Attached files
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EX-31.1 - EX-31.1 - BANK MUTUAL CORP | c64490exv31w1.htm |
EX-32.1 - EX-32.1 - BANK MUTUAL CORP | c64490exv32w1.htm |
EX-31.2 - EX-31.2 - BANK MUTUAL CORP | c64490exv31w2.htm |
EX-32.2 - EX-32.2 - BANK MUTUAL CORP | c64490exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2011 |
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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) |
(IRS Employer Identification No.) |
4949 West Brown Deer Road
Milwaukee, Wisconsin 53223
(414) 354-1500
(Address, including Zip Code, and telephone number,
including area code, of registrants principal executive offices)
Milwaukee, Wisconsin 53223
(414) 354-1500
including area code, of registrants principal executive offices)
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, and (2)
has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate 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 | Small 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
Exchange Act).
Yes o No þ
The number of shares outstanding of the issuers common stock, $0.01 par value per share, was
45,989,845 shares, at May 4, 2011.
BANK MUTUAL CORPORATION
FORM 10-Q QUARTERLY REPORT
Table of Contents
2
Table of Contents
PART I
Item 1. Financial Statements
Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Financial Condition
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 26,498 | $ | 48,393 | ||||
Interest-earning deposits |
57,377 | 184,439 | ||||||
Cash and cash equivalents |
83,875 | 232,832 | ||||||
Securities available-for-sale, at fair value: |
||||||||
Investment securities |
206,037 | 228,023 | ||||||
Mortgage-related securities |
576,522 | 435,234 | ||||||
Loans held-for-sale, net |
3,908 | 37,819 | ||||||
Loans receivable, net |
1,322,727 | 1,323,569 | ||||||
Foreclosed properties and repossessed assets |
22,522 | 19,293 | ||||||
Goodwill |
52,570 | 52,570 | ||||||
Mortgage servicing rights, net |
7,862 | 7,769 | ||||||
Other assets |
253,113 | 254,709 | ||||||
Total assets |
$ | 2,529,136 | $ | 2,591,818 | ||||
Liabilities and equity |
||||||||
Liabilities: |
||||||||
Deposit liabilities |
$ | 2,017,996 | $ | 2,078,310 | ||||
Borrowings |
149,662 | 149,934 | ||||||
Advance payments by borrowers for taxes and insurance |
11,948 | 2,697 | ||||||
Other liabilities |
34,028 | 44,999 | ||||||
Total liabilities |
2,213,634 | 2,275,940 | ||||||
Equity: |
||||||||
Preferred stock $.01 par value: |
||||||||
Authorized 20,000,000 shares in 2011 and 2010
Issued and outstanding none in 2011 and 2010 |
| | ||||||
Common stock $.01 par value: |
||||||||
Authorized 200,000,000 shares in 2011 and 2010
Issued 78,783,849 shares in 2011 and 2010
Outstanding 45,818,882 shares in 2011 and 45,769,443 in 2010 |
788 | 788 | ||||||
Additional paid-in capital |
493,972 | 494,377 | ||||||
Retained earnings |
190,906 | 191,238 | ||||||
Accumulated other comprehensive loss |
(7,131 | ) | (6,897 | ) | ||||
Treasury stock 32,964,967 shares in 2011 and 33,014,406 in 2010 |
(365,945 | ) | (366,553 | ) | ||||
Total shareholders equity |
312,590 | 312,953 | ||||||
Non-controlling interest in real estate partnership |
2,912 | 2,925 | ||||||
Total equity including non-controlling interest |
315,502 | 315,878 | ||||||
Total liabilities and equity |
$ | 2,529,136 | $ | 2,591,818 | ||||
Refer to Notes to Unaudited Condensed Consolidated Financial Statements
3
Table of Contents
Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
Three Months Ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands, | ||||||||
except per share data) | ||||||||
Interest income: |
||||||||
Loans |
$ | 17,873 | $ | 20,857 | ||||
Investment securities |
1,344 | 4,731 | ||||||
Mortgage-related securities |
3,795 | 6,359 | ||||||
Interest-earning deposits |
51 | 45 | ||||||
Total interest income |
23,063 | 31,992 | ||||||
Interest expense: |
||||||||
Deposit liabilities |
5,469 | 8,210 | ||||||
Borrowings |
1,770 | 9,666 | ||||||
Advance payments by borrowers for taxes and insurance |
1 | 1 | ||||||
Total interest expense |
7,240 | 17,877 | ||||||
Net interest income |
15,823 | 14,115 | ||||||
Provision for loan losses |
3,180 | 3,366 | ||||||
Net interest income after provision for loan losses |
12,643 | 10,749 | ||||||
Non-interest income: |
||||||||
Service charges on deposits |
1,468 | 1,390 | ||||||
Brokerage and insurance commissions |
614 | 586 | ||||||
Loan related fees and servicing revenue, net |
251 | 158 | ||||||
Gain on loan sales activities, net |
596 | 653 | ||||||
Gain on investments, net |
1,113 | 4,384 | ||||||
Other non-interest income |
1,753 | 1,797 | ||||||
Total non-interest income |
5,795 | 8,968 | ||||||
Non-interest expense: |
||||||||
Compensation, payroll taxes, and other employee benefits |
9,399 | 8,713 | ||||||
Occupancy and equipment |
2,998 | 2,985 | ||||||
Federal insurance premiums and special assessment |
1,022 | 1,011 | ||||||
Loss on foreclosed real estate, net |
685 | 955 | ||||||
Other non-interest expense |
2,946 | 2,898 | ||||||
Total non-interest expense |
17,050 | 16,562 | ||||||
Income before income taxes |
1,388 | 3,155 | ||||||
Income tax expense |
361 | 1,051 | ||||||
Net income before non-controlling interest |
1,027 | 2,104 | ||||||
Net loss (income) attributable to non-controlling interest |
13 | (1 | ) | |||||
Net income |
$ | 1,040 | $ | 2,103 | ||||
Per share data: |
||||||||
Earnings per share basic |
$ | 0.02 | $ | 0.05 | ||||
Earnings per share diluted |
$ | 0.02 | $ | 0.05 | ||||
Cash dividends per share paid |
$ | 0.03 | $ | 0.07 | ||||
Refer to Notes to Unaudited Condensed Consolidated Financial Statements
4
Table of Contents
Bank Mutual Corporations and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
Accumulated | Non-Controlling | |||||||||||||||||||||||||||||||
Additional | Unearned | Other | Interest in | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Real Estate | ||||||||||||||||||||||||||
Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Partnership | Total | |||||||||||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | 788 | $ | 494,377 | $ | 191,238 | | $ | (6,897 | ) | $ | (366,553 | ) | $ | 2,925 | $ | 315,878 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 1,040 | | | | | 1,040 | ||||||||||||||||||||||||
Net loss attributable to non-controlling interest |
| | | | | | (13 | ) | (13 | ) | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized gain on
securities available-for-sale, net of
deferred income taxes of $331 |
| | | | 495 | | | 495 | ||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $(446) |
| | | | (667 | ) | | | (667 | ) | ||||||||||||||||||||||
Pension asset, net of deferred income
of $(41) |
| | | | (62 | ) | | | (62 | ) | ||||||||||||||||||||||
Total comprehensive income |
794 | |||||||||||||||||||||||||||||||
Issuance of management recognition plan shares |
| (123 | ) | | | | 123 | | | |||||||||||||||||||||||
Exercise of stock options |
| (352 | ) | | | | 485 | | 133 | |||||||||||||||||||||||
Share based payments |
| 70 | | | | | | 70 | ||||||||||||||||||||||||
Cash dividends ($0.03 per share) |
| | (1,372 | ) | | | | | (1,372 | ) | ||||||||||||||||||||||
Balance at March 31, 2011 |
$ | 788 | $ | 493,972 | $ | 190,906 | | $ | (7,131 | ) | $ | (365,945 | ) | $ | 2,912 | $ | 315,502 | |||||||||||||||
Balance at January 1, 2010 |
$ | 788 | $ | 499,376 | $ | 272,518 | $ | (347 | ) | $ | (2,406 | ) | $ | (367,452 | ) | $ | 2,924 | $ | 405,401 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 2,103 | | | | | 2,103 | ||||||||||||||||||||||||
Net income attributable to non-controlling
interest |
| | | | | | 1 | 1 | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized gain on
securities available-for-sale, net of
deferred income taxes of $2,485 |
| | | | 3,709 | | | 3,709 | ||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $(1,758) |
| | | | (2,626 | ) | | | (2,626 | ) | ||||||||||||||||||||||
Total comprehensive income |
3,187 | |||||||||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (4,527 | ) | | (4,527 | ) | ||||||||||||||||||||||
Committed ESOP shares |
| 126 | | 87 | | | | 213 | ||||||||||||||||||||||||
Share based payments |
| 28 | | | | | | 28 | ||||||||||||||||||||||||
Cash dividends ($0.07 per share) |
| | (3,203 | ) | | | | | (3,203 | ) | ||||||||||||||||||||||
Balance at March 31, 2010 |
$ | 788 | $ | 499,530 | $ | 271,418 | $ | (260 | ) | $ | (1,323 | ) | $ | (371,979 | ) | $ | 2,925 | $ | 401,099 | |||||||||||||
Refer to Notes to Unaudited Condensed Consolidated Financial Statements
5
Table of Contents
Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Operating activities: |
||||||||
Net income |
$ | 1,040 | $ | 2,103 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||
Net provision for loan losses |
3,180 | 3,366 | ||||||
Net loss on foreclosed real estate |
685 | 955 | ||||||
Provision for depreciation |
649 | 651 | ||||||
Amortization of intangibles |
102 | 101 | ||||||
Amortization of mortgage servicing rights |
516 | 476 | ||||||
Increase (decrease) in valuation allowance on MSRs |
(6 | ) | 76 | |||||
Stock-based compensation expense |
70 | 241 | ||||||
Net premium amortization on securities |
530 | 814 | ||||||
Loans originated for sale |
(24,311 | ) | (46,728 | ) | ||||
Proceeds from loan sales |
58,215 | 46,242 | ||||||
Net gain on loan sales activities |
(596 | ) | (653 | ) | ||||
Net gain on sale of investments |
(1,113 | ) | (4,384 | ) | ||||
Increase (decrease) in non-controlling interest in real estate partnership |
(13 | ) | 1 | |||||
(Increase) decrease in accrued interest receivable |
(668 | ) | 778 | |||||
Increase (decrease) in other liabilities |
4,205 | (27,397 | ) | |||||
(Increase) decrease in other assets |
(11,033 | ) | 3,439 | |||||
Net cash provided (used) by operating activities |
31,452 | (19,919 | ) | |||||
Investing activities: |
||||||||
Proceeds from maturities of investment securities |
| 206,000 | ||||||
Purchases of investment securities |
| (457,628 | ) | |||||
Purchases of mortgage-related securities |
(168,832 | ) | (30,145 | ) | ||||
Principal repayments on mortgage-related securities |
27,875 | 55,255 | ||||||
Proceeds from sale of investment securities |
21,950 | 171,945 | ||||||
Net (increase) decrease in loans receivable |
(9,060 | ) | 31,755 | |||||
Proceeds from sale of foreclosed properties |
677 | 1,510 | ||||||
Net purchases of premises and equipment |
(445 | ) | (930 | ) | ||||
Net cash used by investing activities |
(127,835 | ) | (22,238 | ) | ||||
(continued) |
6
Table of Contents
Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Financing activities: |
||||||||
Net decrease in deposits liabilities |
$ | (60,314 | ) | $ | (44,756 | ) | ||
Repayments of borrowings |
(272 | ) | (259 | ) | ||||
Net increase in advance payments by borrowers for taxes and insurance |
9,251 | 9,294 | ||||||
Proceeds from exercise of stock options |
126 | | ||||||
Excess tax benefit from exercise of stock options |
7 | | ||||||
Cash dividends |
(1,372 | ) | (3,203 | ) | ||||
Purchase of treasury stock |
| (4,527 | ) | |||||
Net cash used by financing activities |
(52,574 | ) | (43,451 | ) | ||||
Decrease in cash and cash equivalents |
(148,957 | ) | (85,608 | ) | ||||
Cash and cash equivalents at beginning of period |
232,832 | 227,658 | ||||||
Cash and cash equivalents at end of period |
$ | 83,875 | $ | 142,050 | ||||
Supplemental information: |
||||||||
Cash paid in period for: |
||||||||
Interest on deposit liabilities and borrowings |
$ | 8,826 | $ | 17,710 | ||||
Income taxes |
| 56 | ||||||
Non-cash transactions: |
||||||||
Loans transferred to foreclosed properties and repossessed assets |
6,722 | 7,324 |
Refer to Notes to Unaudited Condensed Consolidated Financial Statements
7
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the accounts of Bank Mutual
Corporation (the Company), its wholly-owned subsidiary Bank Mutual (the Bank), and the Banks
subsidiaries.
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with United States generally accepted accounting principles (GAAP) for interim
financial information, Rule 10-01 of Regulation S-X, and the instructions to Form 10-Q. The
financial statements do not include all of the information and footnotes required by GAAP for
complete financial information. However, in the opinion of management, all adjustments (consisting
of normal recurring entries) necessary for a fair presentation of operations, cash flows, and
financial position have been included in the accompanying financial statements. This report should
be read in conjunction with the Companys 2010 Annual Report on Form 10-K. Operating results for
the three months ended March 31, 2011, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2011.
