PINX:ABCW Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

COMMISSION FILE NUMBER 001-34955

 

 

ANCHOR BANCORP WISCONSIN INC.

(Exact name of registrant as specified in its charter)

 

 

 

Wisconsin   39-1726871

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

25 West Main Street

Madison, Wisconsin

  53703
(Address of principal executive office)   (Zip Code)

(608) 252-8700

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class: Common stock — $.10 Par Value

Number of shares outstanding as of July 31, 2012: 21,247,725

 

 

 


Table of Contents

ANCHOR BANCORP WISCONSIN INC.

INDEX - FORM 10-Q

 

              Page #

Part I – Financial Information

  

Item 1       Financial Statements

  
    

Unaudited Consolidated Balance Sheets as of June 30, 2012 and March 31, 2012

   2
    

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended June 30, 2012 and 2011

   3
    

Unaudited Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended June 30, 2012 and Year Ended March 31, 2012

   5
    

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011

   6
    

Notes to Unaudited Consolidated Financial Statements

   8

Item 2        Management’s Discussion and Analysis of Financial Condition and Results of Operations

   44
    

Executive Overview

   44
    

Results of Operations

   49
    

Financial Condition

   53
    

Regulatory Developments

   54
    

Risk Management

   57
    

Credit Risk Management

   58
    

Liquidity Risk Management

   66
    

Market Risk Management

   69
    

Critical Accounting Estimates and Judgments

   72
    

Forward Looking Statements

   75

Item 3        Quantitative and Qualitative Disclosures About Market Risk

   76

Item 4       Controls and Procedures

   76

Part II – Other Information

  

Item 1       Legal Proceedings

   77

Item 1A    Risk Factors

   77

Item 2        Unregistered Sales of Equity Securities and Use of Proceeds

   77

Item 3       Defaults Upon Senior Securities

   77

Item 4       Mine Safety Disclosures

   77

Item 5       Other Information

   77

Item 6       Exhibits

   77

Signatures

   79

 

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Table of Contents

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

     June 30,
2012
    March 31,
2012
 
     (In thousands, except share data)  

Assets

    

Cash and due from banks

   $ 55,995      $ 51,584   

Interest-bearing deposits

     312,374        191,396   
  

 

 

   

 

 

 

Cash and cash equivalents

     368,369        242,980   

Investment securities available for sale

     231,644        242,299   

Investment securities held to maturity (fair value of $0 and $20, respectively)

     —          20   

Loans

    

Held for sale

     27,938        39,332   

Held for investment, less allowance for loan losses of $100,477 at June 30, 2012 and $111,215 at March 31, 2012

     1,959,551        2,058,008   

Other real estate owned, net

     83,955        88,841   

Premises and equipment, net

     27,422        25,453   

Federal Home Loan Bank stock—at cost

     30,522        35,792   

Mortgage servicing rights, net

     20,590        22,156   

Accrued interest receivable

     11,391        12,075   

Other assets

     22,694        22,496   
  

 

 

   

 

 

 

Total assets

   $ 2,784,076      $ 2,789,452   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Deficit

    

Deposits

    

Non-interest bearing

   $ 275,526      $ 264,751   

Interest bearing

     1,977,647        2,000,164   
  

 

 

   

 

 

 

Total deposits

     2,253,173        2,264,915   

Other borrowed funds

     476,378        476,103   

Accrued interest and fees payable

     47,937        43,320   

Accrued taxes, insurance and employee related expenses

     6,502        6,385   

Other liabilities

     28,594        28,279   
  

 

 

   

 

 

 

Total liabilities

     2,812,584        2,819,002   
  

 

 

   

 

 

 

Commitments and contingent liabilities (Note 13)

    

Preferred stock, $0.10 par value, 5,000,000 shares authorized, 110,000 shares issued and outstanding; dividends in arrears of $20,395 at June 30, 2012 and $18,785 at March 31, 2012

     98,284        96,421   

Common stock, $0.10 par value, 100,000,000 shares authorized, 25,363,339 shares issued, 21,247,725 shares outstanding

     2,536        2,536   

Additional paid-in capital

     110,402        110,402   

Retained deficit

     (149,321     (147,513

Accumulated other comprehensive income related to AFS securities

     4,444        3,628   

Accumulated other comprehensive loss related to OTTI securities - non credit factors

     (3,325     (3,496
  

 

 

   

 

 

 

Total accumulated other comprehensive income

     1,119        132   

Treasury stock (4,115,614 shares at June 30, 2012 and March 31, 2012), at cost

     (90,259     (90,259

Deferred compensation obligation

     (1,269     (1,269
  

 

 

   

 

 

 

Total stockholders’ deficit

     (28,508     (29,550
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 2,784,076      $ 2,789,452   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

     Three Months Ended June 30,  
     2012     2011  
     (In thousands, except per share data)  

Interest income:

    

Loans

   $ 25,288      $ 32,109   

Investment securities and Federal Home Loan Bank stock

     1,549        3,956   

Interest-bearing deposits

     154        52   
  

 

 

   

 

 

 

Total interest income

     26,991        36,117   

Interest expense:

    

Deposits

     3,591        7,319   

Other borrowed funds

     7,001        7,278   
  

 

 

   

 

 

 

Total interest expense

     10,592        14,597   
  

 

 

   

 

 

 

Net interest income

     16,399        21,520   

Provision for credit losses

     (1,716     3,482   
  

 

 

   

 

 

 

Net interest income after provision for credit losses

     18,115        18,038   

Non-interest income:

    

Impairment on new OTTI securities

     —          —     

Non-credit related impairment on new OTTI securities recognized in other comprehensive income

     —          —     

Reclassification of credit related other-than-temporary impairment from other comprehensive income

     (64     (59
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (64     (59

Loan servicing income (loss), net of amortization

     (395     814   

Service charges on deposits

     2,866        2,794   

Investment and insurance commissions

     1,032        1,037   

Net gain on sale of loans

     5,823        1,173   

Net gain on sale of investment securities

     62        1,136   

Net gain on sale of OREO

     3,172        1,245   

Revenue from real estate partnership operations

     5        38   

Other

     997        994   
  

 

 

   

 

 

 

Total non-interest income

     13,498        9,172   

(Continued)

 

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Con’t.)

(Unaudited)

 

     Three Months Ended June 30,  
     2012     2011  
     (In thousands, except per share data)  

Non-interest expense:

    

Compensation and benefits

   $ 10,560      $ 10,194   

Occupancy

     1,833        1,980   

Furniture and equipment

     1,586        1,544   

Federal deposit insurance premiums

     1,564        1,933   

Data processing

     1,385        1,383   

Marketing

     239        305   

Expenses from real estate partnership operations

     571        42   

OREO expense, net

     7,012        8,870   

Mortgage servicing rights impairment

     1,257        221   

Legal services

     1,574        934   

Other professional fees

     643        1,018   

Other

     3,334        3,531   
  

 

 

   

 

 

 

Total non-interest expense

     31,558        31,955   
  

 

 

   

 

 

 

Income (loss) before income taxes

     55        (4,745

Income tax expense

     —          10   
  

 

 

   

 

 

 

Net income (loss)

     55        (4,755

Preferred stock dividends in arrears

     (1,610     (1,536

Preferred stock discount accretion

     (1,863     (1,863
  

 

 

   

 

 

 

Net loss available to common equity

   $ (3,418   $ (8,154
  

 

 

   

 

 

 

Net income (loss)

   $ 55      $ (4,755

Reclassification adjustment for realized net gains recognized in income

     (62     (1,136

Reclassification adjustment for unrealized credit related other-than-temporary impairment losses recognized in income

     68        59   

Reclassification adjustment for credit related other-than-temporary impairment previously recognized on securities paid-off during the period

     (4     —     

Change in net unrealized gains on available-for-sale securities

     985        14,013   
  

 

 

   

 

 

 

Comprehensive income

   $ 1,042      $ 8,181   
  

 

 

   

 

 

 

Loss per common share:

    

Basic

   $ (0.16   $ (0.38

Diluted

     (0.16     (0.38

Dividends declared per common share

     —          —     

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Deficit
    Treasury
Stock
    Deferred
Compensation
Obligation
    Accu-
mulated
Other
Compre-
hensive
Income
(Loss)
    Total  
     (In thousands)  

Balance at April 1, 2011

   $ 89,008       $ 2,536       $ 111,513      $ (103,362   $ (90,534   $ (2,380   $ (19,952   $ (13,171

Net loss

     —           —           —          (36,738     —          —          —          (36,738

Reclassification adjustment for realized net gains recognized in income

     —           —           —          —          —          —          (6,579     (6,579

Reclassification adjustment for unrealized credit related other-than-temporary impairment losses recognized in income

     —           —           —          —          —          —          558        558   

Change in net unrealized gains (losses) on available-for-sale securities

     —           —           —          —          —          —          26,105        26,105   

Vesting of restricted stock

     —           —           —          —          275        —          —          275   

Change in stock-based deferred compensation obligation

     —           —           (1,111     —          —          1,111        —          —     

Accretion of preferred stock discount

     7,413         —           —          (7,413     —          —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     96,421         2,536         110,402        (147,513     (90,259     (1,269     132        (29,550
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —           —           —          55        —          —          —          55   

Reclassification adjustment for realized net gains recognized in income

     —           —           —          —          —          —          (62     (62

Reclassification adjustment for unrealized credit related other-than-temporary impairment losses recognized in income

     —           —           —          —          —          —          68        68   

Reclassification adjustment for credit related other-than-temporary impairment previously recognized on securities paid-off during the period

     —           —           —          —          —          —          (4     (4

Change in net unrealized gains (losses) on available-for-sale securities

     —           —           —          —          —          —          985        985   

Accretion of preferred stock discount

     1,863         —           —          (1,863     —          —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 98,284       $ 2,536       $ 110,402      $ (149,321   $ (90,259   $ (1,269   $ 1,119      $ (28,508
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended June 30,  
     2012     2011  
     (In thousands)  

Operating Activities

    

Net income (loss)

