a capital distribution if (i) the total amount of capital
distributions for the applicable calendar year exceeds the sum of the savings associations net
income for that year to date plus the savings associations retained net income for the preceding
two years; (ii) the savings association would not be at least adequately capitalized following the
distribution; (iii) the distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition; or (iv) the savings association is not eligible for expedited treatment of
its filings.
In addition, even if an application is not required, a savings association must give the OTS notice
at least 30 days before the board of directors declares a dividend or approves a capital
distribution if the savings association is a subsidiary of a savings and loan holding company (as
is the Bank), the savings association would not be well capitalized following the distribution, or
the proposed distribution would affect capital in certain other ways.
The OTS may disapprove a notice or application if (i) the savings association would be
undercapitalized, significantly undercapitalized or critically undercapitalized following the
distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii)
the capital distribution would violate a any applicable statute, regulation, agreement or
OTS-imposed condition. The OTS has substantial discretion in making these decisions. For
additional discussion related to the Companys dividends and share repurchases, refer to Financial
ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation.
Qualified Thrift Lender Test Federal savings associations must meet a qualified thrift lender
(QTL) test or they become subject to operating restrictions. The Bank met the QTL test as of
December 31, 2010, and anticipates that it will maintain an appropriate level of mortgage-related
investments (which must be at least 65% of portfolio assets)
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and will otherwise continue to meet the QTL test requirements. Portfolio assets are all assets
minus goodwill and other intangible assets, property used by the institution in conducting its
business, and liquid assets not exceeding 20% of total assets. Compliance with the QTL test is
determined on a monthly basis in nine out of every twelve months.
Liquidity Standards Each federal savings association must maintain sufficient liquidity to
ensure its safe and sound operations. Management of the Bank believes it has established policies,
procedures, and practices to maintain sufficient liquidity to meet the Banks obligations and
otherwise ensure its safe and sound operation.
Federal Home Loan Bank System The Bank is a member of the FHLB of Chicago, one of twelve
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its region. It is funded primarily from funds deposited by member financial
institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank
System. It makes loans to members pursuant to policies and procedures established by the board of
directors of the FHLB of Chicago. The Bank prepaid a significant portion of its outstanding
advances from the FHLB of Chicago in December 2010 and incurred a substantial penalty as a result
of the prepayment (refer to Results of OperationsNon-Interest Expense in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, for additional
discussion)
As a member, the Bank must meet certain eligibility requirements and must purchase and maintain
stock in the FHLB of Chicago in an amount equal to the greater of (i) 1% of its mortgage-related
assets at the most recent calendar year end, (ii) 5% of its outstanding advances from the FHLB of
Chicago, or (iii) $500. At December 31, 2010, the Bank was in compliance with this requirement.
The FHLB of Chicago also imposes limits on advances made to member banks, including limitations
relating to the amount and type of collateral and the amount of advances.
The Bank is a voluntary member of the FHLB of Chicago; however, withdrawal of membership is subject
to approval under a consent order entered into by the FHLB of Chicago with its primary regulator.
The FHLB of Chicagos agreement with its primary regulator requires the FHLB of Chicago to, among
other things, not pay dividends unless it meets certain capital requirements and receives prior
permission from its regulator. The FHLB of Chicago has not paid dividends from 2007 through 2010;
it resumed payment of cash dividends at a relatively modest level in the first quarter of 2011.
However, management is unable to determine whether the FHLB of Chicago will continue to pay
dividends on its common stock or the amount of future dividends, if any. For additional
discussion related to the Companys investment in the common stock of the FHLB of Chicago, refer to
Financial ConditionOther Assets in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Deposit Insurance The deposit accounts held by customers of the Bank are insured by the FDIC up
to maximum limits, as provided by law. Insurance on deposits may be terminated by the FDIC if it
finds that the Bank has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS (as the Banks primary regulator). The management of the
Bank does not know of any practice, condition, or violation that might lead to termination of the
Banks deposit insurance.
The FDIC sets deposit insurance premiums based upon the risks a particular bank or savings
association poses to its deposit insurance funds. Under the risk-based assessment system, the FDIC
assigns an institution to one of three capital categorizations based on the institutions financial
information. With respect to these three categorizations, institutions are classified as well
capitalized, adequately capitalized or undercapitalized using ratios that are substantially similar
to the prompt corrective action capital ratios discussed above. The FDIC also assigns an
institution to one of three supervisory sub-categorizations within each capital group. This
assignment is based on a supervisory evaluation provided by the institutions primary federal
regulator and information that the FDIC determines to be relevant to the institutions financial
condition and the risk posed to the deposit insurance fund.
An institutions assessment rate depends on the capital categorizations and supervisory
sub-categorizations to which it is assigned. Under the risk-based assessment system, there are
then four assessment risk categories to which different assessment rates are applied. Assessment
rates for deposit insurance were increased in 2009 and range from seven basis points to 77.5 basis
points, depending on the institutions categories and type of deposits. The capital and
supervisory subgroup to which an institution is assigned by the FDIC is confidential. Any increase
in insurance assessments could have an adverse effect on the earnings of insured institutions,
including the Bank.
In February 2011 the FDIC adopted a final rule as required by the Dodd-Frank Act that changes the
definition of a financial institutions deposit insurance assessment base and revises the deposit
insurance risk-based assessment rate
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schedule, among other things. Under the new rule the assessment base will change from an insured
institutions domestic deposits (minus certain allowable exclusions) to an insured institutions
average consolidated total assets minus average tangible equity and certain other adjustments. In
addition, the assessment rates will change from the range noted in the previous paragraph to a
range of 2.5 to 45 basis points, depending on the institutions capital category and supervisor
sub-category, as previously described. The new rule will take effect in the quarter beginning
April 1, 2011. For additional discussion regarding the potential financial statement impact of
this new rule, refer to Results of OperationsNon-Interest Expense in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Under the Federal Deposit Insurance Reform Act of 2005 (FDIRA), insured depository institutions
were granted certain assessment credits that could be used to offset certain insurance assessments.
Through the first quarter of 2009, the Bank was able to offset a substantial portion of its
assessment as a result of these credits. The Banks credits then expired, which resulted in higher
costs related to deposit insurance assessments in periods after the first quarter of 2009.
In addition to the increase in the risk-based assessment rates in 2009 as noted in a previous
paragraph, the FDIC also imposed a one-time special assessment against insured financial
institutions in that year in order to bolster its insurance reserves. As a result of these
developments, as well as the expiration of the Banks premium credits described above, the Banks
deposit insurance premiums increased significantly in 2009 and 2010 compared to prior years. For
additional discussion, refer to Results of OperationsNon-Interest Expense in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Also, during the fourth quarter of 2009 the FDIC required insured institutions to prepay their
estimated quarterly deposit insurance assessments for all of 2010, 2011 and 2012. Accordingly, in
December 2009 the Company prepaid $12.5 million in deposit insurance premiums related to these
periods. This prepaid amount was $8.7 million as of December 31, 2010, and was recorded as a
component of other assets in the Companys Consolidated Statements of Financial Condition. This
amount will be continue to be charged to expense in future periods as the Company receives
quarterly statements for FDIC deposit insurance assessments.
In 2008 the FDIC created the Transaction Account Guarantee Program (TAGP), which provided
participating banks with full deposit insurance coverage for non-interest-bearing transaction
deposit accounts, regardless of dollar amount through June 30, 2010, and later extended by the FDIC
through December 31, 2010. The Dodd-Frank Act subsequently extended this insurance coverage on a
broader basis for an additional two years through December 31, 2012. As such, the Banks
non-interest-bearing transaction deposit accounts are fully-insured under this program, which has
not had and is not expected to have a material impact on the deposit insurance premiums paid by the
Bank.
Transactions With Affiliates Sections 23A and 23B of the Federal Reserve Act govern transactions
between an insured federal savings association, such as the Bank, and any of its affiliates, such
as the Company. Federal Reserve Board Regulation W comprehensively implements and interprets
Sections 23A and 23B.
An affiliate is any company or entity that controls, is controlled by or is under common control
with it. A subsidiary of a savings association that is not also a depository institution or a
financial subsidiary under the GLB Act is not treated as an affiliate; however, the OTS may treat
subsidiaries as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which
an institution or a subsidiary may engage in covered transactions with any one affiliate to an
amount equal to 10% of such savings associations capital stock and surplus, and limit all such
transactions with all affiliates to 20% of such stock and surplus. All such transactions must be
on terms that are consistent with safe and sound banking practices. The term covered transaction
includes the making of loans, purchase of assets, issuance of guarantees and other similar types of
transactions. In addition, the Dodd-Frank Act expanded covered transactions to include derivatives
transactions and securities borrowing and lending transactions to the extent that they result in
credit exposure to an affiliate. Further, most loans by a savings association to any of its
affiliates must be secured by specified collateral amounts. In addition, any covered transaction
by a savings association with an affiliate and any purchase of assets or services by an savings
association from an affiliate must be on terms that are at least as favorable to the savings
association as those that would be provided to a non-affiliate.
At December 31, 2010, the Company and Bank did not have any covered transactions.
Acquisitions and Mergers Under the federal Bank Merger Act, any merger of the Bank with or into
another institution would require the approval of the OTS, or the primary federal regulator of the
resulting entity if it is not an OTS-regulated institution. Refer also to Acquisition of Bank
Mutual Corporation, below.
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Prohibitions Against Tying Arrangements Savings associations are subject to the prohibitions of
12 U.S.C. Section 1972 on certain tying arrangements. A savings association is prohibited, subject
to exceptions, from extending credit to or offering any other service, or fixing or varying the
consideration for such credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a competitor.
Uniform Real Estate Lending Standards The federal banking agencies adopted uniform regulations
prescribing standards for extensions of credit that are secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or other improvements to
real estate. Under the joint regulations, all insured depository institutions must adopt and
maintain written policies that establish appropriate limits and standards for such extensions of
credit. These policies must establish loan portfolio diversification standards, prudent
underwriting standards that are clear and measurable, loan administration procedures, and
documentation, approval and reporting requirements. These lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository institution to establish
internal loan-to-value limits for real estate loans that are not in excess of the following
supervisory limits:
| for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral; | ||
| for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), 75%; | ||
| for loans for the construction of commercial, multi-family or other non-residential property, 80%; | ||
| for loans for the construction of one- to four-family properties, 85%; and | ||
| for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), 85%. |
Although there is no supervisory loan-to-value limit for owner-occupied one- to four-family and
home equity loans, the Interagency Guidelines provide that an institution should require credit
enhancement in the form of mortgage insurance or readily marketable collateral for any such loan
with a loan-to-value ratio that equals or exceeds 90% at origination. In December 2010, the
federal government issued an update to the Interagency Guidelines that provided additional
clarification as to expectations for prudent appraisal and evaluation policies, procedures, and
practices in light of the Dodd-Frank Act and other federal statutory changes affecting appraisals.
Community Reinvestment Act Under the Community Reinvestment Act (CRA), any insured depository
institution, including the Bank, must, consistent with its safe and sound operation, help meet the
credit needs of its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs nor does it limit an institutions
discretion to develop the types of products and services that it believes are best suited to its
particular community. The CRA requires the OTS to assess the institutions record of meeting the
credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution, including applications for additional branches and acquisitions.
Among other things, the CRA regulations contain an evaluation system that rates an institution
based on its actual performance in meeting community needs. In particular, the evaluation system
focuses on three tests:
| a lending test, to evaluate the institutions record of making loans in its service areas; | ||
| an investment test, to evaluate the institutions record of making community development investments; and | ||
| a service test, to evaluate the institutions delivery of services through its branches, ATMs and other offices. |
The CRA requires the OTS, in the case of the Bank, to provide a written evaluation of a savings
associations CRA performance utilizing a four-tiered descriptive rating system and requires public
disclosure of the CRA rating. The Bank received a satisfactory overall rating in its most recent
CRA examination.
Safety and Soundness Standards Each federal banking agency, including the OTS, has guidelines
establishing general standards relating to internal controls, information and internal audit
systems, loan documentation, credit
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underwriting, interest rate exposure, asset growth, asset quality, customer privacy, liquidity,
earnings, and compensation and benefits. The guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified in the guidelines.
The guidelines also prohibit excessive compensation as an unsafe and unsound practice.
Loans to Insiders A savings associations loans to its executive officers, directors, any owner
of more than 10% of its stock (each, an insider) and certain entities affiliated with any such
person (an insiders related interest) are subject to the conditions and limitations imposed by
Section 22(h) of the Federal Reserve Act and the Federal Reserve Boards Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and the insiders
related interests may not exceed the loans-to-one-borrower limit applicable to national banks
(comparable to the limit applicable to the Banks loans). All loans by a savings association to
all insiders and related interests in the aggregate may not exceed the savings associations
unimpaired capital and surplus. With certain exceptions, loans to an executive officer (other than
loans for the education of the officers children and certain loans secured by the officers
residence) may not exceed the greater of $25,000 or 2.5% of the savings associations unimpaired
capital and surplus, but in no event more than $100,000. Regulation O also requires that any
proposed loan to an insider or a related interest be approved in advance by a majority of the board
of directors of the savings association, without the vote of any interested director, if such loan,
when aggregated with any existing loans to that insider and the insiders related interests, would
exceed either $500,000 or the greater of $25,000 or 5% of the savings associations unimpaired
capital and surplus. Generally, such loans must be made on substantially the same terms as, and
follow credit underwriting procedures that are no less stringent than, those that are prevailing at
the time for comparable transactions with other persons and must not present more than a normal
risk of collectability. There is an exception for extensions of credit pursuant to a benefit or
compensation plan of a savings association that is widely available to employees that does not give
preference to officers, directors, and other insiders. As of December 31, 2010, total loans to
insiders were $595,000 (including $383,000 which relates to residential mortgages that have been
sold in the secondary market).
The Patriot Act The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) gives the federal government
powers to address terrorist threats through enhanced domestic security measures and surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. Title III
of the Patriot Act encourages information sharing among regulatory agencies and law enforcement
bodies and imposes affirmative obligations on a range of financial institutions, including savings
associations. Title IIIs requirements on financial institutions include:
| Such institutions must establish anti-money laundering programs that include, at minimum; (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs, and (iv) an independent audit function to test the program. | ||
| Bank regulators, may issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened. | ||
| Institutions that establish, maintain, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. | ||
| Institutions may not establish, maintain, administer or manage correspondent accounts for foreign shell banks and are subject to recordkeeping obligations relating to foreign bank correspondent accounts. | ||
| Bank regulators are directed to consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and bank merger applications. |
Regulation and Supervision of the Company
Holding Company Regulation The Company is registered with the OTS as a unitary savings and loan
holding company and is subject to regulation and supervision by the OTS. The OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined to be a risk to
the Bank and to monitor and regulate the Companys capital and activities such as dividends and
share repurchases that can affect capital. As a result of the Dodd-Frank Act, the
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powers and duties of the OTS relating to savings and loan holding companies, including rule-making
and supervision authority, will be transferred to the Federal Reserve.
The Company is limited to activities permissible for financial holding companies, which are
activities that are financial in nature, including underwriting equity securities and insurance,
incidental to financial activities or complementary to a financial activity.
Federal law prohibits a savings and loan holding company from acquiring control of another savings
institution or holding company without prior written regulatory approval. With some exceptions, it
also prohibits the acquisition or retention of more than 5% of the equity securities of a company
engaged in activities that are not closely related to banking or financial in nature or acquiring
an institution that is not federally-insured. In evaluating applications to acquire savings
institutions, the regulator must consider the financial and managerial resources, future prospects
of the institution involved, the effect of the acquisition on the risk to the insurance fund, the
convenience and needs of the community and competitive factors.
Federal Securities Laws The Companys common stock is registered with the SEC under the
Securities Exchange Act of 1934. The Company is therefore subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the Securities Exchange
Act. As a publicly-traded company, the Company is also subject to legislation intended to
strengthen the securities markets and public confidence in them; for example, the Dodd-Frank Act
includes requirements for enhanced disclosure and governance requirements for all public companies.
Because some OTS accounting and governance regulations also refer to the SECs regulations, the
SEC rules may also affect the Bank.
Acquisition of Bank Mutual Corporation No person may acquire control of the Company (or the Bank)
without first obtaining the approval of such acquisition by the appropriate federal regulator.
Currently, under the federal Change in Bank Control Act and the Savings and Loan Holding Company
Act, any person, including a company, or group acting in concert, seeking to acquire 10% or more of
the outstanding shares of the Company must file a notice with the OTS. In addition, any person or
group acting in concert seeking to acquire more than 25% of the Companys common stock must obtain
the prior approval of the OTS. The OTS generally has 60 days in which to act on such applications.
Federal and State Taxation
Federal Taxation The Company and its subsidiaries file a calendar year consolidated federal
income tax return, reporting income and expenses using the accrual method of accounting. The
federal income tax returns for the Companys subsidiaries have been examined and audited or closed
without audit by the Internal Revenue Service for tax years through 2007.
Depending on the composition of its items of income and expense, the Company may be subject to
alternative minimum tax (AMT) to the extent AMT exceeds the regular tax liability. AMT is
calculated at 20% of alternative minimum taxable income (AMTI). AMTI equals regular taxable
income increased by certain tax preferences, including depreciation deductions in excess of
allowable AMT amounts, certain tax-exempt interest income and 75% of the excess of adjusted current
earnings (ACE) over AMTI. ACE equals AMTI adjusted for certain items, primarily accelerated
depreciation and tax-exempt interest. The payment of AMT would create a tax credit, which can be
carried forward indefinitely to reduce the regular tax liability in future years.
State Taxation Prior to 2009, the state of Wisconsin imposed a corporate franchise tax of 7.9%
on the separate taxable incomes of the members of the Companys consolidated income tax group,
excluding its Nevada subsidiaries. Under that law, the income of the Nevada subsidiaries was only
subject to taxation in Nevada, which currently does not impose a corporate income or franchise tax.
However, beginning in 2009, Wisconsin law was amended to significantly restrict the tax benefits
of out-of-state investment subsidiaries through the enactment of combined reporting legislation.
As a result, the Companys consolidated income tax group is subject to combined reporting, which
will result in Wisconsin income taxes being imposed on the earnings of the Banks out-of-state
investment subsidiaries beginning in 2009. For additional discussion regarding the impact of this
change, refer to Results of OperationsIncome Tax Expense (Benefit) in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations. Also, refer to Item
1A. Risk Factors, for additional discussion.
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Item 1A. Risk Factors
In addition to the discussion and analysis set forth in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations, and the cautionary statements set forth
in Item 1. Business, the following risk factors should be considered when evaluating the
Companys results of operations, financial condition, and outlook.
The Global Credit Market Instability and Weak Economic Conditions May Significantly Affect the
Companys Liquidity, Financial Condition, and Earnings
Global financial markets recently have been, and continue to be, unstable and unpredictable, and
economic conditions have been weak. Developments relating to the federal budget and federal
borrowing authority could also negatively impact these markets. Continued, and potentially
increased, volatility, instability and weakness could affect the Companys ability to sell
investment securities and other financial assets, which in turn could adversely affect the
Companys liquidity and financial position. This instability also could affect the prices at which
the Company could make any such sales, which could adversely affect its earnings and financial
condition. Conditions could also negatively affect the Companys ability to secure funds or raise
capital for acquisitions and other projects, which in turn, could cause the Company to use deposits
or other funding sources for such projects.
In addition, the instability of the markets and weakness of the economy could affect the strength
of the Companys customers or counterparties, their willingness to do business, and/or their
ability to fulfill their obligations, which could further affect the Companys earnings. Current
conditions, including high unemployment, weak corporate performance, soft real estate markets, and
the decline of home sales and property values, could negatively affect the volume of loan
originations and prepayments, the value of the real estate securing the Companys mortgage loans,
and borrowers ability to repay loan obligations, all of which could adversely impact the Companys
earnings and financial condition.
The Companys Actual Loan Losses May Exceed its Allowance for Loan Losses, Which Could Have a
Material Adverse Affect on the Companys Earnings
The Company has policies and procedures in place to manage its exposure to risk related to its
lending operations. These practices include, among other things, geographic limits; restrictions
on lending in certain situations; underwriting practices; regularly monitoring loan payment status;
and/or corresponding regularly with and obtaining regular financial updates from large borrowers
and/or guarantors. However, despite these practices, the Companys loan customers may not repay
their loans according to the terms of the loans and the collateral securing the payment of these
loans may be insufficient to pay any remaining loan balance. Continued economic weakness,
including high unemployment rates and declining values of the collateral underlying loans, may
affect borrowers ability to repay their loan obligations that could lead to increased loan losses
or provisions. As a result, the Company may experience significant loan losses, including losses
that may exceed the amounts established in the allowance for loan losses, which could have a
material adverse effect on its operating results.
Further Declines in the Real Estate Values May Continue to Adversely Affect Collateral Values and
the Companys Profits
The Companys market areas have generally experienced a decline in real estate values, an increase
in residential and non-residential tenant vacancies, and weakness in the market for sale of new
properties. These developments could negatively affect the value of the collateral securing the
Companys mortgage and related loans. That decrease in value could in turn lead to increased
losses on loans in the event of foreclosures. Increased losses would affect the Companys loan
loss allowance and may cause it to increase its provision for loan losses resulting in a charge to
earnings.
Some of the Companys Lending Activities Are Riskier than One- to Four-Family Real Estate Loans
The Company has identified commercial real estate, commercial business, construction, and consumer
loans as areas for lending emphasis and has recently augmented its personnel to increase its
penetration in the commercial lending market. While lending diversification is being pursued for
the purpose of increasing net interest income, these types of loans historically have carried
greater risk of payment default than residential real estate loans. As the volume of these loans
increases, credit risk increases. In the event of continued substantial borrower defaults and/or
increased defaults resulting from these diverse types of lending, the Companys provision for loan
losses would further increase and loans may be written off, and therefore, earnings would be
reduced.
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The Banks Ability to Pay Dividends to the Company Is Subject to Current and Potential Future
Limitations That May Affect the Companys Ability to Pay Dividends to Its Shareholders and
Repurchase Its Stock
The Company is a separate legal entity from the Bank and engages in no substantial activities other
than its ownership of the common stock of the Bank. Consequently, the Companys net income and
cash flows are derived primarily from the Banks operations and capital distributions. The
availability of dividends from the Bank to the Company is limited by various statutes and
regulations, including those of the OTS; as a result, it is possible, depending on the results of
operations and the financial condition of the Bank and other factors, that the OTS could restrict
the payment by the Bank of dividends or other capital distributions or take other actions which
could negatively affect the Banks results and dividend capacity. The federal regulators have
become increasingly stringent in their interpretation, application and enforcement of banks
capital requirements, which also could affect the OTSs willingness to approve Bank dividends to
the Company. If the Bank is required to further reduce its dividends to the Company, or is unable
to pay dividends at all, the Company may not be able to pay dividends to its shareholders at
existing levels or at all and/or may not be able to repurchase its common stock.
The Company Has Significant Goodwill That It May Need to Write Off (Expense) in the Future
The Company has $52.6 million in goodwill as of December 31, 2010. The Company analyzes goodwill
for impairment on an annual basis or more frequently when, in the judgment of management, an event
has occurred that may indicate that additional analysis is required. At some point in the future,
particularly in the event of deterioration in the Companys financial condition or operating
results, further weakness in the financial institutions industry, and/or continued economic
weakness, the Companys goodwill could become impaired and it would need to write all or a portion
of it off as a reduction to earnings in the period in which it becomes impaired.
Recent and Future Legislation and Rulemaking in Response to Market and Economic Conditions May
Significantly Affect the Companys Results of Operations and Financial Condition
Instability. volatility, and failures in the credit and financial institutions markets have led
regulators and legislators to consider and/or adopt proposals that will significantly affect
financial institutions and holding companies, including the Company. Legislation such as the
Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009,
and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as programs such
as the Troubled Assets Relief Program, were adopted. Although designed to address capital and
liquidity issues in the banking system, there can be no assurance as to the ultimate impact of
these actions on financial markets. The failure of these actions could have a material, adverse
effect on the Companys business, financial condition, results of operations, access to credit or
the value of the Companys securities.
Recent legislation, and further legislative and regulatory proposals to reform the U.S. financial
system will affect the Company and the Bank. These acts and regulatory actions, as well as future
legislative and regulatory proposals, will, among other things, replace the OTS as the Banks and
the Companys primary regulator (likely in 2011), create a Consumer Financial Protection Agency,
impose capital requirements upon the Company, and subject financial institutions to significant
further regulation in many aspects of their business. Under pending proposals, the roles of Fannie
Mae and/or Freddie Mac could be substantially altered or eliminated, which could have a significant
effect on the housing market in the United States and our lending for real estate mortgages.
Additionally, the FDIC has changed the basis for its assessment of deposit insurance fees, and
higher taxes and/or special fees or assessments have been proposed to apply to some or all
businesses in general, or financial institutions specifically, which could create direct additional
costs for the Company.
Also, the economic conditions have resulted in periodic attempts by federal, state, and/or local
governments to legislate foreclosure forbearance, forced loan modifications, cram downs of losses
to lenders in bankruptcy proceedings, or upkeep laws for foreclosed properties. Such efforts, if
successful, could lead to increased loan charge-offs or loan loss provisions and/or reduced income.
These efforts could also adversely affect the value of certain mortgage-related securities not
guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae, such as private-label CMOs.
The recently-enacted laws, proposed acts, taxes and fees, or any other legislation or regulations
ultimately enacted, could materially affect the Company, the Bank and their operations and
profitability by imposing additional regulatory burdens and costs, imposing limits on fees and
other sources of income, and otherwise more generally affecting the conduct of their business.
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Changes in the Financial Condition or Future Prospects of the FHLB of Chicago May Have an
Adverse Impact on the Companys Investment in FHLB Common Stock
The Company is a voluntary member of the FHLB of Chicago, and holds shares in the FHLB of Chicago
as a condition of borrowing money from it. From 2007 through 2010, the FHLB of Chicago was
required to suspend payment of dividends on its stock, although it recently resumed payment of a
modest cash dividend in the first quarter of 2011. However, if there are any developments in the
future that impair the value of the common stock of the FHLB of Chicago, the Company would be
required to write down the value of the shares that it holds, which in turn could affect the
Companys net income and shareholders equity.
The Interest Rate Environment May Have an Adverse Impact on the Companys Net Interest Income
Interest rates have been volatile in recent years, even though they were relatively stable in 2009
and 2010. A volatile interest rate environment makes it difficult for the Company to coordinate
the timing and amount of changes in the rates of interest it pays on deposits and borrowings with
the rates of interest it earns on loans and securities. In addition, volatile interest rate
environments cause corresponding volatility in the demand by individuals and businesses for the
loan and deposit products offered by the Company. This volatility has a direct impact on the
Companys net interest income, and consequently, its net income. Future interest rates could
continue to be volatile and management is unable to predict the impact such volatility would have
on the net interest income and profits of the Company.
Changes in Market Interest Rates or Other Conditions May Have an Adverse Impact on the Fair Value
of the Companys Available-for-Sale Securities, Shareholders Equity, and Profits
GAAP requires the Company to carry its securities at fair value on its balance sheet. Unrealized
gains or losses on these securities, reflecting the difference between the fair market value and
the amortized cost, net of its tax effect, are reported as a component of shareholders equity.
When market rates of interest increase, the fair value of the Companys securities
available-for-sale generally decreases and equity correspondingly decreases. When rates decrease,
fair value generally increases and shareholders equity correspondingly increases. However, due to
significant disruptions in global financial markets during 2008, this usual relationship was
disrupted. Despite a declining interest rate environment during that period, certain of the
Companys available-for-sale securities declined in value, its private-label CMOs in particular.
Although the value of these securities recovered somewhat in 2009 and 2010, management expects
continued volatility in the fair value of its private-label CMOs and is not able to predict when or
if the fair value of such securities will fully recover.
Wisconsin Tax Developments Could Reduce the Companys Net Income
Like many Wisconsin financial institutions, the Company has non-Wisconsin subsidiaries that hold
and manage investment assets and loans, the income from which has not been subject to Wisconsin tax
prior to 2009. The Wisconsin Department of Revenue (the Department) has instituted an audit
program specifically aimed at financial institutions out-of-state investment subsidiaries. The
Department has asserted the position that some or all of the income of the out-of-state
subsidiaries in years prior to 2009 was taxable in Wisconsin. In 2010 the Departments auditor
issued a Notice of Proposed Audit Report to the Bank which proposes to tax all of the income of the
Banks out-of-state investment subsidiaries for all periods that are still open under the statute
of limitations, which includes tax year back to 1997. This is merely a preliminary determination
made by the auditor and does not represent a formal assessment. The Banks outside legal counsel
has met with representatives of the Department to discuss, and object to, the auditors proposed
adjustments. The Department has not yet responded to the Companys objection.
Management continues to believe that the Bank has reported income and paid Wisconsin taxes in prior
periods in accordance with applicable legal requirements and the Departments long-standing
interpretations of them and that the Banks position will prevail in discussions with the
Department, court proceedings, or other actions that may occur. Ultimately, however, an adverse
resolution of these matters could result in additional Wisconsin tax obligations for prior periods,
which could have a substantial negative impact on the Banks earnings in the period such resolution
is reached. The Bank may also incur further costs in the future to address and defend these issues.
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Strong Competition Within the Companys Market Area May Affect Net Income
The Company encounters strong competition both in attracting deposits and originating real estate
and other loans. The Company competes with commercial banks, savings institutions, mortgage
banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage
and investment banking firms. The Companys market area includes branches of several commercial
banks that are substantially larger than the Company in terms of deposits and loans. In addition,
tax-exempt credit unions operate in most of the Companys market area and aggressively price their
products and services to a large part of the population. If competitors succeed in attracting
business from the Companys customers, its deposits and loans could be reduced, which would likely
affect earnings.
FDIC Increases in Deposit Insurance Premiums Have Raised the Companys Expenses
In 2009 the FDIC significantly increased the initial base assessment rates paid by financial
institutions for deposit insurance, imposed a special assessment, and required financial
institutions to prepay assessments for all of 2010, 2011, and 2012. These measures were partly in
response to the high level of recent bank failures that caused an increase in FDIC resolution costs
and a reduction in the deposit insurance fund. Furthermore, in February 2011 the FDIC issued a new
rule that changes the assessment base and risk-based assessment rates of all insured financial
institutions beginning April 1, 2011. These changes may continue to adversely affect the earnings
of the Company and/or the Bank.
The Companys Ability to Grow May Be Limited if It Cannot Make Acquisitions
The Company will continue to seek to expand its banking franchise by opening new offices, growing
internally, and acquiring other financial institutions or branches and other financial services
providers. The Companys ability to grow through selective acquisitions of other financial
institutions or branches will depend on successfully identifying, acquiring, and integrating those
institution or branches. The Company has not made any acquisitions in recent years, as management
has not identified acquisitions for which it was able to reach an agreement on terms management
believed were appropriate and/or that met its acquisition criteria. The Company cannot provide any
assurance that it will be able to generate internal growth, identify attractive acquisition
candidates, make acquisitions on favorable terms, or successfully integrate any acquired
institutions or branches.
The Company Depends on Certain Key Personnel and the Companys Business Could Be Harmed by the Loss
of Their Services
The Companys success depends in large part on the continued service and availability of its
management team, and on its ability to attract, retain and motivate qualified personnel. This team
was recently augmented in order to attempt to increase the Companys penetration into the
commercial lending market. The competition for these individuals can be significant, and the loss
of key personnel could harm the Companys business. The Company cannot provide assurances that it
will be able to retain existing key personnel or attract additional qualified personnel.
The Company Is Subject to Security and Operational Risks Relating to the Use of Technology that
Could Damage Its Reputation and Business
Security breaches in the Companys internet, telephonic, or other electronic banking activities
could expose it to possible liability and damage its reputation. Any compromise of the Companys
security also could deter customers from using its internet banking services that involve the
transmission of confidential information. The Company relies on standard internet and other
security systems to provide the security and authentication necessary to effect secure transmission
of data. These precautions may not protect the Companys systems from compromises or breaches of
its security measures, which could result in damage to the Companys reputation and business.
Additionally, the Company outsources a large portion of its data processing to third parties. If
these third party providers encounter technological or other difficulties or if they have
difficulty in communicating with the Company, it will significantly affect the Companys ability to
adequately process and account for customer transactions, which would significantly affect business
operations.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company and its subsidiaries conduct their business through an executive office and 79 banking
offices, which had an aggregate net book value of $48.6 million as of December 31, 2010, excluding
furniture, fixtures, and equipment. As of December 31, 2010, the Company owned the building and
land for 69 of its property locations and leased the space for 11.
The Company also owns 15 acres of undeveloped land in a suburb of Milwaukee, Wisconsin, through its
MC Development subsidiary, as well as approximately 300 acres of undeveloped land in another
community located near Milwaukee through MC Developments 50% ownership in Arrowood Development
LLC. The net book value of these parcels of land was $5.6 million at December 31, 2010.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Management believes that these routine legal
proceedings, in the aggregate, are immaterial to the Companys financial condition, results of
operations, and cash flows. Refer also to Item 1A. Risk FactorsWisconsin Tax Developments
Could Reduce the Companys Net Income regarding certain Wisconsin income tax developments.
Item 4. Reserved
This item is not used.
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Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
The common stock of the Company is traded on The NASDAQ Global Select Market under the symbol BKMU.
As of February 28, 2011, there were 45,779,443 shares of common stock outstanding and approximately
5,200 shareholders of record.