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 was the first quarter of 2011 for the Company. The Companys adoption of the new
guidance had no impact on its financial condition, results of operations, or liquidity.
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 had no impact on the
Companys financial condition, results of operations, or liquidity.
In April 2011 the FASB issued new accounting guidance related to a creditors determination of
whether a loan restructuring is a troubled debt restructuring. The new guidance is effective for
the first interim period beginning on or after June 15, 2011, which will be the third quarter of
2011 for the Company. The Companys adoption of this new guidance is not expected to have a
material impact on its financial condition, results of operations, or liquidity, although it will
affect matters that will be disclosed in the financial statements.
The Company describes all of its critical and/or significant accounting policies, judgments, and
estimates in Note 1 of its Audited Consolidated Financial Statements contained in its 2010 Annual
Report on Form 10-K. Particular attention should be paid to the Companys allowance for losses on
loans, which requires significant management judgments and/or estimates because of the inherent
uncertainties surrounding this area and/or the subjective nature of the area. Information
regarding the impact loss allowances have had on the Companys financial condition and results of
operations for the three month periods ended March 31, 2011 and 2010, can be found in Note 3,
Loans Receivable, below.
Significant judgments and/or estimates are also made in accounting for the Companys goodwill and
other-than-temporary impairment (OTTI) of its securities available-for-sale. The Company updated
its annual goodwill impairment analysis during the three months ended March 31, 2011. In the
judgment of management there was no impairment of the Companys goodwill as of that date.
Information regarding the impact OTTI has had on the Companys financial condition and results
of operations for the three month periods ended March 31, 2011 and 2010, can be found in Note 2,
Securities Available-for-Sale, below.
8
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(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:
March 31, 2011 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Investment securities: |
||||||||||||||||
U.S. government and federal obligations |
$ | 205,824 | $ | 516 | $ | (303 | ) | $ | 206,037 | |||||||
Mortgage-related securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation |
420,836 | 1,022 | (1,343 | ) | 420,515 | |||||||||||
Federal National Mortgage Association |
72,414 | 352 | (158 | ) | 72,608 | |||||||||||
Government National Mortgage Association |
1,546 | 7 | (5 | ) | 1,548 | |||||||||||
Private-label CMOs |
84,534 | 724 | (3,407 | ) | 81,851 | |||||||||||
Total mortgage-related securities |
579,330 | 2,105 | (4,913 | ) | 576,522 | |||||||||||
Total securities available-for-sale |
$ | 785,154 | $ | 2,621 | $ | (5,216 | ) | $ | 782,559 | |||||||
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 | |||||||||||
Government National Mortgage Association |
2,711 | 44 | | 2,755 | ||||||||||||
Private-label CMOs |
90,741 | 682 | (3,821 | ) | 87,602 | |||||||||||
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 | |||||||
9
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
The following tables summarize available-for-sale securities by amount of time the securities have
had a gross unrealized loss as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||||||||||
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Estimated | Unrealized | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||||
Loss | Number of | Fair | Loss | Number of | Fair | Loss | Fair | |||||||||||||||||||||||||
Amount | Securities | Value | Amount | Securities | Value | Amount | Value | |||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||
U.S. Government and federal
obligations |
$ | 303 | 3 | $ | 34,697 | | | | $ | 303 | $ | 34,697 | ||||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage
Corporation |
1,343 | 14 | 252,776 | | | | 1,343 | 252,776 | ||||||||||||||||||||||||
Federal National Mortgage
Association |
158 | 3 | 49,039 | | | | 158 | 49,039 | ||||||||||||||||||||||||
Government National
Mortgage Corporation |
3 | 2 | 896 | $ | 2 | 1 | $ | 597 | 5 | 1,493 | ||||||||||||||||||||||
Private-label CMOs |
| | | 3,407 | 19 | 46,897 | 3,407 | 46,897 | ||||||||||||||||||||||||
Total mortgage-related
securities |
1,504 | 19 | 302,711 | 3,409 | 20 | 47,494 | 4,913 | 350,205 | ||||||||||||||||||||||||
Total |
$ | 1,807 | 22 | $ | 337,406 | $ | 3,409 | 20 | $ | 47,494 | $ | 5,216 | $ | 384,902 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Estimated | Unrealized | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||||
Loss | Number of | Fair | Loss | Number 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 | ||||||||||||||||||||
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 | ||||||||||||||||||
The Company determined that the unrealized losses reported for its investment and mortgage-related
securities as of March 31, 2011, and December 31, 2010, 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 portion of the Companys securities that were in an unrealized loss position at March 31, 2011,
and/or December 31, 2010, 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-
10
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
than-temporarily impaired as of those dates. The Company also determined that none of its
private-label collateralized mortgage obligations (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. In addition, as of March 31, 2011, the Company had private-label
CMOs, with an aggregate carrying value of $36,458 and unrealized loss of $2,057, 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 March 31, 2011, or December 31, 2010.
Results of operations included gross realized gains on the sale of securities available-for-sale of
$1,113, and $4,384 for the three month periods ending March 31, 2011 and 2010, respectively. None
of these periods included gross realized losses on the sale of securities available-for-sale.
The amortized cost and fair values of securities by contractual maturity at March 31, 2011, are
shown below. Actual maturities may differ from contractual maturities because issuers have the
right to call or prepay obligations without penalty.
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less |
| | ||||||
Due after one year through five years |
| | ||||||
Due after five years through ten years |
$ | 157,824 | $ | 158,032 | ||||
Due after ten years |
48,000 | 48,005 | ||||||
Mortgage-related securities |
579,330 | 576,522 | ||||||
Total securities available for sale |
$ | 785,154 | $ | 782,559 | ||||
Investment securities with a fair value of approximately $96,450 and $68,500 at March 31, 2011, and
December 31, 2010, respectively, were pledged to secure deposits, borrowings, and for other
purposes as permitted or required by law.
11
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable
The following table summarizes the components of loans receivable as of the dates indicated:
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Permanent mortgage loans: |
||||||||
One- to four-family |
$ | 534,855 | $ | 531,874 | ||||
Multi-family |
241,183 | 247,210 | ||||||
Commercial real estate |
253,222 | 248,253 | ||||||
Total permanent mortgages |
1,029,260 | 1,027,337 | ||||||
Construction and development loans: |
||||||||
One- to four-family |
16,212 | 13,479 | ||||||
Multi-family |
18,850 | 19,308 | ||||||
Commercial real estate |
13,617 | 24,939 | ||||||
Land |
20,915 | 25,764 | ||||||
Total construction and development |
69,594 | 83,490 | ||||||
Total real estate mortgage loans |
1,098,854 | 1,110,827 | ||||||
Consumer loans: |
||||||||
Fixed home equity |
101,261 | 103,619 | ||||||
Home equity lines of credit |
87,030 | 87,383 | ||||||
Student |
17,112 | 17,695 | ||||||
Home improvement |
22,859 | 24,551 | ||||||
Automobile |
2,392 | 2,814 | ||||||
Other consumer |
7,152 | 7,436 | ||||||
Total consumer loans |
237,806 | 243,498 | ||||||
Commercial business loans |
53,495 | 50,123 | ||||||
Total loans receivable |
1,390,155 | 1,404,448 | ||||||
Undisbursed loan proceeds |
(23,387 | ) | (32,345 | ) | ||||
Allowance for loan losses |
(43,526 | ) | (47,985 | ) | ||||
Unearned loan fees and discounts |
(515 | ) | (549 | ) | ||||
Total loans receivable, net |
$ | 1,322,727 | $ | 1,323,569 | ||||
The Companys mortgage loans and home equity loans are primarily secured by properties that are
located in the Companys local lending areas in Wisconsin, Minnesota, Michigan, and Illinois.
Substantially all of the Companys non-mortgage loans have also been made to borrowers in these
same lending areas.
At both March 31, 2011, and December 31, 2010, certain one- to four-family mortgage loans,
multi-family mortgage loans, and home equity loans with aggregate carrying values of approximately
$200,000 were pledged to secure FHLB advances.
The unpaid principal balance of loans serviced for others was $1,093,857 and $1,076,772 at March
31, 2011, and December 31, 2010, respectively. These loans are not reflected in the consolidated
financial statements.
12
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table summarizes the activity in the allowance for loan losses for the periods
indicated:
Three months ended March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance at the beginning of the period |
$ | 47,985 | $ | 17,028 | ||||
Provision for loan losses: |
||||||||
One- to four-family |
(98 | ) | (93 | ) | ||||
Multi-family |
1,747 | 1,517 | ||||||
Commercial real estate |
286 | 137 | ||||||
Construction and development |
996 | 1,067 | ||||||
Consumer |
(103 | ) | 195 | |||||
Commercial business |
352 | 543 | ||||||
Total provision for loan losses |
3,180 | 3,366 | ||||||
Charge-offs: |
||||||||
One- to four-family |
(1,092 | ) | (100 | ) | ||||
Multi-family |
(2,878 | ) | | |||||
Commercial real estate |
(735 | ) | (1,132 | ) | ||||
Construction and development |
(2,415 | ) | | |||||
Consumer |
(228 | ) | (227 | ) | ||||
Commercial business |
(302 | ) | (72 | ) | ||||
Total charge-offs |
(7,650 | ) | (1,531 | ) | ||||
Recoveries: |
||||||||
One- to four-family |
| 20 | ||||||
Consumer |
4 | 9 | ||||||
Commercial business |
7 | | ||||||
Total recoveries |
11 | 29 | ||||||
Net charge-offs |
(7,639 | ) | (1,502 | ) | ||||
Balance at the end of the period |
$ | 43,526 | $ | 18,892 | ||||
13
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following table summarizes the activity in the allowance for loan losses by loan portfolio
segment for the period indicated. The table also summarizes the allowance for loan loss and loans
receivable by the nature of the impairment evaluation, either individually or collectively, at the
dates indicated (the loans receivable amounts in the table are net of undisbursed loan proceeds).
At or For the Three Months Ended March 31, 2011 | ||||||||||||||||||||||||||||
Commercial Real | Construction and | |||||||||||||||||||||||||||
Allowance for loan losses: | One- to Four-Family | Multi-Family | Estate | Development | Consumer | Commercial Business | Total | |||||||||||||||||||||
Beginning balance |
$ | 3,726 | $ | 9,265 | $ | 21,885 | $ | 10,141 | $ | 1,427 | $ | 1,541 | $ | 47,985 | ||||||||||||||
Provision |
(98 | ) | 1,747 | 286 | 996 | (103 | ) | 352 | 3,180 | |||||||||||||||||||
Charge-offs |
(1,092 | ) | (2,878 | ) | (735 | ) | (2,415 | ) | (228 | ) | (302 | ) | (7,650 | ) | ||||||||||||||
Recoveries |
| | | | 4 | 7 | 11 | |||||||||||||||||||||
Transfers |
| 2,765 | 2,026 | (4,791 | ) | | | | ||||||||||||||||||||
Ending balance |
$ | 2,536 | $ | 10,899 | $ | 23,462 | $ | 3,931 | $ | 1,100 | $ | 1,598 | $ | 43,526 | ||||||||||||||
Loss allowance individually
evaluated for impairment |
$ | 761 | $ | 5,561 | $ | 17,363 | $ | 2,628 | $ | 602 | $ | 383 | $ | 27,298 | ||||||||||||||
Loss allowance collectively
evaluated for impairment |
$ | 1,775 | $ | 5,338 | $ | 6,099 | $ | 1,303 | $ | 498 | $ | 1,215 | $ | 16,228 | ||||||||||||||
Loan receivable balances at
the end of the period: |
||||||||||||||||||||||||||||
Loans individually evaluated
for impairment |
$ | 20,683 | $ | 44,609 | $ | 56,863 | $ | 16,165 | $ | 1,724 | $ | 4,319 | $ | 144,363 | ||||||||||||||
Loans collectively evaluated
for impairment |
512,735 | 196,242 | 193,098 | 35,073 | 236,081 | 49,176 | 1,222,405 | |||||||||||||||||||||
Total loans receivable |
$ | 533,418 | $ | 240,851 | $ | 249,961 | $ | 51,238 | $ | 237,805 | $ | 53,495 | $ | 1,366,768 | ||||||||||||||
During the three months ended March 31, 2011, the Company adjusted certain factors used to
determine the allowance for loan losses on loans that are collectively evaluated for impairment.
Management considered these adjustments necessary and prudent in light of recent trends in real
estate values, economic conditions, and unemployment. The Company estimates that these
adjustments, as well as overall changes in the balance of loans to which these factors were
applied, resulted in $186 decrease in the total allowances for loan losses during the three months
ended March 31, 2011. The transfers noted in the table were the result of the reclassification of
certain construction loans to permanent loans as a result of the completion of construction.
14
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following tables present information regarding impaired loans that have a related allowance for
loan loss and those that do not as of the dates indicated (the loans receivable amounts in the
table are net of undisbursed loan proceeds).