   $ 55      $ (4,755

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Provision for credit losses

     (1,716     3,482   

Provision for OREO losses

     4,634        4,890   

Depreciation and amortization

     1,004        909   

Amortization and accretion of investment securities premium/discount, net

     206        371   

Real estate held for development and sale impairment

     245        —     

Mortgage servicing rights impairment

     1,257        221   

Cash paid to originate loans held for sale

     (242,340     (80,549

Cash received on sale of loans held for sale

     259,557        72,927   

Net gain on sales of loans

     (5,823     (1,173

Net gain on sale of investment securities

     (62     (1,136

Gain on sale of OREO

     (3,172     (1,245

Net impairment losses recognized in earnings

     64        59   

Decrease in accrued interest receivable

     684        730   

Increase in prepaid expense and other assets

     (134     (345

Increase in accrued interest and fees payable

     4,617        2,962   

Increase in other liabilities

     432        3,193   
  

 

 

   

 

 

 

Net cash provided by operating activities

     19,508        541   

Investing Activities

    

Proceeds from sale of investment securities

     1,905        55,757   

Principal collected on investment securities

     9,549        10,405   

FHLB stock redemption

     5,270        —     

Decrease in loans held for investment

     81,355        102,646   

Purchases of premises and equipment

     (103     (156

Proceeds from sale of premises and equipment

     —          9   

Proceeds from sale of OREO

     19,372        20,823   
  

 

 

   

 

 

 

Net cash provided by investing activities

     117,348        189,484   

(Continued)

 

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Table of Contents

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Cont’d)

(Unaudited)

 

     Three Months Ended June 30,  
     2012     2011  
     (In thousands)  

Financing Activities

    

Decrease in deposits

   $ (16,401   $ (61,183

Increase in advance payments by borrowers for taxes and insurance

     4,659        3,989   

Proceeds from borrowed funds

     19,700        1,550,000   

Repayment of borrowed funds

     (19,425     (1,661,100
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,467     (168,294
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     125,389        21,731   

Cash and cash equivalents at beginning of period

     242,980        107,015   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 368,369      $ 128,746   
  

 

 

   

 

 

 

Supplementary cash flow information:

    

Cash paid (received) or credited to accounts:

    

Interest on deposits and borrowings

   $ 5,975      $ 11,635   

Income taxes

     10        —     

Non-cash transactions:

    

Transfer of loans to OREO

     18,818        23,252   

Transfer of OREO to premises and equipment

     2,870        —     

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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ANCHOR BANCORP WISCONSIN INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The unaudited consolidated financial statements include the accounts and results of operations of Anchor BanCorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiaries, AnchorBank fsb (the “Bank”) and Investment Directions, Inc. (“IDI”). The Bank has one subsidiary at June 30, 2012: ADPC Corporation. Significant inter-company balances and transactions have been eliminated.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements have been included.

In preparing the unaudited consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, the net carrying value of mortgage servicing rights and deferred tax assets, and the fair value of investment securities, interest rate lock commitments, forward contracts to sell mortgage loans, and loans held for sale. The results of operations and other data for the three-month period ended June 30, 2012 is not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2013. We have evaluated all subsequent events through the date of this filing. The interim unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Certain prior period amounts have been reclassified to conform to the current period presentations with no impact on net income (loss) or total equity.

Note 2 – Significant Risks and Uncertainties

Regulatory Agreements

On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease and Desist (the “Corporation Order” and the “Bank Order,” respectively, and together, the “Orders”) by the Office of Thrift Supervision (the “OTS”). As of July 21, 2011, regulation of the Bank was assumed by the Office of the Comptroller of the Currency (“OCC”), and the Federal Reserve became the primary regulator for the Corporation.

The Corporation Order requires the Corporation to notify, and in certain cases to obtain the permission of, the Federal Reserve prior to: (i) declaring, making or paying any dividends or other capital distributions on its capital stock, including the repurchase or redemption of its capital stock; (ii) incurring, issuing, renewing or rolling over any debt, increasing any current lines of credit or guaranteeing the debt of any entity; (iii) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; and (v) making any golden parachute payments or prohibited indemnification payments. The Corporation developed and submitted to the OTS a three-year cash flow plan, which must be reviewed at least quarterly by the Corporation’s management and board for material deviations between the cash flow plan’s projections and actual results (the “Variance Analysis Report”). Within 45 days following the end of each quarter, the Corporation is required to provide the Federal Reserve its Variance Analysis Report for that quarter.

 

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Table of Contents

The Bank Order requires the Bank to notify, or in certain cases obtain the permission of, the OCC prior to (i) increasing its total assets in any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or renewing any brokered deposits; (iii) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; (v) making any golden parachute or prohibited indemnification payments; (vi) paying dividends or making other capital distributions on its capital stock; (vii) entering into certain transactions with affiliates; and (viii) entering into third-party contracts outside the normal course of business. The Bank also developed and submitted within the prescribed time periods, a written capital restoration plan, a problem asset plan, a revised business plan, and an implementation plan resulting from a review of commercial lending practices. The Orders also require the Bank to regularly review its current liquidity management policy and the adequacy of its allowance for loan and lease losses.

On August 31, 2010, the OTS approved the capital restoration plan submitted by the Bank, although the approval included a Prompt Corrective Action Directive (“PCA”). The only additional requirement included in the PCA was that the Bank must obtain prior written approval from the Regional Director before entering into any contract or lease for the purchase or sale of real estate or of any interest therein, except for contracts entered into in the ordinary course of business for the purchase or sale of other real estate owned due to foreclosure (“OREO”) where the contract does not exceed $3.5 million and the sales price of the OREO does not fall below 85% of the net carrying value of the OREO.

The Orders also required that, as of September 30, 2009, the Bank had to meet and maintain both a core capital ratio equal to or greater than 7 percent and a total risk-based capital ratio equal to or greater than 11 percent. Further, as of December 31, 2009, the Bank had to meet and maintain both a core capital ratio equal to or greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent.

At June 30, 2012, the Bank had a tier 1 leverage (core) ratio of 4.56% and a total risk-based capital ratio of 8.98%, each below the required capital ratios set forth above. Without a waiver, amendment or modification of the Orders, the Bank could be subject to further regulatory action, although neither the Bank nor the Corporation has received notice of any regulatory action to be taken by the OCC or the Federal Reserve with regards to the Orders. That said, at June 30, 2012, the Bank’s risk-based capital is considered “adequately capitalized” for regulatory purposes. Under OCC requirements, a bank must have a total risk-based capital ratio of 8 percent or greater to be considered adequately capitalized. The Bank continues to work toward the requirements of the Bank Order which requires a total risk-based capital ratio of 12 percent, which exceeds traditional capital levels for a bank. All customer deposits remain fully insured to the limits set by the FDIC.

As referenced above, on July 21, 2011, the OTS, which was the Bank’s primary regulator, ceased operations as a result of changes implemented pursuant to the Dodd-Frank Act. As of July 21, 2011, regulation of the Bank was assumed by the OCC, and the Federal Reserve became the primary regulator for the Corporation. The Federal Reserve and the OCC are now responsible for the administration of the Orders.

Going Concern

The Corporation and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Orders. The Corporation and the Bank consult with the Federal Reserve, the OCC and FDIC on a regular basis concerning the Corporation’s and Bank’s proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Corporation’s and Bank’s proposals are accepted by the Federal regulators, that these proposals will be successfully implemented. While the Corporation’s management continues to exert maximum effort to attract new capital, significant operating losses in the past four fiscal years, significant levels of criticized assets at the Bank and negative equity raise substantial doubt as to the Corporation’s ability to continue as a going concern. If the Corporation and Bank are unable to achieve compliance with the requirements of the Orders, or implement an acceptable capital restoration plan, and if the Corporation and Bank cannot otherwise comply with such commitments and regulations, the OCC or FDIC could force a sale, liquidation or federal conservatorship or receivership of the Bank.

 

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As discussed in greater detail in the previous section, “Regulatory Agreements”, the Corporation and the Bank have submitted a capital restoration plan describing how the Corporation intends to restore the capital position of the Bank. On August 31, 2010, the OTS accepted this plan. The OCC and Federal Reserve now have oversight authority of this plan.

Further, the Corporation entered into an amendment dated November 29, 2011 (“Amendment No. 8”) to the Amended and Restated Credit Agreement (“Credit Agreement”) among the Corporation, the lenders from time to time a party thereto, and U.S. Bank National Association, as administrative agent for such lenders, or the “Agent” as described in Note 9, in which the existing interest rate remained the same and the financial covenants related to capital ratios and non-performing loans were moderately relaxed. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights if all covenants are not complied with, including the right to accelerate the maturity of the borrowings. As of June 30, 2012, the Corporation was in compliance with the financial and non-financial covenants contained in the Credit Agreement, as amended, although there is no guarantee that the Corporation will remain in compliance with the covenants. As of the date of this filing, the Corporation does not have sufficient cash on hand to reduce outstanding borrowings to zero. There can be no assurance that the Corporation will be able to raise sufficient capital or have enough cash on hand to reduce outstanding borrowings to zero by November 30, 2012, which may, if unable to secure an extension at that time, limit the Corporation’s ability to fund ongoing operations.

Credit Risks

While the Corporation has devoted and will continue to devote substantial management resources toward the resolution of all delinquent and impaired loans, no assurance can be made that management’s efforts will be successful. These conditions create an uncertainty about material adverse consequences that may occur in the near term. The continuing recession and the decrease in valuations of real estate have had a significant adverse impact on the Corporation’s consolidated financial condition and results of operations.

Non-performing assets totaled $272.9 million at June 30, 2012, or 9.8% of total assets, which decreased the Corporation’s interest income. The Corporation’s results of operations will continue to be impacted by the level of non-performing assets and the Corporation expects continued downward pressure on interest income in the future. As reported in the accompanying unaudited interim consolidated financial statements, the Corporation has net income of $55,000 for the three months ended June 30, 2012. Stockholders’ equity improved from a deficit of $29.6 million or (1.06)% of total assets at March 31, 2012 to a deficit of $28.5 million or (1.02)% of total assets at June 30, 2012.

Note 3 – Recent Accounting Pronouncements

ASU No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 states that in evaluating whether a restructuring constitutes a troubled debt restructuring (TDR), a creditor must separately conclude that both of the following exist: (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments to Topic 310 also required new disclosures regarding currently outstanding TDRs and TDR activity during the period. The Corporation adopted ASU 2011-02 in its second quarter of fiscal 2012.

