Attached files
file | filename |
---|---|
EX-23.1 - EX-23.1 - BANK MUTUAL CORP | c56660exv23w1.htm |
EX-31.1 - EX-31.1 - BANK MUTUAL CORP | c56660exv31w1.htm |
EX-23.2 - EX-23.2 - BANK MUTUAL CORP | c56660exv23w2.htm |
EX-31.2 - EX-31.2 - BANK MUTUAL CORP | c56660exv31w2.htm |
EX-21.1 - EX-21.1 - BANK MUTUAL CORP | c56660exv21w1.htm |
EX-32.2 - EX-32.2 - BANK MUTUAL CORP | c56660exv32w2.htm |
EX-32.1 - EX-32.1 - BANK MUTUAL CORP | c56660exv32w1.htm |
EX-10.2 - EX-10.2 - BANK MUTUAL CORP | c56660exv10w2.htm |
EX-10.11 - EX-10.11 - BANK MUTUAL CORP | c56660exv10w11.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number: 000-31207
BANK MUTUAL CORPORATION
Wisconsin | 39-2004336 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4949 West Brown Deer Road, Milwaukee, Wisconsin | 53223 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (414) 354-1500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value | The NASDAQ Stock Market LLC | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files.)
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
act).
Yes o No þ
As of February 26, 2010, 45,474,835 shares of Common Stock were validly issued and
outstanding. The aggregate market value of the Common Stock (based upon the $8.72 last sale price
on The NASDAQ Global Select Market on June 30, 2009, the last trading of the Companys second
fiscal quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned
by directors and executive officers and unallocated shares of the Employee Stock Ownership Plan;
does not constitute an admission as to affiliate status) was approximately $374.4 million.
Part of Form 10-K Into Which | ||
Documents Incorporated by Reference | Portions of Document are Incorporated | |
Proxy Statement for Annual Meeting of Shareholders on May 3, 2010 | Part III |
BANK MUTUAL CORPORATION
FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2009
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2009
Table of Contents
Item | Page | |||||||
Part I | ||||||||
1 | 3 | |||||||
1A | 24 | |||||||
1B | 28 | |||||||
2 | 28 | |||||||
3 | 28 | |||||||
4 | 28 | |||||||
Part II | ||||||||
5 | 29 | |||||||
6 | 31 | |||||||
7 | 33 | |||||||
7A | 57 | |||||||
8 | 62 | |||||||
9 | 100 | |||||||
9A | 100 | |||||||
9B | 102 | |||||||
Part III | ||||||||
10 | 103 | |||||||
11 | 103 | |||||||
12 | 103 | |||||||
13 | 103 | |||||||
14 | 103 | |||||||
Part IV | ||||||||
15 | 104 | |||||||
SIGNATURES | 105 | |||||||
EX-10.2 | ||||||||
EX-10.11 | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-23.2 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
Part I
Cautionary Statement
This report contains or incorporates by reference various forward-looking statements concerning the
Companys prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may contain words such as anticipate, believe, estimate, expect,
objective, projection and similar expressions or use of verbs in the future tense, and are
intended to identify forward-looking statements; any discussions of periods after the date for
which this report is filed are also forward-looking statements. The statements contained herein
and such future statements involve or may involve certain assumptions, risks, and uncertainties,
many of which are beyond the Companys control, that could cause the Companys actual results and
performance to differ materially from what is expected. In addition to the assumptions and other
factors referenced specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Company: general economic conditions,
including high rates of unemployment and the significant instability in credit, lending, and
financial markets; declines in the real estate market, which could affect both collateral values
and loan activity; high unemployment and other factors which could affect borrowers ability to
repay their loans; negative developments affecting particular borrowers, which could adversely
impact loan repayments and collection; illiquidity of financial markets and other negative
developments affecting particular investment and mortgage-related securities, which could adversely
impact the fair value of and/or cash flows from such securities; legislative and regulatory
initiatives and changes, including action taken, or that may be taken, in response to difficulties
in financial markets and/or which could negatively affect the right of creditors; monetary and
fiscal policies of the federal government; increased competition and/or disintermediation within
the financial services industry; the effects of further regulation and consolidation within the
financial services industry; changes in regulators expectations for financial institutions
capital levels; changes in tax rates, deductions and/or policies; changes in FDIC premiums and
other governmental assessments; changes in deposit flows; changes in the cost of funds;
fluctuations in general market rates of interest and/or yields or rates on competing loans,
investments, and sources of funds; demand for loan or deposit products; demand for other financial
services; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or
developments in the war on terrorism. Refer to Item 1A. Risk Factors, below, as well as the
factors discussed in Part II, Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations, for additional discussion.
Item 1. Business
The discussion in this section should be read in conjunction with Item 1A. Risk Factors, Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations, Item
7A. Quantitative and Qualitative Disclosures about Market Risk, and Item 8. Financial
Statements and Supplementary Data.
General
Bank Mutual Corporation (the Company) is a Wisconsin corporation headquartered in Milwaukee,
Wisconsin. The Company owns 100% of the common stock of Bank Mutual (the Bank) and currently
engages in no substantial activities other than its ownership of such stock. Consequently, the
Companys net income and cash flows are derived primarily from the Banks operations and capital
distributions. The Company is regulated as a savings and loan holding company by the Office of
Thrift Supervision (OTS). The Companys common stock trades on The NASDAQ Global Select Market
under the symbol BKMU.
The Bank was founded in 1892 and is a federally-chartered savings bank headquartered in Milwaukee,
Wisconsin. It is regulated by the OTS and its deposits are insured within limits established by
the Federal Deposit Insurance Corporation (FDIC). The Banks primary business is community
banking, which includes attracting deposits from and making loans to the general public and private
businesses, as well as governmental and non-profit entities. In addition to deposits, the Bank
obtains funds through borrowings from the Federal Home Loan Bank (FHLB) of Chicago. These
funding sources are principally used to originate loans, including one- to four-family residential
loans, multi-family residential loans, commercial real estate loans, commercial business loans and
lines of credit, and consumer loans and lines of credit. From time-to-time the Bank also purchases
and/or participates in loans from third-party financial institutions and is an active seller of
residential loans in the secondary market. It also invests in mortgage-related and other
investment securities.
3
Table of Contents
The Companys principal executive office is located at 4949 Brown Deer Road, Milwaukee, Wisconsin,
53223, and its telephone number at that location is (414) 354-1500. The Companys website is
www.bankmutualcorp.com. The Company will make available through that website, free of charge, its
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practical after the Company files those reports
with, or furnishes them to, the Securities and Exchange Commission (SEC). Also available on the
Companys website are various documents relating to the corporate governance of the Company,
including its Code of Ethics and its Code of Conduct.
Market Area
At December 31, 2009, the Company had 78 banking offices in Wisconsin and one in Minnesota. At
June 30, 2009, the Company had a 1.65% market share of all deposits held by FDIC-insured
institutions in Wisconsin. The Company is the fifth largest financial institution headquartered in
Wisconsin, based on deposit market share.
The largest concentration of the Companys offices is in the Milwaukee Metropolitan Statistical
Area (MSA), the Racine MSA, and the Kenosha, Wisconsin, and Lake County, Illinois MSA. There are
currently 26 offices in these MSAs. The Company has four offices in the Madison MSA, two offices
in the Janesville/Beloit MSA, and six other offices in communities in east central Wisconsin.
The Company also operates 21 banking offices in northeastern Wisconsin, including the Green Bay
MSA. Two of the offices in this region are near the Michigan border; therefore, the Company also
draws customers from northern Michigan. Finally, the Company has 19 offices in northwestern
Wisconsin, including the Eau Claire MSA, and one office in Woodbury, Minnesota, which is located
near the Wisconsin state border on the eastern edge of the Minneapolis-St. Paul metropolitan area.
Competition
The Company faces significant competition in attracting deposits, making loans, and selling other
financial products and services. Wisconsin has many banks, savings banks, savings and loan
associations, and tax-exempt credit unions, which offer the same types of banking products and
services as the Company. The Company also faces competition from other types of financial service
companies, such as mortgage brokerage firms, finance companies, insurance companies, brokerage
firms, and mutual funds. As a result of electronic commerce, the Company also competes with
financial service providers outside of Wisconsin.
Many of the Companys competitors have greater resources and/or offer services that the Company
currently does not provide. For example, the Company does not offer trust services. However, the
Company does offer mutual fund investments, tax-deferred annuities, credit life and disability
insurance, property and casualty insurance, brokerage services, and investment advisory services
through a subsidiary, BancMutual Financial & Insurance Services, Inc.
Lending Activities
General At December 31, 2009, the Companys total loans receivable was $1.5 billion or 42.9% of
total assets. The Companys loan portfolio consists primarily of mortgage loans, which includes
loans secured by one- to four-family residences, multi-family properties, and commercial real
estate properties, as well as construction loans secured by the same types of properties. To a
lesser degree, the loan portfolio includes consumer loans consisting principally of home equity
lines of credit, fixed and adjustable rate home equity loans, student loans, and automobile loans.
Finally, the Companys loan portfolio also contains commercial business loans. The nature, type,
and terms of loans originated or purchased by the Company are subject to federal and state laws and
regulations. The Company has no significant concentrations of loans to particular borrowers or to
borrowers engaged in similar activities. The Companys real estate loans are primarily secured by
properties located in its primary market areas, as previously described. For specific information
related to the Companys loans receivable for the periods covered by this report, refer to
Financial ConditionLoans Receivable in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Residential Mortgage Lending The Company originates and purchases first mortgage loans secured
by one- to four-family properties. At December 31, 2009, the Companys portfolio of these types of
loans was $656.0 million or 42.1% of its gross loans receivable. Most of these loans are
owner-occupied; however, the Company also originates first mortgage loans secured by second homes,
seasonal homes, and investment properties.
4
Table of Contents
The Company originates primarily conventional fixed rate residential mortgage loans and adjustable
rate residential mortgage (ARM) loans with maturity dates up to 30 years. Such loans generally
are underwritten to Federal National Mortgage Association (Fannie Mae) standards. In general,
ARM loans are retained by the Company in its loan portfolio. Fixed rate mortgage loans are
generally sold in the secondary market without recourse, although the Company typically retains the
servicing rights to such loans. From time-to-time, the Company may elect to retain in its loan
portfolio conventional fixed rate loans with maturities of up to 15 years, as well as certain loans
with maturities up to 30 years. As a result of market competition in recent years, the Company has
generally not charged loan origination fees.
The Company also originates jumbo single family mortgage loans in excess of the Fannie Mae
maximum loan amount, which was $417,000 for single family homes in 2009. Fannie Mae has higher
limits for two-, three- and four-family homes. Beginning in 2006, the Company began to retain
certain fixed rate jumbo mortgage loans in its portfolio. ARM jumbo mortgage loans are
underwritten in accordance with the Companys underwriting guidelines.
The Company also originates loans under programs administered by the State Veterans Administration
(State VA), the Wisconsin Housing and Economic Development Authority (WHEDA), the U.S.
Department of Agriculture (USDA) Guaranteed Rural Housing Program, and the Federal Housing
Administration (FHA). Loans originated under State VA, WHEDA, and USDA programs are not held by
the Company in its loan portfolio, although the Company retains the servicing rights for such
loans. In the case of FHA loans, the Company receives a fee for its origination services, but does
not retain the loan or the servicing rights. In 2008 WHEDA suspended its loan programs due to a
lack of funding. However, in February 2010 WHEDA announced its intention to reinstate lending
under its programs effective March 1, 2010.
From time-to-time the Company also originates fixed rate and adjustable rate mortgage loans under
special programs for low- to moderate-income households and first-time home buyers. These programs
are offered for Community Reinvestment Act (CRA) purposes and are retained by the Company in its
loan portfolio. Among the features of these programs are lower down payments, no mortgage
insurance, and generally less restrictive requirements for qualification compared to the Companys
conventional one- to four-family mortgage loans. These loans generally have maturities up to 30
years.
ARM loans pose credit risks different from the risks inherent in fixed rate loans, primarily
because as interest rates rise, the underlying payments from the borrowers increase, which
increases the potential for payment default. At the same time, the marketability and/or value of
the underlying property may be adversely affected by higher interest rates. ARM loans originated
by the Company are typically adjusted by a maximum of 200 basis points per adjustment period. The
adjustments are usually annual, after the initial interest rate lock period. The Company
originates ARM loans with lifetime caps set at 6% above the origination rate. Monthly payments of
principal and interest are adjusted when the interest rate adjusts. The Company does not offer ARM
loans with negative amortization. The Company currently utilizes the monthly average yield on
United States treasury securities, adjusted to a constant maturity of one year (constant maturity
treasury index) as the index to determine the interest rate payable upon the adjustment date of
ARM loans. Some of the ARM loans are granted with conversion options that provide terms under
which the borrower may convert the mortgage loan to a fixed rate mortgage loan for a limited period
early in the term (normally in the first five years) of the ARM loan. The terms at which the ARM
loan may be converted to a fixed rate loan are established at the date of loan origination and are
set to allow the Company to sell the loan into the secondary market upon conversion. The Company
no longer originates ARM loans on an interest-only basis (whereby the borrower pays interest-only
during the initial interest rate lock period). The Companys remaining investment in interest-only
ARM loans does not constitute a material portion of its overall loan portfolio.
The volume and types of ARM loans the Company originates have been affected by the level of market
interest rates, competition, consumer preferences, and the availability of funds. ARM loans are
susceptible to early prepayment during periods of lower interest rates as borrowers refinance into
fixed rate loans.
Residential mortgage loan originations are solicited from real estate brokers, builders, existing
customers, community groups, other referral sources, and residents of the local communities located
in the Companys primary market areas through its loan origination staff. The Company also
advertises its residential mortgage loan products through local media, direct customer
communications, and its website. Most residential mortgage loans are processed under the Fannie
Mae alternative documentation programs. For alternative documentation loans, the Company requires
applicants to complete a Fannie Mae loan application and requests income, asset and debt
information from the borrower. In addition to obtaining outside vendor credit reports on all
borrowers, the Company also looks at other
5
Table of Contents
information to ascertain the creditworthiness of the borrower. In most instances, the Company
utilizes Fannie Maes Desktop Underwriter automated underwriting process. Loans that are processed
under the alternative documentation program conform to secondary market standards and generally may
be sold on the secondary market. Loans originated under Fannie Mae alternative documentation
program should not be confused with Alt-A loans or no documentation loans (i.e., no doc
loans). No doc loans, as the name implies, do not require verification of employment; instead, the
customers stated income is used in the underwriting decision. The Company does not offer Alt-A or
no doc loans, nor does it originate or purchase subprime loans.
The Company requires an appraisal of the real estate that secures a residential mortgage loan,
which must be performed by a certified appraiser approved by the board of directors. Prior to
2009, however, the Company used a streamlined process in certain circumstances on existing mortgage
loans that were refinanced or modified with the Company. In such instances, the Company relied on
the original appraisal. A title insurance policy is required for all real estate first mortgage
loans. Evidence of adequate hazard insurance and flood insurance, if applicable, is required prior
to closing. Borrowers are required to make monthly payments to fund principal and interest (except
for interest-only ARM mortgage loans, which the Company no longer originates) as well as private
mortgage insurance and flood insurance, if applicable. With some exceptions for lower
loan-to-value ratio loans, borrowers are also generally required to escrow in advance for real
estate taxes. If borrowers with loans having a lower loan-to-value ratio want to handle their own
taxes and insurance, an escrow waiver fee is charged. With respect to escrowed real estate taxes,
the Company generally makes this disbursement directly to the borrower as obligations become due.
The Companys staff underwriters review all pertinent information prior to making a credit decision
on an application. All recommendations to deny are reviewed by a designated senior officer of the
Company, in addition to staff underwriters, prior to the final disposition of the application. The
Companys lending policies generally limit the maximum loan-to-value ratio on single family
mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property. This limit is lower for loans secured by two-, three-, and
four-family homes. Loans above 80% loan-to-value ratios are subject to private mortgage insurance
to reduce the Companys exposure to less than 80% of value, except for certain low to moderate
income loan program loans.
In addition to servicing the loans in its own portfolio, the Company continues to service most of
the loans that it sells to Fannie Mae and other third-party investors (loans serviced for
others). Servicing mortgage loans, whether for its own portfolio or for others, includes such
functions as collecting monthly principal and interest payments from borrowers, maintaining escrow
accounts for real estate taxes and insurance, and making certain payments on behalf of borrowers.
When necessary, servicing of mortgage loans also includes functions related to the collection of
delinquent principal and interest payments, loan foreclosure proceedings, and disposition of
foreclosed real estate. As of December 31, 2009, loans serviced for others amounted to $1.0
billion. These loans are not reflected in the Companys Consolidated Statements of Financial
Condition.
When the Company services loans for others, it is compensated through the retention of a servicing
fee from borrowers monthly payments. The Company pays the third-party investors an agreed-upon
yield on the loans, which is generally less than the interest agreed to be paid by the borrowers.
The difference, typically 25 basis points or more, is retained by the Company and recognized as
servicing fee income over the lives of the loans, net of amortization of capitalized mortgage
servicing rights (MSRs). The Company also receives fees and interest income from ancillary
sources such as delinquency charges and float on escrow and other funds.
Management believes that servicing mortgage loans for third parties provides a natural hedge
against other risks inherent in the Companys mortgage banking operations. For example,
fluctuations in volumes of mortgage loan originations and resulting gains on sales of such loans
caused by changes in market interest rates will be partially offset by opposite changes in the
amortization of the MSRs. These fluctuations are usually the result of actual loan prepayment
activity and/or changes in management expectations for future prepayment activity, which impacts
the amount of MSRs amortized in a given period. However, fluctuations in the recorded value of
MSRs may also be caused by valuation adjustments required to be recognized under generally accepted
accounting principles (GAAP). That is, the value of servicing rights may fluctuate because of
changes in the future prepayment assumptions or discount rates used to periodically value the MSRs.
Although management believes that most of the Companys loans that prepay are replaced by new
loans (thus preserving the future servicing cash flow), GAAP requires impairment losses resulting
from a change in future prepayment assumptions to be recorded when the change occurs. However, the
offsetting gain on the sale of the new loan, if any, cannot be recorded under GAAP until the
customer actually prepays the old loan and the new loan is sold in the secondary market. MSRs are
particularly susceptible to impairment losses during periods of declining interest rates during
which prepayment activity typically accelerates to
6
Table of Contents
levels above that which had been anticipated when the servicing rights were originally recorded.
Alternatively, in periods of increasing interest rates, during which prepayment activity typically
declines, the Company could potentially recapture through earnings all or a portion of a previously
established valuation allowance for impairment.
Consumer Loans At December 31, 2009, the Companys portfolio of consumer loans was $275.5
million or 17.7% of its gross loans receivable. Consumer loans include fixed term home equity
loans, home equity lines of credit, home improvement loans, automobile loans, recreational vehicle
loans, boat loans, deposit account loans, overdraft protection lines of credit, unsecured consumer
loans, and to a lesser extent, unsecured consumer loans through credit card programs that are
administered by third parties. In 2008 the Company ceased offering student loans through programs
guaranteed by the federal government due to a lack of profitability. Student loans that continue
to be held by the Company are administered by a third party.
The Companys primary focus in consumer lending has been the origination of loans secured by real
estate, which includes home equity loans, home improvement loans, and home equity lines of credit.
Underwriting procedures for the home equity and home equity lines of credit loans include a
comprehensive review of the loan application, an acceptable credit score, verification of the value
of the equity in the home, and verification of the borrowers income. Home equity and home
improvement loan originations are developed through the cross-sales to existing customers,
advertisements in local media, the Banks website, and from time-to-time, direct mail.
The Company originates fixed rate home equity and home improvement term loans with combined
loan-to-value ratios up to 89.9%. Pricing on fixed rate home equity and home improvement term
loans is periodically reviewed by management. Generally, loan terms are in the three to fifteen
year range in order to minimize interest rate risk. Prior to October 2009 the Company also
originated variable rate home equity and home improvement term loans that had an initial fixed rate
for one to three years then adjust annually or monthly depending upon the offering, with terms of
up to 20 years. The Company discontinued offering variable rate home equity and home improvement
term loans due to increased administrative burdens caused by changes in certain regulatory
requirements.
The Company continues to originate home equity lines of credit. Home equity lines of credit are
variable rate loans secured by a first or second mortgage on owner-occupied one- to four-family
residences and second homes. Current interest rates on home equity lines of credit are tied to the
prime rate, adjust monthly after an initial interest rate lock period, and range from prime rate
minus 26 basis points to prime rate plus 175 basis points, depending on the loan-to-value ratio.
These loans generally have a floor of 4.99%, although loans with a combined loan-to-value ratio
greater than 80% have a floor of 6.99%. Home equity line of credit loans are made for terms up to
10 years and require minimum monthly payments.
Prior to May 2006, the Company made indirect automobile, boat, and recreational vehicle loans
through Savings Financial Corporation (SFC), a 50% owned subsidiary. Applications for these
loans were taken by selected automobile dealerships on application forms approved by the Company.
The Company discontinued such indirect loan originations as a result of the reduced profitability
of these loans. The Companys remaining investment in these types of loans does not constitute a
material portion of its overall loan portfolio.
Consumer loans generally have shorter terms and higher rates of interest than conventional mortgage
loans, but typically involve more credit risk because of the nature of the collateral and, in some
instances, the absence of collateral. In general, consumer loans are more dependent upon the
borrowers continuing financial stability, more likely to be affected by adverse personal
circumstances, and often secured by rapidly depreciating personal property such as automobiles. In
addition, various laws, including bankruptcy and insolvency laws, may limit the amount that may be
recovered from a borrower. However, such risks are mitigated to some extent in the case of home
equity loans and lines of credit. These types of loans are secured by a first or second mortgage
on the borrowers residence for which the total principal balance outstanding (including the first
mortgage) does not generally exceed 89.9% of the propertys value at the time of the loan.
The Company believes that the higher yields earned on consumer loans compensate for the increased
risk associated with such loans and that consumer loans are important to the Companys efforts to
increase the interest rate sensitivity and shorten the average maturity of its loan portfolio.
In conjunction with its consumer lending activities, the Company offers customers credit life and
disability insurance products underwritten and administered by an independent insurance provider.
The Company receives commission revenue related to the sales of these products, although such
amounts are not a material source of revenue for the Company.
7
Table of Contents
Multi-family and Commercial Real Estate Loans At December 31, 2009, the Companys portfolio of
multi-family and commercial real estate loans was $476.1 million or 30.6% of its gross loans
receivable. The Companys multi-family and commercial real estate loan portfolios consist of fixed
rate and adjustable rate loans originated at prevailing market rates usually tied to various
treasury indices. This portfolio generally consists of loans secured by apartment buildings,
office buildings, warehouses, industrial buildings, and retail centers. These loans typically do
not exceed 80% of the lesser of the purchase price or an appraisal by an appraiser designated by
us. Loans originated with balloon maturities are generally amortized on a 25 to 30 year basis with
a typical balloon term of 3 to 5 years.
Loans secured by multi-family and commercial real estate are granted based on the income producing
potential of the property and the financial strength of the borrower. In most cases, the Company
also obtains personal guarantees from the principals involved. The Companys approval process
includes a review of the other debt obligations and overall sources of flow available to the
borrower and guarantors. The propertys net operating income must be sufficient to cover the
payments relating to the outstanding debt. The Company generally requires an assignment of rents
or leases to be assured that the cash flow from the property will be used to repay the debt.
Appraisals on properties securing multi-family and larger commercial real estate loans are
performed by independent state certified fee appraisers approved by the board of directors. Title
and hazard insurance are required as well as flood insurance, if applicable. Environmental
assessments are performed on certain multi-family and commercial real estate loans in excess of
$1.0 million, as well as all loans secured by certain properties that the Company considers to be
environmentally sensitive. In addition, an annual review is performed on non-owner-occupied
multi-family and commercial real estate loans over $1.0 million.
Loans secured by multi-family and commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential mortgage loans. Such
loans typically involve large balances to single borrowers or groups of related borrowers. Because
payments on loans secured by multi-family and commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment of such loans may be subject
to adverse conditions in the real estate market or the economy. In recent periods the Company has
noted that borrowers problems in areas unrelated to the properties that secure the Companys loans
may have an adverse impact on such borrowers ability to comply with the terms of the Companys
loans.
The Banks largest individual multi-family and commercial real estate loans, as well as its
largest individual construction and development and commercial business loans (described below),
are substantially below the Banks legal lending limit to a single borrower, which was
approximately $53.5 million at December 31, 2009. However, the Bank has an internal lending limit
that is adjusted from time-to-time and which is substantially lower than its legal lending limit.
Construction and Development Loans At December 31, 2009, the Companys portfolio of construction
and development loans was $95.9 million or 6.2% of its gross loans receivable. These loans
typically have terms of 18 to 24 months, are interest-only, and carry variable interest rates tied
to the prime rate. Disbursements on these loans are based on draw requests supported by
appropriate lien waivers. As a general matter, construction loans convert to permanent loans and
remain in the Companys loan portfolio upon the completion of the project. Development loans are
typically repaid as the underlying lots or housing units are sold. Construction and development
loans are generally considered to involve a higher degree of risk than mortgage loans on completed
properties. The Companys risk of loss on a construction and development loan is dependent largely
upon the accuracy of the initial estimate of the propertys value at completion of construction,
the estimated cost of construction, and the borrowers ability to advance additional construction
funds if necessary. In addition, in the event a borrower defaults on the loan during its
construction phase, the construction project often needs to be completed before the full value of
the collateral can be realized by the Company. Due to the economic environment, the Company
suspended development lending in 2009, although it continues to engage in construction lending when
the circumstances warrant. The Company is uncertain at this time when it will reinstate
development lending.
Commercial Business Loans At December 31, 2009, the Companys portfolio of commercial business
loans was $52.2 million or 3.4% of its gross loans receivable. This portfolio consists of loans to
businesses for equipment purchases, working capital term loans and lines of credit, debt
refinancing, Small Business Administration (SBA) loans, and domestic standby letters of credit.
Typically, these loans are secured by general business security agreements, owner-occupied real
estate, and personal guarantees. The Company offers variable, adjustable, and fixed rate
commercial business loans. The Company also has commercial business loans that have an initial
period where interest rates are fixed, generally one to five years, and thereafter are adjustable
based on various indices. Fixed rate
8
Table of Contents
loans are priced at either a margin over the yield on U.S. Treasury issues with maturities that
correspond to the maturities of the notes or to match competitive conditions and yield
requirements. Term loans are generally amortized over a three to seven year period and
line-of-credit commercial business loans generally have a term of one year and, in the case of
small lines of credit, up to five years. All borrowers having an exposure to the Company of
$500,000 or more are reviewed annually, unless it is an investment real estate loan at which point
the annual review occurs for loans over $1.0 million.
Loan Approval Authority For one- to four-family residential loans intended for sale into the
secondary market, the Companys staff underwriters are authorized by the board of directors to
approve loans processed through the Fannie Mae Desktop Underwriter automated underwriting system up
to the Fannie Mae conforming loan limits ($417,000 for single family residential units; higher
limits for two-, three-, and four-family units). For residential loans intended to be held in the
Companys loan portfolio, staff underwriters are authorized to approve loans processed through the
Fannie Maes automated underwriting system of $500,000 or less, provided the loan-to-value ratio is
80% or less (and up to 90% with mortgage insurance) and the loan meets other specific underwriting
criteria. All other residential loan relationships must be approved by a senior officer of the
Company.
From time-to-time the Company has delegated limited lending authority to third-party originators
under the Companys correspondent loan program whose loans are purchased by the Company. That
approval is made in conjunction with the loan receiving an approval notification from the Fannie
Mae or the Federal Home Loan Mortgage Corporation (Freddie Mac) automated underwriting systems,
as well as an approval notification from the correspondents underwriter. This lending authority
is delegated only after the Company has reviewed the quality standards of a specified number of
loan files submitted to the Company by the correspondent. For those correspondents that are
granted delegated limited lending authority, the Company continues to select for quality review a
sample of 20% of the loans submitted by the correspondent for purchase by the Company.
Consumer loan underwriters have individual approval authority for secured loans ranging from
$25,000 to $150,000 provided that the loan-to-value ratio on real estate does not exceed 80%, or
90% on personal property, and that the loan meets other specific underwriting criteria. All other
consumer loans must be approved by a senior officer. Consumer loan underwriters have individual
approval authority for unsecured loans ranging from $10,000 to $25,000 provided the loan meets
other specific underwriting criteria. All unsecured consumer loans in excess of $25,000, or not
meeting specific underwriting criteria, must be approved by a senior officer.
Certain individual lenders and senior officers in the multi-family and commercial real estate
department have lending authority of $500,000 or less for both existing and proposed construction
of multi-family and commercial real estate properties. Two senior officers together have lending
authority of $750,000 or less and three senior officers together have lending authority of
$1,000,000 or less for multi-family and commercial real estate loans. All multi-family and
commercial real estate loans over $1,000,000 require approval of the executive loan committee of
the board of directors.
Individual lenders in the commercial banking department have individual lending authority ranging
from $50,000 to $250,000 for secured commercial business loans and $10,000 to $25,000 for unsecured
loans. Senior officers have individual lending authority of $250,000 or less for secured loans and
$50,000 or less for unsecured loans. Two senior officers together have lending authority of
$500,000 or less for secured commercial business loans and $150,000 or less for unsecured loans.
Three senior officers together have lending authority of $1,000,000 or less for secured commercial
business loans and $250,000 or less for unsecured loans. All secured business loans over
$1,000,000, or unsecured loans over $250,000, require approval of the executive loan committee of
the board of directors.
All loans approved by individuals and senior officers must be ratified by the executive loan
committee of the board of directors at its next meeting following the approval.
Asset Quality
General The Company has policies and procedures in place to manage its exposure to credit risk
related to its lending operations. As a matter of policy, the Company limits its lending to
geographic areas in which it has substantial familiarity and/or a physical presence. Currently,
this is limited to certain specific market areas in Wisconsin and contiguous states. In addition,
from time-to-time the Company will prohibit or restrict lending in situations in which the
underlying business operations and/or collateral exceed managements tolerance for risk. For
example, in 2008 the Company stopped making loans secured by hotels, motels, resort properties,
restaurants, or bars.
9
Table of Contents
The Company obtains appraisals or similar estimates of value prior to the origination of mortgage
loans or other secured loans. It also manages its exposure to risk by regularly monitoring loan
payment status, conducting periodic site visits and inspections, obtaining regular financial
updates from large borrowers and/or guarantors, corresponding regularly with large borrowers and/or
guarantors, and/or updating appraisals as appropriate, among other things. These procedures are
emphasized when a borrower has failed to make scheduled loan payments, has otherwise defaulted on
the terms of the loan agreement, or when management has become aware of a significant adverse
change in the financial condition of the borrower, guarantor, or underlying collateral. These
strategies, as well as a continued emphasis on quality loan underwriting, maintenance of sound
credit standards for new loan originations, and annual evaluation of large credits have generally
resulted in delinquency and non-performing asset ratios below the national average, although there
can be no assurances that this will continue. For specific information relating to the Companys
asset quality for the periods covered by this report, refer to Financial ConditionAsset Quality
in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Delinquent Loans When a borrower fails to make required payments on a loan, the Company takes a
number of steps to induce the borrower to cure the delinquency and restore the loan to a current
status. In the case of one- to four-family mortgage loans, the Companys loan servicing department
is responsible for collection procedures from the 15th day of delinquency through the completion of
foreclosure. Specific procedures include a late charge notice being sent at the time a payment is
over 15 days past due with a second notice (in the form of a billing coupon) being sent before the
payment becomes 30 days past due. Once the account is 30 days past due, the Company attempts
telephone contact with the borrower. Letters are sent if contact has not been established by the
45th day of delinquency. On the 60th day of delinquency, attempts at telephone contact continue
and stronger letters, including foreclosure notices, are sent. If telephone contact cannot be
made, the Company sends either a qualified third party inspector or a loan officer to the property
in an effort to contact the borrower. When contact is made with the borrower, the Company attempts
to obtain full payment or work out a repayment schedule to avoid foreclosure of the collateral.
Many borrowers pay before the agreed upon payment deadline and it is not necessary to start a
foreclosure action. The collection procedures and guidelines as outlined by Fannie Mae, Freddie
Mac, State VA, WHEDA, and Guaranteed Rural Housing are followed by the Company.
The collection procedures for consumer loans, excluding student loans, indirect consumer loans, and
credit card loans, include sending periodic late notices to a borrower once a loan is 5 to 15 days
past due depending upon the grace period associated with a loan. The Company attempts to make
direct contact with a borrower once a loan becomes 30 days past due. If collection activity is
unsuccessful, the Company may pursue legal remedies itself, refer the matter to legal counsel for
further collection effort, seek foreclosure or repossession of the collateral (if any), or
charge-off the loan. All student loans are serviced by a third party, which guarantees its
servicing to comply with all U.S. Department of Education guidelines. The Companys student loan
portfolio is guaranteed under programs sponsored by the U.S. government. Credit card loans are
serviced by a third party administrator and indirect consumer loans are serviced by SFC, a 50%
owned subsidiary of the Bank.
The collection procedures for multi-family, commercial real estate, and commercial business loans
include sending periodic late notices to a borrower once a loan is past due. The Company attempts
to make direct contact with a borrower once a loan becomes 15 days past due. The Companys
managers of the multi-family and commercial real estate loan areas review loans 10 days or more
delinquent on a regular basis. If collection activity is unsuccessful, the Company may refer the
matter to legal counsel for further collection effort. After 90 days, loans that are delinquent
are typically proposed for repossession or foreclosure. Legal action requires the approval of the
executive loan committee of the board of directors.
In working with delinquent borrowers, if the Company cannot develop a repayment plan that
substantially complies with the original terms of the loan agreement, the Companys practice has
been to pursue foreclosure or repossession of the underlying collateral. As a matter of practice,
the Company does not restructure or modify troubled loans in a manner that results in a loss under
accounting rules.
The Companys policies require that management continuously monitor the status of the loan
portfolio and report to the board of directors on a monthly basis. These reports include
information on classified loans, delinquent loans, restructured or modified loans, allowance for
loan losses, and foreclosed real estate.
Non-Accrual Policy With the exception of student loans that are guaranteed by the U.S.
government, the Company generally stops accruing interest income on loans when interest or
principal payments are 90 days or more in arrears or earlier when the timely collectibility of such
interest or principal is doubtful. The Company designates loans on which it stops accruing income
as non-accrual loans and generally, it establishes a reserve for outstanding interest
10
Table of Contents
that was previously credited to income. All loans that are greater than 90 days past due are
considered to be impaired. The Company returns a non-accrual loan to accrual status when factors
indicating doubtful collection no longer exist.
Foreclosed Properties and Repossessed Assets In the case of loans secured by real estate,
foreclosure action generally starts when the loan is between the 90th and 120th day of delinquency
following review by a senior officer and the executive loan committee of the board of directors.
If, based on this review, the Company determines that repayment of a loan is solely dependent on
the liquidation of the collateral, the Company will typically seek the shortest redemption period
possible, thus waiving its right to collect any deficiency from the borrower and/or guarantor.
Depending on whether the Company has waived this right and a variety of other factors outside the
Companys control (including the legal actions of borrowers to protect their interests), an
extended period of time could transpire between the commencement of a foreclosure action by the
Company and its ultimate receipt of title to the property.
When the Company ultimately obtains title to the property through foreclosure or deed in lieu of
foreclosure, it transfers the property to foreclosed properties and repossessed assets, which is
a component of other assets on the Companys Consolidated Statements of Financial Condition. In
cases in which a borrower has surrendered control of the property to the Company or has otherwise
abandoned the property, the Company may transfer the property to foreclosed properties as an in
substance foreclosure prior to actual receipt of title.
Marketing of foreclosed real estate begins immediately following the Company taking title to the
property. The marketing is usually undertaken by a realtor knowledgeable with the particular
market. Mortgage insurance claims are filed if the loan had mortgage insurance coverage. The
property is marketed after an appraisal is obtained and any mortgage insurance claims are filed.
Foreclosed real estate properties are initially recorded at the lower of the recorded investment in
the loan or fair value. Thereafter, the Company carries foreclosed real estate at fair value less
estimated selling costs (typically 5 to 10%). Foreclosed real estate is inspected periodically.
Additional outside appraisals are obtained as deemed necessary. Additional write-downs may occur
if the property value deteriorates further after it is acquired. These additional write-downs are
charged to the Companys results of operations as they occur.
In the case of loans secured by assets other than real estate, action to repossess the underlying
collateral generally starts when the loan is between the 90th and 120th day of delinquency
following review by management. The accounting for repossessed assets is similar to that described
for real estate, above.
Loan Charge-Offs The Company typically records loan charge-offs at foreclosure, repossession, or
liquidation and/or when the loan is otherwise deemed uncollectible. The amount of the charge-off
will depend on the fair market value of the underlying collateral, if any, and may be zero if the
fair market value exceeds the loan amount. All charge-offs are recorded as a reduction to
allowance for loan losses. All charge-off activity is reviewed by the board of directors.
Allowance for Loan Losses The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses inherent in the loan portfolio and is based on the
size and current risk characteristics of the loan portfolio, an assessment of individual problem
loans and pools of homogenous loans, actual loss experience, current economic events in specific
industries and geographical areas, including unemployment levels, peer comparisons, and other
pertinent factors, including regulatory guidance and general economic conditions. For additional
information relating to the Companys allowance for loan losses for the periods covered by this
report, refer to Results of OperationsProvision for Loan Losses and Financial ConditionAsset
Quality in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Determination of the allowance is inherently subjective as it requires significant management
judgment and estimates, including the amounts and timing of expected future cash flows on impaired
loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic trends, all of
which may be susceptible to significant change. Higher rates of loan defaults than anticipated
would likely result in a need to increase provisions in future years. Also, increases in the
Companys multi-family, commercial real estate, construction and development, and commercial
business loan portfolios, could result in a higher allowance for loan losses as these loans
typically carry a higher risk of loss. Finally, various regulatory agencies, as an integral part
of their examination processes, periodically review the Companys loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation
11
Table of Contents
allowance for foreclosed real estate. One or more of these agencies, specifically the OTS, may
require the Company to increase the allowance for loan losses or the valuation allowance for
foreclosed real estate based on their judgments of information available to them at the time of
their examination, thereby adversely affecting the Companys results of operations. As a result of
applying management judgment, it is possible that there may be periods when the amount of the
allowance and/or its percentage to total loans or non-performing loans may decrease even though
non-performing loans may increase.