At or For the Three Months Ended March 31, 2011 | ||||||||||||||||||||
Unpaid | Related | Average Loan | Interest | |||||||||||||||||
Loans Receivable | Principal | Allowance | Receivable | Income | ||||||||||||||||
With an allowance recorded: | Balance, Net | Balance | for Loss | Balance, Net | Recognized | |||||||||||||||
One- to four-family |
$ | 5,182 | $ | 5,182 | $ | 761 | $ | 5,242 | $ | 15 | ||||||||||
Multi-family |
24,521 | 24,521 | 5,561 | 27,991 | 287 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
10,492 | 10,492 | 4,738 | 10,841 | 106 | |||||||||||||||
Retail/wholesale/mixed |
26,470 | 26,470 | 11,508 | 21,338 | 310 | |||||||||||||||
Industrial/warehouse |
1,254 | 1,254 | 222 | 1,337 | | |||||||||||||||
Other |
1,709 | 1,709 | 895 | 1,212 | 12 | |||||||||||||||
Total commercial real estate |
39,925 | 39,925 | 17,363 | 34,727 | 428 | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
| | | | | |||||||||||||||
Multi-family |
4,552 | 4,552 | 568 | 4,496 | 70 | |||||||||||||||
Commercial real estate |
157 | 157 | 75 | 4,540 | 2 | |||||||||||||||
Land |
2,296 | 2,296 | 1,985 | 3,887 | | |||||||||||||||
Total construction and development |
7,005 | 7,005 | 2,628 | 12,923 | 72 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
531 | 531 | 502 | 537 | | |||||||||||||||
Student |
| | | | | |||||||||||||||
Other |
210 | 210 | 100 | 193 | | |||||||||||||||
Total consumer |
741 | 741 | 602 | 730 | | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Term loans |
430 | 436 | 169 | 1,071 | 9 | |||||||||||||||
Lines of credit |
472 | 472 | 214 | 436 | 7 | |||||||||||||||
Total commercial business |
902 | 908 | 383 | 1,507 | 16 | |||||||||||||||
Total with an allowance recorded |
$ | 78,276 | $ | 78,282 | $ | 27,298 | $ | 83,119 | $ | 818 | ||||||||||
With no allowance recorded: |
||||||||||||||||||||
One- to four-family |
$ | 13,162 | $ | 18,146 | | $ | 13,272 | $ | 13 | |||||||||||
Multi-family |
8,600 | 9,174 | | 7,464 | 80 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
1,741 | 1,941 | | 1,233 | 18 | |||||||||||||||
Retail/wholesale/mixed |
8,998 | 14,467 | | 9,756 | 165 | |||||||||||||||
Industrial/warehouse |
2,543 | 2,766 | | 1,615 | 3 | |||||||||||||||
Other |
1 | 776 | | 898 | | |||||||||||||||
Total commercial real estate |
13,283 | 19,950 | | 13,501 | 186 | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
| | | | | |||||||||||||||
Multi-family |
| | | 50 | | |||||||||||||||
Commercial real estate |
3,818 | 3,818 | | 3,818 | 59 | |||||||||||||||
Land |
4,562 | 10,411 | | 4,187 | 6 | |||||||||||||||
Total construction and development |
8,380 | 14,229 | | 8,055 | 65 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
847 | 847 | | 837 | 7 | |||||||||||||||
Student |
| | | | | |||||||||||||||
Other |
61 | 61 | | 80 | | |||||||||||||||
Total consumer |
908 | 908 | | 917 | 7 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Term loans |
1,092 | 1,267 | | 1,115 | 2 | |||||||||||||||
Lines of credit |
53 | 98 | | 35 | | |||||||||||||||
Total commercial business |
1,145 | 1,365 | | 1,150 | 2 | |||||||||||||||
Total with no allowance recorded |
$ | 45,478 | $ | 63,772 | | $ | 44,358 | $ | 353 | |||||||||||
15
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
At or For the Twelve Months Ended December 31, 2010 | ||||||||||||||||||||
Unpaid | Related | Average Loan | Interest | |||||||||||||||||
Loans Receivable | Principal | Allowance | Receivable | Income | ||||||||||||||||
With an allowance recorded: | Balance, Net | Balance | for Loss | Balance, Net | Recognized | |||||||||||||||
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 |
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 | ||||||||||
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 |
194 | 667 | | 472 | | |||||||||||||||
Total commercial business |
1,332 | 2,486 | | 1,678 | | |||||||||||||||
Total with no allowance recorded |
$ | 43,415 | $ | 54,944 | | $ | 31,058 | $ | 38 | |||||||||||
16
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following tables present information relating to the Companys internal risk ratings of its
loans receivable as of the dates indicated (all amounts in the tables are net of undisbursed loan
proceeds):
March 31, 2011 | ||||||||||||||||||||
Pass | Watch | Special Mention | Substandard | Total | ||||||||||||||||
One- to four-family |
$ | 507,393 | $ | 4,927 | $ | 415 | $ | 20,683 | $ | 533,418 | ||||||||||
Multi-family |
166,014 | 23,833 | 6,395 | 44,609 | 240,851 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Office |
70,806 | 5,063 | | 12,781 | 88,650 | |||||||||||||||
Retail/wholesale/mixed use |
58,814 | 8,744 | 16,633 | 36,762 | 120,953 | |||||||||||||||
Industrial/warehouse |
24,502 | 772 | 1,157 | 4,279 | 30,710 | |||||||||||||||
Other |
5,784 | 341 | 482 | 3,041 | 9,648 | |||||||||||||||
Total commercial real estate |
159,906 | 14,920 | 18,272 | 56,863 | 249,961 | |||||||||||||||
Construction and development: |
||||||||||||||||||||
One- to four-family |
6,404 | | | | 6,404 | |||||||||||||||
Multi-family |
9,751 | | | 4,552 | 14,303 | |||||||||||||||
Commercial real estate |
4,924 | | | 4,826 | 9,750 | |||||||||||||||
Land |
12,756 | 353 | 885 | 6,787 | 20,781 | |||||||||||||||
Total construction/development |
33,835 | 353 | 885 | 16,165 | 51,238 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity |
209,721 | | | 1,429 | 211,150 | |||||||||||||||
Student |
17,111 | | | | 17,111 | |||||||||||||||
Other |
9,249 | | | 295 | 9,544 | |||||||||||||||
Total consumer |
236,081 | | | 1,724 | 237,805 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Term loans |
20,245 | 943 | 423 | 2,080 | 23,691 | |||||||||||||||
Lines of credit |
26,382 | 1,088 | 95 | 2,239 | 29,804 | |||||||||||||||
Total commercial business |
46,627 | 2,031 | 518 | 4,319 | 53,495 | |||||||||||||||
Total |
$ | 1,149,856 | $ | 46,064 | $ | 26,485 | $ | 144,363 | $ | 1,366,768 | ||||||||||
17
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
December 31, 2010 | ||||||||||||||||||||
Pass | Watch | Special 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 March 31, 2011, or 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 March 31, 2011, or December 31, 2010.
18
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
The following tables contain information relating to the past due and non-accrual status of the
Companys loans receivable as of the dates indicated (all amounts in the table are net of
undisbursed loan proceeds):
March 31, 2011 | ||||||||||||||||||||||||||||
Past Due Status | Total | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | > 90 Days | Total Past Due | Total Current | Total Loans | Non-Accrual | ||||||||||||||||||||||
One- to four-family |
$ | 8,876 | $ | 2,322 | $ | 17,513 | $ | 28,712 | $ | 504,706 | $ | 533,418 | $ | 18,344 | ||||||||||||||
Multi-family |
6,699 | 2,909 | 16,326 | 25,933 | 214,918 | 240,851 | 33,121 | |||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Office |
1,071 | 724 | 4,521 | 6,315 | 82,335 | 88,650 | 12,232 | |||||||||||||||||||||
Retail/wholesale/mixed |
662 | 3,661 | 11,900 | 16,223 | 104,730 | 120,953 | 35,468 | |||||||||||||||||||||
Industrial/warehouse |
| | 3,798 | 3,798 | 26,912 | 30,710 | 3,798 | |||||||||||||||||||||
Other |
195 | | 823 | 1,019 | 8,629 | 9,648 | 1,710 | |||||||||||||||||||||
Total commercial
real estate |
1,928 | 4,385 | 21,042 | 27,355 | 222,606 | 249,961 | 53,208 | |||||||||||||||||||||
Construction and
development: |
||||||||||||||||||||||||||||
One- to four-family |
| | | | 6,404 | 6,404 | | |||||||||||||||||||||
Multi-family |
| 4,452 | | 4,452 | 9,851 | 14,303 | 4,552 | |||||||||||||||||||||
Commercial real estate |
66 | | 843 | 909 | 8,841 | 9,750 | 3,976 | |||||||||||||||||||||
Land |
149 | | 6,815 | 6,964 | 13,817 | 20,781 | 6,857 | |||||||||||||||||||||
Total construction |
215 | 4,452 | 7,658 | 12,325 | 38,913 | 51,238 | 15,385 | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Home equity |
1,022 | 422 | 1,378 | 2,822 | 208,328 | 211,150 | 1,378 | |||||||||||||||||||||
Student |
282 | 331 | 509 | 1,122 | 15,989 | 17,111 | | |||||||||||||||||||||
Other |
140 | 114 | 271 | 525 | 9,019 | 9,544 | 271 | |||||||||||||||||||||
Total consumer |
1,444 | 867 | 2,158 | 4,469 | 233,336 | 237,805 | 1,649 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Term loans |
664 | 69 | 1,168 | 1,900 | 21,791 | 23,691 | 1,522 | |||||||||||||||||||||
Lines of credit |
80 | | 53 | 132 | 29,672 | 29,804 | 525 | |||||||||||||||||||||
Total commercial |
744 | 69 | 1,221 | 2,032 | 51,463 | 53,495 | 2,047 | |||||||||||||||||||||
Total |
$ | 19,906 | $ | 15,004 | $ | 65,918 | $ | 100,826 | $ | 1,265,945 | $ | 1,366,768 | $ | 123,754 | ||||||||||||||
19
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
December 31, 2010 | ||||||||||||||||||||||||||||
Past Due Status | Total | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | > 90 Days | Total Past Due | Total Current | Total Loans | Non-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 March 31, 2011, and December 31, 2010 $509 and $373 in student loans, respectively, were
90-days past due, but remained on accrual status. No other loans 90-days past due were in accrual
status as of either date.
20
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
4. Mortgage Servicing Rights
The following table presents the activity in the Companys mortgage servicing rights (MSRs) for
the periods indicated:
Three months ended March 31 | ||||||||
2011 | 2010 | |||||||
MSRs at beginning of the period |
$ | 7,775 | $ | 7,186 | ||||
Additions |
603 | 412 | ||||||
Amortization |
(516 | ) | (476 | ) | ||||
MSRs at end of period |
7,862 | 7,122 | ||||||
Valuation allowance at end of period |
| (363 | ) | |||||
MSRs at end of the period, net |
$ | 7,862 | $ | 6,759 | ||||
The following table shows the estimated future amortization expense for MSRs for the periods
indicated:
Amount | ||||||||
Estimate for nine months ended December 31: |
2011 | $ | 1,002 | |||||
Estimate for years ended December 31: |
2012 | 1,255 | ||||||
2013 | 1,194 | |||||||
2014 | 1,146 | |||||||
2015 | 1,108 | |||||||
2016 | 1,051 | |||||||
Thereafter | 1,106 | |||||||
Total | $ | 7,862 | ||||||
The projections of amortization expense shown above for MSRs are based on existing asset balances
and the existing interest rate environment as of March 31, 2011. Future amortization expense may
be significantly different depending upon changes in the mortgage servicing portfolio, mortgage
interest rates, and market conditions.
5. Other Assets
The following table summarizes the components of other assets as of the dates indicated:
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Accrued interest: |
||||||||
Mortgage-related securities |
$ | 1,925 | $ | 1,432 | ||||
Investment securities |
906 | 511 | ||||||
Loans receivable |
5,286 | 5,506 | ||||||
Total accrued interest |
8,117 | 7,449 | ||||||
Premises and equipment, net |
50,960 | 51,165 | ||||||
Federal Home Loan Bank stock, at cost |
46,092 | 46,092 | ||||||
Bank owned life insurance |
55,557 | 55,600 | ||||||
Prepaid FDIC insurance premiums |
7,734 | 8,694 | ||||||
Deferred tax asset, net |
40,114 | 40,320 | ||||||
Prepaid and other assets |
44,539 | 45,389 | ||||||
Total other assets |
$ | 253,113 | $ | 254,709 | ||||
21
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
6. Deposit Liabilities
The following table summarizes the components of deposit liabilities as of the dates indicated:
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Checking accounts: |
||||||||
Non-interest-bearing |
$ | 94,577 | $ | 94,446 | ||||
Interest-bearing |
210,732 | 219,136 | ||||||
Total checking accounts |
305,309 | 313,582 | ||||||
Money market accounts |
405,421 | 423,923 | ||||||
Savings accounts |
217,757 | 210,334 | ||||||
Certificates of deposit: |
||||||||
Due within one year |
779,023 | 825,661 | ||||||
After one but within two years |
162,862 | 126,710 | ||||||
After two but within three years |
111,031 | 134,120 | ||||||
After three but within four years |
25,921 | 29,890 | ||||||
After four but within five years |
10,672 | 14,090 | ||||||
Total certificates of deposits |
1,089,509 | 1,130,471 | ||||||
Total deposit liabilities |
$ | 2,017,996 | $ | 2,078,310 | ||||
7. Borrowings
The following table summarizes borrowings as of the dates indicated:
March 31, 2011 | December 31, 2010 | |||||||||||||||
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 |
245 | 4.17 | 249 | 4.17 | ||||||||||||
2017 and thereafter |
49,417 | 5.22 | 49,685 | 5.22 | ||||||||||||
Total borrowings |
$ | 149,662 | 4.79 | % | $ | 149,934 | 4.79 | % | ||||||||
Substantially all of the Companys advances from the Federal Home Loan Bank (FHLB) of Chicago are
subject to prepayment penalties if voluntarily repaid by the Company prior to stated maturity. At
March 31, 2011, $100,000 of the Companys FHLB of Chicago advances was redeemable on a quarterly
basis at the option of the FHLB of Chicago.