As a result of adopting the amendments in ASU 2011-02, the Corporation reassessed all restructurings that occurred on or after April 1, 2011, the beginning of the prior fiscal year, for identification as TDRs. Certain receivables were identified as TDRs for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as TDRs, they were also deemed impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of impairment measured in accordance with the guidance of ASC 310-10-35 for the receivables that are newly identified as impaired. The adoption of the ASU resulted in an increase in the number of loans within its commercial real estate portfolios that are considered TDRs but did not have a material impact on the Company’s financial statements for the periods ended September 30, 2011. At September 30, 2011, the period of adoption, the recorded

 

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investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under ASC 310-10-35 was $258,000, and the resulting allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was zero.

Note 4 – Investment Securities

The amortized cost and fair value of investment securities are as follows:

 

            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      (Losses)     Value  
     (In thousands)  

At June 30, 2012

  

Available-for-sale:

          

U.S. government sponsored and federal agency obligations

   $ 3,528       $ 23       $ —        $ 3,551   

Corporate stock and bonds

     652         77         (22     707   

Non-agency CMOs (1)

     21,784         32         (3,340     18,476   

Government sponsored agency mortgage-backed securities (1)

     3,797         248         —          4,045   

GNMA mortgage-backed securities (1)

     200,764         4,105         (4     204,865   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 230,525       $ 4,485       $ (3,366   $ 231,644   
  

 

 

    

 

 

    

 

 

   

 

 

 

At March 31, 2012

  

Available-for-sale:

          

U.S. government sponsored and federal agency obligations

   $ 3,556       $ —         $ (25   $ 3,531   

Corporate stock and bonds

     652         50         (41     661   

Non-agency CMOs (1)

     25,067         163         (3,638     21,592   

Government sponsored agency mortgage-backed securities (1)

     3,944         251         —          4,195   

GNMA mortgage-backed securities (1)

     208,948         3,597         (225     212,320   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 242,167       $ 4,061       $ (3,929   $ 242,299   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Government sponsored agency mortgage-backed securities (1) (2)

   $ 20       $ —         $ —        $ 20   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Primarily collateralized by residential mortgages.

(2) 

Full principal payoff was received on this security in May, 2012.

Independent pricing services are used to value all investment securities. One pricing service is used to value all securities except the non-agency CMOs. A specialized pricing service is used for valuation of the non-agency CMO portfolio.

 

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To estimate the fair value of non-agency CMOs, the pricing service valuation model discounted estimated expected cash flows after credit losses at rates ranging from 4% to 12%. The rates utilized are based on the risk free rate equivalent to the remaining average life of the security, plus a spread for normal liquidity and a spread to reflect the uncertainty of the cash flow estimates. The pricing service benchmarks its fair value results to other pricing services and monitors the market for actual trades. The cash flow model includes these inputs in its derivation of the discount rates used to estimate fair value. There are no payments in kind allowed on these non-agency CMOs.

The tables below present the fair value and gross unrealized losses of all securities in an unrealized loss position, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at June 30, 2012 and March 31, 2012.

 

     At June 30, 2012  
     Unrealized Loss Position
Less than 12 months
    Unrealized Loss Position
12 months or More
    Total  
     Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 
     (In thousands)  

Corporate stock and bonds

   $ 66       $ (22   $ —         $ —        $ 66       $ (22

Non-agency CMOs

     73         —          16,392         (3,340     16,465         (3,340

GNMA mortgage-backed securities

     10,176         (4     —           —          10,176         (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 10,315       $ (26   $ 16,392       $ (3,340   $ 26,707       $ (3,366
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     At March 31, 2012  
     Unrealized Loss Position
Less than 12 months
    Unrealized Loss Position
12 months or More
    Total  
     Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 
     (In thousands)  

U.S. government sponsored and federal agency obligations

   $ 3,531       $ (25   $ —         $ —        $ 3,531       $ (25

Corporate stock and bonds

     111         (41     —           —          111         (41

Non-agency CMOs

     77         —          18,109         (3,638     18,186         (3,638

GNMA mortgage-backed securities

     37,631         (225     —           —          37,631         (225
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 41,350       $ (291   $ 18,109       $ (3,638   $ 59,459       $ (3,929
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other-Than-Temporary Impairment

The number of individual securities in the tables above total 15 at June 30, 2012 and 20 at March 31, 2012, respectively. Although these securities have declined in value these unrealized losses are considered temporary. Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In estimating other-than-temporary impairment losses on investment securities, management considers many factors which include: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

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To determine if an other-than-temporary impairment exists on a debt security with an unrealized loss, the Corporation first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Corporation will recognize an other-than-temporary impairment loss in earnings equal to the difference between the security’s fair value and its amortized cost basis. If neither condition is met, the Corporation determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected, discounted at the purchase yield or current accounting yield of the security, and the amortized cost basis is the credit loss. The credit loss is the portion of the impairment that is deemed other-than-temporary and recognized in earnings and is a reduction in the cost basis of the security. The portion of impairment related to all other factors is deemed temporary and included in other comprehensive income (loss).

The Corporation utilizes an independent pricing service to run a discounted cash flow model in the calculation of other-than-temporary impairment losses on non-agency CMOs. This model is used to determine the portion of the impairment that is other-than-temporary due to credit losses, and the portion that is temporary due to all other factors.

The significant inputs used for calculating the credit loss portion of securities with other-than-temporary impairment (“OTTI”) include prepayment assumptions, loss severities, original FICO scores, historical rates of delinquency, percentage of loans with limited underwriting, historical rates of default, original loan-to-value ratio, aggregate property location by metropolitan statistical area, original credit support, current credit support, and weighted-average maturity.

The discount rates used to establish the net present value of expected cash flows for purposes of determining OTTI ranged from 4% to 12%. These rates equate to the effective yield implicit in the security at the date of acquisition for the bonds for which the Corporation has not in the past incurred OTTI. For the bonds for which the Corporation has previously recorded OTTI, the discount rate used equates to the accounting yield on the security as of the valuation date.

Default rates were calculated separately for each category of underlying borrower based on delinquency status (i.e. current, 30 to 59 days delinquent, 60 to 89 days delinquent, 90+ days delinquent, and foreclosure balances) of the loans as of June 1, 2012. This data is entered into a loss migration model to calculate projected default rates, which are benchmarked against results that have recently been experienced by other major servicers of non-agency CMOs with similar attributes. The month 1 to month 24 constant default rate in the model ranged from 3.25% to 11.49%.

At June 30, 2012, 11 non-agency CMOs with a fair value of $16.8 million and an adjusted cost basis of $20.2 million were other-than-temporarily impaired. At March 31, 2012, 14 non-agency CMOs with a fair value of $19.6 million and an adjusted cost basis of $23.1 million were other-than-temporarily impaired. Unrealized other-than-temporary impairment due to credit losses of $64,000 was included in earnings for the three months ended June 30, 2012. For the three months ended June 30, 2012, realized losses of $138,000 related to credit issues (i.e. – principal reduced without a receipt of cash) were incurred that were previously recognized in earnings as unrealized other-than-temporary impairment.

Unrealized losses on U.S. government sponsored and federal agency obligations, corporate stocks and bonds and Ginnie Mae (“GNMA”) mortgage-backed securities as of June 30, 2012 due to changes in interest rates and other non-credit related factors totaled $26,000. The Corporation has analyzed these securities for evidence of other-than-temporary impairment and concluded that no OTTI exists and that the unrealized losses are properly classified in accumulated other comprehensive income.

The following table is a roll forward of the amount of other-than-temporary impairment related to credit losses that have been recognized in earnings for which a portion of impairment was deemed temporary and recognized in other comprehensive income for the three months ended June 30, 2012 and 2011:

 

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     Three months ended June 30,  
     2012     2011  
     (In thousands)  

Beginning balance of unrealized OTTI related to credit losses

   $ 2,391      $ 2,197   

Additional unrealized OTTI related to credit losses for which OTTI was previously recognized

     68        59   

Credit related OTTI previously recognized for securities sold or paid-off during the period

     (164     —     

Decrease for realized amount of credit losses for which unrealized credit related OTTI was previously recognized

     (138     —     
  

 

 

   

 

 

 

Ending balance of unrealized OTTI related to credit losses

   $ 2,157      $ 2,256   
  

 

 

   

 

 

 

All of the Corporation’s other-than-temporarily impaired debt securities are non-agency CMOs. On a cumulative basis, other-than-temporary impairment losses recognized in earnings by year of vintage were as follows:

 

Year of

Vintage

   At June 30, 2012  
   (In thousands)  

Prior to 2005

   $ 7   

2005

     471   

2006

     299   

2007

     1,380   
  

 

 

 
   $ 2,157   
  

 

 

 

The cost of investment securities sold is determined using the specific identification method. Sales of investment securities available for sale are summarized below:

 

     Three Months Ended
June 30,
 
     2012      2011  
     (In thousands)  

Proceeds from sales:

   $ 1,905       $ 55,757   

Gross gains on sales

     62         1,141   

Gross losses on sales

     —           (5
  

 

 

    

 

 

 

Net gain on sales

   $ 62       $ 1,136   
  

 

 

    

 

 

 

At June 30, 2012 and March 31, 2012, investment securities available-for-sale with a fair value of approximately $208.2 million and $216.3 million, respectively, were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

 

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The fair values of investment securities by contractual maturity at June 30, 2012 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Within 1
Year
     After 1
Year
through 5
Years
     After 5
Years
through 10
Years
     Over Ten
Years
     Total  
     (In thousands)  

Available-for-sale, at fair value:

              

U.S. government sponsored and federal agency obligations

   $ —         $ 3,551       $ —         $ —         $ 3,551   

Corporate stock and bonds

     —           —           —           707         707   

Non-agency CMOs

     —           —           827         17,649         18,476   

Government sponsored agency mortgage-backed securities

     10         30         867         3,138         4,045   

GNMA mortgage-backed securities

     —           —           434         204,431         204,865   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10       $ 3,581       $ 2,128       $ 225,925       $ 231,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5 – Loans Receivable

Loans receivable held for investment consist of the following:

 

     June 30,
2012
    March 31,
2012
 
     (In thousands)  

Residential

   $ 551,464      $ 564,691   

Commercial and industrial

     30,473        38,977   

Commercial real estate:

    

Land and construction

     163,435        186,048   

Multi-family

     324,481        342,216   

Retail/office

     275,759        298,277   

Other commercial real estate

     234,667        248,275   

Consumer:

    

Education

     227,125        240,331   

Other consumer

     271,975        269,532   
  

 

 

   

 

 

 

Total unpaid principal balance

     2,079,379        2,188,347   
  

 

 

   

 

 

 

Allowance for loan losses

     (100,477     (111,215

Undisbursed loan proceeds(1)

     (16,526     (16,034

Unearned loan fees, net

     (2,819     (3,086

Unearned interest

     (6     (4
  

 

 

   

 

 

 

Total contras to loans

     (119,828     (130,339
  

 

 

   

 

 

 

Loans held for investment

   $ 1,959,551      $ 2,058,008   
  

 

 

   

 

 

 

 

(1) 

Undisbursed loan proceeds are funds to be disbursed upon a draw request approved by the Corporation.

