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EX-3.1 - FIRST PLACE FINANCIAL CORP /DE/v183784_ex3-1.htm
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EX-31.2 - FIRST PLACE FINANCIAL CORP /DE/v183784_ex31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _________________

Commission File Number 0-25049


FIRST PLACE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Delaware
34-1880130
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)

185 E. Market Street, Warren OH   44481
(Address of principal executive offices)

(330) 373-1221
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if change since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                            No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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  ¨                            No  ¨

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

Large accelerated filer  ¨  Accelerated filer  Non-accelerated filer  ¨  Smaller reporting company  ¨

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

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

16,973,270 shares of common stock outstanding as of April 30, 2010

 
 

 

TABLE OF CONTENTS

   
Page
   
Number
PART I.  FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Statements of Financial Condition (Unaudited)
 
 
as of March 31, 2010,  and June 30, 2009
3
     
 
Condensed Consolidated Statements of Income (Loss) (Unaudited)
 
 
for the Three and Nine Months Ended March 31, 2010 and 2009
4
     
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity
 
 
(Unaudited) for the Nine Months Ended March 31, 2010 and 2009
5
     
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
for the Nine Months Ended March 31, 2010 and 2009
6
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
7-19
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operations
20-37
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
37-38
     
Item 4.
Controls and Procedures
38
     
PART II.  OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
39
     
Item 1A.
Risk Factors
39
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
39
     
Item 3.
Defaults Upon Senior Securities
39
     
Item 4.
Submission of Matters to a Vote of Security Holders
39
     
Item 5.
Other Information
39
     
Item 6.
Exhibits
39
     
SIGNATURES
40
 
 
2

 

Part I.      FINANCIAL INFORMATION
Item 1.      Financial Statements

FIRST PLACE FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in thousands, except share data)

   
March 31, 2010
   
June 30, 2009
 
ASSETS
           
Cash and due from banks
  $ 30,907     $ 38,321  
Interest-bearing deposits in other banks
    25,159       56,614  
Trading securities, at fair value
    11,451       11,786  
Securities available for sale, at fair value
    243,596       264,814  
Loans held for sale, at fair value
    330,568       376,406  
Loans
    2,368,483       2,468,444  
Less allowance for loan losses
    52,554       39,580  
Loans, net
    2,315,929       2,428,864  
Federal Home Loan Bank stock
    35,041       36,221  
Premises and equipment, net
    49,787       52,222  
Goodwill
    885       885  
Core deposit and other intangible assets
    8,452       10,639  
Other assets
    156,853       127,695  
Total assets
  $ 3,208,628     $ 3,404,467  
                 
LIABILITIES
               
Deposits:
               
Noninterest-bearing checking
  $ 262,394     $ 238,417  
Interest-bearing checking
    260,297       173,376  
Savings
    408,172       400,424  
Money market deposit accounts
    345,221       291,131  
Certificates of deposit
    1,221,173       1,332,253  
Total deposits
    2,497,257       2,435,601  
Short-term borrowings
    63,337       323,458  
Long-term debt
    378,878       335,159  
Other liabilities
    4,292       28,770  
Total liabilities
    2,943,764       3,122,988  
                 
SHAREHOLDERS' EQUITY
               
Preferred stock, $.01 par value:  3,000,000 shares authorized:
               
Fixed Rate Cumulative Perpetual Preferred stock, Series A, $1,000 liquidation preference per share:  72,927 shares issued and outstanding at March 31, 2010, and June 30, 2009
    69,653       69,198  
Common stock, $.01 par value:  53,000,000 shares authorized, 18,114,673 shares issued
    181       181  
Additional paid-in capital
    218,418       218,310  
Retained (deficit) earnings
    (4,173 )     17,193  
Unearned employee stock ownership plan (ESOP) shares
    (2,805 )     (3,116 )
Treasury stock, at cost:  1,141,403 shares at March 31, 2010, and June 30, 2009
    (19,274 )     (19,274 )
Accumulated other comprehensive income (loss)
    2,864       (1,013 )
Total shareholders' equity
    264,864       281,479  
Total liabilities and shareholders' equity
  $ 3,208,628     $ 3,404,467  

See accompanying notes to condensed consolidated financial statements (unaudited).
 