The Company is required to maintain certain unencumbered mortgage loans and certain
mortgage-related securities as collateral against its outstanding advances from the FHLB of
Chicago. Total advances from the FHLB of Chicago are limited to the lesser of: (1) 35% of the
Banks total assets; (2) 20 times the capital stock of the FHLB of Chicago that is owned by the
Bank; 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.
Advances are also collateralized by any capital stock of the FHLB of Chicago that is owned by the
Bank, which amounted to $46,092 at March 31, 2011.
22
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
7. Borrowings (continued)
The Bank had a $5,000 line of credit with a financial institution at March 31, 2011. At December
31, 2010, the Bank had a $5,000 and a $10,000 line of credit with two financial institutions. At
March 31, 2011, and December 31, 2010, 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 actions and
possible additional discretionary actions by regulators, that, if undertaken, could have a direct
material effect on the Banks and 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 the Banks 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 capital and Tier
1 capital to risk-weighted assets, and of Tier 1 capital to adjusted assets (as all of these terms
are defined in the applicable regulations). Management believes, as of March 31, 2011, that the
Bank met or exceeded all capital adequacy requirements to which it is subject. The Company is not
aware of any conditions or events which would change the Banks status from well capitalized.
The following table presents the Banks actual and required regulatory capital amounts and ratios
as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||
To Be Well | ||||||||||||||||||||||||
Required | Capitalized Under | |||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 248,544 | 18.42 | % | $ | 107,942 | 8.00 | % | $ | 134,927 | 10.00 | % | ||||||||||||
Tier 1 capital ( to risk-weighted assets) |
231,678 | 17.17 | 53,971 | 4.00 | 80,956 | 6.00 | ||||||||||||||||||
Tier 1 capital (to adjusted total assets) |
231,678 | 9.48 | 97,791 | 4.00 | 122,239 | 5.00 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
To Be Well | ||||||||||||||||||||||||
Required | Capitalized Under | |||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
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) |
23
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
9. Earnings Per Share
The following table summarizes the computation of basic and diluted earnings per share for the
periods indicated:
Three Months Ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Basic earnings per share: |
||||||||
Net income |
$ | 1,040 | $ | 2,103 | ||||
Weighted average shares outstanding |
45,734,674 | 45,557,990 | ||||||
Allocated ESOP shares for period |
| 15,772 | ||||||
Vested MRP shares for period |
1,745 | 820 | ||||||
Basic shares outstanding |
45,736,419 | 45,574,582 | ||||||
Basic earnings per share |
$ | 0.02 | $ | 0.05 | ||||
Diluted Earnings Per Share: |
||||||||
Net income |
$ | 1,040 | $ | 2,103 | ||||
Weighted average shares outstanding used in
basic earnings per share
|
45,736,419 | 45,574,581 | ||||||
Net dilutive effect of: |
||||||||
Stock option shares |
126,633 | 433,750 | ||||||
Unvested MRP shares |
| | ||||||
Diluted shares outstanding |
45,863,052 | 46,008,331 | ||||||
Diluted earnings per share |
$ | 0.02 | $ | 0.05 | ||||
The Company had stock options for 2,391,000 shares outstanding as of March 31, 2011, and for
2,064,000 shares as of March 31, 2010, that were not included in the computation of diluted
earnings per share because they were anti-dilutive. These shares had weighted average exercise
prices of $9.50 and $10.75 per share as of those 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 $40 and $37 during the three months
ended March 31, 2011 and 2010, respectively.
The Company also has a defined benefit pension plan covering employees meeting certain minimum age
and service requirements and a non-qualified 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 that produces the highest average.
The Companys funding policy for the qualified plan is to contribute annually the amount necessary
to satisfy the requirements of the Employee Retirement Income Security Act of 1974.
24
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The following table summarizes the qualified plans net periodic benefit cost for the periods
indicated:
Qualified Plan | ||||||||
For the Three Months | ||||||||
Ended March 31 | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 626 | $ | 485 | ||||
Interest cost |
569 | 506 | ||||||
Expected return on plan assets |
(650 | ) | (573 | ) | ||||
Amortization of unrecognized prior service cost |
216 | | ||||||
Net periodic benefit cost |
$ | 761 | $ | 418 | ||||
The net periodic benefit cost for the Companys supplemental plan was $6 and $107 for the three
months ended March 31, 2011 and 2010, respectively. The amounts in both periods consisted solely
of interest cost.
The amount of the 2011 contribution will be determined based on a number of factors, including the
results of the Actuarial Valuation Report as of January 1, 2011. As of March 31, 2011, the amount
of the 2011 contribution was unknown. No contribution is necessary for the Supplemental Plan.
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 had 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 2001 Plan.
In 2004 the Companys shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan), which
provided 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 provided for MRP
awards of up to 1,642,521 shares. MRP shares awarded under the 2004 Plan vest over five years. As
of March 31, 2011, 617,721 MRP shares and options for 1,051,362 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 $30 and $19 for the three month
periods ended March 31, 2011 and 2010 respectively. Outstanding non-vested MRP grants had a fair
value of $202 and an unamortized cost of $362 at March 31, 2011. The cost of these shares is
expected to be recognized over a weighted-average period of 1.7 years.
During the three months ended March 31, 2011 and 2010, the Company recorded stock option
compensation expense of $40 and $9, respectively. As of March 31, 2011, there was $640 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 2.3 years.
25
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
The following table summarizes the activity in the Companys stock options during the periods
indicated:
Three months ended March 31 | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Stock | Exercise | ||||||||||||||
Stock Options | Price | Options | Price | |||||||||||||
Outstanding at beginning of period |
2,462,464 | $ | 9.0184 | 3,129,398 | $ | 8.1823 | ||||||||||
Granted |
421,000 | 5.0251 | | | ||||||||||||
Exercised |
(39,439 | ) | 3.2056 | | | |||||||||||
Forfeited |
(4,000 | ) | 10.6730 | | | |||||||||||
Outstanding at end of period |
2,840,025 | $ | 8.5049 | 3,129,398 | $ | 8.1823 | ||||||||||
The following table provides additional information regarding the Companys outstanding options as
of March 31, 2011.
Remaining | Non-Vested Options | Vested Options | ||||||||||||||||||
Contractual | Stock | Intrinsic | Stock | Intrinsic | ||||||||||||||||
Life | Options | Value | Options | Value | ||||||||||||||||
Exercise Price: |
||||||||||||||||||||
$3.2056 |
0.1 years | | | 449,025 | $ | 460 | ||||||||||||||
$10.6730 |
3.1 years | | | 1,718,000 | | |||||||||||||||
$12.2340 |
5.3 years | 10,000 | | 40,000 | | |||||||||||||||
$11.1600 |
7.1 years | 19,200 | | 12,800 | | |||||||||||||||
$12.0250 |
7.4 years | 30,000 | | 20,000 | | |||||||||||||||
$7.2200 |
9.1 years | 50,000 | | | | |||||||||||||||
$4.7400 |
9.7 years | 70,000 | | | | |||||||||||||||
$5.0500 |
9.8 years | 396,000 | | | | |||||||||||||||
$4.3000 |
10.0 years | 25,000 | | | | |||||||||||||||
Total |
600,200 | | 2,239,825 | $ | 460 | |||||||||||||||
Weighted average remaining
contractual life |
9.5 years | 2.6 years | ||||||||||||||||||
Weighted average exercise price |
$ | 5.8272 | $ | 9.2187 | ||||||||||||||||
The intrinsic value of options exercised during the three month period ended March 31, 2011 was
$38. There were no options exercised during the three months ended March 31, 2010. The weighted
average grant date fair value of non-vested options at March 31, 2011, was $1.26 per share. During
the three months ended March 31, 2011, options for 421,000 shares were granted, options for 43,439
shares became vested, and forfeitures of non-vested options was 4,000 shares.
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. The following weighted-average assumptions were used to value
421,000 options granted during the three month period ended
26
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
March 31, 2011: risk free rate of 2.06%, dividend yield of 2.04%, expected stock volatility of 25%,
and expected term to exercise of 7.5 years. These options had a weighted-average value of $1.15
per option using these assumptions. There were no options granted during the three month period
ended March 31, 2010.
The Company has no stock compensation plans that have not been approved by shareholders.
12. Financial Instruments with Off-Balance Sheet Risk
Off-balance sheet financial instruments or obligations whose contract amounts represent credit
and/or interest rate are summarized in the following table as of the dates indicated:
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Unused consumer lines of credit |
$ | 149,621 | $ | 146,381 | ||||
Unused commercial lines of credit |
23,403 | 20,856 | ||||||
Commitments to extend credit: |
||||||||
Fixed rate |
36,363 | 73,340 | ||||||
Adjustable rate |
8,213 | 1,784 | ||||||
Undisbursed commercial loans |
1,155 | 462 | ||||||
Standby letters of credit |
339 | 339 |
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 March 31, 2011, and December 31, 2010, net unrealized gains of $11 and $1,474, 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 gains (losses) of $56 and
$(800) on loans held-for-sale as of those dates, respectively, which were also included in net gain
on loan sales activities.
The following table summarizes the Companys derivative assets and liabilities as of the dates
indicated:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||
Interest rate lock commitments |
$ | 8,009 | $ | 70 | $ | 14,003 | $ | (57 | ) | |||||||
Forward commitments |
9,755 | (59 | ) | 49,854 | 1,531 | |||||||||||
Net unrealized gain |
$ | 11 | $ | 1,474 | ||||||||||||
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.
27
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Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
13. 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. These securities are recorded on the statement of
financial condition at fair value; thus the carrying value equals fair value.
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 held-for-sale are recorded on statement of
financial condition at fair value; thus the carrying value equals fair value.
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.
Mortgage Servicing Rights The Company has calculated the fair market value of MSRs 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 MSRs 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.
28
Table of Contents
s
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
13. Fair Value of Financial Instruments (continued)
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.
March 31 | December 31 | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Cash and cash equivalents |
$ | 83,875 | $ | 83,875 | $ | 232,832 | $ | 232,832 | ||||||||
Securities available-for-sale |
782,559 | 782,559 | 663,257 | 663,257 | ||||||||||||
Loans held-for-sale |
3,908 | 3,908 | 37,819 | 37,819 | ||||||||||||
Loans receivable, net |
1,322,727 | 1,259,109 | 1,323,569 | 1,213,460 | ||||||||||||
Mortgage servicing rights, net |
7,862 | 11,521 | 7,769 | 9,368 | ||||||||||||
Federal Home Loan Bank stock |
46,092 | 46,092 | 46,092 | 46,092 | ||||||||||||
Accrued interest receivable |
8,117 | 8,117 | 7,449 | 7,449 | ||||||||||||
Deposit liabilities |
2,017,996 | 1,919,003 | 2,078,310 | 1,967,742 | ||||||||||||
Borrowings |
149,662 | 161,573 | 149,934 | 163,521 | ||||||||||||
Advance payments by borrowers |
11,948 | 11,948 | 2,697 | 2,697 | ||||||||||||
Accrued interest payable |
843 | 843 | 2,428 | 2,428 |
Excluded from the above table are off-balance-sheet items (refer to Note 12) 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 (exit price). The
Company utilizes market data or assumptions that market participants would use in pricing its
financial assets and liabilities, 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 fair 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. Accounting guidance establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), the next
highest priority 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).
29
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
13. Fair Value of Financial Instruments (continued)
The following table sets forth by level within the fair value hierarchy (i.e., Level 1, 2, or 3)
the Companys financial assets that were accounted for at fair value on a recurring basis as of the
dates indicated. The Companys financial liabilities accounted for at fair value were a negligible
amount as of these dates. The Companys assessment of the significance of a particular input to
the fair value measurement requires judgment, and may affect the valuation of fair value assets and
liabilities and their placement within the fair value hierarchy levels.
At March 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans held-for-sale |
| $ | 3,908 | | $ | 3,908 | ||||||||||
Securities available-for-sale: |
||||||||||||||||
Investment securities |
| 206,037 | | 206,037 | ||||||||||||
Mortgage-related securities |
| 576,522 | | 576,522 |
At 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 |
For purposes of the impairment testing of MSRs, 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 MSRs to be Level
3 in the fair value hierarchy. There were no pools determined to be impaired at March 31, 2011.
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 had no valuation allowance as of
March 31, 2011, compared to $6 as of December 31, 2010. Refer to Note 4 for additional disclosures
related to MSRs.
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
$27,298 was recorded for loans with a recorded investment of $144,363 at March 31, 2011. These
amounts were $31,571 and $149,665 at December 31, 2010, respectively.
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 March 31, 2011,
$20,368 in foreclosed properties were valued at collateral value compared to $17,742 at December
31, 2010.