 

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Residential Loans

At June 30, 2012, $551.5 million, or 26.5%, of the total loans unpaid principal balance receivable consisted of residential loans, substantially all of which were 1 to 4 family dwellings. Residential loans consist of both adjustable and fixed-rate loans. The adjustable-rate loans currently in the portfolio have up to 30-year maturities and terms which permit the Corporation to annually increase or decrease the rate on the loans, based on a designated index. These rate changes are generally subject to a limit of 2% per adjustment and an aggregate 6% adjustment over the life of the loan. These loans are documented according to standard industry practices. The Corporation makes a limited number of interest-only loans which tend to have a shorter term to maturity and does not originate negative amortization and option payment adjustable rate mortgages.

Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Corporation believes that these risks, which have not had a material adverse effect to date, generally are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment. Also, as interest rates decline, borrowers may refinance their mortgages into fixed-rate loans thereby prepaying the balance of the loan prior to maturity. At June 30, 2012, approximately $380.8 million, or 69.0%, of the held for investment residential loans unpaid principal balance consisted of loans with adjustable interest rates.

The Corporation continues to originate long-term, fixed-rate conventional mortgage loans. Current production of these loans with terms of 15 years or more are generally sold to Fannie Mae, Freddie Mac and other institutional investors, while a small percentage of loan production is retained in the held for investment portfolio. In order to provide a full range of products to its customers, the Corporation also participates in the loan origination programs of Wisconsin Housing and Economic Development Authority (“WHEDA”), Wisconsin Department of Veterans Affairs (“WDVA”) and the Federal Housing Administration (“FHA”). The Corporation retains the right to service substantially all loans that it sells.

At June 30, 2012, approximately $170.7 million, or 31.0%, of the held for investment residential loans unpaid principal balance consisted of loans with fixed rates of interest. Although these loans generally provide for repayments of principal over a fixed period of 10 to 30 years, it is the Corporation’s experience that, because of prepayments and due-on-sale clauses, such loans generally remain outstanding for a substantially shorter period of time.

Commercial and Industrial Loans

The Corporation originates loans for commercial, corporate and business purposes, including issuing letters of credit. At June 30, 2012, the unpaid principal balance receivable of commercial and industrial loans amounted to $30.5 million, or 1.5%, of the total loans unpaid principal balance receivable. The commercial and industrial loan portfolio is comprised of loans for a variety of business purposes and generally are secured by equipment, machinery and other corporate assets. These loans generally have terms of five years or less and interest rates that float in accordance with a designated published index. Substantially all of such loans are secured and backed by the personal guarantees of the owners of the business.

Commercial Real Estate Loans

The Corporation originates commercial real estate loans that it typically holds in its loan portfolio which includes land and construction, multi-family, retail/office and other commercial real estate. Such loans generally have adjustable rates and shorter terms than single-family residential loans, thus increasing the earnings sensitivity of the loan portfolio to changes in interest rates, as well as providing higher fees and rates than residential loans. At June 30, 2012, $998.3 million of loans unpaid principal balance receivable were secured by commercial real estate, which represented 48.0% of the total loans unpaid principal balance receivable. The Corporation generally limits the origination of such loans to its primary market area.

 

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The Corporation’s commercial real estate loans are primarily secured by apartment buildings, office and industrial buildings, land, warehouses, small retail shopping centers and various special purpose properties, including hotels, and nursing homes. Although terms vary, commercial real estate loans generally have amortization periods of 15 to 25 years, as well as balloon payments of two to five years, and terms which provide that the interest rates thereon may be adjusted annually based on a designated index.

Consumer Loans

The Corporation offers consumer loans in order to provide a wider range of financial services to its customers. At June 30, 2012, $499.1 million, or 24.0%, of the total loans unpaid principal balance receivable consisted of consumer loans. Consumer loans typically have higher interest rates than mortgage loans but generally involve more risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral.

Approximately $227.1 million, or 10.9%, of the total loans unpaid principal balance receivable at June 30, 2012 consisted of education loans. These loans are generally made for a maximum of $3,500 per year for undergraduate studies and $8,500 per year for graduate studies and are placed in repayment status on an installment basis within six months following graduation. Education loans generally have interest rates that adjust annually in accordance with a designated index. Both the principal amount of an education loan and interest thereon are generally guaranteed by the Great Lakes Higher Education Corporation up to 97% of the balance of the loan, which typically obtains reinsurance of its obligations from the U.S. Department of Education. During the quarter ended September 30, 2010, the Corporation discontinued the origination of student loans. Education loans may be sold to the U.S. Department of Education or to other investors. No education loans were sold during the three months ended June 30, 2012.

The largest component of the other consumer loan portfolio is second mortgage and home equity loans. The primary home equity loan product has an adjustable rate that is linked to the prime interest rate and is secured by a mortgage, either a primary or a junior lien, on the borrower’s residence. New home equity lines do not exceed 85% of appraised value of the property at the loan origination date. A fixed-rate home equity second mortgage term product is also offered.

The remainder of the other consumer loan portfolio consists of vehicle loans and other secured and unsecured loans made for a variety of consumer purposes. These include credit extended through credit cards issued by a third party, ELAN Financial Services (ELAN), pursuant to an agency arrangement under which the Corporation participates in outstanding balances, currently at 25% to 28%. The Corporation also shares 33% to 37% of annual fees, and 30% of late payment, over limit and cash advance fees, as well as 25% to 30% of interchange income from the underlying portfolio.

Allowances for Loan Losses

The allowance for loan losses consists of general, substandard and specific components even though the entire allowance is available to cover losses on any loan. The specific allowance component relates to impaired loans (i.e. – non-accrual) and all loans reported as troubled debt restructurings. For such loans, an allowance is established when the discounted cash flows (or collateral value if repayment relies solely on the operation or sale of the collateral) of the impaired loan are lower than the carrying value of that loan. The substandard loan component is primarily associated with loans rated in this category but not in non-accrual status. The general allowance component covers pass, watch and special mention rated loans and is based on historical loss experience adjusted for various qualitative and quantitative factors. Loans graded substandard and below are individually examined to determine the appropriate loan loss reserve. A reserve for unfunded commitments and letters of credit is also maintained which is classified in other liabilities.

 

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The following table presents the allowance for loan losses by component:

 

     At June 30,
2012
     At March 31,
2012
 
     (In thousands)  

General component

   $ 32,170       $ 37,085   

Substandard loan component

     28,936         29,980   

Specific component

     39,371         44,150   
  

 

 

    

 

 

 

Total allowance for loan losses

   $ 100,477       $ 111,215   
  

 

 

    

 

 

 

The following table presents the unpaid principal balance of loans by risk category:

 

     At June 30,
2012
     At March 31,
2012
 
     (In thousands)  

Pass

   $ 1,567,180       $ 1,624,889   

Watch

     119,203         115,917   

Special mention

     42,194         56,762   
  

 

 

    

 

 

 

Total pass, watch and special mention rated loans

     1,728,577         1,797,568   
  

 

 

    

 

 

 

Substandard, excluding TDR accrual

     90,122         93,207   
  

 

 

    

 

 

 

TDR accrual

     71,693         72,648   

Non-accrual

     188,987         224,924   
  

 

 

    

 

 

 

Total impaired loans

     260,680         297,572   
  

 

 

    

 

 

 

Total unpaid principal balance

   $ 2,079,379       $ 2,188,347   
  

 

 

    

 

 

 

The following table presents activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2012 and 2011:

 

     Residential     Commercial
and Industrial
    Commercial
Real Estate
    Consumer     Total  
     (In thousands)  

For the Quarter Ended June 30, 2012:

  

Beginning balance

   $ 13,027      $ 10,568      $ 85,153      $ 2,467      $ 111,215   

Provision

     1,673        (1,443     (3,760     727        (2,803

Charge-offs

     (1,363     (1,651     (6,768     (791     (10,573

Recoveries

     208        1,042        1,356        32        2,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,545      $ 8,516      $ 75,981      $ 2,435      $ 100,477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Quarter Ended June 30, 2011:

          

Beginning balance

   $ 20,487      $ 19,541      $ 106,445      $ 3,649      $ 150,122   

Provision

     390        (197     2,733        694        3,620   

Charge-offs

     (1,756     (2,522     (12,574     (858     (17,710

Recoveries

     506        643        1,415        144        2,708   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 19,627      $ 17,465      $ 98,019      $ 3,629      $ 138,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents the balance in the allowance for loan losses and the unpaid principal balance of loans by portfolio segment and based on impairment method as of June 30, 2012 and March 31, 2012:

 

     Residential      Commercial
and Industrial
     Commercial
Real Estate
     Consumer      Total  
     (In thousands)  

At June 30, 2012:

  

Allowance for loan losses:

              

Individually evaluated for impairment

   $ 4,900       $ 4,726       $ 29,363       $ 382       $ 39,371   

Collectively evaluated for impairment

     8,645         3,790         46,618         2,053         61,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,545       $ 8,516       $ 75,981       $ 2,435       $ 100,477   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Loans individually evaluated

   $ 46,172       $ 9,230       $ 197,350       $ 7,928       $ 260,680   

Loans collectively evaluated

     505,292         21,243         800,992         491,172         1,818,699   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 551,464       $ 30,473       $ 998,342       $ 499,100       $ 2,079,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012:

  

Allowance for loan losses:

              

Individually evaluated for impairment

   $ 5,080       $ 5,548       $ 33,137       $ 385       $ 44,150   

Collectively evaluated for impairment

     7,947         5,020         52,016         2,082         67,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,027       $ 10,568       $ 85,153       $ 2,467       $ 111,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Loans individually evaluated

   $ 49,411       $ 10,774       $ 228,873       $ 8,514       $ 297,572   

Loans collectively evaluated

     515,280         28,203         845,943         501,349         1,890,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 564,691       $ 38,977       $ 1,074,816       $ 509,863       $ 2,188,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The provision for credit losses reflected in the consolidated statements of operations includes the provision for loan losses and the provision for unfunded commitment losses as follows:

 

     Three months ended June 30,  
     2012     2011  
     (In thousands)  

Provision for loan losses

   $ (2,803   $ 3,620   

Provision for unfunded commitment losses

     1,087        (138
  

 

 

   

 

 

 

Provision for credit losses

   $ (1,716   $ 3,482   
  

 

 

   

 

 

 

The provision for unfunded commitment losses in the three months ending June 30, 2012 totaled $1.1 million, up from $(0.1) million during the same period in 2011. This increase reflects the implementation in June 2012 of a more refined process of estimating probable losses inherent in the unfunded loan commitment and letter of credit portfolios. The reserve for unfunded commitments and letters of credit at June 30, 2012 totaled $1.7 million, classified in other liabilities on the consolidated balance sheet.

