<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 2000
REGISTRATION NO. 333-39838
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BANK MUTUAL CORPORATION
(Exact name of Registrant as specified in its charter)
---------------------
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WISCONSIN 6035 39-0491685*
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
4949 WEST BROWN DEER ROAD
BROWN DEER, WISCONSIN 53223
(414) 354-1500
(Address, including ZIP Code, and telephone number,
including area code, of Registrant's principal executive offices)
MICHAEL T. CROWLEY, JR.
MUTUAL SAVINGS BANK
4949 WEST BROWN DEER ROAD
BROWN DEER, WISCONSIN 53223
(414) 354-1500
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
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Copies to:
<TABLE>
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KENNETH V. HALLETT CHRISTOPHER J. ZINSKI
QUARLES & BRADY LLP SCHIFF HARDIN & WAITE
411 EAST WISCONSIN AVENUE 233 SOUTH WACKER DRIVE
MILWAUKEE, WISCONSIN 53202 6600 SEARS TOWER
(414) 277-5000 CHICAGO, ILLINOIS 60606
(312) 876-1000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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* FEIN of Mutual Savings Bank. Bank Mutual is a corporation in formation in a
restructuring of Mutual Savings Bank, and has not yet been assigned an
employer ID number.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
FIRST NORTHERN CAPITAL CORP.
201 N. MONROE AVENUE
P.O. BOX 23100
GREEN BAY WI 54305-3100
(920) 437-7101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 19, 2000
To the Shareholders of First Northern Capital Corp.:
A special meeting of the shareholders of First Northern Capital Corp. will
be held at Holiday Inn City Centre, located at 200 Main Street, Green Bay,
Wisconsin, on Thursday, October 19, 2000, at 10:00 a.m., local time, to consider
and act upon a proposal to approve an Agreement and Plan of Merger dated as of
February 21, 2000 among Mutual Savings Bank, a predecessor to Bank Mutual and
First Northern. Pursuant to that merger agreement (a) First Northern will be
merged into Bank Mutual, which will then be a majority-owned subsidiary of
Mutual Savings Bancorp, MHC, and (b) holders of First Northern common stock will
receive cash, shares of Bank Mutual common stock or a combination thereof,
pursuant to an election described in the accompanying proxy
statement/prospectus.
The record date for the special meeting is the close of business on August
31, 2000. Only First Northern shareholders of record at that time are entitled
to notice of and to vote at the special meeting or any adjournment or
postponement thereof. To approve the merger, the holders of a majority of the
outstanding shares of First Northern common stock must vote in favor of the
merger agreement. First Northern shareholders do not have dissenters' rights of
appraisal.
The accompanying proxy statement/prospectus contains more detailed
information regarding the merger and the Agreement and Plan of Merger. A copy of
the merger agreement is included as Appendix A to the proxy
statement/prospectus.
YOUR VOTE IS IMPORTANT. EVEN IF YOU EXPECT TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. IF NO INSTRUCTIONS ARE INDICATED ON YOUR PROXY,
YOUR SHARES WILL BE VOTED "FOR" THE MERGER AGREEMENT. IF YOU DO NOT RETURN YOUR
PROXY OR VOTE IN PERSON, THE EFFECT IS A VOTE AGAINST THE MERGER AGREEMENT. YOU
CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS EXERCISED BY GIVING WRITTEN
NOTICE TO THE SECRETARY OF FIRST NORTHERN, OR FILING ANOTHER PROXY, OR ATTENDING
THE SPECIAL MEETING AND VOTING IN PERSON.
DO NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD. YOU WILL SHORTLY
RECEIVE AN ELECTION FORM WITH INSTRUCTIONS IN A SEPARATE MAILING.
THE FIRST NORTHERN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE MERGER AGREEMENT.
BY ORDER OF THE BOARD OF DIRECTORS
Marla J. Carr
Vice President and Secretary
September , 2000
Green Bay, Wisconsin
<PAGE> 3
<TABLE>
<S> <C>
First Northern Capital Logo
[BANK MUTUAL LOGO]
PROXY STATEMENT PROSPECTUS
OF OF
FIRST NORTHERN CAPITAL CORP. BANK MUTUAL CORPORATION
</TABLE>
We are furnishing this proxy statement/prospectus to you as a shareholder
of First Northern Capital Corp. in connection with the proposed acquisition of
First Northern by Bank Mutual. The First Northern board of directors is
soliciting your proxy for a special meeting of shareholders of First Northern on
October 19, 2000 to approve that transaction. The holders of at least a majority
of First Northern's outstanding shares must vote in favor of the merger
agreement for it to be approved.
In the merger, First Northern shareholders may elect to receive cash, Bank
Mutual common stock, or a combination thereof. First Northern Savings Bank will
become a wholly-owned subsidiary of Bank Mutual. Mutual Savings Bank will also
be a wholly-owned subsidiary of Bank Mutual. Bank Mutual will be a
majority-owned subsidiary of Mutual Savings Bancorp, MHC.
This proxy statement/prospectus also is the prospectus of Bank Mutual filed
as part of a registration statement with the Securities and Exchange Commission,
relating to the shares of Bank Mutual common stock. Bank Mutual estimates that
between 5,025,485 and 8,794,598 shares of Bank Mutual common stock will be
issued in the merger.
Bank Mutual has applied for quotation of its common stock under the symbol
"BKMU" on the Nasdaq Stock Market. First Northern common stock is quoted under
the symbol "FNGB" on the Nasdaq Stock Market. On February 18, 2000, the last
trading day before the execution of the merger agreement, Nasdaq reported that
the last sale price of First Northern common stock was $9.00 per share. On
August 31, 2000, a recent trading day before the date of this proxy
statement/prospectus, the last sale price of First Northern common stock was
$ .
YOU SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION THAT YOU RECEIVE IN
THIS TRANSACTION. FOR SOME OF THE IMPORTANT FACTORS WHICH YOU SHOULD CONSIDER IN
EVALUATING BANK MUTUAL COMMON STOCK AND THE PROPOSED TRANSACTION, PLEASE SEE
"RISK FACTORS" BEGINNING ON PAGE 21.
This proxy statement/prospectus is dated September , 2000. It is first
being mailed to First Northern shareholders on or about September , 2000.
---------------------
THE SHARES OF BANK MUTUAL COMMON STOCK ARE NOT DEPOSITS OR ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY, ARE NOT GUARANTEED BY MUTUAL SAVINGS OR BANK MUTUAL,
AND ARE SUBJECT TO INVESTMENT AND MARKET RISK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES. THEY ALSO HAVE NOT
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY..................................................... 3
RISK FACTORS................................................ 21
THE SPECIAL MEETING......................................... 25
THE MERGER AND THE MERGER AGREEMENT......................... 27
MUTUAL SAVINGS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 56
BUSINESS OF MUTUAL SAVINGS BANK............................. 73
MANAGEMENT.................................................. 100
THE BANK MUTUAL RESTRUCTURING............................... 112
BUSINESS OF FIRST NORTHERN.................................. 114
REGULATION.................................................. 115
RESTRICTIONS ON ACQUISITION OF BANK MUTUAL.................. 127
RIGHTS OF BANK MUTUAL SHAREHOLDERS; COMPARISON TO
FIRST NORTHERN SHARES..................................... 129
PRO FORMA FINANCIAL DATA.................................... 134
REGULATORY CAPITAL COMPLIANCE............................... 147
CAPITALIZATION.............................................. 149
CERTAIN EFFECTS OF THE FIRST NORTHERN MERGER ON BANK
MUTUAL.................................................... 150
MARKET FOR BANK MUTUAL COMMON STOCK......................... 154
LEGAL OPINIONS.............................................. 156
EXPERTS..................................................... 156
OTHER INFORMATION WHICH YOU CAN OBTAIN...................... 156
INDEX TO FINANCIAL STATEMENTS............................... 158
</TABLE>
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<S> <C>
AGREEMENT AND PLAN OF MERGER................................ Appendix A
FAIRNESS OPINION OF KBW..................................... Appendix B
</TABLE>
NEITHER BANK MUTUAL NOR FIRST NORTHERN HAS AUTHORIZED ANYONE TO GIVE YOU
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS EXCEPT FOR THOSE IN THIS PROXY
STATEMENT/PROSPECTUS. THAT IS TRUE WHETHER THE STATEMENTS ARE IN CONNECTION WITH
THE SOLICITATIONS OF PROXIES OR THE OFFERING OF SECURITIES. YOU SHOULD NOT RELY
UPON ANY OTHER INFORMATION OR REPRESENTATIONS EVEN IF SOMEONE PROVIDES YOU WITH
THEM, BECAUSE THEY ARE NOT AUTHORIZED BY BANK MUTUAL, FIRST NORTHERN OR ANYONE
ELSE. BANK MUTUAL AND FIRST NORTHERN DO NOT IMPLY OR REPRESENT BY DELIVERING
THIS PROXY STATEMENT/PROSPECTUS THAT MUTUAL, FIRST NORTHERN OR THEIR BUSINESSES
ARE UNCHANGED AFTER ITS DATE OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME AFTER ITS DATE.
Bank Mutual has provided all information contained in this proxy
statement/prospectus about Bank Mutual, Mutual Savings Bank and the MHC. First
Northern has provided all information in this proxy statement/prospectus about
First Northern.
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<PAGE> 5
SUMMARY
This section is a summary of important information in this proxy
statement/prospectus, and includes summaries of information which we believe is
material. To understand the merger fully and for a more complete description of
the legal terms of the merger, you should read carefully this entire document
and the documents to which we have referred you. See "Other Information Which
You Can Obtain" on page 156. We have included page references to direct you to a
more complete description of some of the topics presented in this summary.
We are furnishing you this proxy statement/prospectus in connection with
the acquisition of First Northern Capital Corp. by Bank Mutual Corporation, a
new holding company being formed by Mutual Savings Bank. Mutual Savings is
simultaneously undertaking other transactions in which it will also form a
mutual holding company and Bank Mutual will offer shares to the public.
The following chart shows our new structure, which is commonly referred to
as a mutual holding company structure with a mid-tier holding company, after the
restructuring, Bank Mutual's stock offering and the First Northern merger:
[FLOW CHART]
THE PARTIES
Bank Mutual and Affiliates
Bank Mutual Corporation
Bank Mutual will become a holding company by owning all of the common stock
of Mutual Savings and of First Northern Savings after the regulatory
restructuring of Mutual Savings Bank. Bank Mutual has not engaged in any
business to date. The primary office of Bank Mutual is located at 4949 West
Brown Deer Road, Brown Deer, Wisconsin 53223. Brown Deer is a suburb of
Milwaukee, Wisconsin.
After the restructuring, the stock offering and the First Northern merger,
we expect Bank Mutual to be the fifth largest financial institution
headquartered in the state of Wisconsin, based on pro forma total assets of $2.7
billion at June 30, 2000.
Mutual Savings Bank
Mutual Savings is a community-oriented savings bank which emphasizes
traditional financial services to individuals and businesses within its market
areas. Our principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, in residential mortgage loans, consumer loans, multi-family and
commercial real estate loans, and commercial business loans. We also invest in
various mortgage-related securities and investment securities.
3
<PAGE> 6
Mutual Savings has 50 branches located in Wisconsin, primarily in the
southern and northwestern parts of the state, and one office in eastern
Minnesota. It serves over 80,000 households. At June 30, 2000, it had assets of
$1.8 billion, deposits of $1.3 billion and equity of $167.6 million. By asset
size, it is the largest mutual savings institution headquartered in Wisconsin,
and one of the largest mutual savings institutions in the country. Mutual
Savings has grown both through acquisitions and internal growth. Its most recent
acquisition was of the $730.7 million asset First Federal Bancshares of Eau
Claire in March 1997.
As part of this transaction, Mutual Savings is converting from a
Wisconsin-chartered mutual savings bank into a federal stock savings bank. When
we refer to Mutual Savings, we also include the federal savings bank after that
conversion.
Mutual Savings Bancorp, MHC
The MHC will own more than half of the outstanding common stock of Bank
Mutual after the restructuring. We do not expect that the MHC will engage in any
business activity other than owning a majority of the common stock of Bank
Mutual and managing dividends, if any, it receives from Bank Mutual. We expect
that the MHC initially will waive the receipt of dividends declared by Bank
Mutual.
For further information, you should see "Business of Mutual Savings Bank"
beginning on page 73, "Mutual Savings' Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 56, and "Index
to Financial Statements" on page 158.
First Northern
First Northern, a Wisconsin corporation founded in 1995, is a holding
company for First Northern Savings Bank, S.A. First Northern Savings is a
Wisconsin-chartered savings and loan association. First Northern Savings also
has wholly-owned subsidiaries which manage certain investments, including the
purchase of loans, for First Northern Savings, and which offer full-service
brokerage services, and a 50%-owned subsidiary which originates, services and
sells automobile loans.
At June 30, 2000, First Northern had assets of $904.9 million, deposits of
$568.6 million and shareholders' equity of $75.6 million. The primary office of
First Northern is located at 201 North Monroe Avenue, Green Bay, Wisconsin
54305. In this document, we use "First Northern" to refer to First Northern
Capital Corp. and "First Northern Savings" to refer to First Northern Savings
Bank, S.A.
As part of this transaction, First Northern Savings will convert into a
federally-chartered savings bank; when we refer to First Northern Savings, we
also include the federal savings bank after that conversion. After the
transaction, First Northern Savings will be wholly-owned by Bank Mutual.
For further information, you should see "Business of First Northern" on
page 114 and the information about First Northern incorporated by reference in
this document. See "Other Information Which You Can Obtain" on page 156.
SUMMARY OF THE MERGER (page 27)
The merger agreement is attached at the back of this proxy
statement/prospectus as Appendix A. We strongly encourage you to read the merger
agreement, because it is the legal document that governs the merger.
In the proposed merger, First Northern will merge into Bank Mutual. Bank
Mutual will be a majority-owned subsidiary of the MHC. First Northern Savings
and Mutual Savings will be wholly-owned subsidiaries of Bank Mutual. You may
elect to receive cash, shares of Bank Mutual common stock or a combination in
exchange for your shares of First Northern common stock.
4
<PAGE> 7
Effective time of the merger
Bank Mutual and First Northern hope to complete the merger shortly after
the special meeting, if regulatory approvals and other required matters are
completed by that time.
What you will receive in the merger (page 27)
First Northern shareholders will receive either cash, Bank Mutual common
stock, or a combination of cash and stock. Each First Northern share which is
converted into cash will be converted into $15.00; each First Northern share
converted into stock will be converted into 1.5 shares of Bank Mutual common
stock.
Immediately prior to closing, Bank Mutual will select a stock percentage
between 40% and 70% of the total merger consideration that it will pay in Bank
Mutual common stock, with the remainder to be paid in cash. Therefore, the exact
percentage of Mutual common stock will not be determined until shortly before
the merger.
First Northern shareholders may elect to receive:
- cash for all of their First Northern shares;
- shares of Bank Mutual common stock for all of their First Northern
shares; or
- if they own at least 170 shares of First Northern common stock, cash for
some of their First Northern shares and shares of Bank Mutual common
stock for the remainder. In this "mixed" election, shareholders will
receive Bank Mutual common stock for the lesser of 50% of their shares or
the stock percentage, referred to above, as chosen by Bank Mutual for the
total consideration to be payable in stock; the balance of shares will be
converted into cash.
SO THAT YOU CAN MAKE AN ELECTION, WE WILL SHORTLY SEND YOU AN ELECTION FORM. You
will need to return it to the exchange agent by October 16, 2000 if you want to
make an election.
In some cases, there will be qualifications, adjustments or pro rations
made to these elections and payments. These exceptions are the following:
- cash at the rate of $10 per full Bank Mutual share will be paid instead
of any fractional shares of Bank Mutual common stock resulting from the
merger;
- if total elections for Bank Mutual common stock exceed the percentage to
be paid in stock, the amount of the elections of First Northern
shareholders for Bank Mutual common stock will be reduced pro rata so
that the resulting amounts approximate the Bank Mutual common stock to be
issued in the merger, with the balance of the merger consideration paid
in cash;
- if total elections for cash, including the cash paid for fractional
shares, exceed the cash percentage, the amount of the elections of First
Northern shareholders for cash will be reduced pro rata so that the
resulting amounts approximate the cash to be paid in the merger, with the
balance of the merger consideration paid in Bank Mutual common stock;
- if total elections for cash exceed the cash percentage, Bank Mutual and
First Northern also may agree that all First Northern shareholders
electing cash who otherwise would receive fewer than 25 shares of Bank
Mutual common stock will receive all cash, and the amount of shares and
cash to be received by other First Northern shareholders electing cash
will be adjusted accordingly; and
- if you do not make a timely election for either cash or stock or a mixed
combination, we will honor the elections of the other First Northern
shareholders to the extent possible and then divide the remaining merger
consideration, whether cash, shares of Bank Mutual common stock, or both,
proportionately among the non-electing First Northern shareholders.
For example, if a First Northern shareholder owns 1,000 shares of First
Northern common stock and elects to be paid in stock, this would be exchanged
for 1,500 shares of Bank Mutual common stock. If the
5
<PAGE> 8
same shareholder requests and receives all cash, the shareholder would receive
$15,000. If that shareholder makes a mixed election and the stock percentage of
the transaction as a whole is 40%, the shareholder would receive 600 shares of
Bank Mutual common stock (1,000 x .40 x 1.5) and $9,000 in cash (1,000 x .60 x
$15). If that shareholder makes a mixed election and the stock percentage of the
transaction as a whole is 60%, the shareholder would receive 750 shares of Bank
Mutual common stock (1,000 x .50 x 1.5) and $7,500 in cash (1,000 x .50 x $15).
These examples illustrate only a few of the possibilities that may occur.
The actual allocation of stock and cash for any particular First Northern
shareholder could be anywhere from 100% stock to 100% cash. Please note that our
examples assume that neither the cash nor the stock election is over-subscribed
and that there is no pro ration.
Tax Consequences (page 50)
To the extent that Bank Mutual stock is issued in the merger, the merger
will be structured as a "tax-free reorganization" for federal income tax
purposes. This means that First Northern shareholders generally will not
recognize any gain or loss for federal income tax purposes to the extent they
exchange their First Northern common stock for Bank Mutual common stock in the
merger. First Northern shareholders will recognize gain or loss, however, in
connection with the receipt of any cash in the merger, including cash paid for
fractional shares of Bank Mutual stock. The companies themselves, as well as the
holders of Bank Mutual stock, will not recognize gain or loss as a result of the
merger. Bank Mutual's outside counsel, Quarles & Brady LLP, has given First
Northern a legal opinion that the merger will be treated as a tax-free
reorganization for federal income tax purposes. It is a condition to First
Northern's obligation to complete the merger that this legal opinion not be
withdrawn or materially modified.
The federal income tax consequences described above may not apply to all
holders of First Northern common stock. Your tax consequences will depend upon
your personal situation. You should consult your tax advisor regarding the tax
consequences of the merger to you.
THE TAX OPINION CONTAINS EXCEPTIONS AND QUALIFICATIONS BECAUSE TAX MATTERS
ARE COMPLICATED, AND YOUR TAX CONSEQUENCES FROM THE MERGER WILL DEPEND ON THE
FACTS OF YOUR OWN SITUATION. WE URGE YOU TO CONTACT YOUR OWN TAX ADVISOR TO
UNDERSTAND FULLY HOW THE MERGER WILL AFFECT YOU, INCLUDING HOW ANY STATE, LOCAL
OR FOREIGN TAX LAWS MAY APPLY TO YOU.
What happens to First Northern stock options (page 37)
Options granted under First Northern's stock option plans will not be
assumed by Bank Mutual. First Northern option holders may exercise vested
options prior to the merger's effective date. The First Northern shares
resulting from an exercise of stock options will be converted in the same way
that other First Northern shares of common stock are converted in the merger.
To the extent that options are not exercised before the merger, whether or
not they are vested, First Northern may "cash out" those options for a cash
amount equal to the difference between the exercise price per share and $15. In
addition, to recognize that option holders will not be able to have their
options converted into options to acquire Bank Mutual stock and the
consequential tax impact to the option holders, First Northern may under the
merger agreement pay option holders an additional amount up to 25% of the cash
difference. We expect First Northern to make these payments. However, the total
of these additional payments may not exceed $756,000 after taking First
Northern's tax deductions for those payments. We decided that First Northern
options would not be assumed by Bank Mutual to permit a greater amount of Bank
Mutual stock to be available to First Northern shareholders.
It is a condition to Bank Mutual's obligations under the merger agreement
that no First Northern stock options be outstanding at the effective time of the
merger.
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<PAGE> 9
No dissenters' rights
Under Wisconsin law, First Northern shareholders do not have dissenters'
rights of appraisal.
Old and new stock certificates
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Stock certificates will need to be included with your election form, if you wish
to make an election. After we complete the merger, if you have not already
submitted stock certificates with an election form, we will send you written
instructions that describe how to exchange your First Northern stock
certificates for Bank Mutual stock certificates and/or cash.
Percentage ownership interest by First Northern shareholders after the merger
(page 29)
Bank Mutual will pay between 40% and 70% of the total merger consideration
by issuing shares of its common stock to the First Northern shareholders. This
means that Bank Mutual will issue between approximately 5.0 million shares and
8.8 million shares of its common stock to First Northern shareholders in the
merger. Assuming the sale of approximately 6.0 million shares of Bank Mutual
common stock in the Mutual Stock offering, which is the midpoint in its expected
offering, and that 40% of the total merger consideration is in Bank Mutual
stock, the shares issued to First Northern shareholders will represent
approximately 22.8% of the total outstanding Bank Mutual common stock after the
merger, and approximately 45.5% of the shares held by persons other than the
MHC. If the percentage increases, former First Northern shareholders will own a
proportionately higher percentage of Bank Mutual stock. For example, if 50% of
the consideration is in stock but other assumptions stay the same, the shares
issued to First Northern shareholders will represent approximately 28.5% of the
total Bank Mutual common stock after the merger, and approximately 57.1% of the
shares held by persons other than the MHC.
This information is based on the number of First Northern shares
outstanding on June 30, 2000, and it assumes that no outstanding First Northern
options are exercised before the merger. In any event, a majority of the
outstanding Bank Mutual shares will be held by the MHC. Federal regulations
require that the MHC continue to own a majority of Bank Mutual's shares as long
as the MHC remains as a mutual holding company. See "The Merger -- Percentage
Ownership by First Northern Shareholders after The Merger" for more information
about what percentage of the combined company former First Northern shareholders
would own under various possible scenarios.
Opinion of First Northern's financial advisor (page 39)
In deciding to approve the merger, the First Northern board considered an
opinion from its financial advisor, Keefe, Bruyette & Woods, Inc., that, as of
the date of such opinion, the consideration to be paid in the merger is fair,
from a financial point of view, to First Northern's shareholders. The full text
of the written opinion of KBW is attached as Appendix B to this proxy
statement/prospectus. We encourage you to read this opinion.
Interests of First Northern's officers and directors in the merger (page 37)
When considering the recommendation by the First Northern board to vote
"FOR" the merger agreement, you should be aware that certain directors and
officers of First Northern have interests in the merger other than solely as
First Northern shareholders. These interests may conflict with the general
interests of shareholders of First Northern. The First Northern Board was aware
of these interests and considered them in approving the merger.
- Outstanding First Northern stock options, including options held by
directors and officers, will be vested as a result of the merger. They
may exercise their options, or they will be repurchased for cash in the
amount of the "spread" between the exercise price and $15. Holders may
receive an additional payment of up to 25% of their cash spread value to
reflect the tax consequences to holders from their inability to convert
the options into options for Bank Mutual common stock.
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<PAGE> 10
- First Northern directors and officers will continue to be indemnified
after the merger.
- The employment agreement of the chief executive officer of First Northern
will be assumed by Bank Mutual. While he will waive provisions of his
employment agreement that might result in an acceleration of benefits as
a result of the merger, he will not be asked to waive similar provisions
under his supplemental employee retirement plan. He also will become
president and chief operating officer of Bank Mutual, and a director of
Mutual Savings.
- Other First Northern executive officers with employment agreements will
be offered replacement employment agreements.
- Directors of First Northern will continue as directors of First Northern
Savings, and four directors of First Northern will be elected to the MHC
and the Bank Mutual boards.
Management and operations of First Northern after the merger (page 45)
In the merger, First Northern will merge into Bank Mutual, and First
Northern Savings will become a company which is wholly owned by Bank Mutual.
Michael T. Crowley, Jr., the President and Chief Executive Officer of Mutual
Savings, will be the Chairman and Chief Executive Officer of Bank Mutual.
Michael D. Meeuwsen, President and Chief Executive Officer of First Northern,
will be the President and Chief Operating Officer of Bank Mutual.
The Board of Directors of the MHC and Bank Mutual will consist of the seven
current directors of Mutual Savings, and four current directors of First
Northern to be chosen by Bank Mutual. Those individuals have not yet been
selected by Mutual Savings although Mutual Savings expects Mr. Meeuwsen to be
one of four designees. The current directors of First Northern will also
continue, with the addition of Mr. Crowley, as directors of First Northern
Savings, and Mr. Meeuwsen will become a director of Mutual Savings.
Bank Mutual currently intends that First Northern Savings will continue as
a separate entity. Initial management and employees of First Northern Savings as
a subsidiary of Bank Mutual will be the same as those before the merger.
Regulatory approvals (see page 47)
In order to complete the merger, we must receive approvals from, or make
filings with, the appropriate federal governmental agencies. The Mutual Savings'
restructuring also requires regulatory approvals, and it is a condition to the
merger that the restructuring occur. Mutual Savings will not proceed with the
First Northern merger if the restructuring does not simultaneously occur.
Other conditions to the merger (page 46)
The merger will be completed only if various conditions are met. These
conditions include, among others, that:
- the First Northern shareholders approve the merger;
- the Mutual restructuring receives regulatory approval, and which also
requires Mutual Savings member approval;
- the parties perform their obligations under the merger agreement;
- the representations and warranties of the parties continue to be
materially accurate; and
- the parties receive the tax opinion discussed above.
The parties may waive conditions unless they are legally prohibited from
doing so. First Northern shareholder approval may not be legally waived.
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<PAGE> 11
No solicitation by First Northern of competing transactions; Mutual Savings'
stock option (page 48)
First Northern has agreed not to discuss, conduct or agree to any other
transaction or proposal that would compete with the merger agreement and the
merger, unless First Northern's board must do so to meet its fiduciary
obligations to the First Northern shareholders. Bank Mutual or First Northern
may terminate the merger agreement if First Northern enters into or agrees to
another transaction following a good faith determination that the action is
required by its board of directors' fiduciary duties.
First Northern entered into a stock option agreement with Mutual Savings
which granted Mutual Savings the option to purchase from First Northern up to
1,708,675 shares of First Northern common stock at a price of $9.0375 per share.
The stock option agreement was an inducement to and condition of Mutual Savings
entering into the merger agreement. The option is intended to increase the
likelihood that the merger will be completed and, consequently, may discourage
third parties who might be interested in acquiring all of or a significant
interest in First Northern from considering or proposing such an acquisition.
Mutual Savings may exercise the option only if certain events described in
the stock option agreement occur. None of these events has occurred as of the
date of this proxy statement/prospectus. At the request of the holder of the
option, under certain circumstances, First Northern will repurchase, for a
specified price, the option and any shares of First Northern common stock
purchased upon its exercise.
These provisions are included in the merger agreement, and the stock option
agreement was signed, because Mutual Savings would not agree to the merger
agreement without protection against competing proposals or transactions which
may upset the proposed merger.
The Bank Mutual Restructuring (page 112)
The merger will not happen unless Mutual Savings simultaneously undergoes
the restructuring transaction which is further described in this document. Our
discussions regarding Bank Mutual and the MHC assume completion of that
restructuring.
The restructuring includes a number of facets; it has the general effect of
creating holding companies for Mutual Savings and, assuming the merger, First
Northern Savings. The transactions also introduce a stock ownership structure to
Mutual Savings which prior to the restructuring has been a member-owned
institution. Significant elements of the restructuring include:
- Formation of the MHC, which is a mutual holding company. As a mutual
holding company, all voting power in the MHC will be held by depositors
of Mutual Savings.
- The establishment of Bank Mutual as a "mid-tier holding company" that
will be majority-owned by the MHC. The balance of the shares of Bank
Mutual will be held by others, including depositors of Mutual Savings and
others who have purchased shares in a conversion offering, former First
Northern shareholders, and Mutual Savings employee plans.
- Mutual Savings will be a wholly-owned subsidiary of Bank Mutual. Rather
than being a mutual institution in which all of the voting power is held
by its members, Mutual Savings will be a stock entity, with all of its
shares held by Bank Mutual.
In connection with the establishment of Bank Mutual, Mutual Savings
depositors are being given the opportunity to purchase shares of Bank Mutual at
an appraised value in a stock offering. If all of the shares are not purchased
by Mutual Savings depositors, they will be offered to other members of the
public and/or the shares used to increase the number of shares of the Bank
Mutual which will be issued in the First Northern merger.
Termination, amendment or waiver of the Merger Agreement
Even if the First Northern shareholders approve the merger agreement, Bank
Mutual and First Northern can agree at any time to terminate the merger
agreement without completing the merger. The
9
<PAGE> 12
merger agreement can also be terminated by either party under specified
circumstances. Once shareholders approve the merger agreement, however, no
amendment may be made to the merger agreement without further shareholder
approval if the amendment would reduce the merger consideration or otherwise
materially adversely affect the rights of First Northern shareholders.
Accounting treatment (page 55)
Bank Mutual expects to account for the merger as a purchase, which means
that First Northern's assets and operations will be reflected only from the
merger date.
Board recommendation to First Northern Shareholders
The First Northern board of directors believes that the merger is in the
best interests of First Northern and its shareholders. THE FIRST NORTHERN BOARD
UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AGREEMENT. Some First
Northern directors and officers have interests in this transaction other than as
First Northern shareholders. For a description, you should see "The Merger and
the Merger Agreement -- Interests of Officers and Directors in the Merger."
FIRST NORTHERN SPECIAL MEETING (page 25)
The special meeting will be held at Holiday Inn City Centre, located at 200
Main Street, Green Bay, Wisconsin, on Thursday, October 19, 2000 at 10:00 a.m.
At the special meeting, First Northern shareholders such as you will consider
and vote on a proposal to approve the merger agreement.
Record Date
You can vote at the special meeting only if you owned shares of First
Northern common stock at the close of business on August 31, 2000, which was the
record date.
Vote Required to Approve the Merger
The merger agreement requires the approval of the holders of a majority of
the outstanding shares of First Northern common stock. If you do not return your
proxy or vote in person, it will have the effect of a vote against the merger
agreement. Brokers who hold your shares of First Northern common stock as
nominees cannot vote those shares unless you give them instructions to vote in
the manner that they require. Mutual Savings members do not need to vote to
approve the merger, but they need to approve the restructuring.