 
3

 

FIRST PLACE FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(Dollars in thousands, except per share data)
   
Three months ended
   
Nine months ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
INTEREST INCOME
                       
Loans, including fees
  $ 35,087     $ 38,702     $ 109,130     $ 118,803  
Securities and interest-bearing deposits:
                               
Taxable
    2,147       2,679       6,969       8,053  
Tax-exempt
    637       640       1,898       1,960  
Dividends
    394       387       1,231       1,549  
Total interest income
    38,265       42,408       119,228       130,365  
                                 
INTEREST EXPENSE
                               
Deposits
    6,992       15,189       25,194       46,609  
Short-term borrowings
    514       1,473       2,831       4,173  
Long-term debt
    3,652       4,061       10,876       13,640  
Total interest expense
    11,158       20,723       38,901       64,422  
                                 
NET INTEREST INCOME
    27,107       21,685       80,327       65,943  
Provision for loan losses
    31,100       6,797       67,600       23,364  
NET INTEREST INCOME (EXPENSE) AFTER PROVISION FOR LOAN LOSSES
    (3,993 )     14,888       12,727       42,579  
                                 
NONINTEREST INCOME
                               
Service charges and fees on deposit accounts
    2,753       2,675       9,057       7,278  
Net gains on sales of securities
    651       1       651       320  
Change in fair value of trading securities
    16       (489 )     415       (12,353 )
Mortgage banking gains
    5,845       6,812       14,586       10,693  
Gains on sales of loan servicing rights
    -       -       689       -  
Loan servicing income (expense)
    699       (1,009 )     1,498       (1,993 )
Insurance commission income
    1,124       1,083       3,449       3,104  
Other income
    3,134       2,063       7,669       7,032  
Total noninterest income
    14,222       11,136       38,014       14,081  
                                 
NONINTEREST EXPENSE
                               
Salaries and employee benefits
    11,956       11,382       32,843       31,818  
Occupancy and equipment
    3,833       3,639       11,022       10,421  
Professional fees
    954       823       2,822       2,485  
Loan expenses
    1,689       899       4,748       2,239  
Marketing
    588       268       1,859       1,423  
Federal deposit insurance premiums
    1,507       987       4,258       2,390  
Merger, integration and restructuring charges
    -       -       297       1,109  
Goodwill impairment
    -       -       -       93,741  
Amortization of intangible assets
    711       784       2,188       2,378  
Real estate owned expense
    1,292       1,102       4,665       3,574  
Other expense
    4,092       3,116       11,546       9,381  
Total noninterest expense
    26,622       23,000       76,248       160,959  
                                 
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
    (16,393 )     3,024       (25,507 )     (104,299 )
Income tax expense (benefit)
    (3,375 )     483       (7,168 )     (6,584 )
NET INCOME (LOSS)
    (13,018 )     2,541       (18,339 )     (97,715 )
Less preferred stock dividends and discount accretion
    1,092       216       3,273       216  
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
  $ (14,110 )   $ 2,325     $ (21,612 )   $ (97,931 )
                                 
Basic income (loss) per common share
  $ (.85 )   $ .14     $ (1.30 )   $ (5.91 )
Diluted income (loss) per common share
    (.85 )     .14       (1.30 )     (5.91 )
Cash dividends declared per common share
    -       .01       .01       .18  
Average common shares outstanding - basic
    16,622,081       16,569,366       16,607,694       16,558,189  
Average common shares outstanding - diluted
    16,622,081       16,569,366       16,607,694       16,558,189  

See accompanying notes to condensed consolidated financial statements (unaudited).

 
4

 

FIRST PLACE FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands, except per share data)
                                       
Accumulated
       
               
Additional
   
Retained
   
Unearned
         
Other
       
   
Preferred
   
Common
   
Paid-in
   
(Deficit)
   
ESOP
   
Treasury
   
Comprehensive
       
   
Stock
   
Stock
   
Capital
   
Earnings
   
Shares
   
Stock
   
Income (Loss)
   
Total
 
Balance at July 1, 2008
  $ -     $ 181     $ 214,216     $ 131,770     $ (3,531 )   $ (19,274 )   $ (4,395 )   $ 318,967  
Comprehensive loss
                                                               