30
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
(Dollars in Thousands, Except Per Share Amounts)
14. Subsequent Event
In late April 2011 the Office of Thrift Supervision (OTS) asked the Company and the Bank to
address certain items identified in the most recent OTS examinations, even though the examinations
did not note any significant regulatory violations, by entering into Memoranda of Understanding
(MOU). An MOU is an agreement between the OTS and an institution which requires the exercise of
reasonable good faith efforts to comply with its requirements but is not subject to direct judicial
enforcement as are other forms of supervisory action such as a consent or cease and desist orders.
Under the proposed MOU for the Company, an updated business and capital plan would be submitted to
the OTS which, among other things, would include the establishment of a minimum tangible capital
ratio (no particular ratio was specified by the draft MOU and was left to the judgment of the board
of directors based on its risk profile analysis). The Company would also be required to provide
notice and obtain the non-objection of the OTS prior to declaring or paying cash dividends,
repurchasing Company shares, or incurring, issuing, increasing, modifying or redeeming any debt or
lines of credit.
Pursuant to the proposed MOU with the Bank, the Bank would continue to develop individual workout
plans for each problem asset, or group of problem assets, to any one borrower or loan relationship
of $3,000 or more. The MOU would require the Bank to retain an independent third party consulting
firm to conduct an external credit administration review and prepare a report, which the Bank would
use to update its credit administration policies, procedures, and practices in accordance with the
recommendations and suggestions. Pursuant to the MOU (and the Banks existing policies), the Bank
would also provide additional information to the board of directors regarding the adequacy of its
allowance for loan losses and its consistency with accounting guidance and the Banks experience
and trends. The Bank would also be required to submit a business and capital plan (although no
particular capital requirements are included in the MOU, with the ratios again left to the
discretion of the board of directors based on its risk analysis). Under the MOU, the Bank would
not be permitted to declare or pay dividends or make any other capital distributions without prior
approval of the OTS.
As to many of these requirements, the Company believes it is already in substantial compliance and
has already taken many of the steps contemplated by the MOUs. For example, the Bank has already
hired additional personnel, re-allocated responsibilities in the credit administration and risk
management areas and addressed the noted loan issues. The MOUs also would give the Company and the
Bank substantial latitude in determining appropriate action and targets. The Companys proposed
MOU was approved by the board of directors on May 2, 2011, and the Bank board of directors is
expected to approve the Banks proposed MOU on May 16, 2011. However, the MOUs will not be final
or effective until formally accepted by the OTS, which is expected to occur in May 2011.
31
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
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
instability in credit, lending, and financial markets; declines in the real estate market, which
could further affect both collateral values and loan activity; continuing relatively 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; 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; the effects of
further regulation and consolidation within the financial services industry, including substantial
changes under the Dodd-Frank Act; regulators increasing expectations for financial institutions
capital levels and restrictions imposed on institutions, as to payments of dividends or otherwise,
to maintain or achieve those levels, including the possible effect of the proposed memoranda of
understanding discussed in this report; potential changes in Fannie Mae and Freddie Mac, which
could impact the home mortgage market; increased competition and/or disintermediation within the
financial services industry; 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; 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;
demand for other financial services; changes in accounting policies or guidelines; natural
disasters, acts of terrorism, or developments in the war on terrorism; and the factors discussed in
the Companys filings with the Securities and Exchange Commission, particularly under Part I, Item
1A, Risk Factors, of the Companys 2010 Annual Report on Form 10-K.
Results of Operations
Overview The Companys net income was $1.0 million or $0.02 per diluted share for the three
months ended March 31, 2011, compared to $2.1 million or $0.05 per diluted share during the same
period in 2010. The Companys net income for these periods represented a return on average assets
(ROA) of 0.16% and 0.24%, respectively, and a return on average equity (ROE) of 1.33% and
2.09%, respectively. The decline in net income between these periods was principally due to a
decline in gains on sales of investments and an increase in compensation-related expenses. These
developments were offset in part by an increase in net interest income and a decrease in losses on
foreclosed real estate. The following paragraphs describe these changes in greater detail, along
with other matters affecting the Companys results of operations during the three month periods
ended March 31, 2011 and 2010.
Net Interest Income Net interest income increased by $1.7 million or 12.1% during the three
months ended March 31, 2011, compared to the same period in 2010. This increase was primarily
attributable to an improvement in the Companys net interest margin between the quarters, which
increased to 2.82% in the 2011 period compared to 1.76% in the 2010 period. This increase was
principally the result of the
32
Table of Contents
Companys early repayment of $756.0 million in high-cost borrowings
from the FHLB of Chicago in December of last year, which contributed to a significant decline in
the average cost of the Companys interest-bearing liabilities in the first quarter of 2011
compared to the same quarter in 2010, as well as a significant decline in the amount of high-cost
liabilities outstanding. During the three months ended March 31, 2011, the Companys average cost
of interest-bearing liabilities was 1.42% compared to 2.46% in the same period of the previous
year. In addition, average borrowings, which consist of advances from the FHLB of Chicago,
declined from $906.8 million in the first quarter of 2010 to $146.5 million in the first quarter of
2011. Also contributing to the decline in the Companys average cost of interest-bearing
liabilities in the 2011 period compared to the 2010 period was a 49 basis point decline in the
average cost of its deposit liabilities. The Company has continued to manage its overall liquidity
position by maintaining the interest rates it offers on its certificates of deposits and certain
other deposit accounts at relatively low levels compared to some competitors. However, absent a
meaningful decline in market interest rates, management believes that the ability to significantly
reduce the average cost of the Companys deposit liabilities in 2011 is limited.
Also contributing to the increase in the Companys net interest margin during the three months
ended March 31, 2011, compared to the same period in 2010, was a 13 basis point improvement in the
yield on interest-earning assets, from 3.99% in the first quarter of 2010 to 4.12% in the first
quarter of 2011. This increase was caused by a shift in the mix of earning assets between the
periods from lower-yielding assets, such as overnight investments and available-for-sale
securities, to higher-yielding assets, such as loans receivable. This change in mix was caused by
the Companys use of lower-yielding assets to fund the early repayment of high-cost borrowings from
the FHLB of Chicago in December of 2010, as previously described. Partially offsetting the
favorable impact of the improved earning asset mix was a decline in the average yield on the
Companys loans receivable and available-for-sale securities in the first quarter of 2011 compared
to the same quarter in 2010. This decline was caused by a declining interest rate environment
during much of 2010 that resulted in lower yields on these earning assets. In addition, the
Company sold a substantial number of higher-yielding available-for-sale securities in 2010 at
gains, which reduced the overall yield on the securities portfolio.
33
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-earning 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.
Three Months Ended March 31 | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable (1) |
$ | 1,366,298 | $ | 17,873 | 5.23 | % | $ | 1,517,398 | $ | 20,857 | 5.50 | % | ||||||||||||
Mortgage-related securities |
511,898 | 3,795 | 2.97 | 786,354 | 6,359 | 3.23 | ||||||||||||||||||
Investment securities (2) |
255,500 | 1,344 | 2.10 | 705,578 | 4,731 | 2.68 | ||||||||||||||||||
Interest-earning deposits |
106,775 | 51 | 0.19 | 195,447 | 45 | 0.09 | ||||||||||||||||||
Total interest-earning assets |
2,240,471 | 23,063 | 4.12 | 3,204,777 | 31,992 | 3.99 | ||||||||||||||||||
Non-interest-earning assets |
385,148 | 283,321 | ||||||||||||||||||||||
Total average assets |
$ | 2,625,619 | $ | 3,488,098 | ||||||||||||||||||||
Liabilities and equity: |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Regular savings deposits |
$ | 207,132 | 22 | 0.04 | $ | 198,649 | 28 | 0.06 | ||||||||||||||||
Money market accounts |
394,276 | 534 | 0.54 | 329,873 | 489 | 0.59 | ||||||||||||||||||
Interest-bearing demand accounts |
193,668 | 23 | 0.05 | 192,158 | 22 | 0.05 | ||||||||||||||||||
Certificates of deposit |
1,084,636 | 4,890 | 1.80 | 1,270,999 | 7,671 | 2.41 | ||||||||||||||||||
Total deposit liabilities |
1,879,712 | 5,469 | 1.16 | 1,991,679 | 8,210 | 1.65 | ||||||||||||||||||
Advance payments by borrowers for taxes
and insurance |
7,722 | 1 | 0.05 | 7,599 | 1 | 0.05 | ||||||||||||||||||
Borrowings |
146,508 | 1,770 | 4.83 | 906,818 | 9,666 | 4.26 | ||||||||||||||||||
Total interest-bearing liabilities |
2,033,942 | 7,240 | 1.42 | 2,906,096 | 17,877 | 2.46 | ||||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Non-interest-bearing deposits |
102,631 | 87,535 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
175,642 | 92,180 | ||||||||||||||||||||||
Total non-interest-bearing liabilities |
278,273 | 179,715 | ||||||||||||||||||||||
Total liabilities |
2,312,215 | 3,085,811 | ||||||||||||||||||||||
Total equity |
313,404 | 402,287 | ||||||||||||||||||||||
Total average liabilities and equity |
$ | 2,625,619 | $ | 3,488,098 | ||||||||||||||||||||
Net interest income and net interest rate spread |
$ | 15,823 | 2.70 | % | $ | 14,115 | 1.53 | % | ||||||||||||||||
Net interest margin |
2.82 | % | 1.76 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
1.10x | 1.10x | ||||||||||||||||||||||
(1) | For the purposes of these computations, non-accruing loans and loans held-for-sale are included in loans receivable. | |
(2) | The carrying value and earnings on stock in the FHLB of Chicago is included in investment securities. |
34
Table of Contents
The following table presents 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.
Three Months Ended March 31, 2011 | ||||||||||||
Compared to March 31, 2010 | ||||||||||||
Increase (Decrease) | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans receivable |
$ | (1,994 | ) | $ | (990 | ) | $ | (2,984 | ) | |||
Mortgage-related securities |
(2,086 | ) | (478 | ) | (2,564 | ) | ||||||
Investment securities |
(2,528 | ) | (859 | ) | (3,387 | ) | ||||||
Interest-earning deposits |
(26 | ) | 32 | 6 | ||||||||
Total interest-earning assets |
(6,634 | ) | (2,295 | ) | (8,929 | ) | ||||||
Interest-bearing liabilities: |
||||||||||||
Savings accounts |
4 | (10 | ) | (6 | ) | |||||||
Money market accounts |
89 | (44 | ) | 45 | ||||||||
Interest-bearing demand accounts |
| 1 | 1 | |||||||||
Certificates of deposit |
(1,019 | ) | (1,762 | ) | (2,781 | ) | ||||||
Total deposit liabilities |
(926 | ) | (1,815 | ) | (2,741 | ) | ||||||
Advance payments by borrowers for taxes
and insurance |
| | | |||||||||
Borrowings |
(9,031 | ) | 1,135 | (7,896 | ) | |||||||
Total interest-bearing liabilities |
(9,957 | ) | (680 | ) | (10,637 | ) | ||||||
Net change in net interest income |
$ | 3,323 | $ | (1,615 | ) | $ | 1,708 | |||||
Provision for Loan Losses The Companys provision for loan losses was $3.2 million during the
three months ended March 31, 2011, compared to $3.4 million in the same period last year. The
losses in both periods were impacted by continuing weak economic conditions, high unemployment, and
lower values for real estate. These conditions have been particularly challenging for borrowers
whose loans are secured by commercial real estate, multi-family real estate, and developed and
undeveloped land. Beginning in the later part of last year, management began to notice an increase
in vacancy rates, a decline in rents, and/or delays in unit sales for many of the properties that
secure the Companys loans. In many instances, managements observations included loans that
borrowers and/or loan guarantors have managed to keep current despite underlying difficulties with
the collateral properties. During the first quarter of 2011, the Company recorded $3.2 million in
loss provisions against several commercial real estate and business loan relationships, the largest
of which was a $903,000 loss on a $3.6 million loan relationship secured by multi-family dwellings.
Although the borrower was current with respect to all principal and interest payments, management
concluded that it was likely the borrower would not be able to continue to service the debt and
that the loan was collateral dependent. The amount of the loss was based on an internal management
evaluation of the collateral that secures the loan. In addition to this development, the Company
recorded a $569,000 loss on an $8.3 million loan secured by an apartment complex and undeveloped
land. This loss was based on an updated independent appraisal that was received during the quarter
and was in addition to $1.5 million that was recorded against this loan in 2010. Remaining losses
during the first quarter of 2011 tended to be on smaller commercial real estate and business loan
relationships. With respect to single-
family residential and consumer loans, the Company recorded modest recoveries in its provision for
loan losses related to these portfolios during the first quarter of 2011. These recoveries were
primarily the result of minor adjustments to the factors used to compute loss allowances on these
portfolios under the Companys homogenous pool approach for determining loss allowances on these
portfolios.
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During the first quarter of the previous year the Company recorded $2.2 million in loss provisions
against four unrelated loan relationships aggregating $10.2 million that defaulted during that
period. These loans were secured by office, commercial, and retail buildings, developed land, and
equipment and inventory. In addition, the Company recorded $1.0 million in additional losses
against two unrelated loan relationships aggregating $13.9 million that had defaulted in earlier
periods.
For additional discussion related to the Companys non-performing loans, non-performing assets,
classified assets, and allowance for loan losses, refer to Financial ConditionAsset Quality,
below.