Periodic adjustments to the allowance for loan loss are recorded through provision for loan losses
in the Companys Consolidated Statements of Income. Actual losses on loans are charged off
against the allowance when the loan is deemed uncollectible. In the case of loans secured by real
estate, this typically occurs when the Company receives title to the property as a result of a
formal foreclosure proceeding, receipt of a deed in lieu of foreclosure, or when, in the judgment
of management, an in-substance foreclosure has occurred. For loans that are not secured by real
estate, charge-off typically occurs when the collateral is repossessed. Unsecured loans are
charged off when the loan is determined to be uncollectible. Recoveries of loan amounts previously
charged off are credited to the allowance as received. Management reviews the adequacy of the
allowance for loan losses on a monthly basis. The board of directors review managements judgments
related to the allowance for loan loss on at least a quarterly basis.
The Company maintains general allowances for loan loss against certain homogenous pools of loans.
These pools generally consist of smaller one- to four-family, multi-family, commercial real estate,
consumer, and commercial business loans that do not warrant individual review due to their size
(the review of large individual loans is discussed in the next paragraph). Certain of these pools,
such as the one- to four-family and consumer loan pools, are further segmented according to the
nature of the collateral that secures the loans. For example, the one- to four-family pool is
segmented by original loan-to-value ratios. The consumer loan pool is segmented by collateral
type, such as loans secured by real estate, loans secured by automobiles, and loans secured by
other collateral. The various loan pools are further segmented by non-performing status and/or
managements internal risk rating of the loans. Management has developed factors for each pool or
segment based on the historical loss experience of each pool or segment, recent delinquency
performance, internal risk ratings, and consideration of current economic trends, in order to
determine what it believes is an appropriate level for the general allowance. Given the
significant amount of management judgment involved in this process there could be significant
variation in the Companys allowance for loan losses and provision for loan losses from period to
period.
The Company maintains specific allowances for loan loss against certain large individual loans
(generally loans greater than $500,000). The allowance for loan loss established against these
loans is based on one of two methods: (1) the present value of the future cash flows expected to be
received from the borrower, discounted at the loans effective interest rate, or (2) the fair value
of the loan collateral, if the loan is considered to be collateral dependent. In the Companys
experience, loss allowances using the first method have been rare. In working with problem
borrowers, if the Company cannot develop a repayment plan that substantially complies with the
original terms of the loan agreement, the Companys practice has been to pursue foreclosure or
repossession of the underlying collateral. As a matter of practice, the Company does not
restructure troubled loans in a manner that results in a loss under the first method. As a
result, most loss allowances are established using the second method because the related loans have
been deemed collateral dependent by management.
Management considers loans to be collateral dependent when, in its judgment, there is no source of
repayment for the loan other than the ultimate sale or disposition of the underlying collateral.
Factors management considers in making this determination typically include, but are not limited
to, the length of time a borrower has been delinquent with respect to loan payments, the nature and
extent of the financial or operating difficulties experienced by the borrower, the performance of
the underlying collateral, the availability of other sources of cash flow or net worth of the
borrower and/or guarantor, and the borrowers immediate prospects to return the loan to performing
status. In some instances, because of the facts and circumstances surrounding a particular loan
relationship, there could be an extended period of time between managements identification of a
problem loan and a determination that it is probable that such loan is or will become collateral
dependent. Based on recent experience, however, management has noted the length of time shorten
between when a loan is classified as non-performing and when it is consider to be collateral
dependent. In managements view, this development is attributable to the deterioration in
commercial real estate markets during 2009. Management believes this is a trend that will continue
as long as economic conditions and/or commercial real estate values remain depressed.
When a loan becomes collateral dependent, management measures impairment based on the estimated
fair value of the underlying collateral. Such estimates are based on managements judgment or,
when considered appropriate, on an updated appraisal or similar evaluation. Updated appraisals
have typically been obtained on or about the time of
12
Table of Contents
foreclosure or repossession of the underlying collateral. Prior to receipt of the updated
appraisal, management has typically relied on the original appraisal and knowledge of the condition
of the collateral, as well as the current market for the collateral, to estimate the Companys
exposure to loss on a collateral dependent loan. In the judgment of management, this practice was
acceptable in periods of relative stability in real estate markets. However, as a result of
deterioration in commercial real estate markets during 2009, as well as the Companys recent
experience, management believes that as long as economic conditions and/or real estate markets
remain depressed updated appraisals will continue to be obtained on collateral dependent loans
earlier in the evaluation process than may have been typical during periods of more stable real
estate markets.
For collateral dependent loans, the Company records allowance for loan losses and related
provisions on each loan for which it is determined that the fair value of the collateral is less
than the carrying value of the loan balance. This is true regardless of whether the estimate of
fair value is based on an updated appraisal or on an internal management assessment.
Investment Activities
General At December 31, 2009, the Companys portfolio of securities available-for-sale was $1.5
billion or 42.2% of its total assets. The Companys board of directors reviews and approves the
Companys investment policy on an annual basis. Senior officers, as authorized by the board of
directors, implement this policy. The board of directors reviews investment activity on a monthly
basis.
The Companys investment objectives are to meet liquidity requirements and to generate a favorable
return on investments without compromising objectives relating to overall risk exposure, including
interest rate risk, credit risk, and investment portfolio concentrations. Federally-chartered
savings banks have authority to invest in various types of assets, including U.S. Treasury
obligations, securities of various federal agencies, state and municipal obligations,
mortgage-related securities, mortgage derivative securities, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans
of federal funds, commercial paper, mutual funds, and, subject to certain limits, corporate debt
and equity securities. From time-to-time the Company pledges eligible securities as collateral for
certain deposit liabilities, FHLB advances, and other purposes permitted or required by law.
The Companys investment policy allows the use of hedging instruments such as financial futures,
options, forward commitments, and interest rate swaps, but only with prior approval of the board of
directors. Other than forward commitments related to its sale of residential loans in the
secondary market, the Company did not have any investment hedging transactions in place at December
31, 2009. The Companys investment policy prohibits the purchase of non-investment grade
bonds,although the Company may continue to hold investments that are reduced to less than
investment grade after their purchase. The Companys investment policy also prohibits any practice
that the Federal Financial Institutions Examination Council (FFIEC) considers to be an unsuitable
investment practice. The Company does not invest in mortgage-related securities secured by
subprime loans. The Company classifies securities as trading, held-to-maturity, or
available-for-sale at the date of purchase. At December 31, 2009, all of the Companys investment
and mortgage-related securities were classified as available-for-sale. These securities are
carried at fair value with the change in fair value recorded as a component of shareholders
equity.
Investment Securities At December 31, 2009, the Companys portfolio of investment securities was
$614.1 million or 41.5% of its total portfolio of available-for-sale securities. The Companys
investment securities consist principally of U.S. government and federal agency obligations and
mutual funds. All of the Companys mutual fund investments are permissible investments under its
investment policy and applicable laws and regulations. For additional discussion related to
certain of the Companys mutual funds, refer to Results of OperationsNon-Interest Income in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Mortgage-Related Securities At December 31, 2009, the Companys portfolio of mortgage-related
securities was $866.8 million or 58.5% of its total portfolio of available-for-sale securities.
Mortgage-related securities consist principally of mortgage-backed securities (MBSs), real estate
mortgage investment conduits (REMICs), and collateralized mortgage obligations (CMOs). Most of
the Companys mortgage-related securities are directly or indirectly insured or guaranteed by
Freddie Mac, Fannie Mae, or the Government National Mortgage Association (Ginnie Mae). The
remaining securities are investment-grade, private-label CMOs. Private-label CMOs generally carry
higher credit risks and higher yields than mortgage-related securities insured or guaranteed by
agencies of the U.S. Government. For additional discussion related to certain of the Companys
private-label CMOs, refer to
13
Table of Contents
Financial ConditionSecurities Available-for-Sale in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Mortgage-related securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees or credit enhancements that reduce credit risk. However,
mortgage-related securities are more liquid than individual mortgage loans.
In general, mortgage-related securities issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie
Mae are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. While these securities
carry a reduced credit risk as compared to private-label CMOs, they remain subject to the risk of a
fluctuating interest rate environment and instability in related markets. Along with other
factors, such as the geographic distribution of the underlying mortgage loans, changes in interest
rates may alter the prepayment rate of those mortgage loans and affect the value of
mortgage-related securities.
Deposit Liabilities
At December 31, 2009, the Companys deposit liabilities were $2.1 billion or 60.9% of its total
liabilities and equity. The Company offers a variety of deposit accounts having a range of
interest rates and terms for both retail and business customers. The Company currently offers
regular savings accounts (consisting of passbook and statement savings accounts), interest-bearing
demand accounts, non-interest-bearing demand accounts, money market accounts, and certificates of
deposit. The Company also offers IRA time deposit accounts and health savings accounts. When the
Company determines its deposit rates, it considers rates offered by local competitors, rates on
U.S. Treasury securities, rates on other sources of funds such as FHLB advances, and its deposit
pricing model, which identifies the profitability of deposits at various price levels. For
additional information, refer to Financial ConditionDeposit Liabilities in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Deposit flows are significantly influenced by general and local economic conditions, changes in
prevailing interest rates, pricing of deposits and competition. The Companys deposits are
primarily obtained from the market areas surrounding its bank offices. The Company relies
primarily on competitive rates, quality service, and long-standing relationships with customers to
attract and retain these deposits. From time to time the Company has used third-party brokers and
a nationally-recognized reciprocal deposit gathering network to obtain wholesale deposits. As of
December 31, 2009, the Company did not have any brokered deposits outstanding and had less than
$500,000 in wholesale deposits outstanding.
Borrowings
At December 31, 2009, the Companys borrowed funds were $907.0 million or 25.8% of its total
liabilities and equity. The Company borrows funds to finance its lending, investing, operating,
and stock repurchase activities. Substantially all of its borrowings take the form of advances
from the FHLB of Chicago and are on terms and conditions generally available to member
institutions. The Companys FHLB borrowings typically carry fixed rates of interest, have stated
maturities, and are generally subject to significant prepayment penalties if repaid prior to their
stated maturity. In addition, substantially all of the Companys advances have redemption features
that permit the FHLB of Chicago to redeem the advances at its option on a quarterly basis. The
Company has pledged all of its one- to four-family mortgage loans and certain multi-family mortgage
loans and available-for-sale securities as blanket collateral for these advances and future
advances. For additional information, refer to Financial ConditionBorrowings in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Shareholders Equity
At December 31, 2009, the Companys shareholders equity was $402.5 million or 11.5% of its total
liabilities and equity. Although the Company is not required to maintain minimum capital at the
consolidated level, the Bank is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS and the FDIC. The Banks objective is to maintain its
regulatory capital in an amount sufficient to be classified in the highest regulatory category
(i.e., as a well capitalized institution). At December 31, 2009, the Bank exceeded all
regulatory minimum requirements, as well as the amount required to be classified as a well
capitalized institution. For additional discussion relating to regulatory capital standards refer
to Regulation and Supervision of the BankRegulatory Capital Requirements and Prompt
Corrective Action, below. For additional information related to the Companys equity and the
Banks regulatory capital for the periods covered by this report, refer to Financial
14
Table of Contents
ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, as well as Note 8. Shareholders Equity in Item 8.
Financial Statements and Supplementary Data.
The Company has paid quarterly cash dividends since its initial stock offering, which was in
November 2000. However, there can be no assurance that the Company will be able to continue the
payment of dividends in the future or that the level of dividends will not be reduced. The payment
of dividends in the future is discretionary with the Companys board of directors and will depend
on the Companys operating results and financial condition, regulatory limitations, tax
considerations, and other factors. Furthermore, the Companys ability to pay dividends is highly
dependent on the Banks ability to pay dividends to the Company. Banking regulators and lawmakers
have become increasingly concerned with the levels of capital adequacy of financial institutions.
Even though the Bank exceeds all current regulatory standards and believes that it is well
capitalized, the regulators interpretation and enforcement of existing and new requirements may
affect the level of capital required to be maintained by the Bank and/or the percentage of income
that may be used for dividends to the Company. This may affect the Companys ability to pay
dividends to its shareholders. For additional information, refer to Regulation and Supervision of
the BankDividend and Other Capital Distribution Limitations, below.
From time to time, the Company repurchases shares of its common stock, and these repurchases have
had the effect of reducing the Companys capital; further repurchases will continue to have the
same effect. The Company regularly reviews its capital position, market conditions, and the cost
of funds to determine whether share repurchases are appropriate. However, as with the payment of
dividends above, the repurchase of common stock is discretionary with the Companys board of
directors and will depend on a variety of factors, including market conditions for the Companys
stock, the financial condition of the Company and the Bank, and actions by banking regulators the
affect the ability of the Bank to pay dividends to the parent company. The Companys ability to
repurchase its common stock may be affected by these actions. For additional information, refer to
Regulation and Supervision of the BankDividend and Other Capital Distribution Limitations,
below.
Subsidiaries
BancMutual Financial & Insurance Services, Inc. (BMFIS), a wholly-owned subsidiary of the Bank,
provides investment, brokerage, and insurance services to the Banks customers and the general
public. Investment services include tax-deferred and tax-free investments, mutual funds, and
government securities. Personal insurance, business insurance, life and disability insurance,
mortgage protection products, and investment advisory services are also offered by BMFIS.
Certain of BMFISs brokerage and investment advisory services are provided through an operating
agreement with a third-party, registered broker-dealer.
Mutual Investment Corporation (MIC), a wholly-owned subsidiary of the Bank, owns and manages a
portion of the Banks investment portfolio. First Northern Investment Inc. (FNII), a
wholly-owned subsidiary of the Bank, also owns and manages a portion of the Banks investments, as
well as certain indirect automobile, recreational vehicle, and boat loans from SFC, a 50% owned
subsidiary of the Bank. FNII also owns a small number of one- to four-family mortgage loans.
Savings Financial Corporation (SFC) is 50% owned by the Bank and 50% owned by another financial
institution. SFC was formed to originate, sell, and service indirect automobile, recreational
vehicle, and boat loans. In 2006 the Bank discontinued the purchase of loans from SFC as a result
of reduced profitability of these loans. The Bank intends to maintain its ownership in SFC until
all of the indirect loans are paid off.
MC Development LTD (MC Development), a wholly-owned subsidiary of the Bank, is involved in land
development and sales. It owns five parcels of undeveloped land totaling 15 acres in Brown Deer,
Wisconsin. In addition, in 2004, MC Development established Arrowood Development with an
independent third party to develop 318 acres in Oconomowoc, Wisconsin. In the initial transaction,
the third party purchased approximately one-half interest in that land, all of which previously had
been owned by MC Development. There are currently no efforts underway to further develop either of
these two properties.
In addition, the Bank has four wholly-owned subsidiaries that are inactive, but are reserved for
possible future use in related or other areas.
15
Table of Contents
Employees
At December 31, 2009, the Company employed 717 full time and 98 part time associates. Management
considers its relations with its associates to be good.
Regulation and Supervision
General
The Company is a Wisconsin corporation registered with the OTS as a unitary savings and loan
holding company. The Company files reports with the OTS and is subject to regulation and
examination by the OTS. As a Wisconsin corporation, the Company is subject to the provisions of
the Wisconsin Business Corporation Law, and as a public company, it is subject to regulation by the
SEC. The Bank is a federally-chartered savings bank and is also subject to OTS requirements as
well as those of the FDIC. Any change in these laws and regulations, whether by the OTS, the FDIC,
or through legislation, could have a material adverse impact on the Company, the Bank, and the
Companys shareholders.
Certain current laws and regulations applicable to the Company and the Bank, as well as certain
legislative and regulatory proposals, are summarized below. These summaries do not purport to be
complete and are qualified in their entirety by reference to such laws and regulations.
Recent Financial Stability Legislation and Other Proposals
In response to instability in the U.S. financial system, lawmakers and federal banking agencies
have taken various actions as part of a comprehensive strategy to stabilize the financial system
and housing markets, and to strengthen U.S. financial institutions.
In 2008 the U.S. Department of the Treasury (Treasury) established the Troubled Assets Relief
Program (TARP) in an effort to restore confidence in the nations financial markets. As part of
TARP, the Treasury created a voluntary Capital Purchase Program (CPP), under which it would
purchase senior preferred equity shares of certain qualified financial institutions. In addition,
in February 2009, the federal government announced a financial stability plan that, among other
things, established a Capital Assistance Program (CAP) under which financial institutions could
undergo comprehensive stress tests to evaluate their capital needs and their ability to absorb
losses and continue lending; companies not passing such tests would receive access to Treasury
funds to restore or maintain their capital bases, in exchange for preferred securities convertible
to common equity. Due to the Companys level of capitalization and overall financial and
operating condition, the Company did not participate in the CPP or the CAP.
In recent months, new statutes, regulations and guidance have been proposed, many of which
contain wide-ranging potential changes to the statutes and regulations governing financial
institutions. Although it is impossible to predict which of these proposals, if any, may be
adopted, there are currently several pending proposals that may affect the Company and the Bank,
including the Consumer Financial Protection Agency Act of 2009, the Financial Stability Improvement
Act of 2009, the Restoring American Financial Stability Act of 2009, the Wall Street Reform and
Consumer Protection Act of 2009 and the Overdraft Protection Act of 2009.
Although the proposals are different in some important ways, they all would place additional
regulatory burdens on financial institutions and/or alter the current regulatory structure. The
proposals, collectively, include provisions that would, among other things, consolidate the OTS and
other regulators into a National Bank Supervisor, create a Consumer Financial Protection Agency,
create a systemic risk regulator, and/or subject financial institutions to both federal and state
level regulation. In addition, the proposals could lead to heightened restrictions being placed
upon institutions and activities that increase systemic risk. Such restrictions would likely
relate to liquidity, capital, and leverage requirements. Finally, additional notification
requirements and restrictions would likely be placed on the manner in which financial institutions
operate their overdraft coverage programs. These proposed acts, or any other legislation
ultimately enacted, could materially affect the Company, the Bank, and their operations and
profitability by imposing additional regulatory burdens and costs and affecting the conduct of
their business.
16
Table of Contents
Regulation and Supervision of the Bank
General As a federally-chartered, FDIC-insured savings bank, the Bank is subject to extensive
regulation by the OTS and the FDIC. Lending activities and other investments must comply with
federal statutory and regulatory requirements. This federal regulation and supervision establishes
a comprehensive framework of activities in which a federal savings bank may engage and is intended
primarily for the protection of the FDIC and depositors rather than the shareholders of the
Company. This regulatory structure gives authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies regarding the
classification of assets and the establishment of adequate loan loss reserves.
The OTS regularly examines the Bank and issues a report on its examination findings to the Banks
board of directors. The Banks relationships with its depositors and borrowers are also regulated
by federal law, especially in such matters as the ownership of savings accounts and the form and
content of the Banks loan documents.
The Bank must file reports with the OTS and the FDIC concerning its activities and financial
condition, and must obtain regulatory approvals prior to entering into transactions such as mergers
or acquisitions.
Regulatory Capital Requirements Although the Company itself is not required to maintain minimum
capital at the consolidated level, OTS regulations require savings associations
such as the Bank to meet three capital standards. The minimum standards are tangible capital equal
to at least 1.5% of adjusted total assets, core capital equal to at least 3% of adjusted total
assets, and risk-based capital equal to at least 8% of total risk-weighted assets. These capital
standards are in addition to the capital standards promulgated by the OTS under its prompt
corrective action regulations and standards required by the FDIC.
Core capital is common shareholders equity, noncumulative perpetual preferred stock, related
surplus, and non-controlling interests in the equity accounts of fully consolidated subsidiaries,
non-withdrawable accounts and pledged deposits of mutual savings associations, and qualifying
supervisory goodwill, less non-qualifying intangible assets, mortgage servicing rights, and
investments in certain non-includable subsidiaries. In the Banks case, core capital is equal to
tangible capital.
The risk-based capital standard for savings institutions requires the maintenance of total
risk-based capital of at least 8% of risk-weighted assets. Risk-based capital is comprised of core
and supplementary capital. Supplementary capital includes, among other items, cumulative perpetual
preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, up to 45% of
unrealized gains on available-for-sale equity securities with readily determinable fair values, and
the portion of the allowance for loan losses not designated for specific loan losses (the portion
is limited to a maximum of 1.25% of risk-weighted assets). Overall, supplementary capital is
limited to 100% of core capital. A savings association calculates its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure,
commercial loans, and other assets.
OTS rules require a deduction from capital for institutions that have unacceptable levels of
interest rate risk. The OTS calculates the sensitivity of an institutions net portfolio value
based on data submitted by the institution using the OTSs interest rate risk measurement model.
The amount of the interest rate risk component, if any, is deducted from an institutions total
capital in to determine if it meets its risk-based capital requirement.
The Banks objective is to maintain its regulatory capital in an amount sufficient to be classified
in the highest regulatory category (i.e., as a well capitalized institution). At December 31,
2009, the Bank exceeded all regulatory minimum requirements, as well as the amount required to be
classified as a well capitalized institution. For additional information related to the
Companys equity and the Banks regulatory capital for the periods covered by this report, refer to
Financial ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, as well as Note 8. Shareholders Equity in Item
8. Financial Statements and Supplementary Data.
Prompt Corrective Action The FDIC has established a system of prompt corrective action to
resolve the problems of undercapitalized insured institutions. The OTS, as well as the other
federal banking regulators, adopted the FDICs regulations governing the supervisory actions that
may be taken against undercapitalized institutions. These regulations establish and define five
capital categories, in the absence of a specific capital directive, as follows:
17
Table of Contents
Total Capital to Risk | Tier 1 Capital to Risk | Tier 1 Capital to | ||||||||||
Category: | Weighted Assets | Weighted Assets | Total Assets | |||||||||
Well capitalized |
³ 10 | % | ³ 6 | % | ³ 5 | % | ||||||
Adequately capitalized |
³ 8 | % | ³ 4 | % | ³ 4 | %(1) | ||||||
Under capitalized |
< 8 | % | < 4 | % | < 4 | %(2) | ||||||
Significantly undercapitalized |
< 6 | % | < 3 | % | < 3 | % | ||||||
Critically undercapitalized (3) |
(1) | ³ 3% if the bank receives the highest rating under the uniform system. | |
(2) | < 3% if the bank receives the highest rating under the uniform system. | |
(3) | Tangible assets to capital of if equal to or less than 2%. |
The severity of the action authorized or required under the prompt corrective action regulations
increases as a banks capital decreases within the three undercapitalized categories. For example,
all savings associations are prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following the distribution, the savings
association would be undercapitalized. The FDIC and the OTS may restrict the growth of a savings
associations assets. An undercapitalized savings association is required to file a capital
restoration plan within 45 days of the date the savings association receives notice that it is
within any of the three undercapitalized categories; the plan must be guaranteed by the holding
company controlling the savings association. Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver or conservator for an
insured depository institution. If grounds exist for appointing a conservator or receiver, the
FDIC may require the institution to issue additional debt or stock, sell assets, be acquired, or
combine with another depository institution. The FDIC is also required to appoint a receiver or a
conservator for a critically undercapitalized institution within 90 days after it becomes
critically undercapitalized or to take other action that would better achieve the purposes of the
prompt corrective action provisions. The alternative action can be renewed for successive 90-day
periods, but if the institution continues to be critically undercapitalized for a specified period,
a receiver generally must be appointed.
Dividend and Other Capital Distribution Limitations OTS regulations govern capital distributions
by savings associations, which include cash dividends, stock repurchases, and certain other
transactions charged against the capital account. A savings association must file an application
with the OTS for approval of a capital distribution if (i) the total amount of capital
distributions for the applicable calendar year exceeds the sum of the savings associations net
income for that year to date plus the savings associations retained net income for the preceding
two years; (ii) the savings association would not be at least adequately capitalized following the
distribution; (iii) the distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition; or (iv) the savings association is not eligible for expedited treatment of
its filings.
In addition, even if an application is not required, a savings association must give the OTS notice
at least 30 days before the board of directors declares a dividend or approves a capital
distribution if the savings association is a subsidiary of a savings and loan holding company (as
is the Bank), the savings association would not be well capitalized following the distribution, or
the proposed distribution would affect capital in certain other ways.
The OTS may disapprove a notice or application if (i) the savings association would be
undercapitalized, significantly undercapitalized or critically undercapitalized following the
distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii)
the capital distribution would violate a any applicable statute, regulation, agreement or
OTS-imposed condition.
The OTS has substantial discretion in making these decisions. While the Bank has received
prior approval for dividends up to or in excess of 100% of net income, there can be no assurances
that the OTS will continue to provide approval at that, or any other, level. For additional
discussion related to the Companys dividends and share repurchases, refer to Financial
ConditionShareholders Equity in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation.
18
Table of Contents
Qualified Thrift Lender Test Federal savings associations must meet a qualified thrift lender
(QTL) test or they become subject to operating restrictions. The Bank met the QTL test as of
December 31, 2009, and anticipates that it will maintain an appropriate level of mortgage-related
investments (which must be at least 65% of portfolio assets) and will otherwise continue to meet
the QTL test requirements. Portfolio assets are all assets minus goodwill and other intangible
assets, property used by the institution in conducting its business, and liquid assets not
exceeding 20% of total assets. Compliance with the QTL test is determined on a monthly basis in
nine out of every twelve months.
Liquidity Standards Each federal savings association must maintain sufficient liquidity to
ensure its safe and sound operations. Management of the Bank believes it has established policies,
procedures, and practices to maintain sufficient liquidity to meet the Banks obligations and
otherwise ensure its safe and sound operation.
Federal Home Loan Bank System The Bank is a member of the FHLB of Chicago, one of twelve
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its region. It is funded primarily from funds deposited by member financial
institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank
System. It makes loans to members pursuant to policies and procedures established by the board of
directors of the FHLB of Chicago.
As a member, the Bank must meet certain eligibility requirements and must purchase and maintain
stock in the FHLB of Chicago in an amount equal to the greater of 1% of its mortgage-related assets
at the most recent calendar year end, 5% of its outstanding advances from the FHLB of Chicago, or
$500. At December 31, 2009, the Bank was in compliance with this requirement. The FHLB of Chicago
also imposes limits advances made to member banks, which limitations relate to the amount and type
of collateral, the amounts of advances, and other items.
Under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the GLB Act), the Bank
is a voluntary member of the FHLB of Chicago; however, withdrawal of membership is subject to
approval under a consent order entered into by the FHLB of Chicago with its primary regulator. The
FHLB of Chicagos agreement with its primary regulator requires the FHLB of Chicago to, among other
things, not pay dividends unless it meets certain capital requirements and receives prior
permission from its regulator. The FHLB of Chicago has not paid dividends since 2007. Management
is unable to determine at this time when, or if, the FHLB of Chicago will resume payment of
dividends on its common stock. For additional discussion related to the Companys
investment in the common stock of the FHLB of Chicago, refer to Financial ConditionOther Assets
in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Deposit Insurance The deposit accounts held by customers of the Bank are insured by the FDIC up
to maximum limits, as provided by law. Insurance on deposits may be terminated by the FDIC if it
finds that the Bank has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS (as the Banks primary regulator). The management of the
Bank does not know of any practice, condition, or violation that might lead to termination of the
Banks deposit insurance.
The FDIC sets deposit insurance premiums based upon the risks a particular bank or savings
association poses to its deposit insurance funds. Under the risk-based assessment system, the FDIC
assigns an institution to one of three capital categorizations based on the institutions financial
information. With respect to these three categorizations, institutions are classified as well
capitalized, adequately capitalized or undercapitalized using ratios that are substantially similar
to the prompt corrective action capital ratios discussed above. The FDIC also assigns an
institution to one of three supervisory sub-categorizations within each capital group. This
assignment is based on a supervisory evaluation provided by the institutions primary federal
regulator and information that the FDIC determines to be relevant to the institutions financial
condition and the risk posed to the deposit insurance fund.
An institutions assessment rate depends on the capital categorizations and supervisory
sub-categorizations to which it is assigned. Under the risk-based assessment system, there are
then four assessment risk categories to which different assessment rates are applied. Assessment
rates adopted in 2009 for deposit insurance currently range from seven basis points to 77.5 basis
points, depending on the institutions categories and type of deposits. The capital and
supervisory subgroup to which an institution is assigned by the FDIC is confidential. Any increase
in insurance assessments could have an adverse effect on the earnings of insured institutions,
including the Bank.
Under the Federal Deposit Insurance Reform Act of 2005 (FDIRA), the FDIC was granted broader
authority to adjust insurance premium rates and more flexibility to establish the designated
reserve ratio. FDIRA provided
19
Table of Contents
assessment credits to insured depository institutions that could be used to offset certain
insurance assessments. Through the first quarter of 2009, the Bank was able to offset a
substantial portion of its assessment as a result of these credits. The Banks credits then
expired, which resulted in higher costs related to deposit insurance assessments in 2009.
In addition to increased assessments, in 2009 the FDIC also imposed a one-time special assessment
against the insured deposits of financial institutions in order to bolster its reserves. As a
result of these developments, as well as the expiration of the Banks premium credits, the Banks
deposit insurance premiums increased significantly in 2009 compared to prior years. For
additional discussion, refer to Results of OperationsNon-Interest Expense in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Also, during the fourth quarter of 2009 the FDIC required insured institutions to prepay their
estimated quarterly deposit insurance assessments for all of 2010, 2011 and 2012. Accordingly, in
December 2009 the Company prepaid $12.5 million in deposit insurance premiums related to these
periods. This prepaid amount was recorded as a component of other assets in the Companys
Consolidated Statements of Financial Condition. This amount will be charged to expense in future
periods as the Company receives quarterly statements for FDIC deposit insurance assessments.
In 2008 the FDIC created the Transaction Account Guarantee Program (TAGP), which provides for
full deposit insurance coverage for non-interest-bearing transaction deposit accounts, regardless
of dollar amount through June 30, 2010. The Bank participates in this program, which did not have
a material impact on the deposit premiums the Bank paid in 2009 and is not expected to have a
material impact in 2010.
Transactions With Affiliates Sections 23A and 23B of the Federal Reserve Act govern transactions
between an insured federal savings association, such as the Bank, and any of its affiliates, such
as the Company. Federal Reserve Board Regulation W comprehensively implements and interprets
Sections 23A and 23B.
An affiliate is any company or entity that controls, is controlled by or is under common control
with it. A subsidiary of a savings association that is not also a depository institution or a
financial subsidiary under the GLB Act is not treated as an affiliate; however, the OTS may treat
subsidiaries as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which
an institution or a subsidiary may engage in covered transactions with any one affiliate to an
amount equal to 10% of such savings associations capital stock and surplus, and limit all such
transactions with all affiliates to 20% of such stock and surplus. All such transactions must be
on terms that are consistent with safe and sound banking practices. The term covered transaction
includes the making of loans, purchase of assets, issuance of guarantees and other similar types of
transactions. Further, most loans by a savings association to any of its affiliates must be
secured by specified collateral amounts. In addition, any covered transaction by a savings
association with an affiliate and any purchase of assets or services by an savings association from
an affiliate must be on terms that are at least as favorable to the savings association as those
that would be provided to a non-affiliate.
Acquisitions and Mergers Under the federal Bank Merger Act, any merger of the Bank with or into
another institution would require the approval of the OTS, or the primary federal regulator of the
resulting entity if it is not an OTS-regulated institution. Refer also to Acquisition of Bank
Mutual Corporation, below.
Prohibitions Against Tying Arrangements Savings associations are subject to the prohibitions of
12 U.S.C. Section 1972 on certain tying arrangements. A savings association is prohibited, subject
to exceptions, from extending credit to or offering any other service, or fixing or varying the
consideration for such credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a competitor.
Uniform Real Estate Lending Standards The federal banking agencies adopted uniform regulations
prescribing standards for extensions of credit that are secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or other improvements to
real estate. Under the joint regulations, all insured depository institutions must adopt and
maintain written policies that establish appropriate limits and standards for such extensions of
credit. These policies must establish loan portfolio diversification standards, prudent
underwriting standards that are clear and measurable, loan administration procedures, and
documentation, approval and reporting requirements. These lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
20
Table of Contents
The Interagency Guidelines, among other things, require a depository institution to establish
internal loan-to-value limits for real estate loans that are not in excess of the following
supervisory limits:
| for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral; | ||
| for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), 75%; | ||
| for loans for the construction of commercial, multi-family or other non-residential property, 80%; | ||
| for loans for the construction of one- to four-family properties, 85%; and | ||
| for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), 85%. |
Although there is no supervisory loan-to-value limit for owner-occupied one- to four-family and
home equity loans, the Interagency Guidelines provide that an institution should require credit
enhancement in the form of mortgage insurance or readily marketable collateral for any such loan
with a loan-to-value ratio that equals or exceeds 90% at origination.
Community Reinvestment Act Under the Community Reinvestment Act (CRA), any insured depository
institution, including the Bank, must, consistent with its safe and sound operation, help meet the
credit needs of its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs nor does it limit an institutions
discretion to develop the types of products and services that it believes are best suited to its
particular community. The CRA requires the OTS to assess the institutions record of meeting the
credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution, including applications for additional branches and acquisitions.
Among other things, the CRA regulations contain an evaluation system that rates an institution
based on its actual performance in meeting community needs. In particular, the evaluation system
focuses on three tests:
| a lending test, to evaluate the institutions record of making loans in its service areas; | ||
| an investment test, to evaluate the institutions record of making community development investments; and | ||
| a service test, to evaluate the institutions delivery of services through its branches, ATMs and other offices. |
The CRA requires the OTS, in the case of the Bank, to provide a written evaluation of a savings
associations CRA performance utilizing a four-tiered descriptive rating system and requires public
disclosure of the CRA rating. The Bank received a satisfactory overall rating in its most recent
CRA examination.
Safety and Soundness Standards Each federal banking agency, including the OTS, has guidelines
establishing general standards relating to internal controls, information and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, customer privacy, liquidity, earnings, and compensation and benefits. The guidelines
require, among other things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines also prohibit excessive compensation as an
unsafe and unsound practice.
Loans to Insiders A savings associations loans to its executive officers, directors, any owner
of more than 10% of its stock (each, an insider) and certain entities affiliated with any such
person (an insiders related interest) are subject to the conditions and limitations imposed by
Section 22(h) of the Federal Reserve Act and the Federal Reserve Boards Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and the insiders
related interests may not exceed the loans-to-one-borrower limit applicable to national banks
(comparable to the limit applicable to the Banks loans). All loans by a savings association to
all insiders and related interests in the aggregate may not exceed the savings associations
unimpaired capital and surplus. With certain exceptions, loans to an executive officer (other than
loans for the education of the officers children and certain loans secured by the officers
residence) may not exceed the greater of $25,000 or 2.5% of the savings associations unimpaired
capital and surplus, but in no event more than $100,000. Regulation O also requires that any
proposed loan to an insider or a related interest be approved in advance by a majority of the board
of directors of the savings
21
Table of Contents
association, without the vote of any interested director, if such loan, when aggregated with any
existing loans to that insider and the insiders related interests, would exceed either $500,000 or
the greater of $25,000 or 5% of the savings associations unimpaired capital and surplus.
Generally, such loans must be made on substantially the same terms as, and follow credit
underwriting procedures that are no less stringent than, those that are prevailing at the time for
comparable transactions with other persons and must not present more than a normal risk of
collectibility.
There is an exception for extensions of credit pursuant to a benefit or compensation plan of a
savings association that is widely available to employees that does not give preference to
insiders.
The Patriot Act The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) gives the federal government
powers to address terrorist threats through enhanced domestic security measures and surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. Through
amendments to the Bank Secrecy Act, Title III of the Patriot Act encourages information sharing
among regulatory agencies and law enforcement bodies. Provisions of Title III impose affirmative
obligations on a range of financial institutions, including savings associations. Among other
things, Title III of the Patriot Act imposes the following requirements on financial institutions:
| Such institutions must establish anti-money laundering programs that include, at minimum; (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs, and (iv) an independent audit function to test the program. | ||
| Bank regulators, may issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened. | ||
| Institutions that establish, maintain, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. | ||
| Institutions may not establish, maintain, administer or manage correspondent accounts for foreign shell banks and are subject to recordkeeping obligations relating to foreign bank correspondent accounts. | ||
| Bank regulators are directed to consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and bank merger applications. |
Regulation and Supervision of the Company
Holding Company Regulation The Company is registered with the OTS as a unitary savings and loan
holding company and is subject to regulation and supervision by the OTS. The OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined to be a risk to
the Bank and to monitor and regulate the Companys capital and activities such as dividends and
share repurchases that can affect capital.
The Company is limited to activities permissible for financial holding companies, which are
activities that are financial in nature, including underwriting equity securities and insurance,
incidental to financial activities or complementary to a financial activity.
Federal law prohibits a savings and loan holding company from acquiring control of another savings
institution or holding company without prior written approval of the OTS. With some exceptions, it
also prohibits the acquisition or retention of more than 5% of the equity securities of a company
engaged in activities that are not closely related to banking or financial in nature or acquiring
an institution that is not federally-insured. In evaluating applications to acquire savings
institutions, the OTS must consider the financial and managerial resources, future prospects of the
institution involved, the effect of the acquisition on the risk to the insurance fund, the
convenience and needs of the community and competitive factors.
Federal Securities Laws The Companys common stock is registered with the SEC under the
Securities Exchange Act of 1934. The Company is therefore subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the Securities Exchange
Act. As a publicly-traded company, the Company is also subject to legislation intended to
strengthen the securities markets and public confidence in them, such as the Sarbanes-Oxley
22
Table of Contents
Act of 2002, which was intended to increase corporate responsibility, provide for enhanced
penalties for accounting and auditing improprieties at publicly traded companies, and protect
investors by improving the accuracy and reliability of disclosures under the securities laws, and
which led to significant new disclosure and related requirements. Because some OTS accounting and
governance regulations also refer to the SECs regulations, the Sarbanes-Oxley Act also affects the
Bank.
Acquisition of Bank Mutual Corporation No person may acquire control of the Company (or the Bank)
without first obtaining the approval of such acquisition by the OTS. Under the federal Change in
Bank Control Act and the Savings and Loan Holding Company Act, any person, including a company, or
group acting in concert, seeking to acquire 10% or more of the outstanding shares of the Company
must file a notice with the OTS. In addition, any person or group acting in concert seeking to
acquire more than 25% of the Companys common stock must obtain the prior approval of the OTS. The
OTS generally has 60 days in which to act on such applications.
