SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

COMMISSION FILE NUMBER 001-34955

ANCHOR BANCORP WISCONSIN INC.

(Exact name of registrant as specified in its charter)

Wisconsin		39-1726871
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
25 West Main Street Madison, Wisconsin		53703
(Address of principal executive office)		(Zip Code)

(608) 252-8700

Not Applicable

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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (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 Exchange Act).

Yes o No þ

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

Class: Common stock — $.10 Par Value
Number of shares outstanding as of January 31, 2011: 21,683,304

 

 

ANCHOR BANCORP WISCONSIN INC.
INDEX — FORM 10-Q

		Page #
Part I — Financial Information
Item 1 Financial Statements
Unaudited Consolidated Balance Sheets as of December 31, 2010 and March 31, 2010			2
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2010 and 2009			3
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2010 and Year Ended March 31, 2010			5
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and 2009			6
Notes to Unaudited Consolidated Financial Statements			8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Executive Overview			35
Results of Operations			40
Financial Condition			45
Risk Management			50
Credit Risk Management			50
Liquidity Risk Management			57
Market Risk Management			62
Item 3 Quantitative and Qualitative Disclosures About Market Risk			68
Item 4 Controls and Procedures			68
Part II — Other Information
Item 1 Legal Proceedings			69
Item 1A Risk Factors			69
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 3 Intentionally Left Blank			71
Item 4 Removed and Reserved			71
Item 5 Other Information			71
Item 6 Exhibits			72
Signatures			73
EX-31.1
EX-31.2
EX-32.1
EX-32.2

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

(unaudited)

		December 31,			March 31,
		2010			2010
		(In Thousands, Except Share Data)
Assets
Cash and due from banks		$	74,913			$	42,411
Interest-bearing deposits			59,605				469,751
Cash and cash equivalents			134,518				512,162
Investment securities available for sale			529,801				416,203
Investment securities held to maturity (fair value of $31 and $40, respectively)			31				39
Loans, less allowance for loan losses of $157,438 at December 31, 2010 and $179,644 at March 31, 2010:
Held for sale			37,196				19,484
Held for investment			2,661,991				3,229,580
Foreclosed properties and repossessed assets, net			69,241				55,436
Real estate held for development and sale			1,213				1,304
Office properties and equipment			30,251				43,558
Federal Home Loan Bank stock—at cost			54,829				54,829
Accrued interest and other assets			61,681				83,670
Total assets		$	3,580,752			$	4,416,265
Liabilities and Stockholders’ (Deficit) Equity
Deposits
Non-interest bearing		$	255,595			$	285,374
Interest bearing deposits and accrued interest			2,588,730				3,267,388
Total deposits and accrued interest			2,844,325				3,552,762
Other borrowed funds			685,608				796,153
Other liabilities			60,340				37,237
Total liabilities			3,590,273				4,386,152
Commitments and contingent liabilities (Note 11)
Preferred stock, $.10 par value, 5,000,000 shares authorized, 110,000 shares issued and outstanding			87,165				81,596
Common stock, $.10 par value, 100,000,000 shares authorized, 25,363,339 shares issued, 21,683,304 and 21,685,925 shares outstanding, respectively			2,536				2,536
Additional paid-in capital			109,133				109,133
Retained deficit			(92,061	)			(61,249	)
Accumulated other comprehensive income (loss) related to AFS securities			(16,463	)			507
Accumulated other comprehensive loss related to OTTI non credit issues			(3,771	)			(5,906	)
Total accumulated other comprehensive income (loss)			(20,234	)			(5,399	)
Treasury stock (3,680,035 and 3,677,414 shares, respectively), at cost			(90,526	)			(90,975	)
Deferred compensation obligation			(5,534	)			(5,529	)
Total Anchor BanCorp stockholders’ (deficit) equity			(9,521	)			30,113
Total liabilities and stockholders’ (deficit) equity		$	3,580,752			$	4,416,265

See accompanying Notes to Unaudited Consolidated Financial Statements.