Non-Interest Income Total non-interest income decreased by $3.2 million or 35.4% during the three
months ended March 31, 2011, compared to the same period in 2010. This decrease was principally
caused by a decline in net gains on investments, which were $1.1 million in the first quarter of
2011 compared to $4.4 million in the same quarter of 2010. In the 2011 period the Company sold a
$20.8 million investment in a mutual fund that management did not expect would perform well in a
higher interest rate environment. In the first quarter of the prior year, the Company sold $167.6
million in longer-term, mortgage-related securities. Management considered these sales to be
prudent in light of expectations that interest rates could trend higher in the future. Significant
reasons for other changes in non-interest income are discussed in the following paragraphs.
Service charges on deposits increased by $78,000 or 5.6% during the three months ended March 31,
2011, compared to the same quarter in 2010. Management attributes this improvement to an increase
in the Companys core deposit accounts, consisting of checking, savings, and money market accounts,
which increased by $97.6 million or 11.7% during the twelve months ended March 31, 2011. In
addition, management believes that unfavorable economic conditions during much of 2009 and 2010
resulted in reduced spending by consumers in general during those periods, which had an adverse
impact on the Companys transaction fee revenue, which consists principally of ATM, debit card, and
overdraft fees.
Brokerage and insurance commissions were $614,000 during the first quarter of 2011, a $28,000 or
4.8% improvement over the same period in the previous year. This improvement was principally due
to increased sales of tax-deferred annuity products in 2011 compared to 2010. 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. In
the first quarter of last year, this revenue item also benefited from higher commissions on sales
of other equity investments due to favorable trends in equity markets during that time frame.
Net loan-related fees and servicing revenue was $251,000 during the three months ended March 31,
2011, compared to $158,000 in the same period of 2010. The following table presents the primary
components of net loan-related fees and servicing revenue for the periods indicated:
Three months ended March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Gross servicing fees |
$ | 681 | $ | 629 | ||||
Mortgage servicing rights amortization |
(516 | ) | (476 | ) | ||||
Mortgage servicing rights valuation (loss) recovery |
6 | (76 | ) | |||||
Loan servicing revenue, net |
171 | 77 | ||||||
Other loan fee income |
80 | 81 | ||||||
Loan-related fees and servicing revenue, net |
$ | 251 | $ | 158 | ||||
Gross servicing fees and related amortization increased in the 2011 period compared to the 2010
period as a result of an increase in the amount of loans that the Company services for third-party
investors. As of March 31, 2011, the Company serviced $1.1 billion in loans for third-party
investors compared to $1.0
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billion at March 31, 2010. 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 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. Alternatively, 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 previously established
allowance on MSRs (if any), as well as record reduced levels of MSR amortization expense.
Gains on sales of loans were $596,000 in the first quarter of 2011 compared to $653,000 in the same
period last year. During the first quarter of 2011 sales of one- to four-family mortgage loans
were $57.6 million compared to $45.9 million for the same period in 2010. Although loan sales
increased in the 2011 period relative to the 2010 period, gains realized on these sales were lower
in the 2011 period than they were in the 2010 period. This development was caused by fluctuations
in period end mark-to-market adjustments on loans held-for-sale. Loans held-for-sale were $3.9
million at March 31, 2011, compared to $37.8 million at December 31, 2010. Despite the increase in
loan sales in the first quarter of 2011 compared to the same quarter last year, loan sales have
actually declined in recent months due to slightly higher interest rates for fixed-rate,
single-family mortgage loans. The Company typically sells these loans in the secondary market. If
this trend continues, management expects that gains on sales of loans in 2011 will be significantly
lower than they were in 2010.
Non-Interest Expense Total non-interest expense increased by $488,000 or 2.9% during the three
months ended March 31, 2011, compared to the same period in 2010. This increase was primarily
attributable to a $686,000 or 7.9% increase in compensation-related expense in the 2011 quarter
compared to the 2010 quarter. This increase was principally due to an increase in compensation
expense related to the Companys hiring of certain key management personnel in recent periods. In
April 2010, David A. Baumgarten joined the Company as President and recently hired two new senior
vice presidents to manage commercial banking and credit administration and risk. In addition, the
Company recently hired several commercial relationship managers experienced in originating loans
and selling deposit and cash management services to the mid-tier commercial banking market, defined
by management as business entities with sales revenues of $10 to $100 million. This is a new
market segment for the Company.
Also contributing to the increase in compensation-related expense in the 2011 quarter compared to
the same period in the prior year was an increase in costs related to the Companys defined-benefit
pension plan. This increase was caused by an increase in the number of qualified participants in
the plan in recent periods, as well as a decline in the interest rate used to determine the present
value of the pension obligation.
The increase in compensation-related expense between the 2011 and 2010 periods was partially offset
by a decline in ESOP expense. Last year marked the scheduled end of a 10-year commitment to the
ESOP. The Company does not intend to make additional contributions to the ESOP at this time.
However, this decision is subject to review on a periodic basis and contributions may be reinstated
in future periods.
Federal insurance premiums were $1.0 million during both the first quarter of 2011 and the first
quarter 2010. In February 2011 the FDIC issued a new rule as required by the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) which changed the
definition of a financial institutions deposit insurance assessment base and revised the deposit
insurance risk-based assessment rate schedule, among other things. Under the new rule the
assessment base changed 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
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assessment rate schedule changed as more
fully described in Part I, Item 1, BusinessRegulation and Supervision, of the Companys 2010
Annual Report on Form 10-K. The new rule takes effect in the quarter beginning April 1, 2011.
Under the new rule and schedule, management expects the Companys FDIC insurance premiums to be
modestly lower during the remainder of 2011, although there can be no assurances.
Losses on foreclosed real estate were $685,000 during the first quarter of 2011 compared a loss of
$955,000 in the same quarter last year. In the past year the Company has experienced elevated
losses on foreclosed real estate due to lower real estate values and weak economic conditions. If
these conditions persist, losses on foreclosed real estate could remain elevated in the near term.
Income Tax Expense Income tax expense was $361,000 during the three months ended March 31, 2011,
compared to $1.1 million in the same period of 2010. The Companys effective tax rate (ETR) for
the three month periods in 2011 and 2010 was 26.0% and 33.3%, respectively. The Companys ETR was
lower in the 2011 period because non-taxable revenue, such as earnings from bank-owned life
insurance (BOLI), comprised a larger percentage of pre-tax earnings than it did in 2010.
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.
Financial Condition
Overview The Companys total assets decreased by $62.7 million or 2.4% during the three months
ended March 31, 2011. Total assets at March 31, 2011, were $2.53 billion compared to $2.59 billion
at December 31, 2010. During the period the Companys cash and cash equivalents declined by
$149.0 million or 64.0% and its loans held-for-sale declined by $33.9 million or 89.7%. These
developments were partially offset by a $119.3 million or 18.0% increase in securities
available-for-sale during the period. The Companys deposit liabilities decreased by $60.3 million
or 2.9% during the three months ended March 31, 2011. The Companys total shareholders equity
decreased slightly from $313.0 million at December 31, 2010, to $312.6 million at March 31, 2011.
Non-performing assets increased by $4.5 million or 3.2% to $146.8 million during the three months
ended March 31, 2011.
The following paragraphs describe these changes in greater detail, along with other changes in the
Companys financial condition during the three months ended March 31, 2011.
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Cash and Cash Equivalents Cash and cash equivalents declined from $232.8 million at December 31,
2010, to $83.9 million at March 31, 2011. This decline was caused by the Companys purchase of
mortgage-related securities during the period and, to a lesser extent, a decrease in deposit
liabilities.
Securities Available-for-Sale The Companys portfolio of securities available-for-sale increased
by $119.3 million or 18.0% during the three months ended March 31, 2011. This increase
was primarily the result of the Companys purchase of $168.8 million in medium-term government
agency mortgage-backed securities (MBSs) and CMOs during the period. These purchases were
partially offset by principal payments in the portfolio, as well as the sale of a $20.8 million
mutual fund, as previously described.
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. The fair value adjustment on the Companys
available-for-sale securities was a net unrealized loss of $2.6 million at March 31, 2011, compared
to a net unrealized loss of $2.3 million at December 31, 2010.
The Company maintains an investment in private-label CMOs that were purchased from 2004 to 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 purchase. However, in recent periods several
of the securities in the portfolio have been downgraded. The following table presents the credit
ratings, carrying values, and unrealized gains (losses) of the Companys private-label CMO
portfolio as of the dates indicated (in instances of split-ratings, each security has been
classified according to its lowest rating):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Unrealized Gain | Unrealized Gain (Loss), | |||||||||||||||
Carrying Value | (Loss), Net | Carrying Value | Net | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Credit rating: | ||||||||||||||||
AAA/Aaa |
$ | 11,364 | $ | 307 | $ | 12,876 | $ | 322 | ||||||||
AA/Aa |
8,357 | 36 | 8,600 | (84 | ) | |||||||||||
A |
15,327 | (830 | ) | 19,249 | (1,155 | ) | ||||||||||
BBB/Baa |
10,343 | (140 | ) | 11,142 | (242 | ) | ||||||||||
Less than investment grade |
36,460 | (2,057 | ) | 35,735 | (1,981 | ) | ||||||||||
Total private-label CMOs |
$ | 81,851 | $ | (2,683 | ) | $ | 87,602 | $ | (3,139 | ) | ||||||
Although the net unrealized gain (loss) on the Companys private-label CMOs improved during the
three months ended March 31, 2011, the market value for these securities has remained depressed due
to weak economic conditions and low real estate values. However, management has determined that it
is unlikely the Company will not collect all amounts due according to the contractual terms of
these securities. As such, management has determined that none of the Companys private-label CMOs
are other-than-temporarily impaired as of March 31, 2011. 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.
Loans Held-for-Sale Loans held-for-sale decreased from $37.8 million at December 31, 2010, to
$3.9 million at March 31, 2011. The Companys policy is to sell substantially all of its
thirty-year, fixed-rate, one- to four-family mortgage loan originations, as well as certain
fifteen-year, one- to four-family loans, in the secondary market. Originations of such loans
declined in the first quarter of 2011 in response to higher interest rates on such loans. As a
result, management expects that loan sales in 2011 will be significantly lower than they were in
2010.
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Loans Receivable Loans receivable decreased by $842,000 or 0.06% during the three months
ended March 31, 2011. The Companys aggregate portfolio of multi-family and commercial real estate
loans decreased slightly from $495.5 million at December 31, 2010, to $494.4 million at March 31,
2011. In addition, its construction and development loans decreased from $83.5 million to $69.6
million during the same period. This latter decrease was due in part to the reclassification of
certain construction loans to permanent loans as a result of the completion of construction. The
Companys originations of multi-family and commercial real estate loans were $14.6 million in the
aggregate during the three months ended March 31, 2011, compared to $5.2 million during the same
period in 2010. Originations of construction and development loans were $7.3 million and $4.1
million during these same periods, respectively.
The Companys portfolio of one- to four-family loans increased slightly from $531.9 million at
December 31, 2010, to $534.9 million at March 31, 2011. In recent periods the Company has elected
to retain certain fifteen-year, fixed-rate, one- to- four family loans in its loan portfolio,
rather than sell such loans in the secondary market. In addition, as a result of recent increases
in market interest rates on fixed-rate one- to four-family loans, fewer borrowers with
adjustable-rate loans have elected to refinance into thirty-year, fixed-rate loans, which the
Company typically sells in the secondary market.
The Companys portfolio of commercial business loans increased from $50.1 million at December 31,
2010, to $53.5 million at March 31, 2011. Commercial business loan originations during the three
months ended March 31, 2011, were $12.1 million compared to $4.4 million during the same period in
the previous year.
The Companys consumer loan portfolio, which includes fixed-term home equity loans and lines of
credit, declined from $243.5 million at December 31, 2010, to $237.8 million at March 31, 2011.
The Companys consumer loan originations were $16.8 million during the three months ended March 31,
2011, compared to $15.2 million during the same period in the prior year.
The following table sets forth the Companys mortgage, consumer, and commercial loan originations
for the periods indicated:
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Mortgage loans: |
||||||||
One- to four-family (1) |
$ | 43,905 | $ | 52,364 | ||||
Multi-family |
5,564 | 3,861 | ||||||
Commercial real estate |
9,014 | 1,364 | ||||||
Construction and development loans |
7,292 | 4,072 | ||||||
Total mortgage loans |
65,775 | 61,661 | ||||||
Consumer loans |
16,821 | 15,165 | ||||||
Commercial business loans |
12,078 | 4,401 | ||||||
Total loans originated |
$ | 94,674 | $ | 81,227 | ||||
(1) | Includes $22.8 million and $46.5 million in loans originated for sale during the three months ended March 31, 2011 and 2010, respectively. |
In April 2010 David A. Baumgarten joined the Company as President. 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
periods 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. This is a new market segment for the
Company. In
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2011 the Company intends to add additional professionals capable of serving this market segment.
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.
Foreclosed Properties and Repossessed Assets The Companys foreclosed properties and repossessed
assets increased to $22.5 million at March 31, 2011, from $19.3 million at December 31, 2010. This
increase was caused by foreclosures related to a number of smaller commercial real estate loans
and, to a lesser extent, single-family residential loans. 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.