The Company paid a total cash dividend of $0.20 per share in 2010. A cash dividend of $0.03 per
share was paid on March 1, 2011, to shareholders of record on February 18, 2011. For additional
discussion relating to the Companys dividends, refer to Financial ConditionShareholders
Equity in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. The payment of dividends in the future is discretionary with the Companys board of
directors and will depend on the Companys operating results and financial condition, regulatory
limitations, tax considerations, and other factors. Interest on deposits will be paid prior to
payment of dividends on the Companys common stock. Refer also to Item 1. BusinessRegulation
and Supervision regarding regulatory limitations on the payment of dividends by the Bank to the
Company, which in turn could affect the payment of dividends by the Company to its shareholders.
The high and low trading prices of the Companys common stock from January 1, 2009, through
December 31, 2010, by quarter, and the dividends paid in each quarter, were as follows:
2010 Stock Prices | 2009 Stock Prices | Cash Dividends Paid | ||||||||||||||||||||||
High | Low | High | Low | 2010 | 2009 | |||||||||||||||||||
1st Quarter |
$ | 7.21 | $ | 5.98 | $ | 11.56 | $ | 7.06 | $ | 0.07 | $ | 0.09 | ||||||||||||
2nd Quarter |
7.40 | 5.68 | 10.81 | 8.60 | 0.07 | 0.09 | ||||||||||||||||||
3rd Quarter |
6.20 | 5.05 | 10.07 | 8.32 | 0.03 | 0.09 | ||||||||||||||||||
4th Quarter |
5.42 | 4.51 | 8.84 | 6.88 | 0.03 | 0.07 | ||||||||||||||||||
Total | $ | 0.20 | $ | 0.34 | ||||||||||||||||||||
During the first two months of 2011, the trading price of the Companys common stock ranged between
$4.38 to $5.08 per share, and closed on February 28, 2011, at $4.62 per share.
During 2010, the Company repurchased 1.0 million shares of its common stock at an average price of
$6.52 per share, including 309,000 shares that were not purchased as part of a publicly announced
repurchase program. These later shares were existing owned shares used by option holders in
payment of the purchase price and/or tax withholding obligations in connection with the exercise of
stock options under the Companys 2001 Stock Incentive Plan. The Company did not repurchase any of
its common stock during the fourth quarter of 2010 and the Companys board of directors has not
authorized a new stock repurchase program. For additional discussion relating to the Companys
repurchase of its common stock, refer to Financial ConditionShareholders Equity in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
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Set forth below is a line graph comparing the cumulative total shareholder return on Company common
stock, based on the market price of the common stock and assuming reinvestment of cash dividends,
with the cumulative total return of companies on the NASDAQ Stock Market U.S. Index (NASDAQ
Composite Index) and the NASDAQ Stock Market Bank Index. The graph assumes that $100 was invested
on December 31, 2005, in Company common stock and each of those indices.
Period Ending | ||||||||||||||||||||||||||||||||
Index | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | ||||||||||||||||||||||||||
Bank Mutual Corporation |
100.00 | 117.03 | 105.18 | 118.80 | 74.29 | 52.98 | ||||||||||||||||||||||||||
NASDAQ Composite Index |
100.00 | 109.84 | 119.14 | 57.41 | 82.53 | 97.95 | ||||||||||||||||||||||||||
NASDAQ Bank Index |
100.00 | 112.23 | 88.95 | 64.59 | 54.35 | 64.29 | ||||||||||||||||||||||||||
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Item 6. Selected Financial Data
The following table provides selected financial data for the Company for its past five fiscal
years. The data is derived from the Companys audited financial statements, although the table
itself is not audited. The following data should be read together with the Companys consolidated
financial statements and related notes and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
At December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands, except number of shares and per share amounts) | ||||||||||||||||||||
Selected financial condition data: |
||||||||||||||||||||
Total assets |
$ | 2,591,818 | $ | 3,512,064 | $ | 3,489,689 | $ | 3,488,046 | $ | 3,451,385 | ||||||||||
Loans receivable, net |
1,323,569 | 1,506,056 | 1,829,053 | 1,994,556 | 2,024,325 | |||||||||||||||
Loans held-for-sale, net |
37,819 | 13,534 | 19,030 | 7,952 | 3,787 | |||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||
Investment securities |
228,023 | 614,104 | 419,138 | 99,450 | 48,290 | |||||||||||||||
Mortgage-related securities |
435,234 | 866,848 | 850,867 | 1,099,922 | 1,064,851 | |||||||||||||||
Foreclosed and repossessed assets |
19,293 | 17,689 | 4,768 | 3,687 | 1,231 | |||||||||||||||
Goodwill |
52,570 | 52,570 | 52,570 | 52,570 | 52,570 | |||||||||||||||
Mortgage servicing rights |
7,769 | 6,899 | 3,703 | 4,708 | 4,653 | |||||||||||||||
Deposit liabilities |
2,078,310 | 2,137,508 | 2,128,277 | 2,093,453 | 2,149,523 | |||||||||||||||
Borrowings |
149,934 | 906,979 | 907,971 | 912,459 | 705,025 | |||||||||||||||
Shareholders equity |
312,953 | 402,477 | 399,611 | 430,035 | 533,779 | |||||||||||||||
Tangible shareholders equity (1) |
260,383 | 349,907 | 347,041 | 377,465 | 481,209 | |||||||||||||||
Number of shares outstanding, net
of
treasury stock |
45,769,443 | 46,165,635 | 47,686,759 | 49,834,756 | 60,277,087 | |||||||||||||||
Book value per share |
$ | 6.84 | $ | 8.72 | $ | 8.38 | $ | 8.63 | $ | 8.86 | ||||||||||
Tangible shareholders equity
per share (1) |
$ | 5.69 | $ | 7.58 | $ | 7.28 | $ | 7.57 | $ | 7.98 | ||||||||||
For the Year Ended December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Selected operating data: |
||||||||||||||||||||
Total interest income |
$ | 112,569 | $ | 151,814 | $ | 177,556 | $ | 183,001 | $ | 174,404 | ||||||||||
Total interest expense |
66,276 | 83,784 | 104,191 | 113,771 | 99,091 | |||||||||||||||
Net interest income |
46,293 | 68,030 | 73,365 | 69,230 | 75,313 | |||||||||||||||
Provision for (recovery of) loan
losses |
49,619 | 12,413 | 1,447 | (272 | ) | 632 | ||||||||||||||
Net interest
income (loss) after provision for loan losses |
(3,326 | ) | 55,617 | 71,918 | 69,502 | 74,681 | ||||||||||||||
Total non-interest income |
40,603 | 31,681 | 17,881 | 20,434 | 17,019 | |||||||||||||||
Total non-interest expense (2) |
159,825 | 68,155 | 63,550 | 63,549 | 61,295 | |||||||||||||||
Income
(loss) before income taxes |
(122,548 | ) | 19,143 | 26,250 | 25,995 | 30,405 | ||||||||||||||
Income tax expense (benefit) |
(49,909 | ) | 5,418 | 9,094 | 8,892 | 9,808 | ||||||||||||||
Net income (loss) before
non-controlling interest |
(72,639 | ) | 13,725 | 17,155 | 17,495 | 20,597 | ||||||||||||||
Net loss (income) attributable to
non-
controlling interest |
(1 | ) | | 1 | (392 | ) | | |||||||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | $ | 17,103 | $ | 20,597 | |||||||||
Earnings (loss) per share-basic |
$ | (1.59 | ) | $ | 0.29 | $ | 0.36 | $ | 0.32 | $ | 0.35 | |||||||||
Earnings (loss) per share-diluted |
$ | (1.59 | ) | $ | 0.29 | $ | 0.35 | $ | 0.31 | $ | 0.34 | |||||||||
Cash dividends paid per share |
$ | 0.20 | $ | 0.34 | $ | 0.36 | $ | 0.33 | $ | 0.29 |
(1) | This is a non-GAAP measure. Tangible shareholders equity is total shareholders equity minus goodwill. | |
(2) | Total non-interest expense in 2010 includes $89.3 million in loss on early repayment of FHLB borrowings. |
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Table of Contents
At or For the Year Ended December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Selected financial ratios: |
||||||||||||||||||||
Net interest margin (3) |
1.47 | % | 2.09 | % | 2.21 | % | 2.09 | % | 2.27 | % | ||||||||||
Net interest rate spread |
1.26 | 1.82 | 1.85 | 1.59 | 1.74 | |||||||||||||||
Return on average assets |
(2.12 | ) | 0.39 | 0.48 | 0.49 | 0.59 | ||||||||||||||
Return on average shareholders
equity |
(18.47 | ) | 3.40 | 4.15 | 3.57 | 3.89 | ||||||||||||||
Efficiency ratio (4) |
99.36 | 73.32 | 68.77 | 69.92 | 67.28 | |||||||||||||||
Non-interest expense as a percent of
adjusted average assets (5) |
2.06 | 1.95 | 1.80 | 1.81 | 1.77 | |||||||||||||||
Shareholders equity to total assets |
12.07 | 11.39 | 11.45 | 12.33 | 15.47 | |||||||||||||||
Tangible shareholders equity to
adjusted total assets (6) |
10.25 | 10.09 | 10.07 | 10.95 | 14.11 | |||||||||||||||
Selected asset quality ratios: |
||||||||||||||||||||
Non-performing loans to loans
receivable, net (7) |
9.29 | % | 2.83 | % | 1.81 | % | 0.65 | % | 0.72 | % | ||||||||||
Non-performing assets to total
assets (7) |
5.49 | 1.72 | 1.08 | 0.48 | 0.46 | |||||||||||||||
Allowance for loan losses to
non-performing loans |
39.03 | 39.99 | 36.89 | 90.98 | 86.74 | |||||||||||||||
Allowance for loan losses to total
loans receivable, net |
3.63 | 1.13 | 0.67 | 0.59 | 0.62 | |||||||||||||||
Charge-offs to average loans |
1.26 | 0.45 | 0.05 | 0.03 | 0.01 |
(3) | Net interest margin is calculated by dividing net interest income by average earnings assets. | |
(4) | Efficiency ratio is calculated by dividing non-interest expense (excluding loss on early repayment of FHLB borrowings) by the sum of net interest income and non-interest income (excluding gains and losses on investments). | |
(5) | Ratio in 2010 excludes the impact of $89.3 million loss on early repayment of FHLB borrowings. | |
(6) | This is a non-GAAP measure. The ratio is calculated by dividing total shareholders equity less intangible assets (net of deferred taxes) divided by total assets less intangible assets (net). Intangible assets consist of goodwill and other intangible assets. Deferred taxes have been established only on other intangible assets and are immaterial in amount. | |
(7) | Non-performing loans and assets in 2010 included $38.1 million in loans (2.88% of loans receivable and 1.47% of total assets) that are current with respect to contractual principal and interest payments. |
33
Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The discussion and analysis in this section should be read in conjunction with Item 8. Financial
Statements and Supplementary Data, and Item 7A. Quantitative and Qualitative Disclosures about
Market Risk, as well as Item 1. Business and Item 1A. Risk Factors.
Results of Operations
Overview The Companys net income (loss) for the years ended December 31, 2010, 2009, and 2008,
was $(72.6) million, $13.7 million, and $17.2 million, respectively. These amounts represented
returns on average assets of (2.12)%, 0.39%, and 0.48%, respectively, and returns on average equity
of (18.47)%, 3.40%, and 4.15%, respectively. Diluted earnings (loss) per share during these
periods were $(1.59), $0.29, and $0.35, respectively.
The Companys net loss in 2010 was impacted by the following unfavorable developments compared to
2009:
| a one-time $89.3 million loss on early repayment of FHLB borrowings in 2010; | ||
| a $37.2 million or 300% increase in provision for loan losses; | ||
| a $21.7 million or 32.0% decrease in net interest income; and | ||
| a $5.7 million or 882% increase in net loss on foreclosed real estate. |
These unfavorable developments were partially offset by the following favorable developments in
2010 compared to 2009:
| a $55.3 million change in income taxes from an expense of $5.4 million in 2009 to a benefit of $49.9 million in 2010; | ||
| a $9.2 million or 136% increase in gain on investment activities; and | ||
| a $3.0 million or 7.7% decrease in compensation-related expenses. |
The Companys earnings performance in 2009 was impacted by the following unfavorable developments
compared to 2008:
| an $11.0 million or 758% increase in provision for loan losses; | ||
| a $5.3 million or 7.3% decrease in net interest income; | ||
| a $2.7 million or 817% increase in regular FDIC insurance premiums; | ||
| a $1.6 million non-recurring special assessment from the FDIC; and | ||
| a $1.2 million or 15.4% decrease in other non-interest income. |
These unfavorable developments were partially offset by the following favorable developments in
2009 compared to 2008:
| a $7.9 million increase in gain on investments compared to a loss in 2008; | ||
| a $7.0 million or 332% increase in gain on loan sales activities; | ||
| a $1.9 million decrease in income tax expense (excluding consideration of the tax benefit, below) due to lower pre-tax income; and | ||
| a $1.8 million one-time tax benefit recorded against income tax expense as a result of a change in Wisconsin tax law. |
34
Table of Contents
The following paragraphs discuss these developments in greater detail, as well as other changes in
the components of net income (loss) during the years ended December 31, 2010, 2009, and 2008.
Net Interest Income Net interest income declined by $21.7 million or 32.0% during the twelve
months ended December 31, 2010, compared to the previous year. This decline was primarily
attributable to a decrease in the Companys interest rate spread between the periods and, to a
lesser extent, a decrease in its average earning assets. The Companys interest rate spread
decreased by 56 basis points, from 1.82% in 2009 to 1.26% in 2010, and its average earning assets
decreased by $97.4 million or 3.0% in 2010 compared to the previous year. During 2010 the Company
experienced increased levels of liquidity due to reduced portfolio loan demand and increased
repayment activity in its loan and securities portfolios. These developments were caused by
persistent weakness in economic conditions, as well as a record low interest rate environment
during the latter half of 2010, that encouraged many home owners to refinance adjustable rate
mortgages and home equity loans and lines of credit, which the Company typically retains in its
loan portfolio, into fixed rate mortgage loans, which the Company typically sells in the secondary
market. In addition, during 2010 the Company sold significant amounts of longer-term, fixed-rate
mortgage-related securities, as well as certain adjustable-rate mortgage-related securities, at
gains in an effort to reduce its exposure to interest rate risk and/or to improve the overall
liquidity position on its balance sheet. In general, the Company reinvested the cash proceeds from
these sources in short-term securities and overnight investments or used them to repay FHLB
borrowings, as discussed below. Short-term and overnight investments typically have significantly
lower yields than loans and other longer-term securities, which contributed to the decline in the
Companys interest rate spread in 2010. The Company also managed its liquidity position in 2010
by reducing the rates it offered on its certificates of deposits and certain other deposit
accounts. This resulted in a $59.2 million or 2.8% decrease in deposit liabilities during the
twelve months ended December 31, 2010. It also contributed to a 53 basis point decline in the
Companys weighted-average cost of interest-bearing deposit liabilities, which declined from 2.21%
in 2009 to 1.44% in 2010.
Contributing to the decline in average earning assets in 2010 was the early repayment of $756.0
million in borrowings from the FHLB of Chicago in December. The Company recognized a one-time
charge of $89.3 million on the early repayment of these borrowings, which had an average remaining
maturity of six years and a weighted-average cost of 4.17% or $31.5 million per year. Management
expects that the repayment of these borrowings will have a favorable impact on the Companys net
interest income in future periods, although this improvement could be offset by an increase in
interest expense from additional borrowings, if any, from the FHLB in future periods.
Net interest income decreased by $5.3 million or 7.3% during the twelve months ended December 31,
2009, compared to 2008. This decrease was due to a $66.9 million or 2.0% decline in average
interest-earning assets, as well as a three basis point decline in net interest rate spread. The
decline in average interest-earning assets in 2009 was due to the combined effects of a low
interest rate environment and the economic recession. As was the case in 2010, lower interest
rates in 2009, particularly in the first half of the year, encouraged home owners to refinance
adjustable rate mortgages and home equity loans and lines of credit into fixed rate mortgage loans,
which the Company generally sold in the secondary market. In addition, due to the economic
recession, the Company experienced a decline in demand for multi-family, commercial real estate,
commercial business, and other consumer loans that was only partially offset by an increase in
available-for-sale securities and overnight investments. As was the case in 2010, the Company
reduced the rates it offers on certificates of deposits and certain other deposit accounts in 2009
in order to manage the liquidity generated from the decline in its loan portfolio. As a result of
these efforts, the average cost of the Companys interest-bearing deposit liabilities declined from
3.15% in 2008 to 2.21% in 2009. However, this improvement was offset by a lower average yield on
the Companys interest-earning assets in 2009 compared to 2008. This development was caused by a
generally lower interest rate environment in 2009 compared to 2008, as well as an increase in
available-for-sale-securities and overnight investments, as previously described, which typically
carry lower yields than the Companys loan portfolio. As a result of these developments, the
Companys net interest rate spread declined by three basis points, from 1.85% in 2008 to 1.82% in
2009.
35
Table of Contents
The following table presents certain details regarding the Companys average balance sheet and
net interest income for the periods indicated. The tables present the average yield on
interest-earning assets and the average cost of interest-bearing liabilities. The yields and costs
are derived by dividing income or expense by the average balance of interest-earnings assets or
interest-bearing liabilities, respectively, for the periods shown. The average balances are
derived from daily balances over the periods indicated. Interest income includes fees, which are
considered adjustments to yields. Net interest spread is the difference between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is
derived by dividing net interest income by average interest-earning assets. No tax equivalent
adjustments were made since the Company does not have any tax exempt investments.
Years ended December 31 | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Interest | Avg. | Interest | Avg. | Interest | Avg. | |||||||||||||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | ||||||||||||||||||||||||||||
Balance | Paid | Cost | Balance | Paid | Cost | Balance | Paid | Cost | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans receivable, net (1) |
$ | 1,478,433 | $ | 79,266 | 5.36 | % | $ | 1,688,906 | $ | 95,802 | 5.67 | % | $ | 1,892,397 | $ | 113,635 | 6.00 | % | ||||||||||||||||||
Mortgage-related securities |
589,070 | 17,445 | 2.96 | 946,142 | 37,734 | 3.99 | 959,574 | 45,535 | 4.75 | |||||||||||||||||||||||||||
Investment securities (2) |
840,424 | 15,428 | 1.84 | 458,311 | 18,199 | 3.97 | 344,533 | 16,041 | 4.66 | |||||||||||||||||||||||||||
Interest-earning deposits |
250,909 | 430 | 0.17 | 162,864 | 79 | 0.05 | 54,666 | 764 | 1.40 | |||||||||||||||||||||||||||
Federal funds sold |
| | 0.00 | | | 0.00 | 71,934 | 1,581 | 2.20 | |||||||||||||||||||||||||||
Total interest-earning assets |
3,158,836 | 112,569 | 3.56 | 3,256,223 | 151,814 | 4.66 | 3,323,104 | 177,556 | 5.34 | |||||||||||||||||||||||||||
Non-interest-earning assets |
266,270 | 236,158 | 214,682 | |||||||||||||||||||||||||||||||||
Total average assets |
$ | 3,425,106 | $ | 3,492,381 | $ | 3,537,786 | ||||||||||||||||||||||||||||||
Liabilities and equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Savings deposits |
$ | 208,544 | 104 | 0.05 | $ | 199,012 | 181 | 0.09 | $ | 190,271 | 609 | 0.32 | ||||||||||||||||||||||||
Money market accounts |
347,906 | 2,075 | 0.60 | 330,506 | 2,795 | 0.85 | 336,208 | 8,245 | 2.45 | |||||||||||||||||||||||||||
Interest-bearing demand accounts |
200,292 | 107 | 0.05 | 184,077 | 121 | 0.07 | 170,700 | 376 | 0.22 | |||||||||||||||||||||||||||
Certificates of deposit |
1,234,411 | 26,320 | 2.13 | 1,304,814 | 41,471 | 3.18 | 1,358,021 | 55,459 | 4.08 | |||||||||||||||||||||||||||
Total deposit liabilities |
1,991,153 | 28,606 | 1.44 | 2,018,409 | 44,568 | 2.21 | 2,055,200 | 64,689 | 3.15 | |||||||||||||||||||||||||||
Advance payment by borrowers for
taxes and insurance |
19,606 | 6 | 0.03 | 19,172 | 11 | 0.06 | 18,549 | 18 | 0.10 | |||||||||||||||||||||||||||
Borrowings |
871,212 | 37,664 | 4.32 | 907,443 | 39,205 | 4.32 | 910,542 | 39,484 | 4.34 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
2,881,971 | 66,276 | 2.30 | 2,945,024 | 83,784 | 2.84 | 2,984,291 | 104,191 | 3.49 | |||||||||||||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits |
96,370 | 91,147 | 89,590 | |||||||||||||||||||||||||||||||||
Other non-interest-bearing liabilities |
53,506 | 52,412 | 50,268 | |||||||||||||||||||||||||||||||||
Total non-interest-bearing
liabilities |
149,876 | 143,559 | 139,858 | |||||||||||||||||||||||||||||||||
Total liabilities |
3,031,847 | 3,008,583 | 3,124,149 | |||||||||||||||||||||||||||||||||
Total equity |
393,259 | 403,798 | 413,637 | |||||||||||||||||||||||||||||||||
Total average liabilities and equity |
$ | 3,425,106 | $ | 3,492,381 | $ | 3,537,786 | ||||||||||||||||||||||||||||||
Net interest income and net interest
rate spread |
$ | 46,293 | 1.26 | % | $ | 68,030 | 1.82 | % | $ | 73,365 | 1.85 | % | ||||||||||||||||||||||||
Net interest margin |
1.47 | % | 2.09 | % | 2.21 | % | ||||||||||||||||||||||||||||||
Average interest-earning assets to
interest-bearing liabilities |
1.10 | x | 1.11 | x | 1.11 | x | ||||||||||||||||||||||||||||||
(1) | For the purposes of these computations, non-accruing loans and loans held-for-sale are included in the average loans outstanding. | |
(2) | FHLB of Chicago stock is included in investment securities. |
36
Table of Contents
The following tables present the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected the Companys
interest income and interest expense during the periods indicated. Information is provided in each
category with respect to the change attributable to change in volume (change in volume multiplied
by prior rate), the change attributable to change in rate (change in rate multiplied by prior
volume), and the net change. The change attributable to the combined impact of volume and rate has
been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2010, | ||||||||||||
Compared to Year Ended December 31, 2009 | ||||||||||||
Increase (Decrease) | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans receivable |
$ | (11,499 | ) | $ | (5,037 | ) | $ | (16,536 | ) | |||
Mortgage-related securities |
(12,038 | ) | (8,251 | ) | (20,289 | ) | ||||||
Investment securities |
10,218 | (12,989 | ) | (2,771 | ) | |||||||
Interest-earning deposits |
64 | 287 | 351 | |||||||||
Total interest-earning assets |
(13,255 | ) | (25,990 | ) | (39,245 | ) | ||||||
Interest-bearing liabilities: |
||||||||||||
Savings deposits |
7 | (84 | ) | (77 | ) | |||||||
Money market deposits |
141 | (861 | ) | (720 | ) | |||||||
Interest-bearing demand deposits |
10 | (24 | ) | (14 | ) | |||||||
Certificates of deposit |
(2,135 | ) | (13,016 | ) | (15,151 | ) | ||||||
Advance payment by borrowers for taxes and
insurance |
| (5 | ) | (5 | ) | |||||||
Borrowings |
(1,565 | ) | 24 | (1,541 | ) | |||||||
Total interest-bearing liabilities |
(3,542 | ) | (13,966 | ) | (17,508 | ) | ||||||
Net change in net interest income |
$ | (9,713 | ) | $ | (12,024 | ) | $ | (21,737 | ) | |||
Year Ended December 31, 2009, | ||||||||||||
Compared to Year Ended December 31, 2008 | ||||||||||||
Increase (Decrease) | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans receivable |
$ | (11,815 | ) | $ | (6,018 | ) | $ | (17,833 | ) | |||
Mortgage-related securities |
(602 | ) | (7,199 | ) | (7,801 | ) | ||||||
Investment securities |
4,760 | (2,602 | ) | 2,158 | ||||||||
Interest-earning deposits |
533 | (1,218 | ) | (685 | ) | |||||||
Federal funds sold |
(791 | ) | (790 | ) | (1,581 | ) | ||||||
Total interest-earning assets |
(7,915 | ) | (17,827 | ) | (25,742 | ) | ||||||
Interest-bearing liabilities: |
||||||||||||
Savings deposits |
29 | (457 | ) | (428 | ) | |||||||
Money market deposits |
(138 | ) | (5,312 | ) | (5,450 | ) | ||||||
Interest-bearing demand deposits |
27 | (282 | ) | (255 | ) | |||||||
Certificates of deposit |
(2,099 | ) | (11,889 | ) | (13,988 | ) | ||||||
Advance payment by borrowers for taxes and
insurance |
1 | (8 | ) | (7 | ) | |||||||
Borrowings |
(134 | ) | (145 | ) | (279 | ) | ||||||
Total interest-bearing liabilities |
(2,314 | ) | (18,093 | ) | (20,407 | ) | ||||||
Net change in net interest income |
$ | (5,601 | ) | $ | 266 | $ | (5,335 | ) | ||||
Provision for Loan Losses The Companys provision for loan losses was $49.6 million, $12.4
million, and $1.4 million during the years ended December 31, 2010, 2009, and 2008, respectively.
In recent years the Companys provision for loan losses has been affected by persistent weakness in
economic conditions, increased levels of unemployment, and decreases in real estate values. These
conditions have been particularly challenging for borrowers whose loans are secured by commercial
real estate, multi-family real estate, and undeveloped land. In recent months management has noted
increased vacancy rates, declining rents, and/or delays in unit sales for many of the properties
that secure Companys loans. In many instances, managements observations have included loans that
borrowers and/or loan guarantors have managed to keep current despite underlying difficulties with
the collateral properties. In view of these developments and their extended continuation, and an
increasingly strict regulatory environment, management concluded during the fourth quarter of 2010
that the probability of a number of these loans being collateral dependent had increased, which
resulted in a significant increase in provision for loan losses for the full year 2010.
37
Table of Contents
In 2010 the Company recorded $31.0 million in loss provisions against 34 larger loan relationships
aggregating $91.6 million. These loans were secured by commercial real estate, multi-family real
estate, undeveloped land, and certain other non-real estate assets in the case a few commercial
business loans. The collateral for three of these loans with an aggregate loan balance of $10.0
million was transferred to foreclosed properties and repossessed assets during the year, net of
related loss allowances. During the year ended December 31, 2010, the Company also recorded $10.0
million in loss provisions on a large number of smaller commercial real estate, multi-family real
estate, and commercial business loan relationships, as well as $1.3 million in loss provisions on
one- to four-family loans and consumer loans. In general, these losses were based on updated
independent appraisals that were received during 2010, but in some cases were based on management
judgment. Finally, during 2010 the Company recorded $7.3 million in additional loss provisions
that reflected managements general concerns related to continued declines in commercial real
estate values, as well as persistent weaknesses in economic conditions and high levels of
unemployment.
During 2009 the Company recorded $9.5 million in loss provisions against 12 commercial real estate,
multi-family real estate, and undeveloped land loan relationships aggregating $33.9 million (none
of which are included in the loan group mentioned in the previous paragraph). The Company also
recorded $1.6 million in loss provisions on a number of smaller loans during that period,
consisting principally of commercial real estate and commercial business loans and, to a lesser
extent, one- to four-family and consumer loans. In general, these losses were based on updated
independent appraisals that were received during 2009, but in some instances were based on
management judgment. Finally, during 2009 the Company also recorded $1.3 million in losses that
reflected managements general concerns relating to deterioration in economic conditions, increased
unemployment rates, and declines in real estate values in that period.
The Companys provision for loan losses in 2008 consisted primarily of a $1.3 million loss on a
completed condominium development project that was transferred to foreclosed real estate in early
2009.
Refer to Financial ConditionAsset Quality and Critical Accounting Policies, below, as well as
Item 1. BusinessAsset Quality, above, for additional discussion related to the Companys
provision for loan losses, allowance for loan losses, asset quality, and related policies and
procedures.
Non-Interest Income Total non-interest income for the years ended December 31, 2010, 2009, and
2008, was $40.6 million, $31.7 million, and $17.9 million, respectively. The following paragraphs
discuss the principal components of non-interest income and primary reasons for their changes from
2009 to 2010, as well as 2008 to 2009.
Service charges on deposits were $6.1 million, $6.4 million, and $6.7 million in 2010, 2009, and
2008, respectively. These declines were principally due to a decrease in overdraft charges and
ATM/debit card fees. Management attributes these declines to persistent weakness in economic
conditions, which has resulted in reduced spending by consumers in general in recent years,
including the Companys deposit customers. In August 2010 the Company implemented procedures in
response to new federal regulations that reduced the circumstances in which financial institutions
may charge overdraft fees on customer debit card transactions. The Company took steps to reduce
the impact the new regulations could have on fee revenue and, as a result, has not noted a
significant decline in overdraft fee revenue since it implemented the new procedures.
Brokerage and insurance commissions were $3.1 million, $2.8 million, and $2.6 million for the years
ended December 31, 2010, 2009, and 2008, respectively. Sales of tax-deferred annuity products
increased in 2010 and 2009 due to a favorable interest rate environment for such investments. It
is not unusual for sales of such products to increase during periods of lower interest rates, when
the returns on annuities improve relative to other investment alternatives, such as certificates of
deposit. Also contributing to the improvement brokerage and insurance commissions in 2010 were
increased sales of mutual funds and other equity investments earlier in the year due to general
improvement in the equity markets.
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Table of Contents
Net loan-related fees and servicing revenue was $103,000 in 2010 compared to $184,000 and $12,000
in 2009 and 2008, respectively. The following table presents the primary components of net
loan-related fees and servicing revenue for the periods indicated:
For the Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Gross servicing fees |
$ | 2,584 | $ | 2,193 | $ | 1,843 | ||||||
MSR amortization |
(3,277 | ) | (3,023 | ) | (1,587 | ) | ||||||
MSR valuation (loss) recovery |
281 | 535 | (822 | ) | ||||||||
Loan servicing revenue, net |
(412 | ) | (295 | ) | (566 | ) | ||||||
Other loan fee income |
515 | 479 | 578 | |||||||||
Loan-related fees and servicing revenue, net |
$ | 103 | $ | 184 | $ | 12 | ||||||
Gross servicing fees increased in 2010 and 2009 due to an increase in the amount of loans the
Company services for third-party investors. As of December 31, 2010, the Company serviced $1.1
billion in loans for third-party investors compared to $1.0 billion and $728.4 million at December
31, 2009 and 2008, respectively. Loans serviced for third-party investors has increased the past
two years due to increased sales of loans in the secondary market, as described below. The Company
typically retains the servicing on these loans. Amortization of MSRs generally increases in
periods of lower interest rates due to increased loan refinance activity, such as that which was
experienced during the latter half of 2010, as well as the first half of 2009. Loan-related fees
and servicing revenue is also impacted by changes in the valuation allowance that is established
against MSRs. The change in this allowance is recorded as a recovery or charge, as the case may
be, in the period in which the change occurs.
The valuation of MSRs, as well as the periodic amortization of MSRs, is significantly influenced by
the level of market interest rates and loan prepayments. If market interest rates for one- to
four-family loans increase and/or actual or expected loan prepayment expectations decrease in
future periods, the Company could recover all or a portion of its previously established allowance
on MSRs, as well as record reduced levels of MSR amortization expense. Alternatively, if interest
rates decrease and/or prepayment expectations increase, the Company could potentially record
charges to earnings related to increases in the valuation allowance on its MSRs. In addition,
amortization expense could increase due to likely increases in loan prepayment activity. Low
interest rate environments typically cause an increase in actual mortgage loan prepayment activity,
which generally results in an increase in the amortization of MSRs.
Gains on loan sales activities were $8.6 million, $9.1 million, and $2.1 million during the years
ended December 31, 2010, 2009, and 2008, respectively. The Companys policy is to sell
substantially all of its fixed rate, one- to four-family mortgage loan originations in the
secondary market. During 2010 and 2009 sales of one- to four-family mortgage loans were $409.4
million and $584.0 million, respectively, compared to $128.8 million in 2008. Loan sales increased
substantially in 2009 and remained elevated in 2010 as a result of low interest rate environments
during the first half of 2009 and the latter half of 2010. Low interest rates encouraged many
borrowers to refinance higher-rate loans into loans at lower rates during these periods. In
addition, adjustable-rate borrowers were motivated to refinance their loans into fixed-rate loans.
Although interest rates were lower during the latter half of 2010, they have increased in recent
months and the pace of residential loan originations and sales has slowed. If this trend
continues, management expect that Companys gains on sales of loans will be substantially lower in
2011 compared to 2010.
Net gain (loss) on investments in 2010, 2009, and 2008 was $16.0 million, $6.8 million, and $(1.2)
million, respectively. Results in 2009 and 2008 included $831,000 and $6.9 million, respectively,
in other-than-temporary-impairment (OTTI) charges related a mutual fund investment. As a result
of an increase in the fair value of this mutual fund in 2010, an additional impairment was not
recorded in that year. Also included in net gain (loss) on investments in 2008 was a $1.4 million
impairment loss associated with the Companys investment in the common stock of the Federal Home
Loan Mortgage Corporation (Freddie Mac), which was placed in conservatorship by the U.S.
government in that year. Excluding the OTTI and Freddie Mac losses, gains on investments were
$15.0 million, $7.6 million, and $7.2 million in 2010, 2009, and 2008, respectively. During these
years the Company sold $885.0 million, $468.8 million, and $392.4 million, respectively, in
longer-term, fixed-rate mortgage-related and certain other securities. In addition, during 2010
the Company sold $190.5 million in adjustable-rate government agency MBSs. In 2010, the proceeds
from securities sales were reinvested primarily in short-term securities and overnight investments
or were used to repay FHLB borrowings, as previously described. In 2009 and 2008, the proceeds
from securities sales were reinvested primarily in medium-term government agency securities,
short-term agency CMOS, and adjustable-rate government agency MBSs.