Net loss
                            (97,715 )                             (97,715 )
Change in unrealized gain on securities available for sale, net of reclassification and tax effects
                                                    2,158       2,158  
Loss on termination of interest rate swaps reclassified to other comprehensive income, net of tax
                                                    448       448  
Total comprehensive loss
                                                            (95,109 )
Adjustment to initially apply the effect of fair value accounting, net of tax
                            188                               188  
Dividends declared and paid on common shares ($.18 per share)
                            (2,865 )                             (2,865 )
Commitment to release employee stock ownership plan shares (31,171 shares)
                    (115 )             311                       196  
Commitment to release recognition and retention plan shares (2,072 shares)
                    44                                       44  
Issuance of 72,927 shares of preferred stock
    72,927                                                       72,927  
Discount on preferred stock issued
    (3,868 )                                                     (3,868 )
Direct costs incurred in connection with issuance of preferred stock and common stock warrant
    (8 )                                                     (8 )
Accretion of preferred stock discount
    34                       (34 )                             -  
Issuance of common stock warrant
                    3,868                                       3,868  
Preferred stock dividends accrued
                            (182 )                             (182 )
Stock option expense
                    218                                       218  
                                                                 
Balance at March 31, 2009
  $ 69,085     $ 181     $ 218,231     $ 31,162     $ (3,220 )   $ (19,274 )   $ (1,789 )   $ 294,376  
                                                                 
Balance at July 1, 2009
  $ 69,198     $ 181     $ 218,310     $ 17,193     $ (3,116 )   $ (19,274 )   $ (1,013 )   $ 281,479  
Comprehensive loss
                                                               
Net loss
                            (18,339 )                             (18,339 )
Change in unrealized gain on securities available for sale, net of reclassification and tax effects
                                                    3,438       3,438  
Loss on termination of interest rate swaps reclassified to other comprehensive income, net of tax
                                                    439       439  
Total comprehensive loss
                                                            (14,462 )
Adjustment to apply the effect of Employer’s Accounting for Employee Stock Ownership Plans, net of tax
                    76                                       76  
Recovery of dividends from recognition and retention plan
                            416                               416  
Dividends declared and paid on common shares ($.01 per share)
                            (170 )                             (170 )
Commitment to release employee stock ownership plan shares (31,161 shares)
                    (216 )             311                       95  
Commitment to release recognition and retention plan shares (11,624 shares)
                    53                                       53  
Direct costs incurred in connection with issuance of preferred stock and common stock warrant
    (83 )                                                     (83 )
Accretion of preferred stock discount
    538                       (538 )                             -  
Preferred stock dividends accrued
                            (2,735 )                             (2,735 )
Stock option expense
                    195                                       195  
                                                                 
Balance at March 31, 2010
  $ 69,653     $ 181     $ 218,418     $ (4,173 )   $ (2,805 )   $ (19,274 )   $ 2,864     $ 264,864  

See accompanying notes to condensed consolidated financial statements (unaudited).
 
5

 
FIRST PLACE FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
   
Nine months ended
 
   
March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net cash from (used in) operating activities
  $ 102,307     $ (55,209 )
                 
Cash flows from investing activities:
               
Securities:
               
Proceeds from sales and redemptions
    16,114       3,389  
Proceeds from maturities, calls and principal paydowns
    48,703       53,349  
Purchases
    (35,905 )     (68,643 )
Net change in interest-bearing deposits in other banks
    31,455       (107,225 )
Net change in federal funds sold
    -       (35,392 )
Net change in loans
    (81,445 )     63,433  
Proceeds from sales of loans
    47,633       12,344  
Proceeds from sales of real estate owned
    22,739       12,335  
Premises and equipment expenditures, net
    (1,839 )     (3,130 )
Cash paid for acquisitions, net of cash received
    -       (1,169 )
Net cash from (used in) investing activities
    47,455       (70,709 )
                 
Cash flows from financing activities:
               
Net change in deposits
    61,645       180,169  
Net change in short-term borrowings
    (265,994 )     (112,914 )
Proceeds from long-term debt
    50,000       -  
Repayment of long-term debt
    (255 )     (310 )
Proceeds from issuance of preferred stock and common stock warrant
    -       72,927  
Common dividends paid
    (170 )     (2,865 )
Preferred dividends paid
    (2,735 )     -  
Direct costs incurred in connection with issuance of preferred stock and common stock warrant
    (83 )     (8 )
Recovery of dividends from recognition and retention plan
    416       -  
Net cash (used in) from financing activities
    (157,176 )     136,999  
                 
Net change in cash and cash equivalents
    (7,414 )     11,081  
                 
Cash and cash equivalents at beginning of period
    38,321       59,483  
                 
Cash and cash equivalents at end of period
  $ 30,907     $ 70,564  
                 
Supplemental cash flow information:
               
Cash payments of interest expense
  $ 45,316     $ 61,933  
Cash payments (refunds) of income taxes
    (8,395 )     527  
Supplemental noncash disclosures:
               
Loans securitized
    15,953       21,969  
Transfer of loans to real estate owned
    25,566       25,342  
Transfer of loans to real estate held for sale
    1,767       -  
Transfer of loans from portfolio to loans held for sale
    46,844       12,344  
Transfer from long-term debt to short-term borrowings
    5,873       86,760  
Allocation of loan basis to mortgage servicing rights
    10,382       8,001  
Loans held for sale converted to fair value
    -       72,341  
Securities available for sale converted to fair value
    -       24,766  

See accompanying notes to condensed consolidated financial statements (unaudited).
 