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

(Unaudited)

		Three Months Ended December 31,								Nine Months Ended December 31,
		2010				2009				2010				2009
						(In Thousands, Except Per Share Data)
Interest income:
Loans		$	36,631			$	48,545			$	117,461			$	151,886
Investment securities and Federal Home Loan Bank stock			4,442				4,801				11,308				16,321
Interest-bearing deposits			78				208				454				838
Total interest income			41,151				53,554				129,223				169,045
Interest expense:
Deposits			10,993				21,278				40,048				68,451
Other borrowed funds			7,963				9,943				25,854				34,407
Total interest expense			18,956				31,221				65,902				102,858
Net interest income			22,195				22,333				63,321				66,187
Provision for credit losses			21,412				10,456				41,020				141,756
Net interest income (loss) after provision for credit losses			783				11,877				22,301				(75,569	)
Non-interest income:
Total other than temporary losses			—				(872	)			—				(1,910	)
Portion of loss recognized in other comprehensive income			—				786				—				1,741
Reclassification from other comprehensive income			(163	)			(260	)			(362	)			(576	)
Net impairment losses recognized in earnings			(163	)			(346	)			(362	)			(745	)
Loan servicing income (loss), net of amortization			(416	)			1,038				1,076				1,525
Credit enhancement income on mortgage loans sold			116				293				605				989
Service charges on deposits			2,855				3,949				9,773				11,924
Investment and insurance commissions			971				1,070				2,696				2,672
Net gain on sale of loans			5,601				2,805				16,164				15,270
Net gain on sale of investment securities			1,187				5,783				7,952				9,396
Net gain on sale of branches			100				—				7,348				—
Other revenue from real estate partnership operations			—				—				387				2,393
Other			1,435				1,104				3,434				2,823
Total non-interest income			11,686				15,696				49,073				46,247

(Continued)

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Con’t.)
(Unaudited)

		Three Months Ended December 31,								Nine Months Ended December 31,
		2010				2009				2010				2009
						(In Thousands, Except Per Share Data)
Non-interest expense:
Compensation		$	10,396			$	12,415			$	31,799			$	40,864
Occupancy			1,921				2,427				6,305				7,487
Federal deposit insurance premiums			1,423				4,300				9,119				14,486
Furniture and equipment			1,520				1,836				5,023				5,978
Data processing			1,627				1,914				4,981				5,535
Marketing			248				542				965				1,557
Other expenses from real estate partnership operations			32				211				547				3,870
Foreclosed properties and repossessed assets—net expense			3,307				7,710				15,747				20,480
Foreclosure cost advance impairment			—				—				—				3,708
Mortgage servicing rights recovery			(1,611	)			(415	)			(149	)			(1,765	)
Legal services			1,866				1,961				6,645				3,834
Other professional fees			767				1,007				2,877				3,168
Other			3,151				3,862				10,595				11,905
Total non-interest expense			24,647				37,770				94,454				121,107
Loss before income taxes			(12,178	)			(10,197	)			(23,080	)			(150,429	)
Income taxes			—				3				14				3
Net Loss			(12,178	)			(10,200	)			(23,094	)			(150,432	)
Preferred stock dividends and discount accretion			(1,853	)			(3,228	)			(7,622	)			(9,700	)
Net loss available to common equity of Anchor BanCorp		$	(14,031	)		$	(13,428	)		$	(30,716	)		$	(160,132	)
Comprehensive loss		$	(35,099	)		$	(20,101	)		$	(37,929	)		$	(155,362	)
Loss per common share:
Basic		$	(0.66	)		$	(0.63	)		$	(1.45	)		$	(7.56	)
Diluted			(0.66	)			(0.63	)			(1.45	)			(7.56	)
Dividends declared per common share			—				—				—				—

See accompanying Notes to Unaudited Consolidated Financial Statements.

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
(Unaudited)

																														Accu-
																														mulated
																														Other
																														Compre-
		Non-												Additional				Retained								Deferred				hensive
		Controlling				Preferred				Common				Paid-in				Earnings				Treasury				Compensation				Income
		Interest				Stock				Stock				Capital				(Deficit)				Stock				Obligation				(Loss)				Total
														(Dollars in thousands except per share data)
Balance at April 1, 2009 (as restated)		$	411			$	74,185			$	2,536			$	109,327			$	131,878			$	(94,744	)		$	(5,480	)		$	(6,337	)		$	211,776
Comprehensive income (loss):
Net loss			—				—				—				—				(177,062	)			—				—				—				(177,062	)
Non-credit portion of other-than-temporary impairments:
Available-for-sale securities, net of tax of $0			—				—				—				—				—				—				—				(2,100	)			(2,100	)
Reclassification adjustment for net gains realized in income, net of tax of $0			—				—				—				—				—				—				—				(11,095	)			(11,095	)
Reclassification adjustment for credit portion of other-than-temporary impairment realized in income, net of tax of $0			—				—				—				—				—				—				—				847				847
Change in net unrealized gains (losses) on available-for-sale securities net of tax of $0			—				—				—				—				—				—				—				13,286				13,286
Comprehensive loss																																		$	(176,124	)
Change in non-controlling interest			(411	)			—				—				—				—				—				—				—				(411	)
Dividend on preferred stock			—				—				—				—				(5,500	)			—				—				—				(5,500	)
Issuance of treasury stock			—				—				—				(194	)			(3,154	)			3,769				(49	)			—				372
Accretion of preferred stock discount			—				7,411				—				—				(7,411	)			—				—				—				—
Balance at March 31, 2010		$	—			$	81,596			$	2,536			$	109,133			$	(61,249	)		$	(90,975	)		$	(5,529	)		$	(5,399	)		$	30,113
Comprehensive income (loss):
Net loss			—				—				—				—				(23,094	)			—				—				—				(23,094	)
Reclassification adjustment for net gains realized in income, net of tax of $0			—				—				—				—				—				—				—				(7,952	)			(7,952	)
Reclassification adjustment for credit portion of other-than-temporary impairment realized in income, net of tax of $0			—				—				—				—				—				—				—				362				362
Change in net unrealized gains (losses) on available-for-sale securities net of tax of $0			—				—				—				—				—				—				—				(7,245	)			(7,245	)
Comprehensive loss																																		$	(37,929	)
Dividend on preferred stock			—				—				—				—				(2,053	)			—				—				—				(2,053	)
Issuance of treasury stock			—				—				—				—				(96	)			449				(5	)			—				348
Accretion of preferred stock discount			—				5,569				—				—				(5,569	)			—				—				—				—
Balance at December 31, 2010		$	—			$	87,165			$	2,536			$	109,133			$	(92,061	)		$	(90,526	)		$	(5,534	)		$	(20,234	)		$	(9,521	)