At June 30, 2012, $260.7 million of unpaid principal balance of loans were identified as impaired which includes performing troubled debt restructurings. At March 31, 2012, impaired loans were $297.6 million. A loan is identified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement and thus are placed on non-accrual status. Interest income on certain impaired loans is recognized on a cash basis.

 

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A substantial portion of the Corporation’s loans are collateralized by real estate in Wisconsin and adjacent states. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in real estate market conditions in that area.

The following table presents impaired loans segregated by loans with no specific allowance and loans with an allowance, by class of loans, as of June 30, 2012:

 

     Unpaid
Principal
Balance
     Associated
Allowance
     Carrying
Amount
     Average
Carrying
Amount
     Fiscal Year to
Date Interest
Income
Recognized
 
     (In thousands)  

With no specific allowance recorded:

              

Residential

   $ 16,389       $ —         $ 16,389       $ 17,311       $ 113   

Commercial and industrial

     111         —           111         1,501         46   

Land and construction

     40,290         —           40,290         43,451         103   

Multi-family

     15,174         —           15,174         15,678         127   

Retail/office

     12,444         —           12,444         12,581         133   

Other commercial real estate

     20,988         —           20,988         22,004         195   

Education

     —           —           —           —           —     

Other consumer

     452         —           452         455         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     105,848         —           105,848         112,981         731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded (1):

              

Residential

     29,783         4,900         24,883         25,599         94   

Commercial and industrial

     9,119         4,726         4,393         5,468         98   

Land and construction

     23,242         13,061         10,181         15,108         107   

Multi-family

     31,017         7,795         23,222         24,184         288   

Retail/office

     29,455         6,609         22,846         22,370         317   

Other commercial real estate

     24,740         1,898         22,842         23,370         157   

Education (2)

     721         1         720         769         —     

Other consumer

     6,755         381         6,374         6,340         111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     154,832         39,371         115,461         123,208         1,172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Residential

     46,172         4,900         41,272         42,910         207   

Commercial and industrial

     9,230         4,726         4,504         6,969         144   

Land and construction

     63,532         13,061         50,471         58,559         210   

Multi-family

     46,191         7,795         38,396         39,862         415   

Retail/office

     41,899         6,609         35,290         34,951         450   

Other commercial real estate

     45,728         1,898         43,830         45,374         352   

Education (2)

     721         1         720         769         —     

Other consumer

     7,207         381         6,826         6,795         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 260,680       $ 39,371       $ 221,309       $ 236,189       $ 1,903   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes ratio-based allowance for loan losses of $2.8 million associated with loans totaling $23.9 million for which individual reviews have not been completed but an allowance established based on the ratio of allowance for loan losses to unpaid principal balance for the loans individually reviewed, by class of loan.

(2) 

Excludes the guaranteed portion of education loans 90+ days past due with unpaid principal balance and average carrying amounts totaling $23,296 and $25,453 that are not considered impaired based on a guarantee provided by government agencies.

 

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The carrying amounts above and below include the unpaid principal balance less the associated allowance. The average carrying amount is a trailing twelve month average calculated based on the ending quarterly balances. The interest income recognized is the fiscal year to date interest income recognized on a cash basis.

The following table presents impaired loans segregated by loans with no specific allowance and loans with an allowance, by class of loans, as of March 31, 2012:

 

     Unpaid
Principal
Balance
     Associated
Allowance
     Carrying
Amount
     Average
Carrying
Amount
     Fiscal Year to
Date Interest
Income
Recognized
 
     (In thousands)  

With no specific allowance recorded:

              

Residential

   $ 19,845       $ —         $ 19,845       $ 22,224       $ 208   

Commercial and industrial

     3,389         —           3,389         6,771         61   

Land and construction

     34,446         —           34,446         39,601         581   

Multi-family

     19,822         —           19,822         21,624         264   

Retail/office

     21,787         —           21,787         23,577         816   

Other commercial real estate

     24,213         —           24,213         23,812         571   

Education

     —           —           —           —           —     

Other consumer

     474         —           474         507         62   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     123,976         —           123,976         138,116         2,563   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded (1):

              

Residential

     29,566         5,080         24,486         28,070         520   

Commercial and industrial

     7,385         5,548         1,837         6,285         260   

Land and construction

     47,545         14,543         33,002         47,499         886   

Multi-family

     27,307         7,896         19,411         25,803         927   

Retail/office

     28,954         6,672         22,282         27,417         858   

Other commercial real estate

     24,799         4,026         20,773         22,891         737   

Education (2)

     762         1         761         789         —     

Other consumer

     7,278         384         6,894         7,190         480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     173,596         44,150         129,446         165,944         4,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Residential

     49,411         5,080         44,331         50,294         728   

Commercial and industrial

     10,774         5,548         5,226         13,056         321   

Land and construction

     81,991         14,543         67,448         87,100         1,467   

Multi-family

     47,129         7,896         39,233         47,427         1,191   

Retail/office

     50,741         6,672         44,069         50,994         1,674   

Other commercial real estate

     49,012         4,026         44,986         46,703         1,308   

Education (2)

     762         1         761         789         —     

Other consumer

     7,752         384         7,368         7,697         542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 297,572       $ 44,150       $ 253,422       $ 304,060       $ 7,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes ratio-based allowance for loan losses of $2.8 million associated with loans totaling $24.6 million for which individual reviews have not been completed but an allowance established based on the ratio of allowance for loan losses to unpaid principal balance for the loans individually reviewed, by class of loan.

(2)

Excludes the guaranteed portion of education loans 90+ days past due with unpaid principal balance and average carrying amounts totaling $24,641 and $25,520 that are not considered impaired based on a guarantee provided by government agencies.

 

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Table of Contents

The following is additional information regarding impaired loans:

 

     At June 30,     At March 31,  
     2012     2012  
     (In thousands)  

Unpaid principal balance of impaired loans:

    

With specific reserve required

   $ 154,832      $ 173,596   

Without a specific reserve

     105,848        123,976   
  

 

 

   

 

 

 

Total impaired loans

     260,680        297,572   

Less:

    

Specific valuation allowance for impaired loans

     (39,371     (44,150
  

 

 

   

 

 

 

Carrying amount of impaired loans

   $ 221,309      $ 253,422   
  

 

 

   

 

 

 

Average carrying amount of impaired loans

   $ 236,189      $ 304,060   

Loans and troubled debt restructurings on non-accrual status

     188,987        224,924   

Troubled debt restructurings – accrual

     71,693        72,648   

Troubled debt restructurings – non-accrual (1)

     61,520        76,378   

Loans past due ninety days or more and still accruing (2)

     23,296        30,697   

 

(1) 

Troubled debt restructurings – non-accrual are included in the loans and troubled debt restructurings on non-accrual status line item above.

(2) 

Includes the guaranteed portion of education loans of $23,296 and $24,641 at June 30, 2012, and March 31, 2012, respectively, that were 90+ days past due which continue to accrue interest due to a guarantee provided by government agencies covering approximately 97% of the outstanding balance.

 

     For the Three Months Ended  
     June 30,  
     2012      2011  
     (In thousands)  

Interest income recognized on impaired loans on a cash basis

   $ 1,903       $ 1,263   

All TDRs are classified as impaired loans, subject to performance conditions noted below. TDRs may be on either accrual or non-accrual status based upon the repayment performance of the borrower and management’s assessment of collectability. Loans deemed non-accrual may return to accrual status after six consecutive months of performance in accordance with the terms of the restructuring. Additionally, they may be considered not a TDR after twelve consecutive months of performance in accordance with the terms of the restructuring agreement, if the interest rate was a market rate for a borrower with similar credit risk at the date of restructuring.

The Corporation is currently committed to lend approximately $6.0 million in additional funds on impaired loans in accordance with the original terms of these loans; however, is not legally obligated to, and will not, disburse additional funds on any loans while in nonaccrual status or if the borrower is in default.

The Corporation experienced declines in the valuations for real estate collateral supporting portions of its loan portfolio throughout fiscal years 2010, 2011 and 2012, as reflected in recently received appraisals. Currently, $348.2 million or approximately 92% of the unpaid principal balance of classified loans (i.e. loans risk rated as substandard or loss) have recent appraisals (i.e. within one year) or have been determined to not need an appraisal. Loans that do not require an appraisal under Corporation policy include situations in which the loan (i) is fully reserved; (ii) has a

 

22


Table of Contents

small balance (less than $250,000) and rather than being individually evaluated for impairment, is included in a homogenous pool of loans; (iii) uses a net present value of future cash flows to measure impairment; or (iv) is not secured by real estate. Appraised values greater than one year old are discounted by an additional 10% for improved land or commercial real estate and 20% for unimproved land, in determination of the allowance for loan losses.