6

 
FIRST PLACE FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.  Significant Accounting Policies
(Dollars in thousands)

Basis of Presentation. The interim unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (SEC).  The financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in First Place Financial Corp.’s (the Company) Annual Report on Form 10-K for the year ended June 30, 2009.  The interim unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented.  The results of operations for the interim periods included in the interim unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for a full year.

Principles of Consolidation. The interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, First Place Bank (the Bank) and First Place Holdings, Inc.  Active subsidiaries of the Bank include the wholly-owned Ardent Service Corporation and two partially-owned affiliates accounted for under the equity method, 50% owned Bercley Woods Development Company, Ltd. and 99% owned Shiloh Springs, L.P.  The Bank also has wholly-owned subsidiaries that are currently inactive including Western Reserve Mortgage Corporation and AutoArm, LLC.  Wholly-owned subsidiaries of First Place Holdings, Inc. include First Place Insurance Agency, Ltd., APB Financial Group, Ltd., First Place Real Estate, Ltd. and Title Works Agency, LLC, a 75% owned affiliate of First Place Holdings, Inc.  The investments of the Company in its wholly-owned subsidiaries, First Place Capital Trust, First Place Capital Trust II and First Place Capital Trust III, have been accounted for using the equity method based on their nature as trusts, which are special purpose entities.  All significant intercompany balances and transactions have been eliminated in consolidation.  The Company’s employee benefits consulting firm, American Pension Benefits, was sold in June 2009.

Business Segments.  While the Company's chief decision-maker monitors the revenue streams of the various Company products and services, the segments that could be separated from the Company’s primary business of banking are not material.  Accordingly, all of the Company's financial service operations are considered by management to be one reportable operating segment.

Use of Estimates. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Areas involving the use of management’s estimates and assumptions include the allowance for loan losses, fair values of financial instruments, the realization of deferred tax assets, the identification and carrying amount of impaired loans, the carrying amount and amortization of intangible assets, the useful lives and impairment of premises and equipment, the carrying amount of goodwill, the determination of an other-than-temporary impairment on investments, and valuations of foreclosed assets, mortgage servicing rights (MSRs), stock options and securitizations.  Actual results could differ from those estimates.

Cash Flows. Cash and cash equivalents includes cash and due from banks.  Net cash flows are reported for interest-bearing deposits in other banks, federal funds sold, loans, deposits and short-term borrowings.

Subsequent Events.  Management has evaluated events and transactions through the time the condensed consolidated financial statements were issued.  Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.  In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the condensed consolidated financial statements or disclosed in the notes to condensed consolidated financial statements.

Reclassifications. Certain items in the prior year financial statements were reclassified to conform to the current presentation.
 
7

 
Note 2.  Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 805 (formerly Statement of Financial Accounting Standards (SFAS)) No. 141(R) (revised version of SFAS No. 141), Business Combinations.  This pronouncement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at fair value as of the acquisition date.  ASC 805 requires additional disclosures to improve the statement user’s ability to evaluate the nature and financial effects of business combinations.  For the Company, it will apply to business combinations where the acquisition date is after June 30, 2009.  Since this pronouncement will be applied prospectively, there was no impact on the Company’s consolidated financial statements upon adoption.

In December 2007, the FASB issued ASC 810 (formerly SFAS No. 160), Noncontrolling Interests in Consolidated Financial Statements.  This pronouncement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  ASC 810 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  ASC 810 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  This pronouncement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  The adoption of ASC 810 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued ASC 815 (formerly SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities.  This pronouncement requires enhanced disclosures about: (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  This pronouncement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The adoption of ASC 815 did not have a material impact on the Company’s consolidated financial statements.  For more information on the Company’s derivative instruments and hedging activities, see Note 8 - Commitments, Contingencies and Guarantees and Note 9– Fair Value Measurement and Fair Value of Financial Instruments.