Voting Power, Voting by Management
On the record date, shares of First Northern common stock were
outstanding. Of these, 1,046,318 shares, approximately 12.5% of the shares
entitled to vote, were beneficially owned by directors and executive officers of
First Northern. Those numbers exclude stock options.
Revoking Proxies
You can revoke a proxy previously given by you by giving written notice to
the Secretary of First Northern, by filing another proxy, or by attending the
special meeting and voting in person.
COMPARISON OF SHAREHOLDER RIGHTS (page 129)
Bank Mutual is a federally-chartered corporation, while First Northern is
incorporated in Wisconsin and governed by Wisconsin law. Bank Mutual has elected
to be generally governed by Wisconsin corporate law where it is consistent with
federal law. However, there are some differences in the rights of the
shareholders under federal and Wisconsin law, and under the charters and other
corporate documents relating to Bank Mutual and First Northern.
10
<PAGE> 13
RISK FACTORS (page 21)
YOU SHOULD SEE "RISK FACTORS" FOR SOME FACTORS WHICH YOU SHOULD CONSIDER IN
DECIDING HOW TO VOTE ON THE MERGER AGREEMENT.
DO YOU HAVE QUESTIONS?
If you have any questions about the merger, please call First Northern
Capital Corp., attention: Michael D. Meeuwsen or Rick B. Colberg, at (920)
437-7101. The precise allocation of merger consideration will not be chosen by
Mutual until immediately prior to closing, so that information will not be
available before that time.
11
<PAGE> 14
MUTUAL SAVINGS SELECTED FINANCIAL AND OTHER DATA
In the following table, Mutual Savings provides selected financial data for
its past five fiscal years. Mutual Savings derived this information from its
audited financial statements, although the table itself is not audited. The
table also includes information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999, derived from Mutual Savings' unaudited financial
statements. Operating results for the interim periods do not necessarily
indicate the results of Mutual Savings that you may expect for the entire year.
The following data should be read together with Mutual Savings' consolidated
financial statements and related notes and "Management's Discussion and
Analysis" which appear in this proxy statement/prospectus beginning at pages F-1
and 56, respectively.
We are presenting information for Mutual Savings rather than Bank Mutual
because Bank Mutual has not had any operations or material assets prior to this
time. In the restructuring, Bank Mutual will become the sole shareholder of
Mutual Savings immediately prior to the First Northern merger.
In 1999, non-interest expense includes a special write-off of intangible
assets of $15.6 million which Mutual deemed to be impaired. The intangible
assets resulted from the 1997 acquisition of First Federal. The effect on
results for the year was a decrease of $13.6 million. See footnote 2 to Mutual
Savings' consolidated financial statements. Also, in 1996, non-interest expense
includes a one-time FDIC Savings Association Insurance Fund ("SAIF") assessment
of $6.4 million. All SAIF insured savings associations were specially assessed
in this quarter. The effect on net income of the assessment in 1996 was a
decrease of $3.9 million.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets............... $1,759,170 $1,769,506 $1,872,862 $1,826,080 $1,169,271 $1,205,092
Loans receivable, net...... 1,127,987 1,082,795 1,037,589 1,255,082 825,131 790,713
Loans available for sale... 1,632 541 27,723 13,397 4,357 2,479
Investment securities
available for sale....... 57,461 57,763 116,534 159,208 159,513 120,081
Mortgage-related securities
available for sale....... 461,377 374,100 270,897 225,906 90,452 196,902
Total cash and cash
equivalents.............. 31,817 178,959 330,248 79,064 37,151 55,234
Federal Home Loan Bank
stock.................... 14,585 13,537 13,537 20,237 8,001 7,841
Intangible assets.......... 11,027 11,496 29,786 32,589 -- --
Foreclosed real estate,
net...................... 2,977 3,018 3,505 159 258 333
Total deposits............. 1,300,613 1,343,007 1,398,858 1,362,330 994,283 1,004,559
Total borrowings........... 264,667 242,699 270,822 270,867 -- 25,000
Total equity............... 167,588 163,820 175,743 163,052 151,294 147,031
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income....... $60,482 $58,653 $118,302 $125,470 $115,993 $81,674 $81,793
Total interest expense...... 37,061 38,128 75,337 80,017 72,194 49,595 50,390
------- ------- -------- -------- -------- ------- -------
Net interest income....... 23,421 20,525 42,965 45,453 43,799 32,079 31,403
Provision for loan losses... 236 203 350 637 1,065 672 597
------- ------- -------- -------- -------- ------- -------
Net interest income after
provision for loan
losses................. 23,185 20,322 42,615 44,816 42,734 31,407 30,806
------- ------- -------- -------- -------- ------- -------
Non-interest income:
Fees and service
charges................ 3,109 2,937 6,100 6,097 4,758 2,816 2,840
Gain on sale of loans,
mortgage-related
securities and
investment securities.. 43 328 655 1,025 474 333 563
Other non-interest
income................. 864 634 1,229 1,318 927 520 406
------- ------- -------- -------- -------- ------- -------
Total non-interest
income.......... 4,016 3,899 7,984 8,440 6,159 3,669 3,809
Non-interest expense:
Amortization of intangible
assets................. 469 1,355 18,290 2,738 1,941 -- --
Other non-interest
expense................ 16,217 16,590 32,989 32,783 30,145 29,904 22,790
------- ------- -------- -------- -------- ------- -------
Total non-interest
expense......... 16,686 17,945 51,279 35,521 32,086 29,904 22,790
------- ------- -------- -------- -------- ------- -------
Income before income
taxes.................. 10,515 6,276 (680) 17,735 16,807 5,172 11,825
Income tax expense.......... 4,001 2,386 3,803 6,584 6,622 1,671 4,181
------- ------- -------- -------- -------- ------- -------
Net income (loss)......... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185 $ 3,501 $ 7,644
======= ======= ======== ======== ======== ======= =======
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------- -----------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on average assets............ 0.74% 0.42% (0.24)% 0.60% 0.62% 0.29% 0.64%
Return on average assets excluding
amortization of intangible
assets............................ 0.79 0.54 0.63 0.73 0.72 0.29 0.64
Return on average equity............ 7.95 4.41 (2.55) 6.57 6.52 2.34 5.42
Return on average equity excluding
amortization of intangible
assets............................ 8.46 5.69 6.63 7.95 7.59 2.34 5.42
Net interest rate spread(a)......... 2.31 1.94 2.03 2.16 2.31 2.09 2.07
Net interest margin(b).............. 2.78 2.33 2.44 2.58 2.76 2.77 2.69
Non-interest income to average
assets............................ 0.46 0.42 0.43 0.46 0.37 0.31 0.32
Non-interest expense (excluding
amortization of intangible assets)
as a percent of average assets.... 1.85 1.79 1.79 1.77 1.82 1.97 1.90
Efficiency ratio(c)................. 59.62 68.49 64.75 60.83 60.34 83.65 64.72
Average interest-earning assets to
average interest-bearing
liabilities....................... 1.11x 1.09x 1.10x 1.09x 1.10x 1.16x 1.14x
CAPITAL RATIOS:
Average equity to average assets.... 9.37% 9.51% 9.56% 9.17% 9.44% 12.54% 11.72%
Equity to assets.................... 9.53 9.44 9.26 9.38 8.93 12.94 12.20
Leverage capital.................... 9.37 8.04 8.66 7.78 7.40 12.69 12.26
Total risk-based capital............ 18.69 17.60 18.51 17.02 14.80 24.58 24.04
ASSET QUALITY RATIOS:
Non-performing loans to total
loans............................. 0.20% 0.53% 0.44% 0.65% 0.79% 0.29% 0.10%
Non-performing assets to total
assets............................ 0.30 0.48 0.44 0.55 0.55 0.23 0.09
Allowance for loan losses to non-
performing loans.................. 319.14 123.21 144.54 101.86 72.14 163.31 433.21
Allowance for loan losses to non-
performing assets................. 136.33 77.62 88.79 66.98 71.01 147.46 303.94
Allowance for loan losses to total
loans............................. 0.63 0.65 0.64 0.66 0.57 0.48 0.43
OTHER DATA:
Offices............................. 51 51 51 52 53 33 33
</TABLE>
-------------------------
(a) "Net interest rate spread" means the difference between the average yield
on the average balance of interest-earning assets and the average cost of
the average balance of interest-bearing liabilities.
(b) "Net interest margin" means the net interest income divided by the average
balance of interest-earning assets.
(c) Computed using net interest income plus non-interest income as the
denominator and non-interest expense (excluding amortization of intangible
assets) as the numerator.
14
<PAGE> 17
FIRST NORTHERN SELECTED FINANCIAL AND OTHER DATA
In the following table, we provide selected financial data for First
Northern for its past five fiscal years. First Northern derived this information
from its audited financial statements, although the table itself is not audited.
The table also includes information at June 30, 2000 and for the six months
ended June 30, 2000 and 1999, derived from First Northern's unaudited financial
statements. Operating results for the interim periods do not necessarily
indicate the results of First Northern that you may expect for the entire year.
The following data should be read together with First Northern's consolidated
financial statements and related notes and First Northern "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
appear beginning on page FN-1 of this proxy statement/prospectus.
In 1996, non-interest expense includes a one-time SAIF assessment of $2.9
million. The effect on net income of this assessment in 1996 was a decrease of
$1.7 million. Earnings per share in 1996 were decreased by $0.19.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ----------------------------------------------------
2000 1999 1998 1997 1996 1995
--------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets................... $904,875 $839,623 $719,713 $667,696 $615,503 $553,467
Loans receivable, net.......... 795,094 736,880 631,739 593,529 553,995 500,535
Loans held for sale............ 2,083 1,085 3,075 2,119 2,532 2,989
Securities held to maturity.... 36,435 36,263 35,263 31,906 25,908 23,388
Investment securities available
for sale..................... 10,941 8,444 9,205 6,799 5,635 2,978
Mortgage-related securities
available for sale........... 5,304 5,554 996 932 1,837 2,013
Total cash and cash
equivalents.................. 11,234 12,372 7,211 964 3,563 1,274
Federal Home Loan Bank stock... 12,500 9,250 5,250 5,250 3,773 3,768
Foreclosed real estate, net.... 456 382 106 153 189 136
Total deposits................. 568,625 566,908 542,372 481,788 458,323 449,954
Total borrowings............... 247,353 185,899 91,977 103,277 77,272 21,000
Total shareholders' equity..... 75,604 76,795 76,093 73,817 70,224 72,579
Book value per share........... $ 9.03 $ 8.98 $ 8.68 $ 8.34 $ 8.00 $ 7.97
Shares outstanding, net of
treasury shares.............. 8,376 8,549 8,765 8,846 8,775 9,110
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------- -----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income....... $30,051 $25,218 $52,770 $49,690 $46,596 $41,876 $39,025
Total interest expense...... 19,186 14,335 30,686 29,003 26,491 23,203 22,036
------- ------- ------- ------- ------- ------- -------
Net interest income....... 10,865 10,883 22,084 20,687 20,105 18,673 16,989
Provision for loan losses... 330 174 472 420 320 370 240
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan
losses................. 10,535 10,709 21,612 20,267 19,785 18,303 16,749
------- ------- ------- ------- ------- ------- -------
Non-interest income:
Fees and service
charges................ 1,028 850 1,829 1,735 1,791 1,548 1,403
Gain on sale of loans,
mortgage-related
securities and
investment securities.. 64 308 380 1,051 359 259 970
Other non-interest
income................. 1,012 795 1,645 1,453 1,126 879 837
------- ------- ------- ------- ------- ------- -------
Total non-interest
income.......... 2,104 1,953 3,854 4,239 3,276 2,686 3,210
Non-interest expense........ 7,694 7,156 14,564 14,071 13,374 15,939 12,651
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 4,945 5,506 10,902 10,435 9,687 5,050 7,308
Income tax expense.......... 1,569 1,840 3,525 3,606 3,651 1,767 2,718
------- ------- ------- ------- ------- ------- -------
Net income................ $ 3,376 $ 3,666 $ 7,377 $ 6,829 $ 6,036 $ 3,283 $ 4,590
======= ======= ======= ======= ======= ======= =======
Diluted net income per
share..................... $ 0.39 $ 0.41 $ 0.83 $ 0.75 $ 0.66 $ 0.36 $ 0.49
======= ======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------- ----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- ------ -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets...... 0.78% 1.00% 0.96% 0.98% 0.94% 0.56% 0.83%
Return on average equity...... 8.80 9.57 9.60 9.08 8.38 4.61 6.43
Net interest rate spread...... 2.12 2.71 2.69 2.73 2.83 2.86 2.69
Net interest margin........... 2.61 3.10 3.00 3.11 3.26 3.31 3.17
Non-interest income to average
assets...................... 0.49 0.53 0.50 0.61 0.51 0.46 0.58
Non-interest expense as a
percent of average assets... 1.77 1.95 1.89 2.03 2.09 2.72 2.27
Efficiency ratio.............. 59.33 55.75 56.15 56.45 57.20 74.62 62.63
Cash dividend payout ratio.... 55.00 47.60 47.10 46.80 47.10 81.10 54.90
Average interest-earning
assets to average
interest-bearing
liabilities................. 106.30 108.10 107.56 108.71 109.87 110.90 111.60
CAPITAL RATIOS:
Average equity to average
assets...................... 8.85% 10.42% 9.99% 10.83% 11.24% 12.14% 12.82%
Equity to assets.............. 8.36 9.15 9.15 10.57 11.06 11.41 13.11
Leverage capital.............. 7.80 9.29 8.60 9.60 10.20 10.50 12.90
Total risk-based capital...... 12.60 15.01 14.00 15.70 16.70 17.80 21.90
ASSET QUALITY RATIOS:
Non-performing loans to total
loans....................... 0.03% 0.10% 0.04% 0.05% 0.08% 0.13% 0.08%
Non-performing assets to total
assets...................... 0.08 0.09 0.08 0.06 0.09 0.15 0.10
Allowance for loan losses to
non-performing loans........ 1,654.12 569.63 1,381.63 1,020.52 722.05 394.76 623.92
Allowance for loan losses to
non-performing assets....... 593.25 526.95 588.86 781.19 535.75 314.79 470.76
Allowance for loan losses to
total loans................. 0.53 0.55 0.53 0.56 0.53 0.53 0.52
OTHER DATA:
Offices....................... 19 19 19 19 19 20 20
</TABLE>
17
<PAGE> 20
COMPARATIVE PER SHARE DATA OF BANK MUTUAL AND FIRST NORTHERN
The following table shows trading information for First Northern common
stock on February 18, 2000 and August 31, 2000. February 18, 2000 was the last
trading date before the parties announced the merger. August 31, 2000 is a
recent date before this proxy statement/prospectus was finalized. To prepare
this table, we have assumed that the average Bank Mutual stock price on the
dates presented was $10.00, its expected offering price; however, there has been
no historic market in Bank Mutual stock and there can be no assurance that the
market prices will not be lower. See "First Northern Market Information" for
historical information on First Northern common stock.
<TABLE>
<CAPTION>
EQUIVALENT
FIRST NORTHERN VALUE FOR EACH
DATE COMMON STOCK FIRST NORTHERN SHARE
---- -------------- --------------------
<S> <C> <C>
February 18, 2000...................................... $9.00 $15.00
August 31, 2000........................................ $15.00
</TABLE>
PRO FORMA PER SHARE DATA
We have summarized in the table on the next page selected per share
information about Bank Mutual and First Northern. We present the Bank Mutual per
share information on a pro forma basis to reflect the restructuring and stock
offering, and then on a pro forma adjusted basis to reflect the First Northern
merger. We present the First Northern per share information both historically,
and on a pro forma basis to reflect the merger. Book value per share will be
affected by the amount raised in Bank Mutual's restructuring and stock offering.
We have assumed that net proceeds of $59.7 million will be raised and assumed
that 5,965,232 shares will be sold at $10 per share in Bank Mutual's stock
offering at the "midpoint" of that offering, although actual results could
differ. We have also assumed that 40% of the consideration in the First Northern
merger will be in shares of Bank Mutual common stock, and the balance in cash.
Given the effect of Mutual Savings' special write-off of intangible assets in
1999, we also present per share results before amortization and write-off of
intangible assets.
The data in the table should be read together with the financial
information and the financial statements of Mutual Savings and First Northern
included or incorporated by reference elsewhere in this proxy
statement/prospectus. We provide the pro forma combined per common share data as
an illustration only. The data do not necessarily indicate the combined
financial position per share or combined results of operations per share that
would have been reported if the merger had occurred when indicated, nor are they
a forecast of the combined financial position or combined results of operations
for any future period. No pro forma adjustments have been included herein which
reflect potential effects of cost savings or synergies which may be obtained by
combining Mutual Savings and First Northern operations or the costs of combining
the companies and operations.
18
<PAGE> 21
Pro forma information for Bank Mutual is given assuming that the Mutual
restructuring occurs, with the same assumptions used below under "Pro Forma
Financial Information." It further assumes a quarterly cash dividend of $0.07
per share, which Bank Mutual has indicated it intends to pay on a quarterly
basis beginning in the first full quarter after the merger, but not earlier than
the first quarter of 2000. Actual dividends, however, are subject to regulatory
and other requirements, and may be higher or lower.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------- ------------------------
2000 1999 1999 1998 1997
------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Bank Mutual:
Pro forma..................................... 0.44 0.26 (0.26) 0.72 0.67
Pro forma combined............................ 0.35 0.26 (0.08) 0.66 0.56
First Northern:
Historical.................................... 0.40 0.42 0.83 0.75 0.66
Equivalent pro forma combined................. 0.60 0.63 (0.11) 1.01 0.86
BASIC EARNINGS PER SHARE BEFORE AMORTIZATION AND
WRITE-OFF OF INTANGIBLE ASSETS:
Bank Mutual:
Pro forma..................................... 0.45 0.30 0.76 0.87 0.77
Pro forma combined............................ 0.43 0.35 0.83 0.92 0.78
First Northern:
Historical.................................... 0.40 0.42 0.83 0.75 0.66
Equivalent pro forma combined................. 0.60 0.63 1.25 1.37 1.17
PERIOD END BOOK VALUE:
Bank Mutual:
Pro forma..................................... 12.44 12.14
Pro forma combined............................ 11.82 11.59
First Northern:
Historical.................................... 9.03 8.98
Equivalent pro forma combined................. 17.73 17.38
PER SHARE DIVIDENDS:
Bank Mutual:
Pro forma..................................... 0.14* -- 0.28* -- --
Pro forma combined............................ 0.14* -- 0.28* -- --
First Northern:
Historical.................................... 0.22 0.20 0.40 0.36 0.32
Equivalent pro forma combined................. 0.21* -- 0.42* -- --
</TABLE>
---------------
*Based upon the $0.07 quarterly dividend that Bank Mutual has indicated it
intends to declare beginning in the first quarter of 2001. We only assume that
dividend on the dates shown. Actual dividends, if any, may be higher or lower.
The unaudited pro forma earnings per share information in the table for all
periods presented give effect to the restructuring, stock issuance and merger as
if they had occurred at the beginning of each period presented. The pro forma
combined book value per share information assumes that the restructuring, stock
issuance and merger was completed on the dates for which information is given.
19
<PAGE> 22
FIRST NORTHERN MARKET INFORMATION
The following table has information on the high and low trading prices of
First Northern common stock for the stated periods, as well as cash dividends
paid. It trades on the Nasdaq Stock Market, and all quotes are actual sales
prices reported by Nasdaq. Bank Mutual common stock does not yet publicly trade,
but Bank Mutual has applied for stock quotation on Nasdaq.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
PERIOD HIGH LOW PAID
------ ------ ------ ---------
<S> <C> <C> <C> <C>
1998 -- 1st quarter.............. $14.00 $12.25 $0.09
2d quarter............... $14.00 $13.00 $0.09
3d quarter............... $13.88 $ 9.75 $0.09
4th quarter.............. $13.75 $ 9.50 $0.09
1999 -- 1st quarter.............. $13.00 $10.88 $0.10
2d quarter............... $12.00 $10.00 $0.10
3d quarter............... $14.00 $10.63 $0.10
4th quarter.............. $12.13 $ 8.75 $0.10
2000 -- 1st quarter.............. $14.00 $ 8.25 $0.11
2d quarter............... $13.75 $12.19 $0.11
3d quarter............... $15.00 $13.13 $0.11
(through August 31)
</TABLE>
On August 31, 2000, First Northern had shareholders of record.
BANK MUTUAL MARKET INFORMATION
Prior to the First Northern merger, the Bank Mutual stock offering and the
restructuring, there has not been any trading market for Bank Mutual common
stock. While we anticipate that Bank Mutual common stock will be sold in the
stock offering for $10.00 per share, Bank Mutual cannot assure that the stock
will trade at this price afterward.
Because Bank Mutual has not previously had shareholders, it has not
historically paid any dividends. However, the Mutual Savings board of directors
has indicated that it initially intends for Bank Mutual to declare and pay
quarterly cash dividends of $0.07 per share beginning in the first quarter after
the merger, but not earlier then the first quarter of 2001. These dividends
remain subject to future Bank Mutual board approval, and the amounts of actual
cash dividends, if any, may be higher or lower. In addition, the payment of
dividends by any financial institution or holding company, including both Bank
Mutual and First Northern, is subject to regulatory requirements which, among
other things, require that financial institutions and their holding companies
maintain adequate capital.
See "Market for Bank Mutual Common Stock."
20
<PAGE> 23
RISK FACTORS
In considering whether to approve the merger agreement and receive Bank
Mutual common stock, you should consider, among other things, the following
matters:
RISKS ABOUT THE MERGER
The Consideration which you Receive may be Prorated.
Even though First Northern shareholders may elect to receive cash or Bank
Mutual common stock in this transaction, more shareholders may choose one of
these alternatives than is available in the transaction. If more shareholders
wish to receive cash than is available in a transaction, you may receive some
Bank Mutual shares whether or not you elected to receive any. Similarly, if more
shareholders choose Bank Mutual common stock than is available, you may receive
some cash, and that receipt of cash would be taxable.
Mutual and First Northern May Not Integrate as We Hope
We anticipate that Mutual Savings and First Northern Savings will initially
operate as separate entities. That will delay or reduce any expense reduction
which the combined companies might achieve from a combination. Similarly, if we
ultimately combine the two banks, any problems, such as customer loss or
difficulties that may result from systems conversions, will be deferred until
such time as the integration occurs. Similarly, Mutual and First Northern may
find after the merger that their operations and management philosophies will not
combine as well as they had expected, which could lead to operating
inefficiencies and complications going forward.
Shareholders who make Elections will be Unable to Sell their Stock in the
Market Pending the Merger.
First Northern shareholders may elect to receive cash or stock in the
transaction. Elections will be irrevocable, and will require that shareholders
making the election turn in their First Northern stock certificates. During the
time between when the election is made and the merger is completed, First
Northern shareholders will be unable to sell their First Northern stock. If the
merger is unexpectedly delayed, this period could extend for a significant
period of time. First Northern shareholders can reduce the period during which
they cannot sell their shares by delivering their election shortly before the
close of the election period, but elections received after the close of the
election period will not be accepted or honored.
Many Regulatory Approvals are Required for the Transaction.
Before we can complete the merger, the Office of the Thrift Supervision and
other bank regulators must approve the transaction. Also, the merger requires
that the Mutual Restructuring have received appropriate regulatory approvals.
While both parties will take the actions which they need to accomplish to
receive these approvals, we cannot assure that we will be able to receive
approvals. Even if we receive the approvals, there may be conditions attached to
the approvals which will adversely affect Bank Mutual in the future.
The Mutual Restructuring is a Unique Transaction.
Mutual's restructuring to a mutual holding company format with a mid-tier
holding company, and the simultaneous acquisition of First Northern Savings, is
an unusual transaction. We are not aware of any prior transactions in which this
type of combination has occurred simultaneously with this type of restructuring.
In addition to regulatory requirements, we do not know whether the unusual
nature of the transaction, or ownership structure after the transaction, will
have an adverse effect on the market for Bank Mutual common stock.
In particular, because many former First Northern shareholders may be
issued shares of Bank Mutual common stock in the First Northern merger, in order
to avoid a taxable transaction that would occur if
21
<PAGE> 24
they received cash, they may be more likely to hold their Bank Mutual common
stock than other types of shareholders. Holding shares, versus selling them,
could reduce market activity for Bank Mutual common stock. Conversely, if the
exchange ratio in the First Northern merger requires some First Northern
shareholders who would prefer to receive cash to receive Bank Mutual shares,
those shareholders may want to quickly sell their Bank Mutual shares, which
could create negative market pressures and cause a drop in our share price.
First Northern Directors and Officers have Interests in the Merger Besides
Those of a Shareholder.
First Northern directors and officers have various interests in the merger
and related transactions besides being First Northern shareholders. These
interests include:
- the continuation of, or new, employment agreements for First Northern
executive officers;
- First Northern will purchase outstanding unexercised stock options,
including options for up to 755,900 shares of First Northern stock held
by First Northern officers and directors, for cash at the difference
between their exercise price and $15, plus additional payments of up to
25% of that spread to offset tax consequences;
- Bank Mutual agreement to continue indemnification for First Northern
directors and officers;
- four First Northern directors will become Bank Mutual and MHC directors,
and will continue as First Northern Savings directors; and
- at least 40% of the executive officers of Bank Mutual initially will be
former First Northern executive officers, and First Northern's chief
executive officer will become a director of Mutual Savings.
See "The Merger and the Merger Agreement -- Interests of Officers and
Directors in the Merger."
RISKS ABOUT BANK MUTUAL
Changing Interest Rates May Hurt Our Profits
To be profitable, we have to earn more money in interest and fees than we
pay as interest and other expenses. Of our first mortgage loans maturing after
one year, a majority have interest rates that are fixed for the term of the
loan. While most of our deposit accounts consist of time deposit accounts with
remaining terms to maturity of less than one year, most of our loans have longer
remaining terms. If interest rates rise, which has been the case in recent
quarters, the amount of interest we pay on deposits is likely to increase more
quickly than the amount of interest we receive on our loans, mortgage-related
securities and investment securities. This would cause our profits to decrease.
Rising interest rates would likely reduce the value of our mortgage-related
securities and investment securities and may decrease demand for loans and make
it more difficult for borrowers to repay their loans. For additional information
on our exposure to interest rates, see "Mutual Savings' Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk."
Increases in Market Interest Rates are Likely to Adversely Affect Equity
As of June 30, 2000, we owned $518.8 million of securities available for
sale. Generally accepted accounting principles require that we carry these
securities at fair value on our balance sheet. Unrealized gains or losses on
these securities, reflecting the difference between the fair market value and
the amortized cost, net of its tax effect, is carried as a component of equity.
In recent quarters, rates have been rising. When market rates of interest
increase, the fair value of our securities available for sale generally
decreases and equity correspondingly decreases. When rates decrease, fair value
generally increases and equity correspondingly increases. As of June 30, 2000,
Mutual Savings' available for sale portfolio had an unrealized loss of $13.9
million, because fair value was $518.8 million and amortized cost
22
<PAGE> 25
was $532.7 million. At June 30, 2000, First Northern Savings had an unrealized
gain of $637,000 on securities available for sale.
Low Demand for Real Estate Loans May Lower Our Profitability
Making loans secured by real estate is our primary business and primary
source of profits. If customer demand for real estate loans decreases, our
profits may decrease because our alternative investments, primarily securities,
earn less income for us than real estate loans. Customer demand for loans
secured by real estate could be reduced by a weaker economy, an increase in
unemployment, a decrease in real estate values or an increase in interest rates.
Strong Competition Within Our Market Area May Reduce Our Customer Base
We encounter strong competition both in attracting deposits and originating
real estate and other loans. We compete with commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms. Our
market area includes branches of several commercial banks that are substantially
larger than us in terms of deposits and loans. In addition, tax exempt credit
unions operate in most of our market area and aggressively price their products
and services to a large part of the population. Our profitability depends upon
our continued ability to successfully increase our market share.
After the First Northern Merger, We Will Have Significant Intangible Assets,
Which Will Hurt Our Future Results
In the First Northern merger, Bank Mutual will record approximately $58.6
million in intangible assets using June 30, 2000 information. Bank Mutual will
amortize these intangible assets over 20 years. As a result, pre-tax earnings
will be reduced by approximately $2.9 million annually. Also, at some point in
the future, intangible assets may become impaired, and we would need to write
them off as a reduction to earnings. For example, in 1999 Mutual Savings wrote
off $15.6 million of "impaired" intangible assets from the 1997 acquisition of
First Federal. Even though this special write-off did not affect our cash
position, our 1999 results were reduced by this action.
We May Expand Our Lending Activities in Riskier Areas
We have identified commercial real estate, commercial business and consumer
loans, including indirect auto loans, as areas for increased lending emphasis.
While increased lending diversification is expected to increase interest income,
non-residential loans carry greater risk of payment default than residential
real estate loans. As the volume of these loans increase, credit risk increases.
In the event of substantial borrower defaults, our provision for loan losses
would increase and therefore, earnings would be reduced.
First Northern's consumer loan portfolio includes $98.3 million of indirect
auto loans at June 30, 2000. Indirect auto lending is not a current business
line for Mutual Savings. Although First Northern has experienced minimal
delinquencies in its automobile loan portfolio, borrowers may be more likely to
become delinquent on an automobile loan than on a residential real estate loan.
Moreover, unlike the collateral for real estate loans, automobiles depreciate
rapidly and, in the event of default, principal loss as a percent of the loan
balance depends upon the mileage and condition of the vehicle at the time of
repossession, over which First Northern has no control. Similarly, any non-real
estate collateral securing commercial business loans may depreciate over time
and fluctuate in value.
Implementing Stock-Based Benefits Will Increase Our Future Compensation
Expense and Reduce Our Earnings
We intend to adopt a stock option plan which will provide for the granting
of options to purchase common stock, to adopt a management recognition plan that
will provide for awards of common stock to our eligible officers, employees and
directors and to have an employee stock ownership plan which may
23
<PAGE> 26
purchase shares in the restructuring. In addition, we may adopt a restoration
plan that will supplement the benefits to select executive officers under the
employee stock ownership plan and our 401(k) plan. These plans will increase our
future costs of compensating our directors and employees, reducing net earnings.
The cost of these plans will vary based on our stock price at specific points in
the future.
The MHC'S Control Over Bank Mutual May Prevent Transactions You Would Like
The MHC will be managed by generally the same directors and officers who
manage Bank Mutual. Because the MHC will own a majority of Bank Mutual's common
stock after the restructuring, the board of directors of the MHC will control
the outcome of most matters put to a vote of shareholders of Bank Mutual. We
cannot assure you that the votes cast by the MHC will be in your best interest
as a shareholder.