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Table of Contents
During 2010 the Company recorded a $700,000 loss on a $2.6 million net investment in approximately
300 acres of partially-developed land held for future development. In the judgment of management,
continued declines in real estate values justified the recognition of the loss. There are
currently no efforts underway to further develop or dispose of this property.
Other non-interest income was $7.5 million, $6.4 million, and $7.6 million for the years ended
December 31, 2010, 2009, and 2008, respectively. The increase in 2010 was due primarily to an
increase in earnings from the Companys investment in bank-owned life insurance (BOLI) and
certain other employee benefit trusts, the latter having benefited from a lower interest rate
environment in 2010. The decrease in 2009 was primarily attributable to a decrease in earnings
from the Companys BOLI, the yield on which was adversely impacted by declining interest rate
environment in during the first half of 2009.
Non-Interest Expense Total non-interest expense for the years ended December 31, 2010, 2009, and
2008 was $159.8 million, $68.2 million, and $63.6 million, respectively. Results in 2010 include a
one-time prepayment penalty of $89.3 million related to the Companys repayment of $756.0 million
in borrowings from the FHLB of Chicago prior to their scheduled maturities, as previously
discussed. Excluding this penalty, total non-interest expense in 2010 was $70.5 million. The
following paragraphs discuss the principal components of non-interest expense and the primary
reasons for their changes from 2009 to 2010, as well as 2008 to 2009.
Compensation and related expenses were $36.0 million, $39.1 million, and $38.5 million during the
years ended December 31, 2010, 2009, and 2008, respectively. The decline in 2010 was primarily
caused by lower levels of stock-based compensation. ESOP expense declined in 2010 because it was
the last year of the Companys commitment to the ESOP. Under the terms of the plan, the number of
shares scheduled to be allocated to employees in the final year was substantially lower than it was
in earlier years. The Company does not expect to continue ESOP contributions beyond its original
commitment at this time. However, this decision is subject to review on a periodic basis and
contributions may be reinstated in future periods. Also contributing to the decrease in
stock-based compensation in 2010 relative to 2009 was a large grant of stock options and restricted
stock that was made in 2004 and became fully vested in mid-2009. No amortization expense related
to that grant was recorded beyond that point. Also contributing to the decrease in compensation
expense in 2010 was a decrease in the number of personnel employed by the Company due to management
actions to reduce the number of Companys employees through attrition. These developments were
only partially offset by the impact of annual merit increases for employees in 2010.
Management does not expect compensation and related expenses to continue to decline in 2011.
Rather, management expects compensation and related expenses in 2011 could increase by up to 10% in
2011. This increase will be primarily the result of recent and planned employment of up to ten
commercial banking professionals and related staff to facilitate the Companys expansion into the
mid-tier commercial banking market, defined by the Company as business entities with sales revenues
of $10 to $100 million. The Company does not currently have significant share of this market.
The increase in compensation and related expenses in 2009 relative to 2008 was due primarily to
annual merit increases in employee compensation, as well as an increase in the number of personnel
employed by the Company, due to new branch office openings. Also contributing to the increase in
compensation expense in 2009 were costs associated with increased residential loan production and
related staffing due to increased originations and sales of residential mortgage loans, as
previously described. These developments were partially offset by the aforementioned decline in
amortization expense related to stock options and restricted stock, which were fully-vested in
mid-2009. In addition, ESOP expense in 2009 was lower due to a decline in the Companys stock
price in that year, which lowered the Companys ESOP expense relative to 2008.
As of December 31, 2010, the Company had 682 full-time associates and 82 part-time associates.
This compared to 717 full-time and 98 part-time employees at December 31, 2009, and 677 full-time
and 92 part-time associates at December 31, 2008.
Occupancy and equipment expense during the years ended December 31, 2010, 2009, and 2008 was $11.2
million, $11.8 million, and $11.6 million, respectively. The decrease in occupancy and equipment
expense in 2010 was primarily caused by lower data processing costs, due to the negotiation of a
new contract with the Companys third-party data processor in late 2009, as well as lower levels of
repair and maintenance expense and rent expense in 2010 relative to prior periods. The increase in
occupancy and equipment expense in 2009 relative to 2008 was the
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Table of Contents
result of the opening of a new office and the construction and relocation of a second office in
2008, the costs of which were fully-reflected in 2009.
Federal insurance premiums and special assessments were $4.1 million, $4.6 million, and $332,000
during 2010, 2009, and 2008, respectively. Results in 2009 included a $1.6 million non-recurring
special assessment from the FDIC that was charged to all insured financial institutions (based
total assets, less its Tier 1 capital) as of June 30, 2009. Excluding this special assessment,
the Companys deposit insurance premiums increased by $1.0 million or 33.5% in 2010 compared to
2009. In the second quarter of 2009 the FDIC raised its regular premium rates for all financial
institutions. In addition, during the first quarter of 2009 the Company utilized the last of
certain premium credits that had been available to offset deposit premium costs.
In February 2011 the FDIC issued a new rule as required by the Dodd-Frank Act which changes the
definition of a financial institutions deposit insurance assessment base and revises the deposit
insurance risk-based assessment rate schedule, among other things. Under the new rule the
assessment base changes from an insured institutions domestic deposits (minus certain allowable
exclusions) to an insured institutions average consolidated total assets minus average tangible
equity and certain other adjustments. In addition, the assessment rate schedule changes as
described in the section entitled Regulation and Supervision of the BankDeposit Insurance
contained in Item 1, BusinessRegulation and Supervision. The new rule takes effect in the
quarter beginning April 1, 2011. Under the new rule, it is possible the Companys FDIC insurance
premiums could decline in 2011, due in part to the decline in the Companys total assets in the
fourth quarter of 2010. However, the Company is unable to provide an estimate of FDIC insurance
premiums in 2011 and there cannot be any assurances that such premiums will actually decline in
2011.
Losses on foreclosed real estate were $6.3 million, $646,000, and $155,000 during the twelve months
ended December 31, 2010, 2009, and 2008, respectively. In recent periods the Company has
experienced an increase in losses on foreclosed real estate due to continued declines in real
estate values and weak economic conditions. If these conditions persist, future losses on
foreclosed real estate could remain elevated in the near term.
Other non-interest expense was $12.8 million, $12.1 million, and $12.9 million during the years
ended December 31, 2010, 2009, and 2008, respectively. The increase in 2010 was primarily caused
by an increase in costs to maintain and otherwise administer the Companys foreclosed and
repossessed properties. This increase was offset in part by lower expenses related to marketing
and advertising in the 2010 relative 2009. The decrease in 2009 compared to 2008 was caused by
lower expenditures related to debit card activity and lower deposit account losses, as well as
lower levels of expenditures for communications and legal, consulting, and professional fees.
These developments were partially offset by increased costs related to foreclosed real estate.
Income Tax Expense (Benefit) Income tax benefit was $49.9 million in 2010 compared to income tax
expense of $5.4 million and $9.1 million in 2009 and 2008, respectively. The large income tax
benefit in the 2010 was caused by the Companys pre-tax loss, which was principally the result of
the one-time prepayment penalty related to the early repayment of borrowings from the FHLB of
Chicago, as well as a significant increase in provision for loan losses, as previously described.
In 2009 the Company recorded a $1.8 million tax benefit related to the elimination of a valuation
allowance it had established against a deferred tax asset in prior years. The deferred tax asset
related to Wisconsin net operating loss carryovers for which management was previously unable to
determine whether it was more likely than not that the tax benefits would be realized in future
periods. Effective in 2009 Wisconsin law was amended from a system that taxed each affiliated
entity separately to a form of combined reporting. As a result of this change, management
determined that Companys Wisconsin net operating losses that had not been recognized in prior
periods would be realizable, which resulted in a one-time tax benefit of $1.8 million in 2009.
Excluding the impact of this one-time tax benefit, the Companys effective tax rate (ETR) in 2009
and 2008 was 37.7% and 34.6%, respectively. The increase in ETR in 2009 was caused by the
amendment of Wisconsin law previously described. Prior to this amendment, the state of Wisconsin
imposed a corporate franchise tax on the separate taxable incomes of the members of the Companys
consolidated income tax group, excluding the Companys out-of-state investment subsidiaries.
However, beginning in 2009, the Companys consolidated income tax group is subject to combined
reporting, which results in state income taxes being imposed on the earnings of the Companys
out-of-state investment subsidiaries. For additional information related to the Companys income
taxes, refer to Item 1A. Risk Factors.
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Table of Contents
Financial Condition
Overview The Companys total assets decreased by $920.2 million or 26.2% during the twelve months
ended December 31, 2010. Total assets at December 31, 2010, were $2.6 billion compared to $3.5
billion at the end of the previous year. Most of the decline in total assets in 2010 was caused
by the Companys early repayment of $756.0 million in FHLB borrowings in December 2010, as
previously described. During the period the Companys portfolio of securities available-for-sale
decreased by $817.7 million or 55.2% in the aggregate and its loans receivable decreased by $182.5
million or 12.1%. Deposit liabilities decreased by $59.2 million or 2.8% during 2010 and total
shareholders equity decreased by $89.5 million or 22.2%. The latter decrease was primarily the
result of the Companys operating loss in 2010, as previously described. Non-performing assets
increased by $82.0 million or 136% to $142.2 million or 5.49% of total assets during the twelve
months ended December 31, 2010. The following paragraphs describe these changes in greater detail,
along with other changes in the Companys financial condition during the twelve months ended
December 31, 2010.
Securities Available-for-Sale The Companys portfolio of securities available-for-sale decreased
by $817.7 million or 55.2% during the year ended December 31, 2010. This decrease was primarily
the result of the sale of $885.0 million in longer-term, fixed-rate mortgage-related securities and
$190.5 million in adjustable-rate mortgage-related securities during the year. As previously
noted, Bank Mutual sold significant amounts of securities in 2010 in an effort to reduce its
exposure to interest rate risk and/or to improve the overall liquidity position on its balance
sheet. These sales were offset in part by purchases of $323.1 million in medium-term, fixed-rate
mortgage-related securities in December 2010.
The following table presents the fair value of the Companys investment securities and
mortgage-related securities portfolios at the dates indicated. For all securities and for all
periods presented, the carrying value is equal to fair value. No individual security exceeded 10%
of the Companys capital as of the dates indicated.
At December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Carrying/ | Carrying/ | Carrying/ | ||||||||||
Fair Value | Fair Value | Fair Value | ||||||||||
(Dollars in thousands) | ||||||||||||
Investment securities: |
||||||||||||
Mutual funds |
$ | 22,055 | $ | 22,312 | $ | 39,603 | ||||||
United States government and federal agency obligations. |
205,968 | 591,792 | 379,535 | |||||||||
Total investment securities available-for-sale |
228,023 | 614,104 | 419,138 | |||||||||
Mortgage-related securities: |
||||||||||||
Freddie Mac |
314,067 | 295,188 | 282,237 | |||||||||
Fannie Mae |
30,810 | 224,758 | 413,364 | |||||||||
Private-label CMOs |
87,602 | 111,782 | 128,559 | |||||||||
Ginnie Mae |
2,755 | 235,120 | 26,707 | |||||||||
Total mortgage-related securities |
435,234 | 866,848 | 850,867 | |||||||||
Total securities available-for-sale |
$ | 663,258 | $ | 1,480,952 | $ | 1,270,005 | ||||||
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Table of Contents
The following table presents the Companys investment securities and mortgage-related securities
activities for the periods indicated.
For the Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Investment securities available-for-sale: |
||||||||||||
Carrying value at beginning of period |
$ | 614,104 | $ | 419,138 | $ | 99,450 | ||||||
Purchases |
3,118,204 | 689,075 | 351,202 | |||||||||
Sales |
(709 | ) | (18,087 | ) | (8,358 | ) | ||||||
Calls |
(3,506,718 | ) | (467,902 | ) | (29,992 | ) | ||||||
Discount accretion (premium amortization), net |
314 | 406 | (34 | ) | ||||||||
Increase (decrease) in net unrealized loss |
2,828 | (8,526 | ) | 6,870 | ||||||||
Net increase in investment securities |
(386,080 | ) | 194,966 | 319,688 | ||||||||
Carrying value at end of period |
$ | 228,024 | $ | 614,104 | $ | 419,138 | ||||||
Mortgage-related securities available-for-sale: |
||||||||||||
Carrying value at beginning of period |
$ | 866,848 | $ | 850,867 | $ | 1,099,922 | ||||||
Purchases |
819,675 | 779,170 | 345,842 | |||||||||
Sales |
(1,058,055 | ) | (468,794 | ) | (385,167 | ) | ||||||
Principal repayments |
(187,664 | ) | (318,225 | ) | (195,479 | ) | ||||||
Discount accretion (premium amortization), net |
(2,383 | ) | (2,445 | ) | 1,516 | |||||||
Increase (decrease) in net unrealized loss |
(3,187 | ) | 26,275 | (15,767 | ) | |||||||
Net increase (decrease) in mortgage-related securities |
(431,614 | ) | 15,981 | (249,055 | ) | |||||||
Carrying value at end of period |
$ | 435,234 | $ | 866,848 | $ | 850,867 | ||||||
The table below presents information regarding the carrying values, weighted average yields and
contractual maturities of the Companys investment securities and mortgage-related securities at
December 31, 2010. Mortgage-related securities are presented by issuer and by coupon type.
More than One Year | More than Five | |||||||||||||||||||||||||||||||||||||||
One Year or Less | to Five Years | Years to Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||
Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | |||||||||||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||||||||||
Mutual funds (1) |
$ | 22,054 | 3.05 | % | | | | | | | $ | 22,054 | 3.05 | % | ||||||||||||||||||||||||||
US government and agencies |
| | | | $ | 158,115 | 2.42 | % | $ | 47,855 | 2.74 | % | 205,970 | 2.49 | ||||||||||||||||||||||||||
Total investment securities |
$ | 22,054 | 3.05 | % | | | $ | 158,115 | 2.42 | % | $ | 47,855 | 2.74 | % | $ | 228,024 | 2.55 | % | ||||||||||||||||||||||
Mortgage-related securities by issuer: |
||||||||||||||||||||||||||||||||||||||||
Ginnie Mae pass-through
certificates |
| | | | | | $ | 58 | 6.74 | % | $ | 58 | 6.74 | % | ||||||||||||||||||||||||||
Fannie Mae pass-through
certificates |
$ | 5 | 5.83 | % | $ | 3,214 | 6.92 | % | $ | 384 | 6.48 | % | 7 | 9.16 | 3,610 | 6.88 | ||||||||||||||||||||||||
Freddie Mac pass-through
certificates |
7 | 5.59 | 23 | 6.01 | 17,603 | 2.61 | | | 17,633 | 2.61 | ||||||||||||||||||||||||||||||
Private-label CMOs |
| | | | 38,648 | 5.15 | 48,953 | 3.64 | 87,601 | 4.28 | ||||||||||||||||||||||||||||||
Freddie Mac, Fannie Mae, and
Ginnie Mae REMICs |
| | 11,232 | 1.42 | 56,091 | 2.39 | 259,009 | 2.97 | 326,332 | 2.81 | ||||||||||||||||||||||||||||||
Total mortgage-related securities |
$ | 12 | 5.69 | % | $ | 14,469 | 2.57 | % | $ | 112,726 | 3.37 | % | $ | 308,027 | 3.08 | $ | 435,234 | 3.13 | % | |||||||||||||||||||||
Mortgage-related securities by coupon: |
||||||||||||||||||||||||||||||||||||||||
Adjustable rate coupon |
| | | | | | $ | 40,680 | 3.25 | % | $ | 40,680 | 3.25 | % | ||||||||||||||||||||||||||
Fixed rate coupon |
$ | 12 | 5.69 | % | $ | 14,469 | 2.57 | % | $ | 112,726 | 3.37 | % | 267,347 | 3.05 | 394,554 | 3.12 | ||||||||||||||||||||||||
Total mortgage-related securities |
$ | 12 | 5.69 | % | $ | 14,469 | 2.57 | % | $ | 112,726 | 3.37 | % | $ | 308,027 | 3.08 | % | $ | 435,234 | 3.13 | % | ||||||||||||||||||||
Total investment and mortgage-related
securities portfolio |
$ | 22,066 | 3.06 | % | $ | 14,469 | 2.57 | % | $ | 270,841 | 2.81 | % | $ | 355,882 | 3.03 | % | $ | 663,257 | 2.93 | % | ||||||||||||||||||||
(1) | The weighted average yield has not been adjusted for the impairments recorded in 2009, 2008, and 2007. Refer to Results of OperationsNon-Interest Income, above, for additional discussion. |
The Company classifies all of its securities as available-for-sale. Changes in the fair value of
such securities are recorded through accumulated other comprehensive loss (net of deferred income
taxes), which is a component of shareholders equity. During the twelve months ended December 31,
2010, the fair value adjustment on the Companys available-for-sale securities was a net unrealized
loss of $2.3 million at December 31, 2010, compared to a net unrealized loss of $1.9 million at
December 31, 2009. This change was primarily the result of the sale in 2010 of a significant
portion of the Companys available-for-sale securities portfolio at gains, as previously described.
Offsetting the impact of this development was a decline in the net unrealized loss on the
Companys
43
Table of Contents
private-label CMOs during the year. The Companys private-label CMOs were originally purchased
from 2004 to early 2006 and are secured by prime residential mortgage loans. The securities were
all rated triple-A by various credit rating agencies at the time of their original purchase.
However, in 2008 and 2009, and to a lesser extent 2010, a number of the securities in the portfolio
were downgraded. The following table presents the credit ratings, carrying values, and unrealized
losses of the Companys private-label CMO portfolio as of the dates indicated:
December 31, 2010 | December 31, 2009 | |||||||||||||||
Net | Net | |||||||||||||||
Carrying | Unrealized | Carrying | Unrealized | |||||||||||||
Value | Gain (Loss) | Value | Gain (Loss) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Credit rating (1): |
||||||||||||||||
AAA/Aaa |
$ | 12,876 | $ | 322 | $ | 22,959 | $ | (341 | ) | |||||||
AA/Aa |
8,600 | (84 | ) | 9,980 | (483 | ) | ||||||||||
A |
19,249 | (1,155 | ) | 31,377 | (3,260 | ) | ||||||||||
BBB/Baa |
11,142 | (242 | ) | 15,769 | (2,151 | ) | ||||||||||
Less than investment grade (2) |
35,735 | (1,981 | ) | 31,697 | (2,763 | ) | ||||||||||
Total private-label CMOs |
$ | 87,602 | $ | (3,139 | ) | $ | 111,782 | $ | (8,998 | ) | ||||||
(1) | In instances of split-ratings, each security has been classified according to its lowest rating. | |
(2) | Securities rated less than investment grade are adversely classified as substandard in accordance with federal guidelines (refer to Item 1. BusinessAsset Quality). |
Although the net unrealized loss on the Companys private-label CMOs declined substantially during
the twelve months ended December 31, 2010, the market for these securities has remained depressed
in response to a general weakness in economic conditions and performance of the underlying loans,
as well as stress in the markets for these types of securities. Although mindful of these
developments, management has determined that it is probable the Company will collect all amounts
due according to the contractual terms of these securities. Furthermore, the Company does not
intend to sell these securities before it collects all the amounts due. Accordingly, management
has determined that none of the Companys private-label CMOs are other-than-temporarily impaired as
of December 31, 2010. However, collection is subject to numerous factors outside of the Companys
control and a future determination of OTTI could result in significant losses being recorded
through earnings in future periods. For additional discussion relating to the Companys
securities available-for-sale, refer to Results of OperationsNon-Interest Income, above, and
Critical Accounting PoliciesOther-Than-Temporary Impairment, below. In addition, refer to
Item 1. BusinessInvestment Activities and Item 1A. Risk Factors.
Loans Held-for-Sale The Companys policy is to sell substantially all of its fixed rate, one- to
four-family mortgage loan originations in the secondary market. The following table presents a
summary of the activity in the Companys loans held-for-sale for the periods indicated:
For the year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance outstanding at beginning of period |
$ | 13,534 | $ | 19,030 | $ | 7,952 | ||||||
Origination of loans intended for sale (1) |
434,388 | 578,312 | 139,387 | |||||||||
Principal balance of loans sold |
(409,369 | ) | (583,966 | ) | (128,725 | ) | ||||||
Change in net unrealized gains or losses (2) |
(734 | ) | 158 | 416 | ||||||||
Total loans held-for-sale |
$ | 37,819 | $ | 13,534 | $ | 19,030 | ||||||
(1) | Excludes one- to four-family loans originated for the Companys loan portfolio. | |
(2) | Refer to Note 1. Basis of Presentation in Item 8. Financial Statements and Supplementary Data. |
The origination of one- to four-family mortgage loans intended for sale and the corresponding sale
of such loans increased significantly in 2009 as a result of lower interest rates during the first
half of that year. Originations and sale of these loans remained elevated in 2010 due to primarily
lower interest rates during the latter half of 2010. For additional discussion, refer to Results
of OperationsNon-Interest Income, above.
Loans Receivable Loans receivable decreased by $182.5 million or 12.1% as of December 31, 2010,
compared to December 31, 2009. The Companys portfolio of one- to four-family loans declined from
$644.9 million at December 31, 2009, to $531.9 million at December 31, 2010. This decline was
caused by continued low interest rates in 2010, particularly
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during the latter half of the year, which encouraged adjustable-rate borrowers to refinance their
existing loans into fixed-rate loans, which the Company typically sells in the secondary market.
Despite increases in market interest rates in recent months, management expects residential
mortgage borrowers to continue to favor fixed-rate loans in the near term, which could result in
further declines in the Companys portfolio of one- to four-family loans in the near term.
The Companys aggregate portfolio of multi-family and commercial real estate mortgage loans
increased from $463.1 million at December 31, 2009, to $495.5 million at December 31, 2010. A
substantial portion of this increase was due to construction and development loans that were
transferred to permanent financing during 2010. As a result of this development, the Companys
portfolio of construction and development loans declined by $41.1 million or 33.0% during the year
ended December 31, 2010. The Companys multi-family and commercial real estate mortgage loan
originations were $47.2 million in the aggregate in 2010 compared to $53.4 million in 2009.
Although the Company continues to emphasize originations of these types of loans, originations in
recent years have been depressed due to persistent weakness in economic conditions and reduced loan
demand on the part of real estate investors/owners. The Company is uncertain at this time when
these conditions will improve.
The Companys portfolio of commercial business loan increased from $47.7 million at December 31,
2009, to $50.1 million at December 31, 2010. Originations of these loans were $34.5 million in
2010 compared to $22.6 million in 2009.
In April 2010 the Company hired David A. Baumgarten as President of the Bank, and later also
appointed him as President of the Company. Mr. Baumgarten has significant commercial banking
experience in senior roles with other large commercial banks and has significant experience in the
Companys major market area, Milwaukee and southeastern Wisconsin. In recent months the Company
has also hired two new senior vice presidents, as well as a number of other commercial relationship
managers, that are experienced in managing and selling loans, deposit, and cash management services
to the mid-tier commercial banking market, defined by the Company as business entities with sales
revenues of $10 to $100 million. The Company does not currently have significant share of this
market. In 2011 the Company intends to add additional professionals capable of serving this market
segment, as described elsewhere in this report. The Company is unable to determine at this time
the level of success, if any, that it will have in increasing its share of this market segment.
Further, the Company is unable to provide any assurances that it will be able to attract or retain
the talent necessary to increase its share of this market segment.
The Companys consumer loan originations, including fixed term home equity loans
and lines of credit, were $78.2 million in 2010 compared to $76.9 million in 2009.
The Companys consumer loan portfolio declined from $275.5 million at December 31,
2009, to $243.5 million at December 31, 2010. This decline was due in part to an
interest rate environment in recent years that has encouraged many borrowers to
refinance their home equity loans or lines of credit and other consumer loans into
first mortgage loans. Many of these borrowers reestablished home equity lines of
credit with the Company in accordance with its established lending standards, but
had not drawn substantial amounts on these lines as of the end of the year.
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The following table presents the composition of the Companys loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
At December 31 | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
of | of | of | of | of | ||||||||||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
Permanent mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
$ | 531,874 | 37.87 | % | $ | 644,852 | 41.45 | % | $ | 867,810 | 45.82 | % | $ | 1,042,019 | 50.29 | % | $ | 1,102,943 | 52.04 | % | ||||||||||||||||||||
Multi-family |
247,210 | 17.60 | 200,222 | 12.87 | 199,709 | 10.54 | 216,147 | 10.43 | 160,205 | 7.56 | ||||||||||||||||||||||||||||||
Commercial real estate |
248,253 | 17.68 | 262,855 | 16.90 | 222,462 | 11.74 | 189,209 | 9.13 | 161,586 | 7.62 | ||||||||||||||||||||||||||||||
Total permanent mortgages |
1,027,337 | 73.15 | 1,107,929 | 71.22 | 1,289,981 | 68.10 | 1,447,375 | 69.85 | 1,424,744 | 67.22 | ||||||||||||||||||||||||||||||
Construction and development: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
13,479 | 0.96 | 11,441 | 0.74 | 17,517 | 0.92 | 35,040 | 1.69 | 53,861 | 2.54 | ||||||||||||||||||||||||||||||
Multi-family |
19,308 | 1.37 | 52,323 | 3.36 | 74,208 | 3.92 | 58,712 | 2.83 | 91,063 | 4.30 | ||||||||||||||||||||||||||||||
Commercial real estate |
24,939 | 1.78 | 27,040 | 1.74 | 82,795 | 4.37 | 58,026 | 2.80 | 13,479 | 0.64 | ||||||||||||||||||||||||||||||
Land |
25,764 | 1.83 | 33,758 | 2.17 | 43,601 | 2.30 | 43,872 | 2.12 | 58,074 | 2.74 | ||||||||||||||||||||||||||||||
Total construction and
development loans |
83,490 | 5.94 | 124,562 | 8.01 | 218,121 | 11.51 | 195,650 | 9.44 | 216,477 | 10.22 | ||||||||||||||||||||||||||||||
Total mortgage loans |
1,110,827 | 79.09 | 1,232,491 | 79.23 | 1,508,102 | 79.61 | 1,643,025 | 79.29 | 1,641,221 | 77.44 | ||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||
Fixed term home equity |
103,619 | 7.38 | 124,519 | 8.00 | 173,104 | 9.14 | 199,161 | 9.62 | 227,811 | 10.75 | ||||||||||||||||||||||||||||||
Home equity lines of credit |
87,383 | 6.24 | 88,796 | 5.71 | 86,962 | 4.59 | 90,631 | 4.37 | 91,730 | 4.33 | ||||||||||||||||||||||||||||||
Student |
17,695 | 1.25 | 19,793 | 1.27 | 21,469 | 1.13 | 21,845 | 1.05 | 20,404 | 0.96 | ||||||||||||||||||||||||||||||
Home improvement |
24,551 | 1.76 | 28,441 | 1.83 | 36,023 | 1.90 | 33,604 | 1.62 | 33,287 | 1.57 | ||||||||||||||||||||||||||||||
Automobile |
2,814 | 0.20 | 4,077 | 0.26 | 11,775 | 0.62 | 24,878 | 1.20 | 46,752 | 2.21 | ||||||||||||||||||||||||||||||
Other |
7,436 | 0.52 | 9,871 | 0.63 | 8,740 | 0.46 | 9,439 | 0.46 | 11,262 | 0.53 | ||||||||||||||||||||||||||||||
Total consumer loans |
243,498 | 17.35 | 275,497 | 17.71 | 338,073 | 17.84 | 379,558 | 18.32 | 431,246 | 20.35 | ||||||||||||||||||||||||||||||
Commercial business loans |
50,123 | 3.56 | 47,708 | 3.07 | 48,277 | 2.55 | 49,635 | 2.40 | 46,920 | 2.21 | ||||||||||||||||||||||||||||||
Gross loans receivable |
1,404,448 | 100.00 | % | 1,555,696 | 100.00 | % | 1,894,452 | 100.00 | % | 2,072,218 | 100.00 | % | 2,119,387 | 100.00 | % | |||||||||||||||||||||||||
Undisbursed loan proceeds |
(32,345 | ) | (32,690 | ) | (54,187 | ) | (68,457 | ) | (85,897 | ) | ||||||||||||||||||||||||||||||
Allowance for loan losses |
(47,985 | ) | (17,028 | ) | (12,208 | ) | (11,774 | ) | (12,574 | ) | ||||||||||||||||||||||||||||||
Deferred fees and costs, net |
(549 | ) | 78 | 996 | 2,569 | 3,409 | ||||||||||||||||||||||||||||||||||
Total loans receivable, net |
$ | 1,323,569 | $ | 1,506,056 | $ | 1,829,053 | $ | 1,994,556 | $ | 2,024,325 | ||||||||||||||||||||||||||||||
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The following table presents a summary of the Companys activity in loans receivable for the
periods indicated.
For the year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance outstanding at beginning of period |
$ | 1,506,056 | $ | 1,829,053 | $ | 1,994,556 | ||||||
Originations: |
||||||||||||
One- to four-family loans (1) |
44,929 | 47,466 | 34,164 | |||||||||
Multi-family loans |
25,091 | 10,889 | 40,177 | |||||||||
Commercial real estate loans |
22,068 | 42,505 | 96,407 | |||||||||
Construction and development loans |
29,029 | 15,720 | 101,818 | |||||||||
Total mortgage loan originations |
121,117 | 116,580 | 272,566 | |||||||||
Consumer loans |
78,198 | 76,854 | 108,584 | |||||||||
Commercial business loans |
34,530 | 22,617 | 30,090 | |||||||||
Total originations |
233,845 | 216,051 | 411,240 | |||||||||
Purchases of one- to four-family mortgage loans |
| 2,658 | 26,138 | |||||||||
Principal payments and repayments: |
||||||||||||
Mortgage loans |
(216,214 | ) | (358,705 | ) | (422,728 | ) | ||||||
Consumer loans |
(110,197 | ) | (139,430 | ) | (150,069 | ) | ||||||
Commercial business loans |
(36,574 | ) | (35,609 | ) | (38,628 | ) | ||||||
Total principal payments and repayments |
(362,985 | ) | (533,744 | ) | (611,425 | ) | ||||||
Transfers to foreclosed properties, real
estate owned,
and repossessed assets |
(22,108 | ) | (23,721 | ) | (3,719 | ) | ||||||
Net change in undisbursed loan proceeds,
allowance
for loan losses, and deferred fees and costs |
(31,239 | ) | 15,759 | 12,263 | ||||||||
Total loans receivable, net |
$ | 1,322,569 | $ | 1,506,056 | $ | 1,829,053 | ||||||
(1) | Excludes one- to four-family loans originated for sale. |
The following table presents the contractual maturity of the Companys construction and development
loans and its commercial business loans at December 31, 2010. The table does not include the
effect of prepayments or scheduled principal amortization.
At December 31, 2010 | ||||||||||||
Construction and | ||||||||||||
Commercial | Development | |||||||||||
Business Loans | Loans | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Amounts due: |
||||||||||||
Within one year or less |
$ | 17,172 | $ | 31,313 | $ | 48,485 | ||||||
After one year through five years |
30,057 | 25,893 | 55,950 | |||||||||
After five years |
2,894 | 26,284 | 29,178 | |||||||||
Total due after one year |
32,951 | 52,177 | 85,128 | |||||||||
Total commercial and construction loans |
$ | 50,123 | $ | 83,490 | $ | 133,613 | ||||||
The following table presents, as of December 31, 2010, the dollar amount of the Companys
construction and development loans and its commercial loans due after one year and whether these
loans have fixed interest rates or adjustable interest rates.
Due After One Year | ||||||||||||
Fixed Rate | Adjustable Rate | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Commercial business loans |
$ | 17,932 | $ | 15,019 | $ | 32,951 | ||||||
Construction and development loans |
20,805 | 31,372 | 52,177 | |||||||||
Total loans due after one year |
$ | 38,737 | $ | 46,391 | $ | 85,128 | ||||||
Foreclosed Properties and Repossessed Assets The Companys foreclosed properties and repossessed
assets increased to $19.3 million at December 31, 2010, compared to $17.7 million at December 31,
2009. This increase was principally caused by the foreclosure or repossession of the collateral on
three larger loan relationships that had an aggregate balance of $5.9 million after the charge off
of $4.1 million in allowances for loan losses. Also contributing was $10.0 million in
foreclosures or repossessions of the collateral on smaller loans. These
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developments were partially offset by $6.3 million in net write-downs of foreclosed real estate, as
well as $8.1 million in sales of foreclosed and repossessed assets ($1.8 million of which was
financed by the Company at market rates and terms). Management expects foreclosed properties and
repossessed assets to trend higher in the near term as the Company continues to work out its
non-performing loans. Refer to Financial ConditionAsset Quality, below.
Goodwill The Company recorded goodwill as a result of its acquisitions of two other financial
institutions in 1997 and 2000. The Company analyzes goodwill annually for impairment or more
frequently when, in the judgment of management, an event has occurred that may indicate that
additional analysis is required. In this process, the Company compares its estimated fair value to
its market capitalization to determine the appropriateness of the Companys fair value.