In April 2009, the FASB issued ASC 820 (formerly Staff Position SFAS No. 157-4), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  This pronouncement affirms the approach to estimating fair value when there is no active market, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless otherwise proven and requires an entity to disclose any change in valuation technique.  This pronouncement became effective for interim and annual reporting periods ending after June 15, 2009.  The adoption of ASC 820 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued ASC 320 (formerly Staff Position SFAS No. 115-2 and SFAS No. 124-2), Recognition and Presentation of Other-Than-Temporary Impairment.  This guidance changes the “ability and intent to hold” provision for debt securities and states that impairment is considered to be other than temporary if a company: (i) intends to sell the security, (ii) more-likely-than-not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost.  This guidance also changes the “probability” standard relating to the collectibility of cash flows and states that impairment is considered to be other than temporary if the present value of cash flows expected to be collected is less than the amortized cost (credit loss).  Other-than-temporary losses also need to be separated between the amount related to credit loss (which is recognized in current earnings) and the amount related to all other factors (which is recognized in other comprehensive income).  This pronouncement is effective for interim and annual reporting periods ending after June 15, 2009.  The adoption of ASC 320 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued ASC 825 (formerly Staff Position SFAS No. 107-1), Interim Disclosures about Fair Value of Financial Instruments.  This pronouncement requires disclosures about fair value of financial instruments in interim, as well as annual financial statements, of publicly traded companies.  This position became effective for interim reporting periods ending after June 15, 2009.  The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
 
8

 
In May 2009, the FASB issued ASC 855 (formerly SFAS No. 165), Subsequent Events.  This new pronouncement established principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  ASC 855 requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date.  Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements under ASC 855.  This pronouncement is effective for interim and annual financial periods ending after June 15, 2009.  The adoption of ASC 855 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 105 (formerly SFAS No. 168), Generally Accepted Accounting Principles - FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.  The Codification™ is the source of authoritative GAAP United States generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC are also sources of authoritative GAAP for SEC registrants.  All existing accounting standard documents are superseded and all other accounting literature not included in the Codification™ is considered nonauthoritative.  The Codification™ is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company has made the appropriate changes to GAAP references in the consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.  This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 was effective October 1, 2009.  The adoption of ASU 2009-05 did not have a material impact on the Company’s consolidated financial statements.

In September 2009, the FASB issued ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820) – Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent).  This ASU permits, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this ASU on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting entity’s measurement date.  The ASU also requires disclosures by major category of investment about the attributes of investments within the scope of the ASU.  This ASU is effective for interim and annual periods ending after December 15, 2009.  The adoption of ASU 2009-12 did not have a material impact on the Company’s consolidated financial statements.

In December 2009, the FASB issued ASU No. 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets (SFAS No. 166, an amendment of FSAB No. 140).  The amendments in this ASU improve financial reporting by eliminating the exceptions for Qualifying Special-Purpose Entities (QSPE) from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets.  In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to as a result of continuing involvement in transferred financial assets.  Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets  eligible for sale accounting.  This ASU is effective for the first annual period beginning after November 15, 2009.  The adoption of ASU 2009-16 is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (SFAS No. 167, Amendments to FASB Interpretation No. 46(R)).  ASU 2009-17 addresses the effects of eliminating the QSPE concept from SFAS No. 140 and the transparency involved with variable interest entities.  The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the authority to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and: (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity  The amendments in this ASU also require additional disclosures about an enterprise’s involvement in variable interest entities.  This ASU is effective for interim and annual periods beginning after November 15, 2009.  The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated financial statements.
 
9

 
In January 2010, the FASB issued ASU No. 2010-05, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.  This ASU amends FASB ASU Topic 820 to require reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements.  The ASU also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques.  Except for the detailed Level 3 roll forward disclosures, the guidance in the ASU is effective for interim and annual reporting periods beginning after December 15, 2009.  The new disclosures about purchases, sales, issuances and settlements in the roll forward activity for Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010.  Early adoption is permitted.  The adoption of ASU 2010-05 did not have a material impact on the Company’s consolidated financial statements.