Recently, the Stock Market has been Volatile and Many Stocks have not
Performed Well in the Aftermarket
Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility, due, in part, to
investors' shifting perceptions of the effect on various industry sectors of
changes and potential changes in the economy. Market fluctuations, therefore,
may be unrelated to the operating performance of the issuer. The purchase price
of Bank Mutual common stock sold in the stock offering is based on the
independent appraisal by RP Financial. The appraisal is not intended, and should
not be construed, as a recommendation of any kind as to the advisability of
purchasing shares of common stock. The valuation is based on estimates and
projections of a number of matters, all of which are subject to change from time
to time. After our shares begin trading, the trading price of our common stock
will be determined by the marketplace, and may be influenced by many factors,
including prevailing interest rates, the overall performance of the economy,
investor perceptions of Bank Mutual, and the outlook for the financial
institutions industry in general. Due to possible continued market volatility,
we cannot assure you that, following the stock offering, the trading price of
Bank Mutual common stock will be at or above the $10.00 per share price in the
stock offering. You should consider investing in the common stock only if you
have a long-term investment horizon.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this proxy statement/prospectus, and in the documents
incorporated in it by reference, which are not historical statements contain
forward-looking statements that involve risks and uncertainties. Statements
which "are not historical statements" include those in the future tense or which
use terms such as "believe," "expect" and "anticipate". Bank Mutual's actual
future results could differ in important and material ways from those discussed.
Many factors could cause or contribute to such differences. These factors
include those we discuss above in "Risk Factors." You should also carefully read
other parts of this proxy statement/prospectus, and the documents which are
incorporated in it, for other factors which could affect Bank Mutual's or First
Northern's operations in the future. In particular, both parties' Management's
Discussion and Analysis of Financial Condition and Results of Operations include
discussions of factors affecting them.
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<PAGE> 27
THE SPECIAL MEETING
This proxy statement/prospectus is being furnished to the First Northern
shareholders in connection with the solicitation of proxies by the First
Northern board from the holders of First Northern common stock for use at the
special meeting.
Date, Time and Place. The special meeting will be held at 10:00 a.m., local
time, on October 19, 2000, at Holiday Inn City Centre, located at 200 Main
Street, Green Bay, Wisconsin.
Purpose. At the special meeting, First Northern shareholders will consider
and vote on a proposal to approve the merger agreement.
The First Northern board is not aware, as of the date of mailing of this
proxy statement/prospectus, of any other matters which may properly come before
the special meeting. If any other matters properly come before the special
meeting, or any adjournment or postponement thereof, it is the intention of the
persons named in the proxy to vote such proxies in accordance with their best
judgment on such matters. Under Wisconsin law, at the special meeting,
shareholders can only consider the matters included in the notice of the special
meeting.
Recommendation of First Northern's Board of Directors. The First Northern
board has determined that the merger is in the best interests of First Northern
and its shareholders and has approved the merger agreement. THE FIRST NORTHERN
BOARD UNANIMOUSLY RECOMMENDS THAT THE FIRST NORTHERN SHAREHOLDERS VOTE IN FAVOR
OF APPROVAL OF THE MERGER AGREEMENT AT THE SPECIAL MEETING. See "The Merger and
the Merger Agreement -- First Northern's Reasons for the Merger."
Record Date; Voting Rights. Only holders of record of First Northern common
stock at the close of business on the record date, August 31, 2000, are entitled
to receive notice of and to vote at the special meeting. On that date, there
were shares of First Northern common stock outstanding and entitled to
vote. Each share entitles the registered holder to one vote.
Quorum. A majority of the outstanding shares of First Northern common stock
entitled to vote must be represented in person or by proxy at the special
meeting in order to constitute a quorum for the transaction of business. Shares
of First Northern common stock represented by proxies that are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum. If a quorum is not present at the special meeting, it is expected that
the meeting will be adjourned or postponed to solicit additional proxies.
Proxies; Revocation. A proxy card is enclosed for use by First Northern
shareholders. The board of directors of First Northern requests that
shareholders SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No
postage is required if mailed within the United States. IF YOU HAVE QUESTIONS OR
REQUESTS FOR ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS, PLEASE CONTACT
MICHAEL D. MEEUWSEN OR RICK B. COLBERG AT:
First Northern Savings Bank, S.A.
201 N. Monroe Avenue
P.O. Box 23100
Green Bay, WI 54305-3100
All properly executed proxies that are not revoked will be voted at the
special meeting as instructed on those proxies. Proxies containing no
instructions will be voted in favor of the merger agreement. A shareholder who
executes and returns a proxy may revoke it at any time before it is voted, but
only by executing and returning a proxy bearing a later date, by giving written
notice of revocation to the corporate secretary of First Northern, or by
attending the special meeting and voting in person. Mere attendance at the
special meeting will not in and of itself have the effect of revoking the proxy.
Abstentions will be treated as shares present in determining whether First
Northern has a quorum for the special meeting, but abstentions will have the
same effect as a vote against approval of the merger agreement. If a broker or
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<PAGE> 28
other record holder or nominee indicates on a proxy that it does not have
direction or authority to vote certain shares, those shares will be considered
present at the special meeting for purposes of determining a quorum but will
have the same effect as a vote against approval of the merger agreement.
The persons designated in the enclosed proxy card will have discretion to
vote on any matters incident to the conduct of the special meeting. If First
Northern proposes to adjourn the special meeting, the persons named in the proxy
will vote all shares, other than those that have been voted against approval of
the merger agreement, in favor of adjournment. At any subsequent reconvening of
the special meeting, all proxies will be voted in the same manner as they would
have been voted at the initial convening, except for any proxies that have
effectively been revoked or withdrawn before the reconvened meeting.
Proxies will be received by First Northern's independent transfer agent,
Firstar Bank NA, and the vote will be certified by representatives of Firstar.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS. Stock certificates will need to be included with your election form, if
you wish to make an election. After we complete the merger, if you have not
already submitted stock certificates with an election form, we will send you
written instructions that describe how to exchange your First Northern stock
certificates for Bank Mutual stock certificates and/or cash.
Solicitation of Proxies. In addition to soliciting proxies by mail, First
Northern's directors, officers, and employees may, if they do not receive extra
compensation for doing so, solicit proxies personally or by telephone, fax or
email. Such persons may be reimbursed for out-of-pocket expenses that they
incur. First Northern intends to reimburse brokerage houses and other
custodians, nominees, and fiduciaries for reasonable out-of-pocket expenses
incurred in forwarding copies of solicitation materials to beneficial owners of
First Northern common stock held of record by those persons.
Required Vote. Approval of the merger agreement will require the
affirmative vote of holders of a majority of the outstanding shares of First
Northern common stock entitled to vote thereon at the special meeting, or
shares.
Share Ownership of Management and Other Significant Holders. On the record
date, directors and executive officers of First Northern and their affiliates
were the beneficial owners of an aggregate of 1,046,318, or approximately 12.5%,
of the shares of First Northern common stock then outstanding and eligible to
vote. All of the directors and executive officers of First Northern have
indicated their intention to vote their shares for approval of the merger
agreement. The above information excludes option shares. See "Ownership of First
Northern Common Stock."
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<PAGE> 29
THE MERGER AND THE MERGER AGREEMENT
The description of the merger and the merger agreement contained in this
proxy statement/prospectus describes the material terms of the merger agreement;
however, it does not purport to be complete. It is qualified in its entirety by
reference to the merger agreement. We have attached a copy of the merger
agreement as Appendix A.
GENERAL
In the merger, and as described in the merger agreement, First Northern
will merge into Bank Mutual. Outstanding shares of First Northern common stock
will be converted into cash or shares of Bank Mutual common stock. Cash will be
paid in lieu of any fractional share of Bank Mutual common stock. See "Election
to Receive Cash or Stock; Conversion of Shares in the Merger" below. As a result
of the merger, the separate corporate existence of First Northern will cease and
Bank Mutual will succeed to all the rights and be responsible for all the
obligations of First Northern. Bank Mutual is a successor to the corporation
named "OV Corp." in the merger agreement.
After the merger, Bank Mutual will be majority owned by the MHC. The other
shares of Bank Mutual will be owned by a combination of former First Northern
shareholders, Mutual depositors who have purchased the shares as part of the
restructuring, other public investors and Mutual employee plans. In turn, Mutual
Savings and First Northern Savings will be wholly-owned subsidiaries of Bank
Mutual.
ELECTIONS TO RECEIVE CASH OR STOCK; CONVERSION OF SHARES IN THE MERGER
At the effective time of the merger, by virtue of the merger and without
any further action on the part of First Northern, Bank Mutual or holders of
their securities:
- any shares of First Northern common stock that are owned by First
Northern or any subsidiary will be canceled and retired and cease to
exist, and no Bank Mutual common stock or other consideration will be
issued or delivered in exchange for those shares; and
- each share of First Northern common stock issued and outstanding, other
than any shares to be canceled as described above, will be converted into
and become the right to receive the merger consideration in the form of
cash, Bank Mutual common stock, or a combination of cash and Bank Mutual
common stock, all as more fully described below.
- each issued and outstanding share of common stock of Bank Mutual will
remain one share of common stock of Bank Mutual;
The amount of merger consideration to be received for each share of First
Northern common stock will be either $15 in cash, 1.5 shares of Bank Mutual
common stock or a combination thereof. No fractional shares will be issued;
fractional shares will be converted into cash at the rate of $10 per share of
Bank Mutual common stock:
Several factors will determine whether a First Northern shareholder will
receive cash, Bank Mutual common stock, or a combination of cash and Bank Mutual
common stock for the First Northern common stock surrendered in the merger. Bank
Mutual has discretion to select a portion of the aggregate merger consideration
between and including 40% and 70% to be paid in the form of Bank Mutual common
stock, excluding fractional share interests to be paid in cash, with the
remainder paid in cash. The plans governing Mutual Savings' restructuring
contemplate that Bank Mutual would only issue shares representing in excess of
40% of the merger consideration if they are not subscribed for in the
subscription offering conducted in conjunction with Mutual Savings'
restructuring.
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<PAGE> 30
The following table shows how cash and stock to be used in the merger would
vary depending upon where in the range these percentages are determined.
<TABLE>
<CAPTION>
NUMBER OF
PERCENT CASH CASH AMOUNT PERCENT STOCK SHARES
------------ ------------- ------------- ---------
<S> <C> <C> <C>
60% $75.4 million 40% 5,025,485
50% $62.8 million 50% 6,281,856
40% $50.3 million 60% 7,538,227
30% $37.7 million 70% 8,794,598
</TABLE>
In each case, though, the net effect to Bank Mutual will be the same as if Bank
Mutual had issued the shares in its stock offering because an increase in stock
issued in the First Northern merger will result in a corresponding decrease in
its need for cash. A portion of the cash needed in the First Northern merger
will be paid using net proceeds of the stock offering; the remainder will be
paid using available funds from Mutual Savings and First Northern Savings.
Issuing additional shares in the merger could reduce the number of shares Bank
Mutual sells in its stock offering if the maximum number of shares in the
offering is reached or if Bank Mutual determines not to sell additional shares
in a community offering.
We will shortly send a letter of transmittal and form of election to First
Northern shareholders of record for their use in electing whether they:
- wish to receive cash for all of their First Northern shares;
- wish to receive shares of Bank Mutual common stock for all of their First
Northern shares;
- if they hold at least 170 shares of First Northern common stock, wish to
receive a mixed consideration; in this mixed election, shareholders will
receive cash for some of their First Northern shares and shares of Bank
Mutual common stock for the remainder. In this "mixed" election,
shareholders will receive Bank Mutual common stock for the lesser of 50%
of their shares or the overall stock percentage, between 40% and 70%, as
chosen by Bank Mutual for the total consideration to be payable in stock.
The balance of the First Northern shares will be converted into cash; or
- have no preference.
Each holder (that is, each registered shareholder account) is generally
required to make a single election for each of the accounts. Nominees, trustees
and others who hold shares of First Northern common stock in representative
capacities may submit multiple forms of election so long as each election form
covers all of the shares of First Northern common stock held for a particular
beneficial owner. If any First Northern shareholder does not provide any
specification by the close of business on the third business day prior to the
effective time of the merger, we will treat that shareholder as not having a
preference between receiving cash or stock. All elections will be irrevocable.
THE ELECTION FORM SHOULD BE RETURNED, WITH YOUR CERTIFICATES, TO THE EXCHANGE
AGENT, AS THE ELECTION FORM PROVIDES.
If the aggregate requests for cash are less than or equal to the portion of
the aggregate merger consideration to be paid in cash, including payments of
cash in lieu of fractional shares, we will satisfy all of the requests for cash
in full and First Northern shareholders who requested stock may be required to
take a portion of their merger consideration in cash. If the aggregate requests
for cash are greater than the portion of the aggregate merger consideration to
be paid in cash, we will divide the available cash (after adjustment for cash to
be paid in lieu of fractional shares) proportionately among the First Northern
shares for which cash was requested, with the balance of the merger
consideration for those shares paid in Bank Mutual common stock, and we will pay
the merger consideration entirely in Bank Mutual common stock for all of the
other First Northern shares. We may further adjust this amount by providing that
any First Northern shareholder who has elected to receive cash who would receive
fewer than 25 shares of Bank Mutual common stock in a pro ration will receive
all cash. In that event, a proportion of cash and stock to be received by other
First Northern shareholders electing to receive all cash would be adjusted
28
<PAGE> 31
with the effect that they will receive proportionately somewhat less cash and
somewhat more Bank Mutual common stock.
If the aggregate requests for stock are less than or equal to the portion
of the aggregate merger consideration to be paid in stock, we will satisfy all
of the requests for stock in full and First Northern shareholders who requested
cash may be required to accept a portion of their merger consideration in stock,
as discussed above. If the aggregate requests for stock are greater than the
portion of the aggregate merger consideration to be paid in stock we will divide
the available stock proportionately among the shares for which stock was
requested, with the balance of the merger consideration for those shares paid in
cash, and we will pay the merger consideration entirely in cash for all of the
other First Northern shares.
In all cases, we will honor "mixed" elections without further adjustment.
We will pay cash in lieu of any fractional share of Bank Mutual common
stock, after aggregating all fractional share interests of any shareholder who
holds more than one certificate for First Northern common stock.
All shares of First Northern common stock converted as provided above will
no longer be outstanding and will automatically be canceled and retired and will
cease to exist. Each holder of a certificate representing, immediately prior to
the effective time of merger, any such shares of First Northern common stock
will cease to have any rights with respect to those shares, except the right to
receive the merger consideration as described above. See "-- Exchange of First
Northern Certificates; No Fractional Shares."
For employees who hold shares of First Northern common stock through the
First Northern 401(k) retirement savings plan, they will be able to direct the
trustees in this manner making an election for their account.
Percentage Ownership by First Northern Shareholders after the Merger
The total number of shares that Bank Mutual may issue in its stock offering
and the First Northern merger combined is limited. The limits arise out of OTS
regulatory requirements.
- Bank Mutual may not issue shares beyond the maximum of the appraisal, as
adjusted.
- The MHC must own at least a majority of the shares of Bank Mutual.
Both the number of shares to be sold by Bank Mutual in the stock offering and
the number of shares to be issued in the First Northern merger can vary within
those limits. Thus, in some circumstances, if Bank Mutual issues more shares in
one transaction, it may be limited to issuing fewer shares in the other.
For example, the sale of shares in the stock offering may preclude Bank
Mutual from increasing above 40% the percentage of shares issued as
consideration in the First Northern merger. Specifically, if Bank Mutual's
subscription offering is fully subscribed by priority subscribers, it may only
issue 40% of the First Northern merger consideration in shares because the
priority subscribers have a regulatory preference for the rest.
Conversely, the issuance of shares above the 40% minimum in the First
Northern merger may reduce the number of shares that Bank Mutual decides to sell
in a stock offering. For example, if there is a high degree of election of Bank
Mutual common stock in the First Northern merger and Mutual Savings increases
the stock percentage, Bank Mutual may decide to sell fewer shares in a community
offering due to reduced cash needs.
The following table reflects the percentage of total Bank Mutual shares
that former shareholders of First Northern as a group will own under alternative
scenarios. We give examples of the issuance of Bank Mutual stock for 40%, 50%,
60% and 70% of the consideration in the merger. (The pro forma data shown
elsewhere in this proxy statement/prospectus is based on 40% of consideration in
Bank Mutual stock and the balance in cash.) The information is given assuming
the issuance of the number of Bank Mutual
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<PAGE> 32
shares indicated at the top of the columns. (Those amounts are equivalent to the
total shares issued in the four columns used in "Pro Forma Financial Data -- Pro
Forma Data Reflecting the Stock Offering.")
<TABLE>
<CAPTION>
PORTION OF
FIRST NORTHERN MERGER
CONSIDERATION PAID IN 19,475,485 22,025,485 24,575,485 27,507,985
BANK MUTUAL STOCK TOTAL SHARES TOTAL SHARES TOTAL SHARES TOTAL SHARES
--------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
40% 25.8% 22.8% 20.4% 18.3%
50% 32.3% 28.5% 25.6% 22.8%
60% 38.7% 34.2% 30.7% 27.4%
70% 45.2% 39.9% 35.8% 32.0%
</TABLE>
From a financial perspective, it will not make a difference to Bank Mutual
whether a share is issued in the First Northern merger or sold in the stock
offering, since the issuance of additional shares in the First Northern merger
will result in a corresponding decrease in Bank Mutual's cash requirements in
the merger. From Bank Mutual's perspective, the result is the same whether Bank
Mutual sells a share for $10.00, and then pays that $10.00 to a First Northern
shareholder, or if it issues a First Northern shareholder a share of common
stock but does not have to pay the $10.00 in cash.
EXCHANGE OF FIRST NORTHERN CERTIFICATES; NO FRACTIONAL SHARES
Bank Mutual has designated Registrar and Transfer Company to act as
exchange agent under the merger agreement. As of the effective time of the
merger, Bank Mutual will deposit with the exchange agent for exchange through
the exchange agent, cash and certificates representing the shares of Bank Mutual
common stock issuable pursuant to the merger agreement in exchange for
outstanding shares of First Northern common stock. That cash and those
certificates for shares of Bank Mutual common stock, together with any dividends
or distributions and together with any cash to be paid for fractional share
interests, will be held as an exchange fund by the Exchange Agent until paid to
the former First Northern shareholders or otherwise transferred as described in
this section.
We will shortly send you a form of election and letter of transmittal and
instructions for surrendering the First Northern stock certificate in exchange
for cash or shares of Bank Mutual common stock or both. Nominees, trustees and
others who hold shares of First Northern common stock in representative
capacities may submit multiple forms of election so long as each election form
covers all of the shares of First Northern common stock held for a particular
beneficial owner.
Upon surrender of a First Northern stock certificate for cancellation to
the exchange agent, together with a duly executed form of election and letter of
transmittal and any other documents the exchange agent may reasonably require,
the holder of a First Northern stock certificate will be entitled to receive in
exchange:
- a certificate representing that number of whole shares of Bank Mutual
common stock into which the First Northern shares formerly represented by
the stock certificate have been converted and cash in lieu of any
fractional share;
- cash into which the First Northern shares formerly represented by the
stock certificate have been converted; or
- a combination of cash and shares of Bank Mutual common stock;
and the surrendered First Northern stock certificate will be canceled, all as
more fully described below.
At the effective time of the merger, the stock transfer books of First
Northern will be closed and there will be no further registration of transfers
of shares of First Northern common stock thereafter on the records of First
Northern. After the effective time of the merger, the holders of First Northern
stock certificates outstanding immediately prior to the effective time of the
merger will cease to have any rights
30
<PAGE> 33
with respect to the shares of First Northern common stock formerly represented
by those certificates except as otherwise provided in the merger agreement or by
law.
In the event of a transfer of ownership of shares of First Northern common
stock which is not registered in the transfer records of First Northern, a
certificate representing the proper number of shares of Bank Mutual common
stock, a check in the proper amount of cash that the holder is entitled to
receive in respect of the First Northern shares pursuant to the merger
agreement, and any cash in lieu of a fractional share, will be delivered to the
transferee if the First Northern stock certificate which represented the shares
of First Northern common stock is presented to the exchange agent, accompanied
by all documents required to make the transfer and by evidence that any
applicable stock transfer taxes have been paid.
Until surrendered as contemplated by the merger agreement after the merger,
each First Northern stock certificate will represent only the right to receive
the merger consideration in cash or shares of Bank Mutual common stock, or both,
as contemplated by the merger agreement.
Bank Mutual will not pay dividends or make other distributions to the
holder of any unsurrendered First Northern stock certificate with respect to any
shares of Bank Mutual common stock represented by the First Northern stock
certificate after the merger, and no cash payment will be paid to the holder,
until the holder sends in the First Northern stock certificate. Subject to the
effect of any applicable law, after we receive a First Northern stock
certificate, we will promptly pay to the holder of the certificate, without
interest:
- the amount of any cash payable with respect to the surrendered First
Northern stock certificate to which the holder is otherwise entitled; and
- the amount of any such dividends or distributions to which the holder is
entitled.
Bank Mutual will not issue fractional shares of its common stock in the
merger. Instead, all fractional share interests of a holder of more than one
First Northern stock certificate will be combined to maximize the number of
whole shares of Bank Mutual common stock to be issued and minimize the
fractional interests to be paid in cash. If a fractional share interest results
after the combination, Bank Mutual will pay the holder of a fractional share
interest an amount in cash equal to $10.00 for each full share of Bank Mutual
common stock.
If any portion of the exchange fund has not been paid or delivered to the
First Northern shareholders 12 months after the effective time of merger, Bank
Mutual will be entitled to receive it upon demand. If that occurs, any First
Northern shareholders who have not yet delivered their First Northern stock
certificates to the Exchange Agent must instead look only to Bank Mutual for
payment of their claim for cash or shares of Bank Mutual common stock, or both,
and any dividends or distributions with respect to Bank Mutual common stock.
Neither the Exchange Agent nor any party to the merger agreement will be liable
to any First Northern shareholder for any property delivered to any public
official pursuant to any abandoned property, escheat or similar law.
Bank Mutual will be entitled to deduct and withhold from the consideration
otherwise payable pursuant to the merger agreement to any First Northern
shareholder any amount that Bank Mutual is required to deduct and withhold under
any provision of federal, state, local or foreign tax law. Any withheld amounts
will be treated for all purposes of the merger agreement as having been paid to
the First Northern shareholder in respect of which the deduction and withholding
was made by Bank Mutual.
BACKGROUND OF THE MERGER
The terms of the merger resulted from arms length negotiations between
representatives of First Northern and Mutual Savings. The following briefly
discusses the background of these negotiations and related matters.
31
<PAGE> 34
Over the last several years, the financial services industry has become
increasingly competitive, with many financial institutions expanding their size
and market area through consolidation. This trend was accelerated in 1998, with
a number of multi-billion dollar mergers announced whose effects would continue
to increase competition in the banking and the financial services industry in
First Northern's marketplace. In 1999, Congress also passed the
Gramm-Leach-Bliley Act which broadens the scope of financial services banks can
offer to consumers and makes it easier for affiliations to take place between
banks, securities firms and insurance companies. As part of its effort to remain
competitive within this environment, First Northern's management and board have
continually analyzed various strategic options available to First Northern
including the following:
- remaining as an independent financial institution via operational
improvements, internal growth, stock repurchase and a continued
investment in technology;
- pursuing external growth through either selected strategic acquisitions
or potential merger of equals transactions; and
- entering into a business combination with a larger entity.
Since its initial public offering in 1983, First Northern has been able to
sustain reasonable internal growth and to grow through two acquisitions. With
limited exceptions, internal growth became more difficult to sustain in the
later part of the 1990's.
However, in late 1998, First Northern analyzed the implementation of
expanded commercial lending to diversify its loan portfolio and enhance its
profitability. It also considered the development of initiatives to enhance a
sales culture within the organization and the establishment of an expanded
operations center. In early 1999, the First Northern board decided to proceed
with these matters. It became clear that the incremental benefits of these
changes would be realized only over time. External growth through acquisition
also became more difficult as there were fewer opportunities in the marketplace
and because First Northern's stock price had become relatively flat. Also, in
early 1999, First Northern considered and decided against the possibility of
acquiring individual branches that were being offered by a large bank holding
company. First Northern also made an unsuccessful effort to acquire a commercial
bank with approximately sixty million dollars in assets. This unsuccessful
effort further illustrated that First Northern could have difficulty acquiring
other institutions in the future unless it could increase the value of its
stock. During this period, First Northern also had discussions with a larger
savings and loan holding company about the possibility of being acquired. By
February 1999, First Northern determined that the parameters of a possible
transaction with this larger holding company were not favorable to First
Northern shareholders and First Northern thus terminated those discussions.
In February 1999, First Northern was also contacted by Mutual Savings
concerning the possibility of combining the two organizations. The CEOs of
Mutual Savings and First Northern have worked together on many banking industry
regulatory and trade activities and, as a result, were familiar with each
other's organizations and business philosophies. After a general discussion,
they decided to meet later when their schedules permitted to explore the matter
in more detail.
In May 1999, the CEOs of First Northern and Mutual Savings met for an
initial exploratory discussion about the possibility of combining the two
organizations. Mutual's concept involved Mutual's reorganization into a holding
company structure so that it could use stock, as well as cash, in a purchase of
First Northern. After this meeting, the First Northern board instructed
management to pursue discussions further with Mutual Savings and to develop more
information about using a mutual holding company structure to combine the two
organizations.
First Northern advised Mutual Savings of its continuing interest in
exploring a mutual holding company concept later in May. At that time, it was
determined that Mutual Savings would engage the services of a financial advisor
to prepare an initial economic/financial analysis of the proposed transaction.
In late May 1999, Mutual Savings engaged RP Financial LP, the financial advisor
and appraiser engaged in connection with the proposed transaction, to conduct an
economic/financial feasibility analysis of a
32
<PAGE> 35
proposed transaction to combine Mutual Savings and First Northern. It was agreed
that if, after receiving that analysis, Mutual Savings wished to pursue further
discussions with First Northern, it would contact First Northern.
In July 1999, Mutual Savings contacted First Northern and asked for a
meeting to discuss RP Financial's initial analysis. A copy of that analysis was
provided to First Northern. On July 8, 1999, First Northern and Mutual Savings
management met and had lengthy discussions on the organizations' operating
philosophies, corporate structures, products and services and reviewed in detail
the RP Financial analysis. RP Financial's analysis reflected that the
transaction could be generally favorable to both organizations from a financial
point of view. The following day, First Northern management distributed the
initial RP Financial analysis and some supplemental data to the First Northern
board. On July 14, 1999, RP Financial delivered an updated analysis, reflecting
input from management of both institutions, to Mutual Savings and First
Northern. After a review of this information on July 15, 1999, the First
Northern board decided to continue to explore and determine the feasibility of a
possible transaction with Mutual from a financial, as well as a regulatory,
point of view.
On July 27, 1999, management of Mutual Savings and First Northern met with
RP Financial and legal counsel to review and discuss the financial, accounting,
tax and other legal issues that would need to be addressed in connection with a
proposed combination.
In August, First Northern, for the second time during 1999, reviewed the
possibility of purchasing a number of commercial bank branch offices from
another large Wisconsin-based bank holding company, but after analyzing the
locations involved and the likely financial ramifications, declined to pursue a
purchase. Also in August, management of First Northern had an initial meeting
with a smaller thrift holding company about a possible combination. That holding
company's market was geographically separated from First Northern's and offered
few, if any, synergies.
Also in early August, First Northern and Mutual Savings management met
again and considered a wide variety of issues including reasons for considering
a combination of the two organizations, accounting, taxation, goodwill,
regulatory and legal treatment of the transaction as well as market conditions.
Also in August 1999, Mutual Savings consented to First Northern management
having a private discussion with RP Financial to obtain a further understanding
of the mutual holding company concept and the financial modeling used to analyze
a potential transaction. In late August 1999, First Northern and Mutual Savings
management and RP Financial further discussed and considered an updated
financial analysis.
In late August and early September 1999, the parties and legal counsel
continued to analyze the regulatory and tax implications of a transaction and
continued to discuss the structure and how to provide favorable financial
results for First Northern shareholders. In September 1999, the boards of Mutual
Savings and First Northern considered the developing financial and tax analysis
and agreed to continue exploratory discussions.
In early October 1999, management of both institutions again met to discuss
the tax, corporate structure, legal, regulatory and financial issues of a
possible transaction and developed an initial blueprint setting forth the major
elements of a transaction. At its October, 1999 board meeting, the First
Northern directors reviewed and discussed a number of documents pertaining to
the transaction and met with representatives of RP Financial in order to review
and question the analysis RP had prepared on behalf of Mutual Savings. As a
result, the First Northern board agreed to continue discussions with Mutual
Savings, and the First Northern management team met with Mutual Savings' CEO
later that month.
On November 12, 1999, Mutual Savings' CEO met with the First Northern board
to discuss the transaction and to respond to questions from First Northern's
board about Mutual's structure, operations, and strategies. On November 18,
1999, the First Northern board met again and had a lengthy discussion on the
strategic alternatives available to First Northern. In particular, the board
reviewed its inability earlier in the year to acquire a small commercial bank
that was offered for sale and the fact that several significant branch purchase
transactions it had considered did not make financial sense. It also discussed
the approach earlier in the year made by a large thrift holding company and the
acceptable parameters of
33
<PAGE> 36
such a transaction. It also reviewed its more recent discussions with a smaller
thrift holding company and decided that a combination with that entity did not
make strategic sense or add a significant value for First Northern shareholders
at that time. The board also reviewed recent contacts by a large bank holding
company and a further contact from the large thrift holding company with which
it had discussions earlier in the year. The First Northern board agreed to
continue pursuing discussions with Mutual Savings on the possible formation of a
mutual holding company and the acquisition by that entity of First Northern
pending further information on identified regulatory, tax, legal and human
resource issues.
At about the same time, Mutual Savings, its legal counsel and RP Financial
visited with the Office of Thrift Supervision in Washington, D.C. to discuss,
without disclosing the identity of First Northern, the parameters of the
transaction under consideration. The proposed transaction is unique in the sense
that it combines a mutual holding company restructuring (which has been
accomplished numerous times by other institutions) with the simultaneous
acquisition of a public company (which had not been previously accomplished
simultaneously with a restructuring). After this meeting, Mutual Savings
received an informal response from OTS staff indicating that such a transaction
likely could be accomplished under existing law and regulation subject to normal
application and review processes and the preservation of rights of Mutual
Savings' eligible account holders going forward.
In early December 1999, management of the institutions continued to meet
and work on financial, structural and human resource issues. Also in early
December, Mutual Savings engaged an investment banking firm experienced in
mutual holding company structures, Ryan, Beck & Co., to assist in the sale of
stock to be offered to its members as part of the mutual holding company
reorganization.