Significant management judgment is required in this process. If goodwill is determined to be
impaired, it will be expensed in the period in which it becomes impaired.
The Company performed an annual impairment analysis of its goodwill during the third quarter of
2010, and determined that its goodwill was not impaired at that time. Due to a continued decline
in the price of the Companys common stock since the third quarter, however, management also
evaluated whether an event occurred that would require the Company to analyze goodwill for
impairment as of December 31, 2010. Based on a third-party independent appraisal of the Company,
which estimated a Step 1 fair value (as defined in GAAP) of the Company using market transaction
information for comparable financial institutions and accepted valuation techniques, management
concluded that the Companys goodwill was not impaired as of December 31, 2010. As of that date,
management estimated the Step 1 fair value of the Company was approximately 19% higher than the
Companys total shareholders equity as of December 31, 2010. As such, management believes it is
possible that a future Step 1 evaluation could indicate that a Step 2 evaluation (as defined in
GAAP) must be performed. Management performed a Step 2 evaluation as of December 31, 2010, in
anticipation of this possibility and further concluded that goodwill would not be impaired in a
Step 2 evaluation. However, there can be no assurances that future circumstances and/or conditions
will not change that could result in an impairment of the Companys goodwill, which could have a
material adverse affect on the Companys results of operations in a future period. Such
circumstances and/or conditions could include, but are not limited to, further decline in the price
of the Companys common stock, deterioration in the Companys financial condition or results of
operations, adverse changes in the fair value of the Companys assets and liabilities, and/or
market information indicating a decline in the fair value of comparable financial institutions used
to estimate the fair value of the Company. Management continues to monitor circumstances and
conditions for events that could result in an impairment of the Companys goodwill.
Mortgage Servicing Rights The carrying value of the Companys MSRs was $7.8 million at December
31, 2010, compared to $6.9 million at December 31, 2009, net of valuation allowances of $6,000 and
$287,000, respectively. The increase in net carrying value was principally the result of elevated
originations and sales of fixed-rate, one- to four-family loans on a servicing retained basis, as
previously noted. As of December 31, 2010, the Company serviced $1.1 billion in loans for
third-party investors compared to $1.0 billion at December 31, 2009. For additional information,
refer to Results of OperationsNon-Interest Income, above, and Critical Accounting
PoliciesMortgage Servicing Rights, below, as well as Item 1. BusinessLending Activities,
above.
Other Assets Other assets consist of the following items on the dates indicated:
At December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Accrued interest receivable: |
||||||||
Mortgage-related securities |
$ | 1,432 | $ | 4,651 | ||||
Investment securities |
511 | 1,875 | ||||||
Loans receivable |
5,506 | 6,795 | ||||||
Total accrued interest receivable |
7,449 | 13,321 | ||||||
Bank owned life insurance |
55,600 | 53,295 | ||||||
Premises and equipment |
51,165 | 51,715 | ||||||
Federal Home Loan Bank stock, at cost |
46,092 | 46,092 | ||||||
Prepaid FDIC insurance premiums |
8,694 | 12,521 | ||||||
Current and deferred income taxes |
63,639 | 6,149 | ||||||
Other assets |
22,070 | 23,613 | ||||||
Total other assets |
$ | 254,709 | $ | 206,706 | ||||
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Table of Contents
BOLI is long-term life insurance on the lives of certain current and past employees where the
insurance policy benefits and ownership are retained by the employer. Its cash surrender value is
an asset that the Company uses to
partially offset the future cost of employee benefits. The cash value accumulation on BOLI is
permanently tax deferred if the policy is held to the insured persons death and certain other
conditions are met. The increase in BOLI in 2010 was a result of the increase in the accumulated
cash value of the insurance policies during the period.
The Company and its subsidiaries conduct their business through an executive office and 79 banking
offices, which had an aggregate net book value of $48.6 million as of December 31, 2010, excluding
furniture, fixtures, and equipment. As of December 31, 2010, the Company owned the building and
land for 69 of its property locations and leased the space for 11.
The Companys investment in the common stock of the FHLB of Chicago did not change in 2010. The
FHLB of Chicago requires that its members own its common stock as a condition for borrowing; the
stock is redeemable at par. As of December 31, 2010, the Company owns substantially more common
stock of the FHLB of Chicago than it would otherwise be required to own given its level of
borrowings from the FHLB of Chicago. From 2007 through 2010 the FHLB of Chicago suspended the
payment of dividends on its common stock, as well as the repurchase of common stock from its
members. The FHLB of Chicago resumed cash dividends at a modest amount in the first quarter of
2011. The original suspension was due to the FHLB of Chicago entering into a memorandum of
understanding with its primary regulator the Federal Housing Finance Board (FHFB) which, among
other things, restricted the dividends that the FHLB of Chicago could pay without prior approval of
the FHFB, as well as the stock that it can repurchase from its members. Management is unable to
determine whether the FHLB of Chicago will continue to pay dividends on its common stock or the
amount of future dividends, if any. Furthermore, the Company is unable to determine when, or if,
it will be able to reduce its holdings of the common stock of the FHLB of Chicago.
The Companys investment in the common stock of the FHLB of Chicago is carried at cost (par value)
and is periodically reviewed for impairment. Investments in FHLB common stock are considered to be
long-term investments under GAAP. Accordingly, the evaluation of FHLB common stock for impairment
is based on managements assessment of the ultimate recoverability at the stocks par value rather
than by temporary declines in its value. Based on a review of the FHLB of Chicagos results of
operations, capital, liquidity, commitments, and other activities during 2010, as well as the
continued status of the FHLB System as a government-sponsored entity, management concluded that the
Companys FHLB stock was not impaired as of December 31, 2010. However, this conclusion is
subject to numerous factors outside the Companys control, including, but not limited to, future
legislative or regulatory changes and/or adverse economic developments that could have a negative
impact on the Companys investment in the common stock of the FHLB of Chicago. Accordingly, a
future determination of impairment could result in significant losses being recorded through
earnings in future periods.
Prepaid FDIC insurance premiums declined from $12.5 million at December 31, 2009, to $8.7 million
at December 31, 2010. In December 2009 the FDIC required insured financial institutions to prepay
their estimated FDIC deposit insurance premiums through 2012. The regular quarterly payments to
the FDIC that are otherwise required from the Company have been applied against this amount and
expensed on a quarterly basis, which is the reason for the decline in the prepaid balance during
2010.
The Companys current and deferred income taxes increased by $57.5 million during the year ended
December 31, 2010. This increase was due to the tax benefit generated by the Companys net loss in
2010.
Deposit Liabilities Deposit liabilities decreased by $59.2 million or 2.8% during the twelve
months ended December 31, 2010, to $2.08 billion compared to $2.14 billion at December 31, 2009.
Core deposits, consisting of checking, savings, and money market accounts, increased by $99.6
million or 11.7% in 2010 while certificates of deposit declined by $158.8 million or 12.3%. Core
deposits increased as primarily in response to a low interest rate environment that made such
accounts more economical and/or practical for customers. In addition, core deposits were higher
than typical at December 31, 2010, due to the timing of certain local government tax deposits which
had not been withdrawn as of that date. With respect to certificates of deposit, the Company
reduced the rates it offers on this product during the year in an effort to manage its overall
liquidity position, which contributed to the decline in certificates of deposit. Due in part to
these efforts, the weighted-average cost of Companys deposits declined by 77 basis points during
the year ended December 31, 2010.
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Table of Contents
The following table presents the distribution of the Companys deposit accounts at the dates
indicated by dollar amount and percent of portfolio, and the weighted average rate.
At December 31 | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Percent | Weighted | Percent | Weighted | Percent | Weighted | |||||||||||||||||||||||||||||||
of Total | Average | of Total | Average | of Total | Average | |||||||||||||||||||||||||||||||
Deposit | Nominal | Deposit | Nominal | Deposit | Nominal | |||||||||||||||||||||||||||||||
Amount | Liabilities | Rate | Amount | Liabilities | Rate | Amount | Liabilities | Rate | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Regular savings |
$ | 210,334 | 10.12 | % | 0.04 | % | $ | 196,983 | 9.22 | % | 0.06 | % | $ | 185,003 | 8.68 | % | 0.19 | % | ||||||||||||||||||
Interest-bearing demand |
219,136 | 10.54 | 0.02 | 211,448 | 9.89 | 0.04 | 180,269 | 8.46 | 0.11 | |||||||||||||||||||||||||||
Money market savings |
423,923 | 20.40 | 0.57 | 345,144 | 16.14 | 0.58 | 340,631 | 16.00 | 1.57 | |||||||||||||||||||||||||||
Non-interest bearing demand |
94,446 | 4.54 | 0.00 | 94,619 | 4.43 | 0.00 | 89,106 | 4.18 | 0.00 | |||||||||||||||||||||||||||
Total demand accounts |
947,839 | 45.60 | 0.27 | 848,194 | 39.68 | 0.26 | 795,009 | 37.32 | 0.74 | |||||||||||||||||||||||||||
Certificates of deposit: |
||||||||||||||||||||||||||||||||||||
With original maturities of: |
||||||||||||||||||||||||||||||||||||
Three months or less |
12,922 | 0.62 | 0.25 | 17,645 | 0.83 | 0.63 | 19,791 | 0.93 | 1.78 | |||||||||||||||||||||||||||
Over three to 12 months |
194,458 | 9.36 | 0.94 | 239,660 | 11.21 | 1.60 | 337,054 | 15.84 | 2.99 | |||||||||||||||||||||||||||
Over 12 to 24 months |
663,576 | 31.93 | 1.60 | 812,154 | 37.99 | 2.62 | 731,884 | 34.40 | 4.04 | |||||||||||||||||||||||||||
Over 24 to 36 months |
92,268 | 4.44 | 2.10 | 46,550 | 2.18 | 2.39 | 46,320 | 2.18 | 2.58 | |||||||||||||||||||||||||||
Over 36 to 48 months |
5,137 | 0.25 | 4.36 | 5,126 | 0.24 | 4.38 | 6,583 | 0.31 | 4.30 | |||||||||||||||||||||||||||
Over 48 to 60 months |
162,110 | 7.81 | 3.81 | 168,179 | 7.87 | 3.99 | 191,636 | 9.02 | 4.25 | |||||||||||||||||||||||||||
Over 60 months |
| 0.00 | 0.00 | | 0.00 | 0.00 | | 0.00 | 0.00 | |||||||||||||||||||||||||||
Total certificates of deposit |
1,130,471 | 54.40 | 1.84 | 1,289,314 | 60.32 | 2.58 | 1,333,268 | 62.68 | 3.72 | |||||||||||||||||||||||||||
Total deposit liabilities |
$ | 2,078,310 | 100.00 | % | 1.12 | % | $ | 2,137,508 | 100.00 | % | 1.66 | % | $ | 2,128,277 | 100.00 | % | 2.61 | % | ||||||||||||||||||
At December 31, 2010, the Company had $283.1 million in certificates of deposit with balances
of $100,000 and over maturing as follows:
Amount | ||||
(In thousands) | ||||
Maturing in: |
||||
Three months or less |
$ | 59,355 | ||
Over three months through six months |
64,988 | |||
Over six months through 12 months |
85,852 | |||
Over 12 months through 24 months |
29,885 | |||
Over 24 months through 36 months |
33,488 | |||
Over 36 months |
9,482 | |||
Total certificates of deposits greater than $100,000 |
$ | 283,050 | ||
The following table presents the Companys activity in its deposit liabilities for the periods
indicated:
For the Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Total deposit liabilities at beginning of period |
$ | 2,137,508 | $ | 2,128,277 | $ | 2,112,968 | ||||||
Net withdrawals |
(85,039 | ) | (31,341 | ) | (58,499 | ) | ||||||
Interest credited, net of penalties |
25,841 | 40,572 | 73,808 | |||||||||
Total deposit liabilities at end of period |
$ | 2,078,310 | $ | 2,137,508 | $ | 2,128,277 | ||||||
Borrowings The Companys borrowings, which consist of advances from the FHLB of Chicago, declined
by $757.0 million or 83.5% during the twelve months ended December 31, 2010. This decline was due
to the early repayment of $756.0 million in borrowings from the FHLB of Chicago in December, as
previously described. Approximately $100.0 million of Bank Mutuals remaining borrowings at
December 31, 2010, are redeemable at the option of the FHLB of Chicago, although such borrowings
have a remaining maturity of only one-and-a-half years. In addition, all of Companys advances
from the FHLB of Chicago at December 31, 2010, are subject to significant prepayment penalties if
repaid prior to their stated maturity. Management believes that additional funds are available to
be borrowed from the FHLB of Chicago or other sources in the future to fund loan originations or
security purchases if needed or desirable; however, management does not expect additional
borrowings to be significant in the near term. There can be no assurances of the future
availability of borrowings or any particular level of future borrowings. For additional
information refer to Item 1. BusinessBorrowings.
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The following table sets forth certain information regarding the Companys borrowings at the end of
and during the periods indicated:
At or For the Year Ended December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance outstanding at end of year: |
||||||||||||||||||||
FHLB term advances |
$ | 149,934 | $ | 906,979 | $ | 907,971 | $ | 912,459 | $ | 705,025 | ||||||||||
Overnight borrowings from FHLB |
| | | | | |||||||||||||||
Weighted average interest rate at end of year: |
||||||||||||||||||||
FHLB term advances |
4.79 | % | 4.26 | % | 4.26 | % | 4.27 | % | 4.46 | % | ||||||||||
Overnight borrowings from FHLB |
| | | | | |||||||||||||||
Maximum amount outstanding during the year: |
||||||||||||||||||||
FHLB term advances |
$ | 149,934 | $ | 907,971 | $ | 912,459 | $ | 921,781 | $ | 841,835 | ||||||||||
Overnight borrowings from FHLB |
| | 5,000 | 52,100 | 38,000 | |||||||||||||||
Other borrowings |
| | 1,103 | | | |||||||||||||||
Average amount outstanding during the year: |
||||||||||||||||||||
FHLB term advances |
$ | 871,212 | $ | 907,443 | $ | 910,517 | $ | 865,540 | $ | 782,619 | ||||||||||
Overnight borrowings from FHLB |
| | 22 | 3,570 | 3,242 | |||||||||||||||
Other borrowings |
| | 3 | | | |||||||||||||||
Weighted average interest rate during the year: |
||||||||||||||||||||
FHLB term advances |
4.32 | % | 4.32 | % | 4.34 | % | 4.34 | % | 3.86 | % | ||||||||||
Overnight borrowings from FHLB |
| | 3.75 | % | 5.56 | % | 5.40 | % | ||||||||||||
Other borrowings |
| | 1.92 | % | | |
Other Liabilities Other liabilities were $45.0 million at December 31, 2010, compared to
$59.7 million at December 31, 2009. Most of this decrease was caused by payables to securities
brokers for securities purchased in December 2009 that settled in January 2010.
Shareholders Equity Shareholders equity decreased from $402.5 million at December 31, 2009, to
$313.0 million at the end of 2010. This decrease was primarily the result of the net loss from
operations in 2010. The Companys accumulated other comprehensive loss increased during the year
due principally to adjustments related to the Companys net pension liability. The Companys
ratio of total shareholders equity to total assets was 12.07% at December 31, 2010, compared to
11.46% at December 31, 2009. For information relating to the Banks regulatory capital, refer to
Note 8. Shareholders Equity in Item 8. Financial Statements and Supplementary Data.
During 2010, the Company repurchased 1.0 million shares of its common stock at an average price of
$6.52 per share. Quarterly cash dividends of $0.07 per share were paid in each of the first two
quarters of 2010 and $0.03 per share was paid in each of the last two quarter of the year. On
February 7, 2011, the Companys board of directors announced that it had declared a $0.03 per share
dividend payable on March 1, 2011, to shareholders of record on February 18, 2011. For additional
information relating to the Companys shareholders equity, refer to Item 1.
BusinessShareholders Equity, above.
The payment of dividends or the repurchase of common stock by the Company is highly dependent on
the ability of the Bank to pay dividends or otherwise distribute capital to the Company. Such
payments are subject to any requirements imposed by law or regulations and to the application and
interpretation thereof by the OTS, which has become increasingly strict as to the amount of capital
it expects financial institutions to maintain. The Company cannot provide any assurances that
dividends will continue to be paid, the amount of any such dividends, or the possible future
resumption of share repurchases. For further information about factors which could affect the
Companys payment of dividends, refer to Item 1. BusinessRegulation and Supervision, as well
as Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchase of Equity Securities, above.
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Asset Quality The following table presents information regarding non-accrual mortgage, consumer
loans, commercial business loans, accruing loans delinquent 90 days or more, and foreclosed
properties and repossessed assets as of the dates indicated.
At December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual mortgage loans: |
||||||||||||||||||||
One- to four-family |
$ | 18,684 | $ | 12,126 | $ | 8,185 | $ | 2,446 | $ | 1,594 | ||||||||||
Multi-family |
31,660 | 3,357 | 13,255 | 3,702 | 6,621 | |||||||||||||||
Commercial real estate |
41,244 | 18,840 | 5,573 | 2,056 | 476 | |||||||||||||||
Construction and development |
26,563 | 4,859 | 2,847 | 3,047 | 2,813 | |||||||||||||||
Total non-accrual mortgage loans |
118,151 | 39,182 | 29,860 | 11,251 | 11,504 | |||||||||||||||
Non-accrual consumer loans: |
||||||||||||||||||||
Secured by real estate |
1,369 | 1,433 | 759 | 585 | 407 | |||||||||||||||
Other consumer loans |
275 | 212 | 400 | 345 | 396 | |||||||||||||||
Total non-accrual consumer loans |
1,644 | 1,645 | 1,159 | 930 | 803 | |||||||||||||||
Non-accrual commercial business loans |
2,779 | 923 | 1,494 | 159 | 1,625 | |||||||||||||||
Total non-accrual loans |
122,574 | 41,750 | 32,513 | 12,340 | 13,932 | |||||||||||||||
Accruing loans delinquent 90 days or more (1) |
373 | 834 | 576 | 602 | 565 | |||||||||||||||
Total non-performing loans |
122,947 | 42,584 | 33,089 | 12,942 | 14,497 | |||||||||||||||
Foreclosed real estate and repossessed assets |
19,293 | 17,689 | 4,768 | 3,687 | 1,231 | |||||||||||||||
Total non-performing assets |
$ | 142,240 | $ | 60,273 | $ | 37,857 | $ | 16,629 | $ | 15,728 | ||||||||||
Non-performing loans to total loans |
9.29 | % | 2.83 | % | 1.81 | % | 0.65 | % | 0.72 | % | ||||||||||
Non-performing assets to total assets |
5.49 | % | 1.72 | % | 1.08 | % | 0.48 | % | 0.46 | % | ||||||||||
Interest income that would have been
recognized if non-accrual loans had been
current |
$ | 4,734 | $ | 2,671 | $ | 2,519 | $ | 1,002 | $ | 652 |
(1) | Consists of student loans that are guaranteed under programs sponsored by the U.S. government. |
The increase in the Companys non-performing loans in recent years has been caused by persistent
weakness in economic conditions, elevated levels of unemployment, and continued declines in
commercial real estate values that resulted in increased stress on borrowers and increased loan
delinquencies. Many properties securing the Companys loans have experienced increased vacancy
rates, declining lease rates, or delays in unit sales, as well as continued declines in real estate
values. During the fourth quarter of 2010 in particular, management increased its assessment of
the number of loans secured by commercial real estate, multi-family real estate, undeveloped land,
and commercial business assets that are or will likely become collateral dependent. In many
instances, managements assessment included loans that borrowers have managed to keep current
despite underlying difficulties with the properties that secure the loans. As of December 31,
2010, non-performing loans included $38.1 million in loans that were current on all contractual
principal and interest payments, but which management determined should be classified as
non-performing in light of underlying difficulties with the properties that secure the loans, as
well as an increasingly strict regulatory environment. No loans that were current on contractual
payments were included in non-performing loans in periods prior to 2010. The Company will continue
to record periodic interest payments on these loans in interest income provided the borrowers
remain current on the loans and provided, in the judgment of management, the Companys net recorded
investment in the loan is deemed to be collectible.
The increase in non-performing loans in 2010 was due in part to the $38.1 million in current loans
mentioned in the preceding paragraph, which consisted of 15 unrelated loan relationships secured by
commercial real estate, multi-family real estate, undeveloped land, and commercial business assets.
The largest of these loan relationships was an $8.3 million loan secured by an
apartment complex in Green Bay, Wisconsin, that has experienced reduced lease rates and higher
vacancies in recent months. The guarantors have maintained the loan in a current payment status,
but management is uncertain at this time how long the guarantors will be able or willing to keep
the loan current. Accordingly, the Company concluded that the loan was collateral dependent and
established a $1.5 million loss allowance on this loan during the fourth quarter of 2010. This
allowance was based on an internal management evaluation of the collateral using the net operating
income of the property and a discount rate and selling costs considered appropriate by management.
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Also contributing to the increase in non-performing loans in 2010 were 16 larger loan relationships
that aggregated $43.5 million that defaulted during the year. These loans were secured by
commercial real estate, multi-family real estate, single-family real estate, undeveloped land, and
commercial business assets. The largest of these loan
relationships was a $7.0 million relationship that was secured by apartment and townhome complexes
near Minneapolis, Minnesota. Although the projects are nearly 100% occupied, rents have been
insufficient to fully service the loan. Accordingly, the Company concluded that the loan was
collateral dependent and established a $568,000 loss allowance on this loan during the fourth
quarter of 2010. This allowance was based on an internal management evaluation of the collateral
using the net operating income of the property and a discount rate and selling costs considered
appropriate by management.
Finally, in 2010 non-performing one- to four-family loans increased by $4.0 million, smaller
non-performing commercial business loans increased by $5.8 million, and smaller non-performing
commercial and multi-family real estate loans increased by $2.0 million. These developments were
offset in part by the combined effects of loan charge-offs and foreclosures during the period. In
particular, the Company transferred the collateral for three larger loan relationships that
aggregated $10.0 million to foreclosed real estate during 2010.
The Companys foreclosed real estate and repossessed properties increased by $1.6 million or 9.1%
in 2010. This increase was principally caused by the transfer of the collateral mentioned in the
previous paragraph, net of $4.1 million in allowances for loan losses, which were charged-off.
Also contributing was $10.0 million in foreclosures or repossessions of smaller loans. These
developments were partially offset by $6.3 million in net write-downs of foreclosed real estate, as
well as $8.1 million in sales of foreclosed and repossessed assets ($1.8 million of which was
financed by the Company at market rates and terms). Management expects foreclosed properties and
repossessed assets to trend higher in the near term as the Company continues to work out its
non-performing loans.
The increase in non-performing loans in 2009 was primarily caused by the default of $15.4 million
in loans to seven borrowers that were secured by office and retail buildings, townhomes, and
improved land. Also contributing was a $6.2 million increase in smaller non-performing
multi-family and commercial real estate loans, a $3.9 million increase in non-performing one- to
four-family residential loans, and a $486,000 increase in non-performing consumer loans. These
developments were partially offset by the Companys acceptance of a deed in lieu of foreclosure on
a $9.1 million loan secured by a completed condominium development project that defaulted in 2008.
In addition, the Company also accepted deeds in lieu of foreclosure on three other large loans that
had an aggregate balance of $7.1 million, as well as the foreclosure and/or repossession of
collateral on numerous smaller loans during 2009. Finally, non-performing commercial business
loans declined by $571,000 or 38.2% in 2009.
The
increase in non-performing loans in 2008 compared to 2007 was due in part to a $9.1
million loan on a completed condominium development project that defaulted in that year (as
mentioned in a preceding paragraph). Also contributing to the increase in 2008 was the
aforementioned deterioration in economic conditions which caused a $5.4 million increase in
non-performing one- to four-family mortgage loans, as well as smaller increases in non-performing
consumer and commercial business loans.
Loans considered to be impaired by the Company at December 31, 2010, totaled $131.4 million as
compared to $42.6 million at December 31, 2009, $33.1 million at December 31, 2008, $20.2 million
at December 31, 2007, and $17.3 million at December 31, 2006. The average annual balance of loans
impaired as of December 31, 2010, was $70.2 million and the interest received and recognized on
these loans while they were impaired was $569,000.
In addition to non-performing assets, at December 31, 2010, management was closely monitoring $8.9
million in additional loans that were classified as special mention and $27.1 million that were
adversely classified as substandard as of that date, in accordance with the Companys internal risk
rating policy. These amounts compared to $9.7 million and $31.3 million, respectively, as of
December 31, 2009. At December 31, 2010, these loans were secured by commercial real estate,
multi-family real estate, undeveloped land, and certain commercial business assets. Although the
loans were performing in accordance with their contractual terms, management of the Company deemed
their classification prudent in light of deterioration in the financial strength of the borrowers
and/or the performance of the collateral, including an assessment of occupancy rates, lease rates,
unit sales, and/or estimated changes in the value of the collateral.
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The following table presents the activity in the Companys allowance for loan losses at or for the
periods indicated.
At or for the Years Ended December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 17,028 | $ | 12,208 | $ | 11,774 | $ | 12,574 | $ | 12,090 | ||||||||||
Provision for (recovery of) loan losses |
49,619 | 12,413 | 1,447 | (272 | ) | 632 | ||||||||||||||
Charge-offs: |
||||||||||||||||||||
One- to four-family |
(528 | ) | (397 | ) | (167 | ) | | (44 | ) | |||||||||||
Multi-family |
(140 | ) | (4,523 | ) | | | | |||||||||||||
Commercial real estate |
(11,621 | ) | (1,989 | ) | (446 | ) | (178 | ) | | |||||||||||
Construction and development |
(3,515 | ) | | | | | ||||||||||||||
Consumer |
(776 | ) | (527 | ) | (411 | ) | (412 | ) | (271 | ) | ||||||||||
Commercial business |
(2,140 | ) | (210 | ) | (34 | ) | (33 | ) | (52 | ) | ||||||||||
Total charge-offs |
(18,720 | ) | (7,646 | ) | (1,058 | ) | (623 | ) | (367 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
One- to four-family |
20 | 1 | | | | |||||||||||||||
Commercial real estate |
1 | 19 | | | | |||||||||||||||
Consumer |
37 | 33 | 45 | 95 | 81 | |||||||||||||||
Commercial business |
| | | | 138 | |||||||||||||||
Total recoveries |
58 | 53 | 45 | 95 | 219 | |||||||||||||||
Net charge-offs |
(18,662 | ) | (7,593 | ) | (1,013 | ) | (528 | ) | (148 | ) | ||||||||||
Balance at end of period |
$ | 47,985 | $ | 17,028 | $ | 12,208 | $ | 11,774 | $ | 12,574 | ||||||||||
Net charge-offs to average loans |
1.26 | % | 0.45 | % | 0.05 | % | 0.03 | % | 0.01 | % | ||||||||||
Allowance for loan losses to total loans |
3.63 | % | 1.13 | % | 0.67 | % | 0.59 | % | 0.62 | % | ||||||||||
Allowance for loan losses to
non-performing loans |
39.03 | % | 39.99 | % | 36.89 | % | 90.98 | % | 86.74 | % |
The increases in the Companys allowance for loan losses in recent years has been caused by the net
effects of loan loss provisions and charge-off activity in such years (refer to Results of
OperationsProvision for Loan Losses, above). Increases in non-performing loans, as well as
managements general concerns regarding persistent weakness in economic conditions, elevated levels
of unemployment, continued declines in real estate values, and a general increase in stressed loans
in the Companys loan portfolio, have resulted in increased provisions for loan losses in 2010 and
2009. In addition, the Companys foreclosure on loans in 2010 and 2009, as well as a general
increase in foreclosure and repossession activity related to smaller loans in both of these
periods, have resulted in increased charge-off activity in recent years. Management is unable to
determine at this time if or when these trends will reverse.
The Companys ratio of allowance for loan losses to total loans increased in 2010 and 2009 due to
an increase in the dollar amount of the allowance for loan loss, as previously described, as well
as an overall decline in total loans receivable during these years. The Companys ratio of
allowance for loan losses as a percent of non-performing loans declined in 2008 and has remained
stable since that time as a result of the net effects of the loan loss provision and charge-off
activity described above, as well as an increase in non-performing loans.
Although management believes the Companys present level of allowance for loan losses is adequate,
there can be no assurances that future adjustments to the allowance will not be necessary, which
could adversely affect the Companys results of operations. For additional discussion, refer to
Item 1. BusinessAsset Quality, above, and Critical Accounting PoliciesAllowance for Loan
Losses, below.
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The following table represents the Companys allocation of its allowance for loan losses by loan
category on the dates indicated:
At December 31 | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
Percentage | Percentage | Percentage | Percentage | Percentage | ||||||||||||||||||||||||||||||||||||
in Category | in Category | in Category | in Category | in Category | ||||||||||||||||||||||||||||||||||||
Amount | to Total | Amount | to Total | Amount | to Total | Amount | to Total | Amount | to Total | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Loan category: |
||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
$ | 3,726 | 7.76 | % | $ | 2,806 | 16.47 | % | $ | 3,038 | 24.89 | % | $ | 3,324 | 28.23 | % | $ | 3,531 | 28.08 | % | ||||||||||||||||||||
Multi-family |
9,265 | 19.31 | 3,167 | 18.60 | 4,197 | 34.38 | 2,375 | 20.17 | 1,336 | 10.63 | ||||||||||||||||||||||||||||||
Commercial real estate |
21,885 | 45.61 | 5,715 | 33.56 | 1,113 | 9.12 | 1,265 | 10.74 | 1,213 | 9.65 | ||||||||||||||||||||||||||||||
Construction/development |
10,141 | 21.13 | 1,172 | 6.88 | 400 | 3.28 | 400 | 3.40 | 500 | 3.98 | ||||||||||||||||||||||||||||||
Total mortgage loans |
45,017 | 93.81 | 12,860 | 75.52 | 8,748 | 71.66 | 7,364 | 62.54 | 6,580 | 52.33 | ||||||||||||||||||||||||||||||
Consumer |
1,427 | 2.97 | 2,243 | 13.17 | 2,125 | 17.41 | 2,266 | 19.25 | 2,556 | 20.33 | ||||||||||||||||||||||||||||||
Commercial business |
1,541 | 3.21 | 1,925 | 11.31 | 1,335 | 10.94 | 2,144 | 18.21 | 3,438 | 27.34 | ||||||||||||||||||||||||||||||
Total allowance for loan losses |
$ | 47,985 | 100.00 | % | $ | 17,028 | 100.00 | % | $ | 12,208 | 100.00 | % | $ | 11,774 | 100.00 | % | $ | 12,574 | 100.00 | % | ||||||||||||||||||||
Critical Accounting Policies
There are a number of accounting policies that the Company has established which require a
significant amount of management judgment. A number of the more significant policies are discussed
in the following paragraphs.
Allowance for Loan Losses Establishing the amount of the allowance for loan losses requires the
use of management judgment. The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses inherent in the loan portfolio and is based on
factors such as the size and current risk characteristics of the portfolio, an assessment of
individual problem loans and pools of homogenous loans within the portfolio, and actual loss,
delinquency, and/or risk rating experience within the portfolio. The Company also considers
current economic conditions and/or events in specific industries and geographical areas, including
unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors,
to include regulatory guidance. Finally, as appropriate, the Company also considers individual
borrower circumstances and the condition and fair value of the loan collateral, if any.
Determination of the allowance is inherently subjective as it requires significant estimates,
including the amounts and timing of expected future cash flows on loans, the fair value of
underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical
loss experience, changes in risk characteristics of the loan portfolio, and consideration of
current economic trends, all of which may be susceptible to significant change. Higher rates of
loan defaults than anticipated would likely result in a need to increase provisions in future
years. 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 operations
based on managements periodic evaluation of the factors previously mentioned, as well as other
pertinent factors. Evaluations are conducted at least quarterly and more often if deemed
necessary. If management misjudges a major component of the allowance and the Company experiences
an unanticipated loss, it will likely affect earnings. Developments affecting loans can also cause
the allowance to vary significantly between quarters. Management consistently challenges itself in
the review of the risk components to identify any changes in trends and their causes.
Other-Than-Temporary Impairment Generally accepted accounting principles require enterprises to
determine whether a decline in the fair value of an individual debt security below its amortized
cost is other than temporary. If the decline is deemed to be other than temporary, the cost basis
of the security must be written down through a charge to earnings. Determination of OTTI requires
significant management judgment relating to the probability of future cash flows, the financial
condition and near-term prospects of the issuer of the security, and/or the collateral for the
security, the duration and extent of the decline in fair value, and the ability and intent of the
Company to retain the security, among other things. Future changes in managements assessment of
OTTI on its securities could result in significant charges to earnings in future periods.
Goodwill Goodwill has been recorded as a result of two acquisitions in which the purchase price
exceeded the fair value of tangible and identifiable intangible net assets acquired. Management
analyzes goodwill annually for impairment or more frequently when, in the judgment of management,
an event has occurred that may indicate that additional analysis is required. The analysis of
goodwill for impairment requires the use of significant management judgment. If goodwill is
determined to be impaired, it would be expensed in the period in which it becomes impaired.
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Income Taxes The assessment of the Companys tax assets and liabilities involves the use of
estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements
and federal and state tax codes. There can be no assurance that future events, such as court
decisions, regulatory actions or interpretations, or changes in positions of federal and state
taxing authorities will not differ from managements current assessments. The impact of these
matters could be significant to the consolidated results of operations and reported earnings.