Federal and State Taxation
Federal Taxation The Company and its subsidiaries file a calendar year consolidated federal
income tax return, reporting income and expenses using the accrual method of accounting. The
federal income tax returns for the Companys subsidiaries have been examined and audited or closed
without audit by the Internal Revenue Service for tax years through 2007.
Depending on the composition of its items of income and expense, the Company may be subject to
alternative minimum tax (AMT) to the extent AMT exceeds the regular tax liability. AMT is
calculated at 20% of alternative minimum taxable income (AMTI). AMTI equals regular taxable
income increased by certain tax preferences, including depreciation deductions in excess of
allowable AMT amounts, certain tax-exempt interest income and 75% of the excess of adjusted current
earnings (ACE) over AMTI. ACE equals AMTI adjusted for certain items, primarily accelerated
depreciation and tax-exempt interest. The payment of AMT would create a tax credit, which can be
carried forward indefinitely to reduce the regular tax liability in future years.
State Taxation Through 2008, the state of Wisconsin imposed a corporate franchise tax of 7.9% on
the separate taxable incomes of the members of the Companys consolidated income tax group,
excluding its Nevada subsidiaries. Under that law, the income of the Nevada subsidiaries was only
subject to taxation in Nevada, which currently does not impose a corporate income or franchise tax.
However, effective January 1, 2009, Wisconsin law was amended to significantly restrict the tax
benefits of out-of-state investment subsidiaries through the enactment of combined reporting
legislation. As a result, the Companys consolidated income tax group is subject to combined
reporting, which will result in Wisconsin income taxes being imposed on the earnings of the Banks
out-of-state investment subsidiaries beginning in 2009. For additional discussion regarding the
impact of this change, refer to Results of OperationsIncome Tax Expense in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations. Also,
refer to Item 1A. Risk Factors, for additional discussion.
23
Table of Contents
Item 1A. Risk Factors |
In addition to the discussion and analysis set forth in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations, and the cautionary statements set forth
in Item 1. Business, the following risk factors should be considered when evaluating the
Companys results of operations, financial condition, and outlook.
The Global Credit Market Instability and Weak Economic Conditions May Significantly Affect the
Companys Liquidity, Financial Condition, and Earnings
Global financial markets recently have been, and continue to be, unstable and unpredictable, and
economic conditions have been weak. Continued, and potentially increased, volatility, instability
and weakness could affect the Companys ability to sell investment securities and other financial
assets, which in turn could adversely affect the Companys liquidity and financial position. This
instability also could affect the prices at which the Company could make any such sales, which
could adversely affect its earnings and financial condition. Conditions could also negatively
affect the Companys ability to secure funds or raise capital for acquisitions and other projects,
which in turn, could cause the Company to use deposits or other funding sources for such projects.
In addition, the instability of the markets and weakness of the economy could affect the strength
of the Companys customers or counterparties, their willingness to do business, and/or their
ability to fulfill their obligations, which could further affect the Companys earnings. Current
conditions, including high unemployment, weak corporate performance, soft real estate markets, and
the decline of home sales and property values, could negatively affect the volume of loan
originations and prepayments, the value of the real estate securing the Companys mortgage loans,
and borrowers ability to repay loan obligations, all of which could adversely impact the Companys
earnings and financial condition.
If the Companys Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, the
Companys Earnings Could Decrease
The Company has policies and procedures in place to manage its exposure to risk related to its
lending operations. These practices include, among other things, geographic limits; restrictions
on lending in certain situations; underwriting practices; regularly monitoring loan payment status;
and/or corresponding regularly with and obtaining regular financial updates from large borrowers
and/or guarantors. However, despite these practices, the Companys loan customers may not repay
their loans according to the terms of the loans and the collateral securing the payment of these
loans may be insufficient to pay any remaining loan balance. Continued economic decline, including
high unemployment rates and declining values of the collateral underlying loans, may affect
borrowers ability to repay their loan obligations that could lead to increased loan losses or
provisions. As a result, the Company may experience significant loan losses, including losses that
may exceed the amounts established in the allowance for loan losses, which could have a material
adverse effect on its operating results.
Further Declines in the Real Estate Values May Continue to Adversely Affect Collateral Values and
the Companys Profits
The Companys market areas have generally experienced a decline in real estate values and an
increase in non-residential tenant vacancies. These developments could affect the value of the
collateral securing the Companys mortgage loans. That decrease in value could in turn lead to
increased losses on loans in the event of foreclosures. Increased losses would affect the
Companys loan loss allowance and may cause it to increase its provision for loan losses resulting
in a charge to earnings.
Some of the Companys Lending Activities Are in Credits that are Riskier than One- to Four-Family
Real Estate Loans
The Company has identified commercial real estate, commercial business, construction and
development, and consumer loans as areas for lending emphasis. While lending diversification is
being pursued for the purpose of increasing net interest income, non-residential and construction
and development loans historically have carried greater risk of payment default than residential
real estate loans. As the volume of these loans increases, credit risk increases. In the event of
substantial borrower defaults, the Companys provision for loan losses would increase and loans may
be written off, and therefore, earnings would be reduced.
24
Table of Contents
Recent and Future Legislation and Rulemaking in Response to Market and Economic Conditions May
Significantly Affect the Companys Results of Operations and Financial Condition
Instability and volatility in the credit markets have led regulators and legislators to consider
and/or adopt proposals that will significantly affect financial institutions and holding companies,
including the Company. Legislation such as the Emergency Economic Stabilization Act of 2008 and
the American Recovery and Reinvestment Act of 2009, as well as programs such as the Troubled Assets
Relief Program, were adopted. Although designed to address capital and liquidity issues in the
banking system, there can be no assurance as to the ultimate impact of these actions on financial
markets. The failure of these actions could have a material, adverse effect on the Companys
business, financial condition, results of operations, access to credit or the value of the
Companys securities.
Current legislative proposals to reform the U.S. financial system may also affect the Company and
the Bank. Pending legislation includes the Consumer Financial Protection Agency Act of 2009, the
Financial Stability Improvement Act of 2009, the Restoring American Financial Stability Act of
2009, the Wall Street Reform and Consumer Protection Act of 2009, and the Overdraft Protection Act
of 2009, among others. These legislative proposals, as well as future legislative and regulatory
proposals, could, among other things, consolidate the OTS and other regulators into a National Bank
Supervisor, create a Consumer Financial Protection Agency, create a systemic risk regulator, and/or
subject financial institutions to both federal and state level regulation. In addition, the
proposals could lead to heightened restrictions being placed upon institutions and activities that
increase systemic risk. Finally, additional notification requirements and restrictions could be
placed on the manner in which financial institutions operate their overdraft coverage programs.
Additionally, higher taxes and/or special fees or assessments have been proposed to apply to some
or all financial institutions, which could create a direct additional cost for the Company.
Also, the recent economic turmoil has resulted in periodic attempts by federal, state, and/or local
governments to legislate foreclosure forbearance, forced loan modifications, cram downs of losses
to lenders in bankruptcy proceedings, or upkeep laws for foreclosed properties. Such efforts, if
successful, could lead to increased loan charge-offs or loan loss provisions and/or reduced income.
These efforts could also adversely affect the value of certain mortgage-related securities not
guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae, such as private-label CMOs.
The recently-enacted laws, proposed acts, taxes and fees, or any other legislation or regulations
ultimately enacted, could materially affect the Company, the Bank and their operations and
profitability by imposing additional regulatory burdens and costs and affecting the conduct of
their business.
The Banks Ability to Pay Dividends to the Company Is Subject to Limitations That May Affect the
Companys Ability to Pay Dividends to Its Shareholders and Repurchase Its Stock
The Company is a separate legal entity from the Bank and engages in no substantial activities other
than its ownership of the common stock of the Bank. Consequently, the Companys net income and
cash flows are derived primarily from the Banks operations and capital distributions. The
availability of dividends from the Bank to the Company is limited by various statutes and
regulations, including those of the OTS; as a result, it is possible, depending on the results of
operations and the financial condition of the Bank and other factors, that the OTS could restrict
the payment by the Bank of dividends or other capital distributions. If the Bank is required to
reduce its dividends to the Company, or is unable to pay dividends at all, the Company may not be
able to pay dividends to its shareholders at existing levels or at all and/or may not be able to
repurchase its common stock.
Changes in the Financial Condition or Future Prospects of the FHLB of Chicago May Have an
Adverse Impact on the Companys Investment in FHLB Common Stock
The Company is a voluntary member of the FHLB of Chicago, and holds shares in the FHLB of Chicago
as a condition of borrowing money from it. In 2007, the FHLB of Chicago was required to suspend
payment of dividends on its stock. If there are any further developments that impair the value of
the common stock of the FHLB of Chicago, the Company would be required to write down the value of
the shares that it holds, which in turn could affect the Companys net income and shareholders
equity.
The Interest Rate Environment May Have an Adverse Impact on the Companys Net Interest Income
Interest rates have been volatile in recent years, even though they were relatively stable in 2009.
A volatile interest rate environment makes it difficult for the Company to coordinate the timing
and amount of changes in the rates of interest it pays on deposits and borrowings with the rates of
interest it earns on loans and securities. In addition,
25
Table of Contents
volatile interest rate environments cause corresponding volatility in the demand by individuals and
businesses for the loan and deposit products offered by the Company. This volatility has a direct
impact on the Companys net interest income, and consequently, its net income. Future interest
rates could continue to be volatile and management is unable to predict the impact such volatility
would have on the net interest income and profits of the Company.
Changes in Market Interest Rates or Other Conditions May Have an Adverse Impact on the Fair Value
of the Companys Available-for-Sale Securities, Shareholders Equity, and Profits
GAAP requires the Company to carry its securities at fair value on its balance sheet. Unrealized
gains or losses on these securities, reflecting the difference between the fair market value and
the amortized cost, net of its tax effect, are reported as a component of shareholders equity.
When market rates of interest increase, the fair value of the Companys securities
available-for-sale generally decreases and equity correspondingly decreases. When rates decrease,
fair value generally increases and shareholders equity correspondingly increases. However, due to
significant disruptions in global financial markets during 2008, this usual relationship was
disrupted. Despite a declining interest rate environment during that period, certain of the
Companys available-for-sale securities declined in value, its private-label CMOs in particular.
Although the value of these securities recovered somewhat in 2009, management expects continued
volatility in the fair value of its private-label CMOs and is not able to predict when or if the
fair value of such securities will fully recover.
In certain instances GAAP requires recognition through earnings of declines in the fair value of
securities that are deemed to be other than temporarily impaired (OTTI). In 2007 the Company
recognized $1.2 million in OTTI losses on two mutual funds. The fair value of one of these funds
declined by an additional $6.9 million in 2008 and by an additional $831,000 in the first quarter
of 2009 that were deemed to be OTTI. Although the value of this mutual fund has recovered somewhat
during the remainder of 2009, management expects continued volatility in the fair value of its
mutual funds and is not able to predict when or if the fair value of such will fully recover.
Wisconsin Tax Developments Could Reduce the Companys Net Income
Like many Wisconsin financial institutions, the Company has non-Wisconsin subsidiaries that hold
and manage investment assets and loans, the income from which has not been subject to Wisconsin tax
prior to 2009. The Wisconsin Department of Revenue (the Department) previously instituted an
audit program specifically aimed at out-of-state subsidiaries of Wisconsin banks. The Department
has asserted the position that some or all of the income of the out-of-state subsidiaries is
taxable in Wisconsin. The Department is conducting audits of many Wisconsin banks; its audit of
the Bank for tax years since 1997 has not yet been concluded, is not being actively pursued, and
the Department has not asserted a claim against the Bank or its subsidiaries.
The Department sent letters in 2004 to Wisconsin financial institutions (whether or not they were
undergoing an audit) reporting on settlements the Department had reached with certain other
financial institutions and their out-of-state investment subsidiaries. The letter provided a
summary of available settlement parameters. For prior periods they included: restrictions on the
types of subsidiary income excluded from Wisconsin taxation; assessment of certain back taxes
relating to a limited time period; limitations on net operating loss carry forwards; and interest
on past-due taxes (but no penalties). For 2004 and going forward, the letter states similar
provisions, including limits on subsidiaries assets, which could be considered in determining
income not subject to Wisconsin taxation.
The Company has previously engaged in discussions with the Department and has asked the Department
to consider some specific factors that the Company believes may distinguish it from many other
institutions. However, the adoption of combined reporting in Wisconsin tax law, described in
Regulation and SupervisionFederal and State Taxation in Item 1. Business, causes the
settlement agreements between the Department and other banks to be inapplicable on a going-forward
basis. For 2009 and going forward, the Banks Nevada subsidiaries are subject to Wisconsin tax.
It is anticipated that the Department will continue to challenge the Banks treatment of its
out-of-state investment subsidiaries for years prior to 2009, but it is not known whether the
Department will continue to offer the same, if any, settlement terms.
Depending on the terms and circumstances, an adverse resolution of these matters could result in
additional Wisconsin tax obligations for periods from 1997 through 2008, which could have a
substantial negative impact on the earnings of the Company. The Company believes it has reported
income and paid Wisconsin taxes in prior years in accordance with applicable legal requirements,
and the Departments long standing interpretations thereof, and that the Company would likely
prevail against the Department should it attempt to tax the income of the Companys out-of-state
subsidiaries in Wisconsin in those years. However, management can provide no assurances of this
result. The Company also may incur further costs in the future to address these issues.
26
Table of Contents
Strong Competition Within the Companys Market Area May Affect Net Income
The Company encounters strong competition both in attracting deposits and originating real estate
and other loans. The Company competes with commercial banks, savings institutions, mortgage
banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage
and investment banking firms. The Companys market area includes branches of several commercial
banks that are substantially larger than the Company in terms of deposits and loans. In addition,
tax-exempt credit unions operate in most of the Companys market area and aggressively price their
products and services to a large part of the population. If competitors succeed in attracting
business from the Companys customers, its deposits and loans could be reduced, which would likely
affect earnings.
FDIC Increases in Deposit Insurance Premiums Have Raised the Companys Expenses
In 2009 the FDIC significantly increased the initial base assessment rates paid by financial
institutions for deposit insurance, imposed a special assessment, and required financial
institutions to prepay assessments for all of 2010, 2011, and 2012. These measures were partly in
response to the high level of recent bank failures that caused an increase in FDIC resolution costs
and a reduction in the deposit insurance fund. These increases and assessments, as well as
possible future increases or special assessments, adversely affect the earnings of the Company
and/or the Bank.
The Companys Ability to Grow May Be Limited if It Cannot Make Acquisitions
The Company will continue to seek to expand its banking franchise by opening new offices, growing
internally, and acquiring other financial institutions or branches and other financial services
providers. The Companys ability to grow through selective acquisitions of other financial
institutions or branches will depend on successfully identifying, acquiring, and integrating those
institution or branches. The Company has not made any acquisitions in recent years, as management
has not identified acquisitions for which it was able to reach an agreement on terms management
believed were appropriate and/or that met its acquisition criteria. The Company cannot provide any
assurance that it will be able to generate internal growth, identify attractive acquisition
candidates, make acquisitions on favorable terms, or successfully integrate any acquired
institutions or branches.
The Company Has Significant Intangible Assets That It May Need to Write Off (Expense) in the Future
The Company has $52.6 million in goodwill and $1.4 million in other intangible assets (consisting
entirely of deposit-based intangible) as of December 31, 2009. The Company continues to amortize
its deposit-based intangible over seven to fifteen years. The Company analyzes goodwill for
impairment on an annual basis or more frequently when, in the judgment of management, an event has
occurred that may indicate that additional analysis is required. The Company analyzes its
deposit-based intangible when facts and circumstances indicate it may be impaired. At some point
in the future, the Companys goodwill and/or deposit-based intangible could become impaired and it
would need to write them off as a reduction to earnings in the period in which they became
impaired.
The Company Depends on Certain Key Personnel and the Companys Business Could Be Harmed by the Loss
of Their Services
The Companys success depends in large part on the continued service and availability of its
management team, and on its ability to attract, retain and motivate qualified personnel. The
competition for these individuals can be significant, and the loss of key personnel could harm the
Companys business. The Company cannot provide assurances that it will be able to retain existing
key personnel or attract additional qualified personnel.
The Company Is Subject to Security and Operational Risks Relating to the Use of Technology that
Could Damage Its Reputation and Business
Security breaches in the Companys internet, telephonic, or other electronic banking activities
could expose it to possible liability and damage its reputation. Any compromise of the Companys
security also could deter customers from using its internet banking services that involve the
transmission of confidential information. The Company relies on standard internet and other
security systems to provide the security and authentication necessary to effect secure transmission
of data. These precautions may not protect the Companys systems from compromises or breaches of
its security measures, which could result in damage to the Companys reputation and business.
27
Table of Contents
Additionally, the Company outsources a large portion of its data processing to third parties. If
these third party providers encounter technological or other difficulties or if they have
difficulty in communicating with the Company, it will significantly affect the Companys ability to
adequately process and account for customer transactions, which would significantly affect business
operations.
Item 1B. Unresolved Staff Comments |
None.
Item 2. Properties |
The Company and its subsidiaries conduct their business through an executive office and 79 banking
offices, which had an aggregate net book value of $51.7 million as of December 31, 2009. As of
December 31, 2009, the Company owned the building and land for 68 of its property locations and
leased the space for 12. In addition, the Company purchased two new office locations in late 2009
and expects to relocate two existing offices to these new locations in the first quarter of 2010.
One of the current locations is leased month-to-month by the Company; the other current location is
owned by the Company.
The Company also owns 15 acres of undeveloped land in a suburb of Milwaukee, Wisconsin, through its
MC Development subsidiary, as well as 318 acres of undeveloped land in another community located
near Milwaukee through MC Developments 50% ownership in Arrowood Development. The net book value
of these parcels of land was $7.2 million at December 31, 2009.
Item 3. Legal Proceedings |
The Company is not involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Management believes that these routine legal
proceedings, in the aggregate, are immaterial to the Companys financial condition, results of
operations, and cash flows.
Item 4. Reserved |
This item is not used.
28
Table of Contents
Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities |
The common stock of the Company is traded on The NASDAQ Global Select Market under the symbol BKMU.
As of February 26, 2010, there were 45,474,835 shares of common stock outstanding and approximately
5,200 shareholders of record.
The Company paid a total cash dividend of $0.34 per share in 2009. A cash dividend of $0.07 per
share was paid on March 1, 2010, to shareholders of record on February 11, 2010. For additional
discussion relating to the Companys dividends, refer to Financial ConditionShareholders
Equity in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. The Company anticipates that it will continue to pay quarterly cash dividends on its
common stock, although there can be no assurance that payment of such dividends will continue or
that they will not be reduced. The payment of dividends in the future is discretionary with the
Companys board of directors and will depend on the Companys operating results and financial
condition, regulatory limitations, tax considerations, and other factors. Interest on deposits
will be paid prior to payment of dividends on the Companys common stock. Refer also to Item 1.
BusinessRegulation and Supervision regarding regulatory limitations on the payment of dividends
by the Bank to the Company, which in turn could affect the payment of dividends by the Company to
its shareholders.
The high and low trading prices of the Companys common stock from January 1, 2008, through
December 31, 2009, by quarter, and the dividends paid in each quarter, were as follows:
2009 Stock Prices | 2008 Stock Prices | Cash Dividends Paid | ||||||||||||||||||||||
High | Low | High | Low | 2009 | 2008 | |||||||||||||||||||
1st Quarter |
$ | 11.56 | $ | 7.06 | $ | 12.32 | $ | 10.05 | $ | 0.09 | $ | 0.09 | ||||||||||||
2nd Quarter |
10.81 | 8.60 | 11.51 | 10.04 | 0.09 | 0.09 | ||||||||||||||||||
3rd Quarter |
10.07 | 8.32 | 14.25 | 9.60 | 0.09 | 0.09 | ||||||||||||||||||
4th Quarter |
8.84 | 6.88 | 12.00 | 8.62 | 0.07 | 0.09 | ||||||||||||||||||
Total | $ | 0.34 | $ | 0.36 | ||||||||||||||||||||
During the first two months of 2010, the trading price of the Companys common stock ranged between
$5.98 to $7.21 per share, and closed on February 26, 2010, at $6.49 per share.
During 2009, the Company repurchased 1.7 million shares of its common stock at an average price of
$8.30 per share. The following table provides the specified information about the repurchases of
shares by the Company during the fourth quarter of 2009.
Total Number | Maximum Number of | |||||||||||||||
Total Number | Average | of Shares Purchased as | Shares That May | |||||||||||||
of Shares | Price Paid | Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | per Share | Announced Plans | Under the Plan | ||||||||||||
October 1 to 31, 2009 |
85,400 | $ | 7.21 | 85,400 | 57,700 | |||||||||||
November 1 to 30, 2009 |
294,545 | 6.97 | 267,400 | 790,300 | (1) | |||||||||||
December 1 to 31, 2009 |
99,500 | 7.01 | 99,500 | 690,800 | (2) | |||||||||||
Total purchased |
479,445 | $ | 7.02 | 452,300 | ||||||||||||
(1) | Reflects the impact of 1.0 million shares approved for repurchase by the Companys board of directors on November 3, 2009. | |
(2) | Since February 8, 2010, no shares remained to be repurchased under the authorization approved on November 3, 2009. |
The shares not purchased as part of the publicly announced program were existing owned shares used
by option holders in payment of the purchase price and/or tax withholding obligations in connection
with the exercise of stock options under the Companys 2001 Stock Incentive Plan. The price used
for these purposes is the fair market value of those shares on the date of purchase. For
additional discussion relating to the Companys repurchase of its
29
Table of Contents
common stock, refer to Financial ConditionShareholders Equity in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Set forth below is a line graph comparing the cumulative total shareholder return on Company common
stock, based on the market price of the common stock and assuming reinvestment of cash dividends,
with the cumulative total return of companies on the NASDAQ Stock Market U.S. Index (NASDAQ
Composite Index) and the NASDAQ Stock Market Bank Index. The graph assumes that $100 was invested
on December 31, 2004, in Company common stock and each of those indices.
Period Ending | ||||||||||||||||||||||||
Index | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||
Bank Mutual Corporation |
100.00 | 89.07 | 104.24 | 93.69 | 105.81 | 66.17 | ||||||||||||||||||
NASDAQ Composite Index |
100.00 | 102.14 | 112.19 | 121.68 | 58.64 | 84.28 | ||||||||||||||||||
NASDAQ Bank Index |
100.00 | 97.69 | 109.64 | 86.90 | 63.36 | 53.09 |
30
Table of Contents
Item 6. Selected Financial Data
The following table provides selected financial data for the Company for its past five fiscal
years. The data is derived from the Companys audited financial statements, although the table
itself is not audited. The following data should be read together with the Companys consolidated
financial statements and related notes and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
At December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands, except number of shares and per share amounts) | ||||||||||||||||||||
Selected financial condition data: |
||||||||||||||||||||
Total assets |
$ | 3,512,064 | $ | 3,489,689 | $ | 3,488,046 | $ | 3,451,385 | $ | 3,431,377 | ||||||||||
Loans receivable, net |
1,506,056 | 1,829,053 | 1,994,556 | 2,024,325 | 1,990,492 | |||||||||||||||
Loans held-for-sale, net |
13,534 | 19,030 | 7,952 | 3,787 | 2,312 | |||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||
Investment securities |
614,104 | 419,138 | 99,450 | 48,290 | 63,361 | |||||||||||||||
Mortgage-related securities |
866,848 | 850,867 | 1,099,922 | 1,064,851 | 1,087,816 | |||||||||||||||
Foreclosed and repossessed assets |
17,689 | 4,768 | 3,687 | 1,231 | 708 | |||||||||||||||
Goodwill |
52,570 | 52,570 | 52,570 | 52,570 | 52,570 | |||||||||||||||
Mortgage servicing rights |
6,899 | 3,703 | 4,708 | 4,653 | 4,771 | |||||||||||||||
Other intangible assets |
1,405 | 1,809 | 2,428 | 3,089 | 3,750 | |||||||||||||||
Deposit liabilities |
2,137,508 | 2,128,277 | 2,093,453 | 2,149,523 | 2,084,351 | |||||||||||||||
Borrowings |
906,979 | 907,971 | 912,459 | 705,025 | 765,796 | |||||||||||||||
Shareholders equity |
402,477 | 399,611 | 430,035 | 533,779 | 544,374 | |||||||||||||||
Tangible shareholders equity (1) |
349,067 | 345,959 | 346,011 | 379,359 | 489,557 | |||||||||||||||
Number of shares outstanding, net of
treasury stock |
46,165,635 | 47,686,759 | 49,834,756 | 60,277,087 | 62,325,268 | |||||||||||||||
Book value per share |
$ | 8.72 | $ | 8.38 | $ | 8.63 | $ | 8.86 | $ | 8.73 | ||||||||||
Tangible shareholders equity
per share (1) |
$ | 7.56 | $ | 7.25 | $ | 7.55 | $ | 7.95 | $ | 7.85 |
For the Year Ended December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Selected operating data: |
||||||||||||||||||||
Total interest income |
$ | 151,814 | $ | 177,556 | $ | 183,001 | $ | 174,404 | $ | 164,871 | ||||||||||
Total interest expense |
83,784 | 104,191 | 113,771 | 99,091 | 77,231 | |||||||||||||||
Net interest income |
68,030 | 73,365 | 69,230 | 75,313 | 87,640 | |||||||||||||||
Provision for (recovery of) loan
losses |
12,413 | 1,447 | (272 | ) | 632 | 541 | ||||||||||||||
Net interest income after provision for loan losses |
55,617 | 71,918 | 69,502 | 74,681 | 87,099 | |||||||||||||||
Total non-interest income |
30,985 | 17,708 | 20,428 | 17,035 | 16,780 | |||||||||||||||
Total non-interest expense |
67,459 | 63,377 | 63,543 | 61,311 | 60,837 | |||||||||||||||
Income before income taxes |
19,143 | 26,250 | 25,995 | 30,405 | 43,042 | |||||||||||||||
Income tax expense |
5,418 | 9,094 | 8,892 | 9,808 | 15,016 | |||||||||||||||
Net income before non-controlling
interest |
13,725 | 17,155 | 17,495 | 20,597 | 28,026 | |||||||||||||||
Net loss (income) attributable to non-controlling interest |
| 1 | (392 | ) | | | ||||||||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | $ | 20,597 | $ | 28,026 | ||||||||||
Earnings per share-basic |
$ | 0.29 | $ | 0.36 | $ | 0.32 | $ | 0.35 | $ | 0.44 | ||||||||||
Earnings per share-diluted |
$ | 0.29 | $ | 0.35 | $ | 0.31 | $ | 0.34 | $ | 0.43 | ||||||||||
Cash dividends paid per share |
$ | 0.34 | $ | 0.36 | $ | 0.33 | $ | 0.29 | $ | 0.25 |
(1) | This is a non-GAAP measure. Tangible shareholders equity is total shareholders equity minus goodwill and other intangible assets (net of deferred taxes, which are immaterial). |
31
Table of Contents
At or For the Year Ended December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Selected financial ratios: |
||||||||||||||||||||
Net interest margin (2) |
2.09 | % | 2.21 | % | 2.09 | % | 2.27 | % | 2.64 | % | ||||||||||
Net interest rate spread |
1.82 | 1.85 | 1.59 | 1.74 | 2.17 | |||||||||||||||
Return on average assets |
0.39 | 0.48 | 0.49 | 0.59 | 0.80 | |||||||||||||||
Return on average shareholders
equity |
3.40 | 4.15 | 3.57 | 3.89 | 4.84 | |||||||||||||||
Efficiency ratio (3) |
73.12 | 68.71 | 69.92 | 66.89 | 59.28 | |||||||||||||||
Non-interest expense as a percent of
adjusted average assets |
1.93 | 1.79 | 1.81 | 1.77 | 1.74 | |||||||||||||||
Shareholders equity to total assets |
11.39 | 11.45 | 12.33 | 15.47 | 15.86 | |||||||||||||||
Tangible shareholders equity to
adjusted total assets (4) |
10.09 | 10.07 | 10.95 | 14.11 | 14.50 | |||||||||||||||
Selected asset quality ratios: |
||||||||||||||||||||
Non-performing loans to loans
receivable, net |
2.83 | % | 1.81 | % | 0.65 | % | 0.72 | % | 0.29 | % | ||||||||||
Non-performing assets to total assets |
1.72 | 1.08 | 0.48 | 0.46 | 0.19 | |||||||||||||||
Allowance for loan losses to
non-performing loans |
39.99 | 36.89 | 90.98 | 86.74 | 207.23 | |||||||||||||||
Allowance for loan losses to total
loans receivable, net |
1.13 | 0.67 | 0.59 | 0.62 | 0.61 | |||||||||||||||
Charge-offs to average loans |
0.45 | 0.05 | 0.03 | 0.01 | 0.12 |
(2) | Net interest margin is calculated by dividing net interest income by average earnings assets. | |
(3) | Efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. | |
(4) | This is a non-GAAP measure. The ratio is calculated by dividing total shareholders equity less intangible assets (net of deferred taxes) divided by total assets less intangible assets (net). Intangible assets consist of goodwill and other intangible assets. Deferred taxes have been established only on other intangible assets and are immaterial in amount. |
32
Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis in this section should be read in conjunction with Item 8. Financial
Statements and Supplementary Data, and Item 7A. Quantitative and Qualitative Disclosures about
Market Risk, as well as Item 1. Business and Item 1A. Risk Factors.
Results of Operations
Overview The Companys net income for the years ended December 31, 2009, 2008, and 2007, was
$13.7 million, $17.2 million, and $17.1 million, respectively. These amounts represented returns
on average assets of 0.39%, 0.48%, and 0.49%, respectively, and returns on average equity of
3.40%, 4,15%, and 3.57%, respectively. Diluted earnings per share during these periods were $0.29,
$0.35, and $0.31, respectively.
The Companys earnings performance in 2009 was impacted by the following unfavorable developments
compared to 2008:
| an $11.0 million or 758% increase in provision for loan losses; | ||
| a $5.3 million or 7.3% decrease in net interest income; | ||
| a $2.7 million or 817% increase in regular FDIC insurance premiums; | ||
| a $1.6 million non-recurring special assessment from the FDIC; and | ||
| a $1.2 million or 15.4% decrease in other non-interest income. |
These unfavorable developments were partially offset by the following favorable developments in
2009 compared to 2008:
| a $7.9 million increase in gain on investments compared to a loss in 2008; | ||
| a $7.0 million or 332% increase in gain on loan sales activities; | ||
| a $1.9 million decrease in income tax expense (excluding consideration of the tax benefit, below) due to lower pre-tax income; and | ||
| a $1.8 million one-time tax benefit recorded against income tax expense as a result of a change in Wisconsin tax law. |
The Companys earnings performance in 2008 compared to 2007 benefited from a $4.1 million or 6.0%
increase in net interest income that was substantially offset by the following unfavorable
developments:
| a $1.7 million increase in provision for loan losses compared to a recovery in 2007; | ||
| a $1.0 million or over 100% decrease in net loan related fees and servicing revenue; | ||
| a $881,000 or 10.4% decrease in other non-interest income; and | ||
| a net gain of $585,000 on the sale of undeveloped land in 2007 compared to no gain or loss in 2008. |
The following paragraphs discuss these developments in greater detail, as well as other changes in
the components of net income during the years ended December 31, 2009, 2008, and 2007.
Net Interest Income Net interest income decreased by $5.3 million or 7.3% during the twelve
months ended December 31, 2009, compared to the same period in 2008. This decrease was due to a
$66.9 million or 2.0% decline in average interest-earning assets, as well as a three basis point
decline in net interest rate spread. The decline in average interest-earning assets in 2009 was
due to the combined effects of a historically low interest rate environment and the economic
recession. During 2009 lower interest rates encouraged many home owners to refinance adjustable
rate mortgages and home equity loans and lines of credit, which the Company typically retains in
its loan portfolio, into fixed rate mortgage loans, which the Company typically sells in the
secondary market. In
33
Table of Contents
addition, due to the economic recession, the Company experienced a decline in demand for
multi-family, commercial real estate, commercial business, and other consumer loans. As a result
of these developments, the Companys average loan portfolio decreased by $203.5 million or 10.8%
during the twelve months ended December 31, 2009. This decrease was offset in part by an increase
in average available-for-sale securities and average overnight investments. The remaining decrease
was used to facilitate a $36.8 million or 1.8% decrease in average deposit liabilities during 2009.
During the year the Company aggressively reduced the rates it offers on certificates of deposits
and certain other deposit accounts in order to manage the liquidity generated from the decline in
its loan portfolio. As a result of these efforts, the average cost of the Companys
interest-bearing deposit liabilities declined from 3.15% in 2008 to 2.21% in 2009. However, this
improvement was offset by a lower average yield on the Companys interest-earning assets in 2009
compared to 2008. This development was caused by a generally lower interest rate environment in
2009 compared to 2008, as well as the aforementioned increase in overnight investments and
available-for-sale securities, which typically carry lower yields than the Companys loan
portfolio. As a result of these developments, the Companys net interest rate spread declined by
three basis points, from 1.85% in 2008 to 1.82% in 2009.
Net interest income increased by $4.1 million or 6.0% in 2008 compared to 2007. Net interest
income in 2008 was favorably impacted by a 26 basis point improvement in net interest rate spread,
which increased from 1.59% in 2007 to 1.85% in 2008. This improvement was primarily attributable
to a declining interest rate environment during 2008 that resulted in a larger decline in the cost
of the Companys liabilities than it did in the yield on its interest-earning assets. Also
contributing to the increase in net interest income in 2008 was a modest increase in average
interest-earning assets relative to 2007. These developments were partially offset by a decrease
in 2008 in the ratio of average interest-earning assets to average interest-bearing liabilities
relative to 2007, which was primarily caused by the Companys stock repurchases. Stock
repurchases reduce shareholders equity (which is non-interest bearing) by means of either an
increase in interest-bearing liabilities or a reduction in interest-earning assets, thereby
reducing the net interest margin. Also affecting the comparison of net interest income between
2008 and 2007 was the inclusion in 2007 of $1.0 million in dividend income from Companys
investment in the common stock of the FHLB of Chicago. The FHLB of Chicago suspended dividends on
its common stock in 2007.
34
Table of Contents
The following table presents certain details regarding the Companys average balance sheet and net
interest income for the periods indicated. The tables present the average yield on
interest-earning assets and the average cost of interest-bearing liabilities. The yields and costs
are derived by dividing income or expense by the average balance of interest-earnings assets or
interest-bearing liabilities, respectively, for the periods shown. The average balances are
derived from daily balances over the periods indicated. Interest income includes fees, which are
considered adjustments to yields. Net interest spread is the difference between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is
derived by dividing net interest income by average interest-earning assets. No tax equivalent
adjustments were made since the Company does not have any tax exempt investments.