Note 3.  Securities
(Dollars in thousands)

The fair value and amortized cost of available for sale and trading securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

   
March 31, 2010
 
         
Gross
   
Gross
       
   
Fair
   
Unrealized
   
Unrealized
   
Amortized
 
   
Value
   
Gains
   
Losses
   
Cost
 
Debt securities - available for sale:
                       
U.S. Government agencies and other government sponsored enterprises
  $ 8,272     $ 25     $ -     $ 8,247  
Obligations of states and political subdivisions
    65,922       982       10       64,950  
Trust preferred securities
    10,291       -       2,963       13,254  
One- to four-family mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises
    158,851       6,648       -       152,203  
Total
    243,336       7,655       2,973       238,654  
                                 
Equity securities - available for sale:
                               
Common stock
    260       -       37       297  
Total
    260       -       37       297  
                                 
Equity securities – trading:
                               
Mortgage-backed securities mutual fund
    11,451       -       -       11,451  
Total
    11,451       -       -       11,451  
Total securities
  $ 255,047     $ 7,655     $ 3,010     $ 250,402  
 
 
10

 

   
June 30, 2009
 
         
Gross
   
Gross
       
   
Fair
   
Unrealized
   
Unrealized
   
Amortized
 
   
Value
   
Gains
   
Losses
   
Cost
 
Debt securities - available for sale:
                       
U.S. Government agencies and other government sponsored enterprises
  $ 4,582     $ 82     $ -     $ 4,500  
Obligations of states and political subdivisions
    62,946       496       1,205       63,655  
Trust preferred securities
    8,267       -       4,955       13,222  
One- to four-family mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises
    188,722       5,107       171       183,786  
Total
    264,517       5,685       6,331       265,163  
                                 
Equity securities - available for sale:
                               
Common stock
    297       -       -       297  
Total
    297       -       -       297  
                                 
Equity securities – trading:
                               
Mortgage-backed securities mutual fund
    11,786       -       -       11,786  
Total
    11,786       -       -       11,786  
Total securities
  $ 276,600     $ 5,685     $ 6,331     $ 277,246  

The amortized cost and estimated fair value of debt securities available for sale by remaining contractual maturity at March 31, 2010, are summarized in the following table.  Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

         
Amortized
 
   
Fair Value
   
Cost
 
Debt securities available for sale:
           
Due in one year or less
  $ 3,285     $ 3,241  
Due after one year through five years
    2,758       2,634  
Due after five years through ten years
    25,773       25,203  
Due after ten years
    52,669       55,373  
      84,485       86,451  
Mortgage-backed securities and collateralized mortgage obligations
    158,851       152,203  
Total
  $ 243,336     $ 238,654  

Debt and mortgage-backed securities with a fair value of $218,516 as of March 31, 2010, and $228,654 as of June 30, 2009, were pledged to secure public deposits, repurchase agreements, borrowings from the Federal Home Loan Bank, borrowings from the Federal Reserve Bank and for other purposes as required or permitted by law.

A review for other-than-temporary impairment was performed as of March 31, 2010, on the portfolio of trust preferred securities, which had an unrealized loss of $2,963, an improvement from the unrealized loss of $4,955 at June 30, 2009.  The trust preferred securities portfolio consists of large single issuers with investment grade credit ratings of Baa3 or higher by Moody’s.  Each of the issuers is a recipient of the U.S. Department of the Treasury’s Troubled Asset Relief Program funding and has not deferred interest payments on those obligations.  The unrealized loss is attributable to the historically low level of interest rates, lack of liquidity in the trust preferred securities market and a lack of confidence in the entire financial institution capital market.  Since this variable rate portfolio is based on three-month LIBOR, it trades at a deep discount to its fixed rate counterparts.  As interest rates return to historically normal levels, management expects the value of this portfolio to recover.  The Company does not intend to sell these securities and it is more-likely-than-not that it will not be required to sell them prior to their recovery.  As a result, no other-than-temporary impairment has been recognized in the current quarter.  The Company will continue to monitor these securities and the events and conditions that have an impact on their values and make adjustments for impairment as necessary.
 
11

 
Note 4.  Loans
(Dollars in thousands)

Loans were as follows:

   
March 31,
   
June 30,
 
   
2010
   
2009
 
Mortgage and construction loans:
           
Permanent financing
  $ 725,946     $ 803,555  
Construction
    58,206       47,726  
Total
    784,152       851,281  
Commercial loans:
               
Multifamily real estate
    112,115       111,281  
Commercial real estate
    899,874       875,836  
Commercial construction
    57,800       68,315  
Commercial non real estate
    169,092       189,083  
Total
    1,238,881       1,244,515  
Consumer loans:
               
Home equity lines of credit
    206,588       215,136  
Home equity loans
    118,006       129,661  
Automobiles and other
    20,856       27,851  
Total
    345,450       372,648  
                 
Total loans
  $ 2,368,483     $ 2,468,444  

Activity in the allowance for loan losses was as follows:

   
Nine months ended
 
   
March 31,
 
   
2010
   
2009
 
             
Balance at beginning of period
  $       39,580     $       28,216  
Provision for loan losses
    67,600       23,364  
Loans charged-off
    (54,928 )     (16,127 )
Recoveries
    302       313  
                 
Balance at end of period
  $ 52,554     $ 35,766  

Approximately $14,000 of the increase in net charge-offs for both the quarterly and year-to-date periods is attributable to aggressive actions taken by management during the current quarter to revalue approximately $60,000 in delinquent loans secured by one- to four-family residential properties.