The Company describes all of its significant accounting policies in Note 1. Basis of
Presentation in Item 8. Financial Statements and Supplementary Data.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The Company has various financial obligations, including contractual obligations and commitments,
that may require future cash payments.
The following table presents, as of December 31, 2010, significant fixed and determinable
contractual obligations to third parties by payment date. Further discussion of the nature of each
obligation is included in the referenced note to the Companys Consolidated Financial Statements.
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Deposit liabilities without a
stated maturity (1) |
$ | 947,839 | | | | $ | 947,839 | |||||||||||||
Certificates of deposit (1) |
825,661 | $ | 260,830 | $ | 43,980 | | 1,130,471 | |||||||||||||
Borrowed funds (1) (2) |
| 100,249 | | $ | 49,685 | 149,934 | ||||||||||||||
Operating leases |
822 | 1,284 | 1,176 | 2,200 | 5,482 | |||||||||||||||
Purchase obligations |
1,680 | 3,360 | 3,360 | 6,300 | 14,700 | |||||||||||||||
Deferred retirement plans and
deferred compensation plans |
1,111 | 2,160 | 2,551 | 7,814 | 13,635 |
(1) | Excludes interest to be paid in the periods indicated. | |
(2) | Includes $100.0 million of borrowings that contain redemption features that permit the FHLB of Chicago to redeem the advances at its option on a quarterly basis. |
The Companys operating lease obligations represent short- and long-term lease and rental payments
for facilities, certain software and data processing and other equipment. Purchase obligations
represent obligations under agreements to purchase goods or services that are enforceable and
legally binding on the Company and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing
of the transaction. The purchase obligation amounts presented above primarily relate to certain
contractual payments for services provided for information technology.
The Company also has obligations under its deferred retirement plan for directors as described in
Note 10. Employee Benefit Plans in Item 8. Financial Statements and Supplementary Data.
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The following table details the amounts and expected maturities of significant off-balance sheet
commitments as of December 31, 2010. Further discussion of these commitments is included in the
Note 13. Financial Instruments with Off-Balance Sheet Risk in Item 8. Financial Statements and
Supplementary Data.
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Commitments to extend credit: |
||||||||||||||||||||
Commercial real estate |
$ | 1,035 | | | | $ | 1,035 | |||||||||||||
Residential real estate |
74,089 | | | | 74,089 | |||||||||||||||
Revolving home equity
and credit card lines |
146,381 | | | | 146,381 | |||||||||||||||
Standby letters of credit |
288 | $ | 41 | | $ | 10 | 339 | |||||||||||||
Commercial letters of credit |
20,856 | | | | 20,856 | |||||||||||||||
Unused commercial lines
of credit |
462 | | | | 462 | |||||||||||||||
Net commitments to sell
mortgage loans |
(49,854 | ) | | | | (49,854 | ) |
Commitments to extend credit, including loan commitments, standby letters of credit, unused lines
of credit and commercial letters of credit do not necessarily represent future cash requirements,
since these commitments often expire without being drawn upon.
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Quarterly Financial Information
The following table sets forth certain unaudited quarterly data for the periods indicated:
2010 Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Interest income |
$ | 31,992 | $ | 29,586 | $ | 28,441 | $ | 22,551 | ||||||||
Interest expense |
17,877 | 17,191 | 16,730 | 14,478 | ||||||||||||
Net interest income |
14,115 | 12,395 | 11,711 | 8,073 | ||||||||||||
Provision for loan losses |
3,366 | 6,150 | 6,163 | 33,940 | ||||||||||||
Net income (loss) after
provision for loan losses |
10,749 | 6,245 | 5,548 | (25,867 | ) | |||||||||||
Total non-interest income |
8,968 | 12,390 | 12,963 | 6,282 | ||||||||||||
Total non-interest expense (1) |
16,562 | 17,742 | 17,278 | 108,243 | ||||||||||||
Income (loss) before taxes |
3,155 | 893 | 1,233 | 127,828 | ||||||||||||
Income tax expense (benefit) |
1,051 | 162 | 307 | (51,430 | ) | |||||||||||
Net income (loss) before
non-controlling interest |
2,104 | 731 | 926 | (76,398 | ) | |||||||||||
Net (income) loss attributable
to
non-controlling interest |
(1 | ) | | | (1 | ) | ||||||||||
Net income (loss) |
$ | 2,103 | $ | 731 | $ | 926 | $ | (76,399 | ) | |||||||
Earnings (loss) per share-basic |
$ | 0.05 | $ | 0.02 | $ | 0.02 | $ | (1.68 | ) | |||||||
Earnings
(loss) per share-diluted |
$ | 0.05 | $ | 0.02 | $ | 0.02 | $ | (1.68 | ) | |||||||
Cash dividend paid per share |
$ | 0.07 | $ | 0.07 | $ | 0.03 | $ | 0.03 |
2009 Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Interest income |
$ | 41,986 | $ | 39,166 | $ | 35,727 | $ | 34,934 | ||||||||
Interest expense |
22,793 | 21,301 | 20,403 | 19,286 | ||||||||||||
Net interest income |
19,193 | 17,865 | 15,324 | 15,648 | ||||||||||||
Provision for loan losses |
3,161 | 472 | 5,189 | 3,591 | ||||||||||||
Net income
after provision for loan losses |
16,032 | 17,393 | 10,135 | 12,057 | ||||||||||||
Total non-interest income |
9,285 | 7,552 | 8,613 | 5,536 | ||||||||||||
Total non-interest expense |
16,459 | 18,576 | 16,731 | 15,694 | ||||||||||||
Income before taxes |
8,858 | 6,369 | 2,017 | 1,899 | ||||||||||||
Income taxes |
1,669 | 2,553 | 772 | 424 | ||||||||||||
Net income before non-controlling interest |
7,189 | 3,816 | 1,245 | 1,475 | ||||||||||||
Net loss attributable to non-controlling interest |
(1 | ) | 1 | | | |||||||||||
Net income |
$ | 7,188 | $ | 3,817 | $ | 1,245 | $ | 1,475 | ||||||||
Earnings per share-basic |
$ | 0.15 | $ | 0.08 | $ | 0.03 | $ | 0.03 | ||||||||
Earnings per share-diluted |
$ | 0.15 | $ | 0.08 | $ | 0.03 | $ | 0.03 | ||||||||
Cash dividend paid per share |
$ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.07 |
(1) | Non-interest expense in the quarter ended December 31, 2010, included $89.3 million loss on early repayment of FHLB borrowings. |
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Companys ability to maintain net interest income depends upon earning a higher yield on assets
than the rates it pays on deposits and borrowings. Fluctuations in market interest rates will
ultimately impact both the level of income and expense recorded on a large portion of the Companys
assets and liabilities. Fluctuations in interest rates will also affect the market value of all
interest-earning assets and interest-bearing liabilities, other than those with a very short term
to maturity.
Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature during a given period of time. The
difference, or the interest rate sensitivity gap, provides an indication of the extent to which
the Companys interest rate spread will be affected by changes in interest rates. Refer to Gap
Analysis below. Interest rate sensitivity is also measured through analysis of changes in the
present value of the Companys equity. Refer to Present Value of Equity, below.
Due to the nature of the Companys operations, it is not directly subject to foreign currency
exchange or commodity price risk. Instead, the Companys real estate loan portfolio, which is
concentrated in Wisconsin, is subject to risks associated with the state and local economies.
To achieve the objectives of managing interest rate risk, the Companys executive management meets
periodically to discuss and monitor the market interest rate environment and provides reports to
the board of directors. Management seeks to coordinate asset and liability decisions so that,
under changing interest rate scenarios, the Companys earnings will remain within an acceptable
range. The primary objectives of the Companys interest rate management strategy are to:
| maintain earnings and capital within self-imposed parameters over a range of possible interest rate environments; | ||
| coordinate interest rate risk policies and procedures with other elements of the Companys business plan, all within the context of the current business environment and regulatory capital and liquidity requirements; and | ||
| manage interest rate risk in a manner consistent with the approved guidelines and policies set by the Companys board of directors. |
Historically, the Companys lending activities have been concentrated in one- to four-family first
and second mortgage loans. The Companys primary source of funds has been deposits and borrowings,
consisting primarily of certificates of deposit and borrowings which have substantially shorter
terms to maturity than the loan portfolio. The Company has employed certain strategies to manage
the interest rate risk inherent in the asset/liability mix, including:
| emphasizing the origination of adjustable rate and certain 15-year fixed rate mortgage loans for portfolio, and selling certain 15, 20, and 30 year fixed rate mortgage loans in the secondary market; | ||
| maintaining a significant level of investment securities and mortgage-related securities with a weighted average life of less than eight years or with interest rates that reprice in less than five years; and | ||
| managing deposits and borrowings to provide stable funding. |
Management believes that the frequent repricing of adjustable rate mortgage loans, the cash flows
from 15-year fixed rate real estate loans, the shorter duration of consumer loans, and adjustable
rate features and shorter durations of investment securities, reduce the Companys interest rate
risk exposure to acceptable levels.
Gap Analysis Repricing characteristics of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are interest rate sensitive and by monitoring a
financial institutions interest rate sensitivity gap. An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
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A gap is considered positive when the amount of interest-earning assets maturing or repricing
within a specific time period exceeds the amount of interest-bearing liabilities maturing or
repricing within that specific time period. A gap is
considered negative when the amount of interest-bearing liabilities maturing or repricing within a
specific time period exceeds the amount of interest-earning assets maturing or repricing within the
same period. During a period of rising interest rates, a financial institution with a negative gap
position would be expected, absent the effects of other factors, to experience a greater increase
in the costs of its liabilities relative to the yields of its assets and thus a decrease in the
institutions net interest income. An institution with a positive gap position would be expected,
absent the effect of other factors, to experience the opposite result. Conversely, during a period
of falling interest rates, a negative gap would tend to result in an increase in net interest
income while a positive gap would tend to reduce net interest income.
The table on the next page presents the amounts of the Companys interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2010, which management anticipates to
reprice or mature in each of the future time periods shown. The information presented in the
following table is based on the following assumptions:
| Investment securitiesbased upon contractual maturities and if applicable, call dates. $40.0 million in investment securities with maturities beyond one year have been classified as due within one year based on their call dates. These investments may not be called prior to their stated maturities. $165.8 million in investment securities with call dates within one year have been classified as due beyond one year according to their stated maturities. These investments may be called prior to their stated maturities. | ||
| Mortgage-related securitiesbased upon known repricing dates (if applicable) and an independent outside source for determining estimated prepayment speeds. Actual cash flows may differ substantially from these assumptions. | ||
| Loansbased upon contractual maturities, repricing date, if applicable, scheduled repayments of principal, and projected prepayments of principal based upon the Companys historical experience or anticipated prepayments. Actual cash flows may differ substantially from these assumptions. | ||
| Deposit liabilitiesbased upon contractual maturities and the Companys historical decay rates. Actual cash flows may differ from these assumptions. | ||
| Borrowingsbased upon final maturity. However, $100.0 million of borrowings classified as due beyond one year contain a redemption option which has not been reflected in the analysis. These borrowings could be redeemed at the option of the lender prior to their stated maturity (refer to Financial ConditionBorrowings, above). |
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At December 31, 2010 | ||||||||||||||||||||||||
Within | Three to | More than | More than | |||||||||||||||||||||
Three | Twelve | 1 Year to | 3 Years - | Over 5 | ||||||||||||||||||||
Months | Months | 2 Years | 5 Years | Years | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable: |
||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||
Permanent: |
||||||||||||||||||||||||
Fixed |
$ | 81,954 | $ | 125,403 | $ | 147,038 | $ | 70,765 | $ | 81,398 | $ | 506,558 | ||||||||||||
Adjustable |
84,731 | 257,946 | 155,594 | 12,722 | 191 | 511,184 | ||||||||||||||||||
Construction: |
||||||||||||||||||||||||
Fixed |
5,904 | 2,975 | 2,321 | 2,264 | 9,934 | 23,398 | ||||||||||||||||||
Adjustable |
11,666 | 163 | 1,032 | 2,953 | | 15,814 | ||||||||||||||||||
Consumer loans |
109,220 | 39,350 | 51,110 | 22,302 | 19,981 | 241,963 | ||||||||||||||||||
Commercial business loans |
28,492 | 10,353 | 9,052 | 288 | 18 | 48,203 | ||||||||||||||||||
Interest-earning deposits |
184,439 | | | | | 184,439 | ||||||||||||||||||
Investment securities |
20,837 | 40,000 | 160,825 | 5,000 | | 226,662 | ||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||
Fixed |
30,788 | 60,745 | 124,868 | 77,278 | 101,142 | 394,821 | ||||||||||||||||||
Adjustable |
44,083 | | | | | 44,083 | ||||||||||||||||||
Other interest-earning assets |
46,092 | | | | | 46,092 | ||||||||||||||||||
Total interest-earning assets |
648,206 | 536,935 | 651,840 | 193,572 | 212,664 | 2,243,217 | ||||||||||||||||||
Non-interest-bearing and interest-bearing liabilities: |
||||||||||||||||||||||||
Non-interest-bearing demand accounts |
52 | 157 | 416 | 414 | 86,087 | 87,126 | ||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposit liabilities: |
||||||||||||||||||||||||
Interest-bearing demand accounts |
136 | 407 | 1,082 | 1,077 | 223,754 | 226,456 | ||||||||||||||||||
Regular savings accounts |
450 | 1,333 | 3,436 | 3,272 | 201,844 | 210,335 | ||||||||||||||||||
Money market accounts |
423,923 | | | | | 423,923 | ||||||||||||||||||
Certificates of deposit |
291,969 | 598,857 | 195,664 | 43,980 | | 1,130,470 | ||||||||||||||||||
Advance payments by borrowers
for taxes and insurance |
| 2,697 | | | | 2,697 | ||||||||||||||||||
Borrowings |
272 | 828 | 102,572 | 2,594 | 43,668 | 149,934 | ||||||||||||||||||
Total interest-bearing liabilities |
716,802 | 604,279 | 303,170 | 51,337 | 555,353 | 2,230,941 | ||||||||||||||||||
Interest rate sensitivity gap |
$ | (68,596 | ) | $ | (67,344 | ) | $ | 348,670 | $ | 142,235 | $ | (342,689 | ) | $ | 12,276 | |||||||||
Cumulative interest rate sensitivity gap |
$ | (68,596 | ) | $ | (135,940 | ) | $ | 212,730 | $ | 354,965 | $ | 12,276 | ||||||||||||
Cumulative interest rate sensitivity gap
as a percent of total assets |
(2.65 | )% | (5.24 | )% | 8.21 | % | 13.70 | % | 0.47 | % | ||||||||||||||
Cumulative interest-earning assets as a
percentage of interest-bearing
liabilities |
90.43 | % | 89.71 | % | 113.10 | % | 121.18 | % | 100.55 | % |
Based on the above gap analysis, at December 31, 2010, the Companys interest-bearing
liabilities maturing or repricing within one year exceeded its interest-earning assets maturing or
repricing within the same period by $135.9 million. This represented a negative cumulative
one-year interest rate sensitivity gap of 5.24%, and a ratio of interest-earning assets maturing or
repricing within one year to interest-bearing liabilities maturing or repricing within one year of
89.71%. Based on this information, management anticipates that over the course of the next year
the Companys net interest income could be adversely impacted by an increase in market interest
rates. Alternatively, the Companys net interest income could be favorably impacted by a decline
in market interest rates. However, it should be noted that the Companys future net interest
income is affected by more than just future market interest rates. Net interest income is also
affected by absolute and relative levels of earning assets and interest-bearing liabilities, the
level of non-performing loans and other investments, and by other factors outlined in Item 1.
BusinessCautionary Statement, Item 1A. Risk Factors, and Item 7. Management Discussion of
Financial Condition and Results of Operations.
In addition to not anticipating all of the factors that could impact future net interest income,
gap analysis has certain shortcomings. For example, although certain assets and liabilities may
mature or reprice in similar periods, the interest rates on such react by different degrees to
changes in market interest rates, especially in instances where changes in rates are limited by
contractual caps or floors or instances where rates are influenced by competitive forces.
Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind changes in market rates
(for example, rate changes on most deposit liabilities generally lag changes in market interest
rates). Certain assets, such as adjustable rate loans, have features which limit changes in
interest rates on a short term basis and over the life of the loan. If interest rates change,
prepayment, and early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of borrowers to make payments on their adjustable rate
loans may decrease if interest rates increase.
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Present Value of Equity In addition to the gap analysis table, management also uses simulation
models to monitor
interest rate risk. The models report the present value of equity (PVE) in different interest
rate environments, assuming an instantaneous and permanent interest rate shock to all interest rate
sensitive assets and liabilities. The PVE is the difference between the present value of expected
cash flows of interest rate sensitive assets and liabilities. The changes in market value of
assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of
those assets and liabilities as their values are derived from the characteristics of the asset or
liability (i.e., fixed rate, adjustable rate, caps, and floors) relative to the current interest
rate environment. For example, in a rising interest rate environment, the fair market value of a
fixed rate asset will decline whereas the fair market value of an adjustable rate asset, depending
on its repricing characteristics, may not decline. Increases in the market value of assets will
increase the PVE whereas decreases in market value of assets will decrease the PVE. Conversely,
increases in the market value of liabilities will decrease the PVE whereas decreases in the market
value of liabilities will increase the PVE.
The following table presents the estimated PVE over a range of interest rate change scenarios at
December 31, 2010. The present value ratio shown in the table is the PVE as a percent of the
present value of total assets in each of the different rate environments. For purposes of this
table, management has made assumptions such as prepayment rates and decay rates similar to those
used for the gap analysis table.
Present Value of Equity | ||||||||||||||||||||
as Percent of | ||||||||||||||||||||
Change in | Present Value of Equity | Present Value of Assets | ||||||||||||||||||
Interest Rates | Dollar | Dollar | Percent | Present Value | Percent | |||||||||||||||
(Basis Points) | Amount | Change | Change | Ratio | Change | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
+400 |
$ | 251,885 | $ | (145,657 | ) | (36.6 | )% | 10.50 | % | (31.3 | )% | |||||||||
+300 |
291,969 | (105,573 | ) | (26.6 | ) | 11.92 | (22.1 | ) | ||||||||||||
+200 |
331,076 | (66,466 | ) | (16.7 | ) | 13.23 | (13.5 | ) | ||||||||||||
+100 |
366,090 | (31,452 | ) | (7.9 | ) | 14.34 | (6.2 | ) | ||||||||||||
0 |
397,542 | | 0.0 | 15.29 | 0.0 | |||||||||||||||
-100 |
397,579 | 37 | 0.0 | 15.06 | (1.5 | ) |
Based on the above analysis, management anticipates that the Companys PVE may be adversely
affected by an increase in interest rates. The decline in the PVE as a result of an increase in
rates is attributable to the combined effects of a decline in the present value of the Companys
earning assets (which is further impacted by an extension in duration in rising rate environments
due to slower prepayments on loan and mortgage-related securities and reduced likelihood of calls
on certain investment securities), partially offset by a decline in the present value of deposit
liabilities and FHLB advances. Based on the above analysis, management also anticipates that the
Companys PVE may also be adversely impacted by a modest amount by a decrease in interest rates.
However, it should be noted that the Companys PVE is impacted by more than changes in market
interest rates. Future PVE is also affected by managements decisions relating to reinvestment of
future cash flows, decisions relating to funding sources, and by other factors outlined in Item 1.
BusinessCautionary Statement, Item 1A. Risk Factors, and Item 7. Management Discussion of
Financial Condition and Results of Operations.
As is the case with gap analysis, PVE analysis also has certain shortcomings. PVE modeling
requires management to make assumptions about future changes in market interest rates that are
unlikely to occur, such as immediate, sustained, and parallel (or equal) changes in all market
rates across all maturity terms. PVE modeling also requires that management make assumptions which
may not reflect the manner in which actual yields and costs respond to changes in market interest
rates. For example, management makes assumptions regarding the acceleration rate of the prepayment
speeds of higher yielding mortgage loans. Prepayments will accelerate in a falling rate
environment and the reverse will occur in a rising rate environment. Management also assumes that
decay rates on core deposits will accelerate in a rising rate environment and the reverse in a
falling rate environment. The model assumes that the Company will take no action in response to
the changes in interest rates, when in practice rate changes on most deposit liabilities lag behind
market changes and/or may be limited by competition. In addition, prepayment estimates and other
assumptions within the model are subjective in nature, involve uncertainties, and therefore cannot
be determined with precision. Accordingly, although the PVE model may provide an estimate of the
Companys interest rate risk at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in interest rates on the Companys
PVE.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the accompanying consolidated statements of financial condition of Bank Mutual
Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of income, equity, and cash flows for each of the three years in the period
ended December 31, 2010. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 2010 and 2009 consolidated financial statements present fairly, in all
material respects, the financial position of Bank Mutual Corporation and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2010, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4,
2011, expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 4, 2011
March 4, 2011
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Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Financial Condition
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 48,393 | $ | 37,696 | ||||
Interest-earning deposits in banks |
184,439 | 189,962 | ||||||
Cash and cash equivalents |
232,832 | 227,658 | ||||||
Securities available-for-sale, at fair value: |
||||||||
Investment securities |
228,023 | 614,104 | ||||||
Mortgage-related securities |
435,234 | 866,848 | ||||||
Loans held-for-sale, net |
37,819 | 13,534 | ||||||
Loans receivable, net |
1,323,569 | 1,506,056 | ||||||
Foreclosed properties and repossessed assets |
19,293 | 17,689 | ||||||
Goodwill |
52,570 | 52,570 | ||||||
Mortgage servicing rights, net |
7,769 | 6,899 | ||||||
Other assets |
254,709 | 206,706 | ||||||
Total assets |
$ | 2,591,818 | $ | 3,512,064 | ||||
Liabilities and equity |
||||||||
Liabilities: |
||||||||
Deposit liabilities |
$ | 2,078,310 | $ | 2,137,508 | ||||
Borrowings |
149,934 | 906,979 | ||||||
Advance payments by borrowers for taxes and insurance |
2,697 | 2,508 | ||||||
Other liabilities |
44,999 | 59,668 | ||||||
Total liabilities |
2,275,940 | 3,106,663 | ||||||
Equity: |
||||||||
Preferred stock$0.01 par value: |
||||||||
Authorized20,000,000 shares in 2010 and 2009 |
||||||||
Issued and outstandingnone in 2010 and 2009 |
| | ||||||
Common stock$0.01 par value: |
||||||||
Authorized200,000,000 shares in 2010 and 2009 |
||||||||
Issued78,783,849 shares in 2010 and 2009 |
||||||||
Outstanding45,769,443 shares in 2010 and 46,165,635 in 2009 |
788 | 788 | ||||||
Additional paid-in capital |
494,377 | 499,376 | ||||||
Retained earnings |
191,238 | 272,518 | ||||||
Unearned ESOP shares |
| (347 | ) | |||||
Accumulated other comprehensive loss |
(6,897 | ) | (2,406 | ) | ||||
Treasury stock33,014,406 shares in 2010 and 32,618,214 in 2009 |
(366,553 | ) | (367,452 | ) | ||||
Total shareholders equity |
312,953 | 402,477 | ||||||
Non-controlling interest in real estate partnership |
2,925 | 2,924 | ||||||
Total equity including non-controlling interest |
315,878 | 405,401 | ||||||
Total liabilities and equity |
$ | 2,591,818 | $ | 3,512,064 | ||||
Refer to Notes to Consolidated Financial Statements
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Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||
Interest income: |
||||||||||||
Loans |
$ | 79,266 | $ | 95,802 | $ | 113,635 | ||||||
Investment securities |
15,428 | 18,199 | 16,041 | |||||||||
Mortgage-related securities |
17,445 | 37,734 | 45,535 | |||||||||
Interest-earning deposits |
430 | 79 | 2,345 | |||||||||
Total interest income |
112,569 | 151,814 | 177,556 | |||||||||
Interest expense: |
||||||||||||
Deposit liabilities |
28,606 | 44,568 | 64,689 | |||||||||
Borrowings |
37,664 | 39,205 | 39,484 | |||||||||
Advance payments by borrowers for taxes and insurance |
6 | 11 | 18 | |||||||||
Total interest expense |
66,276 | 83,784 | 104,191 | |||||||||
Net interest income |
46,293 | 68,030 | 73,365 | |||||||||
Provision for loan losses |
49,619 | 12,413 | 1,447 | |||||||||
Net interest income (loss) after provision for loan losses |
(3,326 | ) | 55,617 | 71,918 | ||||||||
Non-interest income: |
||||||||||||
Service charges on deposits |
6,126 | 6,408 | 6,688 | |||||||||
Brokerage and insurance commissions |
3,067 | 2,785 | 2,626 | |||||||||
Loan related fees and servicing revenue, net |
103 | 184 | 12 | |||||||||
Gain on loan sales activities, net |
8,571 | 9,110 | 2,109 | |||||||||
Gain (loss) on investments, net |
15,966 | 6,758 | (1,166 | ) | ||||||||
Loss on real estate held for investment |
(700 | ) | | | ||||||||
Other non-interest income |
7,470 | 6,436 | 7,612 | |||||||||
Total non-interest income |
40,603 | 31,681 | 17,881 | |||||||||
Non-interest expense: |
||||||||||||
Compensation, payroll taxes, and other employee benefits |
36,009 | 39,077 | 38,538 | |||||||||
Occupancy and equipment |
11,221 | 11,760 | 11,614 | |||||||||
Federal insurance premiums and special assessments |
4,069 | 4,597 | 332 | |||||||||
Loss on foreclosed real estate, net |
6,346 | 646 | 155 | |||||||||
Loss on early repayment of FHLB borrowings |
89,348 | | | |||||||||
Other non-interest expense |
12,832 | 12,075 | 12,911 | |||||||||
Total non-interest expense |
159,825 | 68,155 | 63,550 | |||||||||
Income (loss) before income taxes |
(122,548 | ) | 19,143 | 26,249 | ||||||||
Income tax expense (benefit) |
(49,909 | ) | 5,418 | 9,094 | ||||||||
Net income (loss) before non-controlling interest |
(72,639 | ) | 13,725 | 17,155 | ||||||||
Net (income) loss attributable to non-controlling interests |
(1 | ) | | 1 | ||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
Per share data: |
||||||||||||
Earnings (loss) per sharebasic |
$ | (1.59 | ) | $ | 0.29 | $ | 0.36 | |||||
Earnings (loss) per sharediluted |
$ | (1.59 | ) | $ | 0.29 | $ | 0.35 | |||||
Cash dividends per share paid |
$ | 0.20 | $ | 0.34 | $ | 0.36 |
Refer to Notes to Consolidated Financial Statements
65
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Equity
Non-Controlling | ||||||||||||||||||||||||||||||||
Additional | Unearned | Accumulated Other | Interest in | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Real Estate | ||||||||||||||||||||||||||
Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Partnership | Total | |||||||||||||||||||||||||
Balance at December 31, 2007 |
$ | 788 | $ | 498,408 | $ | 273,330 | $ | (2,166 | ) | $ | (6,069 | ) | $ | (334,256 | ) | $ | 2,910 | $ | 432,945 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 17,156 | | | | | 17,156 | ||||||||||||||||||||||||
Net Income attributable to non-controlling interest |
| | | | | | (1 | ) | (1 | ) | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $(3,430) |
| | | | (6,633 | ) | | | (6,633 | ) | ||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $468 |
| | | | 698 | | | 698 | ||||||||||||||||||||||||
Pension liability, net of deferred income
taxes of $(2,491) |
| | | | (4,392 | ) | | | (4,392 | ) | ||||||||||||||||||||||
Total comprehensive income |
| | | | | | | 6,828 | ||||||||||||||||||||||||
Impact of change in measurement date for
qualified and supplemental pension plans |
| | (218 | ) | | (8 | ) | | | (226 | ) | |||||||||||||||||||||
Capital contribution to real estate partnership |
| | | | | | 15 | 15 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (29,927 | ) | | (29,927 | ) | ||||||||||||||||||||||
Issuance of management recognition plan shares |
| (403 | ) | | | | 403 | | | |||||||||||||||||||||||
Committed ESOP shares |
| 2,696 | | 919 | | | | 3,615 | ||||||||||||||||||||||||
Exercise of stock options |
| (4,489 | ) | | | | 8,181 | | 3,692 | |||||||||||||||||||||||
Share based payments |
| 2,289 | | | | (254 | ) | | 2,035 | |||||||||||||||||||||||
Cash dividends ($0.36 per share) |
| | (16,442 | ) | | | | | (16,442 | ) | ||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 788 | $ | 498,501 | $ | 273,826 | $ | (1,247 | ) | $ | (16,404 | ) | $ | (355,853 | ) | $ | 2,924 | $ | 402,535 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 13,725 | | | | | 13,725 | ||||||||||||||||||||||||
Net Income attributable to non-controlling interest |
| | | | | | | | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $8,847 |
| | | | 15,660 | | | 15,660 | ||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $(2,710) |
| | | | (4,048 | ) | | | (4,048 | ) | ||||||||||||||||||||||
Pension asset, net of deferred income
taxes of $1,126 |
| | | | 2,386 | | | 2,386 | ||||||||||||||||||||||||
Total comprehensive income |
| | | | | | | 27,723 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (14,397 | ) | | (14,397 | ) | ||||||||||||||||||||||
Committed ESOP shares |
| 1,969 | | 900 | | | | 2,869 | ||||||||||||||||||||||||
Exercise of stock options |
| (1,966 | ) | | | | 2,798 | | 832 | |||||||||||||||||||||||
Share based payments |
| 872 | | | | | | 872 | ||||||||||||||||||||||||
Cash dividends ($0.34 per share) |
| | (15,033 | ) | | | | | (15,033 | ) | ||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 788 | $ | 499,376 | $ | 272,518 | $ | (347 | ) | $ | (2,406 | ) | $ | (367,452 | ) | $ | 2,924 | $ | 405,401 | |||||||||||||
66
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Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Equity (continued)
Non-Controlling | ||||||||||||||||||||||||||||||||
Additional | Unearned | Accumulated Other | Interest in | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Real Estate | ||||||||||||||||||||||||||
Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Partnership | Total | |||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 788 | $ | 499,376 | $ | 272,518 | $ | (347 | ) | $ | (2,406 | ) | $ | (367,452 | ) | $ | 2,924 | $ | 405,401 | |||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Net loss |
| | (72,640 | ) | | | | | (72,640 | ) | ||||||||||||||||||||||
Net income attributable to non-controlling interest |
| | | | | | 1 | 1 | ||||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $6,259 |
| | | | 9,347 | | | 9,347 | ||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $(6,403) |
| | | | (9,563 | ) | | | (9,563 | ) | ||||||||||||||||||||||
Pension asset, net of deferred income
taxes of $(2,850) |
| | | | (4,275 | ) | | | (4,275 | ) | ||||||||||||||||||||||
Total comprehensive loss |
| | | | | | | (77,130 | ) | |||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (5,029 | ) | | (5,029 | ) | ||||||||||||||||||||||
Issuance of management recognition plan shares |
| (332 | ) | | | | 332 | | ||||||||||||||||||||||||
Committed ESOP shares |
| 408 | | 347 | | | | 755 | ||||||||||||||||||||||||
Exercise of stock options |
| (5,212 | ) | | | | 5,596 | | 384 | |||||||||||||||||||||||
Share based payments |
| 137 | | | | | | 137 | ||||||||||||||||||||||||
Cash dividends ($0.20 per share) |
| | (8,640 | ) | | | | | (8,640 | ) | ||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 788 | $ | 494,377 | $ | 191,238 | | $ | (6,897 | ) | $ | (366,553 | ) | $ | 2,925 | $ | 315,878 | |||||||||||||||
Refer to Notes to Consolidated Financial Statements
67
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Operating activities: |
||||||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Net provision for loan losses |
49,619 | 12,413 | 1,447 | |||||||||
Provision for depreciation |
2,600 | 2,567 | 2,469 | |||||||||
Amortization of other intangible assets |
405 | 405 | 618 | |||||||||
Amortization of mortgage servicing rights |
3,277 | 3,023 | 1,587 | |||||||||
Increase (decrease) in valuation on MSRs |
(281 | ) | (535 | ) | 822 | |||||||
Minority interest in real estate investment partnership |
1 | | 1 | |||||||||
Stock-based compensation expense |
891 | 3,741 | 5,650 | |||||||||
Net amortization on securities |
2,068 | 2,039 | (1,482 | ) | ||||||||
Loans originated for sale |
(433,218 | ) | (578,312 | ) | (139,387 | ) | ||||||
Proceeds from loan sales |
413,638 | 587,234 | 129,014 | |||||||||
Net gain on sale of available-for-sale securities |
(15,966 | ) | (7,589 | ) | (7,192 | ) | ||||||
Other than temporary impairment of available-for-sale
securities |
| 831 | 8,358 | |||||||||
Loss on foreclosed real estate, net |
6,346 | 646 | 155 | |||||||||
Loss on real estate held for investment |
700 | | | |||||||||
Gain on sales of loans originated for sale |
(8,571 | ) | (9,110 | ) | (2,109 | ) | ||||||
Loss on early repayment of FHLB borrowings |
89,348 | | | |||||||||
Deferred tax benefit |
(32,075 | ) | (1,863 | ) | (6,270 | ) | ||||||
Decrease (increase) in accrued interest receivable |
5,872 | 3,212 | (1,908 | ) | ||||||||
Increase in other assets |
(16,914 | ) | (11,170 | ) | (3,337 | ) | ||||||
Increase (decrease) in other liabilities |
(18,944 | ) | 13,077 | (54 | ) | |||||||
Net cash provided (used) by operating activities |
(23,844 | ) | 34,334 | 5,538 | ||||||||
Investing activities: |
||||||||||||
Proceeds from maturities of investment securities |
3,506,718 | 467,902 | 29,992 | |||||||||
Purchases of investment securities |
(3,118,204 | ) | (689,075 | ) | (351,202 | ) | ||||||
Purchases of mortgage-related securities |
(819,675 | ) | (779,170 | ) | (345,842 | ) | ||||||
Principal repayments on mortgage-related securities |
187,664 | 318,225 | 195,479 | |||||||||
Proceeds from sale of mortgage-related securities |
1,074,730 | 493,639 | 392,358 | |||||||||
Net decrease in loans receivable |
112,261 | 286,863 | 160,877 | |||||||||
Proceeds from sale of foreclosed properties |
6,259 | 3,949 | 2,100 | |||||||||
Net purchases of premises and equipment |
(2,049 | ) | (2,122 | ) | (3,145 | ) | ||||||
Net cash provided by investing activities |
947,704 | 100,211 | 80,618 | |||||||||
68
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Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Financing activities: |
||||||||||||
Net cash inflows (outflows) from deposit liabilities |
$ | (59,198 | ) | $ | 9,231 | $ | 34,825 | |||||
Repayments on long-term borrowings including loss on early
prepayment |
(846,393 | ) | (992 | ) | (4,488 | ) | ||||||
Net increase in advance payments by borrowers for taxes and
insurance |
189 | 579 | 114 | |||||||||
Proceeds from exercise of stock options |
359 | 556 | 3,313 | |||||||||
Excess tax benefit from exercise of stock options |
26 | 276 | 379 | |||||||||
Cash dividends |
(8,640 | ) | (15,033 | ) | (16,442 | ) | ||||||
Capital contribution to real estate partnership |
| | 14 | |||||||||
Purchase of treasury stock |
(5,029 | ) | (14,397 | ) | (29,927 | ) | ||||||
Net cash used in financing activities |
(918,686 | ) | (19,780 | ) | (12,212 | ) | ||||||
Increase in cash and cash equivalents |
5,174 | 114,765 | 73,944 | |||||||||
Cash and cash equivalents at beginning of year |
227,658 | 112,893 | 38,949 | |||||||||
Cash and cash equivalents at end of year |
$ | 232,832 | $ | 227,658 | $ | 112,893 | ||||||
Supplemental information: |
||||||||||||
Cash paid in period for: |
||||||||||||
Interest on deposits and borrowings |
$ | 68,070 | $ | 84,927 | $ | 121,660 | ||||||
Income taxes |
5,062 | 9,112 | 10,704 | |||||||||
Non-cash transactions: |
||||||||||||
Loans transferred to foreclosed properties and
repossessed assets |
22,407 | 23,721 | 3,179 | |||||||||
Due from (to) brokers for securities sales (purchases) |
| (20,000 | ) | |
Refer to Notes to Consolidated Financial Statements
69
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies
Business
Bank Mutual Corporation (the Company), a Wisconsin corporation, is a federally-registered unitary
savings and loan bank holding company which holds all of the outstanding shares of Bank Mutual, a
federal savings bank (the Bank).