While Corporation policy may not require updated appraisals for these loans, new appraisals may still be obtained. For example, 56% of the loans which do not require an updated appraisal do have either an appraisal within the last year or an appraisal on order. If real estate values decline, the Corporation may have to increase its allowance for loan losses as updated appraisals or other indications of a decrease in the value of collateral are received.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2012 by class of loans:

 

     Days Past Due         
     30-59      60-89      90 or More      Total  
     (In thousands)  

Residential

   $ 2,305       $ 1,242       $ 34,442       $ 37,989   

Commercial and industrial

     1,045         936         2,595         4,576   

Land and construction

     5,227         110         24,004         29,341   

Multi-family

     2,087         539         25,850         28,476   

Retail/office

     1,190         6,501         10,352         18,043   

Other commercial real estate

     —           496         13,450         13,946   

Education

     9,113         7,155         24,017         40,285   

Other consumer

     1,045         852         6,384         8,281   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 22,012       $ 17,831       $ 141,094       $ 180,937   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 by class of loans:

 

     Days Past Due         
     30-59      60-89      90 or More      Total  
     (In thousands)  

Residential

   $ 2,414       $ 1,071       $ 37,791       $ 41,276   

Commercial and industrial

     976         539         3,183         4,698   

Land and construction

     37         —           60,680         60,717   

Multi-family

     360         541         26,371         27,272   

Retail/office

     2,627         2,634         14,033         19,294   

Other commercial real estate

     1,884         191         16,323         18,398   

Education

     8,370         6,562         25,403         40,335   

Other consumer

     1,664         692         6,879         9,235   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 18,332       $ 12,230       $ 190,663       $ 221,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total delinquencies (loans past due 30 days or more) at June 30, 2012 were $180.9 million. The Corporation has experienced a reduction in delinquencies in each quarter-end since December 31, 2010 due to improving credit conditions and loans moving to OREO. The Corporation has $23.3 million of education loans past due 90 days or more that are still accruing interest due to the approximate 97% guarantee provided by governmental agencies. Loans less than 90 days delinquent may be placed on non-accrual status when the probability of collection of principal and interest is deemed to be insufficient to warrant further accrual.

 

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Table of Contents

Credit Quality Indicators:

The Corporation groups commercial and industrial and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. This analysis is updated on a monthly basis. The Corporation uses the following definitions for risk ratings:

Pass. Loans classified as pass represent assets that are evaluated and are performing under the stated terms. Pass rated assets are analyzed by the pay capacity of the obligor, current net worth of the obligor and/or by the value of the loan collateral.

Watch. Loans classified as watch possess potential weaknesses that require management attention, but do not yet warrant adverse classification. While the status of an asset put on this list does not technically trigger their classification as substandard or non-accrual, it is considered a proactive way to identify potential issues and address them before the situation deteriorates further and results in a loss for the Corporation.

Special Mention. Loans classified as special mention exhibit material negative financial trends due to company specific or industry conditions which, if not corrected or mitigated, threaten their capacity to meet current or continuing debt obligations. These borrowers still demonstrate the financial flexibility to address and cure the root cause of these adverse financial trends without significant deviations from their current business plan. Their potential weakness deserves close attention and warrant enhanced monitoring on the part of management. The expectation is these borrowers will return to a pass rating given reasonable time; or will be further downgraded.

Substandard. Loans classified as substandard are inadequately protected by the current net worth, paying capacity of the obligor, or by the collateral pledged. Substandard assets must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain a loss if the deficiencies are not corrected.

Non-Accrual. Loans classified as non-accrual have the weaknesses of those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that fall into this category are deemed collateral dependent and an individual impairment evaluation is performed on all relationships greater than $500,000. Loans in this category are allocated a specific reserve if the collateral does not support the outstanding loan balance or charged off if deemed uncollectible.

As of June 30, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

     Pass     Watch     Special
Mention
    Substandard     Non-Accrual     Total  Unpaid
Principal

Balance
 
     (In thousands)  

Commercial and industrial

   $ 10,438      $ 5,132      $ 244      $ 7,446      $ 7,213      $ 30,473   

Commercial real estate:

            

Land and construction

     47,596        18,667        6,236        44,587        46,349        163,435   

Multi-family

     240,725        22,415        1,921        22,534        36,886        324,481   

Retail/office

     144,885        53,769        8,877        43,576        24,652        275,759   

Other

     122,107        19,220        24,916        43,672        24,752        234,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 565,751      $ 119,203      $ 42,194      $ 161,815      $ 139,852      $ 1,028,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total unpaid principal balance

     55.0     11.6     4.1     15.7     13.6     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

As of March 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

                                   Total Unpaid  
                 Special                 Principal  
     Pass     Watch     Mention     Substandard     Non-Accrual     Balance  
     (In thousands)  

Commercial and industrial

   $ 15,187      $ 5,506      $ 255      $ 9,812      $ 8,217      $ 38,977   

Commercial real estate:

            

Land and construction

     63,643        4,532        6,344        47,300        64,229        186,048   

Multi-family

     252,107        26,829        2,728        22,790        37,762        342,216   

Retail/office

     149,907        58,252        13,080        43,221        33,817        298,277   

Other

     122,427        20,798        34,355        42,732        27,963        248,275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 603,271      $ 115,917      $ 56,762      $ 165,855      $ 171,988      $ 1,113,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total unpaid principal balance

     54.2     10.4     5.1     14.9     15.4     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential and consumer loans are managed on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are considered non-accrual. The following table presents the unpaid principal balance of residential and consumer loans based on accrual status as of June 30, 2012 and March 31, 2012:

 

     At June 30, 2012      At March 31, 2012  
     Accrual      Non-Accrual      Total Unpaid
Principal
Balance
     Accrual      Non-Accrual      Total Unpaid
Principal
Balance
 
     (In thousands)  

Residential

   $ 510,129       $ 41,335       $ 551,464       $ 520,141       $ 44,550       $ 564,691   

Consumer:

                 

Education (1)

     226,404         721         227,125         239,569         762         240,331   

Other consumer

     264,896         7,079         271,975         261,908         7,624         269,532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,001,429       $ 49,135       $ 1,050,564       $ 1,021,618       $ 52,936       $ 1,074,554   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Non – accrual education loans represent the portion of these loans 90+ days past due that are not covered by a guarantee provided by government agencies that is limited to approximately 97% of the outstanding balance.

Troubled Debt Restructurings

Modification of loan terms in a troubled debt restructuring are generally in the form of an extension of payment terms or lowering of the interest rate, although occasionally the Corporation has reduced the outstanding principal balance.

Loans modified in a troubled debt restructuring that are currently on non-accrual status will remain on non-accrual status for a period of at least six months. If after six months, or a longer period sufficient to demonstrate the willingness and ability of the borrower to perform under the modified terms, the borrower has made payments in accordance with the modified terms, the loan is returned to accrual status but retains its designation as a troubled debt restructuring. The designation as a troubled debt restructuring is removed in years after the restructuring if both of the following conditions exist: (a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of restructuring for a new loan with comparable risk and (b) the loan is not impaired based on the terms specified by the restructuring agreement.

 

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The following table presents information related to loans modified in a troubled debt restructuring, by class, during the three months ended June 30, 2012:

 

     Three Months Ended June 30, 2012  
     Number of
Modifications
     Unpaid
Principal
Balance (2)
(at period end)
               
           Balance in the ALLL (3)  

Troubled Debt Restructurings (1)

         Prior to
Modification
     At Period
End
 
   (Dollars in thousands)  

Residential

     0       $ —         $ —         $ —     

Commercial and industrial

     2         163         206         156   

Land and construction

     2         962         96         —     

Multi-family

     0         —           —           —     

Retail/office

     3         1,719         596         631   

Other commercial real estate

     0         —           —           —     

Education

     0         —           —           —     

Other consumer

     2         37         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     9       $ 2,881       $ 898       $ 787   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported in this table.
(2) The unpaid principal balance is inclusive of all partial paydowns and charge-offs since the modification date.
(3) The balance in the ALLL represents any specific component of the allowance for loan losses associated with these loans.

The following table presents loans modified in a troubled debt restructuring from July 1, 2011 to June 30, 2012, by class, that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended June 30, 2012:

 

     Three Months Ended  
     June 30, 2012  
            Unpaid  
     Number of      Principal  
     Modified      Balance (2)  

Troubled Debt Restructurings (1)

   Loans      (at period end)  
   (Dollars in thousands)  

Residential

     0       $ —     

Commercial and industrial

     2         523   

Land and construction

     0         —     

Multi-family

     0         —     

Retail/office

     1         161   

Other commercial real estate

     0         —     

Education

     0         —     

Other consumer

     0         —     
  

 

 

    

 

 

 
     3       $ 684   
  

 

 

    

 

 

 

 

(1) Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported in this table.
(2) The unpaid principal balance is inclusive of all partial paydowns and charge-offs since the modification date.

 

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Table of Contents

The following table presents the unpaid principal balance of loans modified in a TDR during the three months ended June 30, 2012, by class and by type of modification:

 

      Principal
and  Interest
to Interest
Only
                                    
        Interest Rate Reduction                       

Troubled Debt Restructurings (1)(2)

      To Below
Market Rate
     To Interest
Only (3)
     Below
Market Rate (4)
     Other (5)      Total  
   (In thousands)  

Residential

   $ —         $ —         $ —         $ —         $ —         $ —     

Commercial and industrial

     —           —           —           —           163         163   

Land and construction

     —           —           —           210         752         962   

Multi-family

     —           —           —           —           —           —     

Retail/office

     —           161         —           546         1,012         1,719   

Other commercial real estate

     —           —           —           —           —           —     

Education

     —           —           —           —           —           —     

Other consumer

     —           —           18         —           19         37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 161       $ 18       $ 756       $ 1,946       $ 2,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported in this table.
(2) The unpaid principal balance is inclusive of all partial paydowns and charge-offs since the modification date.
(3) Includes modifications of loan repayment terms from principal and interest to interest only, along with a reduction in the contractual interest rate.
(4) Includes loans modified at below market rates for borrowers with similar risk profiles and having comparable loan terms and conditions. Market rates are determined by reference to internal new loan pricing grids that specify credit spreads based on loan risk rating and term to maturity.
(5) Other modifications primarily include providing for the deferral of interest currently due to the new maturity date of the loan.

As time passes and borrowers continue to perform in accordance with the restructured loan terms, a portion of the troubled debt restructurings – non-accrual balance may be returned to accrual status.

Pledged Loans

At June 30, 2012 and March 31, 2012, residential, multi-family, education and other consumer loans receivable with unpaid principal of approximately $822.5 million and $792.7 million were pledged to secure borrowings and for other purposes as permitted or required by law. Certain of the real-estate related loans are pledged as collateral for FHLB borrowings. See Note 9.

In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates amounting to $454,000 and $515,000 at June 30, 2012 and March 31, 2012, respectively. During the three months ended June 30, 2012, there were no principal additions and principal payments totaled $61,000.