At its meeting on December 16, 1999, the First Northern board authorized
management to engage special legal counsel and a financial advisor, in
connection with the transaction under discussion. On December 17, 1999, First
Northern engaged Schiff Hardin & Waite as special legal counsel.
On December 22, 1999, Mutual Savings and First Northern management met
jointly with their respective counsel and Ryan, Beck to review the structure and
financial issues of the proposed transaction. At this meeting, Ryan, Beck
provided background on its experience in connection with mutual holding company
formation, mutual holding company values and its overall transaction analysis.
Ryan, Beck presented a detailed written analysis of a possible transaction which
illustrated the potential of the transaction from a financial and market point
of view.
On December 28, 1999, First Northern engaged the investment banking firm of
Keefe, Bruyette & Woods, Inc. as its financial advisor. On December 30, 1999,
First Northern and Mutual Savings management met to discuss and work on a
business plan to analyze costs of the transaction, possible synergies and other
financial matters. They also had a conference call with RP Financial regarding
development of a business plan and worked on financial projections for a planned
joint board meeting.
In early January, management of the two institutions again met to continue
work on financial and business plans. On January 10, 2000, First Northern and
Mutual Savings held a joint board meeting and Ryan, Beck made a detailed
financial presentation on the proposed transaction. Ryan, Beck provided a
detailed analysis regarding marketability of the stock to be issued in the
proposed conversion. Following this joint presentation, the First Northern board
met privately with its legal counsel and KBW to discuss the terms of KBW's
engagement and its role. Legal counsel also reviewed the terms of a proposed
confidentiality agreement with Mutual Savings.
On January 11, 2000, Mutual Savings and First Northern entered into a
confidentiality agreement and began to exchange additional and more detailed
financial and business information. Throughout January, numerous discussions
took place to further refine financial and business plans. At its January 20,
2000 board meeting, First Northern received presentations from KBW and Schiff
Hardin & Waite regarding the fairness from a financial point of view to First
Northern's shareholders and the legal and regulatory aspects of the proposed
transaction. The First Northern board determined to proceed with further due
diligence of Mutual Savings and the negotiation of the terms of a definitive
agreement. In late January 2000, the parties continued to meet, conduct due
diligence and exchange information as well as to negotiate the
34
<PAGE> 37
details of a written definitive agreement. In early February 2000, the parties
continued to work on the drafts of various documents and the parties performed
on site due diligence on each other. A significant documentation issue was the
stock option agreement or "lock-up" that Mutual Savings wished to include as
protection for the transaction.
The stock option agreement, as it was originally presented by Mutual
Savings, gave Mutual Savings the right to acquire a number of new shares of
First Northern, which would be issued only in the event of the exercise of the
option granted in the stock option agreement. This option would only be
exercisable in the event that a third party attempted to outbid Mutual Savings
for an acquisition or merger transaction with First Northern. If a third party
did submit a bid in an attempt to outbid Mutual Savings, then new shares, in an
amount equal to 19.9% of the common stock of First Northern outstanding at the
time of this new bid, would be issued and sold to Mutual Savings at the
pre-announcement market price. The purpose of this stock option agreement, or
"lock-up" is to provide compensation to Mutual Savings for the time and expense
it took in pursuing this transaction in the event a subsequent bid from a third
party exceeds Mutual Savings' bid, and the transaction goes forward with the
other entity.
The First Northern board of directors spent considerable time discussing
the pros and cons of this protection device, focusing particularly on its
fiduciary duty to its shareholders. Many negotiation sessions with Mutual
Savings focused extensively on First Northern's concerns about how this lock-up
could negatively impact its fiduciary duty to its shareholders, by deterring
subsequent bidders, and therefore potentially not allowing the best price
reasonably available to be offered to First Northern shareholders.
First Northern was also concerned that the stock option agreement had no
cap on the value that it represented. This means there was no dollar limit on
the spread between the exercise price at which Mutual Savings would be able to
buy shares of First Northern if the stock option agreement was triggered
($9.0375 per share) and the price any new bidder would have to pay (current fair
market value plus a premium which in total would exceed the per share price
being offered by Mutual Savings). Without a cap, the amount of money that a
subsequent bidder potentially would have to pay could be deemed excessive.
Negotiations led First Northern to realize that Mutual Savings would
withdraw its offer if the First Northern board did not agree to some type of a
lock-up mechanism. After conferring with KBW and Schiff Hardin & Waite, the
First Northern board determined that if Mutual Savings were to withdraw its
offer, another bidder might not be available for some time, if at all, and
probably not at a comparable price. After assessing the current market
conditions, the First Northern board decided that shareholders would be
negatively impacted if First Northern did not enter into the proposed business
combination. Weighing the benefits of the merger agreement against the costs of
the deterrent effect of the lock-up, First Northern determined that the
transaction was in the best interest of the shareholders, even with the lock-up
agreement. However, First Northern and Mutual Savings continued to negotiate the
terms of the lock-up, agreeing to a $12 million cap on the its value. On
February 11, 2000, revised draft documents were sent to the First Northern
directors for review at a February 17, 2000 meeting.
Concurrent with these negotiations, KBW prepared an in depth market
analysis of the transaction, addressing the question of whether or not, from a
financial point of view, the transaction was fair to First Northern
shareholders. This analysis, which concluded that the transaction was fair from
a financial point of view, was also presented to First Northern's board on
February 17, 2000. After engaging in a thorough review of the proposed
transaction documents and the KBW financial analysis and an extensive
questioning of both the financial and legal advisors to First Northern, the
board of directors decided to adjourn the meeting until February 20, 2000 in
order to allow each board member to further analyze and assess the proposed
transaction.
On February 20, 2000, the board reconvened and unanimously approved the
transaction. On February 21, 2000, First Northern and Mutual Savings each signed
the definitive merger agreement and on February 22, 2000 announced the execution
of the definitive merger agreement.
35
<PAGE> 38
FIRST NORTHERN'S REASONS FOR THE MERGER
THE FIRST NORTHERN BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF FIRST NORTHERN AND ITS SHAREHOLDERS. THE FIRST NORTHERN BOARD
UNANIMOUSLY RECOMMENDS THAT FIRST NORTHERN SHAREHOLDERS VOTE "FOR" THE MERGER
AGREEMENT.
The First Northern board of directors has approved the merger agreement and
the stock option agreement. In reaching the decision to approve these
agreements, the board of directors consulted with First Northern management, as
well as its financial and legal advisors, and considered many factors, including
the following:
- The formation of an attractive $2.6 billion (at that date) Wisconsin
financial institution;
- The advantages of a combination with an in-state institution, including
the building of market share without undue market concentration concerns,
enhanced exposure to commercial and consumer banking markets, and the
opportunities for increased efficiencies resulting in increased
profitability of the combined entity over time;
- The increased economic value for First Northern shareholders, because the
merger terms provide a premium over the historical First Northern market
price;
- The belief that the merger agreement would result in First Northern
shareholders receiving stock in a high quality combined company that
should benefit shareholders through enhanced operating efficiencies and
better penetration of commercial and consumer banking markets;
- The fact that the merger agreement, subject to certain limitations,
permits each First Northern shareholder to elect the form of
consideration to be received;
- The opportunity for First Northern shareholders to continue their
investment in a regional bank holding company through a tax-free
exchange;
- The advice from KBW, First Northern's financial advisor, that the merger
terms are fair from a financial point of view;
- Conditions in the marketplace for financial institutions that might
affect First Northern's ability to obtain more attractive offers in the
future;
- The less attractive strategic alternatives available to First Northern in
light of the continuing trend of bank consolidations, such as share
repurchase, acquisition of another banking institution, or continued
independent growth;
- The current and prospective economic and overall market environments
facing First Northern characterized by intensifying competition;
- Information concerning the businesses, earnings, operations, financial
condition, prospects, capital levels and asset quality of First Northern
and Mutual Savings, both individually and as a combined entity;
- The ability to combine First Northern's operations with an attractive
bank holding company which shares many of First Northern's goals of
providing exemplary regional banking services, but which also offers a
larger market area and larger asset base to allow for enhanced service in
the future;
- Availability for employees and customers of opportunities for employment
with and service from a larger bank holding company; and
- The terms of the merger and stock option agreements.
The First Northern board of directors also reviewed various issues in
connection with its approval of the merger agreement and the stock option
agreement. In particular, the First Northern board discussed the potential
effects of the stock option agreement, including a possible deterrent effect
that it might have on subsequent, better offers. Also, the board considered the
possibility that the merger might cause First
36
<PAGE> 39
Northern to lose its independence going forward. First Northern's board of
directors took into account these potential disadvantages when considering the
merger. The First Northern board concluded that any such disadvantages were
outweighed by the factors described above, and the KBW opinion that the merger
consideration was fair from a financial point of view for the shareholders of
First Northern.
This discussion of the various factors considered by the First Northern
board of directors is not, and is not intended to be, exhaustive. It is not
necessarily in the order of importance to the board of directors or any
particular director. The First Northern board of directors did not find it
practicable to, and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination due to the variety of
factors considered. In addition, the board of First Northern is composed of six
individual members, and each director may have given different weights to
different factors. For a discussion of the interests of certain members of First
Northern's management and First Northern's board in the merger, see "Interests
of Officers and Directors in the Merger."
MUTUAL'S REASONS FOR THE MERGER
In significant part, the restructuring is being undertaken to accommodate
the First Northern merger. The First Northern merger will not proceed if the
restructuring does not occur. Mutual Savings' board of directors believes that
the First Northern merger is attractive to Mutual for various reasons. From
Mutual's perspective, the First Northern merger would:
- combine two financial institutions of complementary business focuses.
- significantly expand Mutual's presence in northeastern Wisconsin,
allowing it to enter attractive new markets through an established and
attractive operation.
- permit Mutual to acquire this presence for fair consideration.
- allow elimination of certain duplicative costs and achievement of
potential economies of scale over time by increasing size.
- complement the restructuring by providing a productive use for some of
the offering's cash proceeds.
- obtain additional experienced and well-qualified employees.
The Mutual Savings board has unanimously approved the merger agreement.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the merger by the First Northern
board, the shareholders of First Northern should be aware that some directors
and executive officers of First Northern have certain interests in the
consummation of the merger other than solely as holders of First Northern common
stock that are described below.
Stock Options. Holders of outstanding First Northern stock options,
including directors and officers, will have their options vested as a result of
the merger. Under the merger agreement, these options will not be assumed by
Bank Mutual; this requirement is imposed to permit a greater number of shares of
Bank Mutual common stock to be available to First Northern shareholders. As a
consequence, options must be exercised prior to the merger or they will be
"cashed out" in an amount equal to the "spread" between the exercise price and
$15 per share. In addition, holders may receive an additional payment, of up to
25% of the "spread" amount, in recognition of the taxability of the cash receipt
to the option holder, who is not given a choice to have a tax-free exchange. The
total amount of these additional payments, after considering any tax benefit to
First Northern, may not exceed $756,000.
37
<PAGE> 40
The following table shows, for each director and executive officer of First
Northern, the number of shares for which options are held, the aggregate
"spread" between the option exercise prices and $15, and the maximum potential
25% payment, prior to tax effect, in recognition of the forced taxable
transaction.
<TABLE>
<CAPTION>
MAXIMUM
EXECUTIVE NUMBER OF TOTAL POTENTIAL
OFFICER/DIRECTOR OPTIONS SPREAD AMOUNT 25% PAYMENT
---------------- --------- ------------- -----------
<S> <C> <C> <C>
Richard Aicher.................................. 79,300 $ 518,842 $ 129,711
Marla Carr...................................... 75,100 468,169 117,042
Rick Colberg.................................... 79,300 518,842 129,711
Dale Darmody.................................... 67,800 384,874 96,219
Michael Meeuwsen................................ 168,000 1,101,146 275,287
John Steinbrecker............................... 64,500 350,125 87,531
Steve Wilmet.................................... 54,500 272,625 68,156
Howard Frankenthal.............................. 36,000 252,558 63,140
Thomas Lopina................................... 28,800 172,800 43,200
Robert Olson.................................... 14,400 61,650 15,413
Richard Smits................................... 10,800 37,350 9,338
J. Gus Swoboda.................................. 32,400 209,583 52,396
All executive officers and directors as a
group......................................... 710,900 4,348,564 1,087,143
Total outstanding options (including the
above)........................................ 755,900 4,582,189 1,145,547
</TABLE>
Indemnification. The merger agreement provides that Bank Mutual will
indemnify and hold harmless, to the fullest extent permitted under applicable
law, directors or officers of First Northern against any amounts incurred in
connection with any claim arising out of or relating to the transactions
described in the merger agreement or which arise out of or relate to those
persons having served as a committee member, director, officer, employee or
agent of First Northern. Bank Mutual and any successors will continue to honor
the obligations of First Northern under First Northern's articles of
incorporation and bylaws existing and in force as of the date of the merger
agreement.
Employment Agreements. The First Northern executive officers who currently
have employment agreements with First Northern or First Northern Savings will
have those agreements either continued after the merger or replaced by new
employment agreements. The employment agreement of Mr. Meeuwsen, First
Northern's Chief Executive Officer, will be assumed by Bank Mutual. Mutual is
offering new agreements to the other First Northern executive officers who
currently have employment agreements. It is a condition to Mutual's obligations
under the merger agreement that no more than two First Northern executive
officers fail to enter into such agreements.
Mr. Meeuwsen's current employment agreement provides for an initial term of
five years, which is automatically extended for an additional year on its
anniversary date unless contrary notice is given. Mr. Meeuwsen is entitled to an
annually-reviewed base salary and benefits. The employment agreement can be
terminated by either party at the expiration of the term, at any time for cause,
upon Mr. Meeuwsen's retirement, disability or death, or as required by law. The
agreement provides for certain benefits upon termination, which are generally
increased in case of a change in control. Under the merger agreement, it is a
condition to Mutual's obligations that Mr. Meeuwsen waive any provisions of his
employment agreement under which the merger, or related transactions, would
create severance or other accelerated benefits, and that he enter into a
noncompetition agreement with Bank Mutual. Mr. Meeuwsen is not being asked to
waive provisions of his supplemental employment retirement agreement under which
the merger would constitute a change in control causing all of his benefits to
vest.
The replacement employment agreements being offered to other First Northern
executive officers who have employment agreements are generally similar to their
current agreements, with certain exceptions. The current agreements each provide
for a three-year term which can be renewed annually to restore the initial
three-year term. The replacement agreements will have an initial term of three
years, but will not be subject to annual renewal. At the end of the initial
three-year term and on each anniversary thereafter, the
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<PAGE> 41
employment term for the replacement agreements can be extended by mutual
agreement for additional one-year periods.
The replacement agreements and the current agreements both provide for
certain benefits upon termination. In general, the termination benefits under
the replacement agreements are greater than those under the current agreements
assuming that the current agreements are not renewed annually, but not as great
as the benefits an executive officer would receive if the current agreements
were renewed annually. The replacement employment agreements, like the current
agreements, provide certain rights to the executive officers upon a change in
control, but the replacement employment agreements specifically state that the
merger will not be considered a change in control. In addition, the replacement
employment agreements include noncompetition provisions.
See "Employee Plans" below regarding certain other arrangements with
respect to other employee plans provided for by the merger agreement.
Board and Officer Positions. Under the agreement, the Board of Directors of
the MHC and Bank Mutual will consist of the current members of the board of
Mutual Savings plus four out of the six members of the First Northern Board of
Directors. The four members of the First Northern Board will be selected by
Mutual Savings; Mutual Savings expects that Mr. Meeuwsen will be one of the four
designees but has not yet determined the other three.
In addition, additional officers of Bank Mutual will be elected so that at
least 40% of the initial executive officers of Bank Mutual will be current First
Northern executive officers. Mr. Meeuwsen is expected to be elected the
president and chief operating officer of Bank Mutual, and Rick Colberg, First
Northern's chief financial officer, will be its chief financial officer.
OPINION OF FIRST NORTHERN'S FINANCIAL ADVISOR
On February 21, 2000, KBW rendered its opinion to the First Northern Board
(subsequently confirmed as of the date of this proxy statement/prospectus) to
the effect that the merger consideration was fair, from a financial point of
view, to the holders of First Northern common stock.
KBW'S OPINION IS DIRECTED TO FIRST NORTHERN'S BOARD OF DIRECTORS AND
ADDRESSES ONLY THE CONSIDERATION OFFERED IN THE MERGER. IT DOES NOT ADDRESS THE
UNDERLYING BUSINESS DECISION TO PROCEED WITH THE MERGER AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH
RESPECT TO THE MERGER OR ANY OTHER MATTER RELATED THERETO.
KBW has informed First Northern that in arriving at its opinion, KBW has,
among other things:
- reviewed First Northern's Annual Reports on Form 10-K and related audited
financial information for the three fiscal years ended December 31, 1998
and First Northern's quarterly reports on Form 10-Q and related unaudited
financial information up to the period ended September 30, 1999;
- reviewed Mutual Savings' Reports of Condition and Income ("Call Reports")
and related audited financial information for the three fiscal years
ended December 31, 1998 and Mutual Savings' quarterly Call Report and
related unaudited financial information up to the period ended September
30, 1999;
- reviewed certain limited financial information, including projections of
future financial performance, relating to the respective businesses,
earnings, assets and prospects of First Northern and Mutual Savings
furnished to KBW by senior management of First Northern;
- conducted certain limited discussions with members of senior management
of First Northern and Mutual Savings concerning the respective
businesses, financial condition, earnings, assets, liabilities,
operations, regulatory condition, financial forecasts, contingencies, and
prospects of First Northern and Mutual Savings and their respective views
as to the future financial performance of First Northern, Mutual Savings,
and Bank Mutual, as the case may be, following the merger;
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<PAGE> 42
- reviewed the historical market prices for First Northern's common stock
and compared with that of certain publicly traded companies which KBW
deemed to be relevant;
- compared the respective results of operations of First Northern and
Mutual Savings with those of certain companies which KBW deemed to be
relevant;
- reviewed the merger agreement; and
- reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as KBW
deemed necessary.
In preparing its opinion, KBW, with First Northern's consent, assumed and
relied on the accuracy and completeness of all financial and other information
supplied or otherwise made available to it by First Northern and Mutual Savings,
including information contemplated in the items above, and KBW has not assumed
responsibility for independently verifying such information or undertaken an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of First Northern, Mutual Savings or any of their subsidiaries, nor
has it been furnished any such evaluation or appraisal. KBW is not an expert in
the evaluation of allowances for loan losses, and First Northern acknowledges,
KBW has not made an independent evaluation of the adequacy of the allowance for
loan losses of First Northern or Mutual Savings, nor for this purpose has it
reviewed any individual credit files relating to First Northern or Mutual
Savings, and, with First Northern's consent, it assumed that the respective
aggregate allowances for loan losses for both First Northern and Mutual Savings
are adequate to cover such losses and will be adequate on a pro forma basis for
Bank Mutual. In addition, it has not conducted any physical inspection of the
properties or facilities of First Northern or Mutual Savings. KBW's opinion is
predicated on the merger receiving the tax and accounting treatment contemplated
in the merger. KBW's opinion was necessarily based on economic, market and other
conditions as of, and the information made available to it as of, the date of
its opinion.
KBW's opinion was rendered without regard to the necessity for, or level
of, any restrictions, obligations, undertakings or divestitures which may be
imposed or required in the course of obtaining regulatory approval for the
merger.
In connection with rendering its opinion, KBW performed a variety of
financial analyses, including those summarized below. The summary set forth
below does not purport to be a complete description of the analyses performed by
KBW in this regard. The preparation of a fairness opinion involves various
determinations and judgments as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such opinion is not readily susceptible to a
partial analysis or summary description. Accordingly, notwithstanding the
separate factors summarized below, KBW believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
considered by it, without considering all analyses and factors, or attempting to
ascribe relative weights to some or all such analyses and factors, could create
an incomplete view of the evaluation process underlying KBW's opinion.
In performing its analyses, KBW made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of First Northern, Mutual Savings
and KBW. The analyses performed by KBW are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of KBW's
analysis of the fairness of the consideration to be paid in the merger to First
Northern's shareholders, and were provided to First Northern's board of
directors in connection with the delivery of KBW's opinion. KBW did not draw any
specific conclusions from, or with regard to, any one method of analysis. With
respect to the comparison of selected companies analysis and the analysis of
selected merger transactions summarized below, no company utilized as a
comparison is identical to First Northern or Mutual Savings. Accordingly, an
analysis of comparable companies is not mathematical; rather it involves complex
considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values, as the case may be, of the companies concerned. The
analyses do not purport to
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<PAGE> 43
be appraisals or to reflect the process at which First Northern and Mutual
Savings might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, KBW's opinion is just a part of many factors taken into consideration by
First Northern's board of directors.
The projections of future financial performance furnished to KBW and used
by it in certain of its analyses were prepared by the senior management of First
Northern. First Northern does not publicly disclose internal management
projections of the type provided to KBW in connection with its review of the
merger, and as a result, such projections were not prepared with a view towards
public disclosure. These projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions, and accordingly,
actual results could vary significantly from those set forth in such
projections.
The following is a summary of analyses presented by KBW to First Northern's
board of directors on February 17, 2000 in connection with its opinion.
Comparable Company Analysis. KBW compared the financial performance and
market performance of First Northern and the financial performance of Mutual
Savings based on various financial measures of earnings performance, operating
efficiency, capital adequacy and asset quality and, for First Northern, various
measures of market performance, including, but not limited to, price to book
ratios, price to earnings ratios and dividend payout ratios to those of selected
bank holding companies. For purposes of such analysis, the financial information
used by KBW was as of and for the quarter ended September 30, 1999. Market price
information was as of February 14, 2000. KBW selected publicly traded thrift
institutions in the Midwestern United States with total assets ranging from $500
million to $5 billion.
The twenty-four (24) companies in the First Northern peer group were:
<TABLE>
<S> <C>
MAF Bancorp, Inc., Clarendon Hills, IL First Defiance Financial Corp., Defiance,
Flagstar Bancorp, Inc., Bloomfield Hills, MI OH
Anchor BanCorp Wisconsin Inc., Madison, WI NASB Financial, Inc, Grandview, MO
St. Francis Capital Corporation, Brookfield, WI First Place Financial Corp., Warren, OH
Alliance Bancorp, Hinsdale, IL Camco Financial Corporation, Cambridge, OH
First Federal Capital Corp., La Crosse, WI Home Federal Bancorp, Seymour, IN
First Indiana Corporation, Indianapolis, IN HMN Financial, Inc., Spring Valley, MN
Metropolitan Financial Corp., Mayfield Heights, OH FFY Financial Corp., Youngstown, OH
Jefferson Savings Bancorp, Inc., Ballwin, MO HF Financial Corp., Sioux Falls, SD
CFS Bancorp, Inc., Munster, IN Fidelity Bancorp, Inc., Chicago, IL
Ottawa Financial Corporation, Holland, MI Hallmark Capital Corp., Glendale, WI
United Community Financial Corp., Youngstown, OH First Federal Bankshares, Inc., Sioux
City, IA
First Midwest Financial, Inc., Storm Lake,
IA
</TABLE>
KBW's analysis showed the following concerning First Northern's financial
performance:
<TABLE>
<CAPTION>
FIRST
NORTHERN'S PEER GROUP PEER GROUP
PERFORMANCE AVERAGE MEDIAN
----------- ---------- ----------
<S> <C> <C> <C>
Return on average assets(%)........................ 0.96 0.92 0.91
Return on average equity(%)........................ 9.60 10.65 9.97
Net interest margin(%)............................. 3.00 3.17 3.07
Efficiency ratio(%)................................ 55.95 58.08 57.92
Ratio of total equity to total assets(%)........... 9.15 9.01 8.01
Ratio of tangible equity to tangible assets(%)..... 9.15 8.50 7.37
Ratio of non-performing assets to total loans plus
other real estate owned(%)....................... 0.11 0.85 0.64
Ratio of loan loss reserve to total loans(%)....... 0.52 0.87 0.75
</TABLE>
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<PAGE> 44
KBW's analysis further showed the following concerning First Northern's
market performance:
- that First Northern's price to earnings per share multiple based on 1999
projected earnings was 11.05 times, compared to a peer group average of
9.77 times and median of 8.97 times;
- that its price to earnings per share multiple based on 2000 projected
earnings was 10.30 times, compared to a peer group average of 9.59 times
and median of 9.51 times;
- that its price to book value per share multiple was 112%, compared to a
peer group average of 108% and median of 101% and
- that its dividend payout ratio was 48.15% compared to a peer group
average of 35.55% and median of 28.57%.
The Mutual Savings peer group consisted of eleven (11) selected mutually
held thrift institutions with total assets ranging from $1 billion to $4 billion
and ratios of total equity to total assets ranging from seven percent (7%) to
eleven percent (11%). The members of the Mutual Savings peer group were:
- Columbia Savings Bank, SLA (MHC), FairLawn, NJ
- Middlesex Savings Banks, Natick, MA
- Financial FT & SB of Olympia Fields, Olympia Fields, IL
- First Federal Lincoln Bank, Lincoln, NE
- Cambridge Financial Group, Inc., Cambridge, MA
- North Shore Bank, FSB, Brookfield, WI
- Salem Five Cents Savings Bank, Salem, MA
- Bangor Savings Bank, Bangor, ME
- Provident Savings Bank, Jersey City, NJ
- Connecticut Bankshares, MHC, Manchester, CT
- Beneficial Mutual Savings Bank, Philadelphia, Pa
KBW's analysis showed the following concerning Mutual Savings' financial
performance:
<TABLE>
<CAPTION>
MUTUAL'S PEER GROUP PEER GROUP
PERFORMANCE AVERAGE MEDIAN
----------- ---------- ----------
<S> <C> <C> <C>
Return on average assets(%)........................ 0.45 0.70 0.78
Return on average equity(%)........................ 4.76 7.99 8.19
Net interest margin(%)............................. 2.39 3.28 3.13
Efficiency ratio(%)................................ 71.74 68.42 69.28
Ratio of amortization of intangible assets to
operating revenue(%)............................. 5.47 1.57 0.34
Ratio of total equity to total assets(%)........... 9.61 8.59 9.03
Ratio of tier 1 capital to average tangible
assets(%)........................................ 8.26 8.31 8.09
Ratio of non-performing assets to total loans plus
other real estate owned(%)....................... 0.83 0.65 0.63
Ratio of loan loss reserve to total loans(%)....... 0.64 0.89 0.87
</TABLE>
Historical Stock Data Analysis. KBW reviewed historical stock price data
for First Northern common stock compared to a composite of the First Northern
peer group, the Russell 2000 Financial Index and the Standard and Poors 500
Index for the period from January 1, 1999 through February 14, 2000. This
analysis showed that on a relative performance basis, First Northern's stock
price depreciated 22%, compared with depreciation of 27.5% and 13% for the First
Northern peer group and Russell 2000 Financial Index, respectively and the 14%
appreciation of the Standard and Poors 500 Index.
Comparable Merger Analysis. KBW analyzed two groups of selected banking
merger transactions where the selling institution was a thrift in the United
States from 1998 to 1999. The first group consisted of those transactions where
the buyers utilized the pooling-of-interests accounting method (the "Pooling
Group"); and the second group consisted of those transactions where the buyers
utilized the purchase
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<PAGE> 45
accounting method (the "Purchase Group") The selling institutions for both
groups had total assets ranging from $500 million to $2 billion. KBW then
compared the relevant valuation multiples for the groups to First Northern's
valuation multiples resulting from the transaction value, and additionally
restating the same valuation statistics by adjusting First Northern's capital
level down to the median of the groups' selling institutions ("First Northern
Adjusted").
The comparable merger analysis indicated, based on First Northern's
announced transaction value, the following:
<TABLE>
<CAPTION>
FIRST PURCHASE POOLING
FIRST NORTHERN GROUP GROUP
NORTHERN ADJUSTED MEDIAN MEDIAN
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Deal Price/Book Value(%)......................... 167.04 184.74 194.31 240.96
Deal Price/Tangible Book Value(%)................ 167.04 184.74 206.57 245.90
Deal Price/LTM EPS(x)............................ 18.07 18.83 21.70 24.59
Tangible Premium to Core Deposits(%)............. 11.50 11.50 15.53 23.56
</TABLE>
The Purchase Group included the following transactions:
<TABLE>
<CAPTION>
ACQUIRING INSTITUTION SELLING INSTITUTION
--------------------- -------------------
<S> <C>
Commercial Federal Corporation AmerUs Bank
BB&T Corporation Maryland Federal Bancorp Inc.
UCBH Holdings Inc. USB Holding
Summit Bancorp NSS Bancorp
Richmond County Financial Corp. Bayonne Bancshares Inc.
Temple-Inland Inc. HF Bancorp Inc.
Dime Bancorp Inc. Lakeview Financial Corp.
Belvedere Capital Partners Inc. Placer Savings Bank
Independence Community Bank Corp. Statewide Financial Corporation
Webster Financial Corp. MECH Financial Inc.
</TABLE>
The Pooling Group included the following transactions:
<TABLE>
<CAPTION>
ACQUIRING INSTITUTION SELLING INSTITUTION
--------------------- -------------------
<S> <C>
Commercial Federal Corporation First Colorado Bancorp, Inc.
Hudson United Bancorp IBS Financial Corp.
Hudson United Bancorp Dime Financial Corporation
FirstMerit Corporation Security First Corporation
First Charter Corporation HFNC Financial Corp
Republic Security Financial First Palm Beach Bancorp, Inc.
Corporation
First Source Bancorp, Inc. Pulse Bancorp, Inc
Peoples Heritage Financial Group SIS Bancorp, Inc
Centura Banks, Inc First Coastal Bankshares, Inc
Republic Bancorp, Inc. D & N Financial Corporation
Anchor BanCorp Wisconsin Inc. FCB Financial Corp
Old Kent Financial Corp CFSB Bancorp, Inc
Fifth Third Bancorp Emerald Financial Corporation
Independent Bank Corp Mutual Savings Bank FSB
BB&T Corporation First Liberty Financial Corp
North Fork Bancorporation JSB Financial Inc
Provident Financial Group, Inc. Fidelity Financial of Ohio, Inc
</TABLE>
Discounted Free Capital Analysis. Using financial projections for First
Northern provided by management of First Northern, KBW estimated the future
amount of distributable free capital available to holders of First Northern
shares of common stock assuming the maintenance of a leverage ratio (as
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<PAGE> 46
defined under regulatory guidelines) of 7.0% over a five year period. KBW then
estimated the terminal value for First Northern common stock at the end of the
period by applying terminal multiples ranging from 11 to 19 times First
Northern's projected 2004 adjusted earnings. The distributable free capital
stream and terminal values were then discounted to a present value using
discount rates (ranging from 12% to 14%) chosen to reflect different assumptions
regarding the required rate of return to holders or prospective buyers of shares
of First Northern common stock. KBW calculated present values of distributable
free capital for First Northern ranging from $9.25 per share to $14.58 per
share.