Years ended December 31 | ||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Interest | Avg. | Interest | Avg. | Interest | Avg. | |||||||||||||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | ||||||||||||||||||||||||||||
Balance | Paid | Cost | Balance | Paid | Cost | Balance | Paid | Cost | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans receivable, net (1) |
$ | 1,688,906 | $ | 95,802 | 5.67 | % | $ | 1,892,397 | $ | 113,635 | 6.00 | % | $ | 2,016,225 | $ | 123,141 | 6.11 | % | ||||||||||||||||||
Mortgage-related securities |
946,142 | 37,734 | 3.99 | 959,574 | 45,535 | 4.75 | 1,130,780 | 52,518 | 4.64 | |||||||||||||||||||||||||||
Investment securities (2) |
458,311 | 18,199 | 3.97 | 344,533 | 16,041 | 4.66 | 118,625 | 4,871 | 4.11 | |||||||||||||||||||||||||||
Interest-earning deposits |
162,864 | 79 | 0.05 | 54,666 | 764 | 1.40 | 9,186 | 430 | 4.68 | |||||||||||||||||||||||||||
Federal funds sold |
| | 0.00 | 71,934 | 1,581 | 2.20 | 39,596 | 2,041 | 5.15 | |||||||||||||||||||||||||||
Total interest-earning assets |
3,256,223 | 151,814 | 4.66 | 3,323,104 | 177,556 | 5.34 | 3,314,412 | 183,001 | 5.52 | |||||||||||||||||||||||||||
Non-interest-earning assets |
236,158 | 214,682 | 197,212 | |||||||||||||||||||||||||||||||||
Total average assets |
$ | 3,492,381 | $ | 3,537,786 | $ | 3,511,624 | ||||||||||||||||||||||||||||||
Liabilities and equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Savings deposits |
$ | 199,012 | 181 | 0.09 | $ | 190,271 | 609 | 0.32 | $ | 194,887 | 924 | 0.47 | ||||||||||||||||||||||||
Money market accounts |
330,506 | 2,795 | 0.85 | 336,208 | 8,245 | 2.45 | 267,338 | 8,500 | 3.18 | |||||||||||||||||||||||||||
Interest-bearing demand accounts |
184,077 | 121 | 0.07 | 170,700 | 376 | 0.22 | 161,652 | 351 | 0.22 | |||||||||||||||||||||||||||
Certificates of deposit |
1,304,814 | 41,471 | 3.18 | 1,358,021 | 55,459 | 4.08 | 1,381,480 | 66,236 | 4.79 | |||||||||||||||||||||||||||
Total deposit liabilities |
2,018,409 | 44,568 | 2.21 | 2,055,200 | 64,689 | 3.15 | 2,005,357 | 76,011 | 3.79 | |||||||||||||||||||||||||||
Advance payment by borrowers for
taxes and insurance |
19,172 | 11 | 0.06 | 18,549 | 18 | 0.10 | 19,493 | 22 | 0.11 | |||||||||||||||||||||||||||
Borrowings |
907,443 | 39,205 | 4.32 | 910,542 | 39,484 | 4.34 | 869,110 | 37,738 | 4.34 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
2,945,024 | 83,784 | 2.84 | 2,984,291 | 104,191 | 3.49 | 2,893,960 | 113,771 | 3.93 | |||||||||||||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits |
91,147 | 89,590 | 92,810 | |||||||||||||||||||||||||||||||||
Other non-interest-bearing liabilities |
52,412 | 50,268 | 45,853 | |||||||||||||||||||||||||||||||||
Total non-interest-bearing liabilities |
143,559 | 139,858 | 138,663 | |||||||||||||||||||||||||||||||||
Total liabilities |
3,008,583 | 3,124,149 | 3,032,623 | |||||||||||||||||||||||||||||||||
Total equity |
403,798 | 413,637 | 479,000 | |||||||||||||||||||||||||||||||||
Total average liabilities and equity |
$ | 3,492,381 | $ | 3,537,786 | $ | 3,511,624 | ||||||||||||||||||||||||||||||
Net interest income and net interest
rate spread |
$ | 68,030 | 1.82 | % | $ | 73,365 | 1.85 | % | $ | 69,230 | 1.59 | % | ||||||||||||||||||||||||
Net interest margin |
2.09 | % | 2.21 | % | 2.09 | % | ||||||||||||||||||||||||||||||
Average interest-earning assets to
interest-bearing liabilities |
1.11 | x | 1.11 | x | 1.15 | x | ||||||||||||||||||||||||||||||
(1) | For the purposes of these computations, non-accruing loans and loans held-for-sale are included in the average loans outstanding. | |
(2) | FHLB of Chicago stock is included in investment securities. |
35
Table of Contents
The following tables present the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected the Companys
interest income and interest expense during the periods indicated. Information is provided in each
category with respect to the change attributable to change in volume (change in volume multiplied
by prior rate), the change attributable to change in rate (change in rate multiplied by prior
volume), and the net change. The change attributable to the combined impact of volume and rate has
been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2009, | ||||||||||||
Compared to Year Ended December 31, 2008 | ||||||||||||
Increase (Decrease) | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans receivable |
$ | (11,815 | ) | $ | (6,018 | ) | $ | (17,833 | ) | |||
Mortgage-related securities |
(602 | ) | (7,199 | ) | (7,801 | ) | ||||||
Investment securities |
4,760 | (2,602 | ) | 2,158 | ||||||||
Interest-earning deposits |
533 | (1,218 | ) | (685 | ) | |||||||
Federal funds sold |
(791 | ) | (790 | ) | (1,581 | ) | ||||||
Total interest-earning assets |
(7,915 | ) | (17,827 | ) | (25,742 | ) | ||||||
Interest-bearing liabilities: |
||||||||||||
Savings deposits |
29 | (457 | ) | (428 | ) | |||||||
Money market deposits |
(138 | ) | (5,312 | ) | (5,450 | ) | ||||||
Interest-bearing demand deposits |
27 | (282 | ) | (255 | ) | |||||||
Certificates of deposit |
(2,099 | ) | (11,889 | ) | (13,988 | ) | ||||||
Advance payment by borrowers for taxes and
insurance |
1 | (8 | ) | (7 | ) | |||||||
Borrowings |
(134 | ) | (145 | ) | (279 | ) | ||||||
Total interest-bearing liabilities |
(2,314 | ) | (18,093 | ) | (20,407 | ) | ||||||
Net change in net interest income |
$ | (5,601 | ) | $ | 266 | $ | (5,335 | ) | ||||
Year Ended December 31, 2008, | ||||||||||||
Compared to Year Ended December 31, 2007 | ||||||||||||
Increase (Decrease) | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: |
||||||||||||
Loans receivable |
$ | (7,368 | ) | $ | (2,138 | ) | $ | (9,506 | ) | |||
Mortgage-related securities |
(8,153 | ) | 1,170 | (6,983 | ) | |||||||
Investment securities |
10,444 | 726 | 11,170 | |||||||||
Interest-earning deposits |
822 | (488 | ) | 334 | ||||||||
Federal funds sold |
1,106 | (1,566 | ) | (460 | ) | |||||||
Total interest-earning assets |
(3,149 | ) | (2,296 | ) | (5,445 | ) | ||||||
Interest-bearing liabilities: |
||||||||||||
Savings deposits |
(22 | ) | (293 | ) | (315 | ) | ||||||
Money market deposits |
1,924 | (2,179 | ) | (255 | ) | |||||||
Interest-bearing demand deposits |
20 | 5 | 25 | |||||||||
Certificates of deposit |
(1,108 | ) | (9,669 | ) | (10,777 | ) | ||||||
Advance payment by borrowers for taxes and
insurance |
(1 | ) | (3 | ) | (4 | ) | ||||||
Borrowings |
1,798 | (52 | ) | 1,746 | ||||||||
Total interest-bearing liabilities |
2,611 | (12,191 | ) | (9,580 | ) | |||||||
Net change in net interest income |
$ | (5,760 | ) | $ | 9,895 | $ | 4,135 | |||||
Provision for (Recovery of) Loan Losses The Companys provision for (recovery of) loan losses was
$12.4 million, $1.4 million, and $(272,000) during the years ended December 31, 2009, 2008, and
2007, respectively. During 2009 the Company recorded a $2.2 million loss provision against a $9.1
million loan secured by a completed condominium development project. This loss was based on an
updated independent appraisal management received during 2009 and was in addition to $1.3 million
that had been established against this loan in 2008. During 2009 the Company transferred this loan
to foreclosed real estate, net of its entire loss allowance of $3.4 million, which was charged off.
Foreclosed real estate is a component of other assets in the statement of financial condition.
In addition, during the fourth quarter of 2009 the Company recorded a $2.1 million loss provision
against five loans to related borrowers that aggregated $9.5 million. These loans are secured by
an office building, two apartment complexes, and developed land. Although three of these loans
aggregating $6.7 million were performing in accordance with their loan terms as of December 31,
2009, they are cross-collateralized with the two remaining
36
Table of Contents
loans that were classified as non-performing as of that date. During 2009 the Company
determined that it was probable that these loans will become collateral dependent and that, due to
the cross-collateralization, it was prudent to establish a provision for loan loss on the entire
loan relationship. This loss, which was based on an internal management evaluation of the
original appraisal, was in addition to $500,000 that was recorded against one of these loans in an
earlier year. Also during 2009 the Company recorded a $1.9 million loss provision against a $4.5
million loan secured by a multi-tenant office building that defaulted during the year and which
management determined was collateral dependent. The loss was based on an independent appraisal.
In addition to the developments described above, during 2009 the Company recorded $3.3 million in
loss provisions against five loans to unrelated borrowers that had an aggregate balance of $10.8
million. These loans, which were secured by an apartment complex and office and retail buildings,
were also determined by management to be collateral dependent. The losses were based primarily on
updated independent appraisals that management received during the year. In one instance, however,
the loss was based on an internal management evaluation of the original appraisal. Two of these
loans with an aggregate balance of $5.7 million were transferred to foreclosed real estate during
2009, net of an aggregate loss allowance of $2.1 million, which was charged off.
Finally, during 2009 the Company also recorded $1.1 million in loss provisions on a number of
smaller commercial real estate and commercial business loans and $546,000 on one- to four-family
and consumer loans, as well as $1.3 million in additional loss provisions to reflect managements
general concerns regarding continued deterioration in economic conditions, declines in real estate
values, and a general increase in stressed loans in the Companys loan portfolio.
The Companys provision for loan losses in 2008 consisted primarily of the $1.3 million loss on the
completed condominium development project described above. The $272,000 net recovery in 2007 was
due to a $1.3 million recovery of a loss on a commercial business loan that had been recognized in
a year prior to 2007.
Refer to Financial ConditionAsset Quality and Critical Accounting Policies, below, as well as
Item 1. BusinessAsset Quality, above, for additional discussion related to the Companys
provision for (recovery of) loan losses, allowance for loan losses, asset quality, and related
policies and procedures.
Non-Interest Income Total non-interest income for the years ended December 31, 2009, 2008, and
2007, was $31.0 million, $17.7 million, and $20.4 million, respectively. The following paragraphs
discuss the principal components of non-interest income and primary reasons for their changes from
2008 to 2009, as well as 2007 to 2008.
Net gain (loss) on investments in 2009 was $6.8 million compared to $(1.2) million during both 2008
and 2007. Results in these years included $831,000, $6.9 million, and $1.2 million, respectively,
in OTTI charges related to one of the Companys mutual fund investments. This mutual fund invests
primarily in mortgage-related securities, none of which are secured by sub-prime mortgages, but a
portion of which are secured by interest-only mortgages, option-payment mortgages, and other
Alt-A mortgages. As a result of an increase in the fair value of this mutual fund, an additional
impairment has not been recorded on this investment since the first quarter of 2009. Given the
uncertainty that exists in the markets for investments secured by these types of loans, as well as
the possibility of continued deterioration in the performance of these types of loans, the Company
may be required to record future impairment charges against this investment, although there can be
no assurances. This investment had a carrying value of $21.7 million at December 31, 2009, which
included an unrealized gain of $831,000 based on the mutual funds fair value as of that date.
This unrealized gain was recorded in accumulated other comprehensive income (net of related taxes),
which is a component of shareholders equity.
Also included in net gain (loss) on investments in 2008 was a $1.4 million impairment loss
associated with the Companys investment in the common stock of the Federal Home Loan Mortgage
Corporation (Freddie Mac), which was placed in conservatorship by the U.S. government during that
period. This loss represented the Companys entire recorded book value of the investment.
Excluding the OTTI and Freddie Mac losses described in the previous paragraphs, gains on
investments were $7.6 million in 2009, $7.2 million in 2008, and zero in 2007. During 2009 and
2008, the Company sold $468.8 million and $392.4 million, respectively, in longer-term
mortgage-related and certain other securities, the proceeds of which were reinvested primarily in
medium-term government agency securities, short-term agency CMOS, and adjustable-rate government
agency MBSs. Management considered these actions to be prudent in light of its expectations that
interest rates may trend higher in the future.
37
Table of Contents
Gains on loan sales activities were $9.1 million, $2.1 million, and $1.5 million during the years
ended December 31, 2009, 2008, and 2007, respectively. The Companys policy is to sell
substantially all of its fixed rate, one- to four-family mortgage loan originations in the
secondary market. During 2009 sales of one- to four-family mortgage loans were $584.0 million
compared to $128.8 million and $102.9 million in 2008 and 2007, respectively. Loan sales increased
substantially in 2009 as a result of a historically low interest rate environment that encouraged
many borrowers to refinance higher-rate loans into loans at lower rates. In addition,
adjustable-rate borrowers were motivated to refinance their loans into fixed-rate loans. The pace
of loan sales slowed during the last half of 2009 compared to the first half due to a generally
higher interest rate environment. Absent a decline in interest rates, management expects loan
sales in 2010 to be substantially lower than 2009.
Loan-related fees and servicing revenue was $130,000 in 2009 compared to $(6,000) and $1.0 million
in 2008 and 2007, respectively. Low interest rate environments typically cause an increase in
actual mortgage loan prepayment activity, which generally results in an increase in the
amortization of MSRs. In 2009, 2008, and 2007, MSR amortization expense, which is netted against
loan-related fees and servicing revenue, was $3.0 million, $1.6 million, and $1.2 million,
respectively. Loan-related fees and servicing revenue is also impacted by changes in the valuation
allowance that is established against MSRs. As of December 31, 2009, the Company had a valuation
allowance of $287,000 against MSRs with a gross book value of $7.2 million. This compared to an
allowance of $822,000 against a gross book value of $4.5 million as of December 31, 2008. There
was no allowance as of December 31, 2007. The Company included the increase or decrease in this
valuation allowance in loan-related fees and servicing revenue as a charge or a recovery, as the
case may be, in the period in which the changes occurred.
The valuation of MSRs, as well as the periodic amortization of MSRs, is significantly influenced by
the level of market interest rates and loan prepayments. If market interest rates for one- to
four-family loans increase and/or actual or expected loan prepayment expectations decrease in
future periods, the Company could recover all or a portion of its previously established allowance
on MSRs, as well as record reduced levels of MSR amortization expense. Alternatively, if interest
rates decrease and/or prepayment expectations increase, the Company could potentially record
charges to earnings related to increases in the valuation allowance on its MSRs. In addition,
amortization expense could remain elevated due to likely increases in loan prepayment activity.
Service charges on deposits were $6.4 million, $6.7 million, and $6.6 million in 2009, 2008, and
2007, respectively. The decline in service charges on deposits in 2009 compared to previous years
was due primarily to a decrease in overdraft charges and ATM/debit card fees. Management believes
these declines are due to the current recession, which has resulted in reduced spending by
consumers in general, including deposit customers of the Bank.
Brokerage and insurance commissions were $2.8 million, $2.6 million, and $2.6 million for the years
ended December 31, 2009, 2008, and 2007, respectively. Increased commissions from sales of fixed
annuities in recent years have been offset by reduced commissions from sales of insurance and
securities. Sales of fixed annuities increased in 2009 due to a favorable interest rate
environment for such investments. Sales of securities declined in the same period due to an
overall decline in the stock market.
Non-interest income in 2007 included $1.4 million in income from a real estate investment
partnership. This amount represented the net sales price of approximately 30 acres of land sold by
Arrowood Development, a 50% owned partnership of a subsidiary of the Bank. The cost of sales is
included in non-interest expense and the minority interest in income of real estate operations is
on a separate line in the Companys Consolidated Statements of Income. There were no sales of land
in 2009 or 2008.
Net gain (loss) on disposition of foreclosed real estate was $(642,000) in 2009 compared to
$(155,000) and $8,000 in 2008 and 2007, respectively. The increase in 2009 was caused by continued
declines in real estate values in 2009 due to weak economic conditions. If these conditions
continue, future losses on foreclosed real estate could remain elevated in 2010.
Other non-interest income was $6.4 million, $7.6 million, and $8.5 million for the years ended
December 31, 2009, 2008, and 2007, respectively. The decline in 2009 was primarily attributable to
a decrease in earnings from the Companys investment in bank-owned life insurance (BOLI), the
yield on which was adversely impacted by a lower interest rate environment during 2009. Other
non-interest income in 2007 was favorably impacted by a $685,000 one-time adjustment to the
amortization of certain deferred costs.
38
Table of Contents
Non-Interest Expense Total non-interest expense for the years ended December 31, 2009, 2008, and
2007 was $67.5 million, $63.4 million and $63.5 million, respectively. The following paragraphs
discuss the principal components of non-interest expense and the primary reasons for their changes
from 2008 to 2009, as well as 2007 to 2008.
Non-interest expense in 2009 included the impact of higher FDIC deposit insurance premiums.
Beginning in 2009 the FDIC raised its regular premium rates for all financial institutions by a
substantial amount. As a result, the Banks regular deposit premium expense increased to $3.0
million in 2009 from $332,000 and $258,000 in 2008 and 2007, respectively. FDIC premium expense
in 2009 also included a $1.6 million non-recurring special assessment from the FDIC. This special
assessment was charged to all FDIC-insured financial institutions in the second quarter of 2009.
In the Banks case, the assessment was 0.05% of total assets less Tier 1 capital at June 30, 2009.
In December 2009 the FDIC required insured financial institutions to prepay their estimated FDIC
deposit insurance premiums through 2012. Accordingly, in December the Bank paid $12.5 million to
the FDIC, which has been included in other assets in the Companys Consolidated Statements of
Financial Condition. The regular quarterly payments that would otherwise be required from the Bank
in future periods will be applied against this amount and expensed on a quarterly basis through
2012 or until the amount is exhausted. As such, the prepayment is not expected to have a material
impact on the future operating results, financial condition, or liquidity position of the Bank.
Compensation and related expenses were $39.1 million, $38.5 million, and $38.2 million during the
years ended December 31, 2009, 2008, and 2007, respectively. The increase in expenses from
year-to-year was due primarily to annual merit increases in employee compensation, as well as an
increase in the number of personnel employed by the Company, due to new branch openings in recent
years. Also contributing to the increase in compensation expense in 2009 were costs associated
with increased residential loan production and related staffing, as previously discussed. In 2009
and 2008, these developments were partially offset by declines in certain employee benefit costs
compared to previous years. In 2009 this decline was primarily attributable to lower stock-based
compensation expense. This expense declined because the Companys stock price was generally lower
in 2009 than it was in 2008 (especially during the fourth quarter of 2009), which lowered the
Companys ESOP expense in 2009 relative to 2008. In addition, a large stock-based grant made in
2004 became fully vested in mid-2009 and no amortization expense related to those grants was
recorded after that point.
As of December 31, 2009, the Company had 717 full-time associates and 98 part-time associates.
This compared to 677 full-time and 92 part-time employees at December 31, 2008, and 657 full-time
and 86 part-time associates at December 31, 2007.
Occupancy and equipment expense during the years ended December 31, 2009, 2008, and 2007 was $11.8
million, $11.6 million, and $11.3 million, respectively. Occupancy and equipment expense has
increased in recent years as a result of the opening of one new office in 2008, the construction
and relocation of a second office in 2008, and the opening of two new offices in of 2007. The
Company does not currently plan to increase the number of its banking offices in 2010, although
there can be no assurances.
Non-interest expense in 2007 included $645,000 in cost of sales attributable to the sale of land by
Arrowood Development, a 50% owned partnership of a subsidiary of the Bank. The revenue from these
sales was included in non-interest income, as previously described. There were no sales of land in
2009 or 2008.
Other non-interest expense was $11.6 million, $12.3 million, and $12.5 million during the years
ended December 31, 2009, 2008, and 2007, respectively. The decrease in 2009 was caused by lower
expenditures related to debit card activity and lower deposit account losses (due to the economic
recession), as well as lower levels of expenditures for communications and legal, consulting, and
professional fees. These developments were partially offset by increased period costs related to
foreclosed real estate.
Net (Income) Loss Attributable to Non-Controlling Interest In 2007 this amount related to the
non-controlling interests share in the net income of Arrowood Development, a 50% owned subsidiary
of the Bank. As noted above, this real estate development partnership sold a portion of its real
estate holdings in 2007 at a gain. There were no efforts to further develop or sell the
partnerships real estate holdings in 2009 or 2008 due to adverse market conditions.
39
Table of Contents
Income Tax Expense Income tax expense was $5.4 million, $9.1 million, and $8.9 million in 2009,
2008, and 2007, respectively. In 2009 the Company recorded a $1.8 million tax benefit related to
the elimination of a valuation allowance the Company established against a deferred tax asset in
prior years. The deferred tax asset related to Wisconsin net operating loss carryovers for which
management was unable to determine in prior periods whether it was more likely than not that the
tax benefits would be realized in future periods. Effective January 1, 2009, Wisconsin law was
amended from a system that taxed each affiliated entity separately to a form of combined reporting.
As a result of this change, management determined that the Companys Wisconsin net operating
losses that had not been recognized in prior periods would be realizable, resulting in a one-time
tax benefit of $1.8 million in 2009.
Excluding the impact of the tax benefit described in the previous paragraph, the Companys income
tax expense in 2009 would have been $7.2 million. This amount represented an effective tax rate
(ETR) of 37.7% in 2009 compared to 34.6% and 34.2% in 2008 and 2007, respectively. The increase
in ETR in 2009 was caused by the amendment of Wisconsin law described above. Prior to this
amendment, the state of Wisconsin imposed a corporate franchise tax on the separate taxable incomes
of the members of the Companys consolidated income tax group, excluding the Banks out-of-state
investment subsidiaries. However, beginning January 1, 2009, the Companys consolidated income
tax group is subject to combined reporting, which results in state income taxes being imposed on
the earnings of the Banks out-of-state investment subsidiaries. Accordingly, the Companys ETR
increased compared to prior periods. Management expects the current period ETR to be
representative of the rate in future periods, although there can be no assurances. For additional
information related to the Companys income taxes, refer to Item 1A. Risk Factors.
Financial Condition
Overview The Companys total assets increased by $22.4 million or 0.6% during the twelve months
ended December 31, 2009. Total assets at December 31, 2009, were $3.51 billion compared to $3.49
billion at December 31, 2008. During the period the Companys portfolio of securities
available-for-sale increased by $210.9 million or 16.6% in the aggregate, its cash and cash
equivalents increased by $114.8 million or 102%, and its other assets increased by $22.4 million or
11.1%. These developments were substantially offset by a $323.0 million or 17.7% decrease in
loans receivable. Deposit liabilities increased by $9.2 million or 0.4% during 2009 and other
liabilities increased by $10.7 million or 21.8% during the year. The Companys total shareholders
equity increased from $399.6 million at December 31, 2008, to $402.5 million at December 31, 2009.
Non-performing assets increased by $22.4 million or 59.2% to $60.3 million or 1.72% of total assets
during the twelve months ended December 31, 2009. The following paragraphs describe these changes
in greater detail, along with other changes in the Companys financial condition during the twelve
months ended December 31, 2009.
Cash and cash equivalents Cash and cash equivalents increased from $112.9 million at December 31,
2008, to $227.7 million at December 31, 2009. This increase reflects managements decision during
the year to maintain a higher level of liquidity in anticipation of higher interest rates in the
future.
Securities Available-for-Sale The Companys portfolio of securities available-for-sale increased
by $210.9 million or 16.6% during the twelve months ended December 31, 2009. This increase was
primarily caused by the purchase of $1.4 billion in securities consisting principally of
adjustable-rate government agency MBSs and other medium-term government agency securities. These
purchases were offset in part by $468.8 million in sales of long-term, fixed-rate MBSs and certain
other securities, as previously described, as well as $467.9 million in government agency
securities that were called by the issuers during the period. In addition, the Companys
mortgage-related securities portfolio experienced an increase in prepayment activity during the
period due to lower interest rates.
40
Table of Contents
The following table presents the fair value of the Companys investment securities and
mortgage-related securities portfolios at the dates indicated. For all securities and for all
periods presented, the carrying value is equal to fair value. No individual security exceeded 10%
of the Companys capital as of the dates indicated.
At December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Carrying/ | Carrying/ | Carrying/ | ||||||||||
Fair Value | Fair Value | Fair Value | ||||||||||
(Dollars in thousands) | ||||||||||||
Investment securities: |
||||||||||||
Mutual funds (1) |
$ | 22,312 | $ | 39,603 | $ | 46,550 | ||||||
United States government and federal agency obligations. |
591,792 | 379,535 | 52,036 | |||||||||
Stock in federal agencies |
| | 864 | |||||||||
Total investment securities available-for-sale |
614,104 | 419,138 | 99,450 | |||||||||
Mortgage-related securities: |
||||||||||||
Freddie Mac |
295,188 | 282,237 | 524,898 | |||||||||
Fannie Mae |
224,758 | 413,364 | 363,337 | |||||||||
Private-label CMOs |
111,782 | 128,559 | 180,638 | |||||||||
Ginnie Mae |
235,120 | 26,707 | 31,049 | |||||||||
Total mortgage-related securities |
866,848 | 850,867 | 1,099,922 | |||||||||
Total securities available-for-sale |
$ | 1,480,952 | $ | 1,270,005 | $ | 1,199,372 | ||||||
(1) | Refer to Results of OperationsNon-Interest Income, above, for additional discussion related to the Companys investment in mutual funds. |
The following table presents the Companys investment securities and mortgage-related securities
activities for the periods indicated.
For the Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in thousands) | ||||||||||||
Investment securities available-for-sale: |
||||||||||||
Carrying value at beginning of period |
$ | 419,138 | $ | 99,450 | $ | 48,290 | ||||||
Purchases |
689,075 | 351,202 | 51,270 | |||||||||
Sales |
(18,087 | ) | (8,358 | ) | (1,228 | ) | ||||||
Calls |
(467,902 | ) | (29,992 | ) | | |||||||
Discount accretion (premium amortization), net |
406 | (34 | ) | 1 | ||||||||
Increase (decrease) in net unrealized loss |
(8,526 | ) | 6,870 | 1,117 | ||||||||
Net increase in investment securities |
194,966 | 319,688 | 51,160 | |||||||||
Carrying value at end of period |
$ | 614,104 | $ | 419,138 | $ | 99,450 | ||||||
Mortgage-related securities available-for-sale: |
||||||||||||
Carrying value at beginning of period |
$ | 850,867 | $ | 1,099,922 | $ | 1,064,851 | ||||||
Purchases |
779,170 | 345,842 | 247,428 | |||||||||
Sales |
(468,794 | ) | (385,167 | ) | | |||||||
Principal repayments |
(318,225 | ) | (195,479 | ) | (227,041 | ) | ||||||
Discount accretion (premium amortization), net |
(2,445 | ) | 1,516 | 1,893 | ||||||||
Increase (decrease) in net unrealized loss |
26,275 | (15,767 | ) | 12,791 | ||||||||
Net increase (decrease) in mortgage-related securities |
15,981 | (249,055 | ) | 35,071 | ||||||||
Carrying value at end of period |
$ | 866,848 | $ | 850,867 | $ | 1,099,922 | ||||||
41
Table of Contents
The table below presents information regarding the carrying values, weighted average yields
and contractual maturities of the Companys investment securities and mortgage-related securities
at December 31, 2009. Mortgage-related securities are presented by issuer and by coupon type.
More than One Year | More than Five | |||||||||||||||||||||||||||||||||||||||
One Year or Less | to Five Years | Years to Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||
Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | |||||||||||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||||||||||
Mutual funds (1) |
$ | 22,312 | 3.85 | % | | | | | | | $ | 39,603 | 3.69 | % | ||||||||||||||||||||||||||
US government and agencies |
| | $ | 341,447 | 2.60 | % | $ | 99,429 | 2.26 | % | $ | 150,916 | 4.07 | % | 591,792 | 2.92 | ||||||||||||||||||||||||
Total investment securities |
$ | 22,312 | 3.85 | % | $ | 341,447 | 2.60 | % | $ | 99,429 | 2.26 | % | $ | 150,916 | 4.07 | % | $ | 614,104 | 2.95 | % | ||||||||||||||||||||
Mortgage-related securities by issuer: |
||||||||||||||||||||||||||||||||||||||||
Ginnie Mae pass-through
certificates |
| | | | | | $ | 253 | 4.68 | % | $ | 253 | 4.68 | % | ||||||||||||||||||||||||||
Fannie Mae pass-through
certificates |
| | $ | 13,150 | 5.14 | % | $ | 2,955 | 6.68 | % | 84,993 | 3.12 | 101,098 | 3.48 | ||||||||||||||||||||||||||
Freddie Mac pass-through
certificates |
| | 94 | 5.72 | 416 | 6.51 | 135,155 | 2.79 | 135,665 | 2.80 | ||||||||||||||||||||||||||||||
Private label CMOs |
| | | | 32,569 | 5.15 | 79,213 | 4.65 | 111,782 | 4.78 | ||||||||||||||||||||||||||||||
Freddie Mac, Fannie Mae, and
Ginnie Mae REMICs |
| | 46,021 | 1.69 | 64,735 | 4.63 | 407,294 | 3.72 | 518,050 | 3.65 | ||||||||||||||||||||||||||||||
Total mortgage-related securities |
| | $ | 59,265 | 2.46 | % | $ | 100,675 | 4.87 | % | $ | 706,908 | 3.58 | % | $ | 866,848 | 3.65 | % | ||||||||||||||||||||||
Mortgage-related securities by coupon: |
||||||||||||||||||||||||||||||||||||||||
Adjustable rate coupon |
| | | | $ | 76 | 5.94 | % | $ | 257,832 | 3.07 | % | $ | 257,908 | 3.07 | % | ||||||||||||||||||||||||
Fixed rate coupon |
| | $ | 59,265 | 2.46 | % | 100,599 | 4.87 | 449,076 | 3.88 | 608,940 | 3.90 | ||||||||||||||||||||||||||||
Total mortgage-related securities |
| | $ | 59,265 | 2.46 | % | $ | 100,675 | 3.57 | % | $ | 706,908 | 3.66 | % | $ | 866,848 | 3.65 | % | ||||||||||||||||||||||
Total investment and mortgage-related
securities portfolio |
$ | 22,312 | 3.85 | % | $ | 400,712 | 2.58 | % | $ | 200,104 | 3.57 | % | $ | 857,824 | 3.66 | % | $ | 1,480,952 | 3.36 | % | ||||||||||||||||||||
(1) | The weighted average yield has not been adjusted for the impairments recorded in 2009, 2008, and 2007. Refer to Results of OperationsNon-Interest Income, above, for additional discussion. |
The Company classifies all of its securities as available-for-sale. Changes in the fair value of
such securities are recorded through accumulated other comprehensive loss (net of deferred income
taxes), which is a component of shareholders equity. During the twelve months ended December 31,
2009, the fair value adjustment on the Companys available-for-sale securities improved from a net
unrealized loss of $19.7 million at December 31, 2008, to a net unrealized loss of $1.9 million at
December 31, 2009. This improvement was due primarily to an increase in the fair value of the
Companys portfolio of private-label CMOs. The Companys private-label CMOs were originally
purchased from 2004 to early 2006 and are secured by prime residential mortgage loans. The
securities were all rated triple-A by various credit rating agencies at the time of their
original purchase. However, in recent periods, a number of the securities in the portfolio have
been downgraded. The following table presents the credit ratings, carrying values, and unrealized
losses of the Companys private-label CMO portfolio as of the dates indicated:
December 31, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Unrealized | Carrying | Unrealized | |||||||||||||
Value | Loss, Net | Value | Loss, Net | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Credit rating (1): |
||||||||||||||||
AAA/Aaa |
$ | 22,959 | $ | 341 | $ | 116,023 | $ | 23,219 | ||||||||
AA/Aa |
9,980 | 483 | 12,536 | 5,928 | ||||||||||||
A |
31,377 | 3,260 | | | ||||||||||||
BBB/Baa |
15,769 | 2,151 | | | ||||||||||||
Less than investment grade |
31,697 | 2,763 | | | ||||||||||||
Total private-label CMOs |
$ | 111,782 | $ | 8,998 | $ | 128,559 | $ | 29,147 | ||||||||
(1) | In instances of split-ratings, each security has been classified according to its lowest rating. |
Although the net unrealized loss on the Companys private-label CMOs declined substantially during
the twelve months ended December 31, 2009, the market for these securities has remained depressed
in response to a general deterioration in economic conditions and performance of the underlying
loans, as well as stress in the markets for these types of securities. Although mindful of
these developments, management has determined that it is probable the Company will collect all
amounts due according to the contractual terms of these securities. Furthermore, the Company does
not intend to sell these securities before it collects all the amounts due. Accordingly,
management has determined that none of the Companys private-label CMOs are other-than-temporarily
impaired as of
42
Table of Contents
December 31, 2009. However, collection is subject to numerous factors outside of the Companys
control and a future determination of OTTI could result in significant losses being recorded
through earnings in future periods. For additional discussion relating to the Companys
securities available-for-sale, refer to Results of OperationsNon-Interest Income, above, and
Critical Accounting PoliciesOther-Than-Temporary Impairment, below. In addition, refer to
Item 1. BusinessInvestment Activities and Item 1A. Risk Factors.
Loans Held-for-Sale The Companys policy is to sell substantially all of its fixed rate, one- to
four-family mortgage loan originations in the secondary market. The following table presents a
summary of the activity in the Companys loans held-for-sale for the periods indicated:
For the year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance outstanding at beginning of period |
$ | 19,030 | $ | 7,952 | $ | 3,787 | ||||||
Origination of loans intended for sale (1) |
578,312 | 139,387 | 107,045 | |||||||||
Principal balance of loans sold |
(583,966 | ) | (128,725 | ) | (102,853 | ) | ||||||
Change in net unrealized gains or losses (2) |
158 | 416 | (27 | ) | ||||||||
Total loans held-for-sale |
$ | 13,534 | $ | 19,030 | $ | 7,952 | ||||||
(1) | Excludes one- to four-family loans originated for the Companys loan portfolio. | |
(2) | Refer to Note 1. Basis of Presentation in Item 8. Financial Statements and Supplementary Data. |
The origination of one- to four-family mortgage loans intended for sale and the corresponding sale
of such loans increased significantly in 2009 as a result of a historically low interest rate
environment. For additional discussion, refer to Results of OperationsNon-Interest Income,
above.
Loans Receivable Loans receivable decreased by $323.0 million or 17.7% as of December 31, 2009,
compared to December 31, 2008. The Companys portfolio of one- to four-family loans declined from
$881.3 million at December 31, 2008, to $656.0 million at December 31, 2009. This decline was
caused by a historically low interest rate environment in 2009 that resulted in increased
refinancing by borrowers of adjustable-rate mortgage loans (which the Company typically retains in
portfolio) into fixed-rate mortgage loans (which the Company generally sells in the secondary
market). The Company expects this trend to continue in the near term assuming interest rates
remain at their current levels. However, in light of the increases in market interest rates in
recent months, the pace of decline is likely to be slower than it has been during 2009, although
there can be no assurances.
The Companys multi-family and commercial real estate mortgage loan originations were $39.8 million
in the aggregate in 2009 compared to $209.2 million in 2008. Although the Company continues to
emphasize originations of these types of loans, originations have declined in 2009 due to a general
deterioration in economic conditions, as well as the Companys more conservative underwriting
standards. Despite this decline, however, the Companys aggregate portfolio of multi-family and
commercial real estate mortgage loans increased from $466.3 million at December 31, 2008, to $476.1
million at December 31, 2009. This increase was due to fewer loan repayments and maturities in
2009, as well as construction and development loans that were transferred to permanent financing
during the year. As a result of this latter development, the Companys portfolio of construction
and development loans declined by $63.3 million or 39.8% during 2009.
Commercial business loan originations in 2009 were $38.0 million compared to $34.5 million in 2008.
The Company experienced modest success in further developing this line of business in 2009 despite
a difficult economic environment. As a result of this success, the Companys portfolio of
commercial business loans increased by $2.4 million or 4.8%, from $49.6 million to $52.1 million
during the twelve months ended December 31, 2009.
The Companys consumer loan originations, including fixed term home equity loans
and lines of credit, were $76.9 million in 2009 compared to $108.6 million in 2008.
Lower origination activity in 2009 was primarily the result of declining demand
due to slower economic growth, as well as a general decline in home values, which
has had a negative impact on homeowners equity. This reduced origination
activity resulted in a decline in the Companys consumer loan portfolio from $338.1
million at December 31, 2008, to $275.5 million at December 31, 2009. Also
contributing to this decline was a historically low interest rate environment which
encouraged many borrowers to refinance their home equity loans or lines of credit
and other consumer loans into first mortgage loans during 2009. Many of these
borrowers reestablished home equity lines of credit with the Company in accordance
with its established lending standards, but had not drawn substantial amounts on
these lines as of the end of the year.
43
Table of Contents
The following table presents the composition of the Companys loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
At December 31 | ||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
of | of | of | of | of | ||||||||||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
Permanent mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
$ | 656,018 | 42.17 | % | $ | 881,288 | 46.51 | % | $ | 1,059,307 | 51.12 | % | $ | 1,123,905 | 53.03 | % | $ | 1,048,881 | 50.94 | % | ||||||||||||||||||||
Multi-family |
190,377 | 12.24 | 190,497 | 10.06 | 206,640 | 9.97 | 157,768 | 7.44 | 155,908 | 7.57 | ||||||||||||||||||||||||||||||
Commercial real estate |
285,764 | 18.37 | 275,802 | 14.56 | 202,528 | 9.77 | 167,089 | 7.88 | 175,090 | 8.50 | ||||||||||||||||||||||||||||||
Total permanent mortgages |
1,132,159 | 72.78 | 1,347,587 | 71.13 | 1,468,475 | 70.86 | 1,448,762 | 68.35 | 1,379,879 | 67.01 | ||||||||||||||||||||||||||||||
Construction and development: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
11,441 | 0.74 | 17,349 | 0.92 | 35,040 | 1.69 | 53,861 | 2.54 | 71,247 | 3.46 | ||||||||||||||||||||||||||||||
Multi-family |
52,323 | 3.36 | 71,208 | 3.76 | 58,712 | 2.83 | 90,955 | 4.29 | 30,240 | 1.47 | ||||||||||||||||||||||||||||||
Commercial real estate |
32,109 | 2.06 | 70,612 | 3.73 | 76,649 | 3.70 | 42,507 | 2.01 | 53,718 | 2.61 | ||||||||||||||||||||||||||||||
Total construction and
development loans |
95,873 | 6.16 | 159,169 | 8.41 | 170,401 | 8.22 | 187,323 | 8.84 | 155,205 | 7.54 | ||||||||||||||||||||||||||||||
Total mortgage loans |
1,228,032 | 78.94 | 1,506,756 | 79.54 | 1,638,876 | 79.08 | 1,636,085 | 77.19 | 1,535,084 | 74.55 | ||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||
Fixed term home equity |
124,519 | 8.01 | 173,104 | 9.14 | 199,161 | 9.62 | 227,811 | 10.75 | 246,460 | 11.97 | ||||||||||||||||||||||||||||||
Home equity lines of credit |
88,796 | 5.71 | 86,962 | 4.59 | 90,631 | 4.37 | 91,730 | 4.33 | 88,266 | 4.29 | ||||||||||||||||||||||||||||||
Student |
19,793 | 1.27 | 21,469 | 1.13 | 21,845 | 1.05 | 20,404 | 0.96 | 19,821 | 0.96 | ||||||||||||||||||||||||||||||
Home improvement |
28,441 | 1.83 | 36,023 | 1.90 | 33,604 | 1.62 | 33,287 | 1.57 | 30,067 | 1.46 | ||||||||||||||||||||||||||||||
Automobile |
4,077 | 0.26 | 11,775 | 0.62 | 24,878 | 1.20 | 46,752 | 2.21 | 69,237 | 3.36 | ||||||||||||||||||||||||||||||
Other |
9,871 | 0.63 | 8,740 | 0.46 | 9,439 | 0.46 | 11,262 | 0.53 | 12,944 | 0.63 | ||||||||||||||||||||||||||||||
Total consumer loans |
275,497 | 17.71 | 338,073 | 17.84 | 379,558 | 18.32 | 431,246 | 20.35 | 466,795 | 22.67 | ||||||||||||||||||||||||||||||
Commercial business loans |
52,167 | 3.35 | 49,623 | 2.62 | 53,784 | 2.60 | 52,056 | 2.46 | 57,247 | 2.78 | ||||||||||||||||||||||||||||||
Gross loans receivable |
1,555,696 | 100.00 | % | 1,894,452 | 100.00 | % | 2,072,218 | 100.00 | % | 2,119,387 | 100.00 | % | 2,059,126 | 100.00 | % | |||||||||||||||||||||||||
Undisbursed loan proceeds |
(32,690 | ) | (54,187 | ) | (68,457 | ) | (85,897 | ) | (60,014 | ) | ||||||||||||||||||||||||||||||
Allowance for loan losses |
(17,028 | ) | (12,208 | ) | (11,774 | ) | (12,574 | ) | (12,090 | ) | ||||||||||||||||||||||||||||||
Deferred fees and costs, net |
78 | 996 | 2,569 | 3,409 | 3,470 | |||||||||||||||||||||||||||||||||||
Total loans receivable, net |
$ | 1,506,056 | $ | 1,829,053 | $ | 1,994,556 | $ | 2,024,325 | $ | 1,990,492 | ||||||||||||||||||||||||||||||
44
Table of Contents
The following table presents a summary of the Companys activity in loans receivable for the
periods indicated.