See accompanying Notes to Unaudited Consolidated Financial Statements

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended December 31,
		2010				2009
		(In Thousands)
Operating Activities
Net loss		$	(23,094	)		$	(150,432	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for credit losses			41,020				141,756
OREO losses, net			7,229				13,705
Depreciation and amortization			3,955				3,705
Amortization and accretion of investment securities, net			2,192				1,873
Mortgage servicing rights impairment (recovery)			(149	)			(1,765	)
Foreclosure cost advance impairment			—				3,708
Cash paid due to origination of loans held for sale			(699,518	)			(996,214	)
Cash received due to sale of loans held for sale			697,970				1,137,808
Net gain on sales of loans			(16,164	)			(15,270	)
Net gain on sale of investment securities			(7,952	)			(9,396	)
(Gain) loss on sale of foreclosed properties			(3,325	)			452
Net gain on sale of branches			(7,348	)			—
Net impairment losses recognized in earnings			362				745
Stock-based compensation expense			348				566
Capitalized improvments of OREO			(522	)			—
Decrease in accrued interest receivable			3,029				3,311
Decrease in prepaid expense and other assets			26,457				24,017
Increase (decrease) in accrued interest payable on deposits			5,826				(1,782	)
Increase (decrease) in other liabilities			12,433				(18,179	)
Decrease in non-controlling interest in real estate partnerships			—				(411	)
Net cash provided by operating activities			42,749				138,197
Investing Activities
Proceeds from sale of investment securities			385,209				391,615
Proceeds from maturities of investment securities			62,825				49,965
Purchase of investment securities			(615,458	)			(455,659	)
Principal collected on investment securities			44,399				84,377
Net decrease in loans held for investment			388,280				301,620
Purchases of office properties and equipment			(1,232	)			(2,024	)
Proceeds from sales of office properties and equipment			496				468
Proceeds from sale of foreclosed properties			34,408				18,925
Investment in real estate held for development and sale			91				13,945
Branch sale — Royal Credit Union net of cash and cash equivalents			(99,897	)			—
Branch sale — Nicolet net of cash and cash equivalents			(80,256	)			—
Net cash provided by investing activities			118,865				403,232

(Continued)

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont’d)
(Unaudited)

		Nine Months Ended December 31,
		2010				2009
		(In Thousands)
Financing Activities
Decrease in deposit accounts		$	(418,821	)		$	(316,944	)
Increase in advance payments by borrowers for taxes and insurance			(7,837	)			(6,916	)
Proceeds from borrowed funds			15,500				257
Repayment of borrowed funds			(128,100	)			(319,170	)
Tax benefit from stock related compensation			—				(194	)
Net cash used in financing activities			(539,258	)			(642,967	)
Net decrease in cash and cash equivalents			(377,644	)			(101,538	)
Cash and cash equivalents at beginning of period			512,162				433,826
Cash and cash equivalents at end of period		$	134,518			$	332,288
Supplementary cash flow information:
Cash paid or credited to accounts:
Interest on deposits and borrowings		$	71,728			$	102,470
Income taxes			(17,142	)			(29,376	)
Non-cash transactions:
Transfer of loans to foreclosed properties			51,595				20,939
Securitization of mortgage loans held for sale to mortgage-backed securities			—				48,878

See accompanying Notes to Unaudited Consolidated Financial Statements

ANCHOR BANCORP WISCONSIN INC.