In connection with its opinion dated as of the date of this proxy
statement/prospectus, KBW performed procedures to update, as necessary, certain
of the analyses described above and reviewed the assumptions on which such
analyses described above were based and the factors considered in connection
therewith.
KBW has been retained by First Northern's board as an independent
contractor to act as financial adviser to First Northern with respect to the
merger. KBW, as part of its investment banking business, is continually engaged
in the valuation of banking businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. As specialists in the
securities of banking companies, KBW has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, KBW may, from time to time, purchase securities from, and sell
securities to, First Northern and Mutual Savings and as a market maker in
securities KBW may from time to time have a long or short position in, and buy
or sell, debt or equity securities of First Northern and Mutual Savings for
KBW's own account and for the accounts of its customers.
First Northern and KBW have entered into an agreement dated January 12,
2000 relating to the services provided by KBW in connection with the merger.
Under this agreement First Northern agreed to pay KBW, for the services relating
to the merger, a cash non-refundable financial advisory fee of $50,000, paid
upon the execution of the agreement. In addition, First Northern agreed to pay
KBW a cash fee of $100,000 payable on delivery of KBW's fairness opinion at the
time of announcement of the Merger and an additional cash fee of $100,000 in
conjunction with KBW's delivery of an updated fairness opinion for incorporation
in any proxy statement or prospectus. Upon closing of the transaction, First
Northern will pay to KBW a cash fee contingent equal to $350,000. Pursuant to
KBW's engagement agreement, First Northern also agreed to reimburse KBW for
reasonable out-of-pocket expenses and disbursements incurred in connection with
its retention and to indemnify KBW against certain liabilities, including
liabilities under the federal securities laws.
EMPLOYEE PLANS
Mutual Savings and First Northern have agreed that outstanding First
Northern stock options, including those held by officers and directors, will be
"cashed out" prior to the merger. These provisions include an additional payment
to option holders in recognition of the tax consequences of this transaction. In
addition, First Northern executive officers who currently have employment
agreements will have those agreements either continued under Bank Mutual or
replaced by new employment agreements. See "Interests of Officers and Directors
in the Merger" above.
Mutual Savings has agreed that First Northern's 401(k) retirement plan will
continue, except to the extent not consistent with law, after the merger for
First Northern Savings' employees until the plan is combined with, or replaced
by, a retirement or similar benefit plan covering employees of all affiliates of
Mutual Savings. Previous service with First Northern will be counted to
determine eligibility to participate and vesting in any successor plan, except
where recognition of that prior service would result in a duplication of
benefits. Similarly, Bank Mutual will continue, except to the extent not
consistent with law, First Northern Savings health and welfare benefit plans and
programs until they are replaced by programs or benefits common to all Bank
Mutual employees. None of these plans will be terminated until First Northern
Savings employees become eligible to participate in successor plans. Prior
service will be
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<PAGE> 47
recognized, except where it would result in duplication of benefits, and waiting
periods, pre-existing condition limitations and other exclusions generally would
not apply where First Northern employees previously were covered under First
Northern plans.
See "Interests of Officers and Directors in the Merger" above for a
discussion of employment agreements.
MANAGEMENT AND OPERATIONS OF FIRST NORTHERN SAVINGS AFTER THE MERGER
When the merger is effective, First Northern's separate existence will
cease, and First Northern Savings will become a wholly owned subsidiary of Bank
Mutual. The directors and officers of First Northern Savings immediately prior
to the merger will continue to be its directors and officers and Mr. Crowley,
Jr. will become an additional director. Because First Northern Savings will be a
corporation wholly owned by Bank Mutual, Bank Mutual will have the power to
elect to change directors, and select and change officers, as it believes
appropriate.
Bank Mutual intends, for the immediate future, to continue First Northern
Savings as a separate entity, although consideration may be given to combining
operations with Mutual Savings at some point in the future. First Northern
Savings will continue to employ substantially all of its present employees. The
employees will continue as employees at will who are subject to the
determination of First Northern Savings management, and boards of directors of
First Northern Savings and Bank Mutual.
The parties expect that the merger will become effective shortly after the
special meeting. The merger will be legally completed by the filing of articles
of merger with the Wisconsin Department of Financial Institutions. The filing of
the articles of merger will occur as soon as practicable following the
satisfaction or waiver of the conditions set forth in the merger agreement. See
"Conditions to the Merger" below.
CONDUCT OF BUSINESS PENDING THE MERGER
In the merger agreement, First Northern has agreed, pending consummation of
the merger, unless otherwise consented to in writing by Mutual Savings, that it
will, among other things:
- carry on its business in the regular course;
- not do any act or omit to do any act which will cause a material breach
of any identified contracts to which First Northern is a party;
- not change compensation or benefits, except for ordinary raises;
- not incur any indebtedness outside the ordinary course of business;
- use reasonable best efforts to preserve its business organization intact,
to retain the services of its present officers and key employees and to
preserve the goodwill of suppliers, customers, creditors and others
having business relationships with it; and
- not issue any additional shares of stock except under outstanding
options, or grant any options, or declare or pay any dividend other than
its regular quarterly dividend.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The merger agreement contains various customary representations and
warranties for a transaction of this kind by Mutual Savings, Bank Mutual and
First Northern. They include, among other things:
- the organization, existence, and corporate power and authority, and
capitalization of each of the companies;
- the absence of conflicts with and violations of law and various
documents, contracts and agreements;
- the absence of any development materially adverse to the companies;
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<PAGE> 48
- the absence of adverse material litigation;
- accuracy of reports and financial statements filed by First Northern with
the Securities and Exchange Commission;
- the accuracy and completeness of the statements of fact made in the
merger agreement;
- First Northern's title to its assets;
- the existence, performance and legal effect of certain contracts;
- no violations of law by either party;
- the filing of tax returns, payment of taxes and other tax matters by
either party;
- labor and employee benefit matters, with respect to First Northern; and
- compliance with applicable environmental laws with respect to both
parties.
In addition to the covenants described under "Conduct of Business Pending
the Merger," the merger agreement contains various other customary covenants,
including, among other things, access to information, each party's efforts to
cause its representations and warranties to be true and correct on the closing
date; and each party's agreement to use its reasonable best efforts to cause the
merger to qualify as a tax-free reorganization.
All representations, warranties and covenants of the parties, other than
the covenants in specified sections which relate to continuing matters,
terminate upon the merger.
CONDITIONS TO THE MERGER
The respective obligations of Mutual Savings and First Northern to complete
the merger are subject to various conditions prior to the merger. The conditions
include the following:
- regulatory approvals of the merger and the Mutual Savings restructuring
the performance of and compliance by the parties with their obligations
under the merger agreement;
- the absence of any litigation in which the merger is restrained or
enjoined;
- the accuracy of the representations and warranties of the parties made in
the merger agreement;
- from the date of the merger agreement to the merger, there shall not have
occurred any material adverse change of Mutual Savings, Bank Mutual or
First Northern;
- the approval of the merger agreement by the shareholders of First
Northern;
- as a condition to First Northern's obligations, the receipt of the tax
opinion that has been delivered by counsel; and
- obtaining any appropriate third party consents.
The parties may waive conditions to their obligations unless they are
legally prohibited from doing so. First Northern shareholder approval and
regulatory approvals may not be legally waived. In addition, Mutual Savings will
not proceed with the First Northern merger unless it is able to simultaneously
undergo the restructuring.
First Northern has agreed that it, its subsidiaries, its officers and its
directors will not take actions which could facilitate a competing acquisition
proposal. First Northern has agreed to:
- not initiate, solicit or encourage any inquiries or the making of any
acquisition proposal;
- not engage in any negotiations concerning, provide any confidential
information to, or have any discussions with, any person relating to an
acquisition proposal;
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<PAGE> 49
- cease any pre-existing activities with respect to any other acquisition
proposal; and
- notify Mutual Savings promptly if any such inquiries or proposals are
received by it.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
General. We have agreed to use our best efforts to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
entities which are necessary or advisable to consummate the merger and the
Mutual restructuring which is a condition to the merger. These include approvals
of the OTS and the FDIC. Mutual Savings has completed the filing of all
application materials necessary to obtain these regulatory approvals. The merger
cannot be completed without these regulatory approvals. We cannot assure that we
will obtain the required regulatory approvals, or when they will be received, or
whether there will be conditions in the approvals or any litigation challenging
the approvals. We also cannot assure that the United States Department of
Justice or any state attorney general will not attempt to challenge the merger
on antitrust grounds, or what the outcome will be if such a challenge is made.
We are not aware of any material governmental approvals or actions that are
required prior to the merger other than those described below. We presently
contemplate that we will seek any additional governmental approvals or actions
that may be required; however, we cannot assure that we will successfully obtain
any such additional approvals or actions.
Office of Thrift Supervision. The merger is subject to approval by the OTS,
as is the Mutual Savings restructuring. Mutual Savings has filed the required
applications and notifications with the OTS for these approvals.
The OTS may not approve any transaction that would result in a monopoly or
otherwise substantially lessen competition or restrain of trade, unless it finds
that the anti-competitive effects of the transaction are clearly outweighed in
the public interest. In addition, the OTS considers the financial and managerial
resources of the companies and their subsidiary institutions and the convenience
and needs of the communities to be served. Under the Community Reinvestment Act,
the OTS must take into account the record of performance of each company in
meeting the credit needs of its entire communities, including low and moderate
income neighborhoods, served by each company. Mutual Savings has a satisfactory
CRA rating with the OTS; First Northern Savings has an outstanding CRA rating.
Federal law requires publication of notice of, and the opportunity for
public comment on, the applications submitted by Mutual Savings for approval of
the merger and the restructuring, and authorizes the OTS to hold a public
hearing in connection with the application if it determines that such a hearing
would be appropriate. Any such hearing or comments provided by third parties
could prolong the period during which the application is subject to review. In
addition, under federal law, a period of 30 days must expire following approval
by the OTS within which period the Department of Justice may file objections to
the merger under the federal antitrust laws. If the Department of Justice were
to commence an antitrust action, that action would stay the effectiveness of OTS
approval of the merger unless a court specifically orders otherwise. In
reviewing the merger, the Department of Justice could analyze the merger's
effect on competition differently than the OTS, and thus it is possible that the
Department of Justice could reach a different conclusion than the OTS regarding
the merger's competitive effects.
Mutual Saving's right to exercise the stock option agreement is also
subject to the prior approval of the OTS, to the extent that it were to acquire
stock under the stock option agreement. In considering whether to approve Mutual
Saving's right to exercise its option, the OTS would generally apply the same
statutory criteria it would apply to its consideration of approval of the merger
and would also consider the power of Mutual Savings to hold those shares.
Mutual Savings Restructuring. In addition to the regulatory approvals which
we require for the First Northern merger, Mutual Savings will need to obtain
regulatory approvals, primarily from the OTS, to undergo its restructuring.
These approvals include authorization for Mutual Savings to convert to a
federally-chartered institution, for Mutual Savings to form a mutual holding
company with Bank Mutual
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as a mid-tier holding company, and to offer shares of Bank Mutual to Mutual
Savings' depositors under the terms of Mutual Savings' plan of restructuring. In
considering the restructuring, regulators will look at many of the same factors
discussed above as applying to the First Northern merger, but would also
consider the fairness of the restructuring to Mutual Savings' depositors.
NO SOLICITATION
The merger agreement required First Northern to immediately terminate any
discussions with any other parties with respect to any acquisition transactions
with other parties.
The merger agreement further restricts the circumstances under which First
Northern may provide information to other parties. First Northern has agreed not
to solicit other offers, and has agreed to only provide further information in
limited circumstances.
STOCK OPTION AGREEMENT
On February 21, 2000, First Northern and Mutual Savings executed a stock
option agreement. That agreement grants to Mutual Savings the option to buy up
to 1,708,675 shares of First Northern common stock at an exercise price of
$9.0375 per share, payable in cash; provided, however, that in no event will the
number of shares of First Northern common stock for which the option is
exercisable exceed 19.9% of the First Northern common stock issued and
outstanding without giving effect to the option. The $9.0375 amount was the
average closing price paid for First Northern common stock in the 10 days
preceding the execution of the stock option agreement. The number and type of
shares and the exercise price per share may be adjusted for stock dividends,
stock splits, recapitalizations and similar transactions. A copy of the stock
option agreement is included as Exhibit 2.2 to First Northern's Current Report
on Form 8-K dated February 21, 2000, which is incorporated herein by reference.
See "Where You Can Find More Information."
The option is intended to increase the likelihood that the merger will be
completed. It was a condition to Mutual Savings agreeing to the merger
agreement, to protect Mutual Savings in view of, among other things, the
extended period between signing the merger agreement and expected receipt of
regulatory approvals. Consequently, aspects of the stock option agreement may
have the effect of discouraging persons who might now or at any time be
interested in acquiring all of or a significant interest in First Northern or
its assets before completion of the merger.
Mutual Savings may exercise the option, in whole or in part, at any time
prior to the termination of the option and following the occurrence of a
"purchase event" such as:
- the acquisition by any person other than Mutual Savings of beneficial
ownership of 20% or more of the then outstanding First Northern common
stock;
- First Northern enters into an agreement to engage in another acquisition
transaction with any person other than Mutual Savings, or First
Northern's board of directors recommends that the First Northern
stockholders approve or accept another acquisition transaction;
- any person other than Mutual Savings makes a proposal to First Northern
or its stockholders, that becomes publicly known, to engage in an
acquisition transaction, such an offer being referred to as a "tender
offer" or an "exchange offer"; or
- any person other than Mutual Savings, without Mutual Savings' consent,
files an application or notice with any governmental authority for
approval to engage in an acquisition transaction with First Northern.
If one of these purchase events occurs prior to an event which terminates
the option, First Northern will, at Mutual Savings' request, promptly prepare,
file and keep current a registration statement under the Securities Act covering
any shares issued and issuable pursuant to the option. These registration rights
are subject to certain limitations contained in the stock option agreement.
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The option terminates upon the earliest to occur of:
- the time immediately prior to the time at which the merger is completed;
- a proper termination of the merger agreement prior to a triggering event;
or
- 18 months after the first occurrence of an event that would allow Mutual
Savings to exercise the option, and 12 months after the end of any
continuing triggering event.
If a purchase event occurs prior to an event which terminates the option,
- at Mutual Savings' request, First Northern will repurchase the option
from Mutual Savings at a price equal to the amount by which (1) the
"market/offer price," as defined below, exceeds (2) the option price,
multiplied by the number of shares for which the option may then be
exercised, up to $12.0 million; and/or
- at the request of the holder of option shares, First Northern will
repurchase the number of option shares designated by their holder at a
price equal to the market/offer price multiplied by the number of option
shares designated.
If prior to an event which terminates the option, First Northern enters
into a type of agreement which provides for the conversion of its securities
into another entities', the agreement governing the transaction must provide
that the option shall be converted into, or exchanged for, a substitute of the
acquiring corporation.
Neither First Northern nor Mutual Savings may assign any of its rights or
delegate any of its obligations under the stock option agreement to any other
person without the consent of the other party. However, Mutual Savings may
assign the stock option agreement to one of its subsidiaries and Mutual Savings
may assign its rights under the stock option agreement after the occurrence of a
purchase event by any person other than Mutual Savings of beneficial ownership
of 20% or more of the then outstanding First Northern common stock.
The rights and obligations of Mutual Savings and First Northern under the
stock option agreement are subject to receipt of certain regulatory approvals
and both parties have agreed to use their reasonable efforts to obtain these
approvals. These include making application, if necessary, for listing of the
shares of First Northern common stock issuable under the stock option agreement
on any exchange or quotation system and applying to the OTS and to other
regulatory authorities for approval to acquire the shares issuable under the
stock option agreement. Some of the termination periods provided in the option
are extended if regulatory approvals are pending.
TERMINATION; AMENDMENT; WAIVER
The merger agreement may be terminated prior to the closing, before or
after approval by First Northern's shareholders, as follows:
- by mutual written agreement of Mutual Savings and First Northern;
- by either Mutual Savings or First Northern if the merger has not occurred
on or before January 16, 2001;
- by Mutual Savings if:
- First Northern materially breaches its representations and warranties in
the merger agreement, if not cured;
- First Northern fails to perform its agreements and covenants in the
merger agreement;
- First Northern shareholders do not approve the merger; or
- if there is a material adverse change in First Northern; and
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- by First Northern if:
- Mutual Savings materially breaches its representations and warranties in
the merger agreement, if not cured;
- Mutual Savings fails to perform its agreements and covenants in the
merger agreement;
- if there is a material adverse change in Mutual Savings; or
- First Northern, following specified procedures, agrees to another
transaction.
Upon termination of the merger agreement by either party, there are no
further obligations of any party to the others except that:
- the obligations of Mutual Savings under the provisions of the merger
agreement regarding expenses and rights on termination will survive;
- the obligations of First Northern under the stock option agreement and
its obligations to comply with the provisions of the merger agreement
regarding expenses and rights on termination will survive; and
- each party shall retain any and all remedies which it may have for breach
of contract provided by law based on another party's willful failure to
comply with the terms of the merger agreement.
The merger agreement may be amended by the parties at any time before or
after approval of the merger agreement by the First Northern shareholders.
However, after such approval, no amendment may be made without their approval if
it reduces the exchange rate or materially adversely affects the rights of the
First Northern shareholders.
The parties may waive any of their conditions to closing, unless they may
not be waived under law.
FEES AND EXPENSES
Mutual Savings and First Northern will each pay its own costs and expenses
in connection with the merger agreement and the transactions contemplated
thereby. However, the agreement provides that if Mutual Savings terminates the
agreement because of a willful First Northern breach or because First Northern
terminates the agreement to pursue an offer for which its directors believe is
superior, First Northern will reimburse Mutual Savings for its expenses in the
transaction up to $1.4 million. Similarly, First Northern terminates the
agreement because of a willful Mutual Savings' breach, Mutual Savings will
reimburse First Northern for its expenses in connection with the transaction, up
to $500,000.
FEDERAL INCOME TAX CONSEQUENCES; TAX OPINION
The following is a discussion of material federal income tax consequences
of the merger to Bank Mutual, First Northern and the holders of First Northern
common stock who are citizens or residents of the United States or that are
domestic corporations. This discussion does not address all tax consequences of
the merger. The summary may not apply to First Northern shareholders in special
situations (such as dealers in securities or currencies, traders in securities,
financial institutions, tax-exempt organizations, insurance companies, persons
holding shares of First Northern common stock as part of a hedging, "straddle,"
conversion or other integrated transaction, non-United States persons, persons
whose functional currency is not the United States dollar or persons who
acquired their shares of First Northern common stock pursuant to the exercise of
employee stock options or warrants, or otherwise as compensation). The
discussion assumes that the shares of First Northern common stock are held as
capital assets. In addition, no information is provided with respect to the tax
consequences of the merger under applicable foreign, state or local laws.
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FIRST NORTHERN SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM.
The completion of the merger is conditioned upon the receipt by First
Northern of an opinion from Quarles & Brady LLP that the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. Quarles & Brady has provided its
opinion based upon certain customary assumptions and representations of fact,
including representations of fact contained in letters from Mutual Savings, on
behalf of itself, Bank Mutual and the MHC, and First Northern to Quarles &
Brady, all of which must be true, correct and complete in all material respects
as of the effective time of the merger. No ruling has been sought from the
Internal Revenue Service as to the U.S. federal income tax consequences of the
merger. Although the Internal Revenue Service ordinarily does not give rulings
on merger transactions, its ruling policy would require that at least 50% of the
consideration to be paid in the merger be in the form of Bank Mutual stock for
the merger to be a tax-free reorganization. However, the IRS's ruling policy is
not necessarily its interpretation of existing law, and there are court
decisions that have upheld tax-free reorganization treatment where less than 40%
of the consideration was in the form of stock. The opinion of Quarles & Brady is
not binding upon the Internal Revenue Service or any court. Accordingly, we
cannot assure you that the Internal Revenue Service will not contest the
conclusions expressed in Quarles & Brady's opinion or, if it does so, that a
court will not agree with the IRS's position.
Assuming the merger will qualify as a tax-free reorganization, no gain or
loss will be recognized by Bank Mutual or First Northern as a result of the
merger. The pre-merger holders of Bank Mutual stock, if any, will not recognize
gain or loss as a result of the merger.
The following discussion addresses certain federal income tax consequences
of the merger to a First Northern shareholder, assuming that the merger will
qualify as a tax-free reorganization.
Only Shares of Bank Mutual Common Stock Received
Except as discussed below with respect to cash received in lieu of a
fractional share of Bank Mutual common stock, a First Northern shareholder that
receives only shares of Bank Mutual common stock in exchange for the holder's
shares of First Northern common stock will not recognize gain or loss. The tax
basis of the shares of Bank Mutual common stock received in the merger will be
the same as the tax basis of the shares of First Northern common stock exchanged
in the merger. The holding period of the shares of Bank Mutual common stock
received will include the holding period of shares of First Northern common
stock exchanged in the merger.
Only Cash Received
A First Northern shareholder that receives solely cash in the merger in
exchange for the shareholder's shares of First Northern common stock generally
will recognize capital gain or loss measured by the difference between the
amount of cash received with respect to each share of First Northern common
stock and the tax basis of each share of First Northern common stock exchanged
in the merger. If, however, any such shareholder actually or constructively owns
shares of Bank Mutual common stock after the merger, the cash received by the
shareholder may, in certain circumstances, be taxed as a dividend. This
treatment would apply whether the constructive ownership is the result of
constructive ownership of shares of First Northern common stock that are
exchanged for shares of Bank Mutual common stock in the merger, prior, actual or
constructive ownership of shares of Bank Mutual common stock, or otherwise. The
circumstances under which dividend treatment may apply and the resulting
consequences are similar to those discussed under "-- Shares of Bank Mutual
Common Stock and Cash Received -- Treatment of Gain Recognized," except that the
amount treated as a dividend would not be limited to the amount of the
shareholder's gain recognized in the transaction, and it is possible that there
would be some variation in the manner in which the tests under Section 302 of
the Code would be applied. See also "-- Effect of Overlapping or Constructive
Ownership," for a general discussion of the effect of a shareholder's
overlapping ownership on the dividend/capital gain issue.
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Shares of Bank Mutual Common Stock and Cash Received
General. Except as discussed below with respect to cash received in lieu of
a fractional share of Bank Mutual common stock, a First Northern shareholder
that receives both shares of Bank Mutual common stock and cash in exchange for
shares of First Northern common stock will not recognize loss in the exchange.
However, under Section 356(a)(1) of the Code, the shareholder will recognize
gain, if any, with respect to each share of First Northern common stock
exchanged, measured by the sum of the fair market value of the portion of a
share of Bank Mutual common stock received for the share of First Northern
common stock, plus the amount of any cash received for the share of First
Northern common stock, minus the tax basis of such share of First Northern
common stock. However, this gain will be recognized only to the extent of the
amount of any cash received in exchange for the share of First Northern common
stock.
A First Northern shareholder may receive both shares of Bank Mutual common
stock and cash as the result of (a) making an election to receive some shares
and some cash, (b) making an election to receive all shares and being prorated,
if the election to receive all shares is oversubscribed, (c) making an election
to receive all cash and being prorated, if the election to receive all cash is
oversubscribed or (d) failing to make any election and neither the election to
receive all cash or all shares is oversubscribed.
Treatment of Gain Recognized. Any gain recognized will be taxed as either
gain from the sale or exchange of stock (that is, capital gain) or as a dividend
(to the extent of the shareholder's ratable share of earnings and profits) based
upon whether, in the transaction described in the next sentence, the
shareholder's interest in Bank Mutual was reduced sufficiently so that the cash
received was not treated as a dividend under the tests of Section 302 of the
Code. For purposes of this determination, a First Northern shareholder will be
treated as if the shareholder had engaged in a hypothetical transaction in which
the shareholder and all other First Northern shareholders (a) received solely
shares of Bank Mutual common stock in exchange for all of their shares of First
Northern common stock, and (b) thereafter had a portion of the shares of Bank
Mutual common stock redeemed for the cash portion of the merger consideration. A
First Northern shareholder's hypothetical interest in Bank Mutual after step (a)
is compared to the shareholder's interest in Bank Mutual subsequent to the
deemed redemption in step (b). In each case, subject to limited exceptions,
shares of Bank Mutual common stock actually or constructively owned, under the
constructive ownership rules described in "-- Effect of Overlapping or
Constructive Ownership" below, by the shareholder will be considered owned for
purposes of applying this test, even if the shares of Bank Mutual common stock
were not received or deemed received in the merger. If a shareholder is
subjected to dividend treatment, the entire cash portion of the merger
consideration received by the shareholder will be treated as a dividend to the
extent of the shareholder's ratable share of earnings and profits.
Under Section 302(b) of the Code, a distribution in redemption of stock
will not be treated as a dividend if, insofar as is here pertinent, (1) the
shareholder's interest in Bank Mutual is completely terminated as a result of
the transaction, (2) the shareholder's percentage interest in Bank Mutual is
reduced more than 20% in the redemption described above and after considering
all similar redemptions of other shareholders, or (3) the shareholder's interest
was "meaningfully reduced" by virtue of such redemption (collectively, the
"Section 302 Tests"). While alternative (3) of the Section 302 Tests requires a
determination based on a shareholder's particular facts and circumstances, the
IRS has indicated in published rulings that a distribution that results in any
actual reduction in interest of an extremely small, minority shareholder in a
publicly held corporation will meaningfully reduce the shareholder's interest in
the corporation, if the shareholder exercises no control with respect to
corporate affairs.
Application of the Section 302 Tests -- General. The application of the
Section 302 Tests to a shareholder that receives a combination of cash and Bank
Mutual common stock will depend upon, in addition to the type of election made
by the shareholder, the extent to which: (1) the cash or stock portion of the
merger consideration is oversubscribed; (2) the shareholder actually or
constructively owns after the merger any shares of Bank Mutual common stock
which the shareholder did not receive, actually or constructively, in the
merger -- for example, shares of Bank Mutual common stock issued in the stock
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offering which the shareholder owns actually or constructively; and (3) the
shareholder constructively owns shares of First Northern common stock
immediately prior to the effective time of the merger.
Effect of Overlapping or Constructive Ownership. A First Northern
shareholder that (a) actually or constructively owns after the merger any shares
of Bank Mutual common stock which the shareholder did not receive, actually or
constructively, in the merger as described above, or (b) constructively owns
shares of First Northern common stock immediately prior to the effective time of
the merger or shares of Bank Mutual common stock immediately after the effective
time of the merger, will be required to take those shares into account for
purposes of applying the Section 302 Tests. Under the applicable constructive
ownership rules of Section 318 of the Code, a shareholder will, in general, be
treated as owning shares that are owned by certain family members and other
related entities, or that are subject to options owned or deemed owned by the
person. The actual or constructive ownership of shares of First Northern common
stock may, in some circumstances, have the effect of causing a First Northern
shareholder that would otherwise qualify for capital gain treatment under the
Section 302 Tests to fail to qualify and subject the shareholder to dividend
treatment on the entire cash portion of the merger consideration paid to the
shareholder, to the extent of the shareholder's ratable share of earnings and
profits, even if the shareholder receives solely cash in the merger. Therefore,
First Northern shareholders that (1) constructively own shares of First Northern
common stock or (2) actually or constructively own shares of Bank Mutual common
stock should consult their tax advisors as to the tax consequences of receiving
cash, whether the shareholder intends to make a cash election, a stock election
or a part cash and part stock election.
Treatment of Dividends to Corporate Shareholders. To the extent that cash
received in exchange for shares of First Northern common stock is treated as a
dividend to a corporate shareholder, the corporate shareholder will be (a)
eligible for a dividends received deduction, subject to applicable limitations
and (b) subject to the "extraordinary dividend" provisions of the Code. Any cash
which is treated as a dividend to a corporate shareholder will constitute an
extraordinary dividend, except as otherwise provided in Treasury regulations
which have yet to be adopted. Consequently, the non-taxed portion of any such
dividend would reduce a corporate shareholder's adjusted tax basis in the shares
of Bank Mutual common stock received in the merger, but not below zero, and
would thereafter be taxable as capital gain.
The Basis and Holding Period of Shares of Bank Mutual Common Stock Received
in the Merger. The tax basis of each share of Bank Mutual common stock received
in the merger will be the same as the tax basis of the shares of First Northern
common stock exchanged, increased by the amount of gain recognized on the
exchange with respect to those shares of First Northern common stock, including
any such gain that is treated as a dividend, decreased by any portion of the
shares of First Northern common stock which are converted into cash in lieu of
receipt of a fractional share of Bank Mutual common stock, and further decreased
by the amount of cash received with respect to the shares of First Northern
common stock other than cash received in lieu of a fractional share interest. As
discussed above, corporate shareholders are subject to special adjustments with
respect to the portion of any cash received in the merger which is taxable as a
dividend. See "-- Treatment of Dividends to Corporate Shareholders." The holding
period of the shares of Bank Mutual common stock received will include the
holding period of the shares of First Northern common stock exchanged in the
merger.
Fractional Shares
If a First Northern shareholder receives cash in lieu of a fractional share
of Bank Mutual common stock in the merger, the cash amount will be treated as
received in exchange for the fractional share of Bank Mutual common stock. Gain
or loss recognized as a result of that exchange will be equal to the cash amount
received for the fractional share of Bank Mutual common stock reduced by the
proportion of the shareholder's tax basis in shares of First Northern common
stock exchanged and allocable to the fractional shares of Bank Mutual common
stock.
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First Northern 401(k) Plan
Under the First Northern 401(k) retirement plan, participant accounts may
be invested in First Northern common stock. The instruction by a plan
participant to the plan trustees to convert that stock into cash, into Bank
Mutual common stock, or partly into cash and partly into Bank Mutual stock
pursuant to the merger will not result in a taxable event for the plan
participant at the time of the merger. However, the decision may have a
long-term tax impact on the participant.
Under the terms of the plan, company stock may be distributed in kind at
the election of the plan participant. In the event that company stock is
distributed in kind as part of a benefit payment which qualifies as a "lump sum
distribution" and the participant so elects, only the plan's original cost or
basis of the company stock will be taxed at that time to the participant; any
unrealized appreciation will not be taxed until such time as the company stock
is disposed of in a subsequent taxable transaction. To the extent that gain
recognized from the disposition does not exceed the net unrealized appreciation
at the time of the distribution from the plan, the gain recognized will be taxed
as long-term capital gain. Any additional unrealized appreciation, such as
growth in value subsequent to the distribution, will also be taxed as a
long-term capital gain if the stock has been held for more than one year after
the distribution date.