Impaired loans were as follows:

   
March 31,
   
June 30,
 
   
2010
   
2009
 
Loans with no allocated allowance for loan losses
  $         24,980     $         12,494  
Loans with an allocated allowance for loan losses
    66,504       38,397  
Total
  $ 91,484     $ 50,891  
                 
Amount of allocated allowance for loan losses
  $ 10,036     $ 11,663  

Nonperforming loans were as follows:

   
March 31,
   
June 30,
 
   
2010
   
2009
 
Nonaccrual loans
  $       106,950     $       92,752  
Troubled debt restructurings accruing interest (a)
    4,869       10,476  
Total nonperforming loans
  $ 111,819     $ 103,228  

(a)
Troubled debt restructurings accruing interest are loans that were accruing interest at the time of restructuring and have been in compliance with their modified terms for a period of less than six months.
 
12

 
Included in nonperforming loans at March 31, 2010 were two loans totaling $7,454 that are subject to the borrower’s bankruptcy proceedings described below.  In the third quarter of fiscal year 2009, the Company became aware that the collateral pledged on these loans was fraudulent and evidenced by fraudulently altered documents.  The Company requested and received assignments of replacement collateral from the borrower which the Company now anticipates will be set aside in a subsequent involuntary bankruptcy proceeding.  During the fourth quarter of fiscal year 2009, the borrower stopped making payments and the Company placed these loans on nonaccrual status.  Based on the preliminary state of the bankruptcy proceedings, the amount of any loss on the loans is not estimable at this time.  Therefore, no specific allowance or charge-off was recorded at March 31, 2010.  The Company is also considering legal action against other parties who may have facilitated the fraudulent activity.  If the total loan balance is not realized through a combination of the bankruptcy and legal actions, the Company would anticipate recovery on a claim filed under the Company’s blanket bond insurance policy. The insurance company has initially denied the claim.  However, the Company intends to pursue the settlement of this claim through negotiation and/or legal action.

Note 5.  Mortgage Servicing Rights
(Dollars in thousands)

Following is a summary of mortgage servicing rights:

   
Nine months ended
 
   
March 31,
 
   
2010
   
2009
 
             
Balance at beginning of period
  $ 20,114     $ 14,272  
Additions
    10,382       8,001  
Net change in valuation allowance
    834       (1,137 )
Amortization
    (4,486 )     (4,142 )
                 
Balance at end of period
  $ 26,844     $ 16,994  

The fair value of mortgage servicing rights was $29,349 at March 31, 2010, and $22,041 at June 30, 2009, as determined by an independent third party appraisal.

Activity in the valuation allowance for mortgage servicing rights was as follows:

   
Nine months ended
 
   
March 31,
 
   
2010
   
2009
 
             
Balance at beginning of period
  $ 1,052     $ 100  
Additions expensed
    112       1,363  
Reductions credited to expense
    (946 )     (226 )
Balance at end of period
  $ 218     $ 1,237  

Loans serviced for others, which are not reported as assets, totaled $2,638,459 and $2,052,135 at March 31, 2010, and June 30, 2009, respectively.  Noninterest-bearing deposits included $23,426 and $17,892 of custodial account deposits related to loans serviced for others as of March 31, 2010, and June 30, 2009, respectively.