For the year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance outstanding at beginning of period |
$ | 1,829,053 | $ | 1,994,556 | $ | 2,024,325 | ||||||
Originations: |
||||||||||||
One- to four-family loans (1) |
61,368 | 58,998 | 88,878 | |||||||||
Multi-family loans |
11,689 | 78,613 | 58,701 | |||||||||
Commercial real estate loans |
28,138 | 130,578 | 141,603 | |||||||||
Total mortgage loan originations |
101,195 | 268,189 | 289,182 | |||||||||
Consumer loans |
76,854 | 108,584 | 119,319 | |||||||||
Commercial business loans |
38,002 | 34,467 | 45,862 | |||||||||
Total originations |
216,051 | 411,240 | 454,363 | |||||||||
Purchases of one- to four-family mortgage loans |
2,658 | 26,138 | 76,619 | |||||||||
Principal payments and repayments: |
||||||||||||
Mortgage loans |
(358,705 | ) | (422,728 | ) | (359,296 | ) | ||||||
Consumer loans |
(139,430 | ) | (150,069 | ) | (171,007 | ) | ||||||
Commercial business loans |
(35,609 | ) | (38,628 | ) | (44,134 | ) | ||||||
Total principal payments and repayments |
(533,744 | ) | (611,425 | ) | (574,437 | ) | ||||||
Transfers to foreclosed properties, real
estate owned,
and repossessed assets |
(23,721 | ) | (3,719 | ) | (3,724 | ) | ||||||
Net change in undisbursed loan proceeds,
allowance
for loan losses, and deferred fees and costs |
15,759 | 12,263 | 17,410 | |||||||||
Total loans receivable, net |
$ | 1,506,056 | $ | 1,829,053 | $ | 1,944,556 | ||||||
(1) | Excludes one- to four-family loans originated for sale. |
The following table presents the contractual maturity of the Companys construction and development
loans and its commercial business loans at December 31, 2009. The table does not include the
effect of prepayments or scheduled principal amortization.
At December 31, 2009 | ||||||||||||
Construction and | ||||||||||||
Commercial | Development | |||||||||||
Business Loans | Loans | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Amounts due: |
||||||||||||
Within one year or less |
$ | 19,007 | $ | 56,740 | $ | 75,747 | ||||||
After one year through five years |
29,215 | 14,214 | 43,429 | |||||||||
After five years |
3,945 | 24,919 | 28,864 | |||||||||
Total due after one year |
33,160 | 39,133 | 72,293 | |||||||||
Total commercial and construction loans |
$ | 52,167 | $ | 95,873 | $ | 148,040 | ||||||
The following table presents, as of December 31, 2009, the dollar amount of the Companys
construction and development loans and its commercial loans due after one year and whether these
loans have fixed interest rates or adjustable interest rates.
Due After One Year | ||||||||||||
Adjustable | ||||||||||||
Fixed Rate | Rate | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Commercial business loans |
$ | 23,329 | $ | 9,680 | $ | 33,009 | ||||||
Construction and development loans |
20,393 | 18,740 | 39,133 | |||||||||
Total loans due after one year |
$ | 43,722 | $ | 28,420 | $ | 72,142 | ||||||
45
Table of Contents
Goodwill The Company recorded goodwill as a result of its acquisitions of two other
financial institutions in 1997 and 2000. The Company analyzes goodwill annually for impairment or
more frequently when, in the judgment of management, an event has occurred that may indicate that
additional analysis is required. In this process, the Company compares its estimated fair value to
its market capitalization to determine the appropriateness of the Companys fair value.
Significant management judgment is required in this process. If goodwill is determined to be
impaired, it will be expensed in the period in which it becomes impaired.
The Company performed an annual impairment analysis during the third quarter of 2009 and determined
that its goodwill was not impaired at that time. After the Company had completed this analysis,
the price of its common stock declined significantly, ending the year at $6.93 per share or
approximately 79% of book value per share. As a result, the Company evaluated whether an event had
occurred that would require it to analyze goodwill for impairment as of December 31, 2009. Based
on an analysis of the Companys financial condition, results of operations, asset quality, capital,
and liquidity, as well as recent merger and acquisition activity for financial institutions,
management concluded that it was probable that the Companys fair value exceeded its book value on
December 31, 2009. As such, management believes the Companys goodwill was not impaired as of
December 31, 2009. The Companys stock has continued to decline subsequent to December 31, 2009.
Management continues to monitor conditions for events that could result in an impairment of the
Companys goodwill. Management can provide no assurances that future events will not occur that
could result in an impairment of goodwill.
Other Intangible Assets Other intangible assets are composed of core deposit base intangibles
recorded as a result of the acquisitions mentioned in the previous paragraph. Core deposit base
intangibles are amortized over their expected life and evaluated for impairment if facts and
circumstances indicate they may be impaired.
Mortgage Servicing Rights The carrying value of the Companys MSRs was $6.9 million at December
31, 2009, compared to $3.7 million at December 31, 2008, net of valuation allowances of $287,000
and $822,000, respectively. The increase in net carrying value was principally the result of the
Companys increased origination and sale of fixed-rate, one- to four-family loans on a servicing
retained basis, as previously described. As of December 31, 2009, the Company serviced $1.0
billion in loans for third-party investors compared to $728.4 million at December 31, 2008. For
additional information, refer to Results of OperationsNon-Interest Income, above, and Critical
Accounting PoliciesMortgage Servicing Rights, below, as well as Item 1. BusinessLending
Activities, above.
Other Assets Other assets consist of the following items on the dates indicated:
At December 31 | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Accrued interest receivable: |
||||||||
Mortgage-related securities |
$ | 4,651 | $ | 6,669 | ||||
Investment securities |
1,875 | 1,734 | ||||||
Loans receivable |
6,795 | 8,130 | ||||||
Total accrued interest receivable |
13,321 | 16,533 | ||||||
Bank owned life insurance |
53,295 | 51,261 | ||||||
Premises and equipment |
51,715 | 52,209 | ||||||
Federal Home Loan Bank stock, at cost |
46,092 | 46,092 | ||||||
Foreclosed properties and repossessed assets |
17,689 | 4,768 | ||||||
Prepaid FDIC insurance premiums |
12,521 | | ||||||
Other assets |
28,357 | 29,763 | ||||||
Total other assets |
$ | 222,990 | $ | 200,626 | ||||
The Companys foreclosed properties and repossessed assets increased to $17.7 million at December
31, 2009, compared to $4.8 million at December 31, 2008. This increase was caused by the transfers
to foreclosed real estate described in Results of OperationsProvisions for Loan Losses, above.
Also contributing was a general deterioration in economic conditions in 2009 that resulted in
increased foreclosure and repossession actions on smaller one- to four-family and consumer loans.
Management expects this trend to continue in the near term.
46
Table of Contents
The Companys investment in the common stock of the FHLB of Chicago did not change in 2009. The
FHLB of Chicago requires that its members own its common stock as a condition for borrowing; the
stock is redeemable at par. In 2007 the FHLB of Chicago suspended the payment of dividends on its
common stock. This suspension was due to the FHLB of Chicago entering into a memorandum of
understanding with its primary regulator the Federal Housing Finance Board (FHFB) which among
other things restricted the dividends that the FHLB of Chicago can pay without prior approval of
the FHFB. Management is unable to determine at this time when, or if, the FHLB of Chicago will
resume payment of dividends on its common stock.
The Companys investment in the common stock of the FHLB of Chicago is carried at cost (par value)
and is periodically reviewed for impairment. Investments in FHLB common stock are considered to be
long-term investments under GAAP. Accordingly, the evaluation of FHLB common stock for impairment
is based on managements assessment of the ultimate recoverability at the stocks par value rather
than by temporary declines in its value. Based on a review of the FHLB of Chicagos results of
operations, capital, liquidity, commitments, and other activities during 2009, as well as the
continued status of the FHLB System as a government-sponsored entity, management concluded that the
Companys FHLB stock was not impaired as of December 31, 2009. However, this conclusion is
subject to numerous factors outside the Companys control, including, but not limited to, future
legislative or regulatory changes and/or adverse economic developments that could have a negative
impact on the Companys investment in the common stock of the FHLB of Chicago. Accordingly, a
future determination of impairment could result in significant losses being recorded through
earnings in future periods.
BOLI is long-term life insurance on the lives of certain current and past employees where the
insurance policy benefits and ownership are retained by the employer. Its cash surrender value is
an asset that the Company uses to partially offset the future cost of employee benefits. The cash
value accumulation on BOLI is permanently tax deferred if the policy is held to the insured
persons death and certain other conditions are met. The increase in BOLI in 2009 was a result of
the increase in the accumulated cash value of the insurance policies during the period.
Refer to Results of OperationsNon-Interest Expense, above, for a discussion of prepaid FDIC
insurance premiums.
Deposit Liabilities Deposit liabilities decreased by $9.2 million or 0.4% during the twelve
months ended December 31, 2009, to $2.14 billion compared to $2.13 billion at December 31, 2008.
Core deposits, consisting of checking, savings, and money market accounts, increased by $53.2
million or 6.7% during the year while certificates of deposit declined by a $44.0 million or 3.3%.
During 2009 the Company aggressively reduced the rates it offers on its certificates of deposit
and certain other deposit accounts in an effort to manage its overall liquidity position, which
resulted in the decline in certificates of deposit. As a result of these efforts, the Companys
weighted average cost of deposits declined by 94 basis points during the twelve months ended
December 31, 2009.
47
Table of Contents
The following table presents the distribution of the Companys deposit accounts at the dates
indicated by dollar amount and percent of portfolio, and the weighted average rate.
At December 31 | ||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Percent | Weighted | Percent | Weighted | Percent | Weighted | |||||||||||||||||||||||||||||||
of Total | Average | of Total | Average | of Total | Average | |||||||||||||||||||||||||||||||
Deposit | Nominal | Deposit | Nominal | Deposit | Nominal | |||||||||||||||||||||||||||||||
Amount | Liabilities | Rate | Amount | Liabilities | Rate | Amount | Liabilities | Rate | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Regular savings |
$ | 196,983 | 9.22 | % | 0.06 | % | $ | 185,003 | 8.68 | % | 0.19 | % | $ | 183,756 | 8.70 | % | 0.45 | % | ||||||||||||||||||
Interest-bearing demand |
211,448 | 9.89 | 0.04 | 180,269 | 8.46 | 0.11 | 170,971 | 8.09 | 0.21 | |||||||||||||||||||||||||||
Money market savings |
345,144 | 16.14 | 0.58 | 340,631 | 16.00 | 1.57 | 280,097 | 13.27 | 3.03 | |||||||||||||||||||||||||||
Non-interest bearing demand |
94,619 | 4.43 | 0.00 | 89,106 | 4.18 | 0.00 | 97,506 | 4.61 | 0.00 | |||||||||||||||||||||||||||
Total demand accounts |
848,194 | 39.68 | 0.26 | 795,009 | 37.32 | 0.74 | 732,330 | 34.67 | 1.32 | |||||||||||||||||||||||||||
Certificates of deposit: |
||||||||||||||||||||||||||||||||||||
With original maturities of: |
||||||||||||||||||||||||||||||||||||
Three months or less |
17,645 | 0.83 | 0.63 | 19,791 | 0.93 | 1.78 | 45,199 | 2.17 | 3.97 | |||||||||||||||||||||||||||
Over three to 12 months |
239,660 | 11.21 | 1.60 | 337,054 | 15.84 | 2.99 | 899,167 | 43.15 | 5.06 | |||||||||||||||||||||||||||
Over 12 to 24 months |
812,154 | 37.99 | 2.62 | 731,884 | 34.40 | 4.04 | 235,670 | 11.31 | 4.61 | |||||||||||||||||||||||||||
Over 24 to 36 months |
46,550 | 2.18 | 2.39 | 46,320 | 2.18 | 2.58 | 57,703 | 2.77 | 3.51 | |||||||||||||||||||||||||||
Over 36 to48 months |
5,126 | 0.24 | 4.38 | 6,583 | 0.31 | 4.30 | 4,895 | 0.23 | 3.68 | |||||||||||||||||||||||||||
Over 48 to 60 months |
168,179 | 7.87 | 3.99 | 191,636 | 9.02 | 4.25 | 118,489 | 5.70 | 4.12 | |||||||||||||||||||||||||||
Over 60months |
| 0.00 | 0.00 | | 0.00 | 0.00 | | 0.00 | 0.00 | |||||||||||||||||||||||||||
Total certificates of deposit |
1,289,314 | 60.32 | 2.58 | 1,333,268 | 62.68 | 3.72 | 1,361,123 | 65.33 | 4.79 | |||||||||||||||||||||||||||
Total deposit liabilities |
$ | 2,137,508 | 100.00 | % | 1.66 | % | $ | 2,128,277 | 100.00 | % | 2.61 | % | $ | 2,093,453 | 100.00 | % | 3.59 | % | ||||||||||||||||||
At December 31, 2009, the Company had $313.1 million in certificates of deposit with balances
of $100,000 and over maturing as follows:
Amount | ||||
(In thousands) | ||||
Maturing in: |
||||
Three months or less |
$ | 71,260 | ||
Over three months through six months |
59,508 | |||
Over six months through 12 months |
118,830 | |||
Over 12 months through 24 months |
30,519 | |||
Over 24 months through 36 months |
4,028 | |||
Over 36 months |
28,908 | |||
Total certificates of deposits greater than $100,000 |
$ | 313,053 | ||
The following table presents the Companys activity in its deposit liabilities for the periods
indicated:
For the Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in thousands) | ||||||||||||
Total deposit liabilities at beginning of period |
$ | 2,128,277 | $ | 2,112,968 | $ | 2,149,523 | ||||||
Net withdrawals |
(31,341 | ) | (58,499 | ) | (121,106 | ) | ||||||
Interest credited, net of penalties |
40,572 | 73,808 | 65,036 | |||||||||
Total deposit liabilities at end of period |
$ | 2,137,508 | $ | 2,128,277 | $ | 2,093,453 | ||||||
Borrowings The Companys borrowings consist of advances from the FHLB, which decreased slightly
during the year as a result of the repayment and/or periodic amortization of a small number of
advances. The Companys FHLB borrowings typically carry fixed rates of interest, have stated
maturities beyond 2011, and are generally subject to significant prepayment penalties if repaid
prior to their stated maturity. In addition, substantially all of the Companys advances have
redemption features that permit the FHLB of Chicago to redeem the advances at its option on a
quarterly basis. While the Company expects that it would be able to refinance any or all of its
current borrowings with the FHLB of Chicago as they mature or are redeemed, it cannot provide any
assurances that it could do so nor can it provide any assurance as to the terms at which any such
refinancing could be made. For additional information refer to Item 1. BusinessBorrowings.
48
Table of Contents
The following table sets forth certain information regarding the Companys borrowings at the end of
and during the periods indicated:
At or For the Year Ended December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance outstanding at end of year: |
||||||||||||||||||||
FHLB term advances |
$ | 906,979 | $ | 907,971 | $ | 912,459 | $ | 705,025 | $ | 765,796 | ||||||||||
Overnight borrowings from FHLB |
| | | | | |||||||||||||||
Weighted average interest rate at end of year: |
||||||||||||||||||||
FHLB term advances |
4.26 | % | 4.26 | % | 4.27 | % | 4.46 | % | 3.58 | % | ||||||||||
Overnight borrowings from FHLB |
| | | | | |||||||||||||||
Maximum amount outstanding during the year: |
||||||||||||||||||||
FHLB term advances |
$ | 907,971 | $ | 912,459 | $ | 921,781 | $ | 841,835 | $ | 909,920 | ||||||||||
Overnight borrowings from FHLB |
| 5,000 | 52,100 | 38,000 | 186,000 | |||||||||||||||
Other borrowings |
| 1,103 | | | 500 | |||||||||||||||
Average amount outstanding during the year: |
||||||||||||||||||||
FHLB term advances |
$ | 907,443 | $ | 910,517 | $ | 865,540 | $ | 782,619 | $ | 811,937 | ||||||||||
Overnight borrowings from FHLB |
| 22 | 3,570 | 3,242 | 50,712 | |||||||||||||||
Other borrowings |
| 3 | | | 1 | |||||||||||||||
Weighted average interest rate during the year: |
||||||||||||||||||||
FHLB term advances |
4.32 | % | 4.34 | % | 4.34 | % | 3.86 | % | 3.25 | % | ||||||||||
Overnight borrowings from FHLB |
| 3.75 | % | 5.56 | % | 5.40 | % | 2.95 | % | |||||||||||
Other borrowings |
| 1.92 | % | | | 3.04 | % |
Other Liabilities Other liabilities were $59.7 million at December 31, 2009, compared to
$49.0 million at December 31, 2008. Substantially all of this increase was caused by payables to
securities brokers for securities purchased in December 2009 that settled in January 2010.
Shareholders Equity Shareholders equity increased slightly from $399.6 million at December 31,
2008, to $402.5 million at the end of 2009. During 2009 the positive effects of the Companys
earnings and a decline in its accumulated other comprehensive loss were partially offset by
dividend payments and stock repurchases. Accumulated other comprehensive loss declined for
reasons described in Financial ConditionSecurities Available-for-Sale, above.
During 2009, the Company repurchased 1.7 million shares of its common stock at an average price of
$8.30 per share. From January 1, 2010, through February 8, 2010, the Company repurchased 690,800
shares of its common stock at an average price of $6.55 per share. As a result of these
repurchases, no shares remain available for repurchase under the authorization that the Companys
board of directors approved on November 3, 2009. Quarterly cash dividends of $0.09 per share were
paid in each of the first three quarters of 2009 and $0.07 per share was paid in the last quarter
of the year. The dividend payout ratio was 109.5% of net income during the twelve months ended
December 31, 2009. On February 1, 2010, the Companys board of directors announced that it had
declared a $0.07 per share dividend payable on March 1, 2010, to shareholders of record on February
11, 2010. For additional information relating to the Companys shareholders equity, refer to
Item 1. BusinessShareholders Equity, above.
The Companys ratio of total shareholders equity to total assets was 11.46% at December 31, 2009,
compared to 11.45% at December 31, 2008. For information relating to the Banks regulatory
capital, refer to Note 8. Shareholders Equity in Item 8. Financial Statements and
Supplementary Data.
The payment of dividends or the repurchase of common stock by the Company is highly dependent on
the ability of the Bank to pay dividends or otherwise distribute capital to the Company. Such
payments are subject to any requirements imposed by law or regulations and to the interpretations
thereof by the OTS. For further information about factors which could affect the Companys payment
of dividends, refer to Item 1. BusinessRegulation and Supervision, as well as Item 5. Market
for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity
Securities, above.
49
Table of Contents
Asset Quality The following table presents information regarding non-accrual mortgage, consumer
loans, commercial business loans, accruing loans delinquent 90 days or more, and foreclosed
properties and repossessed assets as of the dates indicated.
At December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual mortgage loans: |
||||||||||||||||||||
One- to four-family |
$ | 12,126 | $ | 8,185 | $ | 2,446 | $ | 1,594 | $ | 1,764 | ||||||||||
Multi-family |
3,357 | 13,255 | 3,702 | 6,621 | | |||||||||||||||
Commercial real estate |
23,699 | 8,420 | 5,103 | 3,289 | 450 | |||||||||||||||
Construction and development |
| | | | | |||||||||||||||
Total non-accrual mortgage loans |
39,182 | 29,860 | 11,251 | 11,504 | 2,214 | |||||||||||||||
Non-accrual consumer loans: |
||||||||||||||||||||
Secured by real estate |
1,433 | 759 | 585 | 407 | 322 | |||||||||||||||
Other consumer loans |
212 | 400 | 345 | 396 | 294 | |||||||||||||||
Total non-accrual consumer loans |
1,645 | 1,159 | 930 | 803 | 616 | |||||||||||||||
Non-accrual commercial business loans |
923 | 1,494 | 159 | 1,625 | 2,517 | |||||||||||||||
Total non-accrual loans |
41,750 | 32,513 | 12,340 | 13,932 | 5,347 | |||||||||||||||
Accruing loans delinquent 90 days or more |
834 | 576 | 602 | 565 | 487 | |||||||||||||||
Total non-performing loans |
42,584 | 33,089 | 12,942 | 14,497 | 5,834 | |||||||||||||||
Foreclosed real estate and repossessed assets |
17,689 | 4,768 | 3,687 | 1,231 | 708 | |||||||||||||||
Total non-performing assets |
$ | 60,273 | $ | 37,857 | $ | 16,629 | $ | 15,728 | $ | 6,542 | ||||||||||
Non-performing loans to total loans |
2.83 | % | 1.81 | % | 0.65 | % | 0.72 | % | 0.29 | % | ||||||||||
Non-performing assets to total assets |
1.72 | % | 1.08 | % | 0.48 | % | 0.46 | % | 0.19 | % | ||||||||||
Interest income that would have been
recognized if non-accrual loans had been
current |
$ | 2,671 | $ | 2,519 | $ | 1,002 | $ | 652 | $ | 1,159 |
The increase in the Companys non-performing loans in recent years was caused by a general
deterioration in economic conditions and increased unemployment that resulted in increased stress
on borrowers and increased loan delinquencies. A substantial portion of the increase in 2009 was
caused by the default of $7.3 million in loans to three unrelated borrowers that are secured by
office properties. The Company recorded an aggregate loss provision of $3.3 million on these
loans in 2009 based on updated appraisals and expects to complete foreclosure on these loans in
2010. No additional losses are anticipated on these loans at this time, although there can be no
assurances.
Also contributing to the increase in non-performing loans in 2009 was a $2.5 million loan secured
by townhomes, a $2.3 million loan secured by a completed office condominium project, and a $1.1
million loan secured by improved land, all of which defaulted during the year. The Company
continues to work with these borrowers and does not believe the loans were collateral dependent as
of December 31, 2009, due to the existence of credible prospects which could return these loans to
performing status. As such, management does not expect a loss on these loan relationships at this
time, although there can be no assurance.
Management also continues to closely monitor a $2.2 million loan secured by a retail building and
improved land that defaulted in 2009 and that management concluded was collateral dependent. The
Company established a $450,000 loss allowance on this loan as of December 31, 2009, based on an
internal management evaluation of the original appraisal. The Company does not anticipate an
additional loss on this loan relationships at this time, although there can be no assurances.
Finally, the increase in non-performing loans in 2009 was also caused by a $6.2 million increase in
smaller non-performing multi-family and commercial real estate loans, a $3.9 million increase in
non-performing one- to four-family residential loans, and a $486,000 increase in non-performing
consumer loans. The increases were due primarily to a general decline in economic conditions, as
previously discussed.
The above developments were partially offset by the Companys acceptance of a deed in lieu of
foreclosure on a $9.1 million loan secured by a completed condominium development project that
defaulted in 2008, as described in Results of OperationsProvision for (Recovery of) Loan
Losses, above. In addition, the Company also
50
Table of Contents
accepted deeds in lieu of foreclosure on three
other large loans that had an aggregate balance of $7.1 million (two of
which were mentioned in Results of OperationsProvision for (Recovery of) Loan Losses, above),
as well as the foreclosure and/or repossession of collateral on numerous smaller loans during 2009.
The collateral for all of these loans was transferred from loans to foreclosed properties and
repossessed assets during 2009, net of their related loss allowances. Finally, non-performing
commercial business loans declined by $571,000 or 38.2% during the twelve months ended December 31,
2009.
Management continues to closely monitor five loans to related borrowers that aggregated $9.5
million. These loans are secured by an office building, two apartment complexes, and developed
land. Although three of these loans aggregating $6.7 million were performing in accordance with
their loan terms as of December 31, 2009, they are cross-collateralized with the two remaining
loans that were classified as non-performing as of December 31, 2009 and 2008. During 2009 the
Company determined that it was possible that these loans will become collateral dependent and that,
due to the cross-collateralization, it was prudent to establish a provision for loan loss of $2.1
million on the entire loan relationship. This loss, which was based on an internal management
evaluation of the original appraisal, was in addition to $500,000 that was recorded against one of
these loans in an earlier year. The Company does not anticipate an additional loss on this loan
relationships at this time, although there can be no assurances.
The increase in non-performing loans in 2008 compared to 2007 was due in part to a $9.1
million loan on a completed condominium development project that defaulted in that year (as
described in a preceding paragraph). Also contributing to the increase in 2008 was the
aforementioned deterioration in economic conditions which caused a $5.4 million increase in
non-performing one- to four-family mortgage loans, as well as smaller increases in non-performing
consumer and commercial business loans.
Management believes non-performing loans and assets, expressed as a percentage of total loans and
assets, compare favorably with national averages for financial institutions, due in part to the
Companys conservative loan underwriting standards. In addition, management believes real estate
values in Wisconsin have not been as negatively impacted by recent economic developments as certain
other regions of the United States.
Loans considered to be impaired as defined by the accounting standards at December 31, 2009,
totaled $42.6 million as compared to $33.1 million at December 31, 2008, $20.2 million at December
31, 2007, $17.3 million at December 31, 2006, and $9.7 million at December 31, 2005. The average
of impaired loans for the year ended December 31, 2009, was $40.2 million and the interest received
and recognized on these loans was $196,000.
51
Table of Contents
The following table presents the activity in the Companys allowance for loan losses at or for the
periods indicated.
At or for the Years Ended December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 12,208 | $ | 11,774 | $ | 12,574 | $ | 12,090 | $ | 13,923 | ||||||||||
Provision for (recovery of) loan losses |
12,413 | 1,447 | (272 | ) | 632 | 541 | ||||||||||||||
Charge-offs: |
||||||||||||||||||||
Mortgage loans |
(5,829 | ) | (613 | ) | (178 | ) | (44 | ) | | |||||||||||
Consumer loans |
(526 | ) | (411 | ) | (412 | ) | (271 | ) | (327 | ) | ||||||||||
Commercial business loans |
(1,291 | ) | (34 | ) | (33 | ) | (52 | ) | (2,104 | ) | ||||||||||
Total charge-offs |
(7,646 | ) | (1,058 | ) | (623 | ) | (367 | ) | (2,431 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Mortgage loans |
20 | | | | | |||||||||||||||
Consumer loans |
33 | 45 | 95 | 81 | 49 | |||||||||||||||
Commercial business loans |
| | | 138 | 8 | |||||||||||||||
Total recoveries |
53 | 45 | 95 | 219 | 57 | |||||||||||||||
Net charge-offs recoveries |
(7,593 | ) | (1,013 | ) | (528 | ) | (148 | ) | (2,374 | ) | ||||||||||
Balance at end of period |
$ | 17,028 | $ | 12,208 | $ | 11,774 | $ | 12,574 | $ | 12,090 | ||||||||||
Net charge-offs to average loans |
0.45 | % | 0.05 | % | 0.03 | % | 0.01 | % | 0.12 | % | ||||||||||
Allowance for loan losses to total loans |
1.13 | % | 0.67 | % | 0.59 | % | 0.62 | % | 0.61 | % | ||||||||||
Allowance for loan losses to
non-performing loans |
39.99 | % | 36.89 | % | 90.98 | % | 86.74 | % | 207.23 | % |
The increases in the Companys allowance for loan losses since 2007 were caused by the net effects
of the loan loss provisions and charge-off activity described in previous paragraphs (refer to
Results of OperationsProvision for (Recovery of) Loan Losses, above). Increases in
non-performing loans, as well as managements general concerns regarding continued deterioration in
economic conditions, declines in real estate values, and a general increase in stressed loans in
the Companys loan portfolio, have resulted in increased provisions for loan losses in 2009 and
2008. The Companys aforementioned acceptance of deeds in lieu of foreclosure on four large loans
during the 2009, as well as a general increase in foreclosure and repossession activity related to
smaller loans in both 2009 and 2008, have resulted in increased charge-off activity in recent
years. Management is unable to determine at this time if or when these trends will reverse.
The Companys ratio of allowance for loan losses to total loans increased in 2009 due to an
increase in the dollar amount of the allowance for loan loss, as previously described, offset in
part by an overall decline in total loans receivable during the year. The Companys ratio of
allowance for loan losses as a percent of non-performing loans was lower at the end of 2009 and
2008 than it was in prior years as a result of the net effects of the loan loss provision and
charge-off activity described above, as well as an increase in non-performing loans.
Although management believes the Companys present level of allowance for loan losses is adequate,
there can be no assurances that future adjustments to the allowance will not be necessary, which
could adversely affect the Companys results of operations. For additional discussion, refer to
Asset QualityAllowance for Loan Losses in Item 1. Business, above, and Critical Accounting
PoliciesAllowance for Loan Losses, below.
52
Table of Contents
The following table represents the Companys allocation of its allowance for loan losses by loan
category on the dates indicated:
At December 31 | ||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
Percentage | Percentage | Percentage | Percentage | Percentage | ||||||||||||||||||||||||||||||||||||
of Loans | of Loans | of Loans | of Loans | of Loans | ||||||||||||||||||||||||||||||||||||
in Category | in Category | in Category | in Category | in Category | ||||||||||||||||||||||||||||||||||||
to Total | to Total | to Total | to Total | to Total | ||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Loan category: |
||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
One- to four-family |
$ | 2,823 | 16.58 | % | $ | 3,038 | 47.43 | % | $ | 3,324 | 51.12 | % | $ | 3,531 | 53.03 | % | $ | 3,294 | 50.94 | % | ||||||||||||||||||||
Other mortgage loans |
10,036 | 58.94 | 5,710 | 32.11 | 4,040 | 27.96 | 3,049 | 24.16 | 2,424 | 23.61 | ||||||||||||||||||||||||||||||
Total mortgage loans |
12,859 | 75.52 | 8,748 | 79.54 | 7,364 | 79.08 | 6,580 | 77.19 | 5,718 | 74.55 | ||||||||||||||||||||||||||||||
Home equity lines |
1,425 | 8.37 | 473 | 4.59 | 496 | 4.37 | 496 | 4.33 | 483 | 4.29 | ||||||||||||||||||||||||||||||
Other consumer |
819 | 4.81 | 1,652 | 13.25 | 1,770 | 13.95 | 2,060 | 16.02 | 2,118 | 18.38 | ||||||||||||||||||||||||||||||
Commercial loans |
1,925 | 11.30 | 1,335 | 2.62 | 2,144 | 2.60 | 3,438 | 2.46 | 3,771 | 2.78 | ||||||||||||||||||||||||||||||
Total allowance for
loan losses |
$ | 17,028 | 100.00 | % | $ | 12,208 | 100.00 | % | $ | 11,774 | 100.00 | % | $ | 12,574 | 100.00 | % | $ | 12,090 | 100.00 | % | ||||||||||||||||||||
Critical Accounting Policies
There are a number of accounting policies that the Company has established which require a
significant amount of management judgment. A number of the more significant policies are discussed
in the following paragraphs.
Allowance for Loan Losses Establishing the amount of the allowance for loan losses requires the
use of management judgment. The allowance for loan losses is maintained at a level believed
adequate by management to absorb losses inherent in the loan portfolio and is based on the size and
current risk characteristics of the loan portfolio, an assessment of individual problem loans and
pools of homogenous loans, actual loss experience, current economic events in specific industries
and geographical areas, including unemployment levels, and other pertinent factors, including
regulatory guidance and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends, all of which may be
susceptible to significant change. Higher rates of loan defaults than anticipated would likely
result in a need to increase provisions in future years. Loan losses are charged off against the
allowance, while recoveries of amounts previously charged off are credited to the allowance. A
provision for loan losses is charged to operations based on managements periodic evaluation of the
factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at
least quarterly and more often if deemed necessary. If management misjudges a major component of
the allowance and the Company experiences an unanticipated loss, it will likely affect earnings.
Developments affecting loans can also cause the allowance to vary significantly between quarters.
Management consistently challenges itself in the review of the risk components to identify any
changes in trends and their causes.
Other-Than-Temporary Impairment Generally accepted accounting principles require enterprises to
determine whether a decline in the fair value of an individual debt security below its amortized
cost is other than temporary. If the decline is deemed to be other than temporary, the cost basis
of the security must be written down through a charge to earnings. Determination of an
other-than-temporary impairment requires significant management judgment relating to the
probability of future cash flows, the financial condition and near-term prospects of the issuer of
the security, and/or the collateral for the security, the duration and extent of the decline in
fair value, and the ability and intent of the Company to retain the security, among other things.
Future changes in managements assessment of other-than-temporary impairment on its securities
could result in significant charges to earnings in future periods.
Goodwill Goodwill has been recorded as a result of two acquisitions in which the purchase price
exceeded the fair value of tangible and identifiable intangible net assets acquired. Management
analyzes goodwill annually for impairment or more frequently when, in the judgment of management,
an event has occurred that may indicate that additional analysis is required. The analysis of
goodwill for impairment requires the use of significant management
53
Table of Contents
judgment. If goodwill is
determined to be impaired, it would be expensed in the period in which it becomes impaired.
Income Taxes The assessment of the Companys tax assets and liabilities involves the use of
estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements
and federal and state tax codes. There can be no assurance that future events, such as court
decisions, regulatory actions or interpretations, or changes in positions of federal and state
taxing authorities will not differ from managements current assessments. The impact of these
matters could be significant to the consolidated results of operations and reported earnings.
The Company describes all of its significant accounting policies in Note 1. Basis of
Presentation in Item 8. Financial Statements and Supplementary Data.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The Company has various financial obligations, including contractual obligations and commitments,
that may require future cash payments.
The following table presents, as of December 31, 2009, significant fixed and determinable
contractual obligations to third parties by payment date. Further discussion of the nature of each
obligation is included in the referenced note to the Companys Consolidated Financial Statements.
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Deposit liabilities without a
stated maturity (1) |
$ | 848,194 | | | | $ | 848,194 | |||||||||||||
Certificates of deposit (1) |
992,752 | $ | 168,755 | $ | 127,807 | | 1,289,314 | |||||||||||||
Borrowed funds (1) (2) |
| 100,000 | 264 | $ | 806,715 | 906,979 | ||||||||||||||
Operating leases |
974 | 1,444 | 1,212 | 2,898 | 6,528 | |||||||||||||||
Purchase obligations |
1,680 | 3,360 | 3,360 | 8,395 | 16,795 | |||||||||||||||
Deferred retirement plans and
deferred compensation plans |
664 | 2,191 | 2,667 | 8,733 | 14,255 |
(1) | Excludes interest to be paid in the periods indicated. | |
(2) | Includes $856.0 million of borrowings that contain redemption features that permit the FHLB of Chicago to redeem the advances at its option on a quarterly basis. |
The Companys operating lease obligations represent short- and long-term lease and rental payments
for facilities, certain software and data processing and other equipment. Purchase obligations
represent obligations under agreements to purchase goods or services that are enforceable and
legally binding on the Company and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing
of the transaction. The purchase obligation amounts presented above primarily relate to certain
contractual payments for services provided for information technology.
The Company also has obligations under its deferred retirement plan for directors as described in
Note 10. Employee Benefit Plans in Item 8. Financial Statements and Supplementary Data.
54
Table of Contents
The following table details the amounts and expected maturities of significant off-balance sheet
commitments as of December 31, 2009. Further discussion of these commitments is included in the
Note 13. Financial Instruments with Off-Balance Sheet Risk in Item 8. Financial Statements and
Supplementary Data.
Payments Due In | ||||||||||||||||||||
One to | Three to | Over | ||||||||||||||||||
One Year | Three | Five | Five | |||||||||||||||||
Or Less | Years | Years | Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Commitments to extend credit: |
||||||||||||||||||||
Commercial real estate |
$ | 2,163 | | | | $ | 2,163 | |||||||||||||
Residential real estate |
35,792 | | | | 35,792 | |||||||||||||||
Revolving home equity
and credit card lines |
150,424 | | | | 150,424 | |||||||||||||||
Standby letters of credit |
60 | | $ | 41 | $ | 10 | 111 | |||||||||||||
Commercial letters of credit |
18,904 | | | | 18,904 | |||||||||||||||
Unused commercial lines
of credit |
524 | | | | 524 | |||||||||||||||
Net commitments to sell
mortgage loans |
(27,668 | ) | | | | (27,668 | ) |
Commitments to extend credit, including loan commitments, standby letters of credit, unused lines
of credit and commercial letters of credit do not necessarily represent future cash requirements,
since these commitments often expire without being drawn upon.
55
Table of Contents
Quarterly Financial Information
The following table sets forth certain unaudited quarterly data for the periods indicated:
Quarter Ended | ||||||||||||||||
2009 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Interest income |
$ | 41,986 | $ | 39,166 | $ | 35,727 | $ | 34,934 | ||||||||
Interest expense |
22,793 | 21,301 | 20,403 | 19,286 | ||||||||||||
Net interest income |
19,193 | 17,865 | 15,324 | 15,648 | ||||||||||||
Provision for loan losses |
3,161 | 472 | 5,189 | 3,591 | ||||||||||||
Net income after provision
for loan losses |
16,032 | 17,393 | 10,135 | 12,057 | ||||||||||||
Total non-interest income |
9,285 | 7,552 | 8,613 | 5,536 | ||||||||||||
Total non-interest expense |
16,459 | 18,576 | 16,731 | 15,694 | ||||||||||||
Income before income taxes |
8,858 | 6,369 | 2,017 | 1,899 | ||||||||||||
Income taxes |
1,669 | 2,553 | 772 | 424 | ||||||||||||
Net income before non-
controlling interest |
7,189 | 3,816 | 1,245 | 1,475 | ||||||||||||
Net (income) loss
attributable to
non-controlling interest |
(1 | ) | 1 | | | |||||||||||
Net income |
$ | 7,188 | $ | 3,817 | $ | 1,245 | $ | 1,475 | ||||||||
Earnings per share-basic |
$ | 0.15 | $ | 0.08 | $ | 0.03 | $ | 0.03 | ||||||||
Earnings per share-diluted |
$ | 0.15 | $ | 0.08 | $ | 0.03 | $ | 0.03 | ||||||||
Cash dividend paid per share |
$ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.07 | ||||||||
Quarter Ended | ||||||||||||||||
2008 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Interest income |
$ | 45,268 | $ | 44,075 | $ | 44,225 | $ | 43,988 | ||||||||
Interest expense |
28,239 | 25,980 | 25,643 | 24,329 | ||||||||||||
Net interest income |
17,029 | 18,095 | 18,582 | 19,659 | ||||||||||||
Provision for loan losses |
156 | 67 | 1,135 | 89 | ||||||||||||
Net income after provision
for loan losses |
16,873 | 18,028 | 17,447 | 19,570 | ||||||||||||
Total non-interest income |
6,290 | 4,059 | 843 | 6,516 | ||||||||||||
Total non-interest expense |
15,601 | 15,727 | 16,022 | 16,028 | ||||||||||||
Income before income taxes |
7,562 | 6,360 | 2,268 | 10,058 | ||||||||||||
Income taxes |
2,501 | 2,081 | 645 | 3,867 | ||||||||||||
Net income before non-
controlling interest |
5,061 | 4,279 | 1,623 | 6,191 | ||||||||||||
Net loss attributable to non-
controlling interest |
1 | | | 1 | ||||||||||||
Net income |
$ | 5,062 | $ | 4,279 | $ | 1,623 | $ | 6,192 | ||||||||
Earnings per share-basic |
$ | 0.11 | $ | 0.09 | $ | 0.03 | $ | 0.13 | ||||||||
Earnings per share-diluted |
$ | 0.10 | $ | 0.09 | $ | 0.03 | $ | 0.13 | ||||||||
Cash dividend paid per share |
$ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 |
56
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Companys ability to maintain net interest income depends upon earning a higher yield on assets
than the rates it pays on deposits and borrowings. Fluctuations in market interest rates will
ultimately impact both the level of income and expense recorded on a large portion of the Companys
assets and liabilities. Fluctuations in interest rates will also affect the market value of all
interest-earning assets and interest-bearing liabilities, other than those with a very short term
to maturity.
Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature during a given period of time. The
difference, or the interest rate sensitivity gap, provides an indication of the extent to which
the Companys interest rate spread will be affected by changes in interest rates. Refer to Gap
Analysis below. Interest rate sensitivity is also measured through analysis of changes in the
present value of the Companys equity. Refer to Present Value of Equity, below.
Due to the nature of the Companys operations, it is not directly subject to foreign currency
exchange or commodity price risk. Instead, the Companys real estate loan portfolio, which is
concentrated in Wisconsin, is subject to risks associated with the state and local economies.
To achieve the objectives of managing interest rate risk, the Companys executive management meets
periodically to discuss and monitor the market interest rate environment and provides reports to
the board of directors. Management seeks to coordinate asset and liability decisions so that,
under changing interest rate scenarios, the Companys earnings will remain within an acceptable
range. Thee primary objectives of the Companys interest rate management strategy are to:
| maintain earnings and capital within self-imposed parameters over a range of possible interest rate environments; | ||
| coordinate interest rate risk policies and procedures with other elements of the Companys business plan, all within the context of the current business environment and regulatory capital and liquidity requirements; and | ||
| manage interest rate risk in a manner consistent with the approved guidelines and policies set by the Companys board of directors. |
Historically, the Companys lending activities have been concentrated in one- to four-family first
and second mortgage loans. The Companys primary source of funds has been deposits and borrowings,
consisting primarily of certificates of deposit and borrowings which have substantially shorter
terms to maturity than the loan portfolio. The Company has employed certain strategies to manage
the interest rate risk inherent in the asset/liability mix, including:
| emphasizing the origination of adjustable rate and certain 15-year fixed rate mortgage loans for portfolio, and selling certain 15, 20, and 30 year fixed rate mortgage loans in the secondary market; | ||
| maintaining a significant level of investment securities and mortgage-related securities with a weighted average life of less than eight years or with interest rates that reprice in less than five years; and | ||
| managing deposits and borrowings to provide stable funding. |
Management believes that the frequent repricing of adjustable rate mortgage loans, the cash flows
from 15-year fixed rate real estate loans, the shorter duration of consumer loans, and adjustable
rate features and shorter durations of investment securities, reduce the Companys interest rate
risk exposure to acceptable levels.
Gap Analysis Repricing characteristics of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are interest rate sensitive and by monitoring a
financial institutions interest rate sensitivity gap. An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference between the amount of
interest-
57
Table of Contents
earning assets maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets maturing or repricing
within a specific time period exceeds the amount of interest-bearing liabilities maturing or
repricing within that specific time period. A gap is considered negative when the amount of
interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount
of interest-earning assets maturing or repricing within the same period. During a period of rising
interest rates, a financial institution with a negative gap position would be expected, absent the
effects of other factors, to experience a greater increase in the costs of its liabilities relative
to the yields of its assets and thus a decrease in the institutions net interest income. An
institution with a positive gap position would be expected, absent the effect of other factors, to
experience the opposite result. Conversely, during a period of falling interest rates, a negative
gap would tend to result in an increase in net interest income while a positive gap would tend to
reduce net interest income.
The table on the next page presents the amounts of the Companys interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2009, which management anticipates to
reprice or mature in each of the future time periods shown. The information presented in the
following table is based on the following assumptions:
| Investment securitiesbased upon contractual maturities and if applicable, call dates. $177.8 million in investment securities with maturities beyond one year have been classified as due within one year based on their call dates. These investments may not be called prior to their stated maturities. $396.3 million in investment securities with call dates within one year have been classified as due beyond one year according to their stated maturities. These investments may be called prior to their stated maturities. | ||
| Mortgage-related securitiesbased upon known repricing dates (if applicable) and an independent outside source for determining estimated prepayment speeds. Actual cash flows may differ substantially from these assumptions. | ||
| Loansbased upon contractual maturities, repricing date, if applicable, scheduled repayments of principal, and projected prepayments of principal based upon the Companys historical experience or anticipated prepayments. Actual cash flows may differ substantially from these assumptions. | ||
| Deposit liabilitiesbased upon contractual maturities and the Companys historical decay rates. Actual cash flows may differ from these assumptions. | ||
| Borrowingsbased upon final maturity. However, $856.0 million of borrowings classified as due beyond one year contain a redemption option which has not been reflected in the analysis. These borrowings could be redeemed at the option of the lender prior to their stated maturity (refer to Financial ConditionBorrowings, above). |
58
Table of Contents
At December 31, 2009 | ||||||||||||||||||||||||
Within | Three to | More than | More than | |||||||||||||||||||||
Three | Twelve | 1 Year to | 3 Years | Over 5 | ||||||||||||||||||||
Months | Months | 2 Years | 5 Years | Years | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable: |
||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||
Permanent: |
||||||||||||||||||||||||
Fixed |
$ | 46,078 | $ | 112,801 | $ | 173,621 | $ | 87,722 | $ | 103,030 | $ | 523,252 | ||||||||||||
Adjustable |
82,353 | 277,815 | 197,222 | 34,157 | 243 | 591,790 | ||||||||||||||||||
Construction: |
||||||||||||||||||||||||
Fixed |
8,543 | 9,063 | 6,949 | 351 | 4,331 | 29,237 | ||||||||||||||||||
Adjustable |
22,531 | 6,661 | | 12,707 | | 41,899 | ||||||||||||||||||
Consumer loans |
102,124 | 51,772 | 66,410 | 29,094 | 24,731 | 274,131 | ||||||||||||||||||
Commercial business loans |
20,187 | 15,991 | 14,531 | 497 | 38 | 51,244 | ||||||||||||||||||
Interest-earning deposits |
189,962 | | | | | 189,962 | ||||||||||||||||||
Investment securities |
21,545 | 177,800 | 94,884 | 225,350 | 95,991 | 615,570 | ||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||
Fixed |
29,009 | 75,065 | 123,040 | 120,663 | 257,087 | 604,864 | ||||||||||||||||||
Adjustable |
114,724 | 147,743 | | | | 262,467 | ||||||||||||||||||
Other interest-earning assets |
46,092 | | | | 46,092 | |||||||||||||||||||
Total interest-earning assets |
683,148 | 874,711 | 676,657 | 510,541 | 485,451 | 3,230,508 | ||||||||||||||||||
Non-interest-bearing and interest-bearing liabilities: |
||||||||||||||||||||||||
Non-interest-bearing demand accounts |
303 | 902 | 2,361 | 2,300 | 85,919 | 91,785 | ||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposit liabilities: |
||||||||||||||||||||||||
Interest-bearing demand accounts |
706 | 2,105 | 5,513 | 5,369 | 200,590 | 214,283 | ||||||||||||||||||
Regular savings accounts |
1,053 | 3,109 | 7,934 | 7,448 | 177,439 | 196,983 | ||||||||||||||||||
Money market accounts |
345,144 | | | | | 345,144 | ||||||||||||||||||
Certificates of deposit |
315,766 | 699,380 | 146,360 | 127,807 | | 1,289,313 | ||||||||||||||||||
Advance payments by borrowers
for taxes and insurance |
| 2,508 | | | | 2,508 | ||||||||||||||||||
Borrowings |
258 | 786 | 102,254 | 2,680 | 801,001 | 906,979 | ||||||||||||||||||
Total interest-bearing liabilities |
663,230 | 708,790 | 264,422 | 145,604 | 1,264,949 | 3,046,995 | ||||||||||||||||||
Interest rate sensitivity gap |
$ | 19,918 | $ | 165,921 | $ | 412,235 | $ | 364,937 | $ | (779,498 | ) | $ | 183,513 | |||||||||||
Cumulative interest rate sensitivity gap |
$ | 19,918 | $ | 185,839 | $ | 598,074 | $ | 963,011 | $ | 183,513 | ||||||||||||||
Cumulative interest rate sensitivity gap
as a percent of total assets |
0.57 | % | 5.29 | % | 17.03 | % | 27.42 | % | 5.23 | % | ||||||||||||||
Cumulative interest-earning assets as a
percentage of interest-bearing
liabilities |
103.00 | % | 113.54 | % | 136.55 | % | 154.04 | % | 106.02 | % |
Based on the above gap analysis, at December 31, 2009, the Companys interest-earning assets
maturing or repricing within one year exceeded its interest-bearing liabilities maturing or
repricing within the same period by $185.8 million. This represented a positive cumulative
one-year interest rate sensitivity gap of 5.3%, and a ratio of interest-earning assets maturing or
repricing within one year to interest-bearing liabilities maturing or repricing within one year of
113.5%. Based on this information, management anticipates that over the course of the next year
the Companys net interest income could benefit from an increase in market interest rates.
Alternatively, the Companys net interest income could be adversely affected by a decline in market
interest rates. However, it should be noted that the Companys future net interest income is
affected by more than just future market interest rates. Net interest income is also affected by
absolute and relative levels of earning assets and interest-bearing liabilities, the level of
non-performing loans and other investments, and by other factors outlined in Item 1.
BusinessCautionary Statement, Item 1A. Risk Factors, and Item 7. Management Discussion of
Financial Condition and Results of Operations.
In addition to not anticipating all of the factors that could impact future net interest income,
gap analysis has certain shortcomings. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different degrees to changes in
market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types may lag behind
changes in market rates. Certain assets, such as adjustable rate loans, have features which limit
changes in interest rates on a short term basis and over the life of the loan. If interest rates
change, prepayment, and early
59
Table of Contents
withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers to make payments on their
adjustable rate loans may decrease if interest rates increase.
Present Value of Equity In addition to the gap analysis table, management also uses simulation
models to monitor interest rate risk. The models report the present value of equity (PVE) in
different interest rate environments, assuming an instantaneous and permanent interest rate shock
to all interest rate sensitive assets and liabilities. The PVE is the difference between the
present value of expected cash flows of interest rate sensitive assets and liabilities. The
changes in market value of assets and liabilities due to changes in interest rates reflect the
interest rate sensitivity of those assets and liabilities as their values are derived from the
characteristics of the asset or liability (i.e., fixed rate, adjustable rate, caps, and floors)
relative to the current interest rate environment. For example, in a rising interest rate
environment, the fair market value of a fixed rate asset will decline whereas the fair market value
of an adjustable rate asset, depending on its repricing characteristics, may not decline.
Increases in the market value of assets will increase the PVE whereas decreases in market value of
assets will decrease the PVE. Conversely, increases in the market value of liabilities will
decrease the PVE whereas decreases in the market value of liabilities will increase the PVE.
The following table presents the estimated PVE over a range of interest rate change scenarios at
December 31, 2009. The present value ratio shown in the table is the PVE as a percent of the
present value of total assets in each of the different rate environments. For purposes of this
table, management has made assumptions such as prepayment rates and decay rates similar to those
used for the gap analysis table.
Present Value of Equity | ||||||||||||||||||||
as Percent of | ||||||||||||||||||||
Change in | Present Value of Equity | Present Value of Assets | ||||||||||||||||||
Interest Rates | Dollar | Dollar | Percent | Present Value | Percent | |||||||||||||||
(Basis Points) | Amount | Change | Change | Ratio | Change | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
+300 |
$ | 379,148 | $ | (147,605 | ) | (28.0 | )% | 11.20 | % | (22.4 | )% | |||||||||
+200 |
435,625 | (91,128 | ) | (17.3 | ) | 12.54 | (13.1 | ) | ||||||||||||
+100 |
485,394 | (41,359 | ) | (7.9 | ) | 13.63 | (5.6 | ) | ||||||||||||
0 |
526,753 | | | 14.43 | | |||||||||||||||
-100 |
496,638 | (30,115 | ) | (5.7 | ) | 13.43 | (6.9 | ) |
Based on the above analysis, management anticipates that the Companys PVE may be adversely
affected by an increase in interest rates. The decline in the PVE as a result of an increase in
rates is attributable to the combined effects of a decline in the present value of the Companys
earning assets (which is further impacted by an extension in duration in rising rate environments
due to slower loan prepayments and reduced likelihood of security calls), partially offset by a
decline in the present value of FHLB advances. However, at higher interest rate scenarios (i.e.,
+300), management has assumed the Companys FHLB advances will be redeemed, which reduces the
positive impact of this offset in higher interest rate scenarios. Based on the above analysis,
management anticipates that the Companys PVE may also be adversely impacted by a decrease in
interest rates. This decline is due to shorter earning asset durations in lower interest rate
scenarios which reduces the positive impact decreases in interest rates normally have on the
present value of earning assets. It should be noted that the Companys PVE is impacted by more
than changes in market interest rates. Future PVE is also affected by managements decisions
relating to reinvestment of future cash flows, decisions relating to funding sources, and by other
factors outlined in Item 1. BusinessCautionary Statement, Item 1A. Risk Factors, and Item
7. Management Discussion of Financial Condition and Results of Operations.
As is the case with gap analysis, PVE analysis also has certain shortcomings. PVE modeling
requires management to make assumptions about future changes in market interest rates that are
unlikely to occur, such as parallel or equal changes in all market rates across all maturity terms.
PVE modeling also requires that management make assumptions which may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. For example, management
makes assumptions regarding the acceleration rate of the prepayment speeds of higher yielding
mortgage loans. Prepayments will accelerate in a falling rate environment and the reverse will
occur in a rising rate environment. Management also assumes that decay rates on core deposits will
accelerate in a rising rate environment and the reverse in a falling rate environment. The model
assumes that the Company will take no action in response to the changes in interest rates, when in
practice rate changes on certain products, such as savings deposits, may lag
60
Table of Contents
behind market changes.
In addition, prepayment estimates and other assumptions within the model are subjective in nature,
involve uncertainties, and therefore cannot be determined with precision. Accordingly, although
the PVE model may provide an estimate of the Companys interest rate risk at a particular point in
time, such measurements are not intended to and do not provide a precise forecast of the effect of
changes in interest rates on the Companys PVE.
61
Table of Contents
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the accompanying consolidated statements of financial condition of Bank Mutual
Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of income, equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 2009 and 2008 consolidated financial statements present fairly, in all
material respects, the financial position of Bank Mutual Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5,
2010, expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 5, 2010
March 5, 2010
62
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Bank Mutual Corporation
We have
audited the accompanying statements of income, equity, and cash flows
of Bank Mutual Corporation for the year ended
December 31, 2007. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects,
the consolidated results of operations and cash flows of Bank Mutual Corporation and Subsidiaries
for the year ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young
Milwaukee, Wisconsin
March 5, 2008
March 5, 2008
63
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Financial Condition
December 31 | ||||||||
2009 | 2008 | |||||||
(Dollars in Thousands) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 37,696 | $ | 41,017 | ||||
Interest-earning deposits in banks |
189,962 | 71,876 | ||||||
Cash and cash equivalents |
227,658 | 112,893 | ||||||
Securities available-for-sale, at fair value: |
||||||||
Investment securities |
614,104 | 419,138 | ||||||
Mortgage-related securities |
866,848 | 850,867 | ||||||
Loans held-for-sale, net |
13,534 | 19,030 | ||||||
Loans receivable, net |
1,506,056 | 1,829,053 | ||||||
Goodwill |
52,570 | 52,570 | ||||||
Mortgage servicing rights, net |
6,899 | 3,703 | ||||||
Other intangible assets, net |
1,405 | 1,809 | ||||||
Other assets |
222,990 | 200,626 | ||||||
Total assets |
$ | 3,512,064 | $ | 3,489,689 | ||||
Liabilities and equity |
||||||||
Liabilities: |
||||||||
Deposit liabilities |
$ | 2,137,508 | $ | 2,128,277 | ||||
Borrowings |
906,979 | 907,971 | ||||||
Advance payments by borrowers for taxes and insurance |
2,508 | 1,929 | ||||||
Other liabilities |
59,668 | 48,977 | ||||||
Total liabilities |
3,106,663 | 3,087,154 | ||||||
Equity: |
||||||||
Preferred stock$0.01 par value: |
||||||||
Authorized 20,000,000 shares in 2009 and 2008
Issued and outstandingnone in 2009 and 2008 |
| | ||||||
Common stock $0.01 par value: |
||||||||
Authorized 200,000,000 shares in 2009 and 2008
Issued78,783,849 shares in 2009 and 2008
Outstanding46,165,635 shares in 2009 and 47,686,759 in 2008 |
788 | 788 | ||||||
Additional paid-in capital |
499,376 | 498,501 | ||||||
Retained earnings |
272,518 | 273,826 | ||||||
Unearned ESOP shares |
(347 | ) | (1,247 | ) | ||||
Accumulated other comprehensive loss |
(2,406 | ) | (16,404 | ) | ||||
Treasury stock32,618,214 shares in 2009 and 31,097,090 in 2008 |
(367,452 | ) | (355,853 | ) | ||||
Total shareholders equity |
402,477 | 399,611 | ||||||
Non-controlling interest in real estate partnership |
2,924 | 2,924 | ||||||
Total equity including non-controlling interest |
405,401 | 402,535 | ||||||
Total liabilities and equity |
$ | 3,512,064 | $ | 3,489,689 | ||||
Refer to Notes to Consolidated Financial Statements
64
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||
Interest income: |
||||||||||||
Loans |
$ | 95,802 | $ | 113,635 | $ | 123,141 | ||||||
Investment securities |
18,199 | 16,041 | 4,871 | |||||||||
Mortgage-related securities |
37,734 | 45,535 | 52,518 | |||||||||
Interest-earning deposits |
79 | 2,345 | 2,471 | |||||||||
Total interest income |
151,814 | 177,556 | 183,001 | |||||||||
Interest expense: |
||||||||||||
Deposit liabilities |
44,568 | 64,689 | 76,011 | |||||||||
Borrowings |
39,205 | 39,484 | 37,738 | |||||||||
Advance payments by borrowers for taxes and insurance |
11 | 18 | 22 | |||||||||
Total interest expense |
83,784 | 104,191 | 113,771 | |||||||||
Net interest income |
68,030 | 73,365 | 69,230 | |||||||||
Provision for (recovery of) loan losses |
12,413 | 1,447 | (272 | ) | ||||||||
Net interest income after provision for loan losses |
55,617 | 71,918 | 69,502 | |||||||||
Non-interest income: |
||||||||||||
Service charges on deposits |
6,408 | 6,688 | 6,612 | |||||||||
Brokerage and insurance commissions |
2,785 | 2,626 | 2,617 | |||||||||
Loan related fees and servicing revenue, net |
130 | (6 | ) | 1,026 | ||||||||
Gain on loan sales activities, net |
9,110 | 2,109 | 1,478 | |||||||||
Gain (loss) on investments, net |
6,758 | (1,166 | ) | (1,228 | ) | |||||||
Gain (loss) on foreclosed real estate, net |
(642 | ) | (155 | ) | 8 | |||||||
Real estate investment partnership income |
| | 1,422 | |||||||||
Other non-interest income |
6,436 | 7,612 | 8,493 | |||||||||
Total non-interest income |
30,985 | 17,708 | 20,428 | |||||||||
Non-interest expense: |
||||||||||||
Compensation, payroll taxes, and other employee benefits |
39,077 | 38,538 | 38,234 | |||||||||
Occupancy and equipment |
11,760 | 11,614 | 11,277 | |||||||||
Federal insurance premiums and special assessments |
4,597 | 332 | 258 | |||||||||
Amortization of other intangible assets |
405 | 618 | 661 | |||||||||
Real estate investment partnership cost of sales |
| | 645 | |||||||||
Other non-interest expense |
11,620 | 12,275 | 12,468 | |||||||||
Total non-interest expense |
67,459 | 63,377 | 63,543 | |||||||||
Income before income taxes |
19,143 | 26,249 | 26,387 | |||||||||
Income tax expense |
5,418 | 9,094 | 8,892 | |||||||||
Net income before non-controlling interest |
13,725 | 17,155 | 17,495 | |||||||||
Net (income) loss attributable to non-controlling interests |
| 1 | (392 | ) | ||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
Per share data: |
||||||||||||
Earnings per sharebasic |
$ | 0.29 | $ | 0.36 | $ | 0.32 | ||||||
Earnings per sharediluted |
$ | 0.29 | $ | 0.35 | $ | 0.31 | ||||||
Cash dividends per share paid |
$ | 0.34 | $ | 0.36 | $ | 0.33 |
Refer to Notes to Consolidated Financial Statements
65
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Equity
Non-Controlling | ||||||||||||||||||||||||||||||||
Additional | Unearned | Accumulated Other | Interest in | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Real Estate | ||||||||||||||||||||||||||
Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Partnership | Total | |||||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 788 | $ | 496,302 | $ | 273,454 | $ | (3,066 | ) | $ | (15,426 | ) | $ | (218,273 | ) | $ | 2,518 | $ | 536,297 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 17,103 | | | | | 17,103 | ||||||||||||||||||||||||
Net Income attributable to non-controlling interest |
| | | | | | 392 | 392 | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $4,707 |
| | | | 7,973 | | | 7,973 | ||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $492 |
| | | | 736 | | | 736 | ||||||||||||||||||||||||
Pension asset, net of deferred income
taxes of $349 |
| | | | 648 | | | 648 | ||||||||||||||||||||||||
Total comprehensive income |
| | | | | | | 26,852 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (120,687 | ) | | (120,687 | ) | ||||||||||||||||||||||
Committed ESOP shares |
| 2,829 | | 900 | | | | 3,729 | ||||||||||||||||||||||||
Exercise of stock options |
| (3,001 | ) | | | | 4,830 | | 1,829 | |||||||||||||||||||||||
Share based payments |
| 2,278 | | | | (126 | ) | | 2,152 | |||||||||||||||||||||||
Cash dividends ($0.33 per share) |
| | (17,227 | ) | | | | | (17,227 | ) | ||||||||||||||||||||||
Balance at December 31, 2007 |
$ | 788 | $ | 498,408 | $ | 273,330 | $ | (2,166 | ) | $ | (6,069 | ) | $ | (334,256 | ) | $ | 2,910 | $ | 432,945 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | 17,156 | | | | | 17,156 | ||||||||||||||||||||||||
Net Income attributable to non-controlling interest |
| | | | | | (1 | ) | (1 | ) | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $(3,430) |
| | | | (6,633 | ) | | | (6,633 | ) | ||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $468 |
| | | | 698 | | | 698 | ||||||||||||||||||||||||
Pension liability, net of deferred income
taxes of $(2,491) |
| | | | (4,392 | ) | | | (4,392 | ) | ||||||||||||||||||||||
Total comprehensive income |
| | | | | | | 6,828 | ||||||||||||||||||||||||
Impact of change in measurement date for
qualified and supplemental pension plans |
| | (218 | ) | | (8 | ) | | | (226 | ) | |||||||||||||||||||||
Capital contribution to real estate partnership |
| | | | | | 15 | 15 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (29,927 | ) | | (29,927 | ) | ||||||||||||||||||||||
Issuance of management recognition plan shares |
| (403 | ) | | | | 403 | | | |||||||||||||||||||||||
Committed ESOP shares |
| 2,696 | | 919 | | | | 3,615 | ||||||||||||||||||||||||
Exercise of stock options |
| (4,489 | ) | | | | 8,181 | | 3,692 | |||||||||||||||||||||||
Share based payments |
| 2,289 | | | | (254 | ) | | 2,035 | |||||||||||||||||||||||
Cash dividends ($0.36 per share) |
| | (16,442 | ) | | | | | (16,442 | ) | ||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 788 | $ | 498,501 | $ | 273,826 | $ | (1,247 | ) | $ | (16,404 | ) | $ | (355,853 | ) | $ | 2,924 | $ | 402,535 | |||||||||||||
66
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Equity (continued)
Non-Controlling | ||||||||||||||||||||||||||||||||||||
Additional | Unearned | Accumulated Other | Interest in | |||||||||||||||||||||||||||||||||
Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Real Estate | ||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Partnership | Total | |||||||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 788 | $ | 498,501 | $ | 273,826 | $ | (1,247 | ) | $ | (16,404 | ) | $ | (355,853 | ) | $ | 2,924 | $ | 402,535 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
| | 13,725 | | | | | 13,725 | ||||||||||||||||||||||||||||
Net income attributable to non-controlling interest |
| | | | | | | | ||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities
available-for-sale, net of deferred
income taxes of $8,847 |
| | | | 15,660 | | | 15,660 | ||||||||||||||||||||||||||||
Reclassification adjustment for gain on
securities included in income, net of
income taxes of $(2,710) |
| | | | (4,048 | ) | | | (4,048 | ) | ||||||||||||||||||||||||||
Pension asset, net of deferred income
taxes of $1,126 |
| | | | 2,386 | | | 2,386 | ||||||||||||||||||||||||||||
Total comprehensive income |
| | | | | | | 27,723 | ||||||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (14,397 | ) | | (14,397 | ) | ||||||||||||||||||||||||||
Committed ESOP shares |
| 1,969 | | 900 | | | | 2,869 | ||||||||||||||||||||||||||||
Exercise of stock options |
| (1,966 | ) | | | | 2,798 | | 832 | |||||||||||||||||||||||||||
Share based payments |
| 872 | | | | | | 872 | ||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) |
| | (15,033 | ) | | | | | (15,033 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 788 | $ | 499,376 | $ | 272,518 | $ | (347 | ) | $ | (2,406 | ) | $ | (367,452 | ) | $ | 2,924 | $ | 405,401 | |||||||||||||||||
Refer to Notes to Consolidated Financial Statements
67
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Net provision for (recovery of) loan losses |
12,413 | 1,447 | (272 | ) | ||||||||
Provision for depreciation |
2,567 | 2,469 | 2,620 | |||||||||
Amortization of other intangible assets |
405 | 618 | 661 | |||||||||
Amortization of mortgage servicing rights |
3,023 | 1,587 | 1,191 | |||||||||
Increase (decrease) in valuation on MSRs |
(535 | ) | 822 | | ||||||||
Minority interest in real estate investment partnership |
| 1 | 392 | |||||||||
Stock-based compensation expense |
3,741 | 5,650 | 5,881 | |||||||||
Net amortization on securities |
2,039 | (1,482 | ) | (1,894 | ) | |||||||
Loans originated for sale |
(578,312 | ) | (139,387 | ) | (107,045 | ) | ||||||
Proceeds from loan sales |
587,234 | 129,014 | 103,112 | |||||||||
Net gain on sale of available-for-sale securities |
(7,589 | ) | (7,192 | ) | | |||||||
Other than
temporary impairment of available-for-sale securities |
831 | 8,358 | 1,228 | |||||||||
Net gain from real estate investment partnership |
| | (777 | ) | ||||||||
Gain on sales of loans originated for sale |
(9,110 | ) | (2,109 | ) | (1,478 | ) | ||||||
Increase (decrease) in other liabilities |
13,077 | (54 | ) | (15,518 | ) | |||||||
Decrease (increase) in other assets |
(12,387 | ) | (9,452 | ) | 21,415 | |||||||
Decrease (increase) in accrued interest receivable |
3,212 | (1,908 | ) | (1,118 | ) | |||||||
Net cash provided by operating activities |
34,334 | 5,538 | 25,501 | |||||||||
Investing activities: |
||||||||||||
Proceeds from maturities of investment securities |
467,902 | 29,992 | | |||||||||
Purchases of investment securities |
(689,075 | ) | (351,202 | ) | (51,270 | ) | ||||||
Purchases of mortgage-related securities |
(779,170 | ) | (345,842 | ) | (247,428 | ) | ||||||
Principal repayments on mortgage-related securities |
318,225 | 195,479 | 227,041 | |||||||||
Proceeds from sale of investment securities |
493,639 | 392,358 | | |||||||||
Net decrease in loans receivable |
286,863 | 160,877 | 26,317 | |||||||||
Proceeds from real estate investment partnership |
| | 1,422 | |||||||||
Purchase of Federal Home Loan Bank stock |
| | (216 | ) | ||||||||
Proceeds from sale of foreclosed properties |
3,949 | 2,100 | 949 | |||||||||
Net purchases of premises and equipment |
(2,122 | ) | (3,145 | ) | (3,722 | ) | ||||||
Net cash provided by (used in) investing activities |
100,211 | 80,618 | (46,907 | ) | ||||||||
68
Table of Contents
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Financing activities: |
||||||||||||
Net cash inflows (outflows) from deposit liabilities |
$ | 9,231 | $ | 34,825 | $ | (56,070 | ) | |||||
Net decrease in short-term borrowings |
| | (175,000 | ) | ||||||||
Proceeds from long-term borrowings |
| | 657,950 | |||||||||
Repayments on long-term borrowings |
(992 | ) | (4,488 | ) | (275,516 | ) | ||||||
Net increase
(decrease) in advance payments by borrowers for taxes and insurance |
579 | 114 | (384 | ) | ||||||||
Proceeds from exercise of stock options |
556 | 3,313 | 1,396 | |||||||||
Excess tax benefit from exercise of stock options |
276 | 379 | 433 | |||||||||
Cash dividends |
(15,033 | ) | (16,442 | ) | (17,227 | ) | ||||||
Capital contribution to real estate partnership |
| 14 | | |||||||||
Purchase of treasury stock |
(14,397 | ) | (29,927 | ) | (120,687 | ) | ||||||
Net cash provided by (used in) financing activities |
(19,780 | ) | (12,212 | ) | 14,895 | |||||||
Increase (decrease) in cash and cash equivalents |
114,765 | 73,944 | (6,511 | ) | ||||||||
Cash and cash equivalents at beginning of year |
112,893 | 38,949 | 45,460 | |||||||||
Cash and cash equivalents at end of year |
$ | 227,658 | $ | 112,893 | $ | 38,949 | ||||||
Supplemental information: |
||||||||||||
Interest paid on deposits and borrowings |
$ | 84,927 | $ | 121,660 | $ | 102,744 | ||||||
Income taxes paid |
9,112 | 10,704 | 8,187 | |||||||||
Loans transferred to foreclosed and repossessed assets |
23,721 | 3,179 | 3,724 |
Refer to Notes to Consolidated Financial Statements
69
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies
Business
Bank Mutual Corporation (the Company), a Wisconsin corporation, is a federally-registered unitary
savings and loan bank holding company which holds all of the outstanding shares of Bank Mutual, a
federal savings bank (the Bank).
The Bank is a federal savings bank offering a full range of financial services to customers who are
primarily located in the state of Wisconsin. The Bank is principally engaged in the business of
attracting deposits from the general public and using such deposits to originate residential and
commercial real estate loans, consumer loans, and commercial and industrial loans.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The consolidated financial statements include the
accounts and transactions of the Company and its wholly-owned subsidiaries. The Bank has the
following wholly-owned subsidiaries: BancMutual Financial & Investment Services, Inc., Mutual
Investment Corporation, MC Development Ltd., and First Northern Investments, Inc. All intercompany
accounts and transactions have been eliminated in consolidation. The Bank or its subsidiaries also
own 50% interests in two entities, Savings Financial Corporation, which is accounted for using the
equity method, and Arrowood Development, LLC, which is a variable interest entity and is
consolidated into the financial statements.
In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers federal funds sold and interest-bearing deposits in banks that have original
maturities of three months or less to be cash equivalents. Under Regulation D, the Bank is
required to maintain cash and reserve balances with the Federal Reserve Bank. The average amount
of reserve balances for the years ended December 31, 2009 and 2008, was approximately $600 and
$610, respectively.
Federal Home Loan Bank Stock
Stock of the Federal Home Loan Bank of Chicago (FHLB of Chicago) is owned due to regulatory
requirements and carried at cost, which is its redemption value, and is included in other assets.
FHLB stock is periodically reviewed for impairment based on managements assessment of the ultimate
recoverability of the investment rather than temporary declines in its estimated fair value.
Securities Available-for-Sale
Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of accumulated other comprehensive income in shareholders
equity.
The amortized cost of securities classified as available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of mortgage-related securities,
over the estimated life of the
70
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
security. Such accretion or amortization is included in interest income from investments. Interest
and dividends are included in interest income from investments. Realized gains and losses and
declines in value judged to be other-than-temporary are included in net gain or loss on sales of
securities and are based on the specific identification method.
Impairment of available-for-sale securities is evaluated considering numerous factors, and their
relative significance varies case-by-case. Factors considered include the length of time and
extent to which the market value has been less than cost; the financial condition and near-term
prospects of the issuer of a security; and the Companys intent and/or likely need to sell the
security before its anticipated recovery in fair value. Further, if the Company does not expect to
recover the entire amortized cost of the security (i.e., a credit loss is expected), the Company
will be unable to assert that it will recover its cost basis even if it does not intend to sell the
security. If, based upon an analysis of each of these factors, it is determined that the
impairment is other-than-temporary, the carrying value of the security is written down through
earnings by the amount of the expected credit loss.
Loans Held-for-Sale
In 2009, loans held-for-sale, which generally consist of current production of certain fixed-rate
mortgage loans, are recorded at market value, determined on an individual loan basis. Prior to
2009, loans held-for-sale were recorded at the lower of cost or market value, determined on an
individual loan basis. Refer to Recent Accounting Changes, below, for additional discussion.
The Companys interest rate lock commitments and forward commitments to sell loans are measured at
fair value with the resulting unrealized gain or loss included in loans held-for-sale. Fees
received from the borrower are deferred and recorded as an adjustment of the carrying value.
Loans Receivable and Related Interest Income
Interest on loans is accrued and credited to income as earned. Accrual of interest is generally
discontinued either when reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by more than 90 days with respect to
interest or principal. At that time, any accrued but uncollected interest is reversed and
additional income is recorded only to the extent that payments are received and the collection of
principal is reasonably assured. Loans are generally restored to accrual status when the
obligation is brought to a current status by the borrower. Loans are shown net of the allowance
for loan losses.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination costs are deferred and
amortized as an adjustment of the related loans yield.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses inherent in the loan portfolio and is based on the size and current risk
characteristics of the loan portfolio, an assessment of individual problem loans and pools of
homogenous loans, actual loss experience, current economic events in specific industries and
geographical areas, including unemployment levels, peer comparisons, and other pertinent factors,
including regulatory guidance and general economic conditions. Determination of the allowance is
inherently subjective as it requires significant estimates, including the amounts and timing of
expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based
on historical loss experience, and consideration of current economic trends, all of which may be
susceptible to significant change. Loan losses are charged off against the allowance, while
recoveries of amounts previously charged off are credited to the allowance.
71
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
A provision for loan losses is charged to operations based on managements periodic evaluation of
the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at
least quarterly and more often if deemed necessary.
Mortgage Servicing Rights
Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights
retained. The total cost of loans sold is allocated between the loan balance and their servicing
asset based on their relative fair values. The capitalized value of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net future servicing revenue.
Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for
amortization, or estimated fair value. The carrying values are periodically evaluated for
impairment. For purposes of measuring impairment, the servicing rights are stratified into pools
based on term and interest rate. Impairment represents the excess of the remaining capitalized
cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The
fair value of each servicing rights pool is calculated based on the present value of estimated
future cash flows using a discount rate, given current market conditions. Estimates of fair value
include assumptions about prepayment speeds, interest rates and other factors which are subject to
change over time. Changes in these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, if any, to change significantly in the
future.
Mortgage Banking Loan Commitments
In connection with its mortgage banking activities, the Company enters into loan commitments to
fund residential mortgage loans at specified interest rates and within specified periods of time,
generally up to 60 days from the time of rate lock. A loan commitment whose loan arising from
exercise of the loan commitment will be held for sale upon funding is a derivative instrument,
which must be recognized at fair value on the consolidated balance sheet in other assets and other
liabilities with changes in its value recorded in income from mortgage banking operations.
In determining the fair value of its derivative loan commitments for economic purposes, the Company
considers the value that would be generated when the loan arising from exercise of the loan
commitment is sold in the secondary mortgage market. That value includes the price that the loan
is expected to be sold for in the secondary mortgage market.
Foreclosed Properties and Repossessed Assets
Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower
of cost or fair value less estimated costs to sell. Costs related to the development and
improvement of property are capitalized, whereas costs related to holding the property are
expensed. Gains and losses on sales are recognized based on the carrying value upon closing of the
sale.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and
equipment are depreciated over their estimated useful lives (office buildings 40 to 44 years and
furniture and equipment 3 to 10 years) using the straight-line method. Leasehold improvements are
amortized over the shorter of their useful lives or expected lease terms. The Company reviews
buildings, leasehold improvements and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment
exists when the estimated undiscounted cash flows for the property are less than its carrying
value. If identified, an impairment loss is recognized through a charge to earnings based on the
fair value of the property.
72
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets
Goodwill, representing the excess of purchase price over the fair value of net assets acquired,
results from acquisitions made by the Company. Goodwill is analyzed annually for impairment or more
frequently when, in the judgment of management, an event has occurred that may indicate that
additional analysis is required. Goodwill is analyzed at the reporting unit level. A reporting
unit is an operating segment or one level below an operating segment. The Company determined that
the consolidated entity has one operating segment and is the level for which goodwill is analyzed.