Note 1 — Principles of Consolidation

The unaudited consolidated financial statements include the accounts and results of operations of Anchor BanCorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiaries, AnchorBank fsb (the “Bank”) and Investment Directions, Inc. (“IDI”). The Bank’s accounts and results of operations include its wholly-owned subsidiaries ADPC Corporation and Anchor Investment Corporation. Significant inter-company balances and transactions have been eliminated. The Corporation also consolidates certain variable interest entities (joint ventures and other 50% or less owned partnerships) to which the Corporation is the primary beneficiary.

Note 2 — Basis of Presentation

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

In preparing the unaudited consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, mortgage servicing rights and deferred tax assets, and the fair value of investment securities. The results of operations and other data for the three- and nine-month periods ended December 31, 2010 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2011. We have evaluated all subsequent events through the date of this filing. The interim unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

The Corporation’s investment in real estate held for investment and sale includes 50% owned real estate partnerships which are considered variable interest entities which are consolidated by the entity that will absorb a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.

Certain prior period accounts have been reclassified to conform to the current period presentations. The April 1, 2009 stockholders’ equity has been restated to reflect $2.4 million of FDIC premium that should have been expensed in prior years. The reclassifications had no impact on the prior year’s consolidated net loss.

Note 3 — Significant Risks and Uncertainties

Regulatory Agreements

On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease and Desist (the “Corporation Order” and the “Bank Order,” respectively, and together, the “Orders”) by the Office of Thrift Supervision (the “OTS”).

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

The Bank Order requires the Bank to notify, or in certain cases obtain the permission of, the OTS prior to (i) increasing its total assets in any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or renewing any brokered deposits; (iii) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; (v) making any golden parachute or prohibited indemnification payments; (vi) paying dividends or making other capital distributions on its capital stock; (vii) entering into certain transactions with affiliates; and (viii) entering into third-party contracts outside the normal course of business.

The Orders also required the Bank to meet and maintain a core capital ratio equal to or greater than 8% and a total risk-based capital ratio equal to or greater than 12% by December 31, 2009. The Bank must also submit, and has submitted, to the OTS, within prescribed time periods, a written capital restoration plan, a problem asset plan, a revised business plan, and an implementation plan resulting from a review of commercial lending practices. The Orders also require the Bank to review its current liquidity management policy and the adequacy of its allowance for loan and lease losses.

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

At March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, the Bank had a core capital ratio of 3.73%, 4.08%, 4.36% and 4.43%, respectively, and a total risk-based capital ratio of 7.32%, 7.63%, 8.14% and 8.37%, respectively, each below the required capital ratios set forth above. Without a waiver by the OTS or amendment or modification of the Orders, the Bank could be subject to further regulatory action. All customer deposits remain fully insured to the highest limits set by the FDIC.

The description of each of the Orders and the corresponding Stipulation and Consent to Issuance of Order to Cease and Desist were previously filed as Exhibits to the Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Going Concern

The Corporation and the Bank continue to diligently work with their financial and professional advisors in seeking qualified sources of outside capital, and in achieving compliance with the requirements of the Orders. The

Corporation and the Bank continue to consult with the OTS and FDIC on a regular basis concerning the Corporation’s and Bank’s proposals to obtain outside capital and to develop action plans that will be acceptable to federal regulatory authorities, but there can be no assurance that these actions will be successful, or that even if one or more of the Corporation’s and Bank’s proposals are accepted by the Federal regulators, that these proposals will be successfully implemented. While the Corporation’s management continues to exert maximum effort to attract new capital, significant operating losses in fiscal 2008, 2009 and 2010, significant levels of criticized assets and low levels of capital raise substantial doubt as to the Corporation’s ability to continue as a going concern. If the Corporation and Bank are unable to achieve compliance with the requirements of the Orders, or implement an acceptable capital restoration plan, and if the Corporation and Bank cannot otherwise comply with such commitments and regulations, the OTS or FDIC could force a sale, liquidation or federal conservatorship or receivership of the Bank.

The Corporation and the Bank have submitted a capital restoration plan stating that the Corporation intends to restore the capital position of the Bank. On August 31, 2010, the OTS accepted this plan.

Further, the Corporation entered into an amendment dated April 29, 2010 (“Amendment No. 6”) to the Amended and Restated Credit Agreement (“Credit Agreement”) with U.S. Bank NA, as described in Note 14, which established new financial covenants. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if all covenants are not complied with. As of December 31, 2010, the Corporation was in compliance with the financial and non-financial covenants contained in the Credit Agreement, as amended, although there is no guarantee that the Corporation will remain in compliance with the covenants. As of the date of this filing, the Corporation does not have sufficient cash on hand to reduce the outstanding borrowings to zero. There can be no assurance that we will be able to raise sufficient capital or have sufficient cash on hand to reduce the outstanding borrowings to zero by May 31, 2011, which may limit our ability to fund ongoing operations.