The Bank is a federal savings bank offering a full range of financial services to customers who are
primarily located in the state of Wisconsin. The Bank is principally engaged in the business of
attracting deposits from the general public and using such deposits to originate residential and
commercial real estate loans, consumer loans, and commercial and industrial loans.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The consolidated financial statements include the
accounts and transactions of the Company and its wholly-owned subsidiaries. The Bank has the
following wholly-owned subsidiaries: BancMutual Financial & Investment Services, Inc., Mutual
Investment Corporation, First Northern Investments, Inc., and MC Development Ltd. MC Development
Ltd. owns a 50% interest in Arrowood Development LLC, which is a variable interest entity and is
consolidated into the financial statements. All intercompany accounts and transactions have been
eliminated in consolidation.
In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers federal funds sold and interest-bearing deposits in banks that have original
maturities of three months or less to be cash equivalents. Under Regulation D, the Bank is
required to maintain cash and reserve balances with the Federal Reserve Bank of Chicago. The
average amount of reserve balances for the years ended December 31, 2010 and 2009, was
approximately $25 and $600, respectively.
Federal Home Loan Bank Stock
Stock of the Federal Home Loan Bank of Chicago (FHLB of Chicago) is owned due to regulatory
requirements and carried at cost, which is its redemption value, and is included in other assets.
FHLB stock is periodically reviewed for impairment based on managements assessment of the ultimate
recoverability of the investment rather than temporary declines in its estimated fair value.
Securities Available-for-Sale
Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of accumulated other comprehensive income in shareholders
equity.
The amortized cost of securities classified as available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of mortgage-related securities,
over the estimated life of the
security. Such accretion or amortization is included in interest income from investments. Interest
and dividends are
70
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
included in interest income from investments. Realized gains and losses and declines in value
judged to be other-than-temporary are included in net gain or loss on sales of securities and are
based on the specific identification method.
Impairment of available-for-sale securities is evaluated considering numerous factors, and their
relative significance varies case-by-case. Factors considered include the length of time and
extent to which the market value has been less than cost; the financial condition and near-term
prospects of the issuer of a security; and the Companys intent and/or likely need to sell the
security before its anticipated recovery in fair value. Further, if the Company does not expect to
recover the entire amortized cost of the security (i.e., a credit loss is expected), the Company
will be unable to assert that it will recover its cost basis even if it does not intend to sell the
security. If, based upon an analysis of each of these factors, it is determined that the
impairment is other-than-temporary, the carrying value of the security is written down through
earnings by the amount of the expected credit loss.
Loans Receivable and Loans Held-for-Sale
Loans receivable are recorded at cost, net of undisbursed loan proceeds, allowance for loan losses,
unamortized deferred fees and costs, and unamortized purchase premiums or discounts, if any. Loan
origination and commitment fees and certain direct loan origination costs are deferred and
amortized as an adjustment of the related loans yield. Purchase premiums and discounts are also
amortized as an adjustment of yield.
Loans held-for-sale, which generally consists of recently originated fixed-rate residential
mortgage loans, are recorded at market value, determined on an individual loan basis. The
Companys interest rate lock commitments and forward commitments to sell loans are measured at fair
value with the resulting unrealized gain or loss included in loans held-for-sale. Fees received
from the borrower are deferred and recorded as an adjustment of the carrying value.
Accrued Interest on Loans
Interest on loans receivable is accrued and credited to income as earned. The Company determines a
loans past due status by the number of days that have elapsed since a borrower has failed to make
a contractual loan payment. Accrual of interest is generally discontinued when either (i)
reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a
loan becomes past due by more than 90 days. At that time, the loan is considered impaired and any
accrued but uncollected interest is reversed. Additional interest income is recorded only to the
extent that payments are received, collection of the principal is reasonably assured, and/or the
net recorded investment in the loan is deemed to be collectible. Loans are generally restored to
accrual status when the obligation is brought to a current status by the borrower.
Allowance for Loan Losses and Impaired Loans
The Company classifies its loan portfolio into six segments for purposes of determining its
allowance for loan losses: one- to four-family, multi-family, commercial real estate, construction
and development, consumer, and commercial business loans. This segmentation is based on the
nature of the loan collateral and the purpose of the loan, which in the judgment of management are
the primary risk characteristics that determine the allowance for loan loss. Loans in the one- to
four-family, multi-family, and commercial real estate segments are secured principally by real
estate. Loans in the consumer segment may be secured by real estate (such as of home equity loans
and lines of credit), by personal property (such as automobiles), or may be unsecured. Loans in
the commercial business segment are typically secured by equipment, inventory, receivables, other
business assets, and in some instances, business and personal real estate, or may be unsecured.
The commercial real estate segment
71
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
consists of non-residential loans secured by office, retail/wholesale, industrial/warehouse, and
other properties. The construction and development segment consists of loans secured by one- to
four-family, multi-family, commercial real estate, and developed and undeveloped land.
The allowance for loan losses for each segment is maintained at a level believed adequate by
management to absorb probable losses inherent in each segment and is based on factors such as the
size and current risk characteristics of the segments, an assessment of individual problem loans
and pools of homogenous loans within the segments, and actual loss, delinquency, and/or risk rating
experience within the segments. The Company also considers current economic conditions and/or
events in specific industries and geographical areas, including unemployment levels, trends in real
estate values, peer comparisons, and other pertinent factors, to include regulatory guidance.
Finally, as appropriate, the Company also considers individual borrower circumstances and the
condition and fair value of the loan collateral, if any.
The allowance for loan losses for each segment is determined using a combined approach. Individual
loans in the segments that have been identified as impaired are analyzed individually to determine
an appropriate allowance for loan loss. In addition, the allowance for loan losses for each
segment is augmented using a homogenous pool approach for loans in each segment that are current
and/or have not been individually identified as impaired loans. The homogenous approach utilizes
quantitative factors that are developed by management using the qualitative factors and other
considerations outlined in the previous paragraph.
Loans are considered impaired when they are identified as such by the Companys internal risk
rating and loss evaluation process or when contractually past due 90 days or more with respect to
interest or principal. Factors that indicate impairment include, but are not limited to,
deterioration in a borrowers financial condition, performance, or outlook, decline in the
condition, performance, or fair value of the collateral for the loan (if any), payment or other
default on the loan, and adverse economic or market developments in the borrowers region or
business segment. Accrual of interest is typically discontinued on impaired loans, although from
time-to-time the Company may continue to accrue interest and/or recognize interest income on
impaired loans when payments are being received and, in the judgment of management, collection of
the principal is reasonably assured and/or the net recorded investment in the loan is deemed to be
collectible.
The Company has various policies and procedures in place to monitor its exposure to credit risk
including, but not limited to, a formal risk rating process, periodic loan delinquency reporting,
periodic loan file reviews, financial updates from and visits to borrowers, and established
past-due loan collection procedures. The Company formally evaluates its allowance for loan losses
on a quarterly basis or more often as deemed necessary. A provision for loan loss is charged to
operations based on this periodic evaluation. Actual loan losses are charged off against the
allowance for loan losses, while recoveries of amounts previously charged off are credited to the
allowance.
Determination of the allowance is inherently subjective as it requires significant estimates,
including the amounts and timing of expected future cash flows on loans, the fair value of
underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical
loss experience, changes in risk characteristics of the loan portfolio, and consideration of
current economic trends, all of which may be susceptible to significant change.
Mortgage Servicing Rights
Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights
retained. The total cost of loans sold is allocated between the loan balance and their servicing
asset based on their relative fair values. The capitalized value of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net future servicing revenue.
Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for
amortization, or estimated fair value. The carrying values are periodically evaluated for
impairment. For purposes
72
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
of measuring impairment, the servicing rights are stratified into pools based on term and interest
rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over
its fair value, and is recorded through a valuation allowance. The fair value of each servicing
rights pool is calculated based on the present value of estimated future cash flows using a
discount rate, given current market conditions. Estimates of fair
value include assumptions about prepayment speeds, interest rates and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, if any, to change significantly in the
future.
Mortgage Banking Loan Commitments
In connection with its mortgage banking activities, the Company enters into loan commitments to
fund residential mortgage loans at specified interest rates and within specified periods of time,
generally up to 60 days from the time of rate lock. A loan commitment whose loan arising from
exercise of the loan commitment will be held for sale upon funding is a derivative instrument,
which must be recognized at fair value on the consolidated balance sheet in other assets and other
liabilities with changes in its value recorded in income from mortgage banking operations.
In determining the fair value of its derivative loan commitments for economic purposes, the Company
considers the value that would be generated when the loan arising from exercise of the loan
commitment is sold in the secondary mortgage market. That value includes the price that the loan
is expected to be sold for in the secondary mortgage market.
Foreclosed Properties and Repossessed Assets
Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower
of cost or fair value less estimated costs to sell. Costs related to the development and
improvement of property are capitalized, whereas costs related to holding the property are
expensed. Gains and losses on sales are recognized based on the carrying value upon closing of the
sale. In 2010 the Company revised its presentation of loss on foreclosed real estate, net, from
non-interest income to non-interest expense. This correction resulted in the reclassification of
$646 and $155 of net losses from non-interest income to non-interest expense in 2009 and 2008,
respectively. This change had no impact on total assets, net income, or cash flows for 2009 or
2008.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and
equipment are depreciated over their estimated useful lives (office buildings 40 to 44 years and
furniture and equipment 3 to 10 years) using the straight-line method. Leasehold improvements are
amortized over the shorter of their useful lives or expected lease terms. The Company reviews
buildings, leasehold improvements and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment
exists when the estimated undiscounted cash flows for the property are less than its carrying
value. If identified, an impairment loss is recognized through a charge to earnings based on the
fair value of the property.
Goodwill
Goodwill, representing the excess of purchase price over the fair value of net assets acquired,
results from acquisitions made by the Company. Goodwill is analyzed annually for impairment or more
frequently when, in the judgment of management, an event has occurred that may indicate that
additional analysis is required. Goodwill is analyzed at the reporting unit level. The Company
determined that the consolidated entity consists of one reporting
73
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
unit level, which is the level at which goodwill is analyzed. Management determined that there
were no goodwill impairments in 2010, 2009, or 2008. The carrying value of goodwill at the end of
each of these periods was $52,570.
Life Insurance Policies
Investments in life insurance policies owned by the Company are carried at the amount that could be
realized under the insurance contract if the Company cashed them in on the respective dates.
Income Taxes
The Company files a consolidated federal income tax return and, prior to 2009, separate or combined
state income tax returns, depending on the state. Beginning in 2009, the Company files combined
state income tax returns in all of the states in which it conducts business. A deferred tax asset
or liability is determined based on the enacted tax rates that will be in effect when the
differences between the financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Companys income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment
date of the change. A valuation allowance is provided for any deferred tax asset for which it is
more likely than not that the asset will not be realized. Changes in valuation allowances are
recorded as a component of income taxes.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share (EPS) are computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period. ESOP shares committed to
be released are considered outstanding for basic EPS calculations. Vested shares of restricted
stock which have been awarded under the management recognition plan (MRP) provisions of the
Companys 2004 and 2001 Stock Incentive Plans are also considered outstanding for basic EPS.
Non-vested MRP and stock option shares are considered dilutive potential common shares and are
included in the weighted-average number of shares outstanding for diluted EPS.
Pension Costs
The Company has both defined benefit and defined contribution plans. The Companys net periodic
pension cost of the defined benefit plan consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected benefit obligation,
reduced by the expected earnings on assets held by the retirement plan, amortization of prior
service cost, and amortization of recognized actuarial gains and losses over the estimated future
service period of existing plan participants.
The costs associated with the defined contribution plan consist of a predetermined percentage of
compensation, which is determined by the Companys board of directors.
Segment Information
The Company has determined that it has one reportable segmentcommunity banking. The Company
offers a range of financial products and services to external customers, including: accepting
deposits from the general public; originating residential, consumer and commercial loans; and
marketing annuities and other insurance products.
74
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Changes
In 2007 the FASB issued new accounting guidance on fair value measurements, which allows eligible
assets and liabilities to be measured at fair value without having to apply complex hedge
accounting provisions. This new accounting guidance was effective for the Company as of January 1,
2008. As of that date, the Company elected not to apply the new accounting guidance to any of its
financial assets or financial liabilities. Effective January 1, 2009, however, the Company elected
to measure at fair value the fixed-rate, 15- and 30-year, one- to four-family mortgage loans
originated after that date that the Company intends to sell in the secondary market (i.e., loans
held-for-sale). The Company believes this change more appropriately matches the accounting
treatment of loans held-for-sale with the accounting treatment of the financial instruments the
Company uses to hedge its exposure to market risk in such loans. Adoption of this new guidance had
no material effect on the Companys financial statements. Prior to 2009, loans held-for-sale were
carried at the lower of cost or market.
In 2007 the FASB issued accounting guidance that established new accounting and reporting standards
for non-controlling interests in subsidiaries and for the deconsolidation of certain subsidiaries.
This new accounting guidance was effective for fiscal years beginning after December 15, 2008.
Accordingly, the Company applied the provisions of the new guidance effective January 1, 2009.
Application of this new guidance did not have a material impact on the Companys financial
condition, results of operations, or liquidity, although it affects how these matters are presented
in the financial statements.
In 2007 the FASB issued new accounting guidance related to business combinations. This new
guidance was effective for the Company on January 1, 2009, and will be applied prospectively to
future business combinations. This new accounting guidance may have a significant impact on the
Companys future financial condition or results of operations depending on the nature or type of
future business combinations, if any.
In April 2009, the FASB issued new accounting guidance in three areas: recognition and
presentation of other-than-temporary impairments (OTTI); determining fair value for assets or
liabilities in markets that are not orderly; and interim disclosures about the fair value of
financial instruments. The new guidance in all of these areas was effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009. The Company adopted the new guidance in all three of these areas during the second
quarter of 2009. Application of this new guidance did not have a material impact on the Companys
financial condition, results of operations, or liquidity, although it affects how certain matters
may be presented in the financial statements.
In June 2009 the FASB amended certain accounting guidance related to the transfer of financial
assets. This amended guidance must be applied as of the beginning of the first annual reporting
period that begins after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The amended guidance must be
applied to transfers occurring on or after the effective date. Earlier application was
prohibited. Adoption of this guidance did not have a material impact on the Companys financial
condition, results of operations, or liquidity.
In June 2009 the FASB amended certain accounting guidance related to the consolidation of variable
interest entities. The amended guidance was effective as of the beginning of each entitys first
annual reporting period that began after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application was prohibited. Adoption of this guidance did not have a material impact on the
Companys financial condition, results of operations, or liquidity.
75
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
In January 2010 the FASB issued new accounting guidance related to certain disclosures about fair
value measurements. Certain aspects of the new guidance were effective for reporting periods
beginning after December 15, 2009, which for the Company was the first quarter of 2010. However,
certain other aspects are not effective until the first reporting period beginning after December
15, 2010, which will be the first quarter of 2011 for the Company. The Companys partial adoption
of the guidance in 2010 did not have an impact on its financial condition, results of operations,
or liquidity, although it did affect the matters that will be disclosed in the financial
statements. The Companys adoption of the guidance that is effective in the first quarter of 2011
is not expected to have a material impact on the Company.
In July 2010 the FASB issued new accounting guidance related to certain disclosures about the
credit quality of financing receivables and allowances for credit losses. Certain aspects of the
new guidance were effective for reporting periods ending after December 15, 2010, which for the
Company was the fourth quarter of 2010. Certain other aspects of the new guidance are not
effective until the accounting periods beginning after December 15, 2010, which will be the first
quarter of 2011 for the Company. In January of 2011 the FASB deferred the effective date for
certain disclosure requirements related to troubled debt restructurings. It is anticipated that
the new guidance related to troubled debt restructurings will be effective for interim and annual
periods after June 15, 2011, which for the Company will be the second quarter of 2011. The
Companys adoption of this new guidance had no impact or is not expected to have an impact on its
financial condition, results of operations or liquidity, although it does affect matters that are
and/or will be disclosed in the financial statements related to the Companys loans receivable.
In December 2010 the FASB issued new accounting guidance clarifying the presentation of pro forma
information required for business combinations when a public company presents comparative financial
information. The amendments in this guidance are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. This new accounting guidance is not expected to have an
impact on its financial condition, results of operations, or liquidity, but it may impact future
financial disclosures if the Company were to engage in a future business combination.
76
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale
The amortized cost and fair value of investment securities available-for-sale are as follows:
December 31, 2010 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Investment securities: |
||||||||||||||||
U.S. government and federal obligations |
$ | 205,825 | $ | 395 | $ | (252 | ) | $ | 205,968 | |||||||
Mutual funds |
20,837 | 1,218 | | 22,055 | ||||||||||||
Total investment securities |
226,662 | 1,613 | (252 | ) | 228,023 | |||||||||||
Mortgage-related securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation |
314,858 | 105 | (896 | ) | 314,067 | |||||||||||
Federal National Mortgage Association |
30,594 | 293 | (77 | ) | 30,810 | |||||||||||
Private-label CMOs |
90,741 | 682 | (3,821 | ) | 87,602 | |||||||||||
Government National Mortgage Association |
2,711 | 44 | | 2,755 | ||||||||||||
Total mortgage-related securities |
438,904 | 1,124 | (4,794 | ) | 435,234 | |||||||||||
Total securities available-for-sale |
$ | 665,566 | $ | 2,737 | $ | (5,046 | ) | $ | 663,257 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Investment securities: |
||||||||||||||||
U.S. government and federal obligations |
$ | 594,024 | $ | 128 | $ | (2,360 | ) | $ | 591,792 | |||||||
Mutual funds |
21,546 | 831 | (65 | ) | 22,312 | |||||||||||
Total investment securities |
615,570 | 959 | (2,425 | ) | 614,104 | |||||||||||
Mortgage-related securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation |
291,318 | 4,180 | (310 | ) | 295,188 | |||||||||||
Federal National Mortgage Association |
220,437 | 5,044 | (723 | ) | 224,758 | |||||||||||
Private-label CMOs |
120,780 | 104 | (9,102 | ) | 111,782 | |||||||||||
Government National Mortgage Association |
234,796 | 1,512 | (1,188 | ) | 235,120 | |||||||||||
Total mortgage-related securities |
867,331 | 10,840 | (11,323 | ) | 866,848 | |||||||||||
Total securities available-for-sale |
$ | 1,482,901 | $ | 11,799 | $ | (13,748 | ) | $ | 1,480,952 | |||||||
77
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
As of December 31, 2010, the following schedule identifies securities by time in which the
securities had a gross unrealized loss.
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Number | Estimated | Unrealized | Number | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||
Loss | of | Fair | Loss | of | Fair | Loss | Fair | |||||||||||||||||||||||||
Amount | Securities | Value | Amount | Securities | Value | Amount | Value | |||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||
U.S. government and federal
obligations |
$ | 252 | 4 | $ | 49,749 | | | | $ | 252 | $ | 49,749 | ||||||||||||||||||||
Total investment securities |
252 | 4 | 49,749 | | | | 252 | 49,749 | ||||||||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage
Corporation |
880 | 7 | 187,848 | $ | 16 | 2 | $ | 11,688 | 896 | 199,536 | ||||||||||||||||||||||
Federal National Mortgage
Association |
77 | 5 | 26,372 | | | | 77 | 26,372 | ||||||||||||||||||||||||
Private-label CMOs |
| | | 3,821 | 21 | 58,669 | 3,821 | 58,669 | ||||||||||||||||||||||||
Total mortgage-related
securities |
957 | 12 | 214,220 | 3,837 | 23 | 70,357 | 4,794 | 284,577 | ||||||||||||||||||||||||
Total |
$ | 1,209 | 16 | $ | 263,969 | $ | 3,837 | 23 | $ | 70,357 | $ | 5,046 | $ | 334,326 | ||||||||||||||||||
As of December 31, 2009, the following schedule identifies securities by time in which the
securities had a gross unrealized loss.
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Number | Estimated | Unrealized | Number | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||
Loss | of | Fair | Loss | of | Fair | Loss | Fair | |||||||||||||||||||||||||
Amount | Securities | Value | Amount | Securities | Value | Amount | Value | |||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||
U.S. government and federal
obligations |
$ | 2,360 | 24 | $ | 441,714 | | | | $ | 2,360 | $ | 442,714 | ||||||||||||||||||||
Mutual funds |
| | | $ | 65 | 1 | $ | 644 | 65 | 644 | ||||||||||||||||||||||
Total investment securities |
2,360 | 24 | 441,714 | 65 | 1 | 644 | 2,425 | 442,358 | ||||||||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage
Corporation |
122 | 3 | 49,961 | 188 | 5 | 6,073 | 310 | 56,034 | ||||||||||||||||||||||||
Federal National Mortgage
Association |
668 | 5 | 35,848 | 55 | 1 | 1,490 | 723 | 37,338 | ||||||||||||||||||||||||
Government National Mortgage
Association |
1,106 | 5 | 84,135 | 82 | 3 | 7,039 | 1,188 | 91,174 | ||||||||||||||||||||||||
Private-label CMOs |
| | | 9,102 | 25 | 88,860 | 9,102 | 88,860 | ||||||||||||||||||||||||
Total mortgage-related
securities |
1,896 | 13 | 169,944 | 9,427 | 34 | 103,462 | 11,323 | 273,406 | ||||||||||||||||||||||||
Total |
$ | 4,256 | 37 | $ | 611,658 | $ | 9,492 | 35 | $ | 104,106 | $ | 13,748 | $ | 715,764 | ||||||||||||||||||
78
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
The Company has determined that the unrealized losses reported for its investment and
mortgage-related securities as of December 31, 2010 and 2009, were temporary. The Company believes
it is probable that it will receive all
future contractual cash flows related to these securities. The Company does not intend to sell
these securities and it is unlikely that it will be required to sell the securities before the
recovery of their amortized cost.
A substantial portion of the Companys securities that were in an unrealized loss position at
December 31, 2010 and 2009, consisted of U.S. government and federal agency obligations and
mortgage-related securities issued by government sponsored entities. Accordingly, the Company
determined that none of those securities were other-than-temporarily impaired as of those dates.
The Company also determined that none of its private-label CMOs were other-than-temporarily
impaired as of those dates. This determination was based on managements judgment regarding the
nature of the loan collateral that supports the securities, a review of the current ratings issued
on the securities by various credit rating agencies, a review of the actual delinquency and/or
default performance of the loan collateral that supports the securities, and recent trends in the
fair market values of the securities. As of December 31, 2010, the Company had private-label CMOs
with an aggregate carrying value of $35,735 and unrealized loss of $1,981 that were rated less than
investment grade. These private-label CMOs were analyzed using modeling techniques that considered
the priority of cash flows in the CMO structure and various default and loss rate scenarios that
management considered appropriate given the nature of the loan collateral. Based on this analysis,
management concluded that none of these securities were other-than-temporarily impaired as of
December 31, 2010. Private-label CMOs rated less than investment grade at December 31, 2009 had a
carrying value of $31,697 and an unrealized loss of $2,763.
During 2009, the Company recorded an impairment of $831 on one of its mutual fund investments.
This impairment was included as a component of net gain (loss) on investments in the income
statement for the year ended December 31, 2009. During 2008, the company recorded an impairment
of $6,916 on this same mutual fund, and accordingly it was included as a component of net gain
(loss) on investments in the income statement in that period.
Results of operations included gross realized gains on the sale of securities available-for-sale of
$16,041, $7,589, and $7,192 for 2010, 2009, and 2008, respectively. Gross realized losses on the
sale of securities available-for-sale was $75 in 2010, and zero for 2009 and 2008.
The amortized cost and fair values of 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.
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less |
| | ||||||
Due after one year through five years |
| | ||||||
Due after five years through ten years |
$ | 157,825 | $ | 158,114 | ||||
Due after ten years |
48,000 | 47,855 | ||||||
Mutual funds |
20,837 | 22,054 | ||||||
Mortgage-related securities |
438,904 | 435,234 | ||||||
Total securities available for sale |
$ | 665,566 | $ | 663,257 | ||||
79
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
The following table summarizes the adjustment to other comprehensive income and the related tax
effect for securities available-for-sale for each of the three years ended December 31:
2010 | 2009 | 2008 | ||||||||||
Change in unrealized holding gain (loss): |
||||||||||||
Unrealized net gains (losses) |
$ | (359 | ) | $ | 17,749 | $ | (8,897 | ) | ||||
Related tax expense (benefit) |
(143 | ) | 6,137 | (2,962 | ) | |||||||
Change in other comprehensive income |
$ | (216 | ) | $ | 11,612 | $ | (5,935 | ) | ||||
Investment securities with a fair value of approximately $68,500 and $394,800 at December 31, 2010
and 2009, respectively, were pledged to secure deposits, FHLB advances, and for other purposes as
permitted or required by law.
3. Loans Receivable
Loans receivable is summarized as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Permanent mortgage loans: |
||||||||
One- to four-family |
$ | 531,874 | $ | 644,852 | ||||
Multi-family |
247,210 | 200,222 | ||||||
Commercial real estate |
248,253 | 262,855 | ||||||
Total permanent mortgages |
1,027,337 | 1,107,929 | ||||||
Construction and development loans: |
||||||||
One- to four-family |
13,479 | 11,441 | ||||||
Multi-family |
19,308 | 52,323 | ||||||
Commercial real estate |
24,939 | 27,040 | ||||||
Land |
25,764 | 33,758 | ||||||
Total construction and development |
83,490 | 124,562 | ||||||
Total mortgage loans |
1,110,827 | 1,232,491 | ||||||
Consumer loans: |
||||||||
Fixed term home equity |
103,619 | 124,519 | ||||||
Home equity lines of credit |
87,383 | 88,796 | ||||||
Student |
17,695 | 19,793 | ||||||
Home improvement |
24,551 | 28,441 | ||||||
Automobile |
2,814 | 4,077 | ||||||
Other |
7,436 | 9,871 | ||||||
Total consumer loans |
243,498 | 275,497 | ||||||
Commercial business loans |
50,123 | 47,708 | ||||||
Gross loans receivable |
1,404,448 | 1,555,696 | ||||||
Undisbursed loan proceeds |
(32,345 | ) | (32,690 | ) | ||||
Allowance for loan losses |
(47,985 | ) | (17,028 | ) | ||||
Deferred fees and costs, net |
(549 | ) | 78 | |||||
Total loans receivable, net |
$ | 1,323,569 | $ | 1,506,056 | ||||
The Companys first mortgage loans and home equity lines of credit are primarily secured by
properties that are located in the Companys local lending areas in Wisconsin, Michigan, and
Minnesota.
80
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
At December 31, 2010 and 2009, certain one- to four-family mortgage loans, multi-family mortgage
loans, and home equity loans with aggregate carrying values of approximately $200,000 and $796,000,
respectively, were pledged to secure FHLB advances.
The unpaid principal balance of loans serviced for others was $1,076,772 and $1,006,279 at December
31, 2010 and 2009, respectively. These loans are not reflected in the consolidated financial
statements.
A summary of the activity in the allowance for loan losses follows:
Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of period |
$ | 17,028 | $ | 12,208 | $ | 11,774 | ||||||
Provision for loan losses |
49,619 | 12,413 | 1,447 | |||||||||
Charge-offs: |
||||||||||||
One- to four-family |
(528 | ) | (397 | ) | (167 | ) | ||||||
Multi-family |
(140 | ) | (4,523 | ) | | |||||||
Commercial real estate |
(11,621 | ) | (1,989 | ) | (446 | ) | ||||||
Construction and development |
(3,515 | ) | | | ||||||||
Consumer |
(776 | ) | (527 | ) | (411 | ) | ||||||
Commercial business |
(2,140 | ) | (210 | ) | (34 | ) | ||||||
Total charge-offs |
(18,720 | ) | (7,646 | ) | (1,058 | ) | ||||||
Recoveries: |
||||||||||||
One- to four-family |
20 | 1 | | |||||||||
Commercial real estate |
1 | 19 | | |||||||||
Consumer |
37 | 33 | 45 | |||||||||
Total recoveries |
58 | 53 | 45 | |||||||||
Net charge-offs |
(18,662 | ) | (7,593 | ) | (1,013 | ) | ||||||
Balance at end of period |
$ | 47,985 | $ | 17,028 | $ | 12,208 | ||||||
81
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table summarizes the allowance for loan losses by loan portfolio segment during the
year ended December 31, 2010. The table also summarizes the allowance for loan loss and loans
receivable at December 31, 2010, by the nature of the impairment evaluation, either individually or
collectively (the loans receivable amounts in the table are net of undisbursed loan proceeds).
One- to | Construction | |||||||||||||||||||||||||||
Four- | Multi- | Commercial | and | Commercial | ||||||||||||||||||||||||
Family | Family | Real Estate | Development | Consumer | Business | Total | ||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 2,806 | $ | 3,167 | $ | 5,715 | $ | 1,172 | $ | 2,243 | $ | 1,925 | $ | 17,028 | ||||||||||||||
Provision |
1,428 | 6,238 | 27,790 | 12,484 | (77 | ) | 1,756 | 49,619 | ||||||||||||||||||||
Charge-offs |
(528 | ) | (140 | ) | (11,621 | ) | (3,515 | ) | (776 | ) | (2,140 | ) | (18,720 | ) | ||||||||||||||
Recoveries |
20 | | 1 | | 37 | | 58 | |||||||||||||||||||||
Ending balance |
$ | 3,726 | $ | 9,265 | $ | 21,885 | $ | 10,141 | $ | 1,427 | $ | 1,541 | $ | 47,985 | ||||||||||||||
Loss allowance individually
evaluated for impairment |
$ | 1,122 | $ | 7,134 | $ | 12,853 | $ | 9,384 | $ | 641 | $ | 437 | $ | 31,571 | ||||||||||||||
Loss allowance collectively
evaluated for impairment |
$ | 2,604 | $ | 2,131 | $ | 9,032 | $ | 757 | $ | 786 | $ | 1,104 | $ | 16,414 | ||||||||||||||
Loan receivable balances at
December 31, 2010: |
||||||||||||||||||||||||||||
Loans individually evaluated
for impairment |
$ | 18,972 | $ | 40,675 | $ | 55,849 | $ | 27,607 | $ | 1,763 | $ | 4,799 | $ | 149,665 | ||||||||||||||
Loans collectively evaluated
for impairment |
505,100 | 206,034 | 189,536 | 34,442 | 241,673 | 45,653 | 1,222,438 | |||||||||||||||||||||
Total loans receivable |
$ | 524,072 | $ | 246,709 | $ | 245,385 | $ | 62,049 | $ | 243,336 | $ | 50,452 | $ | 1,372,103 | ||||||||||||||
In 2010 the Company increased the value for certain factors it uses to determine the allowance
for loan losses on loans that are collectively evaluated for impairment. Management considered
these changes necessary and prudent in light of continued declines in real estate values,
persistent weaknesses in economic conditions, and high levels of unemployment. The Company
estimates that these changes, as well as overall increases in the balance of loans to which the
various factors are applied, resulted in a $7.3 million increase in the total allowance for loan
losses during the twelve months ended December 31, 2010.