The net unrealized appreciation rules provide an option for a plan
participant who receives company stock in a lump sum distribution. For any
participant interested in maximizing the portion of share value that is
attributed to "appreciation" as opposed to "basis" in the stock, the instruction
to the plan trustee concerning the election to convert the First Northern common
stock into cash or Bank Mutual stock will be important. A conversion into cash
and subsequent investment by the participant in Bank Mutual common stock will
result in a new, presumably higher, basis and lower future appreciation. A
conversion into Bank Mutual common stock will result in the transfer in basis by
the plan trustee from the participant's allocable interest in First Northern
common stock to the participant's allocable interest in Bank Mutual common
stock.
Limitations on Tax Opinion and Discussion
As noted earlier, the tax opinion is subject to certain assumptions,
relating to, among other things, the truth and accuracy of certain
representations made by Mutual Savings, Bank Mutual, the MHC and First Northern,
and the consummation of the merger in accordance with the terms of the merger
agreement and applicable state law. Furthermore, the tax opinion will not bind
the IRS and, therefore, the IRS is not precluded from asserting a contrary
position. The tax opinion and this discussion are based on currently existing
provisions of the Code, existing and proposed Treasury regulations, and current
administrative rulings and court decisions. There can be no assurance that
future legislative, judicial, or administrative changes or interpretations will
not adversely affect the accuracy of the tax opinion or of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS THAT MAY BE IMPORTANT TO YOU. THUS, WE
URGE FIRST NORTHERN SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE MERGER, INCLUDING TAX
RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
RESALE OF BANK MUTUAL COMMON STOCK
All shares of Bank Mutual common stock received by First Northern
shareholders in the merger will be freely transferable, except that shares of
Bank Mutual common stock received by persons who are deemed to be "affiliates,"
as the term is defined under the Securities Act, of Bank Mutual or First
Northern prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act.
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Persons who may be deemed to be affiliates of Bank Mutual or First Northern
generally include individuals or entities that control, are controlled by, or
are under common control with, the party and may include certain officers and
directors of such party as well as principal shareholders of such party.
Affiliates of both parties have previously been notified of their status. It is
a condition to the obligation of Bank Mutual to complete the merger that Bank
Mutual shall have received an affiliate letter from each person who is an
affiliate of First Northern.
This proxy statement/prospectus does not cover resales of Bank Mutual
common stock received by any person who may be deemed to be an affiliate of
First Northern or Bank Mutual.
ACCOUNTING TREATMENT
In accordance with generally accepted accounting principles, the
restructuring will be accounted for using the pooling of interests method and
the merger will be accounted for using the purchase method. The result of this
is that the recorded assets and liabilities of Mutual Savings will be carried
forward at their recorded amounts, the historical operating results will be
unchanged for the prior periods being reported on and that the net proceeds from
the acquisition of First Northern will be adjusted to fair value at the date of
the merger. To the extent that the purchase price, consisting of cash plus the
number of shares of Bank Mutual to be issued to former First Northern
shareholders at fair value, exceeds the fair value of the net assets of First
Northern at the merger date, that amount will be reported as goodwill to be
amortized to the consolidated income of Bank Mutual in future periods. Further,
the purchase accounting method results in the operating results of First
Northern only being included in the consolidated income of Bank Mutual beginning
from the date of the merger.
NO DISSENTERS' RIGHTS OF APPRAISAL
Under Wisconsin law, First Northern shareholders do not have the right to
dissent from the merger and to receive payment in cash for the fair value of
their shares of First Northern common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Mutual Savings' consolidated
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Mutual
Savings' consolidated financial statements and accompanying notes to
consolidated financial statements beginning on page F-1 of this proxy
statement/prospectus, and the other statistical data provided elsewhere in this
proxy statement/prospectus.
GENERAL
Mutual Savings' results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income on
interest-earning assets, which for Mutual Savings primarily are loans and
mortgage-related and investment securities, and interest expense on
interest-bearing liabilities, which for Mutual Savings primarily are deposits
and borrowings. Our results of operations are also affected by our provision for
loan losses, non-interest income, and non-interest expense. Non-interest income
consists mainly of service fees and charges, gains on sales of loans held for
sale and insurance, securities and annuity commissions. Non-interest expense
consists primarily of salaries and employee benefits, occupancy expenses and
other general and administrative expenses, and amortization of intangible
assets.
Our results of operations may also be affected significantly by general and
local economic and competitive conditions, particularly changes in market
interest rates, government policies, and actions of regulatory authorities.
Future changes in applicable law, regulations or government policies may
materially impact us. Additionally, our lending activity is concentrated in
loans secured by real estate located in Wisconsin and/or to Wisconsin borrowers.
Accordingly, our results of operations are affected by regional market and
economic conditions.
FIRST NORTHERN MERGER
Mutual Savings and First Northern have signed an agreement under which Bank
Mutual will acquire First Northern Savings. In many respects, both organizations
have similar businesses and business philosophies. However, the acquisition will
be significant for Bank Mutual. We have highlighted material differences which
we have identified in "Certain Effects of the First Northern Merger on Bank
Mutual." Please also see the financial information of First Northern identified
in "Index to Financial Statements."
MANAGEMENT STRATEGY
Mutual Savings' operating strategy is to succeed as a well-capitalized,
profitable community bank. We seek to accomplish this goal by:
- maintaining a community orientation and providing quality customer
service;
- expanding our market area;
- continuing our commitment to residential lending, while diversifying our
portfolio;
- managing credit risk;
- promoting core deposit accounts;
- limiting exposure to interest rate risk; and
- controlling expenses.
First Northern's operating strategy is similar to Mutual Savings' strategy.
Although the two banks initially will operate separately after the
restructuring, their business philosophies will continue to be complementary.
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MANAGEMENT OF INTEREST RATE RISK
Mutual Savings' ability to maintain net interest income depends upon
earning a higher yield on assets than the rates we pay on deposits and
borrowings. Fluctuations in interest rates will ultimately impact both our level
of income and expense recorded on a large portion of our assets and liabilities.
Fluctuations in interest rates will also affect the market value of all
interest-earning assets, other than those which possess a short term to
maturity.
We have attempted to reduce our interest rate risk by emphasizing the
origination of ARM loans and by selling a majority of our longer-than-15 year
fixed rate mortgage loan originations. During the past few years we have
retained 15-year fixed rate mortgage loans in our portfolio. It is our opinion
that the enhanced yield and cash flows offered by this product offset the amount
of interest rate risk that is assumed. For the year ended December 31, 1999, we
originated $96.4 million of fixed rate one- to four-family first mortgage loans,
or 63.1% of total one-to-four family first mortgage originations, of which $57.4
million were sold with servicing retained. In managing our investment
securities, we invested varying amounts up to $250 million in overnight Federal
Funds during 1999 which resulted in an average monthly yield ranging from 4.728%
to 5.514%. In December of 1999 we purchased $100 million of 7% FNMA 15-year
mortgage-backed securities at a yield of 7.003% and in January 2000 we purchased
another $100 million of 7% FNMA 15-year mortgage-backed securities at a yield of
7.077%. We have fixed rate investments having a weighted average remaining life
of 82 months at June 30, 2000. While these strategies have reduced income, we
believe that reducing our exposure to interest rate fluctuations will enhance
long-term profitability.
For the first six months of 2000, we originated $12.3 million of fixed
rate, one-to-four family first mortgage loans, or 22.7% of total one-to-four
family first mortgage originations, of which we sold $4.9 million with servicing
retained. As interest rates have risen, more borrowers have selected adjustable
loans.
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature during a given period of time. The difference, or the interest rate
sensitivity "gap," provides an indication of the extent to which our interest
rate spread will be affected by changes in interest rates. For further
information about interest rate repricing, see "Gap Analysis".
During 1998 and early 1999, we operated in a low interest rate environment.
In that environment we experienced both increased interest rate competition
related to loan originations and above-average prepayment rates related to
mortgage loans and mortgage-related securities, as borrowers refinanced
higher-rate loans. As a result we had to invest our excess liquidity in short
term low-yielding investments. This had an adverse impact on our profitability.
As interest rates began to rise later in 1999, we began to re-deploy our excess
liquidity into higher yielding investments.
Due to the nature of our operations, we are not directly subject to foreign
currency exchange or commodity price risk. Instead, our real estate loan
portfolio, concentrated in Wisconsin, is subject to risks associated with the
local economy. We did not engage in any hedging transactions that use derivative
instruments (such as interest rate swaps and caps) during 1999 and did not have
any such hedging transactions in place at June 30, 2000. In the future, we may,
with approval of our board of directors, engage in hedging transactions
utilizing derivative instruments.
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range.
The primary objectives of our interest rate management strategy are to:
- maintain earnings and capital within self-imposed parameters over a range
of possible interest rate environments;
57
<PAGE> 60
- coordinate interest rate risk policies and procedures with other elements
of our business plan, all within the context of the current business
environment and our capital and liquidity requirements; and
- manage interest rate risk in a manner consistent with the approved
guidelines and policies set by our board of directors.
To achieve the objectives of managing interest rate risk, our
Asset/Liability committee meets periodically to discuss and monitor the market
interest rate environment and provides reports to the board of directors
monthly. This committee is chaired by the President and is comprised of members
of Mutual Savings' senior management.
Historically, our lending activities have emphasized one- to four-family
first and second mortgage loans. Our primary source of funds has been deposits
and borrowings, consisting primarily of time deposits and borrowings which have
substantially shorter terms to maturity than the loan portfolio. We have
employed certain strategies to manage the interest rate risk inherent in the
asset/liability mix, including:
- emphasizing the origination of adjustable-rate and 15-year fixed rate
real estate loans for portfolio, and selling 30-year fixed rate loans;
- maintaining a significant level of investment securities and
mortgage-related securities with a weighted average life of less than
eight years or with interest rates that reprice in less than five years;
and
- managing deposits and borrowings to provide stable funding.
We believe that the frequent repricing of our adjustable-rate real estate
loans, the cash flows from our 15-year fixed rate real estate loans, and
adjustable rate features and shorter durations of our investment securities,
reduce our exposure to interest rate fluctuations.
Gap Analysis. Repricing characteristics of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring a financial institution's interest
rate sensitivity "gap." An asset or liability is said to be "interest rate
sensitive" within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-bearing assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
At June 30, 2000, based on the assumptions below, our interest-bearing
liabilities maturing or repricing within one year exceeded our interest-earning
assets maturing or repricing within the same period by $345.6 million. This
represented a negative cumulative one-year interest rate sensitivity gap of
(19.6%), and a ratio of interest-earning assets maturing or repricing within one
year to interest-bearing liabilities maturing or repricing within one year of
62.0%. The cumulative one-year gap ratio is significantly affected by $200.0
million of long-term FHLB borrowings repricing in May and June 2001.
58
<PAGE> 61
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2000, which we anticipate
to reprice or mature in each of the future time periods shown. Except as stated
below, we determined the amounts of assets and liabilities shown which reprice
or mature during a particular period in accordance with the earlier of the term
to repricing or the contractual maturity of the asset or liability. The
information presented in the following table is also based on the following
assumptions:
1. We assumed the following repayment rates applied to outstanding
balances applied to the beginning of the period:
<TABLE>
<S> <C>
Mortgage loans: 14.7%
Consumer loans: 50.8%
Commercial loans: 36.8%
</TABLE>
2. Anticipated cash flows for mortgage-related securities were
obtained from an independent outside source.
3. We reported federal agency securities with call options, that we
believed would be called, at the earlier of the next call date or
contractual maturity date.
4. We reported savings, money market accounts and interest-bearing
demand accounts that had no stated maturity using decay rates. The decay
rates were calculated using an average of the Mutual Savings' most recent
12 months experience.
5. FHLB advances are reported at the earlier of call date or final
maturity.
However, changes in interest rates could affect the loan and investment
prepayment assumptions and deposit decay rates used in our analysis.
The repayment assumption used for mortgage loans in (1) above was adjusted
from recent history due to the current rise in interest rates. In a rising rate
environment, prepayments on mortgage loans slow down significantly as mortgage
loan customers retain their low interest rate loans. Deposit decay rates, as
reflected in items (4) above, are based on Mutual Savings' recent history.
Deposit decay rates, prepayment rates and anticipated call dates can have a
significant impact on the estimated interest rate sensitivity gap. While we
believe that our assumptions are reasonable, they may not be indicative of
actual future deposit decay activity, loan and mortgage-related securities
prepayments, and the actual timing of federal agency calls.
59
<PAGE> 62
<TABLE>
<CAPTION>
AT JUNE 30, 2000
-----------------------------------------------------------------------------------
THREE TO MORE THAN ONE MORE THAN
WITHIN THREE TWELVE YEAR TO THREE THREE YEARS TO OVER
MONTHS MONTHS YEARS FIVE YEARS FIVE YEARS TOTAL
------------ --------- ------------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans:
Fixed.................. $ 15,532 $ 44,562 $ 104,028 $ 80,985 $183,635 $ 428,742
Adjustable............. 68,213 133,138 105,155 104,184 33,922 444,612
Other loans............... 62,354 64,638 129,273 -- -- 256,265
Securities:
Interest earning
deposits............... 42,138 -- -- -- -- 42,138
Non-mortgage.............. 3,543 -- 5,270 19,349 -- 28,162
Mortgage-related fixed.... 14,471 38,748 104,377 89,001 152,072 398,669
Mortgage-related
adjustable............. 62,708 -- -- -- -- 62,708
Other interest-earning
assets.................... 14,585 -- -- -- -- 14,585
-------- --------- --------- -------- -------- ----------
Total
interest-earning
assets.......... 283,544 281,086 448,103 293,519 369,629 1,675,881
-------- --------- --------- -------- -------- ----------
Interest-bearing
liabilities:
Deposits:
Interest-bearing NOW
accounts............. 893 2,479 5,982 5,231 71,548 86,133
Savings accounts....... 8,597 22,876 44,254 27,446 45,233 148,406
Money market
accounts............. 11,762 30,536 61,340 40,252 76,831 220,721
Time deposits.......... 231,946 323,963 219,472 20,970 -- 796,351
Advance payments by
borrowers for taxes and
insurance................. -- 13,012 -- -- -- 13,012
-------- --------- --------- -------- -------- ----------
Other borrowings............ 64,147 200,000 520 -- -- 264,667
-------- --------- --------- -------- -------- ----------
Total
interest-bearing
liabilities..... 317,345 592,866 331,568 93,899 193,612 1,529,290
======== ========= ========= ======== ======== ==========
Interest rate sensitivity
gap....................... $(33,801) $(311,780) $ 116,535 $199,620 $176,017 $ 146,591
======== ========= ========= ======== ======== ==========
Cumulative interest rate
sensitivity gap........... $(33,801) $(345,581) $(229,046) $(29,426) $146,591
======== ========= ========= ======== ========
Cumulative interest rate
sensitivity gap as a
percentage total assets... (1.92)% (19.64)% (13.02)% (1.67)% 8.33%
Cumulative interest-earning
assets as a percentage of
interest bearing
liabilities............... 89.35% 62.03% 81.55% 97.80% 109.59%
</TABLE>
The methods used in the previous table have some shortcomings. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans, have features which limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates
increase.
60
<PAGE> 63
Present Value of Equity. In addition to the gap analysis table, we also use
a simulation model to monitor interest rate risk. This model reports the present
value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the present value of expected cash flows of interest rate-sensitive assets and
liabilities. The changes in market value of assets and liabilities due to
changes in interest rates reflect the interest rate sensitivity of those assets
and liabilities as their values are derived from the characteristics of the
asset or liability (i.e., fixed rate, adjustable-rate, caps, floors) relative to
the current interest rate environment. For example, in a rising interest rate
environment the fair market value of a fixed rate asset will decline, whereas
the fair market value of an adjustable-rate asset, depending on its repricing
characteristics, may not decline. Increases in the market value of assets will
increase the present value of equity whereas decreases in market value of assets
will decrease the present value of equity. Conversely, increases in the market
value of liabilities will decrease the present value of equity whereas decreases
in the market value of liabilities will increase the present value of equity.
The following table presents the estimated present value of equity over a
range of interest rate change scenarios at June 30, 2000. The present value
ratio shown in the table is the present value of equity as a percent of the
present value of total assets in each of the different rate environments. For
purposes of this table, we have made assumptions such as prepayment rates and
decay rates similar to those used for the gap analysis table.
<TABLE>
<CAPTION>
PRESENT VALUE OF EQUITY
AS PERCENT OF
PRESENT VALUE OF EQUITY PRESENT VALUE OF ASSETS
--------------------------------- -----------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE RATIO CHANGE
-------------- ---------- ---------- ------- ------------- -------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+200 $179,628 $(35,609) (16.54)% 10.79% (12.77)%
+100 199,970 (15,267) (7.09)% 11.75% (5.01)%
0 215,237 -- 0.00% 12.37% 0.00%
-100 215,458 221 0.10% 12.14% (1.86)%
-200 194,345 (20,892) (9.71)% 10.77% (12.93)%
</TABLE>
As in the case of the gap analysis table, the methods we used in the
previous table have some shortcomings. This type of modeling requires that we
make assumptions which may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. For example, we make
assumptions regarding the acceleration rate of the prepayment speeds of higher
yielding mortgage loans. Prepayments will accelerate in a falling rate
environment and the reverse will occur in a rising rate environment. We also
assume that decay rates on core deposits will accelerate in a rising rate
environment and the reverse in a falling rate environment. The table assumes
that we will take no action in response to the changes in interest rates, when
in practice rate changes on certain products, such as savings deposits, may lag
market changes. In addition, prepayment estimates and other assumptions within
the model are subjective in nature, involve uncertainties, and therefore cannot
be determined with precision. Accordingly, although the present value of equity
model may provide an estimate of our interest rate risk at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in interest rates on our present value of
equity.
61
<PAGE> 64
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the interest income
we earn on our interest-earning assets, primarily loans, mortgage-related
securities and investment securities, and the expense we pay on interest-bearing
liabilities, primarily time deposits and borrowings. Net interest income depends
on our volume of interest-earning assets and interest-bearing liabilities and
the interest rates we earned or paid on them.
Average Balance Sheet. The following tables present certain information
regarding Mutual Savings' financial condition and net interest income for the
six months ended June 30, 2000 and 1999, and the years 1999, 1998 and 1997. The
table presents the average yield on interest-earning assets and the average cost
of interest-bearing liabilities for the periods indicated. We derived the yields
and costs by dividing income or expense by the average balance of
interest-earnings assets or interest-bearing liabilities respectively, for the
periods shown. We derived average balances from daily balances over the periods
indicated. Interest income includes fees which we considered adjustments to
yields.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
2000 1999
-------------------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST
ACTUAL OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE BALANCE PAID RATE BALANCE PAID RATE
---------- ----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Loans receivable(1)............................. $1,129,619 $1,110,535 $41,403 7.46% $1,060,985 $39,737 7.49%
Mortgage-related securities..................... 461,377 467,792 15,860 6.78% 269,913 8,503 6.30%
Investment securities and interest-earning
deposits...................................... 70,300 91,831 2,725 5.93% 417,858 9,985 4.78%
Federal Home Loan Bank stock.................... 14,585 13,938 494 7.09% 13,537 428 6.32%
---------- ---------- ------- ---- ---------- ------- ----
Total interest-earning assets................. 1,675,881 1,684,096 60,482 7.18% 1,762,293 58,653 6.66%
------- -------
Non-interest-earning assets...................... 83,289 65,069 93,368
Total assets.................................. $1,759,170 $1,749,165 $1,855,661
========== ========== ==========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits................................ $ 148,406 $ 150,204 $ 1,786 2.38% $ 166,484 $ 1,981 2.38%
Money market accounts........................... 220,721 226,724 5,656 4.99% 181,965 4,315 4.74%
Interest-bearing demand accounts................ 86,133 86,807 452 1.04% 90,097 472 1.05%
Time deposits................................... 796,351 804,525 21,845 5.43% 898,492 24,217 5.39%
---------- ---------- ------- ---- ---------- ------- ----
Total deposits................................ 1,251,611 1,268,260 29,739 4.69% 1,337,038 30,985 4.63%
Escrows......................................... 13,012 7,369 90 2.44% 7,415 98 2.64%
Borrowings...................................... 264,667 246,234 7,232 5.87% 270,800 7,045 5.20%
---------- ---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities............ 1,529,290 1,521,863 37,061 4.87% 1,615,253 38,128 4.72%
---------- ---------- ------- ---- ---------- ------- ----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits................... 49,002 44,292 41,861
Other non-interest-bearing liabilities.......... 13,290 19,095 22,053
---------- ---------- ----------
Total non-interest-bearing liabilities........ 62,292 63,387 63,914
---------- ---------- ----------
Total liabilities............................. 1,591,582 1,585,250 1,679,167
Equity.......................................... 167,588 163,915 176,494
---------- ---------- ----------
Total liabilities and equity.................. $1,759,170 $1,749,165 $1,855,661
========== ========== ==========
Net interest income/net interest rate spread..... $23,421 2.31% $20,525 1.94%
======= =======
Net interest-earning assets/net interest
margin.......................................... $ 162,233 2.78% $ 147,040 2.33%
========== ==== ========== ====
Average interest-earnings assets to average
interest-bearing liabilities.................... 1.11x 1.09x
</TABLE>
-------------------------
(1) Nonaccrual loans were included in their respective categories.
62
<PAGE> 65
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Loans receivable(1)........ $1,069,568 $ 79,623 7.44% $1,159,786 $ 90,092 7.77% $1,212,945 $ 93,628 7.72%
Mortgage-related
securities............... 290,772 18,479 6.36% 238,338 15,664 6.57% 159,259 10,250 6.44%
Investment securities and
interest-earning
deposits................. 383,630 19,294 5.03% 347,115 18,681 5.38% 193,665 10,940 5.65%
Federal Home Loan Bank
stock.................... 13,537 906 6.69% 15,640 1,033 6.60% 18,206 1,175 6.45%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning
assets................. 1,757,507 118,302 6.73% 1,760,879 125,470 7.12% 1,584,075 115,993 7.32%
Non-interest-earning
assets..................... 80,369 89,137 70,376
---------- ---------- ----------
Total assets............. $1,837,876 $1,850,016 $1,654,451
========== ========== ==========
LIABILITIES AND EQUITY:
INTEREST-BEARING
LIABILITIES:
Savings deposits........... $ 163,102 $ 3,885 2.38% $ 168,965 $ 4,268 2.53% $ 168,998 $ 4,696 2.78%
Money market accounts...... 203,924 9,796 4.80% 141,860 6,571 4.63% 119,283 5,458 4.58%
Interest-bearing demand
accounts................. 89,139 940 1.05% 90,211 1,070 1.19% 83,127 1,137 1.37%
Time deposits.............. 872,824 46,470 5.32% 927,241 53,327 5.75% 863,534 49,626 5.75%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total deposits........... 1,328,989 61,091 4.60% 1,328,277 65,236 4.91% 1,234,942 60,917 4.93%
Escrows.................... 12,227 313 2.56% 13,143 344 2.62% 15,674 380 2.42%
Borrowings................. 263,400 13,933 5.29% 270,838 14,437 5.33% 191,346 10,897 5.69%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities............ 1,604,616 75,337 4.70% 1,612,258 80,017 4.96% 1,441,962 72,194 5.01%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
NON-INTEREST-BEARING
LIABILITIES
Non-interest-bearing
deposits................. 43,402 39,714 31,969
Other non-interest-bearing
liabilities.............. 14,098 28,307 24,260
---------- ---------- ----------
Total
non-interest-bearing
liabilities............ 57,500 68,021 56,229
---------- ---------- ----------
Total liabilities........ 1,662,116 1,680,279 1,498,191
Equity..................... 175,760 169,737 156,260
---------- ---------- ----------
Total liabilities and
equity................. $1,837,876 $1,850,016 $1,654,451
========== ========== ==========
Net interest income/net
interest rate spread....... $ 42,965 2.03% $ 45,453 2.16% $ 43,799 2.31%
======== ======== ========
Net interest-earning
assets/net interest
margin..................... $ 152,891 2.44% $ 148,621 2.58% $ 142,113 2.76%
========== ==== ========== ==========
Average interest-earnings
assets to average
interest-bearing
liabilities................ 1.10x 1.09x 1.10x
</TABLE>
-------------------------
(1) Nonaccrual loans were included in their respective categories.
63
<PAGE> 66
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
(1) changes attributable to changes in volume (change in volume
multiplied by prior rate);
(2) changes attributable to change in rate (changes in rate multiplied
by prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO 1999
------------------------------
INCREASE (DECREASE) DUE TO
------------------------------
VOLUME RATE NET
--------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable............................................ $ 1,848 $ (182) $ 1,666
Mortgage-related securities................................. 6,664 693 7,357
Investment securities....................................... (9,229) 1,969 (7,260)
Federal Home Loan Bank Stock................................ 13 53 66
-------- ------ -------
Total............................................. (704) 2,533 1,829
-------- ------ -------
INTEREST-BEARING LIABILITIES:
Savings deposits............................................ $ (194) $ (1) $ (195)
Money market accounts....................................... 1,107 234 1,341
Interest bearing demand accounts............................ (17) (3) (20)
Time deposits............................................... (2,550) 178 (2,372)
Escrows..................................................... (1) (7) (8)
Borrowings.................................................. (673) 860 187
-------- ------ -------
Total............................................. (2,328) 1,261 (1,067)
-------- ------ -------
Net change in net interest income........................... $ 1,624 $1,272 $ 2,896
======== ====== =======
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
---------------------------- ---------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------- ---------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable........................ $(6,818) $(3,651) $(10,469) $(4,126) $ 590 $(3,536)
Mortgage-related securities............. 3,347 (532) 2,815 5,192 222 5,414
Investment securities................... 1,885 (1,272) 613 8,280 (539) 7,741
Federal Home Loan Bank Stock............ (141) 14 (127) (169) 27 (142)
------- ------- -------- ------- ------- -------
Total......................... (1,727) (5,441) (7,168) 9,177 300 9,477
------- ------- -------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Savings deposits........................ (145) (238) (383) (1) (427) (428)
Money market accounts................... 2,973 252 3,225 1,045 68 1,113
Interest bearing demand accounts........ (13) (117) (130) 92 (159) (67)
Time deposits........................... (3,028) (3,829) (6,857) 3,664 37 3,701
Escrows................................. (23) (8) (31) (65) 29 (36)
Borrowings.............................. (394) (110) (504) 4,276 (736) 3,540
------- ------- -------- ------- ------- -------
Total......................... (630) (4,050) (4,680) 9,011 (1,188) 7,823
------- ------- -------- ------- ------- -------
Net change in net interest income....... $(1,097) $(1,391) $ (2,488) $ 166 $ 1,488 $ 1,654
======= ======= ======== ======= ======= =======
</TABLE>
COMPARISONS OF FINANCIAL CONDITION
At June 30, 2000 and December 31, 1999
Mutual Savings' total assets decreased $10.3 million, or 0.6% at June 30,
2000 to $1.76 billion from $1.77 billion at December 31, 1999.
At June 30, 2000, loans increased $45.2 million, or 4.2%. Investment
securities available for sale were stable, showing a slight reduction of
$302,000, or 0.5%. Mortgage-related securities increased $87.3 million, or
23.3%, to $461.4 million at June 30, 2000 from $374.1 million at December 31,
1999. The change in loans reflects an increase of $18.5 million in first
mortgage loans and an increase of $28.5 million in consumer loans and other
loans. Loan originations were supplemented by the purchase of mortgage-related
securities. Cash and cash equivalents decreased from $179.0 million to $31.8
million There was a shift of funds from total cash and cash equivalents to
higher-yielding loans and securities. Cash was also used to manage the deposit
outflow during the six months ended June 30, 2000.
The reduction in total assets was the result of a reduction of $42.4
million, or 3.2%, in total deposits to $1.30 billion at June 30, 2000 from $1.34
billion at December 31, 1999. Interest-bearing deposits decreased $48.8 million
or 3.8%, to $1.25 billion at June 30, 2000. Non-interest-bearing deposits
increased $6.4 million, or 15.0% during the same period. Interest-bearing
deposit changes reflect competition from the equity and bond markets, as well as
increased competition for funds from traditional financial institutions.
Non-interest-bearing deposit changes reflect normal fluctuations in demand type
accounts and an increase in retail customer demand deposits at the end of the
quarter.
FHLB borrowings increased $22.0 million or 9.1% to $264.7 million at June
30, 2000 from $242.7 million at December 31, 1999. The borrowings were used as
an alternative funding source.
Equity increased $3.8 million, or 2.3%, to $167.6 million at June 30, 2000,
from $163.8 million at December 31, 1999. The increase resulted from net income
of $6.5 million for the six months ended June 30, 2000, partially offset by a
$2.7 million increase in unrealized loss on securities available for sale,
primarily resulting from increasing market interest rates.
65
<PAGE> 68
At December 31, 1999 and 1998
Mutual Savings' total assets decreased $103.4 million, or 5.5%, to $1.77
billion at December 31, 1999 from $1.87 billion at December 31, 1998.
At December 31, 1999, loans increased $45.2 million, or 4.3%, to $1.08
billion, while investment securities available for sale decreased $58.8 million,
or 50.4%, to $57.8 million. Mortgage-related securities available for sale
increased $103.2 million, or 38.1%, to $374.1 million at December 31, 1999 from
$270.9 million at December 31, 1998. The changes in the first two categories
reflect our strategy of diversifying our loan originations to increase our
portfolio of home equity, multi-family and commercial real estate and commercial
business loans, by utilizing funds generated by maturing investments. Our
strategy of reinvesting short term investments into higher yielding mortgage
related securities is reflected in the increase in mortgage-related securities
and the decrease in cash and cash equivalents by $151.3 million or 45.8%, to
$179.0 million. The special $15.6 million write-off of intangible assets also
contributed to the reduction in assets.
Total deposits decreased by $55.9 million, or 4.0% to $1.343 billion at
December 31, 1999, compared with $1.399 billion at December 31, 1998. Total time
deposits were $828.1 million at December 31, 1999, a decrease of 10.9% from
$929.4 million at December 31, 1998. This runoff is a reflection of our interest
rate risk strategy of replacing high cost deposits with lower cost sources of
funds when possible. This reduction in time deposits was partially offset by an
increase in money market deposits which increased by $71.8 million or 45.0% to
$231.2 million at December 31, 1999, compared with $159.4 million at December
31, 1998. Remaining deposits, comprised of savings, interest and
non-interest-bearing demand deposits decreased $26.4 million or 8.5% to $283.7
million at December 31, 1999 from $310.1 million at December 31, 1998. Also,
borrowings decreased $28.1 million or 10.4% to $242.7 million at December 31,
1999 from $270.8 million at December 31, 1998. This reduction in borrowings
reflects our strategy of managing net interest margin.
Equity decreased $11.9 million, or 6.8%, to $163.8 million at December 31,
1999, from $175.7 million at December 31, 1998, primarily due to the $4.5
million net loss for 1999 and a $7.4 million unrealized loss on securities
available for sale.