Credit Risks

While the Corporation has devoted, and will continue to devote, substantial management resources toward the resolution of all delinquent, impaired and nonaccrual loans, no assurance can be made that management’s efforts will be successful. These conditions also raise substantial doubt as to the Corporation’s ability to continue as a going concern. The continuing recession and the decrease in valuations of real estate have had a significant adverse impact on the Corporation’s consolidated financial condition and results of operations. As reported in the accompanying unaudited interim consolidated financial statements, the Corporation has incurred a net loss of $12.2 million and $23.1 million for the three and nine months ended December 31, 2010, respectively. Stockholders’ equity decreased from $30.1 million or 0.68% of total assets at March 31, 2010 to a deficit of $9.5 million at December 31, 2010. At December 31, 2010, the Bank’s risk-based capital is considered adequately capitalized for regulatory purposes. However, the Bank’s risk-based capital and Tier 1 capital ratios are below the target levels of the Bank Order dated June 26, 2009. The provision for credit losses was $21.4 million for the three months ended December 31, 2010, which has reduced the Corporation’s net interest income. The Corporation’s net interest income will continue to be impacted by the level of non-performing assets and the Corporation expects additional losses into the next fiscal year.

Note 4 — Summary of Significant Accounting Related to Loans Held for Investment and Allowance for Loan Losses

Loans Held for Investment. Loans are stated at the amount of the unpaid principal, reduced by unearned net loan fees and an allowance for loan losses. Interest on loans is accrued on the unpaid principal balances as earned. Loans are placed on non-accrual status when they become 90 days past due or in the judgment of management the probability of collection of principal and interest is deemed to be insufficient to warrant further accrual. Factors that management considers include early stage delinquencies and financial difficulties of the borrower that lead management to believe that principal and interest will not be collected in full. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Payments received on non-accrual loans are recognized in income on a cash basis. Loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The Corporation has defined the following segments within its loan portfolio in order to determine its allowance for loan losses: Residential, Commercial and Industrial, Commercial Real Estate and Consumer. The Corporation has disaggregated those segments into the following classes based on risk characteristics: Residential, Commercial and Industrial, Land and Construction, Multi-Family, Retail/Office and Other Commercial Real estate within the Commercial Real Estate segment and Education and Other Consumer within the Consumer segment.

Loan Fees and Discounts. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment to the related loan’s yield. The Corporation primarily amortizes these amounts, as well as discounts on purchased loans, using the level yield method, adjusted for prepayments, over the life of the related loans.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable and estimable 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; actual and anticipated loss experience; and current economic events in specific industries and geographical areas. These economic events include unemployment levels, 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. A provision for loan losses is charged to net interest income based on management’s periodic evaluation of the factors previously mentioned as well as other pertinent factors. In addition, regulatory agencies periodically review the allowance for loan losses. These agencies may require the Corporation to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their examination.

In determining the general allowance management has segregated the loan portfolio by collateral type. This allows management to identify trends in borrower behavior and loss severity. A historical loss factor is computed for each collateral type. In determining the appropriate period of activity to use in computing the historical loss factor management considers trends in quarterly net charge-off ratios. It is management’s intention to utilize a period of activity that it believes to be most reflective of current experience. Changes in the historical period are made when there is a distinct change in the trend of net charge-off experience. Given the changes in the credit market that have occurred in fiscal years 2009 and 2010, management reviewed each strata’s historical losses by quarter for any trends that would indicate a shorter look back period would be more representative.

In addition to the historical loss factor, management considers the impact of the following qualitative factors: changes in lending policies; procedures and practices; economic and industry trends and conditions; experience; ability and depth of lending management; level of and trends in past dues and delinquent loans; changes in the quality of the loan review system; changes in the value of the underlying collateral for collateral dependent loans; changes in credit concentrations and portfolio size; and other external factors such as legal and regulatory. In determining the impact, if any, of an individual qualitative factor, management compares the current underlying facts and circumstances surrounding a particular factor with those in the historical periods, adjusting the historical loss factor based on changes in the qualitative factor. Management will continue to analyze the qualitative factors on a quarterly basis, adjusting the historical loss factor both as necessary, to a factor we believe is appropriate for the probable and inherent risk of loss in its portfolio.