 
13

 
 
Note 6.  Short-term Borrowings and Long-term Debt
(Dollars in thousands)

Following is a summary of short-term borrowings and long-term debt:

   
March 31,
   
June 30,
 
   
2010
   
2009
 
Short-term borrowings:
           
Federal Home Loan Bank advances
  $ 32,448     $ 153,993  
Securities sold under agreements to repurchase
    30,889       33,165  
Federal Reserve discount window borrowings
    -       136,300  
Total
  $ 63,337     $ 323,458  
                 
Long-term debt:
               
Federal Home Loan Bank advances
  $ 267,022     $ 223,303  
Securities sold under agreements to repurchase
    50,000       50,000  
Junior subordinated debentures owed to unconsolidated subsidiary trusts
    61,856       61,856  
Total
  $ 378,878     $ 335,159  

The Bank has a borrowing capacity of approximately $360,000 with the Federal Home Loan Bank, which is collateralized by real estate, and commercial loans with a carrying amount of approximately $1,738,000, securities with a fair value of approximately $4,000 and the Company’s stock in the Federal Home Loan Bank.  The Bank had approximately $22,000 of borrowing capacity available from the Federal Home Loan Bank at March 31, 2010.  The Bank also has a borrowing capacity of approximately $50,000 through the Federal Reserve Bank discount window, collateralized by consumer loans with a carrying amount of approximately $291,000.  The Company had no Federal Reserve Bank borrowings outstanding at March 31, 2010.  In addition, the Bank has a $10,000 unsecured line of credit with a commercial bank, all of which was available at March 31, 2010.

Note 7.  Income Taxes
(Dollars in thousands)

The Company’s income taxes for the three and nine months ended March 31, 2010 and 2009, were as follows:

   
Three months ended
   
Nine months ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
Income tax expense (benefit)
  $ (6,046 )   $ 483     $ (9,839 )   $ (6,584 )
Provision for deferred tax assets
    2,671       -       2,671       -  
Net income tax expense (benefit)
  $ (3,375 )   $ 483     $ (7,168 )   $ (6,584 )

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes.  Management conducts quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded.  The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies and projected future reversals of deferred tax items.  These assessments involve a certain degree of subjectivity which may change significantly depending on the related circumstances.

Based upon the above assessment process, during the third quarter of fiscal 2010, the Company recorded a $2,671 charge to income taxes to establish a valuation allowance on its deferred tax assets that may not be realized.  In future periods, the Company anticipates that it will have an effective tax rate near zero until such time as it is able to reverse the deferred tax asset allowance.

 
14

 

Note 8.  Commitments, Contingencies and Guarantees
(Dollars in thousands)

The Company regularly enters into transactions that generate off-balance sheet risk.  These transactions include commitments to originate loans, commitments to sell loans, loans with future commitments to disburse funds such as construction loans and lines of credit, recourse obligations for loans sold and letters of credit.  The Company enters into these transactions to meet customer needs or to facilitate the sale of assets.

The financial instruments with off-balance sheet risk as of March 31, 2010, were as follows:

   
Contractual
   
Asset/
 
   
amount
   
(liability) recorded
 
Commitments:
           
Commitments to make loans
  $ 268,007     $ 1,890  
Construction loan funds not yet disbursed
    83,094       -  
Unused lines of credit and letters of credit
    268,879       (374 )
Mortgage loan sales commitments
    227,635       (4,444 )
Mortgage-backed securities sales commitments
    230,840       398  
                 
Guarantees:
               
Loans sold with recourse
    97,368       (1,139 )
Standby letters of credit
    3,818       (17 )

The Company has originated and sold certain loans for which the buyer has recourse to the Company in the event the loans do not perform as specified in the agreements or if there is noncompliance with the buyer’s underwriting specifications.  Depending on the agreement, recourse may be limited to a predetermined length of time or over the entire life of the loan.  Therefore, these sold loans with limited recourse represent a risk to the Company and a liability has been established to recognize any credit losses.  The Company also has risk associated with unused lines of credit and letters of credit and a liability has been established to recognize any credit losses.

Note 9.  Fair Value Measurement and Fair Value of Financial Instruments
(Dollars in thousands)

Fair Value Measurement

The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest).  A brief description of each level follows:

Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability.  Valuation techniques include use of discounted cash flow models and similar techniques.

 
15

 

The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, and June 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy.

         
Fair value measurements at
March 31, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets (liabilities) measured on a recurring basis
                       
                         
Trading securities:
                       
Mortgage-backed securities mutual fund
  $ 11,451     $ -     $ 11,451     $ -  
Securities available for sale:
                               
U.S. Government agencies and other government sponsored enterprises
    8,272       -       8,272       -  
Obligations of states and political subdivisions
    65,922       -       65,922       -  
Trust preferred securities
    10,291       -       9,826       465  
One- to four-family mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises
    158,851       -       158,851       -  
Common stocks
    260       -       260       -  
Loans held for sale
    330,568       -       330,568       -  
Derivatives – mortgage-backed securities sales commitments
    398       -       398