Other intangible assets, primarily attributed to the customer relationships acquired, are amortized
over their estimated useful lives, generally seven to fifteen years. Other intangible assets are
analyzed for impairment if facts and circumstances indicate they may be impaired
Life Insurance Policies
Investments in life insurance policies owned by the Company are carried at the amount that could be
realized under the insurance contract if the Company cashed them in on the respective dates.
Income Taxes
The Company files a consolidated federal income tax return and, prior to 2009, separate or combined
state income tax returns, depending on the state. Beginning in 2009, the Company files combined
state income tax returns in all of the states in which it conducts business. A deferred tax asset
or liability is determined based on the enacted tax rates that will be in effect when the
differences between the financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Companys income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment
date of the change. A valuation allowance is provided for any deferred tax asset for which it is
more likely than not that the asset will not be realized. Changes in valuation allowances are
recorded as a component of income taxes.
Earnings Per Share
Basic and diluted earnings per share (EPS) are computed by dividing net income by the
weighted-average number of common shares outstanding for the period. ESOP shares committed to be
released are considered outstanding for basic EPS calculations. Vested shares of restricted stock
which have been awarded under the management recognition plan (MRP) provisions of the Companys
2004 and 2001 Stock Incentive Plans are also considered outstanding for basic EPS. Non-vested MRP
and stock option shares are considered dilutive potential common shares and are included in the
weighted-average number of shares outstanding for diluted EPS.
Pension Costs
The Company has both defined benefit and defined contribution plans. The Companys net periodic
pension cost of the defined benefit plan consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected benefit obligation,
reduced by the expected earnings on assets held by the retirement plan, amortization of prior
service cost, and amortization of recognized actuarial gains and losses over the estimated future
service period of existing plan participants.
The costs associated with the defined contribution plan consist of a predetermined percentage of
compensation, which is determined by the Companys board of directors.
73
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Segment Information
The Company has determined that it has one reportable segmentcommunity banking. The Company
offers a range of financial products and services to external customers, including: accepting
deposits from the general public; originating residential, consumer and commercial loans; and
marketing annuities and other insurance products.
Recent Accounting Changes
In 2006 the Financial Accounting Standards Board (FASB) issued new accounting guidance related to
employers accounting for defined benefit pension and other postretirement plans. The Company
adopted the recognition portions of this new accounting guidance in 2006 and the measurement
portions in 2008, as required by the standard. The adoptions of this new guidance had no material
effect on the Companys financial statements.
In 2007 the FASB issued new accounting guidance on fair value measurements, which allows eligible
assets and liabilities to be measured at fair value without having to apply complex hedge
accounting provisions. This new accounting guidance was effective for the Company as of January 1,
2008. As of that date, the Company elected not to apply the new accounting guidance to any of its
financial assets or financial liabilities. Effective January 1, 2009, however, the Company elected
to measure at fair value the fixed-rate, 15- and 30-year, one- to four-family mortgage loans
originated after that date that the Company intends to sell in the secondary market (i.e., loans
held-for-sale). The Company believes this change more appropriately matches the accounting
treatment of loans held-for-sale with the accounting treatment of the financial instruments the
Company uses to hedge its exposure to market risk in such loans. Adoption of this new guidance had
no material effect on the Companys financial statements. Prior to 2009, loans held-for-sale were
carried at the lower of cost or market.
In 2007 the FASB issued accounting guidance that established new accounting and reporting standards
for non-controlling interests in subsidiaries and for the deconsolidation of certain subsidiaries.
This new accounting guidance was effective for fiscal years beginning after December 15, 2008.
Accordingly, the Company applied the provisions of the new guidance effective January 1, 2009.
Application of this new guidance did not have a material impact on the Companys financial
condition, results of operations, or liquidity, although it affects how these matters are presented
in the financial statements.
In 2007 the FASB issued new accounting guidance related to business combinations. This new
guidance was effective for the Company on January 1, 2009, and will be applied prospectively to
future business combinations. This new accounting guidance may have a significant impact on the
Companys future financial condition or results of operations depending on the nature or type of
future business combinations, if any.
In 2008 the FASB issued new accounting guidance related to employers disclosures about
postretirement benefit plan assets. This new guidance was effective for fiscal years ending after
December 15, 2009. The Companys adoption of this new guidance had no impact on the Companys
financial condition, results of operations, or liquidity, although it affected how certain matters
are presented in the financial statements.
In April 2009, the FASB issued new accounting guidance in three areas: recognition and
presentation of other-than-temporary impairments (OTTI); determining fair value for assets or
liabilities in markets that are not orderly; and interim disclosures about the fair value of
financial instruments. The new guidance in all of these areas was effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009. The Company adopted the new guidance in all three of these areas during the second
quarter of 2009. Application of this new guidance did not have a material impact on the Companys
financial condition, results of operations, or liquidity, although it affects how certain matters
may be presented in the financial statements.
74
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
In June 2009 the Company adopted new guidance issued by the FASB related to subsequent events.
This new guidance established general standards and requirements for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are available to
be issued. It requires the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date; that is, whether that date represents the date the financial
statements were issued or were available to be issued. The Company evaluated subsequent events
through the issuance date of the financial statements.
In June 2009 the FASB amended certain accounting guidance related to the transfer of financial
assets. This amended guidance must be applied as of the beginning of the first annual reporting
period that begins after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The amended guidance must be
applied to transfers occurring on or after the effective date. Earlier application is prohibited.
Management does not expect the adoption of this amended guidance will have a material impact on
the Companys financial condition, results of operations, or liquidity.
In June 2009 the FASB amended certain accounting guidance related to the consolidation of variable
interest entities. The amended guidance is effective as of the beginning of each entitys first
annual reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Management does not expect the adoption of this amended guidance will
have a material impact on the Companys financial condition, results of operations, or liquidity.
In August 2009 the FASB issued new accounting guidance that clarified certain matters relating to
the measurement of the fair value of liabilities. This guidance was effective for the first
reporting period following its issuance, which for the Company was the fourth quarter of 2009.
The Companys adoption of the new guidance had no impact on its financial condition, results of
operations, liquidity, or fair value disclosures.
In January 2010 the FASB issued new accounting guidance related to certain disclosures about fair
value measurements. Certain aspects of the new guidance are effective for reporting periods
beginning after December 15, 2009, which for the Company is the first quarter of 2010. However,
certain other aspects are not effective until the first reporting period beginning after December
15, 2010, which will be the first quarter of 2011 for the Company. The Companys adoption of the
new guidance is not expected to have an impact on its financial condition, results of operations,
or liquidity, although it will affect the matters that will be disclosed in the financial
statements.
Reclassifications
In 2009, the Company changed its presentation of certain items in the consolidated statements of
income and cash flows. Conforming changes were also reflected via a change in presentation of 2008
and 2007 amounts. In the consolidated statements of income, the Company changed its presentation
of net mortgage servicing revenue and gain (loss) from changes in fair market valuations of loan
commitments. This resulted in a reclassification of $(566) and $548 of net mortgage servicing
revenue from other non-interest income to net loan related fees and servicing revenue for 2008 and
2007, respectively. The Company reclassified gain (loss) from changes in the fair value of loan
commitments from other non-interest income to net gain on loan sale activities of $416 and zero for
2008 and 2007, respectively.
75
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale
The amortized cost and fair value of investment securities available-for-sale are as follows:
December 31, 2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Investment securities: |
||||||||||||||||
U.S. government and federal obligations |
$ | 594,024 | $ | 128 | $ | (2,360 | ) | $ | 591,792 | |||||||
Mutual funds |
21,546 | 831 | (65 | ) | 22,312 | |||||||||||
Total investment securities |
615,570 | 959 | (2,425 | ) | 614,104 | |||||||||||
Mortgage-related securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation |
291,318 | 4,180 | (310 | ) | 295,188 | |||||||||||
Federal National Mortgage Association |
220,437 | 5,044 | (723 | ) | 224,758 | |||||||||||
Private label CMOs |
120,780 | 104 | (9,102 | ) | 111,782 | |||||||||||
Government National Mortgage Association |
234,796 | 1,512 | (1,188 | ) | 235,120 | |||||||||||
Total mortgage-related securities |
867,331 | 10,840 | (11,323 | ) | 866,848 | |||||||||||
Total securities available-for-sale |
$ | 1,482,901 | $ | 11,799 | $ | (13,748 | ) | $ | 1,480,952 | |||||||
December 31, 2008 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Investment securities: |
||||||||||||||||
U.S. government and federal obligations |
$ | 372,446 | $ | 7,089 | | $ | 379,535 | |||||||||
Mutual funds |
39,632 | 36 | $ | (65 | ) | 39,603 | ||||||||||
Total investment securities |
412,078 | 7,125 | (65 | ) | 419,138 | |||||||||||
Mortgage-related securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation |
281,652 | 1,367 | (782 | ) | 282,237 | |||||||||||
Federal National Mortgage Association |
411,528 | 2,534 | (698 | ) | 413,364 | |||||||||||
Private label CMOs |
157,706 | | (29,147 | ) | 128,559 | |||||||||||
Government National Mortgage Association |
26,739 | 208 | (240 | ) | 26,707 | |||||||||||
Total mortgage-related securities |
877,625 | 4,109 | (30,867 | ) | 850,867 | |||||||||||
Total securities available-for-sale |
$ | 1,289,703 | $ | 11,234 | $ | (30,932 | ) | $ | 1,270,005 | |||||||
76
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
As of December 31, 2009, the following schedule identifies securities by time in which the
securities had a gross unrealized loss.
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Number | Estimated | Unrealized | Number | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||
Loss | of | Fair | Loss | of | Fair | Loss | Fair | |||||||||||||||||||||||||
Amount | Securities | Value | Amount | Securities | Value | Amount | Value | |||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||
U.S. government and federal obligations |
$ | (2,360 | ) | 24 | $ | 441,714 | | | | $ | (2,360 | ) | $ | 442,714 | ||||||||||||||||||
Mutual funds |
| | | $ | (65 | ) | 1 | $ | 644 | (65 | ) | 644 | ||||||||||||||||||||
Total investment securities |
(2,360 | ) | 24 | 441,714 | (65 | ) | 1 | 644 | (2,425 | ) | 442,358 | |||||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
(122 | ) | 3 | 49,961 | (188 | ) | 5 | 6,073 | (310 | ) | 56,034 | |||||||||||||||||||||
Federal National Mortgage Association |
(668 | ) | 5 | 35,848 | (55 | ) | 1 | 1,490 | (723 | ) | 37,338 | |||||||||||||||||||||
Government National Mortgage Association |
(1,106 | ) | 5 | 84,135 | (82 | ) | 3 | 7,039 | (1,188 | ) | 91,174 | |||||||||||||||||||||
Private label CMOs |
| | | (9,102 | ) | 25 | 88,860 | (9,102 | ) | 88,860 | ||||||||||||||||||||||
Total mortgage-related securities |
(1,896 | ) | 13 | 169,944 | (9,427 | ) | 34 | 103,462 | (11,323 | ) | 273,406 | |||||||||||||||||||||
Total |
$ | (4,256 | ) | 37 | $ | 611,658 | $ | (9,492 | ) | 35 | $ | 104,106 | $ | (13,748 | ) | $ | 715,764 | |||||||||||||||
As of December 31, 2008, the following schedule identifies securities by time in which the
securities had a gross unrealized loss.
Less Than 12 Months | Greater Than 12 Months | |||||||||||||||||||||||||||||||
in an Unrealized Loss Position | in an Unrealized Loss Position | Gross | Total | |||||||||||||||||||||||||||||
Unrealized | Number | Estimated | Unrealized | Number | Estimated | Unrealized | Estimated | |||||||||||||||||||||||||
Loss | of | Fair | Loss | of | Fair | Loss | Fair | |||||||||||||||||||||||||
Amount | Securities | Value | Amount | Securities | Value | Amount | Value | |||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||||||||||
Mutual funds |
$ | (65 | ) | 1 | $ | 643 | | | | $ | (65 | ) | $ | 643 | ||||||||||||||||||
Mortgage-related securities: |
||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
| | | $ | (782 | ) | 38 | $ | 94,959 | (782 | ) | 94,959 | ||||||||||||||||||||
Federal National Mortgage Association |
(192 | ) | 8 | 12,537 | (506 | ) | 40 | 96,429 | (698 | ) | 108,966 | |||||||||||||||||||||
Government National Mortgage Association |
(4 | ) | 1 | 218 | (236 | ) | 6 | 14,825 | (240 | ) | 15,043 | |||||||||||||||||||||
Private label CMOs |
(6,078 | ) | 11 | 56,594 | (23,069 | ) | 18 | 71,963 | (29,147 | ) | 128,557 | |||||||||||||||||||||
Total mortgage-related securities |
(6,274 | ) | 20 | 69,349 | (24,593 | ) | 102 | 278,176 | (30,867 | ) | 347,525 | |||||||||||||||||||||
Total |
$ | (6,339 | ) | 21 | $ | 69,992 | $ | (24,593 | ) | 102 | $ | 278,176 | $ | (30,932 | ) | $ | 348,168 | |||||||||||||||
The Company has determined that the unrealized losses reported for its investment and
mortgage-related securities as of December 31, 2009 and 2008, were temporary. The Company believes
it is probable that it will receive all
77
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
future contractual cash flows related to these securities. The Company does not intend to sell
these securities and it is unlikely that it will be required to sell the securities before the
recovery of their amortized cost.
A substantial portion of the Companys securities that were in an unrealized loss position at
December 31, 2009 and 2008, consisted of U.S. government and federal agency obligations and
mortgage-related securities issued by government sponsored entities. Accordingly, the Company
determined that none of those securities were other-than-temporarily impaired as of those dates.
The Company also determined that none of its private-label CMOs were other-than-temporarily
impaired as of those dates. This determination was based on managements judgment regarding the
nature of the loan collateral that supports the securities, a review of the current ratings issued
on the securities by various credit rating agencies, a review of the actual delinquency and/or
default performance of the loan collateral that supports the securities, and recent trends in the
fair market values of the securities. As of December 31, 2009, the Company had seven private-label
CMOs with an aggregate carrying value of $31,697 and unrealized loss of $2,763 that were rated less
than investment grade. These seven private-label CMOs were analyzed using modeling techniques that
considered the priority of cash flows in the CMO structure and various default and loss rate
scenarios that management considered appropriate given the nature of the loan collateral. Based on
this analysis, management concluded that none of these seven securities were other-than-temporarily
impaired as of December 31, 2009. The Company had no private-label CMOs rated less than investment
grade at December 31, 2008.
During 2009, the Company recorded an impairment of $831 on one of its mutual fund investments.
This impairment was included as a component of net gain (loss) on investments in the income
statement for the year ended December 31, 2009. During 2008, the company recorded an impairment
of $6,916 on this same mutual fund, and accordingly it was included as a component of net gain
(loss) on investments in the income statement in that period.
Results of operations included gross realized gains on the sale of securities available-for-sale of
$7,589, $7,192, and zero for 2009, 2008, and 2007, respectively. None of these periods included
gross realized losses on the sale of securities available-for-sale.
The amortized cost and fair values of securities by contractual maturity at December 31, 2009, are
shown below. Actual maturities may differ from contractual maturities because issuers have the
right to call or prepay obligations with or without call or prepayment penalties.
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less |
| | ||||||
Due after one year through five years |
$ | 342,350 | $ | 341,447 | ||||
Due after five years through ten years |
99,706 | 99,429 | ||||||
Due after ten years |
151,969 | 150,916 | ||||||
Mutual funds |
21,545 | 22,312 | ||||||
Mortgage-related securities |
867,331 | 866,848 | ||||||
Total securities available for sale |
$ | 1,482,901 | $ | 1,480,952 | ||||
78
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale (continued)
The following table summarizes the adjustment to other comprehensive income and the related tax
effect for securities available-for-sale for each of the three years ended December 31:
2009 | 2008 | 2007 | ||||||||||
Change in unrealized holding gain (loss): |
||||||||||||
Unrealized net gains (losses) |
$ | 17,749 | $ | (8,897 | ) | $ | 13,908 | |||||
Related tax expense (benefit) |
6,137 | (2,962 | ) | 5,199 | ||||||||
Change in other comprehensive income |
$ | 11,612 | $ | (5,935 | ) | $ | 8,709 | |||||
Investment securities with a fair value of approximately $394,789 and $206,642 at December 31, 2009
and 2008, respectively, were pledged to secure deposits, FHLB advances, and for other purposes as
permitted or required by law.
3. Loans Receivable
Loans receivable consist of the following:
December 31 | ||||||||
2009 | 2008 | |||||||
Permanent mortgage loans: |
||||||||
One- to four-family |
$ | 656,018 | $ | 881,288 | ||||
Multi-family |
190,377 | 190,497 | ||||||
Commercial real estate |
285,764 | 275,802 | ||||||
Total permanent mortgages |
1,132,159 | 1,347,587 | ||||||
Construction and development loans: |
||||||||
One- to four-family |
11,441 | 17,349 | ||||||
Multi-family |
52,323 | 71,208 | ||||||
Commercial real estate |
32,109 | 70,612 | ||||||
Total construction and development |
95,873 | 159,169 | ||||||
Total mortgage loans |
1,228,032 | 1,506,756 | ||||||
Consumer loans: |
||||||||
Fixed term home equity |
124,519 | 173,104 | ||||||
Home equity lines of credit |
88,796 | 86,962 | ||||||
Student |
19,793 | 21,469 | ||||||
Home improvement |
28,441 | 36,023 | ||||||
Automobile |
4,077 | 11,775 | ||||||
Other |
9,871 | 8,740 | ||||||
Total consumer loans |
275,497 | 338,073 | ||||||
Commercial business loans |
52,167 | 49,623 | ||||||
Gross loans receivable |
1,555,696 | 1,894,452 | ||||||
Undisbursed loan proceeds |
(32,690 | ) | (54,187 | ) | ||||
Allowance for loan losses |
(17,028 | ) | (12,208 | ) | ||||
Deferred fees and costs, net |
78 | 996 | ||||||
Total loans receivable, net |
$ | 1,506,056 | $ | 1,829,053 | ||||
The Companys first mortgage loans and home equity lines of credit are primarily secured by
properties that are generally located in the Companys local lending areas in Wisconsin, Michigan,
and Minnesota. Non-accrual loans at December 31, 2009, were $41,750 and at December 31, 2008, were $32,513. Accruing loans that were delinquent 90 days or
more at December 31, 2009, were $834 and at December 31, 2008, were $576.
79
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
At December 31, 2009 and 2008, certain one- to four-family mortgage loans, multi-family mortgage
loans, and home equity loans with aggregate carrying values of $796,046 and $1,038,779,
respectively, were pledged to secure FHLB advances.
A summary of the activity in the allowance for loan losses follows:
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of period |
$ | 12,208 | $ | 11,774 | $ | 12,574 | ||||||
Provision for (recovery of) loan losses |
12,413 | 1,447 | (272 | ) | ||||||||
Charge-offs: |
||||||||||||
Mortgage loans |
(5,829 | ) | (613 | ) | (178 | ) | ||||||
Consumer loans |
(526 | ) | (411 | ) | (412 | ) | ||||||
Commercial business loans |
(1,291 | ) | (34 | ) | (33 | ) | ||||||
Total charge-offs |
(7,646 | ) | (1,058 | ) | (623 | ) | ||||||
Recoveries: |
||||||||||||
Mortgage loans |
20 | | | |||||||||
Consumer loans |
33 | 45 | 95 | |||||||||
Total recoveries |
53 | 45 | 95 | |||||||||
Net charge-offs |
(7,593 | ) | (1,013 | ) | (528 | ) | ||||||
Balance at end of period |
$ | 17,028 | $ | 12,208 | $ | 11,774 | ||||||
The unpaid principal balance of loans serviced for others was $1,006,279 and $728,407 at December
31, 2009 and 2008, respectively. These loans are not reflected in the consolidated financial
statements.
A loan is considered impaired when, in managements judgment, it becomes probable that all
contractual principal and interest will not be collected. The following tables present data on
impaired loans:
December 31 | ||||||||
2009 | 2008 | |||||||
Impaired loans for which an allowance has been provided |
$ | 16,299 | $ | 16,535 | ||||
Impaired loans for which no allowance has been provided |
26,285 | 16,554 | ||||||
Total loans determined to be impaired |
$ | 42,584 | $ | 33,089 | ||||
Allowance for loan losses related to impaired loans |
$ | 6,033 | $ | 3,351 | ||||
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Average recorded investment in impaired loans |
$ | 40,172 | $ | 21,396 | $ | 19,746 | ||||||
Cash basis interest income recognized from impaired loans |
$ | 196 | $ | 117 | $ | 853 |
4. Goodwill, Other Intangible Assets, and Mortgage Servicing Rights
Goodwill is not amortized but is subject to impairment tests on at least an annual basis.
Management determined that there were no goodwill impairments in 2009, 2008, or 2007. The carrying
value of goodwill at the end of each of these periods was $52,570.
Other intangible assets consist of deposit base intangibles. As of December 31, 2009 and 2008,
deposit base intangibles were net of accumulated amortization of $13,095 and $12,691, respectively.
80
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
4. Goodwill, Other Intangible Assets, and Mortgage Servicing Rights (continued)
The activity in mortgage servicing rights during the years ended December 31 is presented in the
following table.
2009 | 2008 | 2007 | ||||||||||
Mortgage servicing rights at beginning of year |
$ | 4,525 | $ | 4,708 | $ | 4,653 | ||||||
Additions |
5,684 | 1,404 | 1,246 | |||||||||
Amortization |
(3,023 | ) | (1,587 | ) | (1,191 | ) | ||||||
Mortgage servicing rights at end of year |
7,186 | 4,525 | 4,708 | |||||||||
Valuation allowance |
(287 | ) | (822 | ) | | |||||||
Mortgage servicing rights at end of year |
$ | 6,899 | $ | 3,703 | $ | 4,708 | ||||||
The following table shows the current period and estimated future amortization expense for
amortizable intangible assets:
Mortgage | ||||||||||||
Servicing | Deposit Base | |||||||||||
Rights | Intangibles | Total | ||||||||||
Twelve months ended December 31, 2009 |
$ | 3,023 | $ | 405 | $ | 3,428 | ||||||
Estimate for year ending December 31: |
||||||||||||
2010 |
$ | 1,268 | $ | 405 | $ | 1,673 | ||||||
2011 |
1,154 | 405 | 1,559 | |||||||||
2012 |
1,006 | 199 | 1,205 | |||||||||
2013 |
912 | 140 | 1,052 | |||||||||
2014 |
838 | 140 | 978 | |||||||||
Thereafter |
1,721 | 116 | 1,837 | |||||||||
Total |
$ | 6,899 | $ | 1,405 | $ | 8,304 | ||||||
The projections of amortization expense shown above for mortgage servicing rights are based on
existing asset balances and the existing interest rate environment as of December 31, 2009. Future
amortization expense may be significantly different depending upon changes in the mortgage
servicing portfolio, mortgage interest rates and market conditions.
81
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
5. Other Assets
Other assets are summarized as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Accrued interest: |
||||||||
Mortgage-related securities |
$ | 4,651 | $ | 6,669 | ||||
Investment securities |
1,875 | 1,734 | ||||||
Loans receivable |
6,795 | 8,130 | ||||||
Total accrued interest |
13,321 | 16,533 | ||||||
Bank owned life insurance |
53,295 | 51,261 | ||||||
Premises and equipment, net |
51,715 | 52,209 | ||||||
Federal Home Loan Bank stock, at cost |
46,092 | 46,092 | ||||||
Foreclosed properties and repossessed assets |
17,689 | 4,768 | ||||||
Prepaid FDIC insurance premiums |
12,521 | | ||||||
Other assets |
28,357 | 29,763 | ||||||
Total other assets |
$ | 222,990 | $ | 200,626 | ||||
Premises and equipment are summarized as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Land and land improvements |
$ | 17,523 | $ | 17,300 | ||||
Office buildings |
51,376 | 50,177 | ||||||
Furniture and equipment |
18,448 | 18,701 | ||||||
Leasehold improvements |
1,189 | 1,298 | ||||||
Total cost |
88,536 | 87,476 | ||||||
Less accumulated depreciation and amortization |
36,821 | 35,267 | ||||||
Total premises and equipment, net |
$ | 51,715 | $ | 52,209 | ||||
Depreciation expense for 2009, 2008, and 2007 was $2,567, $2,469, and $2,620, respectively.
The Company leases various branch offices, office facilities and equipment under non-cancelable
operating leases which expire on various dates through 2017. Future minimum payments under
non-cancelable operating leases with initial or remaining terms of one year or more for the years
indicated are as follows at December 31, 2009:
Amount | ||||
2010 |
$ | 974 | ||
2011 |
770 | |||
2012 |
674 | |||
2013 |
624 | |||
2014 |
588 | |||
Thereafter |
2,898 | |||
Total |
$ | 6,528 | ||
Rental expense totaled $1,146, $1,238, and $1,132, for 2009, 2008, and 2007, respectively.
82
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
6. Deposits Liabilities
Deposit liabilities are summarized as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Checking accounts: |
||||||||
Non-interest-bearing |
$ | 94,619 | $ | 89,106 | ||||
Interest-bearing |
211,448 | 180,269 | ||||||
Total checking accounts |
306,067 | 269,375 | ||||||
Money market accounts |
345,144 | 340,631 | ||||||
Regular savings accounts |
196,983 | 185,003 | ||||||
Certificate of deposits: |
||||||||
Due within one year |
992,752 | 958,863 | ||||||
After one but within two years |
145,385 | 243,104 | ||||||
After two but within three years |
23,370 | 25,746 | ||||||
After three but within four years |
98,274 | 13,723 | ||||||
After four but within five years |
29,533 | 91,832 | ||||||
After five years |
| | ||||||
Total certificates of deposit |
1,289,314 | 1,333,268 | ||||||
Total deposit liabilities |
$ | 2,137,508 | $ | 2,128,277 | ||||
The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more
was $313,053 and $293,589 at December 31, 2009 and 2008, respectively.
Interest expense on deposits was as follows:
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Interest-bearing checking accounts |
$ | 121 | $ | 376 | $ | 351 | ||||||
Money market accounts |
2,795 | 8,245 | 8,500 | |||||||||
Regular savings accounts |
181 | 609 | 924 | |||||||||
Certificate of deposits |
41,471 | 55,459 | 66,236 | |||||||||
Total interest expense on deposit liabilities |
$ | 44,568 | $ | 64,689 | $ | 76,011 | ||||||
7. Borrowings
Borrowings consist of the following:
December 31, 2009 | December 31, 2008 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate | Balance | Rate | |||||||||||||
Federal Home Loan
Bank advances
maturing in: |
||||||||||||||||
2012 |
$ | 100,000 | 4.52 | % | $ | 100,000 | 4.52 | % | ||||||||
2013 |
264 | 4.17 | 278 | 4.17 | ||||||||||||
Thereafter |
806,715 | 4.23 | 807,693 | 4.23 | ||||||||||||
Total borrowings |
$ | 906,979 | 4.26 | % | $ | 907,971 | 4.26 | % | ||||||||
Substantially all of the Companys FHLB advances are subject to prepayment penalties if voluntarily
repaid prior to their stated maturity. At December 31, 2009, $856,000 of the Companys FHLB
advances were redeemable on a quarterly basis at the option of the FHLB of Chicago.
83
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
7. Borrowings (continued)
The Company is required to pledge certain unencumbered mortgage loans and mortgage-related
securities as collateral against its outstanding advances from the FHLB of Chicago. Advances are
also collateralized by the shares of capital stock of the FHLB of Chicago that are owned by the
Company. The Companys borrowings at the FHLB of Chicago are limited to the lesser of: (1) 35% of
total assets; (2) twenty (20) times the FHLB of Chicago capital stock owned by the Company; or (3)
the total of 60% of the book value of certain multi-family mortgage loans, 75% of the book value of
one- to four-family mortgage loans, and 95% of certain mortgage-related securities.
The Company has a $5,000 and a $10,000 line of credit with two financial institutions. At December
31, 2009 and 2008, no amounts were outstanding on these lines of credit.
8. Shareholders Equity
The Bank is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possible additional discretionary, actions by regulators, that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by federal regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I
capital (as these terms are defined in regulations) to risk-weighted assets (as these terms are
defined in regulations), and of Tier I capital (as these terms are defined in regulations) to
average assets (as these terms are defined in regulations). Management believes, as of December
31, 2009, that the Bank met all capital adequacy requirements. Management is not aware of any
conditions or events, which would change the Banks status as well capitalized.
84
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
8. Shareholders Equity (continued)
The Banks actual and required regulatory capital amounts and ratios as of December 31, 2009 and
2008, are presented in the following table:
To Be Well Capitalized | ||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||
For Capital | Corrective Action | |||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2009: |
||||||||||||||||||||||||
Total capital
(to risk-weighted assets) |
$ | 348,741 | 20.86 | % | $ | 133,772 | 8.00 | % | $ | 167,215 | 10.00 | % | ||||||||||||
Tier 1 capital
(to risk-weighted assets) |
339,847 | 20.32 | 66,886 | 4.00 | 100,329 | 6.00 | ||||||||||||||||||
Tier 1 capital
(to adjusted total assets) |
339,847 | 9.84 | 138,158 | 4.00 | 172,697 | 5.00 | ||||||||||||||||||
As of December 31, 2008: |
||||||||||||||||||||||||
Total capital
(to risk-weighted assets) |
$ | 349,928 | 20.61 | % | $ | 135,856 | 8.00 | % | $ | 169,820 | 10.00 | % | ||||||||||||
Tier 1 capital
(to risk-weighted assets) |
337,720 | 19.89 | 67,928 | 4.00 | 101,892 | 6.00 | ||||||||||||||||||
Tier 1 capital
(to adjusted total assets) |
337,720 | 9.79 | 138,028 | 4.00 | 172,536 | 5.00 |
The following table presents reconciliations of the Banks equity under generally accepted
accounting principles to capital as determined by regulators:
December 31, 2009 | ||||||||
Risk- | Tier I | |||||||
Based | (Core) | |||||||
Capital | Capital | |||||||
Stockholders equity according to the Banks records |
$ | 394,594 | $ | 394,594 | ||||
Net unrealized loss on securities available for sale, net of taxes |
1,167 | 1,167 | ||||||
Additional minimum pension asset, net of taxes |
1,239 | 1,239 | ||||||
Goodwill and intangibles |
(53,410 | ) | (53,410 | ) | ||||
Investment in non-includable subsidiaries |
(3,743 | ) | (3,743 | ) | ||||
Allowance for loan losses |
8,894 | | ||||||
Regulatory capital |
$ | 348,741 | $ | 339,847 | ||||
Accumulated other comprehensive income is as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Net unrealized loss on securities available-for-sale |
$ | (1,167 | ) | $ | (12,779 | ) | ||
Additional minimum pension asset |
(1,239 | ) | (3,625 | ) | ||||
Accumulated other comprehensive income (loss) |
$ | (2,406 | ) | $ | (16,404 | ) | ||
85
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
9. Earnings Per Share
The computation of the Companys basic and diluted earnings per share is presented in the following
table.
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Basic earnings per share: |
||||||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
Weighted average shares outstanding |
46,177,189 | 47,212,574 | 53,593,140 | |||||||||
Allocated ESOP shares during the period |
327,251 | 327,250 | 327,251 | |||||||||
Vested MRP shares during the period |
61,455 | 186,636 | 189,252 | |||||||||
Basic shares outstanding |
46,565,895 | 47,726,460 | 54,109,643 | |||||||||
Basic earnings per share |
$ | 0.29 | $ | 0.36 | $ | 0.32 | ||||||
Diluted earnings per share: |
||||||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
Weighted average shares outstanding used
in basic earnings per share |
46,565,895 | 47,726,460 | 54,109,643 | |||||||||
Net dilutive effect of: |
||||||||||||
Stock option shares |
612,584 | 898,416 | 1,267,200 | |||||||||
Non-vested MRP shares |
| 4,363 | 20,947 | |||||||||
Diluted shares outstanding |
47,178,479 | 48,629,239 | 55,397,790 | |||||||||
Diluted earnings per share |
$ | 0.29 | $ | 0.35 | $ | 0.31 | ||||||
The Company had stock options for 2,064,000, 2,133,800, and 2,271,000 shares outstanding at
December 31, 2009, 2008, and 2007, respectively, which were not included in the computation of
diluted earnings per share because they were anti-dilutive. These shares had weighted average
exercise prices of $10.75, $10.75, and $10.71, as of those same dates, respectively.
10. Employee Benefit Plans
The Company has a discretionary, defined contribution savings plan (the Savings Plan). The
Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and provides
employees meeting certain minimum age and service requirements the ability to make contributions to
the Savings Plan on a pretax basis. The Company then matches a percentage of the employees
contributions. Matching contributions made by the Company were $181 in 2009, $155 in 2008, and
$146 in 2007.
The Company also has a defined benefit pension plan covering employees meeting certain minimum age
and service requirements and a supplemental pension plan for certain qualifying employees. The
supplemental pension plan is funded through a rabbi trust arrangement. The benefits are
generally based on years of service and the employees average annual compensation for five
consecutive calendar years in the last ten calendar years which produces the highest average. The
Companys funding policy is to contribute annually the amount necessary to satisfy the requirements
of the Employee Retirement Income Security Act of 1974.
Effective January 1, 2008, the Company adopted the measurement portions of a new accounting
standard that the FASB issued in 2006 related to defined benefit pension and other post retirement
benefit plans. The Company uses a year-end measurement date to measure the funded status of its
plans. The adoption of the new standard in 2008
86
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
resulted in an increase in the Companys liabilities for its qualified pension plan and its
supplemental pension plan of $347, an increase in deferred tax assets of $122, an after-tax
increase to accumulated other comprehensive loss of $8, and an after tax charge to retained
earnings of $218.
The changes in benefit obligations and plan assets at December 31, 2009 and 2008, are presented in
the following table. Due to the adoption of the new measurement date provisions in 2008, the
changes in benefit obligations and plan assets for the year ended December 31, 2008, include
fourteen months of activity.
Qualified | Supplemental | |||||||||||||||
Pension Plan | Pension Plan | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 30,389 | $ | 26,863 | $ | 7,233 | $ | 6,880 | ||||||||
Service cost |
1,765 | 2,033 | 197 | 215 | ||||||||||||
Interest cost |
1,821 | 1,934 | 430 | 491 | ||||||||||||
Actuarial loss (gain) |
1,801 | 329 | (115 | ) | (6 | ) | ||||||||||
Benefits paid |
(744 | ) | (770 | ) | (297 | ) | (347 | ) | ||||||||
Benefit obligation at end of year |
$ | 35,032 | $ | 30,389 | $ | 7,448 | $ | 7,233 | ||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 24,943 | $ | 28,237 | | | ||||||||||
Actual return on plan assets |
6,435 | (4,146 | ) | | | |||||||||||
Employer contributions |
5,000 | 1,622 | $ | 297 | $ | 347 | ||||||||||
Benefits paid |
(744 | ) | (770 | ) | (297 | ) | (347 | ) | ||||||||
Fair value of plan assets at end of year |
35,634 | 24,943 | | | ||||||||||||
Funded status at the end of the year |
$ | 602 | $ | (5,446 | ) | $ | (7,448 | ) | $ | (7,233 | ) | |||||
The funded status of the qualified plan at December 31, 2009, is recognized in the statement of
financial condition as prepaid pension. The underfunded status of this plan at December 31, 2008,
as well as the underfunded status of the supplemental plan at both December 31, 2009 and 2008, are
recognized as accrued pension liability.
Unrecognized net losses (gains) in accumulated other comprehensive income, net of tax, are $1,785
and $4,192 for the qualified pension plan and $(446) and $(402) for the supplemental pension plan
as of December 31, 2009 and 2008, respectively.
The estimated net of tax costs that will be amortized from accumulated other comprehensive income
into net periodic cost over the next fiscal year is zero for the qualified plan. The accumulated
benefit obligations for the defined benefit pension plan were $32,081 at December 31, 2009, and
$27,954 at December 31, 2008.
The assumptions used to determine the benefit obligation as of December 31 is as follows:
2009 | 2008 | |||||||
Discount rate |
5.84 | % | 6.07 | % | ||||
Rate of increase in compensation levels |
3.50 | % | 3.50 | % | ||||
Expected long-term rate of return on plan assets (qualified plan) |
6.50 | % | 7.00 | % |
87
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The assumptions used to determine the net cost for the years ended December 31 is as follows:
2009 | 2008 | 2007 | ||||||||||
Discount rate |
6.07 | % | 6.25 | % | 6.00 | % | ||||||
Rate of increase in compensation levels |
3.50 | % | 3.50 | % | 3.50 | % | ||||||
Expected long-term rate of return on plan assets (qualified plan) |
7.00 | % | 7.00 | % | 7.00 | % |
The expected long-term rate of return was estimated using a combination of the expected rate of
return for immediate participation contracts and the historical rate of return for immediate
participation contracts.
Using an actuarial measurement date of December 31, 2009 and 2008, and October 31, 2007, components
of net periodic benefit cost follow:
2009 | 2008 | 2007 | ||||||||||
Qualified pension plan: |
||||||||||||
Service cost |
$ | 1,764 | $ | 1,743 | $ | 1,789 | ||||||
Interest cost |
1,821 | 1,657 | 1,471 | |||||||||
Expected return on plan assets |
(1,719 | ) | (1,953 | ) | (1,796 | ) | ||||||
Amortization of unrecognized prior service cost |
| 23 | 30 | |||||||||
Amortization of net loss |
558 | | | |||||||||
Net periodic cost |
$ | 2,424 | $ | 1,470 | $ | 1,494 | ||||||
Supplemental pension plan: |
||||||||||||
Service cost |
$ | 196 | $ | 184 | $ | 173 | ||||||
Interest cost |
430 | 421 | 393 | |||||||||
Amortization of prior service cost |
| | 55 | |||||||||
Net periodic cost |
$ | 626 | $ | 605 | $ | 621 | ||||||
At December 31, 2009, the projected benefit payments for each of the plans are as follows:
Qualified | Supplemental | |||||||||||
Plan | Plan | Total | ||||||||||
2009 |
$ | 1,060 | $ | 297 | $ | 1,357 | ||||||
2011 |
1,296 | 760 | 2,056 | |||||||||
2012 |
1,524 | 760 | 2,284 | |||||||||
2012 |
1,864 | 760 | 2,624 | |||||||||
2014 |
2,095 | 760 | 2,855 | |||||||||
2015 - 2019 |
13,992 | 2,411 | 16,403 | |||||||||
Total |
$ | 21,831 | $ | 5,748 | $ | 27,579 | ||||||
88
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
The fair value of the Companys pension plan assets at December 31, 2009, is summarized as follows:
Fair Value Hierarchy | ||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset category: |
||||||||||||||||
Money market fund |
$ | 232 | | $ | 232 | | ||||||||||
Equity security |
1,090 | $ | 1,090 | | | |||||||||||
Immediate participation guarantee contract |
34,312 | | | $ | 34,312 | |||||||||||
Total |
$ | 35,634 | $ | 1,090 | $ | 232 | $ | 34,312 | ||||||||
The investment objective is to minimize risk. The assets of the pension plan are concentrated in a
group annuity contract issued by a life insurance company. Pension plan contributions are
maintained in the general account of the insurance company, which invests primarily in corporate
and government notes and bonds with ten to fifteen
years to maturity. The group annuity contract is valued at fair value by discounting the related
cash flows based on current yields of similar instruments with comparable durations and considering
the credit worthiness of the issuer.