Specific allowance allocations are established for probable losses resulting from analysis developed through specific allocations on individual loans and are based on a regular analysis of impaired loans. A loan is considered impaired when it is probable that the Corporation will be unable to collect all contractual principal and interest due according to the terms of the loan agreement. Impaired loans include non-accrual and restructured loans exclusive of smaller homogeneous loans such as home equity, installment, and 1-4 family residential loans. The fair value of impaired loans is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the underlying collateral less costs to sell, if the loan is collateral dependent. Cash collections on impaired loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is current.

On a monthly basis, adversely classified loans are analyzed to determine the amount to be charged off to the allowance. Commercial charge-offs are recorded when available information indicates that specific loans, or portions of loans, are uncollectible. Any portion of the recorded investment deemed uncollectible in a collateral-dependent loan (including capitalized accrued interest, net deferred loan fees or costs and unamortized premium or discount) in excess of the fair value of the collateral is considered a confirmed loss and is charged against the allowance. Residential loans are charged off at the time funds are received by an approved short sale, information is obtained regarding the property that shows an insufficient value and the borrower has not made a payment in a significant amount of time or the foreclosure sale is complete and the loan is being reclassified to OREO. Consumer loans are charged off based on various criteria including: foreclosure sale is complete and there are no surplus proceeds available based on recent valuation, a recent valuation shows no surplus for the Bank, collateral is repossessed or sold and deficiency is realized, information is received indicating the collateral has little or no value, and for unsecured notes on or before reaching 150 days past due or the month following notice of discharge for a Chapter 7 Bankruptcy.

Reserve for Unfunded Commitments. The reserve for unfunded commitments is determined using the overall loss factor of the associated loan and is applied to unfunded commitments of performing loans. A provision for unfunded commitments is charged to the provision for credit losses based on management’s periodic evaluation of the factors previously mentioned as well as other pertinent factors. The reserve for unfunded commitments is included in other liabilities on the Consolidated Statement of Financial Condition.

Note 5 — Recent Accounting Pronouncements

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would primarily be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Corporation beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Corporation on January 1, 2010.

FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 was effective April 1, 2010 and did not have an impact on the Corporation’s consolidated financial statements.

ASU No. 2010-11, “Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions

of ASU 2010-11 were effective for the Corporation on July 1, 2010 and did not have a significant impact on the Corporation’s financial statements.

ASU No. 2010-20, “Receivables (Topic 830) — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is primarily a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 was effective for the Corporation’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Corporation’s financial statements that include periods beginning on or after January 1, 2011. In January 2011, the FASB issued ASU No. 2011-01 “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” which defers the effective date of the loan modification disclosures.

Note 6 — Investment Securities

The amortized cost and fair values of investment securities are as follows (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				(Losses)				Fair Value
At December 31, 2010:
Available-for-sale:
U.S. government and federal agency obligations		$	7,740			$	112			$	—			$	7,852
Corporate stock and other			1,152				99				(104	)			1,147
Agency CMOs and REMICs			365				17				—				382
Non-agency CMOs			54,163				437				(3,874	)			50,726
Residential agency mortgage-backed securities			6,513				285				(13	)			6,785
GNMA securities			480,102				1,462				(18,655	)			462,909
		$	550,035			$	2,412			$	(22,646	)		$	529,801
Held-to-maturity:
Residential agency mortgage-backed securities		$	31			$	—			$	—			$	31
		$	31			$	—			$	—			$	31

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				(Losses)				Fair Value
At March 31, 2010:
Available-for-sale:
U.S. government and federal agency obligations		$	51,029			$	49			$	(47)			$	51,031
Corporate stock and other			1,176				72				(50)				1,198
Agency CMOs and REMICs			1,393				20				—				1,413
Non-agency CMOs			91,140				550				(6,323)				85,367
Residential agency mortgage-backed securities			14,907				593				(60)				15,440
GNMA securities			261,957				1,226				(1,429)				261,754
		$	421,602			$	2,510			$	(7,909)			$	416,203
Held-to-maturity:
Residential agency mortgage-backed securities		$	39			$	1			$	—			$	40
		$	39			$	1			$	—			$	40

The table below shows the Corporation’s gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2010 and March 31, 2010.