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 that time, however, management also evaluated
whether an event occurred that would require the Company to analyze goodwill for impairment as of
March 31, 2011. Based on an internal update of 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 March 31, 2011. As of that date,
management estimated the Step 1 fair value of the Company was approximately 12% higher than the
Companys total shareholders equity as of March 31, 2011. 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 March 31, 2011, 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 values of the Companys MSRs were $7.9 million at March 31,
2011, and $7.8 million at December 31, 2010, net of valuation allowances of zero and $6,000 as of
these dates, respectively. As of March 31, 2011, and December 31, 2010, the Company serviced $1.1
billion in loans for third-party investors.
Other Assets As a condition of membership in the FHLB of Chicago, the Company holds shares of the
common stock of the FHLB of Chicago that had a carrying value of $46.1 million at both March 31,
2011, and December 31, 2010, and which is included as a component of other assets. As of March
31, 2011, 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
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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, 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 March 31, 2011. 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.
Deposit Liabilities Deposit liabilities decreased by $60.3 million or 2.9% during the three
months ended March 31, 2011, to $2.02 billion compared to $2.08 billion at December 31, 2010. Core
deposits, consisting of checking, savings, and money market accounts, declined by $19.4 million or
2.0% during the period while certificates of deposit declined by $41.0 million or 3.6%. 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 has reduced the rates it offers on this product during the past year in an
effort to manage its overall liquidity position, which has resulted in a decline in certificates of
deposit.
Borrowings Borrowings, which consist of advances from the FHLB of Chicago, declined slightly
during the three months ended March 31, 2011. The following table presents the Companys FHLB
advances by contractual maturities as of that date.
Amount | Rate | |||||||
(Dollars in thousands) | ||||||||
FHLB advances maturing in: | ||||||||
2012 |
$ | 100,000 | 4.52 | % | ||||
2013 |
245 | 4.17 | ||||||
2017 and thereafter |
49,417 | 5.22 | ||||||
Total FHLB advances |
$ | 149,662 | 4.79 | % | ||||
The Companys advances from the FHLB of Chicago are subject to significant prepayment penalties if
repaid by the Company prior to their stated maturity. In December 2010, the Company repaid $756.0
million in advances that had an average remaining maturity of six years. The Company recognized a
one-time charge of $89.3 million during the fourth quarter of 2010, as previously noted. As of
March 31, 2011, $100.0 million in advances from the FHLB of Chicago that mature in 2012 are
redeemable at the option of the FHLB of Chicago, although management believes such is unlikely to
occur.
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.
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Advance Payments by Borrowers for Taxes and Insurance Advance payments by borrowers for taxes and
insurance (i.e., escrow deposits) were $11.9 million at March 31, 2011, compared to $2.7 million at
December 31, 2010. Escrow deposits typically increase during the course of the calendar year until
real estate tax obligations are paid, generally in December of each year or January of the
following year.
Other Liabilities The Companys other liabilities declined to $34.0 million at March 31, 2011,
from $45.0 million at December 31, 2010. Most of this decline was seasonal, caused by a decline in
drafts payable related to disbursement of customer escrow deposits near the end of 2010.
Shareholders Equity The Companys shareholders equity decreased slightly from $313.0 million at
December 31, 2010, to $312.6 million at March 31, 2011. This decline was primarily due to the
Companys payment of $1.4 million in cash dividends, offset in part by $1.0 million in net income
for the period. Also contributing to the decline in shareholders equity was an increase in
accumulated other comprehensive loss, due to a modest increase in the unrealized loss on the
Companys available-for-sale securities during the period. The Companys ratio of shareholders
equity to total assets was 12.36% at March 31, 2011, compared to 12.07% at December 31, 2010. Book
value per share of the Companys common stock was $6.82 at March 31, 2011, compared to $6.84 at
December 31, 2010.
A quarterly cash dividend of $0.03 per share was paid in the first quarter of 2011; the dividend
payout ratio during this period was 132% of net income. On May 2, 2011, the Companys board of
directors announced that it had declared a $0.01 per share dividend payable on June 1, 2011, to
shareholders of record on May 13, 2011. In view of the Companys earnings level in the first
quarter, the current regulatory and economic climate, and the proposed memorandum of understanding
with the OTS, discussed below, the board of directors determined that it would be prudent to reduce
the Companys quarterly dividend payment. During the first quarter of 2011 the Company did not
repurchase any shares of its common stock nor did its board of directors authorize a program for
the purchase of additional shares.
For additional discussion relating to the Companys ability to pay dividends or repurchase shares
of its common stock, refer to Liquidity and Capital ResourcesCapital Resources, below.
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Asset Quality The following table summarizes non-performing loans and assets as of the dates
indicated:
At March 31 | At December 31 | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual mortgage loans: |
||||||||
One- to four-family |
$ | 18,344 | $ | 18,684 | ||||
Multi-family |
33,121 | 31,660 | ||||||
Commercial real estate |
53,208 | 41,244 | ||||||
Construction and development |
15,365 | 26,563 | ||||||
Total non-accrual mortgage loans |
120,658 | 118,151 | ||||||
Non-accrual consumer loans: |
||||||||
Secured by real estate |
1,378 | 1,369 | ||||||
Other consumer loans |
271 | 275 | ||||||
Total non-accrual consumer loans |
1,649 | 1,644 | ||||||
Non-accrual commercial business loans |
2,047 | 2,779 | ||||||
Total non-accrual loans |
123,754 | 122,574 | ||||||
Accruing loans delinquent 90 days or more |
509 | 373 | ||||||
Total non-performing loans |
124,263 | 122,947 | ||||||
Foreclosed properties and repossessed assets |
22,522 | 19,293 | ||||||
Total non-performing assets |
$ | 146,785 | $ | 142,240 | ||||
Non-performing loans to loans receivable, net |
9.39 | % | 9.29 | % | ||||
Non-performing assets to total assets |
5.80 | % | 5.49 | % | ||||
Gross interest income that would have been recorded
if non-accrual loans had been current (1) |
$ | 2,103 | $ | 8,531 | ||||
Interest income on non-accrual loans included in
interest income (1) |
1,171 | 5,985 |
(1) | Amounts shown are for the three months ended March 31, 2011, and the twelve months ended December 31, 2010, respectively. |
The Companys non-performing loans were $124.3 million or 9.39% of loans receivable as of March 31,
2011, compared to $122.9 million or 9.29% as of December 31, 2010. Non-performing assets, which
includes non-performing loans, were $146.8 million or 5.80% of total assets and $142.2 million or
5.49% of total assets as of these same dates, respectively. The Companys elevated level of
non-performing loans and assets is due to continuing weakness in economic conditions, low values
for commercial and multi-family real estate, and high unemployment rates in recent periods, which
has resulted in increased stress on borrowers and increased loan delinquencies. Many properties
securing the Companys loans have experienced increased vacancy rates, reduced lease rates, and/or
delays in unit sales, as well as lower 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 March 31, 2011, non-performing loans included $48.2 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. The Company has
continued to record periodic interest payments on these loans in interest income provided the
borrowers have remained current on the loans and provided, in the judgment of management, the
Companys net recorded investment in the loan has been deemed to be collectible.
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The increases in non-performing commercial real estate and multi-family loans during the three
months ended March 31, 2011, was largely due to the reclassification of certain construction loans
during the period, due to the completion of the construction phase on these loan relationships.
In addition to non-performing assets, at March 31, 2011, management was closely monitoring $26.5
million in additional loans that were classified as special mention and $20.1 million that were
adversely classified as substandard in accordance with the Companys internal risk rating policy.
These amounts compared to $8.9 million and $27.1 million, respectively, as of December 31, 2010.
These loans are primarily secured by commercial real estate, multi-family real estate, developed
and undeveloped land, and certain commercial business assets. Although these loans were performing
in accordance with their contractual terms, management 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. The decrease in substandard loans during the three months
ended March 31, 2011, was largely due to the repayment of two loans from the same borrower that
aggregated $6.1 million. The Company charged-off $1.9 million in previously established loan loss
allowances related to the resolution of this loan relationship. The increase in special mention
loans during the three months ended March 31, 2011, was primarily caused by the Companys downgrade
of a $15.9 million loan secured by a multi-tenant retail development. Although this loan is
performing in accordance with its contractual terms, management determined that classification as
special mention was appropriate in light of recent trends in occupancy levels and lease rates on
the collateral property. The Company does not expect to incur a loss on this loan at this time,
although there can be no assurance.
A summary of the allowance for loan losses is shown below for the periods indicated:
Three months ended March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance at the beginning of the period |
$ | 47,985 | $ | 17,028 | ||||
Provision for loan losses: |
||||||||
One- to four-family |
(98 | ) | (93 | ) | ||||
Multi-family |
1,747 | 1,517 | ||||||
Commercial real estate |
286 | 137 | ||||||
Construction and Development |
996 | 1,067 | ||||||
Consumer loans |
(103 | ) | 195 | |||||
Commercial business loans |
352 | 543 | ||||||
Total provision for loan losses |
3,180 | 3,366 | ||||||
Charge-offs: |
||||||||
One- to four-family |
(1,092 | ) | (100 | ) | ||||
Multi-family |
(2,878 | ) | | |||||
Commercial real estate |
(735 | ) | (1,132 | ) | ||||
Construction and development |
(2,415 | ) | | |||||
Consumer loans |
(228 | ) | (227 | ) | ||||
Commercial business loans |
(302 | ) | (72 | ) | ||||
Total charge-offs |
(7,650 | ) | (1,531 | ) | ||||
Recoveries: |
||||||||
One- to four-family |
| 20 | ||||||
Commercial business loans |
7 | | ||||||
Consumer loans |
4 | 9 | ||||||
Total recoveries |
11 | 29 | ||||||
Net charge-offs |
(7,639 | ) | (1,502 | ) | ||||
Balance at the end of the period |
$ | 43,526 | $ | 18,892 | ||||
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March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Allowance as a percent of total loans |
3.29 | % | 3.63 | % | ||||
Allowance as a percent of non-performing loans |
35.03 | % | 39.03 | % | ||||
Net charge-offs to average loans (1) |
2.24 | % | 0.40 | % |
(1) | The rate for the three months ended March 31, 2011, is annualized. |
The Companys allowance for loan losses declined to $43.5 million or 3.29% of total loans at March
31, 2011, compared to $48.0 million or 3.63% at December 31, 2010. As a percent of non-performing
loans, the Companys allowance for loan losses was 35.0% at March 31, 2011, compared to 39.0% at
December 31, 2010. The decrease in the allowance was caused by $7.6 million in net charge-offs
that was only partially offset by the additional loss allowances established during the period, as
described earlier in this report. As previously noted, the Company charged off $1.9 million on
two loans from the same borrower that aggregated $6.1 million and which were paid off during the
period. In addition, the Company charged off $3.7 million on four unrelated loans that aggregated
$6.8 million on which management commenced foreclosure proceedings during the period. For the most
part, these allowances were established in prior periods.
The allowance for loan losses has been determined in accordance with GAAP. Management is
responsible for the timely and periodic determination of the amount of the allowance required.
Future provisions for loan losses will continue to be based upon managements assessment of the
overall loan portfolio and the underlying collateral, trends in non-performing loans, current
economic conditions, and other relevant factors. To the best of managements knowledge, all known
and inherent losses have been provided for in the allowance for loan losses.
Refer to Operating ResultsProvision for Loan Losses, above, for additional discussion.
Liquidity and Capital Resources
Liquidity The term liquidity refers to the Companys ability to generate cash flow to fund loan
originations, loan purchases, deposit withdrawals, and operating expenses. The Companys primary
sources of funds are deposit liabilities, scheduled payments, prepayments, and maturities of loans
and securities available-for-sale, sales of one- to four-family loans in the secondary market,
sales of securities available-for-sale, borrowings from the FHLB of Chicago, and cash flow provided
by the Companys operations. Historically, these sources of funds have been adequate to maintain
liquidity, with the Company borrowing correspondingly more in periods in which its operations
generate less cash.
Scheduled payments and maturities of loans and securities available-for-sale are relatively
predictable sources of funds. However, cash flows from customer deposits, calls of investment
securities, and prepayments of loans and mortgage-related securities are strongly influenced by
interest rates, general and local economic conditions, and competition in the marketplace. These
factors increase the variability of cash flows from these sources of funds.
The Company is committed to maintaining a strong liquidity position; therefore, management monitors
the Companys liquidity position on a daily basis. Based upon historical experience and available
sources of liquidity, management anticipates that the Company will have sufficient funds to meet
current funding commitments. For additional discussion refer to Financial Condition, above, and
Qualitative and Quantitative Disclosures about Market Risk in Part I, Item 3, below.
Capital Resources At March 31, 2011, the Bank exceeded each of the applicable regulatory capital
requirements (refer to Note 8, Shareholders Equity, of the Unaudited Condensed Consolidated
Financial Statements, above). In order to be classified as well-capitalized by the FDIC, the
Bank is
46
Table of Contents
required to have Tier 1 (leverage) capital to total adjusted assets of at least 5.0% and total
risk-based capital to risk-weighted assets of at least 10.0%. At March 31, 2011, the Bank had a
Tier 1 capital ratio of 9.48% and a total risk-based capital ratio of 18.42%.
Current economic conditions and the weakness in the financial markets have caused bank regulators
to become more aggressive in monitoring financial institutions. Among other actions, the
regulators have been requiring institutions to maintain capital beyond regulatory requirements and
to take aggressive loss reserves and write offs in view of the systemic level of problem loans.