The equity securities are shares of stock issued by the life insurance company when it
demutualized. This investment is valued at the closing price reported in the active market in
which the security is traded. The money market fund, which invests in short-term U.S. government
securities, is based on a $1 net asset value (NAV) specified by the fund manager. The fund is
not traded in an active market. The fund manager bases its estimate of the NAV on quoted prices
for similar assets in active markets.
The following table presents a summary of the changes in the fair value of the pension plans Level
3 asset during the year ended December 31, 2009. As noted above, the Companys Level 3 asset
consists entirely of a group annuity contract issued by an insurance company.
Amount | ||||
Fair value at December 31, 2008 |
$ | 23,739 | ||
Actual return on plan assets |
6,317 | |||
Employer contribution |
5,000 | |||
Benefits paid |
(744 | ) | ||
Fair value at December 31, 2009 |
$ | 34,312 | ||
The Company has a deferred retirement plan for certain non-officer directors who have provided at
least five years of service. All eligible directors benefits have vested. In the event a
director dies prior to completion of these payments, payments will go to the directors heirs. The
Company has funded these arrangements through rabbi trust arrangements and, based on actuarial
analyses, believes these obligations are adequately funded. The Company also has supplemental
retirement plans for certain executives of a financial institution it acquired in 2000. The
liabilities related to these plans were $3,221 and $3,125 at December 31, 2009 and 2008,
respectively. The net expense (revenue) related to these plans for the years ended December 31,
2009, 2008, and 2007 was $226, $(57), and $141, respectively.
89
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans
In 2001 the Companys shareholders approved the 2001 Stock Incentive Plan (the 2001 Plan), which
provided for stock option awards of up to 4,150,122 shares. Options granted under the 2001 Plan
vested over five years and have expiration terms of ten years. The 2001 Plan also provided for
restricted stock (MRP) awards of up to 1,226,977 shares. All options and MRPs awarded under the
2001 Plan are fully vested and no further awards may be granted under the plan.
In 2004 the Companys shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan), which
provides for stock option awards of up to 4,106,362 shares. Options granted under the 2004 Plan
vest over five years and have expiration terms of ten years. The 2004 Plan also provides for MRP
awards of up to 1,642,521 shares. MRP shares awarded under the 2004 Plan vest over five years. As
of December 31, 2009, options for 1,592,362 shares and 654,721 MRP shares remain eligible for award
under the 2004 Plan.
MRP grants are amortized to compensation expense as the Companys employees and directors become
vested in the granted shares. The amount amortized to expense was $704 for 2009, $1,735 for 2008,
and $1,873. Outstanding non-vested MRP grants had a fair value of $159 and an unamortized cost of
$268 at December 31, 2009. The cost of these shares is expected to be recognized over a
weighted-average period of 1.8 years.
The Company recorded stock option compensation expenses of $168, $300, and $278 for 2009, 2008, and
2007 respectively. As of December 31, 2009, there was $114 in total unrecognized stock option
compensation expense related to non-vested options. This cost is expected to be recognized over a
weighted-average period of 1.7 years.
The following schedule reflects activity in the Companys vested and non-vested stock options and
related weighted average exercise prices for the years ended December 31, 2009, 2008, and 2007.
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Stock | Average | Stock | Average | Stock | Average | |||||||||||||||||||
Options | Exercise | Options | Exercise | Options | Exercise | |||||||||||||||||||
Outstanding at beginning of year |
3,445,967 | $ | 7.8763 | 4,090,628 | $ | 7.3650 | 4,525,238 | $ | 7.0730 | |||||||||||||||
Granted |
| | 82,000 | 11.6870 | | | ||||||||||||||||||
Exercised |
(246,769 | ) | 3.2056 | (667,461 | ) | 4.9956 | (402,610 | ) | 3.7620 | |||||||||||||||
Forfeited |
(69,800 | ) | 10.6707 | (59,200 | ) | 10.6730 | (32,000 | ) | 10.6730 | |||||||||||||||
Outstanding at end of year |
3,129,398 | $ | 8.1823 | 3,445,967 | $ | 7.8763 | 4,090,628 | $ | 7.3250 | |||||||||||||||
The following table provides additional information regarding the Companys outstanding options as
of December 31, 2009.
Remaining | Non-Vested Options | Vested Options | ||||||||||||||||
Contractual | Stock | Intrinsic | Stock | Intrinsic | ||||||||||||||
Life | Options | Value | Options | Value | ||||||||||||||
Exercise price: |
||||||||||||||||||
$3.2056 |
1.3 years | | | 1,065,398 | $ | 3,968 | ||||||||||||
$10.6730 |
4.3 years | | | 1,932,000 | | |||||||||||||
$12.2340 |
6.5 years | 20,000 | | 30,000 | | |||||||||||||
$11.1600 |
8.3 years | 25,600 | | 6,400 | | |||||||||||||
$12.0250 |
8.6 years | 40,000 | | 10,000 | | |||||||||||||
Total |
85,600 | | 3,043,798 | $ | 3,968 | |||||||||||||
Weighted average remaining contractual life |
8.0 years | 3.3 years | ||||||||||||||||
Weighted average exercise price |
$ | 11.8151 | $ | 8.0801 | ||||||||||||||
90
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
The total intrinsic value of options exercised was $1,337, $4,304, and $3,227 during 2009, 2008,
and 2007, respectively. The weighted average grant date fair value of non-vested options at
December 31, 2009, was $2.01 per share. There were no grants or forfeitures of non-vested options
during 2009; however, options for 431,600 shares became vested during this period.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of granted
options. This model was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. However, the Companys stock options have
characteristics significantly different from traded options and changes in the subjective input
assumptions can materially affect the fair value estimate. Option valuation models such as
Black-Scholes require the input of highly subjective assumptions including the expected stock price
volatility, which is computed using five-years of actual price activity in the Companys stock.
The Company uses historical data of employee behavior as a basis to estimate the expected life of
the options, as well as forfeitures due to employee terminations. The Company also uses its actual
dividend yield at the time of the grant, as well as actual U.S. Treasury yields in effect at the
time of the grant to estimate the risk-free rate. There were no options granted during 2007 or
2009. The following assumptions were used to value 82,000 options granted during 2008: risk free
interest rate of 3.15%, dividend yield of 3.00%, expected stock volatility of 18.2%, and expected
term to exercise of 7.5 years.
The Company maintains an Employee Stock Ownership Plan (ESOP) for its employees. The ESOP is a
qualifying plan under Internal Revenue Service guidelines. It covers all full-time employees who
have attained at least 21 years of age and completed one year of service. In 2000 and 2001, the
ESOP borrowed a total of $8,999 and purchased 3,271,946 of the Companys common shares on various
dates in 2000, 2001, and 2002. ESOP expense is recognized based on the fair value (average stock
price) of shares scheduled to be released from the ESOP trust. Beginning in 2001, one-tenth of the
shares are scheduled to be released each year. Also, additional
shares may be released as the ESOP trust receives cash dividends from the unallocated shares held
in the trust. ESOP expense for the years ended December 31, 2009, 2008, and 2007, was $2,869,
$3,615, and $3,729, respectively.
The following table summarizes shares of Company common stock held by the ESOP at December 31.
2009 | 2008 | 2007 | ||||||||||
Shares allocated to participants in fiscal year |
327,251 | 327,250 | 327,251 | |||||||||
Unallocated and unearned shares |
126,175 | 453,426 | 780,677 | |||||||||
Fair value of unearned ESOP shares |
$ | 874 | $ | 5,233 | $ | 8,252 |
The Company has no stock compensation plans that have not been approved by shareholders.
12. Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and
Wisconsin and Minnesota. The Company is no longer subject to U.S. federal and Minnesota income tax
examinations by tax authorities for years prior to 2005, and for Wisconsin for years prior to 1997.
If any interest and/or penalties would be imposed by an appropriate taxing authority, the Company
would report the interest component through miscellaneous operating expense and penalties through
income tax expense.
91
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
12. Income Taxes (continued)
The provision for income taxes consists of the following:
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current income tax expense: |
||||||||||||
Federal |
$ | 7,193 | $ | 15,281 | $ | 9,566 | ||||||
State |
88 | 83 | 121 | |||||||||
Current income tax expense |
7,281 | 15,364 | 9,687 | |||||||||
Deferred income tax expense (benefit): |
||||||||||||
Federal |
210 | (6,267 | ) | (788 | ) | |||||||
State |
(2,073 | ) | (3 | ) | (7 | ) | ||||||
Deferred income tax expense |
(1,863 | ) | (6,270 | ) | (795 | ) | ||||||
Income tax expense |
$ | 5,418 | $ | 9,094 | $ | 8,892 | ||||||
Income tax expense differs from the provision computed at the federal statutory corporate rate as
follows:
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Income before provision for income taxes |
$ | 19,143 | $ | 26,249 | $ | 26,387 | ||||||
Tax expense at federal statutory rate |
$ | 6,700 | $ | 9,188 | $ | 9,235 | ||||||
Increase (decrease) in taxes resulting from: |
||||||||||||
State income taxes, net of federal tax benefit |
510 | 52 | 74 | |||||||||
Bank owned life insurance |
(751 | ) | (873 | ) | (887 | ) | ||||||
Executive compensation in excess of Section 162(m) limit |
141 | 143 | 117 | |||||||||
Reversal of valuation allowance, net of federal benefit |
(1,800 | ) | | | ||||||||
Tax return and other reserve adjustments |
230 | 492 | 464 | |||||||||
Other |
388 | 92 | (111 | ) | ||||||||
Income tax expense |
$ | 5,418 | $ | 9,094 | $ | 8,892 | ||||||
92
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
12. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of the Companys deferred tax assets and liabilities are
summarized as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
State net operating losses |
$ | 778 | $ | 1,424 | ||||
Loan loss reserves |
6,834 | 4,887 | ||||||
Pension |
5,644 | 5,196 | ||||||
Deferred compensation |
1,553 | 1,637 | ||||||
Restricted stock amortization |
312 | 741 | ||||||
Unrealized loss on investment securities |
782 | 6,919 | ||||||
Other-than-temporary impairment of investment securities |
3,599 | 3,279 | ||||||
Other |
388 | 839 | ||||||
Total deferred tax assets |
19,890 | 24,922 | ||||||
Valuation allowance |
(135 | ) | (2,021 | ) | ||||
Total deferred tax assets, net of valuation allowance |
19,755 | 22,901 | ||||||
Deferred tax liabilities: |
||||||||
Property and equipment depreciation |
1,001 | 854 | ||||||
FHLB stock dividends |
5,130 | 5,130 | ||||||
Deferred loan fees |
260 | 258 | ||||||
Purchase accounting adjustments |
3,656 | 3,895 | ||||||
Mortgage servicing rights |
2,769 | 1,816 | ||||||
Other |
347 | 82 | ||||||
Total deferred tax liabilities |
13,163 | 12,035 | ||||||
Net deferred tax asset |
$ | 6,592 | $ | 10,866 | ||||
During first quarter of 2009 the Company recorded a $1.8 million state tax benefit related to the
reversal of a valuation allowance it had established against a deferred tax asset in prior years.
The deferred tax asset related to Wisconsin net operating loss carryovers for which the Company was
unable to determine in prior periods whether it was more likely than not that the tax benefits
would be realized in future periods. In the first quarter of 2009 Wisconsin law was amended from
a system that taxed each affiliated entity separately to a form of combined reporting. As a result
of this change, the Company determined that its Wisconsin net operating losses that had not been
recognized in prior periods would be realizable, resulting in a one-time tax benefit of $1.8
million in the first quarter of 2009.
For state income tax purposes, the Company has net operating loss carryovers of $15,154 available
to offset against future income. The carryovers expire in the years 2010 through 2023 if unused.
The Company continues to carry a valuation allowance against the portion of this carryover that
relates to the parent companys net operating losses prior to 2009, as well as certain other
deferred tax assets. At December 31, 2009, the Company believed it was more likely than not that
these items would not be realized. However, as time passes the Company will be able to
better assess the amount of tax benefit it will realize from using these items.
93
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
13. Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments consist of
commitments to extend credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the
consolidated statements of financial condition. The contract amounts reflect the extent of
involvement the Company has in particular classes of financial instruments and also represents the
Companys maximum exposure to credit loss.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and generally require payment of a fee. As some commitments expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates the collateral needed and creditworthiness of each customer on
a case by case basis. The Company generally extends credit only on a secured basis. Collateral
obtained varies, but consists principally of one- to four-family residences.
Financial instruments whose contract amounts represent credit risk are as follows:
December 31 | ||||||||
2009 | 2008 | |||||||
Unused consumer lines of credit |
$ | 150,424 | $ | 153,568 | ||||
Unused commercial lines of credit |
18,904 | 21,760 | ||||||
Commitments to extend credit: |
||||||||
Fixed rate |
35,769 | 22,690 | ||||||
Adjustable rate |
2,185 | 20,585 | ||||||
Undisbursed commercial loans |
524 | 994 | ||||||
Standby letters of credit |
111 | 60 |
The Company sells substantially all of its long-term, fixed-rate, one- to four-family loan
originations in the secondary market. The Company uses derivative instruments to manage interest
rate risk associated with these activities. Specifically, the Company enters into interest rate
lock commitments (IRLCs) with borrowers, which are considered to be derivative instruments. The
Company manages its exposure to interest rate risk in IRLCs (as well as interest rate risk in its
loans held-for-sale) by entering into forward commitments to sell loans to the Federal National
Mortgage Association (Fannie Mae). Commitments to sell loans expose the Company to interest rate
risk if market rates of interest decrease during the commitment period. Such forward commitments
are considered to be derivative instruments. These derivatives are not designated as accounting
hedges as specified in GAAP. As such, changes in the fair value of the derivative instruments are
recognized currently through earnings.
As of December 31, 2009 and 2008, net unrealized gains (losses) of $(306) and $397, respectively,
were recognized in net gain on loan sales activities on the derivative instruments specified in the
previous paragraph. These amounts were exclusive of net unrealized losses of $(67) and $0 on loans
held-for-sale as of those dates, respectively, which were also included in net gain on loan sales
activities.
94
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
13. Financial Instruments with Off-Balance-Sheet Risk (continued)
The following table summarizes the Companys derivative assets and liabilities as of the dates
indicated.
December 31, 2009 | December 31, 2008 | |||||||||||||||
Notional | Fair | Notional | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Interest rate lock commitments |
$ | 15,433 | $ | (69 | ) | $ | 74,298 | $ | 1,025 | |||||||
Forward commitments |
27,668 | 375 | 69,587 | (628 | ) | |||||||||||
Net unrealized gain (loss) |
$ | (306 | ) | $ | 397 | |||||||||||
Other assets include unrealized gains on IRLCs and forward commitments of $375 and $1,025 as of
December 31, 2009, and December 31, 2008, respectively. Unrealized losses of $69 and $628 on IRLCs
and forward commitments are included in other liabilities at December 31, 2009, and December 31,
2008, respectively.
14. Fair Value of Financial Instruments
Disclosure of fair value information about certain financial instruments, whether or not recognized
in the consolidated financial statements, for which it is practicable to estimate the value, is
summarized below. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument.
Certain financial instruments and all nonfinancial instruments are excluded from this disclosure.
Accordingly, the aggregate fair value of amounts presented does not represent the underlying value
of the Company and is not particularly relevant to predicting the Companys future earnings or cash
flows.
The following methods and assumptions are used by the Company in estimating its fair value
disclosures of financial instruments:
Cash and Cash Equivalents The carrying amounts reported in the statements of financial condition
for cash and cash equivalents approximate those assets fair values.
Securities Available-for-Sale Fair values for these securities are based on quoted market prices
or such prices of comparable instruments.
Loans Held-for-Sale The fair value of loans held-for-sale is based on the current market price for
securities collateralized by similar loans.
Loans Receivable Loans receivable are segregated by type such as one- to four-family,
multi-family, and commercial real estate mortgage loans, consumer loans, and commercial business
loans. The fair value of each type is calculated by discounting scheduled cash flows through the
expected maturity of the loans using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan type. The estimated maturity is based on the Companys
historical experience with prepayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
95
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
Mortgage Servicing Rights The Company has calculated the fair market value of mortgage servicing
rights for those loans that are sold with servicing rights retained. For valuation purposes, loans
are stratified by product type and, within product type, by interest rates. The fair value of
mortgage servicing rights is based upon the present value of estimated future cash flows using
current market assumptions for prepayments, servicing cost and other factors.
Federal Home Loan Bank Stock FHLB of Chicago stock is carried at cost, which is its redeemable
(fair) value, since the market for this stock is restricted.
Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and
payable approximate their fair value.
Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for
demand deposits equal book value. Fair values for other deposits are estimated using a discounted
cash flow calculation that applies current market borrowing interest rates to a schedule of
aggregated expected monthly maturities on deposits. The advance payments by borrowers for taxes
and insurance are equal to their carrying amounts at the reporting date.
Borrowings The fair value of long-term borrowings is estimated using discounted cash flow
calculations with the discount rates equal to interest rates currently being offered for borrowings
with similar terms and maturities. The carrying value on short-term borrowings approximates fair
value.
The carrying values and fair values of the Companys financial instruments are presented in the
following table as of the indicated dates.
December 31, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Cash and cash equivalents |
$ | 227,658 | $ | 227,658 | $ | 112,893 | $ | 112,893 | ||||||||
Securities available-for-sale |
1,480,952 | 1,480,952 | 1,270,005 | 1,270,005 | ||||||||||||
Loans held-for-sale |
13,534 | 13,534 | 19,030 | 19,455 | ||||||||||||
Loans receivable, net |
1,506,056 | 1,483,981 | 1,829,053 | 1,781,536 | ||||||||||||
Mortgage servicing rights |
6,899 | 7,720 | 3,703 | 4,696 | ||||||||||||
Federal Home Loan Bank stock |
46,092 | 46,092 | 46,092 | 46,092 | ||||||||||||
Accrued interest receivable |
13,321 | 13,321 | 16,532 | 16,532 | ||||||||||||
Deposit liabilities |
2,137,508 | 2,061,164 | 2,130,348 | 2,123,284 | ||||||||||||
Borrowings |
906,979 | 994,300 | 907,971 | 1,060,896 | ||||||||||||
Advance payments by borrowers |
2,508 | 2,508 | 1,929 | 1,929 | ||||||||||||
Accrued interest payable |
4,228 | 4,228 | 3,312 | 3,312 |
Excluded from the above table are off-balance-sheet items (refer to Note 13) as the fair value of
these items is not significant.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The Company utilizes
market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated, or generally unobservable. The
Company primarily applies the market approach for recurring value measurements and endeavors to
utilize the best available information. Accordingly, the Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs. The
Company is able to classify fair value balances based on the observability of those inputs. GAAP
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices
96
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
in active markets for identical assets or liabilities (Level 1), the next highest priority is given
to prices based on models, methodologies, and/or management judgments that rely on direct or
indirect observable inputs (Level 2), and the lowest priority to prices derived from models,
methodologies, and/or management judgments that rely on significant unobservable inputs (Level 3).
The following table segregates by fair value hierarchy (i.e., Level 1, 2, or 3) all of the
Companys assets and liabilities as of December 31, 2009 and 2008, that are measured at fair value
on a recurring basis.
December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans held-for-sale |
| $ | 13,534 | | $ | 13,534 | ||||||||||
Securities available-for-sale: |
||||||||||||||||
Investment securities |
$ | 22,312 | 591,792 | | 614,104 | |||||||||||
Mortgage-related securities |
| 866,848 | | 866,848 | ||||||||||||
Total |
$ | 22,312 | $ | 1,472,174 | | $ | 1,494,486 | |||||||||
December 31, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Securities available-for-sale: |
||||||||||||||||
Investment securities |
$ | 39,603 | $ | 379,535 | | $ | 419,138 | |||||||||
Mortgage-related securities |
| 850,867 | | 850,867 | ||||||||||||
Total |
$ | 39,603 | $ | 1,230,402 | | $ | 1,270,005 | |||||||||
For purposes of the impairment testing of mortgage servicing rights, the underlying mortgage loans
are stratified into pools by product type and, within product type, by interest rates. Pools with
an amortized cost basis greater than fair value are carried at fair value in the Companys
financial statements. Although not included in the above table, the Company considers the fair
value of mortgage servicing rights to be Level 3 in the fair value hierarchy. Pools determined to
be impaired at December 31, 2009, had an amortized cost basis of $2,286 and a fair value of $1,999
as of that date. Accordingly, the Company recorded a valuation allowance of $287 as of December
31, 2009, as well as a corresponding charge to earnings equal to the change in this valuation
allowance during the twelve months then ended.
Prior to 2009, loans held-for-sale are recorded at lower of cost or fair value and therefore were
reported at fair value on a non-recurring basis. For non-accrual loans greater than an established
threshold and individually evaluated for impairment and all renegotiated loans, impairment is
measured based on: (1) the fair value of the loan or the fair value of the collateral less
estimated selling costs (collectively the collateral value method) or (2) the present value of the
estimated cash flows discounted at the loans original effective interest rate (the discounted cash
flow method). The resulting valuation allowance, if any, is a component of the allowance for loan
losses. The discounted cash flow method is a fair value measure. For the collateral value method,
the Company generally obtains appraisals to support the fair value of collateral underlying the
loans. Appraisals incorporate measures such as recent sales prices for comparable properties and
costs of construction. The Company considers these fair values to be Level 3 in the fair value
hierarchy. For those loans individually evaluated for impairment using the collateral value
method, a valuation allowance of $6,033 was recorded for loans with a recorded investment of
$16,299 at December 31, 2009. These comparable amounts at December 31, 2008, were $3,351 and
$16,535, respectively.
97
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower
of cost or fair value less estimated costs to sell. In determining fair value, the Company
generally obtains appraisals to support the fair value of foreclosed properties. The Company
considers these fair values to be Level 3 in the fair value hierarchy. As of December 31, 2009,
$10,442 in foreclosed properties were valued at collateral value compared to $640 at December 31,
2008.
15. Condensed Parent Company Only Financial Statements
STATEMENT OF FINANCIAL CONDITION
December 31 | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 8,787 | $ | 17,235 | ||||
Investment in subsidiary |
391,670 | 378,963 | ||||||
Receivable from ESOP |
347 | 1,247 | ||||||
Other assets |
1,744 | 2,166 | ||||||
Total assets |
$ | 402,548 | $ | 399,611 | ||||
Liabilities and shareholders equity |
||||||||
Other liabilities |
$ | 71 | | |||||
Shareholders equity: |
||||||||
Common stock$0.01 par value: |
||||||||
Authorized200,000,000 shares in 2009 and 2008
Issued78,783,849 shares in 2009 and 2008
Outstanding46,165,635 in 2009 and 47,686,759 shares in 2008 |
788 | $ | 788 | |||||
Additional paid-in capital |
499,376 | 498,501 | ||||||
Retained earnings |
272,518 | 273,826 | ||||||
Unearned ESOP shares |
(347 | ) | (1,247 | ) | ||||
Accumulated other comprehensive income |
(2,406 | ) | (16,404 | ) | ||||
Treasury stock32,618,214 shares in 2009 and 31,097,090 shares in 2008 |
(367,452 | ) | (355,853 | ) | ||||
Total shareholders equity |
402,477 | 399,611 | ||||||
Total liabilities and shareholders equity |
$ | 402,548 | $ | 399,611 | ||||
98
Table of Contents
Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(Dollars in Thousands, Except Per Share Amounts)
15. Condensed Parent Company Only Financial Statements (continued)
STATEMENT OF INCOME
Year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Total income |
$ | 207 | $ | 354 | $ | 1,627 | ||||||
Total expenses |
1,077 | 1,460 | 1,430 | |||||||||
Income (loss) before income taxes |
(870 | ) | (1,106 | ) | 197 | |||||||
Income tax expense (benefit) |
(338 | ) | (387 | ) | 67 | |||||||
Income (loss) before equity in earnings of subsidiary |
(532 | ) | (719 | ) | 130 | |||||||
Equity in earnings of subsidiary |
14,257 | 17,875 | 16,973 | |||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
STATEMENT OF CASH FLOWS
Year ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 13,725 | $ | 17,156 | $ | 17,103 | ||||||
Adjustment to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Equity in earnings of Bank subsidiary |
(14,257 | ) | (17,875 | ) | (16,973 | ) | ||||||
Stock-based compensation |
253 | 248 | 546 | |||||||||
Change in other operating activities and liabilities |
493 | (2,076 | ) | 1,582 | ||||||||
Net cash provided (used) by operating activities |
214 | (2,547 | ) | 2,258 | ||||||||
Investing activities: |
||||||||||||
Dividends from Bank subsidiary |
19,700 | 26,400 | 100,200 | |||||||||
Other investing activities |
(664 | ) | (547 | ) | 33 | |||||||
Net cash provided by investing activities |
19,036 | 25,853 | 100,233 | |||||||||
Financing activities: |
||||||||||||
Cash dividends |
(15,033 | ) | (16,442 | ) | (17,227 | ) | ||||||
Purchase of treasury stock |
(14,397 | ) | (29,927 | ) | (120,687 | ) | ||||||
Proceeds from exercise of stock options |
556 | 3,313 | 1,396 | |||||||||
Excess tax benefit from exercise of stock options |
276 | 379 | 433 | |||||||||
Cash received for MRP grants from Bank subsidiary |
| 9,997 | | |||||||||
Payments received on ESOP |
900 | 900 | 900 | |||||||||
Net cash used in financing activities |
(27,698 | ) | (31,780 | ) | (135,185 | ) | ||||||
Decrease in cash and cash equivalents |
(8,448 | ) | (8,474 | ) | (32,694 | ) | ||||||
Cash and cash equivalents at beginning of year |
17,235 | 25,709 | 58,403 | |||||||||
Cash and cash equivalents at end of year |
$ | 8,787 | $ | 17,235 | $ | 25,709 | ||||||
99
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The management of the Company, including its Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of
December 31, 2009, that the disclosure controls and procedures were effective.
Change in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal
quarter of the year to which this report relates that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
The internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. The Companys internal control over financial reporting
includes those policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the Company are being made only in accordance with authorization of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material
effect on the financial statements.
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. The Companys management, including its Chief Executive Officer and
Chief Financial Officer, has assessed the effectiveness of its internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon their assessment and those criteria, management believes
that as of December 31, 2009, the Companys internal control over financial reporting was
effective.
Deloitte & Touche LLP, the Companys independent registered public accounting firm, has audited the
consolidated financial statements included in this Annual Report on Form 10-K and, as a part of its
audit, has issued an attestation report on the effectiveness of the Companys internal control over
financial reporting. That attestation report can be found on the following page as part of this
Item 9A.
100
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the internal control over financial reporting of Bank Mutual Corporation and
subsidiaries (the Company) as of December 31, 2009, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2009 of the Company and our report dated March 5, 2010, expressed an unqualified opinion on
those financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 5, 2010
March 5, 2010
101
Table of Contents
Table of Contents
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Information in response to this item is incorporated herein by reference to Election of
Directors, Section 16(a) Beneficial Ownership Reporting Compliance, and Executive Officers in
the Companys definitive Proxy Statement for its Annual Meeting of Shareholders on May 3, 2010 (the
2010 Annual Meeting Proxy Statement).
Item 11. Executive Compensation
Information in response to this item is incorporated by reference to Election of DirectorsBoard
Meetings and CommitteesCompensation Committee Interlocks and Insider Participation, Directors
Compensation, Compensation Discussion and Analysis, Compensation Committee Report on Executive
Compensation, Executive Compensation, and Risk Management and Compensation in the 2010 Annual
Meeting Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information in response to this item is incorporated by reference to Security Ownership of Certain
Beneficial Owners in the 2010 Annual Meeting Proxy Statement.
The following chart gives aggregate information regarding grants under all equity compensation
plans of the Company through December 31, 2009.
Number of securities | ||||||||||||
remaining available | ||||||||||||
Number of securities | for future issuance under | |||||||||||
to be issued upon | Weighted-average | equity compensation | ||||||||||
exercise of | exercise price of | plans (excluding | ||||||||||
outstanding options, | outstanding options, | securities reflected | ||||||||||
Plan category | warrants and rights (1) | warrants and rights | in 1st column) (2) | |||||||||
Equity compensation plans
approved by security holders |
3,129,398 | $ | 8.1823 | 2,247,083 | ||||||||
Equity compensation plans
not
approved by security
holders |
None | None | None |
(1) | Represents options granted under the 2001 Plan or 2004 Plan, which plans were approved by Company shareholders in 2001 and 2004, respectively. | |
(2) | Represents options and restricted stock which may be granted under the 2004 Plan. No further awards may be made under the 2001 Plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information in response to this item is incorporated by reference to Election of DirectorsBoard
Meetings and Committees and Certain Transactions and Relationships with the Company in the 2010
Annual Meeting Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information in response to this item is incorporated by reference to Independent Registered Public
Accounting Firm in the 2010 Annual Meeting Proxy Statement.
103
Table of Contents
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the Report:
1. and 2. Financial Statements and Financial Statement Schedules.
The following consolidated financial statements of the Company and subsidiaries are filed as part
of this report under Item 8. Financial Statements and Supplementary Data:
| Reports of Deloitte & Touche LLP and Ernst & Young LLP, Independent Registered Public Accounting Firms, on consolidated financial statements. | ||
| Consolidated Statements of Financial ConditionAs of December 31, 2009 and 2008. | ||
| Consolidated Statements of IncomeYears Ended December 31, 2009, 2008, and 2007. | ||
| Consolidated Statements of EquityYears Ended December 31, 2009, 2008, and 2007. | ||
| Consolidated Statements of Cash FlowsYears Ended December 31, 2009, 2008, and 2007. | ||
| Notes to Consolidated Financial Statements. |
All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) Exhibits. Refer to the Exhibit Index following the signature page of this report, which is
incorporated herein by reference. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report is identified in the Exhibit Index by an
asterisk following its exhibit number.
104
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
March 5, 2010 |
BANK MUTUAL CORPORATION |
|||
By: | /s/ Michael T. Crowley, Jr. | |||
Michael T. Crowley, Jr. | ||||
Chairman, President and Chief Executive Officer | ||||
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Michael T. Crowley, Jr., Michael W.
Dosland, Richard L. Schroeder or any of them, as attorneys-in-fact with full power of substitution,
to execute in the name and on behalf of such person, individually, and in each capacity stated
below or otherwise, and to file, any and all amendments to this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated.*
Signature and Title
/s/ Michael T. Crowley, Jr.
|
/s/ Mark C. Herr | |||
Michael T. Crowley, Jr., Chairman, President,
|
Mark C. Herr, Director | |||
Chief Executive Officer and Director |
||||
(Principal Executive Officer) |
||||
/s/ Michael W. Dosland
|
/s/ Thomas J. Lopina, Sr. | |||
Michael
W. Dosland, Senior
Vice President and |
Thomas J. Lopina, Sr., Director | |||
Chief Financial Officer (Principal Financial Officer) |
||||
/s/ Richard L. Schroeder
|
/s/ William J. Mielke | |||
Richard L. Schroeder, Vice President and
|
William J. Mielke, Director | |||
Controller (Principal Accounting Officer) |
||||
/s/ David C. Boerke
|
/s/ Robert B. Olson | |||
David C. Boerke, Director
|
Robert B. Olson, Director | |||
/s/ Richard A. Brown
|
/s/ Jelmer G. Swoboda | |||
Richard A. Brown, Director
|
Jelmer G. Swoboda, Director | |||
/s/ Thomas H. Buestrin
|
* | Each of the above signatures is affixed as of March 5, 2010. |
105
Table of Contents
BANK MUTUAL CORPORATION
(Bank Mutual Corporation or the Company) **
Commission File No. 000-32107
(Bank Mutual Corporation or the Company) **
Commission File No. 000-32107
EXHIBIT INDEX
TO
2009 REPORT ON FORM 10-K
TO
2009 REPORT ON FORM 10-K
The following exhibits are filed with, or incorporated by reference in, this Report on Form 10-K
for the year ended December 31, 2009:
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
3(i)
|
Restated Articles of Incorporation, as last amended May 29, 2003, of Bank Mutual Corporation (the Articles) | Exhibit 3(i) to the Companys Registration Statement on Form S-1, Registration No. 333-105685 | ||||
3(ii)
|
Bylaws, as last amended May 7, 2007, of Bank Mutual Corporation | Exhibit 3.1 to the Companys Report on Form 8-K dated May 7, 2007 | ||||
4.1
|
The Articles | Exhibit 3(i) above | ||||
10.1*
|
Bank Mutual Corporation Savings Restoration Plan and Bank Mutual Corporation ESOP Restoration Plan | Exhibit 10.1(b) to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (2003 10-K) | ||||
10.2*
|
Bank Mutual Corporation Outside Directors Retirement Plan + | X | ||||
10.3*
|
Mutual Savings Bank Executive Excess Benefit Plan *** | Exhibit 10.3 to Bank Mutual Corporations Registration Statement on Form S-1, Registration No. 333-39362 (2000 S-1) | ||||
10.4*
|
Agreement regarding deferred compensation dated May 16, 1988 between Mutual Savings Bank and Michael T. Crowley, Sr. | Exhibit 10.4 to 2000 S-1 | ||||
10.5(a)*
|
Employment Agreement between Mutual Savings Bank and Michael T. Crowley Jr. dated December 21, 1993 (continuing , as amended, through 2012) | Exhibit 10.5(a) to 2000 S-1 | ||||
10.5(b)*
|
Amendment thereto dated February 17, 1998 | Exhibit 10.5(b) to 2000 S-1 | ||||
10.6(a)*
|
Form of Employment Agreements of Mr. Maurer [terminated upon his retirement in September 2009], Mr. Anderegg, and Mr. Callen with Mutual Savings Bank, each dated as of January 1, 2001 (continuing through 2010) | Exhibit 10.7 to 2000 S-1 |
106
Table of Contents
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
10.6(b)*
|
Form of Amendment thereto, dated as of May 2006 | Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 | ||||
10.7(a)*
|
Employment Agreement of Mr. Dosland with Bank Mutual dated as of August 18, 2008 (continuing through 2010) | Exhibit 10.1 to the Companys Report on Form 8-K dated August 19, 2008 | ||||
10.7(b)*
|
Amendment to Employment Agreement dated August 18, 2008, between Bank Mutual and Michael W. Dosland (continuing through 2010) | Exhibit 10.2 to the Companys Report on Form 8-K dated August 19, 2008 | ||||
10.8(a)*
|
Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank | Exhibit 10.10(a) to Bank Mutuals Annual Report on Form 10-K for the year ended December 31, 2000 | ||||
10.8(b)*
|
Amendment No. 1 thereto | Exhibit 10.3.2 to First Northern Capital Corp.s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 | ||||
10.9*
|
Bank Mutual Corporation 2001 Stock Incentive Plan, as amended May 7, 2002 (superseded, except as to outstanding awards) | Exhibit 10.1 to Bank Mutual Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 | ||||
10.10(a)*
|
Bank Mutual Corporation 2004 Stock Incentive Plan | Appendix A to Proxy Statement for 2004 Annual Meeting of Shareholders | ||||
10.10(b)*
|
Form of Option Agreement thereunderBank Mutual Corporation Director Stock Option Agreement | Exhibit 10.1(b) to the Companys Report on Form 10-Q for the quarter ended June 30, 2004 (6/30/04 10-Q) | ||||
10.10(c)*
|
Form of Option Agreement thereunderBank Mutual Corporation Incentive Stock Option Agreement | Exhibit 10.1(c) to the 6/30/04 10-Q | ||||
10.10(d)*
|
Form of Restricted Stock Agreement thereunder Bank Mutual Corporation Directors Management Recognition Award | Exhibit 10.1(d) to the 6/30/04 10-Q | ||||
10.10(e)*
|
Form of Restricted Stock Agreement thereunderBank Mutual Corporation Officers Management Recognition Award | Exhibit 10.1(e) to the 6/30/04 10-Q | ||||
10.11*
|
Bank Mutual Corporation Management Incentive Compensation Plan + | X |
107
Table of Contents
Incorporated Herein by | Filed | |||||
Exhibit | Description | Reference To | Herewith | |||
21.1
|
List of Subsidiaries | X | ||||
23.1
|
Consent of Deloitte & Touche LLP | X | ||||
23.2
|
Consent of Ernst & Young LLP | X | ||||
24.1
|
Powers of Attorney | Signature Page of this Report | ||||
31.1
|
Sarbanes-Oxley Act Section 302 Certification signed by the Chairman, President, and Chief Executive Officer of Bank Mutual Corporation | X | ||||
31.2
|
Sarbanes-Oxley Act Section 302 Certification signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation | X | ||||
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chairman, President, and Chief Executive Officer of Bank Mutual Corporation | X | ||||
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Bank Mutual Corporation | X |
* | Designates management or compensatory agreements, plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of Form 10-K. | |
** | As used in this Exhibit Index, references to Bank Mutual Corporation and the Company also include, where appropriate, Bank Mutual Corporation, a federally-chartered corporation and the predecessor of the current registrant. | |
*** | Mutual Savings Bank is now known as Bank Mutual. | |
+ | Includes non-material changes from prior version(s), consistent with the compensation-related disclosures in the Companys prior annual meeting proxy statements. |
108