		At December 31, 2010
		Unrealized loss position								Unrealized loss position
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
										(In Thousands)
Corporate stock and other		$	—			$	—			$	48			$	(104	)		$	48			$	(104	)
Non-agency CMOs			5,532				(25	)			23,555				(3,849	)			29,087				(3,874	)
Residential agency mortgage-backed securities			963				(13	)			—				—				963				(13	)
GNMA securities			387,356				(18,655	)			—				—				387,356				(18,655	)
		$	393,851			$	(18,693	)		$	23,603			$	(3,953	)		$	417,454			$	(22,646	)

		At March 31, 2010
		Unrealized loss position								Unrealized loss position
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
										(In Thousands)
US government and federal agency obligations		$	4,000			$	(47	)		$	—			$	—			$	4,000			$	(47	)
Corporate stock and other			51				(13	)			50				(37	)			101				(50	)
Non-agency CMOs			4,244				(37	)			43,029				(6,286	)			47,273				(6,323	)
Residential agency mortgage-backed securities			1,336				(60	)			—				—				1,336				(60	)
GNMA securities			138,996				(1,429	)			—				—				138,996				(1,429	)
		$	148,627			$	(1,586	)		$	43,079			$	(6,323	)		$	191,706			$	(7,909	)

The tables above represent fifty (50) investment securities at December 31, 2010 compared to forty-three (43) at March 31, 2010 that, due to the current interest rate environment and other factors not relating to credit, have declined in value.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In estimating other-than-temporary impairment losses on investment securities, management considers many factors which include: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.

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

The Corporation utilizes a discounted cash flow model in the determination of fair value which is used in the calculation of other-than-temporary impairments on non-agency Collateralized Mortgage Obligations (“CMOs”). This model is also used to determine the portion of the other-than-temporary impairment that is due to credit losses, and the portion that is due to all other factors. On securities with other-than-temporary impairment, the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security is the credit loss.

To estimate fair value of non-agency CMOs, the Corporation discounted its best estimate of expected cash flows after credit losses at rates ranging from 5.0% to 12.0%. The rates utilized are based on the risk free rate equivalent to the remaining average life of the security, plus a spread for normal liquidity and a spread to reflect the uncertainty of the cash flow estimates. The Corporation benchmarks its fair value results to a pricing service and monitors the market for actual trades. The Corporation includes these inputs in its derivation of the discount rates used to estimate fair value. There are no payments in kind allowed on these non-agency CMOs. The significant inputs used for calculating the credit loss portion of securities with other than temporary impairment (“OTTI”) include prepayment assumptions, loss severities, original FICO scores, historical rates of delinquency, percentage of loans with limited underwriting, historical rates of default, original loan-to-value ratio, aggregate property location by metropolitan statistical area, original credit support, current credit support, and weighted-average maturity. The discount rates used to establish the net present value of expected cash flows for purposes of determining OTTI ranged from 5.0% to 7.5%. The rates used equate to the effective yield implicit in the security at the date of acquisition for the bonds for which the Corporation has not in the past incurred OTTI. For the bonds for which the Corporation has previously recorded OTTI, the discount rate used equates to the accounting yield on the security as of the valuation date. Default rates were calculated separately for each category of underlying borrower based on delinquency status (i.e. current, 30 to 59 days delinquent, 60 to 89 days delinquent, 90+ days delinquent, and foreclosure balances) of the loans as of December 1, 2010. These balances were entered into a loss migration model to calculate projected default rates, which are benchmarked against results that have recently been experienced by other major servicers on non-agency CMOs with similar attributes. The projected default rates used in the model ranged from 2.8% to 11.8%.

Based on the Corporation’s impairment testing as of December 31, 2010, 14 non-agency CMOs with a fair value of $27.2 million and an adjusted cost of $31.0 million were other-than-temporarily impaired compared to 15 non-agency CMOs with a fair value of $34.8 million and an adjusted cost basis of $40.7 million as of March 31, 2010. The portion of the other-than-temporary impairment due to credit of $163,000 and $362,000 was included in earnings for the three and nine month periods ending December 31, 2010. These other-than-temporary impairments were all additional credit losses on existing OTTI securities.

The cumulative unrealized losses on the securities with other-than-temporary impairment were $5.9 million at December 31, 2010 and $7.8 million at March 31, 2010. The difference between the total unrealized losses of $5.9 million and the credit loss of $2.1 million, or $3.8 million at December 31, 2010, was included in accumulated other comprehensive income. All of the Corporation’s other-than-temporary impaired debt securities are non-agency CMOs. On a cumulative basis, other-than-temporary impairments related to credit loss by year of vintage were $1.4 million for 2007, $317,000 for 2006, $349,000 for 2005 and $25,000 prior to 2005.

The Corporation has $18.7 million in unrealized losses on long-term GNMA securities as of December 31, 2010 due to increases in interest rates and factors other than credit during the most recent quarter. GNMA securities are guaranteed by the U.S. Government. The Corporation has reviewed this portfolio for other-than-temporary impairment and has concluded that no OTTI exists and that the unrealized losses are properly classified in accumulated other comprehensive income.