82
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table presents information regarding impaired loans that have a related allowance for
loan loss and those that do not as of December 31, 2010 (the loans receivable amounts in the table
are net of undisbursed loan proceeds)
Loans | Unpaid | Related | Average Loan | Interest | ||||||||||||||||
Receivable | Principal | Allowance | Receivable | Income | ||||||||||||||||
Balance, Net | Balance | for Loss | Balance, Net | Recognized | ||||||||||||||||
Impaired loans with an allowance recorded: |
||||||||||||||||||||
One- to four-family |
$ | 5,301 | $ | 5,301 | $ | 1,182 | $ | 5,411 | $ | 21 | ||||||||||
Multi-family |
31,461 | 31,461 | 6,834 | 14,431 | 460 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
11,190 | 11,190 | 4,938 | 4,208 | | |||||||||||||||
Retail/wholesale/mixed |
16,205 | 16,205 | 7,310 | 5,404 | 45 | |||||||||||||||
Industrial/warehouse |
1,419 | 1,419 | 305 | 416 | 19 | |||||||||||||||
Other |
714 | 714 | 300 | 143 | | |||||||||||||||
Total commercial real estate |
29,528 | 29,528 | 12,853 | 10,171 | 64 | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
| | | | | |||||||||||||||
Multi-family |
4,440 | 4,440 | 568 | 888 | | |||||||||||||||
Commercial real estate |
8,923 | 8,923 | 4,791 | 1,785 | | |||||||||||||||
Land |
5,477 | 5,477 | 3,965 | 4,896 | | |||||||||||||||
Total construction and development |
18,840 | 18,840 | 9,324 | 7,569 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
543 | 543 | 513 | 544 | 19 | |||||||||||||||
Student |
| | | | | |||||||||||||||
Other |
176 | 176 | 128 | 177 | 5 | |||||||||||||||
Total consumer |
719 | 719 | 641 | 721 | 24 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Term loans
Term loans |
1,712 | 1,712 | 568 | 746 | | |||||||||||||||
Lines of credit |
400 | 400 | 169 | 80 | | |||||||||||||||
Total commercial business |
2,112 | 2,112 | 737 | 826 | | |||||||||||||||
Total with an allowance recorded |
$ | 87,961 | $ | 87,961 | $ | 31,571 | $ | 39,129 | $ | 569 | ||||||||||
Impaired loans with no allowance recorded: |
||||||||||||||||||||
One- to four-family |
$ | 13,381 | $ | 13,526 | | $ | 9,383 | $ | 14 | |||||||||||
Multi-family |
6,328 | 6,468 | | 3,759 | | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
725 | 725 | | 145 | | |||||||||||||||
Retail/wholesale/mixed |
10,513 | 16,150 | | 6,908 | | |||||||||||||||
Industrial/warehouse |
687 | 927 | | 597 | | |||||||||||||||
Other |
1,794 | 2,632 | | 2,599 | | |||||||||||||||
Total commercial real estate |
13,719 | 20,434 | | 10,249 | | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
| | | | | |||||||||||||||
Multi-family |
100 | 100 | | 20 | | |||||||||||||||
Commercial real estate |
3,818 | 3,818 | | 764 | | |||||||||||||||
Land |
3,812 | 7,187 | | 4,336 | | |||||||||||||||
Total construction and development |
7,730 | 11,105 | | 5,120 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
826 | 826 | | 852 | 21 | |||||||||||||||
Student |
| | | | | |||||||||||||||
Other |
99 | 99 | | 17 | 3 | |||||||||||||||
Total consumer |
925 | 925 | | 869 | 24 | |||||||||||||||
Commercial business: |
| |||||||||||||||||||
Term loans |
1,138 | 1,819 | | 1,206 | | |||||||||||||||
Lines of credit |
16 | 667 | | 472 | | |||||||||||||||
Total commercial business |
1,332 | 2,486 | | 1,678 | | |||||||||||||||
Total with no allowance recorded |
$ | 43,414 | $ | 54,944 | | $ | 31,058 | $ | 38 | |||||||||||
83
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table presents information relating to the Companys internal risk ratings of its
loans receivable as of December 31, 2010 (all amounts in the tables are net of undisbursed loan
proceeds):
Special | ||||||||||||||||||||
Pass | Watch | Mention | Substandard | Total | ||||||||||||||||
One- to four-family |
$ | 505,100 | | | $ | 18,972 | $ | 524,072 | ||||||||||||
Multi-family |
164,177 | $ | 27,521 | $ | 6,429 | 48,582 | 246,709 | |||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
67,764 | 5,089 | | 13,014 | 85,867 | |||||||||||||||
Retail/wholesale/mixed use |
63,254 | 22,888 | 545 | 28,119 | 114,806 | |||||||||||||||
Industrial/warehouse |
25,400 | 3,488 | | 3,446 | 32,334 | |||||||||||||||
Other |
5,503 | 4,062 | 502 | 2,311 | 12,378 | |||||||||||||||
Total commercial real estate |
161,921 | 35,527 | 1,047 | 46,890 | 245,385 | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
6,382 | | | | 6,382 | |||||||||||||||
Multi-family |
5,556 | | | 4,609 | 10,165 | |||||||||||||||
Commercial real estate |
6,267 | | | 13,740 | 20,007 | |||||||||||||||
Land |
14,095 | 203 | 887 | 10,310 | 25,495 | |||||||||||||||
Total construction/development |
32,300 | 203 | 887 | 28,659 | 62,049 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
214,132 | | | 1,421 | 215,553 | |||||||||||||||
Student |
17,695 | | | | 17,695 | |||||||||||||||
Other |
9,846 | | | 342 | 10,188 | |||||||||||||||
Total consumer |
241,673 | | | 1,763 | 243,436 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Term loans |
20,322 | 1,314 | 403 | 3,155 | 25,194 | |||||||||||||||
Lines of credit |
20,991 | 2,527 | 96 | 1,644 | 25,258 | |||||||||||||||
Total commercial business |
41,313 | 3,841 | 499 | 4,799 | 50,452 | |||||||||||||||
Total |
$ | 1,146,484 | $ | 67,092 | $ | 8,862 | $ | 149,665 | $ | 1,372,103 | ||||||||||
Loans rated pass or watch are generally current on contractual loan and principal payments and
comply with other contractual loan terms. Pass loans generally have no noticeable credit
deficiencies or potential weaknesses. Loans rated watch, however, will typically exhibit early
signs of credit deficiencies or potential weaknesses that deserve managements close attention.
Loans rated special mention do not currently expose the Company to a sufficient degree of risk to
warrant a lower rating, but possess clear trends in credit deficiencies or potential weaknesses
that deserve managements close attention. The allowance for loan losses on loans rated pass,
watch, or special mention is typically evaluated collectively for impairment using a homogenous
pool approach. This approach utilizes quantitative factors developed by management from its
assessment of historical loss experience, qualitative factors, and other considerations.
Loans rated substandard involve a distinct possibility that the Company could sustain some loss
if deficiencies associated with the loan are not corrected. Loans rated doubtful indicate that
full collection is highly questionable or improbable. The Company did not have any loans that were
rated doubtful at December 31, 2010. Loans rated substandard or
doubtful that are also
considered in managements judgment to be impaired are generally analyzed individually to determine
an appropriate allowance for loan loss. A loan rated loss is considered uncollectible, even if
a partial recovery could be expected in the future. The Company generally charges off loans that
are rated as a loss. As such, the Company did not have any loans that were rated loss at December
31, 2010.
84
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table contains information relating to the past due and non-accrual status of the
Companys loans receivable as of December 31, 2010 (all amounts in the table are net of undisbursed
loan proceeds):
Past Due Status | Total | |||||||||||||||||||||||||||
30-59 | 60-89 | > 90 | Total | Total | Total | Non- | ||||||||||||||||||||||
Days | Days | Days | Past Due | Current | Loans | Accrual | ||||||||||||||||||||||
One- to four-family |
$ | 6,704 | $ | 3,256 | $ | 18,684 | $ | 28,644 | $ | 495,428 | $ | 524,072 | $ | 18,684 | ||||||||||||||
Multi-family |
6,847 | 10,337 | 14,557 | 31,741 | 214,968 | 246,709 | 31,660 | |||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Office |
1,936 | 1,072 | 3,081 | 6,089 | 79,778 | 85,867 | 11,915 | |||||||||||||||||||||
Retail/wholesale/mixed |
2,164 | 1,364 | 12,870 | 16,398 | 99,460 | 115,858 | 25,695 | |||||||||||||||||||||
Industrial/warehouse |
| | 853 | 853 | 31,481 | 32,334 | 2,107 | |||||||||||||||||||||
Other |
| | 1,527 | 1,527 | 9,799 | 11,326 | 1,527 | |||||||||||||||||||||
Total commercial
real estate |
4,100 | 2,436 | 18,331 | 24,867 | 220,518 | 245,385 | 41,244 | |||||||||||||||||||||
Construction and
development: |
||||||||||||||||||||||||||||
One- to four-family |
| | | | 6,382 | 6,382 | | |||||||||||||||||||||
Multi-family |
| 4,441 | | 4,441 | 5,724 | 10,165 | 4,540 | |||||||||||||||||||||
Commercial real estate |
2,975 | 843 | | 3,818 | 16,189 | 20,007 | 12,741 | |||||||||||||||||||||
Land |
112 | | 9,282 | 9,394 | 16,101 | 25,495 | 9,282 | |||||||||||||||||||||
Total construction |
3,087 | 5,284 | 9,282 | 17,653 | 44,396 | 62,049 | 26,563 | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Home equity |
855 | 400 | 1,369 | 2,624 | 212,929 | 215,553 | 1,369 | |||||||||||||||||||||
Student |
485 | 140 | 373 | 998 | 16,697 | 17,695 | | |||||||||||||||||||||
Other |
183 | 96 | 275 | 554 | 9,634 | 10,188 | 275 | |||||||||||||||||||||
Total consumer |
1,523 | 636 | 2,017 | 4,176 | 239,260 | 243,436 | 1,644 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Term loans |
150 | 246 | 1,992 | 2,388 | 22,806 | 25,194 | 2,185 | |||||||||||||||||||||
Lines of credit |
523 | | 194 | 717 | 24,541 | 25,258 | 594 | |||||||||||||||||||||
Total commercial |
673 | 246 | 2,186 | 3,105 | 47,347 | 50,452 | 2,779 | |||||||||||||||||||||
Total |
$ | 22,934 | $ | 22,195 | $ | 65,057 | $ | 110,186 | $ | 1,261,917 | $ | 1,372,103 | $ | 122,574 | ||||||||||||||
As of December 31, 2010 and 2009, $373 and $834 in student loans, respectively, were 90-days past
due, but remained in on accrual status. No other loans 90-days past due were in accrual status as
of either date.
85
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
4. Mortgage Servicing Rights
The activity in mortgage servicing rights during the years ended December 31 is presented in the
following table.
2010 | 2009 | 2008 | ||||||||||
Mortgage servicing rights at beginning of year |
$ | 7,186 | $ | 4,525 | $ | 4,708 | ||||||
Additions |
3,866 | 5,684 | 1,404 | |||||||||
Amortization |
(3,277 | ) | (3,023 | ) | (1,587 | ) | ||||||
Mortgage servicing rights at end of year |
7,775 | 7,186 | 4,525 | |||||||||
Valuation allowance |
(6 | ) | (287 | ) | (822 | ) | ||||||
Mortgage servicing rights at end of year |
$ | 7,769 | $ | 6,899 | $ | 3,703 | ||||||
The following table shows the estimated future amortization expense for mortgage servicing rights
for the years ended December 31:
2011 |
$ | 1,315 | ||
2012 |
1,209 | |||
2013 |
1,145 | |||
2014 |
1,094 | |||
2015 |
1,054 | |||
Thereafter |
1,952 | |||
Total |
$ | 7,769 | ||
The projection of amortization for mortgage servicing rights is based on existing asset balances
and interest rate environment as of December 31, 2010. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing portfolio, mortgage
interest rates, loan prepayments, and market conditions.
86
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
5. Other Assets
Other assets are summarized as follow:
December 31 | ||||||||
2010 | 2009 | |||||||
Accrued interest: |
||||||||
Mortgage-related securities |
$ | 1,432 | $ | 4,651 | ||||
Investment securities |
511 | 1,875 | ||||||
Loans receivable |
5,506 | 6,795 | ||||||
Total accrued interest |
7,449 | 13,321 | ||||||
Bank owned life insurance |
55,600 | 53,295 | ||||||
Premises and equipment, net |
51,165 | 51,715 | ||||||
Federal Home Loan Bank stock, at cost |
46,092 | 46,092 | ||||||
Prepaid FDIC insurance premiums |
8,694 | 12,521 | ||||||
Other assets |
85,709 | 29,762 | ||||||
Total other assets |
$ | 254,709 | $ | 206,706 | ||||
Premises and equipment are summarized as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Land and land improvements |
$ | 17,578 | $ | 17,523 | ||||
Office buildings |
52,116 | 51,376 | ||||||
Furniture and equipment |
18,648 | 18,448 | ||||||
Leasehold improvements |
1,213 | 1,189 | ||||||
Total cost |
89,555 | 88,536 | ||||||
Accumulated depreciation and amortization |
(38,390 | ) | (36,821 | ) | ||||
Total premises and equipment, net |
$ | 51,165 | $ | 51,715 | ||||
Depreciation expense for 2010, 2009, and 2008 was $2,600, $2,567, and $2,469, respectively.
The Company leases various branch offices, office facilities and equipment under non-cancelable
operating leases which expire on various dates through 2017. Future minimum payments under
non-cancelable operating leases with initial or remaining terms of one year or more for the years
indicated are as follows at December 31, 2010:
Amount | ||||
2011 |
$ | 822 | ||
2012 |
674 | |||
2013 |
610 | |||
2014 |
588 | |||
2015 |
588 | |||
Thereafter |
2,200 | |||
Total |
$ | 5,482 | ||
Rent expense was $969, $1,146, and $1,238, in 2010, 2009, and 2008, respectively.
87
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
6. Deposits Liabilities
Deposit liabilities are summarized as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Checking accounts: |
||||||||
Non-interest-bearing |
$ | 94,446 | $ | 94,619 | ||||
Interest-bearing |
219,136 | 211,448 | ||||||
Total checking accounts |
313,582 | 306,067 | ||||||
Money market accounts |
423,923 | 345,144 | ||||||
Regular savings accounts |
210,334 | 196,983 | ||||||
Certificate of deposits: |
||||||||
Due within one year |
825,661 | 992,752 | ||||||
After one but within two years |
126,710 | 145,385 | ||||||
After two but within three years |
134,120 | 23,370 | ||||||
After three but within four years |
29,890 | 98,274 | ||||||
After four but within five years |
14,090 | 29,533 | ||||||
After five years |
| | ||||||
Total certificates of deposit |
1,130,471 | 1,289,314 | ||||||
Total deposit liabilities |
$ | 2,078,310 | $ | 2,137,508 | ||||
The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more
was $283,050 and $313,053 at December 31, 2010 and 2009, respectively.
Interest expense on deposits was as follows:
Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Interest-bearing checking accounts |
$ | 107 | $ | 121 | $ | 376 | ||||||
Money market accounts |
2,075 | 2,795 | 8,245 | |||||||||
Regular savings accounts |
104 | 181 | 609 | |||||||||
Certificate of deposits |
26,320 | 41,471 | 55,459 | |||||||||
Total interest expense on deposit liabilities |
$ | 28,606 | $ | 44,568 | $ | 64,689 | ||||||
88
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
7. Borrowings
Borrowings consist of the following:
December 31, 2010 | December 31, 2009 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate | Balance | Rate | |||||||||||||
Federal Home Loan Bank advances maturing in: |
||||||||||||||||
2012 |
$ | 100,000 | 4.52 | % | $ | 100,000 | 4.52 | % | ||||||||
2013 |
249 | 4.17 | 264 | 4.17 | ||||||||||||
Thereafter |
49,685 | 5.22 | 806,715 | 4.23 | ||||||||||||
Total borrowings |
$ | 149,934 | 4.79 | % | $ | 906,979 | 4.26 | % | ||||||||
All of the Companys FHLB advances are subject to prepayment penalties if voluntarily repaid prior
to their stated maturity. In 2010 the Company voluntarily repaid $756,000 of FHLB advances prior
to their scheduled maturities and incurred $89,300 prepayment penalty. At December 31, 2010,
$100,000 of the Companys FHLB advances maturing in 2012 are redeemable on a quarterly basis at the
option of the FHLB of Chicago.
The Company is required to pledge certain unencumbered mortgage loans and mortgage-related
securities as collateral against its outstanding advances from the FHLB of Chicago. Advances are
also collateralized by the shares of capital stock of the FHLB of Chicago that are owned by the
Company. The Companys borrowings at the FHLB of Chicago are limited to the lesser of: (1) 35% of
total assets; (2) twenty (20) times the FHLB of Chicago capital stock owned by the Company; or (3)
the total of 60% of the book value of certain multi-family mortgage loans, 75% of the book value of
one- to four-family mortgage loans, and 95% of certain mortgage-related securities.
The Company has a $5,000 and a $10,000 line of credit with two financial institutions. At December
31, 2010 and 2009, no amounts were outstanding on these lines of credit.
8. Shareholders Equity
The Bank is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possible additional discretionary, actions by regulators, that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by federal regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I
capital (as these terms are defined in regulations) to risk-weighted assets (as these terms are
defined in regulations), and of Tier I capital (as these terms are defined in regulations) to
average assets (as these terms are defined in regulations). Management believes, as of December
31, 2010, that the Bank met all capital adequacy requirements. Management is not aware of any
conditions or events, which would change the Banks status as well capitalized.
89
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
8. Shareholders Equity (continued)
The Banks actual and required regulatory capital amounts and ratios as of December 31, 2010 and
2009, are presented in the following table:
To Be Well Capitalized | ||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||
For Capital | Corrective Action | |||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2010: |
||||||||||||||||||||||||
Total capital |
$ | 245,628 | 17.86 | % | $ | 110,044 | 8.00 | % | $ | 137,555 | 10.00 | % | ||||||||||||
(to risk-weighted assets) |
||||||||||||||||||||||||
Tier 1 capital |
228,434 | 16.61 | 55,022 | 4.00 | 82,533 | 6.00 | ||||||||||||||||||
(to risk-weighted assets) |
||||||||||||||||||||||||
Tier 1 capital |
228,434 | 9.12 | 100,215 | 4.00 | 125,268 | 5.00 | ||||||||||||||||||
(to adjusted total assets) |
||||||||||||||||||||||||
As of December 31, 2009: |
||||||||||||||||||||||||
Total capital |
$ | 348,741 | 20.86 | % | $ | 133,772 | 8.00 | % | $ | 167,215 | 10.00 | % | ||||||||||||
(to risk-weighted assets) |
||||||||||||||||||||||||
Tier 1 capital |
339,847 | 20.32 | 66,886 | 4.00 | 100,329 | 6.00 | ||||||||||||||||||
(to risk-weighted assets) |
||||||||||||||||||||||||
Tier 1 capital |
339,847 | 9.84 | 138,158 | 4.00 | 172,697 | 5.00 | ||||||||||||||||||
(to adjusted total assets) |
The following table presents reconciliations of the Banks equity under generally accepted
accounting principles to capital as determined by regulators:
December 31, 2010 | ||||||||
Risk- | Tier I | |||||||
Based | (Core) | |||||||
Capital | Capital | |||||||
Stockholders equity according to the Banks records |
$ | 311,279 | $ | 311,279 | ||||
Net unrealized loss on securities available for sale, net of taxes |
1,383 | 1,383 | ||||||
Additional minimum pension asset, net of taxes |
5,514 | 5,514 | ||||||
Goodwill and intangibles |
(53,569 | ) | (53,569 | ) | ||||
Investment in non-includable subsidiaries |
(3,273 | ) | (3,273 | ) | ||||
Disallowed deferred tax assets |
(32,900 | ) | (32,900 | ) | ||||
Allowance for loan losses |
17,194 | | ||||||
Regulatory capital |
$ | 245,628 | $ | 228,434 | ||||
Accumulated other comprehensive income is as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Net unrealized loss on securities available-for-sale |
$ | (1,383 | ) | $ | (1,167 | ) | ||
Additional minimum pension asset |
(5,514 | ) | (1,239 | ) | ||||
Accumulated other comprehensive income (loss) |
$ | (6,897 | ) | $ | (2,406 | ) | ||
90
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
9. Earnings (Loss) Per Share
The computation of the Companys basic and diluted earnings (loss) per share is presented in the
following table.
Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Basic earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
Weighted average shares outstanding |
45,529,126 | 46,177,189 | 47,212,574 | |||||||||
Allocated ESOP shares during the period |
63,068 | 327,251 | 327,250 | |||||||||
Vested MRP shares during the period |
4,276 | 61,455 | 186,636 | |||||||||
Basic shares outstanding |
45,596,490 | 46,565,895 | 47,726,460 | |||||||||
Basic earnings (loss) per share |
$ | (1.59 | ) | $ | 0.29 | $ | 0.36 | |||||
Diluted earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
Weighted average shares outstanding used
in basic earnings (loss) per share |
45,569,490 | 46,565,895 | 47,726,460 | |||||||||
Net dilutive effect of: |
||||||||||||
Stock option shares |
| 612,584 | 898,416 | |||||||||
Non-vested MRP shares |
| | 4,363 | |||||||||
Diluted shares outstanding |
45,569,490 | 47,178,479 | 48,629,239 | |||||||||
Diluted earnings (loss) per share |
$ | (1.59 | ) | $ | 0.29 | $ | 0.35 | |||||
The Company had stock options for 1,974,000, 2,064,000, and 2,133,800 shares outstanding at
December 31, 2010, 2009, and 2008, respectively, which were not included in the computation of
diluted earnings (loss) per share because they were anti-dilutive. These shares had weighted
average exercise prices of $10.56, $10.75, and $10.75, as of those same dates, respectively.
10. Employee Benefit Plans
The Company has a discretionary, defined contribution savings plan (the Savings Plan). The
Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and provides
employees meeting certain minimum age and service requirements the ability to make contributions to
the Savings Plan on a pretax basis. The Company then matches a percentage of the employees
contributions. Matching contributions made by the Company were $169 in 2010, $181 in 2009, and
$155 in 2008.
The Company also has a defined benefit pension plan covering employees meeting certain minimum age
and service requirements and a supplemental pension plan for certain qualifying employees. The
supplemental pension plan is funded through a rabbi trust arrangement. The benefits are
generally based on years of service and the employees average annual compensation for five
consecutive calendar years in the last ten calendar years which produces the highest average. The
Companys funding policy is to contribute annually the amount necessary to satisfy the requirements
of the Employee Retirement Income Security Act of 1974.
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The changes in benefit obligations and plan assets at December 31, 2010 and 2009, are presented in
the following table.
Qualified | Supplemental | |||||||||||||||
Pension Plan | Pension Plan | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 35,032 | $ | 30,389 | $ | 7,448 | $ | 7,233 | ||||||||
Service cost |
1,939 | 1,765 | | 197 | ||||||||||||
Interest cost |
2,023 | 1,821 | 426 | 430 | ||||||||||||
Actuarial loss (gain) |
5,372 | 1,801 | 382 | (115 | ) | |||||||||||
Benefits paid |
(962 | ) | (744 | ) | (297 | ) | (297 | ) | ||||||||
Benefit obligation at end of year |
$ | 43,404 | $ | 35,032 | $ | 7,959 | $ | 7,448 | ||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 35,634 | $ | 24,943 | | | ||||||||||
Actual return on plan assets |
986 | 6,435 | | | ||||||||||||
Employer contributions |
5,000 | 5,000 | $ | 297 | $ | 297 | ||||||||||
Benefits paid |
(962 | ) | (744 | ) | (297 | (297 | ) | |||||||||
Fair value of plan assets at end of year |
40,658 | 35,634 | | | ||||||||||||
Funded status at the end of the year |
$ | (2,746 | ) | $ | 602 | $ | (7,959 | ) | $ | (7,448 | ) | |||||
The underfunded status of the qualified and supplemental pension plans at December 31, 2010, are
recognized in the statement of condition as accrued pension liability.
Unrecognized net losses (gains) in accumulated other comprehensive income, net of tax, are $5,792
and $1,785 for the qualified pension plan and $(217) and $(446) for the supplemental pension plan
as of December 31, 2010 and 2009, respectively.
The estimated net of tax costs that will be amortized from accumulated other comprehensive income
into net periodic cost over the next fiscal year is $865 for the qualified plan. The accumulated
benefit obligations for the defined benefit pension plan were $39,084 at December 31, 2010, and
$32,081 at December 31, 2009.
The assumptions used to determine the benefit obligation as of December 31 is as follows:
2010 | 2009 | |||||||
Discount rate |
5.32 | % | 5.84 | % | ||||
Rate of increase in compensation levels |
3.50 | % | 3.50 | % | ||||
Expected long-term rate of return on plan assets (qualified plan) |
6.50 | % | 6.50 | % |
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The assumptions used to determine the net cost for the years ended December 31 is as follows:
2010 | 2009 | 2008 | ||||||||||
Discount rate |
5.84 | % | 6.07 | % | 6.25 | % | ||||||
Rate of increase in compensation levels |
3.50 | % | 3.50 | % | 3.50 | % | ||||||
Expected long-term rate of return on plan assets (qualified plan) |
6.50 | % | 7.00 | % | 7.00 | % |
The expected long-term rate of return was estimated using a combination of the expected rate of
return for immediate participation contracts and the historical rate of return for immediate
participation contracts.
Using an actuarial measurement date of December 31, 2010, 2009, and 2008, components of net
periodic benefit cost follow:
2010 | 2009 | 2008 | ||||||||||
Qualified pension plan: |
||||||||||||
Interest cost |
$ | 2,023 | $ | 1,821 | $ | 1,657 | ||||||
Service cost |
1,939 | 1,764 | 1,743 | |||||||||
Expected return on plan assets |
(2,291 | ) | (1,719 | ) | (1,953 | ) | ||||||
Amortization of unrecognized prior service cost |
| | 23 | |||||||||
Amortization of net loss |
| 558 | | |||||||||
Net periodic cost |
$ | 1,671 | $ | 2,424 | $ | 1,470 | ||||||
Supplemental pension plan: |
||||||||||||
Interest cost |
$ | 426 | $ | 430 | $ | 421 | ||||||
Service cost |
| 196 | 184 | |||||||||
Amortization of prior service cost |
| | | |||||||||
Net periodic cost |
$ | 426 | $ | 626 | $ | 605 | ||||||
At December 31, 2010, the projected benefit payments for each of the plans are as follows:
Qualified | Supplemental | |||||||||||
Plan | Plan | Total | ||||||||||
2011 |
$ | 1,282 | $ | 297 | $ | 1,579 | ||||||
2012 |
1,522 | 956 | 2,478 | |||||||||
2013 |
1,921 | 956 | 2,877 | |||||||||
2014 |
2,168 | 956 | 3,124 | |||||||||
2015 |
2,460 | 717 | 3,177 | |||||||||
2016 2020 |
16,202 | 3,381 | 19,583 | |||||||||
Total |
$ | 25,555 | $ | 7,263 | $ | 32,818 | ||||||
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The fair value of the Companys pension plan assets at December 31, 2010, is summarized as follows:
Fair Value Hierarchy | ||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset category: |
||||||||||||||||
Money market fund |
$ | 262 | | $ | 262 | | ||||||||||
Equity security |
1,022 | $ | 1,022 | | | |||||||||||
Immediate participation guarantee contract |
39,374 | | | $ | 39,374 | |||||||||||
Total |
$ | 40,658 | $ | 1,022 | $ | 262 | $ | 39,374 | ||||||||
The investment objective is to minimize risk. The assets of the pension plan are concentrated in a
group annuity contract issued by a life insurance company. Pension plan contributions are
maintained in the general account of the insurance company, which invests primarily in corporate
and government notes and bonds with ten to fifteen
years to maturity. The group annuity contract is valued at fair value by discounting the related
cash flows based on current yields of similar instruments with comparable durations and considering
the credit worthiness of the issuer.
The equity securities are shares of stock issued by the life insurance company when it
demutualized. This investment is valued at the closing price reported in the active market in
which the security is traded. The money market fund, which invests in short-term U.S. government
securities, is based on a $1 net asset value (NAV) specified by the fund manager. The fund is
not traded in an active market. The fund manager bases its estimate of the NAV on quoted prices
for similar assets in active markets.
The following table presents a summary of the changes in the fair value of the pension plans Level
3 asset during the year ended December 31, 2010. As noted above, the Companys Level 3 asset
consists entirely of a group annuity contract issued by an insurance company.
Amount | ||||
Fair value at December 31, 2009 |
$ | 34,312 | ||
Actual return on plan assets |
1,024 | |||
Employer contribution |
5,000 | |||
Benefits paid |
(962 | ) | ||
Fair value at December 31, 2010 |
$ | 39,374 | ||
The Company has a deferred retirement plan for certain non-officer directors who have provided at
least five years of service. All eligible directors benefits have vested. In the event a
director dies prior to completion of these payments, payments will go to the directors heirs. The
Company has funded these arrangements through rabbi trust arrangements and, based on actuarial
analyses, believes these obligations are adequately funded. The Company also has supplemental
retirement plans for certain executives of a financial institution it acquired in 2000. The
liabilities related to these plans were $3,297 and $3,221 at December 31, 2010 and 2009,
respectively. The net expense (revenue) related to these plans for the years ended December 31,
2010, 2009, and 2008 was $221, $226, and $(57), respectively.
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans
In 2001 the Companys shareholders approved the 2001 Stock Incentive Plan (the 2001 Plan), which
provided for stock option awards of up to 4,150,122 shares. Options granted under the 2001 Plan
vested over five years and have expiration terms of ten years. The 2001 Plan also provided for
restricted stock (MRP) awards of up to 1,226,977 shares. All options and MRPs awarded under the
2001 Plan are fully vested and no further awards may be granted under the plan.
In 2004 the Companys shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan), which
provides for stock option awards of up to 4,106,362 shares. Options granted under the 2004 Plan
vest over five years and have expiration terms of ten years. The 2004 Plan also provides for MRP
awards of up to 1,642,521 shares. MRP shares awarded under the 2004 Plan vest over five years. As
of December 31, 2010, options for 1,472,362 shares and 627,721 MRP shares remain eligible for award
under the 2004 Plan.
MRP grants are amortized to compensation expense as the Companys employees and directors become
vested in the granted shares. The amount amortized to expense was $91 for 2010, $704 for 2009, and
$1,735 for 2008. Outstanding non-vested MRP grants had a fair value of $197 and an unamortized cost
of $342 at December 31, 2010. The cost of these shares is expected to be recognized over a
weighted-average period of 1.6 years.
The Company recorded stock option compensation expenses of $46, $168, and $300, for 2010, 2009, and
2008 respectively. As of December 31, 2010, there was $220 in total unrecognized stock option
compensation expense related to non-vested options. This cost is expected to be recognized over a
weighted-average period of 2.0 years.
The following schedule reflects activity in the Companys vested and non-vested stock options and
related weighted average exercise prices for the years ended December 31, 2010, 2009, and 2008.
2010 | 2009 | 2008 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Stock | Average | Stock | Average | Stock | Average | |||||||||||||||||||
Options | Exercise | Options | Exercise | Options | Exercise | |||||||||||||||||||
Outstanding at beginning of year |
3,129,398 | $ | 8.1823 | 3,445,967 | $ | 7.8763 | 4,090,628 | $ | 7.3650 | |||||||||||||||
Granted |
120,000 | 5.7733 | | | 82,000 | 11.6870 | ||||||||||||||||||
Exercised |
(576,934 | ) | 3.2056 | (246,769 | ) | 3.2056 | (667,461 | ) | 4.9956 | |||||||||||||||
Forfeited |
(210,000 | ) | 10.673 | (69,800 | ) | 10.6707 | (59,200 | ) | 10.6730 | |||||||||||||||
Outstanding at end of year |
2,462,464 | $ | 9.0184 | 3,129,398 | $ | 8.1823 | 3,445,967 | $ | 7.8763 | |||||||||||||||
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
The following table provides additional information regarding the Companys outstanding options as
of December 31, 2010.