COMPARISONS OF OPERATING RESULTS
Six Months Ended June 30, 2000 and 1999
General. Net income for the six months ended June 30, 2000 was $6.5 million
compared with $3.9 million for the six months ended June 30, 1999. The $2.6
million, or 67.5% increase is primarily attributable to a $2.9 million increase
in net interest income and a $886,000 decrease in the amortization of intangible
assets, which was offset in part by a $1.6 million increase in income taxes.
Net Interest Income. Net interest income increased $2.9 million, or 14.1%,
to $23.4 million for the first six months of 2000 compared with $20.5 million
for the first six months of 1999. On an annualized basis, our net interest
spread increased to 2.31% for the six months ended June 30, 2000 from 1.94% for
the comparable six months of 1999. Additionally, our annualized net interest
margin increased to 2.78% from 2.33%.
Interest Income. Total interest income increased $1.8 million, or 3.1% to
$60.5 million for the six months ended June 30, 2000 compared with $58.7 million
for the six months ended June 30, 1999. Interest on loans increased $1.7 million
or 4.2%, to $41.4 million. Interest on investments decreased $7.2 million, or
69.1%, to $3.2 million, and interest on mortgage-related securities increased
$7.4 million, or 86.5%, to $15.9 million for the six months ended June 30, 2000
compared with the corresponding prior year period.
The average balance of total interest-earning assets decreased $78.2
million or 4.4% to $1.7 billion for the six months ended June 30, 2000 compared
with $1.8 billion for the corresponding period of the prior year. This decrease
consisted of a $49.6 million or 4.7% increase in the average balance of loans, a
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$326.0 million, or 78.0% decrease to $91.8 million in the average balance of
investment securities and a $197.9 million, or 73.3% increase to $467.8 million
in the average balance of mortgage-related investments. These changes reflect
our strategy of emphasizing consumer loans and re-deploying excess liquidity
into higher earning mortgage-related investments.
For the six months ended June 30, 2000, the impact on interest income from
the decrease in the average balance of total interest-earning assets was offset
by a 52 basis point increase in the annualized average yield on total
interest-earning assets to 7.18% compared with 6.66% for the corresponding six
months in the prior year. The re-deployment of lower yielding investments into
higher earning mortgage-related investments and the increased production of
consumer loans resulted in the higher yield of our interest-earning assets for
the six months ended June 30, 2000.
Interest Expense. Interest expense on deposits decreased $1.2 million, or
4.0%, to $29.7 million for the first six months of 2000 from $31.0 million for
the first six months of 1999. Interest on time deposits, which accounted for
73.5% of interest on deposits for the six months ended June 30, 2000, decreased
$2.4 million, or 9.8%, to $21.8 million from the corresponding period of the
prior year. Interest expense on borrowings increased $187,000, or 2.7%, to $7.2
million for the six months ended June 30, 2000 compared to $7.0 million for the
same period for the prior year.
The average balance of total interest-bearing liabilities decreased $93.4
million, or 5.8%, to $1.52 billion for the six months ended June 30, 2000
compared with $1.62 billion for the corresponding six months of the prior year.
We experienced a decrease of $68.8 million to $1.27 billion in the average
balance of deposits and a decrease of $24.6 million to $246.2 million in
borrowings. The impact on interest expense from the decrease in the average
balance of total interest-bearing liabilities was partially offset, however, by
a 15 basis point increase in the average cost of total interest-bearing
liabilities to 4.87% compared with 4.72% for the first six months of 1999. The
annualized average cost of deposits increased six basis points to 4.69% compared
with 4.63% for the first six months of 1999, reflecting the rising costs of term
deposits. The annualized average cost of borrowings increased 67 basis points to
5.87% for the first six months of 2000, compared with 5.20% for the
corresponding period of the prior year. The increased cost of borrowings
reflects the upward pricing of our borrowings as a result of the higher interest
rate environment.
Provision for Loan Losses. Our provision for losses was $236,000 for the
first six months of 2000 and $203,000 for the corresponding period of the prior
year. The allowance for loan losses at June 30, 2000 was $7.1 million, or 319.1%
of non-performing loans. Non-performing loans at June 30, 2000 were $2.2 million
compared with $5.6 million at June 30, 1999. Future provisions for loan losses
will continue to be based upon our assessment of the overall loan portfolio and
the underlying collateral, trends in non-performing loans, current economic
conditions and other relevant factors in order to maintain the allowance for
loan losses at adequate levels to provide for estimated future losses.
Non-Interest Income. Total non-interest income, consisting of service fees,
gain on sale of loans and other income, decreased 0.3%, or $117,000, to $4.02
million for the first six months of 2000 from $3.9 million for the same period
of the previous year. The decrease in non-interest income is primarily
attributable to a decrease in gain on the sale of loans of $285,000 offset by
the receipt of an IRS settlement which had been previously accrued. That
settlement included interest of $168,000 which was included in other
non-interest income in 2000. Gain on the sale of loans decreased as a result of
a lesser demand for longer-term fixed-rate mortgages due to the higher interest
rate environment. Deposit and loan fees increased $172,000 or 5.9% to $3.1
million for the six months ended June 30, 2000 compared with $2.9 million for
the same period of the previous year.
Non-Interest Expense. Total non-interest expense, consisting primarily of
salaries and employee benefits, occupancy expense, other operating expenses and
amortization of intangible assets, decreased $1.3 million, to $16.7 million, for
the six months ended June 30, 2000 compared with $18.0 million for the six
months ended June 30, 1999. Also, deposit insurance premiums decreased by
$274,000. This was principally because amortization of intangible assets
decreased $886,000 to $469,000, for the six months ended June 30, 2000 compared
with $1.4 million for the comparable six months of 1999.
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Our efficiency ratio, excluding amortization of intangible assets, for the
first six months of 2000 was 59.6% compared with 68.5% for the corresponding
period in 1999. Our non-interest expense (excluding amortization of intangible
assets) to average assets ratio was 1.85% for the six months ended June 30, 2000
and 1.79% for the six months ended June 30, 1999.
Income Taxes. Income tax expense increased $1.6 million, or 67.7%, to $4.0
million for the six months ended June 30, 2000 compared with $2.4 million for
the six months ended June 30, 1999, due to an increase in income before tax
expense. The effective tax rate was 38.05% and 38.02% for the six months ended
June 30, 2000 and 1999, respectively.
Years Ended December 31, 1999 and 1998
General. Net loss was $4.5 million for 1999, a decrease of $15.7 million,
or 140.2%, compared with net income of $11.2 million for 1998. The decrease was
primarily attributable to a $2.5 million decrease in net interest income and a
$15.6 million increase in amortization of intangible assets, offset in part by a
$2.8 million decrease in income tax expense.
We purchased First Federal Bancshares of Eau Claire in 1997 and used the
purchase method of accounting in that transaction. Purchase accounting resulted
in the creation of goodwill and other intangible assets which we amortize on our
financial statements over a period of time. Our amortization of intangible
assets increased in 1999 primarily because we accelerated the write off of some
of the intangible assets which resulted from our purchase of First Federal. We
regularly evaluate our intangible assets to determine whether any special action
needs to be taken. As part of that evaluation, we determined the cash flows that
we expected in future years from the acquired operations and then calculated the
present value of that cash flows. In the case of First Federal, factors such as
changes in the market area, the departure of former officers and the composition
of the loan portfolio affected our future expectations. When we made this
calculation, we determined that the intangible assets from the First Federal
acquisition were overvalued by $15.6 million. Therefore, we wrote off that
amount against the intangible assets in the fourth quarter of 1999. That
write-down, net of a tax benefit of $2.0 million, substantially affected our
1999 results. We do not expect to take special write-downs on a regular basis.
For further information, see footnote 2 to Mutual Savings' consolidated
financial statements.
Net Interest Income. Net interest income for 1999 decreased $2.5 million,
or 5.5%, to $43.0 million for 1999 compared with $45.5 million for 1998. Net
interest rate spread, the difference between the average yield on the average
balance of interest-earning assets and the average cost of the average balance
of interest-bearing liabilities, decreased 13 basis points to 2.03% for 1999
from 2.16% for the prior year. Net interest margin, represented by net interest
income divided by the average balance of interest-earning assets, decreased 14
basis points to 2.44% for 1999 compared with 2.58% for 1998. These decreases
were primarily due to the investment of proceeds from the repayment and sale of
mortgage loans in short-term, lower-yielding investments as market rates
declined.
Interest Income. Total interest income decreased $7.2 million, or 5.7%, to
$118.3 million for 1999 compared with $125.5 million for 1998. Interest and fees
on loans accounted decreased from $90.1 million for 1998 to $79.6 million for
1999. Interest and dividends on investment securities available for sale
increased $486,000, or 2.5%, to $20.2 million for 1999 compared with $19.7
million for 1998. Interest on mortgage-related securities available for sale
increased $2.8 million, or 17.8%, to $18.5 million for 1999 compared with $15.7
million for 1998.
We experienced a $3.4 million, or 0.2%, decrease in the average balance of
total interest-earning assets. However, the mix of our earning assets changed
more significantly. The average balance of loans decreased $90.2 million, or
7.8%, to $1.07 billion for 1999 compared with $1.16 billion for 1998. This
decrease primarily reflects decreased origination and the large repayments of
adjustable rate loans refinanced with 30 year fixed rate loans which were
subsequently sold. The average balance of mortgage-related securities increased
$52.4 million, or 22.0%, to $290.8 million for 1999 compared with $238.3 million
for 1998. The average balance of investment securities increased $36.5 million,
or 10.5%, to
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$383.6 million for 1999 compared with $347.1 million for 1998. These increases
reflect our continued strategy of using our investments to increase interest
income while managing interest rate risk.
The primary reason for the decrease in interest income was a 40 basis point
decrease in the average yield on interest-earning assets to 6.73% for 1999 from
7.13% for 1998. The average yield on loans decreased 33 basis points to 7.44%
for 1999 compared with 7.77% for the prior year. The average yield on
mortgage-related securities decreased 21 basis points to 6.36% for 1999 compared
with 6.57% for 1998. The average yield on investment securities decreased 35
basis points. to 5.03% for 1999 compared with 5.38% for 1998. The lower interest
rate environment along with the relatively flat yield curve that prevailed
during 1999 and the end of 1998 resulted in the downward repricing of our
interest rate-sensitive assets. In addition, the average yield on our assets was
affected by the refinancing of many of our existing loans to fixed rate mortgage
loans which were subsequently sold. The proceeds of loan repayments and loan
sales were invested in lower-yielding investment securities and mortgage-related
securities.
Interest Expense. Interest expense on deposits decreased $4.1 million, or
6.3%, to $61.1 million for 1999 compared with $65.2 million for 1998. Interest
expense on time deposits decreased $6.9 million, or 12.9% to $46.5 million for
1999, down from $53.3 million for 1998. Interest expense on savings accounts
decreased $383,000 or 9.0% to $3.9 million for 1999 compared to $4.3 million for
1998. Interest expense on money market accounts increased $3.2 million or 48.5%
to $9.8 million for 1999 compared to $6.6 million for 1998. Interest expense on
borrowings decreased $504,000, or 3.5%, to $13.9 million compared to $14.4
million in 1998.
The 5.8% overall decrease in interest expense was primarily attributable to
a decrease of 26 basis points in the average cost of interest-bearing
liabilities This decrease reflects a lower interest rate environment and our
strategy of funding assets through competitive pricing of our deposit products
and allowing higher costing time deposits to run off when adverse market
conditions exist.
Provision for Loan Losses. During 1999 we provided $350,000 for loan
losses, compared to $637,000 for 1998. Net loan charge-offs were approximately
$257,000 for 1999, compared to $977,000 in 1998. The allowance for loan losses,
which is established through a provision for loan losses charged against income
was $6.9 million at both December 31, 1999 and December 31, 1998.
Non-interest Income. Non-interest income, consisting of service fees,
brokerage commissions, gain on sale of loans and other income, decreased
$456,000, or 5.4%, to $8.0 million for 1999 compared with $8.4 million for 1998.
Various factors contributed to the change, primarily a $598,000 increase in
brokerage commissions, a $648,000 decrease in loan fees and service charges due
to decreased loan originations, and a $528,000 decrease in gains on sales of
loans due to decreased loan sales.
Non-interest Expense. Non-interest expense increased $15.8 million, or
44.5%, to $51.3 million during 1999 compared with $35.5 million for the prior
year. Amortization of intangible assets made up 98.7% of the increase in
non-interest expense. An increase in amortization of intangible assets of $15.6
million, or 578%, to $18.3 million in 1999 compared to $2.7 million in 1998, was
a result of the special write-off of intangible assets from the 1997 First
Federal acquisition. The remaining increase was $206,000 or 0.6% to $33.0
million in 1999, compared to $32.8 million in 1998 for other non-interest
expense items, excluding amortization of intangible assets.
Our efficiency ratio was 64.8% for 1999 compared with 60.8% for 1998. The
increase in the efficiency ratio reflects lower interest income as a result of
our high volume of lower yielding short-term investment securities rather than
an increase in operating expenses. The ratio of non-interest expense, excluding
amortization of intangible assets, to average assets was 1.79% for 1999 and
1.77% for 1998.
Income Taxes. Income tax expense decreased $2.8 million or 42.4% to $3.8
million for 1999 compared to $6.6 million for 1998. Income tax expense in 1999
is significantly impacted by the non-deductibility of a substantial portion of
the amortization of intangible assets. Excluding this amortization, our
effective tax rate for 1999 was 38.9% compared to 37.1% in 1998.
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Years Ended December 31, 1998 and 1997
General. Net income was $11.2 million for 1998, an increase of $1.0
million, or 9.8%, compared with net income of $10.2 million for 1997. The
increase was primarily attributable to a $1.7 million increase in net interest
income, a reduction in provision for loan losses of $428,000, and an increase of
$2.3 million in total non-interest income offset by an increase in total
non-interest expense of $3.4 million.
Net Interest Income. Net interest income for 1998 increased $1.7 million,
or 3.9%, to $45.5 million compared with $43.8 million for 1997. Net interest
income was increased by the full year of earning assets from the purchase of
First Federal. However, this increase was offset by a decrease in net interest
rate spread by 15 basis points to 2.16% for 1998 from 2.31% for the prior year.
Net interest margin decreased 18 basis points to 2.58% for 1998 compared with
2.76% for 1997. This reduction was caused by the investment of proceeds from
loan sales and repayments, including significant refinancings into lower-
yielding investments. Borrowed funds were utilized in 1998 to enhance net
interest income by using the proceeds to invest in mortgage-related securities
with a positive spread. This partially offset the negative effect from reduction
of the loan portfolio.
Interest Income. Total interest income increased $9.5 million, or 8.2%, to
$125.5 million for 1998 compared with $116.0 million for 1997. Interest on
mortgage-related securities increased 52.4% to $15.7 million for 1998 compared
with $10.3 million for 1997. Interest and fees on loans decreased $3.5 million,
or 3.7%, to $90.1 million for 1998, compared with $93.6 million for the prior
year. Additionally, interest and dividends on investment securities available
for sale increased $7.6 million, or 62.8%, to $19.7 million for 1998 from $12.1
million for 1997.
The increase in total interest income was primarily due to a $176.8
million, or 11.2%, increase in the average balance of total interest-earning
assets to $1.76 billion for 1998 compared with $1.58 billion for 1997. This
growth reflects the impact of the purchase of First Federal which occurred in
April 1997 and which was accounted for as a purchase. We purchased $539.7
million of loans in the acquisition. Growth in assets was funded by deposit
growth and by an increase in Federal Home Loan Bank borrowings, both of which
were also the result of the purchase of First Federal. The average balance of
net loans, however, decreased $53.2 million, or 4.4%, to $1.16 billion for 1998
compared with $1.21 billion for 1997, while the average balance of
mortgage-related securities increased $79.1 million, or 49.7%, to $238.3 million
for 1998 compared with $159.3 million for 1997. In addition, the average balance
of investment securities increased by $153.5 million, or 79.2%, to $347.1
million in 1998 compared with $193.7 million in 1997. In 1998, we experienced a
run off in mortgage loans. This was the result of customer loan prepayments.
Some ARM loans were refinanced to 30-year fixed rate mortgages. As part of our
interest rate risk strategy, these loans were subsequently sold.
The average yield on interest-earning assets decreased to 7.13% for 1998
compared with 7.32% for 1997. The average yield on loans increased five basis
points, to 7.77% for 1998 from 7.72% for the prior year. The average yield on
mortgage-related securities increased 13 basis points to 6.57% for 1998 from
6.44% for 1997. The average yield on investment securities decreased 27 basis
points to 5.38% for 1998 from 5.65% for 1997.
Interest Expense. Total interest expense increased $7.8 million or 10.8% to
$80.0 million in 1998 compared to $72.2 million in 1997. Interest expense on
deposits increased $4.3 million, or 7.1%, to $65.2 million for 1998 compared
with $60.9 million for 1997. Interest expense on time deposits, which accounted
for 81.5% of interest expense on deposits, increased $3.7 million, or 7.5%, to
$53.3 million for 1998 from $49.6 million for 1997. Interest expense on savings,
money market accounts and interest-bearing demand accounts increased $618,000,
or 5.5% to $11.9 million for 1998 compared to $11.3 million for 1998. Interest
expense on borrowings increased $3.5 million or 32.1% to $14.4 million in 1998
compared to $10.9 million in 1997.
The overall increase in interest expense on deposits was primarily
attributable to an increase of $170.3 million, or 11.8%, in the average balance
of total interest-bearing liabilities to $1.6 billion for 1998 compared with
$1.4 billion for 1997. The increase reflects a full year of balances resulting
from the
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purchase of First Federal in April, 1997. The increase in interest-bearing
liabilities occurred in three major areas: money market accounts increased $22.6
million, or 18.9%, to $141.9 million in 1998 compared to $119.3 million in 1997;
time deposits increased $63.7 million or 7.4% to $927.2 million in 1998 compared
with $863.5 million in 1997; and Federal Home Loan Bank borrowings increased
$79.5 million, or 41.5% to $270.8 in 1998 compared to $191.3 for 1997.
The average cost of total interest-bearing liabilities decreased to 4.96%
for 1998 compared with 5.01% for 1997.
Provision For Loan Losses. During 1998 and 1997, we provided $637,000 and
$1.1 million, respectively, for loan losses. Net loan charge-offs were $1.0
million for 1998 and $240,000 for 1997. This resulted in the allowance for loan
losses decreasing $340,000, or 4.7%, to $6.9 million at December 31, 1998, from
$7.2 million at December 31, 1997. The decrease in the provision reflects the
lower level of non-performing loans in 1998 as compared to 1997. The reduction
in total allowances was more than offset by the reduction in the loan portfolio.
Therefore, at December 31, 1998, the allowance for loan losses as a percentage
of loans was 0.66% compared with 0.57% at December 31, 1997. The allowance for
loan losses was 101.9% of non-performing loans at December 31, 1998, compared
with 72.1% at December 31, 1997.
Non-Interest Income. Total non-interest income for 1998 was $8.4 million,
an increase of $2.3 million, or 35.5%, from $6.2 million for 1997. The overall
increase is partially due to 1998 including a full year of income resulting from
the purchase of First Federal compared to 1997, which included nine months of
income from the purchase. We experienced a 9.0% increase in fees on deposit
accounts to $2.6 million in 1998 compared with $2.4 million in 1997. Brokerage
commissions increased $244,000, or 24.8%, increasing to $1.2 million for 1998
compared to $1.0 million in 1997. Loan fees and service charges increased
$889,000, or 115.0% to $1.7 million in 1998 compared with $773,000 in 1997. Gain
on sale of loans, due to increase volume in loan sales, increased $539,000, or
110.9%, to $1.0 million in 1998 compared with $486,000 in 1997. Other income
increased $391,000 or 42.2% to $1.3 million in 1998 compared to $927,000 in
1997.
Non-Interest Expense. Total non-interest expense increased $3.4 million, or
10.6%, to $35.5 million during 1998 compared with $32.1 million for the prior
year. The overall increase is partially due to 1998 including a full year of
expenses resulting from the purchase of First Federal compared to 1997 which
included 9 months of expense. Salaries and employee benefits increased $1.3
million, or 8.5%, to $16.6 million for 1998 compared with $15.3 million for
1997. Net occupancy expense increased $292,000 or 5.5% to $5.6 million in 1998
compared with $5.3 million in 1997. Other operating expense increased $1.2
million or 23.5% to $6.3 million in 1998 compared with $5.1 million in 1997.
Amortization of intangible assets constituted 23.5% of the $3.4 million increase
in non-interest expense. The amortization of intangible assets related to the
First Federal acquisition was recorded for nine months during 1997 and for the
full year in 1998. Amortization amounted to $2.7 million in 1998 compared with
$1.9 million in 1997.
The ratio of non-interest expense to average assets, excluding amortization
of intangible assets, was 1.77% for 1998 and 1.82% for 1997. Our efficiency
ratio, which excludes amortization of intangible assets, was 60.8% for 1998
compared with 60.3% for 1997.
Income Taxes. Income tax expense decreased $38,000, or 0.6%, to $6.58
million for 1998 compared with $6.62 million for 1997, resulting in effective
tax rates of 37.1% and 39.4% for 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-related securities,
maturities and calls of investment securities, borrowings from the Federal Home
Loan Bank (the "FHLB") of Chicago and funds provided by our operations.
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Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-related securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination and purchase of one-to
four-family real estate loans, multi-family and commercial real estate loans,
home equity loans, other consumer loans, commercial business loans, the purchase
of mortgage-related securities, and to a lesser extent, the purchase of
investment securities. During 1999 we originated and purchased loans of
approximately $374.9 million and during 1998 we originated and purchased loans
of approximately $428.3 million. Purchases of mortgage-related securities were
$213.5 million for 1999 and $119.5 million for 1998, while purchases of
investment securities were $21.5 million for 1999 and $381.9 million for 1998.
In the first six months of 2000, we originated and purchased loans of $169.6
million, and purchased $115.4 million in mortgage-related securities and $19.7
million in investment securities.
These investing activities were funded by principal payments on mortgage
loans and mortgage-related securities, calls and maturities on investment
securities, borrowings and funds provided by our operating activities. Principal
repayments on loans and mortgage-related securities totaled $350.7 million
during 1999, compared to $587.0 million during 1998. Maturities and calls of
investment securities totaled $65.0 million during 1999 and $429.3 million
during 1998. Sales of loans and mortgage-related securities provided cash flows
of $111.1 million during 1999 and $116.8 million during 1998.
At June 30, 2000, Mutual Savings had outstanding loan commitments to
borrowers of approximately $27.8 million, unused commercial lines of credit of
approximately $1.5 million and available home equity and overdraft lines of
credit of approximately $70.0 million. There were no outstanding commitments to
purchase securities at June 30, 2000. Total deposits decreased $42.4 million in
the first six months of 2000, decreased $55.9 million during 1999 and increased
$36.5 million during 1998. Deposit flows are affected by the level of interest
rates, the interest rates and products offered by competitors and other factors.
Time deposit accounts scheduled to mature within one year were $539.2 million at
June 30, 2000. We are committed to maintaining a strong liquidity position;
therefore, we monitor our liquidity position on a daily basis. We anticipate
that we will have sufficient funds to meet current funding commitments.
At June 30, 2000, we exceeded each of the applicable regulatory capital
requirements. Our leverage (tier 1) capital was $164.5 million, or 9.37%, at
June 30, 2000. In order to be classified as "well-capitalized" by the FDIC we
were required to have leverage (tier 1) capital of 5.00%. To be classified as a
well-capitalized bank by the FDIC, we must also have a risk-based total capital
ratio of 10.00%. At June 30, 2000, we had a risk-based total capital ratio of
18.69%. See "Regulation -- Mutual Savings Federal Regulation Prior to
Restructuring -- Capital Requirements" for a discussion of the regulatory
capital requirements applicable to Mutual Savings and see "Regulatory Capital
Compliance" for information regarding the impact of the offering on our capital
position.
It is anticipated that the restructuring and First Northern merger
transactions will result in a decrease in the capital of both Mutual Savings and
First Northern: See "Capitalization." Following the transactions, however, the
banks are expected to satisfy the FDIC criteria to be categorized as
"well-capitalized."
We do not anticipate any material capital expenditures, nor do we have any
balloon or other payments due on any long-term obligations or any off-balance
sheet items other than the commitments and unused lines of credit noted above.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, an entity
may elect to recognize stock-based compensation expense based on the fair value
of the awards, or they may elect to account for stock-based compensation under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity
elects to account for stock-based compensation under APB No. 25, it is not
required to recognize expense
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based on the fair value of the awards. However, the entity must disclose in the
financial statements the effects of SFAS No. 123, as if the recognition
provisions of SFAS No. 123 were adopted.
Currently, Mutual Savings does not provide stock-based compensation to its
employees. Upon completion of the restructuring, subject to shareholder
approval, we will establish certain stock-based compensation plans. If
established, we have evaluated the alternatives available under the provisions
of SFAS No. 123 and currently expect that we will not adopt the recognition
provisions of the statement, but will provide the required footnote disclosures.
Therefore, we do not expect that the adoption of SFAS No. 123 will have a
material impact on our financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement established standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing EPS previously
found in APB Opinion No. 15, "Earnings Per Share," and makes them more
comparable with international EPS standards.
Mutual Savings, as a mutual savings bank, does not have common stock
authorized, issued or outstanding and we do not calculate or present EPS. Upon
completion of the restructuring, we will calculate and present EPS in accordance
with SFAS No. 128.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended, is effective for all quarters of those years
beginning after June 15, 2000. This statement may not be applied retroactively
to financial statements of prior periods. As Mutual Savings does not utilize
derivatives, we do not expect that our adoption of SFAS No. 133 will have a
material impact on our financial position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes of Mutual Savings have been
prepared in accordance with generally accepted accounting principles (GAAP).
GAAP generally requires the measurement of financial position and operating
results in terms of historical dollars without consideration for changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Unlike
industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact on
performance than do the effects of inflation.
BUSINESS OF MUTUAL SAVINGS BANK
GENERAL
Mutual Savings is a community oriented financial institution which
emphasizes traditional financial services to individuals and businesses within
its market areas. Our principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
other operations, in residential mortgage loans, consumer loans, commercial real
estate loans, and commercial business loans. We also invest in various
mortgage-related securities and investment securities. The principal lending is
on one-to four-family, owner-occupied homes, home equity loans and lines of
credit, consumer loans, multi-family and commercial real estate loans, and
commercial business loans.
Mutual Savings' revenues are derived principally from interest on our loans
and mortgage-related securities, interest and dividends on our investment
securities, and commissions on non-interest income (including loan servicing
fees, deposit servicing fees, gains on sales of loans held for sale and
insurance,
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securities and annuity sales). Our primary sources of funds are deposits,
borrowings, scheduled amortization and prepayments of loan principal and
mortgage-related securities, maturities and calls of investment securities and
funds provided by operations.
Mutual Savings and First Northern have signed an agreement under which Bank
Mutual will acquire First Northern Savings. In many respects, both organizations
have similar businesses and business philosophies. However, the acquisition will
be significant for Bank Mutual. We have highlighted material differences which
have been identified by the parties in "Certain Effects of the First Northern
Merger on Bank Mutual." Please also see the financial information of First
Northern identified in "Index to Financial Statements."
MARKET AREA
Mutual Savings conducts its operations from 50 banking offices located in
21 counties throughout most of the state of Wisconsin, and one office in
Minnesota. At June 30, 1999 Mutual Savings had a 1.73% share of all Wisconsin
bank, savings bank and savings association deposits. The counties in which
Mutual Savings operates include 57% of the population of the state, which
provides us with access to a large base of potential customers. The markets in
which Mutual Savings operates vary, which provides diversity of opportunities
for Mutual Savings.
As a result of the First Northern merger, we will significantly expand our
presence. Together, Mutual Savings and First Northern Savings will then have 69
banking offices located in 28 counties in Wisconsin, in addition to the
Minnesota office. At June 30, 1999, the combined enterprise would have had a
2.42% share of all Wisconsin bank, savings bank and savings association
deposits. Counties in which Bank Mutual subsidiaries will operate will include
66% of the population of the state. On a pro forma basis, at June 30, 2000, Bank
Mutual would have been the fifth largest financial institution headquartered in
the state of Wisconsin, based on asset size.
The largest concentration of Mutual Savings' offices is in the Milwaukee
metropolitan area which includes Milwaukee, Waukesha, Ozaukee and Washington
counties. There are 18 offices in this area. The Milwaukee metro area is the
largest population and commercial base in Wisconsin, representing approximately
28% of Wisconsin's population. The Milwaukee area has traditionally had an
extensive manufacturing economic base, which is diversifying into service and
technology based businesses. The Milwaukee metropolitan area grew at an average
annual rate of approximately 4.85% in population during the 1990s.
Mutual Savings has four offices in the Madison area. Madison is the state
capital of Wisconsin and is the second largest metropolitan area in Wisconsin
representing approximately 8% of the state's population. Mutual Savings' ten
other south central Wisconsin offices are located in smaller cities that have
economic concentrations ranging from manufacturing to agriculture.
The third largest concentration of Mutual Savings offices is in the
northwestern part of the state, largely resulting from the First Federal
acquisition in 1997. This part of the state has medium sized to smaller cities
and towns. Industry includes medium sized and small business, with a significant
agricultural component. The counties in which Mutual Savings' northwest region
offices are located hold 8% of the state's population. Mutual Savings' Minnesota
office is located near the Wisconsin state border on the eastern edge of the
Minneapolis-St. Paul metropolitan area.
Recently, Mutual Savings targeted the northeastern part of Wisconsin for a
larger presence. Mutual Savings believes it will be able to accomplish this
growth through the First Northern merger because First Northern Savings'
operations are located in this part of the state. First Northern operates 19
offices in eight northeastern counties that make up 12% of the state's
population. Mutual Savings currently has a relatively small presence in this
area of the state.
COMPETITION
Mutual Savings faces significant competition both in making loans and
attracting deposits. Wisconsin has many banks, savings banks, and savings and
loan associations which offer the same types of banking
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products as Mutual Savings. Wisconsin also has an extensive tax-exempt credit
union industry, whose expanded powers have resulted in increased competition to
financial institutions.
Many of Mutual Savings' competitors have greater resources than Mutual
Savings does. Similarly, many competitors offer services that Mutual Savings and
First Northern Savings do not provide. For example, neither Mutual Savings nor
First Northern Savings provide trust or money management services. However,
Mutual Savings has an affiliate, Lake Financial and Insurance Services, Inc.
that offers securities, annuity and property and casualty insurance services.