The following table is a rollforward of the amount of other-than-temporary impairment related to credit losses that have been recognized in earnings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income for the three and nine months ended December 31, 2010 and 2009 (in thousands):

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		December 31, 2010				December 31, 2009				December 31, 2010				December 31, 2009
Beginning balance of the amount of OTTI related to credit losses		$	1,964			$	1,203			$	1,889			$	805
The credit portion of OTTI not previously recognized			—				86				—				168
Additional increases to the amount related to the credit loss for which OTTI was previously recognized			163				260				362				576
Credit portion of OTTI previously recognized for securities sold during the period			—				—				(124	)			—
Ending balance of the amount of OTTI related to credit losses		$	2,127			$	1,549			$	2,127			$	1,549

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
						(in thousands)
Proceeds from sales		$	82,490			$	243,545			$	385,209			$	391,615
Gross gains on sales			1,187				5,783				7,952				9,396
Gross losses on sales			—				—				—				—
Net gain on sales		$	1,187			$	5,783			$	7,952			$	9,396

At December 31, 2010 and March 31, 2010, investment securities available-for-sale with a fair value of approximately $419.1 million and $301.2 million, respectively, were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

The fair value of investment securities by contractual maturity at December 31, 2010 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Investment securities subject to six-month and twelve-month calls were zero and $500,000, respectively, as of December 31, 2010.

						After 1				After 5
						Year				Years
		Within 1				through 5				through 10				Over Ten
		Year				Years				Years				Years				Total
Available-for-sale, at fair value:
U.S. government and federal agency obligations		$	3,700			$	4,152			$	—			$	—			$	7,852
Corporate stock and other			—				—				—				1,147				1,147
Agency CMOs and REMICs			—				—				—				382				382
Non-agency CMOs			—				29				9,666				41,031				50,726
Residential agency mortgage-backed securities			—				590				907				5,288				6,785
GNMA secrurities			—				—				718				462,191				462,909
Total		$	3,700			$	4,771			$	11,291			$	510,039			$	529,801
Held-to-maturity, at fair value:
Residential agency mortgage-backed securities		$	—			$	7			$	24			$	—			$	31
Total		$	—			$	7			$	24			$	—			$	31
		$	3,700			$	4,778			$	11,315			$	510,039			$	529,832
Held-to-maturity, at cost:
Residential agency mortgage-backed securities		$	—			$	7			$	24			$	—			$	31

Note 7 — Loans Receivable

Loans receivable held for investment consist of the following (in thousands):

		December 31,				March 31,
		2010				2010
Residential		$	685,536			$	775,520
Commercial and Industrial			112,568				169,050
Land and Construction			268,358				333,503
Multi-Family			456,210				535,905
Other Commercial Real Estate			290,828				361,202
Retail/office			449,408				551,512
Other Consumer			300,752				378,385
Education			286,489				331,475
			2,850,149				3,436,552
Contras to loans:
Undisbursed loan proceeds*			(27,076	)			(23,334	)
Allowance for loan losses			(157,438	)			(179,644	)
Unearned loan fees			(3,536	)			(3,898	)
Net discount on loans purchased			(5	)			(8	)
Unearned interest			(103	)			(88	)
			(188,158	)			(206,972	)
		$	2,661,991			$	3,229,580

At December 31, 2010, loans receivable with a carrying value of approximately $909.7 million of mortgage loans and $135.5 million of education loans were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

A summary of the activity in the allowance for loan losses follows:

		Three Months Ended December 31,								Nine Months Ended December 31,
		2010				2009				2010				2009
		(Dollars In Thousands)								(Dollars In Thousands)
Allowance at beginning of period		$	156,186			$	170,664			$	179,644			$	137,165
Provision			21,691				10,456				40,213				141,756
Charge-offs			(23,467	)			(17,131	)			(68,257	)			(116,792	)
Recoveries			3,028				505				5,838				2,365
Allowance at end of period		$	157,438			$	164,494			$	157,438			$	164,494

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010 (in thousands):

						Commercial				Commercial
		Residential				and Industrial				Real Estate				Consumer				Total
Allowance for Loan Losses:
Ending balance		$	24,554			$	15,461			$	113,627			$	3,796			$	157,438
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	9,815			$	5,159			$	33,434			$	428			$	48,837
Collectively evaluated for impairment			14,738				10,302				80,193				3,368				108,602
Total ending allowance balance		$	24,554			$	15,461			$	113,627			$	3,796			$	157,438
Loans:
Loans individually evaluated		$	73,872			$	21,448			$	296,275			$	31,323			$	422,918
Loans collectively evaluated			611,664				91,120				1,168,529				555,918				2,427,231
Total ending gross loans balance		$	685,536			$	112,568			$	1,464,804			$	587,241			$	2,850,149