Remaining | Non-Vested Options | Vested Options | ||||||||||||||||||
Contractual | Stock | Intrinsic | Stock | Intrinsic | ||||||||||||||||
Life | Options | Value | Options | Value | ||||||||||||||||
Exercise price: |
||||||||||||||||||||
$ 3.2056 |
0.3 years | | | 488,464 | $ | 769 | ||||||||||||||
$10.6730 |
3.3 years | | | 1,722,000 | | |||||||||||||||
$12.2340 |
5.5 years | 10,000 | | 40,000 | | |||||||||||||||
$11.1600 |
7.3 years | 19,200 | | 12,800 | | |||||||||||||||
$12.0250 |
7.6 years | 30,000 | | 20,000 | | |||||||||||||||
$ 7.2260 |
9.3 years | 50,000 | | | | |||||||||||||||
$ 4.7400 |
10.0 years | 70,000 | | | 3 | |||||||||||||||
Total |
179,200 | | 2,283,264 | $ | 772 | |||||||||||||||
Weighted average remaining contractual life |
8.9 years | 2.8 years | ||||||||||||||||||
Weighted average exercise price |
$ | 7.7576 | $ | 9.1174 | ||||||||||||||||
The total intrinsic value of options exercised was $1,844, $1,337, and $4,304 during 2010, 2009,
and 2008, respectively. The weighted average grant date fair value of non-vested options at
December 31, 2010, was $1.50 per share. There were no forfeitures of non-vested options during
2010; however, 120,000 options were granted, and options for 26,400 shares became vested during
this period.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of granted
options. This model was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. However, the Companys stock options have
characteristics significantly different from traded options and changes in the subjective input
assumptions can materially affect the fair value estimate. Option valuation models such as
Black-Scholes require the input of highly subjective assumptions including the expected stock price
volatility, which is computed using five-years of actual price activity in the Companys stock.
The Company uses historical data of employee behavior as a basis to estimate the expected life of
the options, as well as forfeitures due to employee terminations. The Company also uses its actual
dividend yield at the time of the grant, as well as actual U.S. Treasury yields in effect at the
time of the grant to estimate the risk-free rate. There were no options granted during 2009. The
following weighted-average assumptions were used to value 82,000 options granted during 2008: risk
free interest rate of 3.15%, dividend yield of 3.00%, expected stock volatility of 18.2%, and
expected term to exercise of 7.5 years. The following weighted-average assumptions were used to
value 120,000 options granted during 2010: risk free interest rate of 2.42%, dividend yield of
2.44%, expected stock volatility of 25.0%, and expected term to exercise of 7.5 years.
The Company maintains an Employee Stock Ownership Plan (ESOP) for its employees. The ESOP is a
qualifying plan under Internal Revenue Service guidelines. It covers all full-time employees who
have attained at least 21 years of age and completed one year of service. In 2000 and 2001, the
ESOP borrowed a total of $8,999 and purchased 3,271,946 of the Companys common shares on various
dates in 2000, 2001, and 2002. ESOP expense is recognized based on the fair value (average stock
price) of shares scheduled to be released from the ESOP trust. Beginning in 2001, one-tenth of the
shares were scheduled to be released each year. Also, additional shares could have been released
as the ESOP trust received cash dividends from the unallocated shares held in the trust. As of
December 31, 2010, no shares remained to be allocated in the ESOP. ESOP expense for the years
ended December 31, 2010, 2009, and 2008, was $782, $2,969, and $3,615, respectively.
96
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
The following table summarizes shares of Company common stock held by the ESOP at December 31.
2010 | 2009 | 2008 | ||||||||||
Shares allocated to participants in fiscal year |
126,175 | 327,251 | 327,250 | |||||||||
Unallocated and unearned shares |
| 126,175 | 453,426 | |||||||||
Fair value of unearned ESOP shares |
| $ | 874 | $ | 5,233 |
The Company has no stock compensation plans that have not been approved by shareholders.
12. Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and
Wisconsin and Minnesota. The Company is no longer subject to U.S. federal and Minnesota income tax
examinations by tax authorities for years prior to 2005, and for Wisconsin for years prior to 1997.
If any interest and/or penalties would be imposed by an appropriate taxing authority, the Company
would report the interest component through miscellaneous operating expense and penalties through
income tax expense.
The provision for income taxes consists of the following:
Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current income tax expense (benefit): |
||||||||||||
Federal |
$ | (17,924 | ) | $ | 7,193 | $ | 15,281 | |||||
State |
90 | 88 | 83 | |||||||||
Current income tax expense (benefit) |
(17,834 | ) | 7,281 | 15,364 | ||||||||
Deferred income tax expense (benefit): |
||||||||||||
Federal |
(22,388 | ) | 210 | (6,267 | ) | |||||||
State |
(9,687 | ) | (2,073 | ) | (3 | ) | ||||||
Deferred income tax expense (benefit) |
(32,075 | ) | (1,863 | ) | (6,270 | ) | ||||||
Income tax expense (benefit) |
$ | (49,909 | ) | $ | 5,418 | $ | 9,094 | |||||
Income tax expense (benefit) differs from the provision computed at the federal statutory corporate
rate as follows:
Year Ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income (loss) before provision for income taxes |
$ | (122,548 | ) | $ | 19,143 | $ | 26,249 | |||||
Tax expense (benefit) at federal statutory rate |
$ | (42,892 | ) | $ | 6,700 | $ | 9,188 | |||||
Increase (decrease) in taxes resulting from: |
||||||||||||
State income taxes, net of federal tax benefit |
(6,269 | ) | 510 | 52 | ||||||||
Bank owned life insurance |
(842 | ) | (751 | ) | (873 | ) | ||||||
Reversal of valuation allowance, net of federal benefit |
| (1,800 | ) | | ||||||||
Executive compensation in excess of Section 162(m) limit |
| 141 | 143 | |||||||||
Tax return and other reserve adjustments |
47 | 230 | 492 | |||||||||
Other |
47 | 388 | 92 | |||||||||
Income tax expense (benefit) |
$ | (49,909 | ) | $ | 5,418 | $ | 9,094 | |||||
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
12. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of the Companys deferred tax assets and liabilities are
summarized as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Loan loss reserves |
$ | 19,261 | $ | 6,834 | ||||
Federal net operating losses and AMT credits |
12,441 | | ||||||
State net operating losses |
5,279 | 778 | ||||||
Pension |
6,907 | 4,025 | ||||||
Other-than-temporary impairment of investment securities |
3,493 | 3,599 | ||||||
Non-deductible losses on foreclosed real estate |
2,421 | 163 | ||||||
Deferred compensation |
1,512 | 1,553 | ||||||
Unrealized loss on investment securities |
925 | 782 | ||||||
Restricted stock amortization |
135 | 312 | ||||||
Other |
998 | 409 | ||||||
Total deferred tax assets |
53,372 | 18,455 | ||||||
Valuation allowance |
(135 | ) | (135 | ) | ||||
Total deferred tax assets, net of valuation allowance |
53,237 | 18,320 | ||||||
Deferred tax liabilities: |
||||||||
FHLB stock dividends |
5,130 | 5,130 | ||||||
Purchase accounting adjustments |
3,341 | 3,639 | ||||||
Mortgage servicing rights |
3,118 | 2,769 | ||||||
Property and equipment depreciation |
987 | 1,001 | ||||||
Other |
341 | 607 | ||||||
Total deferred tax liabilities |
12,917 | 13,146 | ||||||
Net deferred tax asset |
$ | 40,320 | $ | 5,174 | ||||
During first quarter of 2009 the Company recorded a $1.8 million state tax benefit related to the
reversal of a valuation allowance it had established against a deferred tax asset in prior years.
The deferred tax asset related to Wisconsin net operating loss carryovers for which the Company was
unable to determine in prior periods whether it was more likely than not that the tax benefits
would be realized in future periods. In the first quarter of 2009 Wisconsin law was amended from
a system that taxed each affiliated entity separately to a form of combined reporting. As a result
of this change, the Company determined that its Wisconsin net operating losses that had not been
recognized in prior periods would be realizable, resulting in a one-time tax benefit of $1.8
million in the first quarter of 2009.
For federal and state income tax purposes, the Company has net operating loss and AMT credit
carryovers of $38.1 million and $101.7 million available to offset against future income,
respectively. The carryovers expire in the years 2011 through 2025 if unused. The Company
continues to carry a $135 valuation allowance against the small portion of the state income tax
loss carryover that relates to the parent companys net operating losses prior to 2009, as well as
certain other deferred tax assets. At December 31, 2010, the Company believed it was more likely
than not that the tax benefit of the parent companys net operating losses prior to 2009, as well
as certain other deferred tax assets, would not be realized. However, as time passes the Company
will be able to better assess the amount of tax benefit it will realize from using these items.
In 2010 the Company corrected its presentation of the deferred tax asset amount for its pension as
of December 31, 2009. This resulted in a decrease to deferred tax assets of $1,619 related to the
pension. This correction had no impact on the basic financial statements.
98
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
13. Financial Instruments with Off-Balance-Sheet Risk
The Company is 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 consist of
commitments to extend credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the
consolidated statements of financial condition. The contract amounts reflect the extent of
involvement the Company has in particular classes of financial instruments and also represents the
Companys maximum exposure to credit loss.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and generally require payment of a fee. As some commitments expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates the collateral needed and creditworthiness of each customer on
a case by case basis. The Company generally extends credit only on a secured basis. Collateral
obtained varies, but consists principally of one- to four-family residences.
Financial instruments whose contract amounts represent credit risk are as follows:
December 31 | ||||||||
2010 | 2009 | |||||||
Unused consumer lines of credit |
$ | 146,381 | $ | 150,424 | ||||
Unused commercial lines of credit |
20,856 | 18,904 | ||||||
Commitments to extend credit: |
||||||||
Fixed rate |
73,340 | 35,769 | ||||||
Adjustable rate |
1,784 | 2,185 | ||||||
Undisbursed commercial loans |
462 | 524 | ||||||
Standby letters of credit |
339 | 111 |
The Company sells substantially all of its long-term, fixed-rate, one- to four-family loan
originations in the secondary market. The Company uses derivative instruments to manage interest
rate risk associated with these activities. Specifically, the Company enters into interest rate
lock commitments (IRLCs) with borrowers, which are considered to be derivative instruments. The
Company manages its exposure to interest rate risk in IRLCs (as well as interest rate risk in its
loans held-for-sale) by entering into forward commitments to sell loans to the Federal National
Mortgage Association (Fannie Mae). Commitments to sell loans expose the Company to interest rate
risk if market rates of interest decrease during the commitment period. Such forward commitments
are considered to be derivative instruments. These derivatives are not designated as accounting
hedges as specified in GAAP. As such, changes in the fair value of the derivative instruments are
recognized currently through earnings.
As of December 31, 2010 and 2009, net unrealized gains (losses) of $1,474 and $(306), respectively,
were recognized in net gain on loan sales activities on the derivative instruments specified in the
previous paragraph. These amounts were exclusive of net unrealized losses of $(801) and $(67) on
loans held-for-sale as of those dates, respectively, which were also included in net gain on loan
sales activities.
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Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
13. Financial Instruments with Off-Balance-Sheet Risk (continued)
The following table summarizes the Companys derivative assets and liabilities as of the dates
indicated.
December 31, 2010 | December 31, 2009 | |||||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Interest rate lock commitments |
$ | 14,003 | $ | (57 | ) | $ | 15,433 | $ | (69 | ) | ||||||
Forward commitments |
49,854 | 1,531 | 27,668 | 375 | ||||||||||||
Net unrealized gain (loss) |
$ | 1,474 | $ | (306 | ) | |||||||||||
The unrealized gains shown in the above table were included as a component of other assets as of
the dates indicated. The unrealized losses were included in other liabilities as of the dates
indicated.
14. Fair Value of Financial Instruments
Disclosure of fair value information about certain financial instruments, whether or not recognized
in the consolidated financial statements, for which it is practicable to estimate the value, is
summarized below. 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 instrument.
Certain financial instruments and all nonfinancial instruments are excluded from this disclosure.
Accordingly, the aggregate fair value of amounts presented does not represent the underlying value
of the Company and is not particularly relevant to predicting the Companys future earnings or cash
flows.
The following methods and assumptions are used by the Company in estimating its fair value
disclosures of financial instruments:
Cash and Cash Equivalents The carrying amounts reported in the statements of financial condition
for cash and cash equivalents approximate those assets fair values.
Securities Available-for-Sale Fair values for these securities are based on quoted market prices
or such prices of comparable instruments.
Loans Held-for-Sale The fair value of loans held-for-sale is based on the current market price for
securities collateralized by similar loans.
Loans Receivable Loans receivable are segregated by type such as one- to four-family,
multi-family, and commercial real estate mortgage loans, consumer loans, and commercial business
loans. The fair value of each type is calculated by discounting scheduled cash flows through the
expected maturity of the loans using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan type. The estimated maturity is based on the Companys
historical experience with prepayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
100
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
Mortgage Servicing Rights The Company has calculated the fair market value of mortgage servicing
rights for those loans that are sold with servicing rights retained. For valuation purposes, loans
are stratified by product type and, within product type, by interest rates. The fair value of
mortgage servicing rights is based upon the present value of estimated future cash flows using
current market assumptions for prepayments, servicing cost and other factors.
Federal Home Loan Bank Stock FHLB of Chicago stock is carried at cost, which is its redeemable
(fair) value, since the market for this stock is restricted.
Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and
payable approximate their fair value.
Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for
demand deposits equal book value. Fair values for other deposits are estimated using a discounted
cash flow calculation that applies current market borrowing interest rates to a schedule of
aggregated expected monthly maturities on deposits. The advance payments by borrowers for taxes
and insurance are equal to their carrying amounts at the reporting date.
Borrowings The fair value of long-term borrowings is estimated using discounted cash flow
calculations with the discount rates equal to interest rates currently being offered for borrowings
with similar terms and maturities. The carrying value on short-term borrowings approximates fair
value.
The carrying values and fair values of the Companys financial instruments are presented in the
following table as of the indicated dates.
December 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Cash and cash equivalents |
$ | 232,832 | $ | 232,832 | $ | 227,658 | $ | 227,658 | ||||||||
Securities available-for-sale |
663,257 | 663,257 | 1,480,952 | 1,480,952 | ||||||||||||
Loans held-for-sale |
37,819 | 37,819 | 13,534 | 13,534 | ||||||||||||
Loans receivable, net |
1,323,569 | 1,213,460 | 1,506,056 | 1,483,981 | ||||||||||||
Mortgage servicing rights |
7,769 | 9,368 | 6,899 | 7,720 | ||||||||||||
Federal Home Loan Bank stock |
46,092 | 46,092 | 46,092 | 46,092 | ||||||||||||
Accrued interest receivable |
7,449 | 7,449 | 13,321 | 13,321 | ||||||||||||
Deposit liabilities |
2,078,310 | 1,967,742 | 2,137,508 | 2,061,164 | ||||||||||||
Borrowings |
149,934 | 163,521 | 906,979 | 994,300 | ||||||||||||
Advance payments by borrowers |
2,697 | 2,697 | 2,508 | 2,508 | ||||||||||||
Accrued interest payable |
2,428 | 2,428 | 4,228 | 4,228 |
Excluded from the above table are off-balance-sheet items (refer to Note 13) as the fair value of
these items is not significant.
Fair value is 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. The Company utilizes
market data or 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. The
Company primarily applies the market approach for recurring value measurements and endeavors to
utilize the best available information. Accordingly, the Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs. The
Company is able to classify fair value balances based on the observability of those inputs. GAAP
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices
101
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
in active markets for identical assets or liabilities (Level 1), the next highest priority is given
to prices based on models, methodologies, and/or management judgments that rely on direct or
indirect observable inputs (Level 2), and the lowest priority to prices derived from models,
methodologies, and/or management judgments that rely on significant unobservable inputs (Level 3).
The following table segregates by fair value hierarchy (i.e., Level 1, 2, or 3) all of the
Companys assets and liabilities as of December 31, 2009 and 2008, that are measured at fair value
on a recurring basis.
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans held-for-sale |
| $ | 37,819 | | $ | 37,819 | ||||||||||
Securities available-for-sale: |
||||||||||||||||
Investment securities |
$ | 22,054 | 205,970 | | 228,024 | |||||||||||
Mortgage-related securities |
| 435,234 | | 435,234 | ||||||||||||
Total |
$ | 22,054 | $ | 679,023 | | $ | 701,077 | |||||||||
December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans held-for-sale |
| $ | 13,534 | | $ | 13,534 | ||||||||||
Securities available-for-sale: |
||||||||||||||||
Investment securities |
$ | 22,312 | 591,792 | | 614,104 | |||||||||||
Mortgage-related securities |
| 866,848 | | 866,848 | ||||||||||||
Total |
$ | 22,312 | $ | 1,472,174 | | $ | 1,494,486 | |||||||||
For purposes of the impairment testing of mortgage servicing rights, the underlying mortgage loans
are stratified into pools by product type and, within product type, by interest rates. Pools with
an amortized cost basis greater than fair value are carried at fair value in the Companys
financial statements. Although not included in the above table, the Company considers the fair
value of mortgage servicing rights to be Level 3 in the fair value hierarchy. Pools determined to
be impaired at December 31, 2010, had an amortized cost basis of $390 and a fair value of $384 as
of that date. Accordingly, the Company recorded a valuation allowance of $6 as of December 31,
2010, as well as a corresponding charge to earnings equal to the change in this valuation allowance
during the twelve months then ended.
Prior to 2009, loans held-for-sale are recorded at lower of cost or fair value and therefore were
reported at fair value on a non-recurring basis. For non-accrual loans greater than an established
threshold and individually evaluated for impairment and all renegotiated loans, impairment is
measured based on: (1) the fair value of the loan or the fair value of the collateral less
estimated selling costs (collectively the collateral value method) or (2) the present value of the
estimated cash flows discounted at the loans original effective interest rate (the discounted cash
flow method). The resulting valuation allowance, if any, is a component of the allowance for loan
losses. The discounted cash flow method is a fair value measure. For the collateral value method,
the Company generally obtains appraisals to support the fair value of collateral underlying the
loans. Appraisals incorporate measures such as recent sales prices for comparable properties and
costs of construction. The Company considers these fair values to be Level 3 in the fair value
hierarchy. For those loans individually evaluated for impairment using the collateral value
method, a valuation allowance of $31,571 was recorded for loans with a recorded investment of
$149,665 at December 31, 2009. These comparable amounts at December 31, 2009, were $6,033 and
$16,299, respectively.
102
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower
of cost or fair value less estimated costs to sell. In determining fair value, the Company
generally obtains appraisals to support the fair value of foreclosed properties. The Company
considers these fair values to be Level 3 in the fair value hierarchy. As of December 31, 2010,
$17,742 in foreclosed properties were valued at collateral value compared to $10,442 at December
31, 2009.
15. Condensed Parent Company Only Financial Statements
STATEMENT OF FINANCIAL CONDITION
December 31 | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 4,474 | $ | 8,787 | ||||
Investment in subsidiary |
308,354 | 391,670 | ||||||
Receivable from ESOP |
| 347 | ||||||
Other assets |
125 | 1,744 | ||||||
Total assets |
$ | 312,953 | $ | 402,548 | ||||
Liabilities and shareholders equity |
||||||||
Other liabilities |
| $ | 71 | |||||
Shareholders equity: |
||||||||
Common stock$0.01 par value: |
||||||||
Authorized200,000,000 shares in 2010 and 2009 |
||||||||
Issued78,783,849 shares in 2010 and 2009
|
||||||||
Outstanding45,769,443 in 2010 and 46,165,635 shares in 2009 |
$ | 788 | 788 | |||||
Additional paid-in capital |
494,377 | 499,376 | ||||||
Retained earnings |
191,238 | 272,518 | ||||||
Unearned ESOP shares |
| (347 | ) | |||||
Accumulated other comprehensive income |
(6,897 | ) | (2,406 | ) | ||||
Treasury stock33,014,406 shares in 2010 and 32,618,214 shares in 2009 |
(366,553 | ) | (367,452 | ) | ||||
Total shareholders equity |
312,953 | 402,477 | ||||||
Total liabilities and shareholders equity |
$ | 312,953 | $ | 402,548 | ||||
103
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Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
(Dollars in Thousands, Except Per Share Amounts)
15. Condensed Parent Company Only Financial Statements (continued)
STATEMENT OF INCOME
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Total income |
$ | 43 | $ | 207 | $ | 354 | ||||||
Total expenses |
846 | 1,077 | 1,460 | |||||||||
Income (loss) before income taxes |
(803 | ) | (870 | ) | (1,106 | ) | ||||||
Income tax expense (benefit) |
(313 | ) | (338 | ) | (387 | ) | ||||||
Income (loss) before equity in earnings of subsidiary |
(490 | ) | (532 | ) | (719 | ) | ||||||
Equity in earnings of subsidiary |
(72,150 | ) | 14,257 | 17,875 | ||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
STATEMENT OF CASH FLOWS
Year ended December 31 | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating activities: |
||||||||||||
Net income (loss) |
$ | (72,640 | ) | $ | 13,725 | $ | 17,156 | |||||
Adjustment to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Equity in earnings of Bank subsidiary |
72,150 | (14,257 | ) | (17,875 | ) | |||||||
Stock-based compensation |
39 | 253 | 248 | |||||||||
Change in other operating activities and liabilities |
1,547 | 493 | (2,076 | ) | ||||||||
Net cash provided (used) by operating activities |
1,096 | 214 | (2,547 | ) | ||||||||
Investing activities: |
||||||||||||
Dividends from Bank subsidiary |
7,450 | 19,700 | 26,400 | |||||||||
Other investing activities |
78 | (664 | ) | (547 | ) | |||||||
Net cash provided by investing activities |
7,528 | 19,036 | 25,853 | |||||||||
Financing activities: |
||||||||||||
Cash dividends |
(8,640 | ) | (15,033 | ) | (16,442 | ) | ||||||
Purchase of treasury stock |
(5,029 | ) | (14,397 | ) | (29,927 | ) | ||||||
Proceeds from exercise of stock options |
359 | 556 | 3,313 | |||||||||
Excess tax benefit from exercise of stock options |
26 | 276 | 379 | |||||||||
Cash received for MRP grants from Bank subsidiary |
| | 9,997 | |||||||||
Payments received on ESOP |
347 | 900 | 900 | |||||||||
Net cash used in financing activities |
(12,937 | ) | (27,698 | ) | (31,780 | ) | ||||||
Decrease in cash and cash equivalents |
(4,313 | ) | (8,448 | ) | (8,474 | ) | ||||||
Cash and cash equivalents at beginning of year |
8,787 | 17,235 | 25,709 | |||||||||
Cash and cash equivalents at end of year |
$ | 4,474 | $ | 8,787 | $ | 17,235 | ||||||
104
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The management of the Company, including its Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of
December 31, 2010, that the disclosure controls and procedures were effective.
Change in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal
quarter of the year to which this report relates that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
The internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. The Companys internal control over financial reporting
includes those policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the Company are being made only in accordance with authorization of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material
effect on the financial statements.
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. The Companys management, including its Chief Executive Officer and
Chief Financial Officer, has assessed the effectiveness of its internal control over financial
reporting as of December 31, 2010, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon its assessment and those criteria, management believes
that as of December 31, 2010, the Companys internal control over financial reporting was
effective.
Deloitte & Touche LLP, the Companys independent registered public accounting firm, has audited the
consolidated financial statements included in this Annual Report on Form 10-K and, as a part of its
audit, has issued an attestation report on the effectiveness of the Companys internal control over
financial reporting. That attestation report can be found on the following page as part of this
Item 9A.
105
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the internal control over financial reporting of Bank Mutual Corporation and
subsidiaries (the Company) as of December 31, 2010, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2010 of the Company and our report dated March 4, 2011 expressed an unqualified opinion on
those financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 4, 2011
March 4, 2011
106
Table of Contents
Table of Contents
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Information in response to this item is incorporated herein by reference to Election of
Directors, Section 16(a) Beneficial Ownership Reporting Compliance, and Executive Officers in
the Companys definitive Proxy Statement for its Annual Meeting of Shareholders on May 2, 2011 (the
2011 Annual Meeting Proxy Statement).
Item 11. Executive Compensation
Information in response to this item is incorporated by reference to Election of DirectorsBoard
Meetings and CommitteesCompensation Committee Interlocks and Insider Participation, Directors
Compensation, Compensation Discussion and Analysis, Compensation Committee Report on Executive
Compensation, Executive Compensation, and Risk Management and Compensation in the 2011 Annual
Meeting Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in response to this item is incorporated by reference to Security Ownership of Certain
Beneficial Owners in the 2011 Annual Meeting Proxy Statement.
The following chart gives aggregate information regarding grants under all equity compensation
plans of the Company through December 31, 2010.
Number of securities | ||||||
remaining available | ||||||
Number of securities | for future issuance under | |||||
to be issued upon | Weighted-average | equity compensation | ||||
exercise of | exercise price of | plans (excluding | ||||
outstanding options, | outstanding options, | securities reflected | ||||
Plan category | warrants and rights (1) | warrants and rights | in 1st column) (2) | |||
Equity compensation plans
approved by security
holders |
2,462,464 | $9.0184 | 2,100,083 | |||
Equity compensation
plans not
approved by security
holders |
None | None | None |
(1) | Represents options granted under the 2001 Plan or 2004 Plan, which plans were approved by Company shareholders in 2001 and 2004, respectively. | |
(2) | Represents options and restricted stock which may be granted under the 2004 Plan. No further awards may be made under the 2001 Plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information in response to this item is incorporated by reference to Election of DirectorsBoard
Meetings and Committees and Certain Transactions and Relationships with the Company in the 2011
Annual Meeting Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information in response to this item is incorporated by reference to Independent Registered Public
Accounting Firm in the 2011 Annual Meeting Proxy Statement.
108
Table of Contents
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the Report:
1. and 2. Financial Statements and Financial Statement Schedules.
The following consolidated financial statements of the Company and subsidiaries are filed as part
of this report under Item 8. Financial Statements and Supplementary Data:
| Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, on the consolidated financial statements. | ||
| Consolidated Statements of Financial ConditionAs of December 31, 2010 and 2009. | ||
| Consolidated Statements of IncomeYears Ended December 31, 2010, 2009, and 2008. | ||
| Consolidated Statements of EquityYears Ended December 31, 2010, 2009, and 2008. | ||
| Consolidated Statements of Cash FlowsYears Ended December 31, 2010, 2009, and 2008. | ||
| Notes to Consolidated Financial Statements. |
All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) Exhibits. Refer to the Exhibit Index following the signature page of this report, which is
incorporated herein by reference. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report is identified in the Exhibit Index by an
asterisk following its exhibit number.
109
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BANK MUTUAL CORPORATION | ||||||
March 4, 2011 |
||||||
By: | /s/ Michael T. Crowley, Jr.
|
|||||
Chairman and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Michael T. Crowley, Jr., Michael W.
Dosland, Richard L. Schroeder or any of them, as attorneys-in-fact with full power of substitution,
to execute in the name and on behalf of such person, individually, and in each capacity stated
below or otherwise, and to file, any and all amendments to this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated.*
Signature and Title
/s/ Michael T. Crowley, Jr.
|
/s/ Thomas H. Buestrin
|
|||||
Chief Executive Officer, and Director |
||||||
(Principal Executive Officer) |
||||||
/s/ David A. Baumgarten
|
/s/ Mark C. Herr
|
|||||
/s/ Michael W. Dosland
Chief Financial Officer (Principal Financial Officer) |
/s/ Thomas J. Lopina, Sr.
|
|||||
/s/ Richard L. Schroeder
|
/s/ William J. Mielke
|
|||||
Controller (Principal Accounting Officer) |
||||||
/s/ David C. Boerke
|
/s/ Robert B. Olson
|
|||||
/s/ Richard A. Brown
|
/s/ Jelmer G. Swoboda
|
* | Each of the above signatures is affixed as of March 4, 2011. |
110
Table of Contents
BANK MUTUAL CORPORATION
(Bank Mutual Corporation or the Company) **
Commission File No. 000-32107
(Bank Mutual Corporation or the Company) **
Commission File No. 000-32107
EXHIBIT INDEX
TO
2010 REPORT ON FORM 10-K
TO
2010 REPORT ON FORM 10-K
The following exhibits are filed with, or incorporated by reference in, this Report on Form 10-K
for the year ended December 31, 2010:
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
3(i)
|
Restated Articles of Incorporation, as last amended May 29, 2003, of Bank Mutual Corporation (the Articles) | Exhibit 3(i) to the Companys Registration Statement on Form S-1, Registration No. 333-105685 | ||||
3(ii)
|
Bylaws, as last amended May 7, 2007, of Bank Mutual Corporation | Exhibit 3.1 to the Companys Report on Form 8-K dated May 7, 2007 | ||||
4.1
|
The Articles | Exhibit 3(i) above | ||||
10.1*
|
Bank Mutual Corporation Savings Restoration Plan and Bank Mutual Corporation ESOP Restoration Plan | Exhibit 10.1(b) to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (2003 10-K) | ||||
10.2*
|
Bank Mutual Corporation Outside Directors Retirement Plan |
Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2009 (2009 10-K) | ||||
10.3*
|
Mutual Savings Bank Executive Excess Benefit Plan *** |
Exhibit 10.3 to Bank Mutual Corporations Registration Statement on Form S-1, Registration No. 333-39362 (2000 S-1) | ||||
10.4*
|
Agreement regarding deferred compensation dated May 16, 1988 between Mutual Savings Bank and Michael T. Crowley, Sr. | Exhibit 10.4 to 2000 S-1 | ||||
10.5(a)*
|
Employment Agreement between Mutual Savings Bank and Michael T. Crowley Jr. dated December 21, 1993 (continuing , as amended, through 2013) | Exhibit 10.5(a) to 2000 S-1 | ||||
10.5(b)*
|
Amendment thereto dated February 17, 1998 | Exhibit 10.5(b) to 2000 S-1 | ||||
10.6(a)*
|
Form of Employment Agreements of Mr. Anderegg and Mr. Callen with Mutual Savings Bank, each dated as of January 1, 2001 (superseded) | Exhibit 10.7 to 2000 S-1 |
111
Table of Contents
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
10.6(b)*
|
Form of Amendment thereto, dated as of May 2006 (superseded) | Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 | ||||
10.6(c)*
|
Form of Employment Agreement (with Messrs. Anderegg, Dosland, Larson, and Mayne) + | X | ||||
10.7(a)*
|
Employment Agreement of Mr. Dosland with Bank Mutual dated as of August 18, 2008 (superseded) | Exhibit 10.1 to the Companys Report on Form 8-K dated August 19, 2008 | ||||
10.7(b)*
|
Amendment to Employment Agreement dated August 18, 2008, between Bank Mutual and Michael W. Dosland (superseded) | Exhibit 10.2 to the Companys Report on Form 8-K dated August 19, 2008 | ||||
10.8*
|
Employment Agreement of Mr. Baumgarten with Bank Mutual dated as of April 5, 2010 (continuing through 2012) | Exhibit 10.1 to the Companys Report on Form 8-K dated April 5, 2010 | ||||
10.9(a)*
|
Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank | Exhibit 10.10(a) to Bank Mutuals Annual Report on Form 10-K for the year ended December 31, 2000 | ||||
10.9(b)*
|
Amendment No. 1 thereto | Exhibit 10.3.2 to First Northern Capital Corp.s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 | ||||
10.10*
|
Bank Mutual Corporation 2001 Stock Incentive Plan, as amended May 7, 2002 (superseded, except as to outstanding awards) | Exhibit 10.1 to Bank Mutual Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 | ||||
10.11(a)*
|
Bank Mutual Corporation 2004 Stock Incentive Plan |
Appendix A to Proxy Statement for 2004 Annual Meeting of Shareholders | ||||
10.11(b)(i)*
|
Form of Option Agreement thereunderBank Mutual Corporation Director Stock Option Agreement (superseded) | Exhibit 10.1(b) to the Companys Report on Form 10-Q for the quarter ended June 30, 2004 (6/30/04 10-Q) | ||||
10.11(b)(ii)*
|
2011 updated Form of Bank Mutual Director Stock Option Agreement ++ | X | ||||
10.11(c)(i)*
|
Form of Option Agreement thereunderBank Mutual Corporation Incentive Stock Option Agreement (superseded) | Exhibit 10.1(c ) to the 6/30/04 10-Q |
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Table of Contents
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
10.11(c)(ii)*
|
2010 updated Bank Mutual Corporation Incentive Stock Option Agreement ++ | X | ||||
10.11(d)*
|
Form of Restricted Stock Agreement thereunder Bank Mutual Corporation Directors Management Recognition Award | Exhibit 10.1(d) to the 6/30/04 10-Q | ||||
10.11(e)(i)*
|
Form of Restricted Stock Agreement thereunderBank Mutual Corporation Officers Management Recognition Award | Exhibit 10.1(e) to the 6/30/04 10-Q | ||||
10.11(e)(ii)*
|
2010 updated Form of Bank Mutual Corporation Officers Management Recognition Award ++ | X | ||||
10.12*
|
Bank Mutual Corporation Management Incentive Compensation Plan + | Exhibit 10.11 to 2009 10-K | ||||
21.1
|
List of Subsidiaries | X | ||||
23.1
|
Consent of Deloitte & Touche LLP | X | ||||
24.1
|
Powers of Attorney | Signature Page of this Report | ||||
31.1
|
Sarbanes-Oxley Act Section 302 Certification signed by the Chairman and Chief Executive Officer of Bank Mutual Corporation | X | ||||
31.2
|
Sarbanes-Oxley Act Section 302 Certification signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation | X | ||||
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chairman and Chief Executive Officer of Bank Mutual Corporation | X | ||||
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation | X |
* | Designates management or compensatory agreements, plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of Form 10-K. | |
** | As used in this Exhibit Index, references to Bank Mutual Corporation and the Company also include, where appropriate, Bank Mutual Corporation, a federally-chartered corporation and the predecessor of the current registrant. | |
*** | Mutual Savings Bank is now known as Bank Mutual. | |
+ | Included non-material changes from prior versions used with Messrs. Anderegg and Dosland, consistent with the compensation-related disclosures in the Companys prior annual meeting proxy statements. | |
++ | Includes non-material changes form prior version, consistent with the 2004 Plan. |
113