Although the Company and the Bank maintain capital well above current regulatory requirementsat
levels sufficient to be considered well capitalizedand believe their loan loss experience has
been generally better than peer institutions, the OTS, in late April 2011, asked the Company and
the Bank to address certain items identified in the most recent OTS examinations, even though the
examinations did not note any significant regulatory violations, by entering into Memoranda of
Understanding (MOU). An MOU is an agreement between the OTS and an institution which requires
the exercise of reasonable good faith efforts to comply with its requirements but is not subject to
direct judicial enforcement as are other forms of supervisory action such as a consent or cease
and desist orders.
Under the proposed MOU for the Company, an updated business and capital plan would be submitted to
the OTS which, among other things, would include the establishment of a minimum tangible capital
ratio (no particular ratio was specified by the draft MOU and was left to the judgment of the board
of directors based on its risk profile analysis). The Company would also be required to provide
notice and obtain the non-objection of the OTS prior to declaring or paying cash dividends,
repurchasing Company shares, or incurring, issuing, increasing, modifying or redeeming any debt or
lines of credit. Although the MOU is not yet in effect, the OTS provided a non-objection to the
dividend declared by the board of directors in May 2011 and described herein.
Pursuant to the proposed MOU with the Bank, the Bank would continue to develop individual workout
plans for each problem asset, or group of problem assets, to any one borrower or loan relationship
of $3.0 million or more. The MOU would require the Bank to retain an independent third party
consulting firm to conduct an external credit administration review and prepare a report, which the
Bank would use to update its credit administration policies, procedures, and practices in
accordance with the recommendations and suggestions. Pursuant to the MOU (and the Banks existing
policies), the Bank would also provide additional information to the board of directors regarding
the adequacy of its allowance for loan losses and its consistency with accounting guidance and the
Banks experience and trends. The Bank would also be required to submit a business and capital
plan (although no particular capital requirements are included in the MOU, with the ratios again
left to the discretion of the board of directors based on its risk analysis). Under the MOU, the
Bank would not be permitted to declare or pay dividends or make any other capital distributions
without prior approval of the OTS.
As to many of these requirements, the Company believes it is already in substantial compliance and
has already taken many of the steps contemplated by the MOUs. For example, the Bank has already
hired additional personnel, re-allocated responsibilities in the credit administration and risk
management areas and addressed the noted loan issues. The MOUs also would give the Company and the
Bank substantial latitude in determining appropriate action and targets. The Companys proposed
MOU was approved by the board of directors on May 2, 2011, and the Bank board of directors is
expected to approve the Banks proposed MOU on May 16, 2011. However, the MOUs will not be final
or effective until formally accepted by the OTS, which is expected to occur in May 2011.
As noted in Financial ConditionShareholders Equity, above, the Company did not repurchase any
shares of its common stock during the three months ended March 31, 2011, nor did its board of
directors authorize a program for the purchase of additional shares. In addition, recently the
board of directors reduced the regular quarterly dividend from $0.03 per share paid in the first
quarter of 2011 to $0.01 per share to be paid in the second quarter. In view of the Companys
earnings level in the first quarter, the
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current regulatory and economic climate, and the proposed memorandum of understanding discussed
above, the board of directors determined that it would be prudent to reduce the Companys quarterly
dividend payment and to continue to the suspension of stock repurchases.
The payment of dividends or the repurchase of common stock by the Company is highly dependent on
the ability of the Companys bank subsidiary 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. Refer to Part I, Item 1, BusinessRegulation
and Supervision, of the Companys 2010 Annual Report on Form 10-K for additional discussion.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
Contractual Obligations The following table presents, as of March 31, 2011, significant fixed and
determinable contractual obligations to third parties by payment date (excluding interest payments
due in the future on deposits and borrowed funds).
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Deposits with no stated maturity |
$ | 928,487 | | | | $ | 928,487 | |||||||||||||
Certificates of deposits |
779,023 | $ | 273,893 | $ | 36,593 | | 1,089,509 | |||||||||||||
Borrowed funds (1) |
| 100,245 | | $ | 49,417 | 149,662 | ||||||||||||||
Operating leases |
738 | 1,249 | 1,176 | 2,053 | 5,216 | |||||||||||||||
Purchase obligations |
1,680 | 3,360 | 3,360 | 5,880 | 14,280 | |||||||||||||||
Non-qualified retirement plans and
deferred compensation plans |
1,101 | 2,168 | 2,485 | 7,615 | 13,369 |
(1) | Includes $100.0 million in advances that are redeemable on a quarterly basis at the option of the FHLB of Chicago. |
The Companys operating lease obligations represent short- and long-term lease and rental payments
for facilities, certain software and data processing equipment, 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 executives and directors as
described in Note 10, Employee Benefit Plans, to the Unaudited Condensed Consolidated Financial
Statements, above.
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Commitments to Extend Credit The following table details the amounts and expected maturities of
approved commitments as of March 31, 2011.
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Commercial loans |
$ | 6,591 | | | | $ | 6,591 | |||||||||||||
Residential real estate loans |
37,985 | | | | 37,985 | |||||||||||||||
Revolving home equity and
credit card lines |
149,621 | | | | 149,621 | |||||||||||||||
Standby letters of credit |
288 | $ | 41 | | $ | 10 | 339 | |||||||||||||
Commercial lines of credit |
23,403 | | | | 23,403 | |||||||||||||||
Undisbursed commercial loans |
1,155 | | | | 1,155 |
Approved 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.
Off-Balance Sheet Arrangements At March 31, 2011, the Company had forward commitments to sell
one- to four-family mortgage loans of $9.8 million to Fannie Mae. As described in Note 12,
Financial Instruments with Off-Balance Sheet Risk, to the Companys Unaudited Condensed
Consolidated Financial Statements, the Company uses forward commitments to sell loans to mitigate
interest rate risk on one- to four-family IRLCs and loans held-for-sale.
Contingent Liabilities The Company did not have a material exposure to contingent liabilities as
of March 31, 2011.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
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 same 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.
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The table on the following page presents the amounts of the Companys interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2011, which management anticipates will
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. $122.8 million in investment securities with maturities beyond one year have been classified as due within one year base on their call dates. These investments may or may not be called prior to their stated maturities. $83.0 million in investment securities with call dates within one year have been classified as due beyond one year. These investments may be called prior to one year. | ||
| Mortgage-related securitiesbased upon known repricing dates (if applicable) and an independent outside source for determining estimated repayment speeds. Actual cash flows may differ from these assumptions. | ||
| Loans receivablebased upon contractual maturities, repricing dates (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 from these assumptions. | ||
| Deposit liabilitiesbased upon contractual maturities and historical decay rates. Actual cash flows may differ from these assumptions. | ||
| Borrowingsbased upon stated 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 in Part I, Item 2, above). |
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At March 31, 2011 | ||||||||||||||||||||||||
Within | Three to | More Than One Year | More Than | |||||||||||||||||||||
Three | Twelve | To Three | Three Years | |||||||||||||||||||||
Months | Months | Years | To Five Years | Over Five Years | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable: |
||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||
Permanent: |
||||||||||||||||||||||||
Fixed |
$ | 76,023 | $ | 95,805 | $ | 146,989 | $ | 74,756 | $ | 83,316 | $ | 476,889 | ||||||||||||
Adjustable |
109,656 | 234,689 | 153,033 | 11,930 | 303 | 509,611 | ||||||||||||||||||
Construction: |
||||||||||||||||||||||||
Fixed |
2,975 | | 2,321 | 2,264 | 8,529 | 16,089 | ||||||||||||||||||
Adjustable |
12,853 | 182 | 1,992 | 2,109 | | 17,136 | ||||||||||||||||||
Consumer loans |
105,551 | 32,707 | 45,298 | 23,834 | 28,938 | 236,328 | ||||||||||||||||||
Commercial business loans |
31,463 | 10,858 | 9,449 | 489 | 16 | 52,275 | ||||||||||||||||||
Interest-earning deposits |
57,377 | | | | | 57,377 | ||||||||||||||||||
Investment securities |
82,825 | 40,000 | 83,000 | | | 205,825 | ||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||
Fixed |
22,657 | 62,695 | 160,645 | 121,248 | 169,622 | 536,867 | ||||||||||||||||||
Adjustable |
42,463 | | | | | 42,463 | ||||||||||||||||||
Other interest-earning assets |
46,092 | | | | | 46,092 | ||||||||||||||||||
Total interest-earning assets |
589,935 | 476,936 | 602,727 | 236,630 | 290,724 | 2,196,952 | ||||||||||||||||||
Non-interest-bearing and
interest-bearing
liabilities: |
||||||||||||||||||||||||
Non-interest-bearing demand accounts |
515 | 1,528 | 3,943 | 3,758 | 76,342 | 86,086 | ||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposit liabilities: |
||||||||||||||||||||||||
Interest-bearing demand accounts |
1,313 | 3,891 | 10,040 | 9,569 | 194,411 | 219,224 | ||||||||||||||||||
Savings accounts |
1,464 | 4,331 | 11,111 | 10,503 | 190,348 | 217,757 | ||||||||||||||||||
Money market accounts |
405,421 | | | | | 405,421 | ||||||||||||||||||
Certificates of deposit |
361,990 | 496,528 | 194,397 | 36,593 | | 1,089,508 | ||||||||||||||||||
Advance payments by borrowers for
taxes and insurance |
| 11,948 | | | | 11,948 | ||||||||||||||||||
Borrowings |
272 | 840 | 102,600 | 2,625 | 43,325 | 149,662 | ||||||||||||||||||
Total interest-bearing and
non-interest-bearing liabilities |
770,975 | 519,066 | 322,091 | 63,048 | 504,426 | 2,179,606 | ||||||||||||||||||
Interest rate sensitivity gap |
$ | (181,040 | ) | $ | (42,130 | ) | $ | 280,636 | $ | 173,582 | $ | (213,702 | ) | $ | 17,346 | |||||||||
Cumulative interest rate sensitivity gap |
$ | (181,040 | ) | $ | (223,170 | ) | $ | 57,466 | $ | 231,048 | $ | 17,346 | ||||||||||||
Cumulative interest rate sensitivity
gap as a percentage of total assets |
(7.16 | )% | (8.82 | )% | 2.27 | % | 9.14 | % | 0.69 | % | ||||||||||||||
Cumulative interest-earning assets as a
percentage of interest bearing
liabilities |
76.52 | % | 82.70 | % | 103.56 | % | 113.79 | % | 100.08 | % | ||||||||||||||
Based on the above gap analysis, at March 31, 2011, the Companys interest-bearing liabilities
maturing or repricing within one year exceeded its interest-earning assets maturing or repricing
within the same period by $223.2 million. This represented a negative cumulative one-year interest
rate sensitivity gap of 8.82%, and a ratio of interest-earning assets maturing or repricing within
one year to interest-bearing liabilities maturing or repricing within one year of 82.70%. Based on
this information, 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
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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 Part I, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of OperationsCautionary Statement,
above, as well as Part I, Item 1A, Risk Factors, of the Companys 2010 Annual Report on Form
10-K.
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
have similar maturities or periods to repricing, they may react in different degrees to changes in
market interest rates. 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. 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.
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
March 31, 2011. 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 a 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 |
$ | 232,831 | $ | (172,770 | ) | (42.6 | )% | 10.08 | % | (37.0 | )% | |||||||||
+300 |
276,907 | (128,694 | ) | (31.7 | ) | 11.70 | (26.9 | ) | ||||||||||||
+200 |
323,342 | (82,596 | ) | (20.3 | ) | 13.33 | (16.7 | ) | ||||||||||||
+100 |
366,213 | (39,388 | ) | (9.7 | ) | 14.76 | (7.8 | ) | ||||||||||||
0 |
405,601 | | | 15.98 | | |||||||||||||||
-100 |
412,476 | 6,875 | 1.7 | 14.91 | (0.1 | ) |
Based on the above analysis, the Companys PVE could 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
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reduced likelihood of calls on certain investment
securities), partially offset by a decline in the present value
of deposit liabilities and FHLB of Chicago advances. Also based on the above analysis, the
Companys PVE could be favorably impacted by a modest amount by a decrease in interest rates for
opposite reasons than those described, above. 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 Part I, Item 2, Managements Discussion and Analysis of
Financial Condition and Results of OperationsCautionary Statement, above, as well as Part I,
Item 1A, Risk Factors, of the Companys 2010 Annual Report on Form 10-K.
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 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 certain products, such as savings deposits, may lag behind market changes.
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.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated 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 such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits under the Exchange
Act.
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 fiscal quarter
to which this report relates that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II
Item 1A. Risk Factors
Refer to Risk Factors in Part I, Item 1A, of the Companys 2010 Annual Report on Form 10-K.
Refer also to Managements Discussion and Analysis of Financial Condition and Results of
OperationsCautionary Statement in Part I, Item 2, above.
Item 6. Exhibits
Refer to Exhibit Index, which follows the signature page hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
BANK MUTUAL CORPORATION (Registrant) |
||||
Date: May 4, 2011 | /s/ Michael T. Crowley, Jr. | |||
Michael T. Crowley, Jr. | ||||
Chairman and Chief Executive Officer | ||||
Date: May 4, 2011 | /s/ Michael W. Dosland | |||
Michael W. Dosland | ||||
Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
BANK MUTUAL CORPORATION
Form 10-Q for Quarter Ended March 31, 2011
Incorporated Herein | ||||||
Exhibit No. | Description | by Reference To | Filed Herewith | |||
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 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 Chief Financial Officer of Bank Mutual Corporation | X |