Note 6 – Other Real Estate Owned

Real estate acquired by foreclosure, real estate acquired by deed in lieu of foreclosure and other repossessed assets (OREO) are held for sale and are initially recorded at fair value less a discount for estimated selling expenses at the date of foreclosure. At the date of foreclosure, any write down to fair value less estimated selling costs is charged to the allowance for loan losses. If the discounted fair value exceeds the net carrying value of the loans, recoveries to the allowance for loan losses are recorded to the extent of previous charge-offs, with any excess, which is infrequent, recognized as a gain in non-interest income. Subsequent to foreclosure, valuations are periodically performed and a valuation allowance is established if fair value less estimated selling costs exceeds the carrying value. Costs relating to the development and improvement of the property may be capitalized; holding period costs and subsequent changes to the valuation allowance are charged to expense.

 

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Table of Contents

A summary of the activity in other real estate owned is as follows:

 

     For the Three Months Ended June 30,  
     2012     2011  
     (In thousands)  

Balance at beginning of period

   $ 88,841      $ 90,707   

Additions

     18,818        23,252   

Valuations/write-offs

     (4,634     (4,890

Transfer to premises and equipment

     (2,870     —     

Sales

     (16,200     (19,578
  

 

 

   

 

 

 

Balance at end of period

   $ 83,955      $ 89,491   
  

 

 

   

 

 

 

The balances at end of period above are net of a valuation allowance of $24.5 million and $20.9 million at June 30, 2012 and 2011, respectively, recognized during the holding period for declines in fair value subsequent to foreclosure or acceptance of deed in lieu of foreclosure. A summary of activity in the OREO valuation allowance is as follows:

 

     For the Three Months Ended June 30,  
     2012     2011  
     (In thousands)  

Balance at beginning of period

   $ 22,521      $ 19,975   

Provision

     4,634        4,890   

Sales

     (2,623     (4,000
  

 

 

   

 

 

 

Balance at end of period

   $ 24,532      $ 20,865   
  

 

 

   

 

 

 

During the three months ended June 30, 2012 and 2011, OREO expense, net was $7.0 million and $8.9 million, consisting of $4.6 million and $4.9 million of valuation adjustments, $411,000 and $1.1 million of foreclosure cost expense and $2.0 million and $2.9 million of net expenses from operations, respectively.

Note 7 – Mortgage Servicing Rights

The Corporation records mortgage servicing rights (MSRs) when loans are sold to third parties with servicing of those loans retained. In addition, MSRs are recorded when acquiring or assuming an obligation to service a financial (loan) asset that does not relate to an asset that is owned. Servicing assets are initially measured at fair value determined using a discounted cash flow model based on market assumptions at the time of origination. Subsequently, the MSR asset is carried at the lower of amortized cost or fair value. The Corporation assesses MSRs for impairment using a discounted cash flow model provided by a third party that is based on current market assumptions at each reporting period. For purposes of measuring fair value, the servicing rights are stratified into relatively homogeneous pools based on characteristics such as product type and interest rate bands. Impairment is recognized, if necessary, at the pool level rather than for each individual servicing right asset.

The fair value of the Corporation’s MSRs is highly sensitive to changes in market interest rates, and will generally decrease in value in a falling rate environment, while generally increasing in value as rates rise. The Corporation’s MSRs are fairly highly correlated to changes in the U.S. Treasury 10-year note rate which fell considerably from 1.67% at June 30, 2012 to 1.51% at July 31, 2012. Impairment losses are expected in future periods if market interest rates remain at these historically low levels or continue to decline.

The Corporation has chosen to use the amortization method to measure servicing assets. Under the amortization method, servicing assets are amortized in proportion to and over the period of net servicing income. Income generated as the result of the capitalization of new servicing assets is reported as net gain on sale of loans and the amortization of servicing assets is reported as a reduction to loan servicing income in the consolidated statements of operations. Ancillary income is recorded in other non-interest income.

 

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Table of Contents

Information regarding mortgage servicing rights for the three months ended June 30, 2012 and 2011 is as follows:

 

     For the Three Months Ended June 30,  
     2012     2011  
     (In thousands)  

Balance at beginning of period

   $ 24,970      $ 25,366   

Additions

     2,027        670   

Amortization

     (2,336     (1,305
  

 

 

   

 

 

 

Balance at end of period – before valuation allowance

     24,661        24,731   

Valuation allowance

     (4,071     (626
  

 

 

   

 

 

 

Balance at end of period

   $ 20,590      $ 24,105   
  

 

 

   

 

 

 

Fair value at the end of the period

   $ 20,848      $ 25,210   

Key assumptions:

    

Weighted average discount rate

     10.97     11.30

Weighted average prepayment speed

     15.95     9.90

The projections of amortization expense for mortgage servicing rights set forth below are based on asset balances as of June 30, 2012 and an assumed amortization rate of 20% per year. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

 

     MSR
Amortization
 
    
     (In thousands)  

Three months ended June 30, 2012

   $ 2,336   
  

 

 

 

Estimate for the year ended March 31,

  

2013 (nine remaining months)

   $ 3,699   

2014

     4,192   

2015

     3,354   

2016

     2,683   

2017

     2,146   

Thereafter

     8,586   
  

 

 

 
   $ 24,661   
  

 

 

 

Mortgage loans serviced for others are not included on the consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was approximately $3.1 billion at June 30, 2012 and March 31, 2012.

 

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Table of Contents

Note 8 – Deposits

Deposits are summarized as follows:

 

     June 30, 2012     March 31, 2012  
     Carrying      Weighted     Carrying      Weighted  
     Amount      Average Rate     Amount      Average Rate  
     (Dollars in thousands)  

Non-interest-bearing checking

   $ 275,526         0.00   $ 264,751         0.00

Interest-bearing checking

          

Fixed rate

     237,961         0.07        235,459         0.07   

Variable rate

     29,308         0.10        30,639         0.10   
  

 

 

      

 

 

    

Total checking accounts

     542,795         0.04        530,849         0.04   

Money market accounts

     496,042         0.25        492,787         0.28   

Regular savings

     271,202         0.10        265,238         0.10   

Advance payments by borrowers for taxes and insurance

     10,793         0.10        6,134         0.10   

Certificates of deposit:

          

0.00% to 1.99%

     728,914         0.82        751,326         0.86   

2.00% to 3.99%

     171,491         2.38        179,455         2.42   

4.00% and above

     31,936         4.54        39,126         4.51   
  

 

 

      

 

 

    

Total certificates of deposit

     932,341         1.23        969,907         1.30   
  

 

 

      

 

 

    

Total deposits

   $ 2,253,173         0.59   $ 2,264,915         0.64
  

 

 

      

 

 

    

Maturities of certificates of deposit outstanding at June 30, 2012 are summarized as follows:

 

Matures During Year Ended March 31,

   Amount  
   (In thousands)  

2013 (nine remaining months)

   $  653,971   

2014

     198,798   

2015

     29,441   

2016

     11,620   

2017

     38,511   

Thereafter

     —     
  

 

 

 
   $ 932,341   
  

 

 

 

At June 30, 2012 and March 31, 2012, certificates of deposit with balances greater than or equal to $100,000 totaled $190.3 million and $195.2 million, respectively.

The Bank has entered into agreements with certain brokers that provided deposits obtained from their customers at specified interest rates for an identified fee, or so called “brokered deposits.” At June 30, 2012 and March 31, 2012, the Bank had $274,000 and $2.1 million in brokered deposits. Due to existing capital levels, the Bank is currently prohibited from obtaining or renewing any brokered deposits. The Bank has $24.9 million in out-of-network certificates of deposit at June 30, 2012. These deposits, which are not considered brokered deposits, are opened via internet listing services and are kept within FDIC insured balance limits.

 

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Table of Contents

Note 9 – Other Borrowed Funds

Other borrowed funds consist of the following:

 

          June 30, 2012     March 31, 2012  
     Matures During           Weighted            Weighted  
     Year Ended           Average            Average  
    

March 31,

   Amount      Rate     Amount      Rate  
          (Dollars in thousands)  

FHLB advances:

   2013 (nine remaining months)    $ 10,000         4.12   $ 10,000         4.12
   2014      11,500         1.93        11,500         1.93   
   2015      150,000         1.52        150,000         1.62   
   2018      100,000         3.36        100,000         3.36   
   2019      86,000         2.87        86,000         2.87   
     

 

 

      

 

 

    

Total FHLB advances

        357,500           357,500      

Line of credit

        116,300         15.00        116,300         15.00   

Repurchase agreements

        2,578         0.14        2,303         0.21   
     

 

 

      

 

 

    
      $ 476,378         5.41   $ 476,103         5.53
     

 

 

      

 

 

    

The Bank selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances. FHLB advances are limited to 65% of single-family loans, 60% of multi-family loans and 20% of eligible home equity and home equity line of credit loans meeting such criteria. FHLB borrowings of $191.0 million have call features that may be exercised quarterly by the FHLB. The FHLB borrowings are also collateralized by mortgage-related securities with a fair value of $179.3 million and $184.6 million at June 30, 2012 and March 31, 2012, respectively.

Credit Agreement

As of June 30, 2012 and March 31, 2012, the Corporation had drawn a total of $116.3 million at a weighted average interest rate of 15.00%, on a short term line of credit to various lenders led by U.S. Bank. The total line of credit available is $116.3 million. At June 30, 2012 and March 31, 2012, the base rate was 0.00% and the deferred rate was 15.00% for a weighted average interest rate of 15.00%.

On November 29, 2011, the Corporation entered into Amendment No. 8 (the “Amendment”) to the Amended and Restated Credit Agreement, dated as of June 9, 2008, (the “Credit Agreement”), among the Corporation, the lenders from time to time a party thereto, and U.S. Bank National Association, as administrative agent for such lenders, or the “Agent.” The Corporation is currently in default on the Credit Agreement as a result of failure to make a principal payment on March 2, 2009. Under the Amendment, the Agent and the Lenders agreed to forbear from exercising their rights and remedies against the Corporation until the earliest to occur of the following: (i) the occurrence of any Event of Default (other than a failure to make principal payments on the outstanding balance under the Credit Agreement or other Existing Defaults); or (ii) November 30, 2012. Notwithstanding the agreement to forbear, the Agent may at any time, in its sole discretion, take any action reasonably necessary to preserve or protect its interest in the stock of the Bank, IDI, or any other collateral securing any of the obligations against the actions of the Corporation or any third party without notice to or the consent of any party.

The Amendment also provides that the outstanding balance under the Credit Agreement shall bear interest at 15% per annum. Interest accruing under the Credit Agreement is due on the earlier of (i) the date the Credit Agreement is paid in full or (ii) November 30, 2012. At June 30, 2012, the Corporation had accrued interest and amendment fees payable related to the Credit Agreement of $40.2 million and $5.7 million, respectively.

Within two business days after the Corporation has knowledge of an “event,” the CFO is required to submit a statement of the event to the Agent, together with a statement of the actions which the Corporation proposes to take in response to the event. An event may include: (i) any event which, either of itself or with the lapse of time or the giving of notice or both, would constitute a Default under the Credit Agreement; (ii) a default or an event of default under any other material agreement to which the Corporation or Bank is a party; or (iii) any pending or threatened litigation or certain administrative proceedings.

 

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Table of Contents

The Amendment requires the Bank to maintain the following financial covenants:

 

   

Tier 1 leverage ratio of not less than 3.70% at all times.

 

   

Total risk based capital ratio of not less than 7.50% at all times.

 

   

Ratio of non-performing loans to gross loans not to exceed 15.00% at any time.

The Credit Agreement and the Amendment also contain customary representations, warranties, conditions and events of default for agreements of such type. At June 30, 2012, the Corporation was in compliance with all covenants contained in the Credit Agreement and the Amendment. Under the terms of the Credit Agreement and Amendment, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if the Corporation is not in compliance with all covenants. Currently, no such action has been taken by the Agent or the Lenders. However, the default creates significant uncertainty related to the Corporation’s operations.

Temporary Liquidity Guarantee Program

In October 2008, the Secretary of the United States Department of the Treasury invoked the systemic risk exception of the FDIC Improvement Act of 1991 and the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”). The TLGP provides a guarantee, through the earlier of maturity or June 30, 2012, of certain senior unsecured debt issued by participating Eligible Entities (including the Corporation) between October 14, 2008 and June 30, 2009. The Bank signed a master agreement with the FDIC on December 5, 2008 for issuance of bonds under the program and subsequently issued $60.0 million of bonds in February 2009 bearing interest at a fixed rate of 2.74%. The bonds matured on February 11, 2012 and were paid in full.

Note 10 – Capital Purchase Program

Pursuant to the Capital Purchase Program (“CPP”) in January 2009, Treasury, on behalf of the U.S. government, purchased the Corporation’s preferred stock, along with warrants to purchase approximately 7.4 million shares of the Corporation’s common stock at an exercise price of $2.23 per share. The preferred stock has a dividend rate of 5% per year, until the fifth anniversary of Treasury’s investment and a dividend of 9% thereafter. During the time Treasury holds securities issued pursuant to this program, the Corporation is required to comply with certain provisions regarding executive compensation and corporate governance. Participation in the CPP also imposes certain restrictions upon the payment of dividends to common shareholders and stock repurchase activities. The Corporation elected to participate in the CPP and received $110 million. The Corporation has deferred 13 dividend payments on the Series B Preferred Stock held by the U.S. Treasury. On September 30, 2011, the Treasury exercised its right to appoint two directors to the Board of Directors of the Corporation as a result of the nonpayment of dividends. At June 30, 2012 and March 31, 2012, the cumulative amount of dividends in arrears not declared, including interest on unpaid dividends at 5% per annum, was $20.4 million and $18.8 million, respectively.

Note 11 – Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s 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 Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

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Table of Contents

Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of core, tangible, and risk-based capital. Management believes, as of June 30, 2012, that the Bank was adequately capitalized under PCA guidelines. Under these OCC requirements, a bank must have a total risk-based capital ratio of 8.0 percent or greater to be considered “adequately capitalized.” The Bank continues to work toward the requirements of the previously issued Cease and Desist Order which requires a total risk-based capital ratio of 12.0 percent, which exceeds traditional capital levels for a bank. The Bank does not currently meet these elevated capital levels. See Note 2.

The following table summarizes the Bank’s capital ratios and the ratios required by its federal regulators to be considered adequately or well-capitalized under standard PCA guidelines at June 30, 2012 and March 31, 2012:

 

                  Minimum Required  
     Actual     To be Adequately
Capitalized
    To be Well
Capitalized
    Under Order to
Cease and Desist
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

At June 30, 2012

                    

Tier 1 leverage (core)

   $ 127,026         4.56   $ 111,333         4.00   $ 139,166         5.00   $ 222,666         8.00

Total risk-based capital

     148,738         8.98        132,460         8.00        165,574         10.00        198,689         12.00   

At March 31, 2012

                    

Tier 1 leverage (core)

   $ 125,894         4.51   $ 111,685         4.00   $ 139,606         5.00   $ 223,370         8.00

Total risk-based capital

     149,141         8.42        141,701         8.00        177,126         10.00        212,551         12.00   

The following table reconciles the Bank’s stockholders’ equity to federal regulatory capital at June 30, 2012 and March 31, 2012:

 

     June 30,
2012
    March 31,
2012
 
     (In thousands)  

Stockholders’ equity of the Bank

   $ 129,972      $ 128,071   

Less: Disallowed servicing assets

     (1,827     (2,045

Accumulated other comprehensive (income) loss

     (1,119     (132
  

 

 

   

 

 

 

Tier 1 capital

     127,026        125,894   

Plus: Allowable general valuation allowances

     21,712        23,247   
  

 

 

   

 

 

 

Total risk-based capital

   $ 148,738      $ 149,141   
  

 

 

   

 

 

 

Note 12 – Income Taxes

The Corporation accounts for income taxes based on the asset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, computed using enacted tax rates. Significant net deferred tax assets have been created for deductible temporary differences, the largest of which relates to our allowance for loan losses. For

 

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income tax return purposes, only net charge-offs on uncollectible loan balances are deductible, not the provision for credit losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s evaluation and judgment of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. The Corporation considers both positive and negative evidence regarding the ultimate realizability of deferred tax assets. Positive evidence includes the existence of taxes paid in available carry back years as well as the probability that taxable income will be generated in future periods while negative evidence includes significant losses in the current year or cumulative losses in the current and prior two years as well as general business and economic trends.

At June 30, 2012 and March 31, 2012, the Corporation determined that a valuation allowance relating to the deferred tax asset was necessary. This determination was based largely on the negative evidence represented by the losses in the current and prior fiscal years caused by the significant loan loss provisions associated with the loan portfolio. In addition, general uncertainty surrounding future economic and business conditions have increased the potential volatility and uncertainty of projected earnings. Therefore, a valuation allowance of $150.4 million and $149.8 million at June 30, 2012 and March 31, 2012, respectively, was recorded to offset net deferred tax assets that exceed the Corporation’s carry back potential.

The significant components of the Corporation’s deferred tax assets (liabilities) are as follows:

 

     At June 30,     At March 31,  
     2012     2012  
     (In thousands)  

Deferred tax assets:

    

Allowance for loan losses

   $ 50,998      $ 54,063   

Other loss reserves

     2,206        2,635   

Federal NOL carryforwards

     86,141        82,885   

State NOL carryforwards

     18,656        18,178   

Purchase accounting

     223        216   

Other

     3,586        3,635   
  

 

 

   

 

 

 

Total deferred tax assets

     161,810        161,612   

Valuation allowance

     (150,447     (149,831
  

 

 

   

 

 

 

Adjusted deferred tax assets

     11,363        11,781   

Deferred tax liabilities:

    

FHLB stock dividends

     (2,269     (2,636

Mortgage servicing rights

     (8,258     (8,825

Unrealized gains (losses)

     (449     (53

Other

     (387     (267
  

 

 

   

 

 

 

Total deferred tax liabilities

     (11,363     (11,781
  

 

 

   

 

 

 

Net deferred tax assets

   $ —        $ —     
  

 

 

   

 

 

 

The Corporation is subject to U.S. federal income tax as well as income tax of state jurisdictions. The tax years 2009-2011 remain open to examination by the Internal Revenue Service and certain state jurisdictions while the years 2008-2011 remain open to examination by certain other state jurisdictions.

The Corporation recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2012 and March 31, 2012, the Corporation has not recognized any accrued interest and penalties related to uncertain tax positions.

 

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Note 13 – Commitments and Contingent Liabilities

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and financial guarantees which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement and exposure to credit loss the Corporation has in particular classes of financial instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements.

Financial instruments whose contract amounts represent credit risk are as follows:

 

     June 30,
2012
     March 31,
2012
 
     (In thousands)  

Commitments to extend credit:

   $ 11,627       $ 15,022   

Unused lines of credit:

     

Home equity

     112,619         112,760   

Credit cards

     28,888         31,658   

Commercial

     10,974         9,446   

Letters of credit

     17,709         17,349   

Credit enhancement under the Federal Home Loan Bank of Chicago Mortgage Partnership Finance Program

     20,442         20,442   

Commitments to extend credit are in the form of a loan in the near future. Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and may be drawn upon at the borrowers’ discretion. Letters of credit commit the Corporation to make payments on behalf of customers when certain specified future events occur. Commitments and letters of credit primarily have fixed expiration dates or other termination clauses and may require payment of a fee. As some such commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. With the exception of credit card lines of credit, the Corporation primarily extends credit on a secured basis. Collateral obtained consists primarily of single-family residences and income-producing commercial properties.

At June 30, 2012, the Corporation has $1.7 million of reserves on unfunded commitments, unused lines of credit and letters of credit classified in other liabilities. The Corporation intends to fund commitments through current liquidity.

Pursuant to a credit enhancement feature of the MPF program, the Corporation has retained secondary credit loss exposure in the amount of $20.4 million at June 30, 2012 related to approximately $351.4 million of residential mortgage loans that the Bank has originated as agent for the FHLB. Under the credit enhancement, the FHLB is liable for losses on loans up to one percent of the original delivered loan balances in each pool. The Bank is then liable for losses over and above the first position up to a contractually agreed-upon maximum amount in each pool that was delivered to the Program. The Corporation receives a monthly fee for this credit enhancement obligation based on the outstanding loan balances. The Corporation has recorded net credit enhancement fee income from this program totaling $4,000 and $46,000 for the three months ending June 30, 2012 and June 30, 2011, respectively. Based on historical experience, the Corporation does not anticipate that any cre