Most of Mutual Savings' competition for loans traditionally has come from
commercial banks, savings banks, savings and loan associations and credit
unions. Increasingly, other types of companies, such as mortgage banking firms,
finance companies, insurance companies and other providers of financial services
also compete for these products. For deposits, Mutual Savings and First Northern
Savings have also competed with traditional financial institutions. However,
competition for deposits now also includes mutual funds, particularly short-term
money market funds, and brokerage firms and insurance companies. The recent
increase in electronic commerce now also increases competition from institutions
and other entities outside of Wisconsin.
LENDING ACTIVITIES
Loan Portfolio Composition. Mutual Savings' loan portfolio primarily
consists of one-to four-family residential first mortgage loans. To a lesser
degree, the loan portfolio includes consumer and other loans, including home
equity credit lines and fixed-rate second mortgage loans, multi-family loans,
commercial real estate loans, and commercial business loans.
At June 30, 2000, our loan portfolio totaled $1.2 billion, of which $895.2
million, or 77.7%, were first mortgage loans. Included in that total were $894.3
million of loans due after one year, of which 51.2% were adjustable rate
mortgage or ARM loans and 48.8% were fixed-rate loans with a weighted average
remaining maturity of 147 months. The remainder of our loans at June 30, 2000,
amounting to $256.3 million, or 22.3% of total loans, consisted of consumer
loans ($213.5 million or 18.5%) and commercial business loans ($42.8 million or
3.7%).
We originate primarily ARM loans and up to 15 year fully amortizing fixed
rate loans for our own portfolio. We also offer longer term fixed rate
residential mortgages, most of which are immediately sold into the secondary
market.
The loans that we originate are subject to federal and state laws and
regulations. The interest rates we charge on loans are affected principally by
the demand for loans, the supply of money available for lending purposes and the
interest rates offered by our competitors. These factors are in turn affected
by, among other things, economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters.
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The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-------------------- ------------------------------------------------------------------
2000 1999 1998 1997
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One to four-family.............. $ 733,958 63.74% $ 743,993 67.37% $ 742,231 70.56% $ 930,011 73.1%
Multi-family.................... 65,105 5.65 53,777 4.87 53,521 5.09 68,811 5.41
Commercial...................... 65,267 5.67 52,375 4.74 40,922 3.89 51,739 4.07
Construction and development.... 30,840 2.68 26,530 2.40 21,939 2.09 24,774 1.95
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total first mortgage real
estate loans............ $ 895,170 77.74 876,675 79.38 858,613 81.63 1,075,335 84.53
---------- ------ ---------- ------ ---------- ------ ---------- ------
Consumer and other loans:
Consumer loans:
Fixed equity.................. 108,811 9.45 89,315 8.09 67,629 6.42 74,196 5.83
Home equity lines of credit... 55,371 4.81 50,618 4.58 45,827 4.36 46,380 3.65
Student....................... 27,698 2.41 28,371 2.57 29,634 2.82 29,425 2.31
Home improvement.............. 12,134 1.05 9,920 0.90 8,373 0.80 8,128 0.64
Other......................... 9,436 0.82 10,028 0.91 12,970 1.23 19,893 1.56
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer loans...... 213,450 18.54 188,252 17.05 164,433 15.63 178,022 13.99
---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial business loans....... 42,815 3.72 39,488 3.57 28,839 2.74 18,866 1.48
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer and other
loans................... 256,265 22.26 227,740 20.62 193,272 18.37 196,888 15.47
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans receivable.... 1,151,435 100.00% 1,104,415 100.00% 1,051,885 100.00% 1,272,223 100.00%
Less:
Undisbursed loan proceeds......... 16,368 14,658 7,001 8,788
Deferred fees and discounts....... (5) 14 440 1,158
Allowance for losses.............. 7,085 6,948 6,855 7,195
---------- ---------- ---------- ----------
Total loans receivable,
net..................... $1,127,987 $1,082,795 $1,037,589 $1,255,082
========== ========== ========== ==========
Total loans receivable.... $1,151,435 $1,104,415 $1,051,885 $1,272,223
Loans available for sale.......... 1,632 541 27,723 13,397
---------- ---------- ---------- ----------
Total loans receivable and
loans available
for sale................ $1,153,067 $1,104,956 $1,079,608 $1,285,620
========== ========== ========== ==========
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1996 1995
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
First mortgage loans:
One to four-family.............. $577,612 68.39% $566,990 70.1%
Multi-family.................... 74,446 8.81 74,024 9.15
Commercial...................... 49,624 5.88 48,390 5.98
Construction and development.... 22,082 2.61 23,496 2.91
-------- ------ -------- ------
Total first mortgage real
estate loans............ 723,764 85.69 712,900 88.14
-------- ------ -------- ------
Consumer and other loans:
Consumer loans:
Fixed equity.................. 40,150 4.74 29,849 3.69
Home equity lines of credit... 33,245 3.94 27,440 3.39
Student....................... 9,428 1.12 9,757 1.21
Home improvement.............. 6,411 0.76 6,039 0.75
Other......................... 6,355 0.75 5,512 0.68
-------- ------ -------- ------
Total consumer loans...... 95,589 11.32 78,597 9.72
-------- ------ -------- ------
Commercial business loans....... 25,231 2.99 17,281 2.14
-------- ------ -------- ------
Total consumer and other
loans................... 120,820 14.31 95,878 11.86
-------- ------ -------- ------
Total loans receivable.... 844,584 100.00% 808,778 100.00%
Less:
Undisbursed loan proceeds......... 14,563 13,271
Deferred fees and discounts....... 969 1,402
Allowance for losses.............. 3,921 3,392
-------- --------
Total loans receivable,
net..................... $825,131 $790,713
======== ========
Total loans receivable.... $844,584 $808,778
Loans available for sale.......... 4,357 2,479
-------- --------
Total loans receivable and
loans available
for sale................ $848,941 $811,257
======== ========
</TABLE>
At June 30, 2000, our one-to-four family first mortgage loans were pledged
as collateral under a blanket pledge to the Federal Home Loan Bank of Chicago.
As of June 30, 2000 and December 31, 1999 there were no other significant
concentrations of loans such as loans to a number of borrowers engaged in
similar activities. Mutual Savings' first mortgage loans, fixed equity, home
equity lines of credit and home improvement loans are primarily secured by
properties housing one to four families which are generally located in the
bank's local lending areas in Wisconsin.
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Loan Maturity. The following table presents the contractual maturity of our
loans at June 30, 2000. The table does not include the effect of prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on first mortgage loans totaled $60.6 million for the first six
months of 2000, $179.7 million for fiscal 1999, $389.1 million for fiscal 1998
and $237.1 million for fiscal 1997.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
------------------------------------------
FIRST MORTGAGE CONSUMER AND
LOANS OTHER LOANS TOTAL
-------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
AMOUNTS DUE:
Within one year..................................... $ 876 $ 24,057 $ 24,933
-------- -------- ----------
After one year
One to two years................................. 4,460 16,576 21,036
Two to three years............................... 11,919 19,258 31,177
Three to five years.............................. 17,944 35,609 53,553
Five to ten years................................ 141,978 103,609 245,587
Ten to twenty years.............................. 377,695 57,156 434,851
Over twenty years................................ 340,298 -- 340,298
-------- -------- ----------
Total due after one year.................... 894,294 232,208 1,126,502
-------- -------- ----------
Total loans................................. $895,170 $256,265 1,151,435
======== ========
LESS:
Undisbursed loan proceeds........................... 16,368
Deferred loan fees.................................. (5)
Allowance for loan losses........................... 7,085
----------
Net loans........................................ $1,127,987
==========
</TABLE>
The following table presents, as of June 30, 2000, the dollar amount of all
loans, due after June 30, 2001, and whether these loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 2001
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loans........................................ $436,399 $457,895 $ 894,294
Consumer and other loans.................................... 119,954 112,254 232,208
-------- -------- ----------
Total loans due after one year.................... $556,353 $570,149 $1,126,502
======== ======== ==========
</TABLE>
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The following table presents our loan originations, purchases, sales and
principal payments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance outstanding at beginning of
period............................. $1,104,956 $1,079,608 $1,079,608 $1,285,620 $ 848,941
---------- ---------- ---------- ---------- ----------
ORIGINATIONS
First mortgage loans............... 71,545 109,345 171,071 309,606 170,268
Consumer and other loans........... 82,635 72,554 146,837 118,711 96,871
---------- ---------- ---------- ---------- ----------
Total originations......... 154,180 181,899 317,908 428,317 267,139
---------- ---------- ---------- ---------- ----------
PURCHASES
One-to four-family first mortgage
loans........................... 15,425 45,356 56,943 -- 1,034
Acquisition of First Federal....... -- -- -- -- 539,655
Total purchases............ 15,425 45,355 56,943 -- 540,689
---------- ---------- ---------- ---------- ----------
LESS:
Principal payments:
First mortgage loans............ 60,477 108,265 179,673 389,149 237,123
Consumer and other loans........ 54,404 58,953 111,196 120,460 90,856
---------- ---------- ---------- ---------- ----------
Total principal payments... 114,881 167,218 290,869 509,609 327,979
---------- ---------- ---------- ---------- ----------
Transfers to foreclosed real
estate.......................... 1,673 951 1,773 7,975 178
---------- ---------- ---------- ---------- ----------
Loan sales -- first mortgage
loans........................... 4,940 46,680 56,861 116,745 42,992
---------- ---------- ---------- ---------- ----------
Balance outstanding at end of
period.......................... $1,153,067 $1,092,014 $1,104,956 $1,079,608 $1,285,620
========== ========== ========== ========== ==========
</TABLE>
Residential Mortgage Lending. Our primary lending activity has been the
origination of first mortgage loans secured by one- to four-family properties,
within our primary lending area, that are owner-occupied. At June 30, 2000,
$734.0 million or 63.7% of our gross loan portfolio consisted of loans secured
by one- to four-family residential properties. In addition to our loan
originations, we have purchased one- to four-family first mortgage loans of
$15.4 million in the first six months of 2000 and $56.9 million in the year
1999. Mutual reviews these loans for compliance with its underwriting standards,
and generally only invests in loans in the midwestern United States.
We offer conventional fixed rate mortgage loans and ARM loans with maturity
dates which typically range from 15 to 30 years. Residential mortgage loans
generally are underwritten to Federal National Mortgage Association Standards
(FNMA) and other agency guidelines. All ARM loans and fixed rate loans with
maturities of up to 15 years are held in our portfolio. Fixed rate loans greater
than 15 years typically are sold without recourse, servicing retained, into the
secondary market. During the past few years we have generally not charged loan
origination fees. The interest rates charged on mortgage loan originations at
any given date will vary, depending upon conditions in the local and secondary
markets.
We also originate "jumbo loans" in excess of the FNMA maximum loan amount,
which currently is $252,700. Fixed rate jumbo loans generally are sold servicing
released without recourse to secondary market purchasers of such loans. ARM
jumbo loans are underwritten in accordance with our underwriting guidelines and
are retained in our loan portfolio.
Mortgage loan originations are solicited from real estate brokers,
builders, existing customers, community groups and residents of the local
communities located in our primary market area through our loan origination
staff. We also advertise our mortgage loan products through local newspapers,
periodicals and internal customer communications.
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<PAGE> 81
We currently offer loans that conform to underwriting standards that are
based on standards specified by FNMA ("conforming loans") and also originate a
limited amount of non-conforming loans for our own portfolio or for sale. Loans
may be fixed-rate one- to four-family mortgage loans or adjustable-rate one- to
four-family mortgage loans with maturities of up to 30 years. The average size
of our one- to four-family mortgage loans originated in 1999 was approximately
$94,000, and in the first six months of 2000 was $107,000. The overall average
size of our one- to four-family first mortgage loans was approximately $59,000
at June 30, 2000. We are an approved seller/servicer for FNMA and an approved
servicer for the Federal Home Loan Mortgage Corporation (FHLMC).
The focus of our loan portfolio is the origination of 30-year ARM loans
with interest rates adjustable in one, two, three, or five years. ARM loans
typically are adjusted by a maximum of 200 points per adjustment period with a
lifetime cap of 12.9%. Monthly payments of principal and interest are adjusted
when the interest rate adjusts. We do not offer ARM loans which provide for
negative amortization. The initial rates offered on ARM loans fluctuate with
general interest rate changes and are determined by secondary market pricing,
competitive conditions and our yield requirements. We currently utilize the
monthly average yield on United States treasury securities, adjusted to a
constant maturity of one year ("constant treasury maturity index") as the index
to determine the interest rate payable upon the adjustment date of our ARM
loans. Some of the ARM loans are granted with conversion options which provide
terms under which the borrower may convert the mortgage loan to a fixed rate
mortgage loan for a limited period early in the term of the ARM loan. The terms
at which the ARM loan may be converted to a fixed rate loan are established at
the date of loan origination and are set at a level allowing us to sell the ARM
loan into the secondary market upon conversion.
ARM loans may pose credit risks different from the risks inherent in fixed
rate loans, primarily because as interest rates rise, the underlying payments
from the borrowers rise, thereby increasing the potential for payment default.
At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In order to minimize the risk associated with
ARM loans, borrowers under the one year ARM programs generally are qualified at
no less than the maximum adjusted rate at the first adjustment.
The volume and types of ARM loans we originate have been affected by the
level of market interest rates, competition, consumer preferences and the
availability of funds. During the past three years, we experienced a decreased
demand for ARM loans, versus fixed rate loans, due to the continued low interest
rate environment. Although we will continue to offer ARM loans, we cannot
guarantee that we will be able to originate a sufficient volume of ARM loans to
increase or maintain the proportion that these loans bear to our total loans.
In addition to conventional fixed rate and ARM loans, we are authorized to
originate mortgages utilizing various government programs, including programs
offered by the Federal Housing Administration, the Federal Veterans
Administration, and Guaranteed Rural Housing. We also participate in two state-
sponsored mortgage programs operated by Wisconsin Housing and Economic
Development Authority (WHEDA) and Wisconsin Department of Veterans Affairs
(WDVA). We originate these state-sponsored loans as an agent and assign them to
the agency immediately after closing. Servicing is retained by Mutual on both
the WHEDA and WDVA loans.
Upon receipt of a completed mortgage loan application from a prospective
borrower, a credit report is ordered, income and other information is verified,
and if necessary, additional financial information is requested. An appraisal of
the real estate to secure the loan is required which must be performed by an
independent, certified appraiser approved by the Board of Directors. A title
insurance policy is required on all real estate first mortgage loans. Evidence
of adequate hazard insurance and flood insurance, if applicable, is required
prior to closing. Borrowers are required to make monthly payments to fund
principal and interest as well as private mortgage insurance and flood
insurance, if applicable. With some exceptions for lower loan-to-value ratio
loans, borrowers also generally are required to escrow in advance for real
estate taxes and hazard insurance. We make disbursements for these items from
the escrow account as the obligations become due.
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<PAGE> 82
In addition to our full documentation loan program, we process some loans
as reduced documentation loans. These loans are processed under the FNMA
alternative documentation program. We require applicants for reduced
documentation loans to complete a FNMA loan application and request income,
assets and debt information from the borrower. In addition to obtaining outside
vendor credit reports on all borrowers, we also look at other information to
ascertain the creditworthiness of the borrower. In most instances, we utilize
the FNMA "Desktop Underwriter" automated underwriting process to further reduce
the necessary documentation. For example, a simplified appraisal may be used to
verify the value of the property. All loans that are process with reduced
documentation conform to secondary market standards and are generally salable.
Our Underwriting Department reviews all pertinent information prior to
making a credit decision to approve or deny an application. All recommendations
to deny are reviewed by a designated officer of Mutual prior to the final
disposition of the loan application. Our lending policies generally limit the
maximum loan-to-value ratio on one- to four-family mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property. Loans above 80% loan-to-value ratios are subject
to the availability of private mortgage insurance. Coverage is required to
reduce our exposure to less than 80% of value.
Our originations of residential first mortgage loans amounted to $152.7
million in 1999, $288.5 million in 1998 and $163.5 million in 1997, and $54.4
million in the first six months of 2000. A significant number of our first
mortgage loan originations have been the result of refinancing of our existing
loans due to the relatively low interest rate levels over the past three years.
Total refinancings of our existing first mortgage loans were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF FIRST
MORTGAGE LOAN
PERIOD AMOUNT ORIGINATIONS
------ ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Six months ended June 30, 2000.............................. $ 6.0 8.4%
Year ended December 31, 1999................................ 49.4 28.9
Year ended December 31, 1998................................ 178.4 57.6
Year ended December 31, 1997................................ 57.3 33.6
</TABLE>
In addition to our standard mortgage and consumer credit products, we have
developed mortgage programs designed to specifically address the credit needs of
low- to moderate-income home mortgage applicants and first-time home buyers.
Among the features of the low- to moderate-income home mortgage and first-time
home buyer's programs are reduced rates, lower down payments, reduced fees and
closing costs, and generally less restrictive requirements for qualification
compared with our traditional one- to four-family mortgage loans. For instance,
certain of these programs currently provide for loans with up to 97%
loan-to-value ratios and rates which are lower than our traditional mortgage
loans.
Consumer Loans. We have been expanding our consumer loan portfolio because
higher yields can be obtained, there is strong consumer demand for such
products, and we have experienced relatively low delinquency and few losses on
such products. In addition, we believe that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities. At June 30, 2000, $213.5 million, or 18.5%, of our gross loan
portfolio was in consumer loans. Consumer loan products offered within our
market areas include home equity loans, home equity lines of credit, and to a
lesser extent, automobile loans, recreational vehicle loans, marine loans,
deposit account loans, overdraft protection lines of credit, unsecured consumer
loans through the Mastercard and Visa credit card programs (offered through Elan
Financial Services) and federally guaranteed student loans.
Our focus in consumer lending has been the origination of home equity
loans, home equity lines of credit and home improvement loans. At June 30, 2000,
we had $176.3 million or 82.6% of the consumer loan portfolio in such loans.
Underwriting procedures for these loans include a comprehensive review of the
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loan application, and require an acceptable credit rating and verification of
the value of the equity in the home and income of the borrower. The
loan-to-value ratio and debt ratios to income are determining factors in the
underwriting process. Home equity loan and home improvement loan originations
are developed through the use of direct mail, cross-sales to existing customers,
and advertisements in local newspapers.
We originate both fixed rate and variable rate home equity loans and home
improvement loans with combined loan-to-value ratios to 100%. Loans above 80%
combined loan to value ratios are subject to the availability of private
mortgage insurance. Pricing on fixed rate home equity and home improvement loans
is reviewed by senior management, and generally terms are in the three to
fifteen year range in order to minimize interest rate risk. During the six
months ended June 30, 2000 we originated approximately $31.4 million of fixed
rate loans. These loans carry a weighted average written term of 8 years and a
fixed rate ranging from 7.25% to 11.75%. We also offer variable rate home equity
and home improvement loans. At June 30, 2000, $33.7 million or 27.9% of the home
equity and home improvement loan portfolio carried a variable rate. The variable
rate loans have a fixed rate for three years then adjust annually, with terms of
up to twenty years. Our home equity and home improvement loans are originated in
amounts which, together with the amount of the first mortgage, do not exceed
100% of the value of the property securing the loan.
Our home equity credit line loans, which totaled $55.4 million, or 25.9% of
total consumer loans at June 30, 2000, are adjustable-rate loans secured by a
first or second mortgage on owner-occupied one to four-family residences located
in the state of Wisconsin. Current interest rates on home equity credit lines
are tied to the prime rate, adjust monthly and range from 100 to 150 basis
points over the prime rate, depending on the loan-to-value ratio. Home equity
line of credit loans are made for terms up to 10 years and require a minimum
monthly payment of the greater of $100 or 1 1/2% of the month end balance. An
annual fee is charged on home equity lines of credit.
At June 30, 2000, student loans amounted to $27.7 million, or 13.0% of our
consumer loan portfolio. These loans are serviced by Great Lakes Higher
Education Servicing Corporation.
Consumer loans may entail greater credit risk than residential mortgage
loans. At June 30, 2000, $1.0 million or approximately 0.46% of the consumer
loan portfolio was 90 days or more delinquent. Although the level of
delinquencies in our consumer loan portfolio generally has been low, there can
be no assurance that delinquencies will not increase in the future.
Multi-family and Commercial Real Estate Loans. At June 30, 2000 our
multi-family and commercial real estate loan portfolio consisted of 156 loans
totaling $130.4 million or 11.3% of our gross loan portfolio. The multi-family
and commercial real estate loan portfolio consist of fixed rate, ARM and balloon
loans originated at prevailing market rates. This portfolio generally consists
of mortgages secured by apartment buildings, office buildings, warehouses,
industrial buildings and retail centers. ARM loans of this type are currently
being originated at 175 to 250 basis points above the rate on U.S. Treasury
securities for comparable maturities. These loans typically do not exceed 80% of
the lesser of the purchase price or an appraisal by an appraiser designated by
us. Balloon loans generally are amortized on a 15 to 25 year basis with a
typical loan term of three to ten years.
Loans secured by multi-family and commercial real estate are granted based
on the income producing potential of the property and the financial strength of
the borrower. The net operating income, which is the income derived from the
operation of the property less all operating expenses, must be sufficient to
cover the payments relating to the outstanding debt. In most cases, we obtain
joint and several personal guarantees from the principals involved. We generally
require an assignment of rents or leases in order to be assured that the cash
flow from the project will be used to repay the debt. Appraisals on properties
securing multi-family and commercial real estate loans are performed by
independent state certified fee appraisers approved by the board of directors.
Title and hazard insurance are required as well as flood insurance, if
applicable. Environmental assessments are performed on all multi-family and
commercial real estate loans in excess of $500,000.
81
<PAGE> 84
At June 30, 2000, the largest outstanding loan on a multi-family property
was $9.0 million on a 128 unit apartment project located in Brookfield,
Wisconsin. At the same date, the largest outstanding loan on a commercial real
estate property was $6.9 million on two office buildings located in Milwaukee,
Wisconsin. At June 30, 2000, these loans were current and performing in
accordance with their terms.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project decreases, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
Commercial Business Loans. At June 30, 2000, our commercial business loan
portfolio consisted of loans totaling $42.8 million or 3.7% of our gross loan
portfolio. The commercial loan portfolio consists of loans to businesses for
equipment purchases, working capital lines of credit, debt refinancing, SBA
loans and domestic stand-by letters of credit. Typically, these loans are
secured by business assets and personal guarantees. We offer both variable and
fixed rate loans. Approximately 16.0% of the commercial business loans have an
interest rate adjusted monthly based on the prevailing prime rate. Term loans
are generally amortized over a three to seven year period. Fixed rates are
priced at a margin over the yield on US Treasury issues with maturities that
correspond to the maturities of the notes. All lines of credit and term loans
with balances over $500,000 are reviewed annually. The largest commercial
business loan at June 30, 2000 had an outstanding balance of $16.9 million and
was secured by equipment and chattel paper. All payments under commercial
business loans were current as of June 30, 2000.
Loan Approval Authority. For one- to four- family residential loans sold
into the secondary market, our underwriters are authorized by the board of
directors to approve loans processed through the FNMA "Desktop Underwriter"
automated underwriting system up to $252,700. For one-to four-family residential
loans held in portfolio, our underwriters are authorized by the board of
directors to approve loans processed through the FNMA "Desktop Underwriter"
automated underwriting system up to $150,000, provided the loan-to-value ratio
is 75% of less and the loan meets other specific underwriting criteria. All
other loans in excess of $80,000 must be approved by a senior officer.
Consumer loan underwriters have individual loan approval authorities
ranging from $15,000 to $50,000. Loan applications exceeding $50,000 must be
approved by a senior officer. All home equity loans where the loan-to-value
ratio exceeds 80% and/or where the normal underwriting standards are not met
must be approved by a senior officer.
The executive committee of the board of directors reviews on a monthly
basis all loans made, and the board ratifies actions taken by the committee.
Multi-family and commercial loan proposals and multi-family and commercial
construction loan proposals are subject to approval of the executive committee
of the board. All loan decisions are subject to ratification by the board at
their monthly meetings.
Any commercial business loan less than $50,000 may be approved by the
department head or a senior officer, and any two of those individuals may
approve loans in the amount of $50,000 to $100,000. All commercial business
loans in the amount of $100,000 or more are approved by the executive committee
of the board of directors and ratified by the board at their next meeting.
Asset Quality
One of our key operating objectives has been and continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of owned properties, we have been proactive in addressing problem and
non-performing assets. These strategies, as well as our emphasis on quality
mortgage underwriting, our maintenance of sound credit standards for new loan
originations and relatively favorable economic and real
82
<PAGE> 85
estate market conditions have resulted in historically low delinquency ratios
and, in recent years, a reduction in non-performing assets. These factors have
helped strengthen our financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to a current status. In the case of
one-to-four family mortgage loans, our mortgage servicing department is
responsible for collection procedures from the 15th day of delinquency through
the completion of foreclosure. Specific procedures include a late charge notice
being sent at the time a payment is over 15 days past due with a second notice
(in the form of a billing coupon) being sent before the payment becomes 30 days
past due. Once the account is 30 days past due, we attempt telephone contact
with the borrower. Letters are sent if contact has not been established by the
45th day of delinquency. On the 60th day of delinquency, attempts at telephone
contact continue and stronger letters, including foreclosure notices, are sent.
If telephone contact cannot be made, we send our property inspector to the
property.
When contact is made with the borrower, we attempt to obtain full payment
or work out a repayment schedule to avoid foreclosure. All properties are
inspected prior to foreclosure approval. Most borrowers pay before the deadline
given and it is not necessary to start foreclosure action. If it is, action
starts when the loan is between the 90th and 120th day of delinquency. We
normally seek the shortest redemption period possible. If we obtain the property
at the foreclosure sale, we hold the properties as real estate owned. They are
marketed after an outside appraisal is obtained and any PMI claims are filed.
The collection procedures and guidelines as outlined by Federal National
Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Federal Housing Administration (FHA), Veterans Administration (VA), Department
of Veterans Affairs (DVA), Wisconsin Housing and Economic Development Authority
(WHEDA) and Farmers Home Administration (FmHA) are followed.
The collection procedures for consumer loans, excluding student loans,
include our sending periodic late notices to a borrower once a loan is 15 days
past due. We attempt to make direct contact with a borrower once a loan becomes
30 days past due. Supervisory personnel in our Consumer Loan Collection
Department review loans 60 days or more delinquent on a regular basis. If
collection activity is unsuccessful after 90 days, we may charge-off a loan or
refer the matter to our legal counsel for further collection effort. Loans we
deem to be uncollectible are proposed for chargeoff by our Collection
Department. Charge-offs of consumer loans require the approval of our Consumer
Loan Manager and a senior officer. All student loans are serviced by Great Lakes
Higher Education Servicing Corporation which guarantees their servicing to
comply with all Department of Education Guidelines. Our student loan portfolio
is guaranteed by the Great Lakes Higher Education Guaranty Corporation, which is
reinsured by the U.S. Department of Education.
The collection procedures for multi-family, commercial real estate and
commercial business loans include sending periodic late notices to a borrower
once a loan is past due. We attempt to make direct contact with a borrower once
a loan becomes 15 days past due. The manager of multi-family and commercial real
estate reviews loans 15 days or more delinquent on a regular basis. The
commercial banking manager reviews loans 10 days or more delinquent on a regular
basis. If collection activity is unsuccessful, we may refer the matter to our
legal counsel for further collection effort. After 90 days or sooner, loans we
deem to be uncollectible are proposed for repossession or foreclosure and
charge-off. This action requires the approval of our board of directors.
Our policies require that management continuously monitor the status of the
loan portfolio and report to the board of directors on a monthly basis. These
reports include information on delinquent loans and
83
<PAGE> 86
foreclosed real estate. The following table presents information regarding loans
delinquent for 60 days or longer (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- -------------------- ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
-------- --------- -------- --------- -------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family first mortgages..... 14 $ 814 20 $ 873 21 $1,042 40 $3,351
Other first mortgages................... -- -- 5 303 -- -- 2 352
Consumer and other loans................ 106 646 247 1,007 127 462 221 1,072
-------- ------ -------- ------ -------- ------ --- ------
Total delinquent loans.............. 120 $1,460 272 $2,183 148 $1,504 263 $4,775
======== ====== ======== ====== ======== ====== === ======
Delinquent loans to total loans......... 0.13% 0.19% 0.14% 0.44%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
first mortgages..... 19 $ 691 42 $3,542 37 $1,589 96 $5,860
Other first
mortgages........... -- -- 6 680 -- -- 1 73
Consumer and other
loans............... 112 495 215 969 121 660 221 881
---- ------ --- ------ --- ------ --- ------
Total delinquent
loans........... 131 $1,186 263 $5,191 158 $2,249 318 $6,814
==== ====== === ====== === ====== === ======
Delinquent loans to
total loans......... 0.11% 0.47% 0.21% 0.63%
<CAPTION>
DECEMBER 31,
---------------------------------------
1997
---------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------ ------------------
PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family
first mortgages..... 31 $1,427 70 $ 4,880
Other first
mortgages........... -- -- 2 3,965
Consumer and other
loans............... 146 707 297 1,469
--- ------ --- -------
Total delinquent
loans........... 177 $2,134 369 $10,314
=== ====== === =======
Delinquent loans to
total loans......... 0.17% 0.80%
</TABLE>
Our $2.2 million in loans delinquent 90 days or more at June 30, 2000 were
comprised primarily of 20 one- to four-family first mortgage loans (including
FHA/VA first mortgage loans) with an average principal balance of approximately
$46,000 and 247 consumer and other loans with an average balance of $4,000. The
largest non-performing asset at June 30, 2000 was a high-rise condominium in
Bloomington, Minnesota. The property is carried as foreclosed real estate in the
amount of $1.4 million. First Federal originally made a construction and
development loan on the building which contains forty-nine residential units and
three commercial units. Mutual Savings obtained title to the property in 1998.
As of June 30, 2000, twelve residential units remained to be sold. Mutual
Savings does not anticipate further loss. Non-performing assets totaled $5.2
million at June 30, 2000, and $7.8 million at December 31, 1999, compared with
$10.2 million at December 31, 1998. The following table presents information
regarding non-accrual mortgage and consumer and other loans, accruing loans
delinquent 90 days or more, and foreclosed real estate as of the dates
indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, --------------------------------------------
2000 1999 1998 1997 1996 1995
--------- ------ ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans...... $1,214 $3,372 $ 2,793 $ 8,936 $2,149 $ 624
Non-accrual consumer and other
loans............................... 277 283 320 732 94 31
Accruing loans delinquent 90 days or
more................................ 729 1,152 3,617 813 158 128
------ ------ ------- ------- ------ ------
Total non-performing
loans..................... 2,220 4,807 6,730 10,481 2,401 783
Foreclosed real estate, net........... 2,977 3,018 3,505 159 258 333
------ ------ ------- ------- ------ ------
Total non-performing
assets.................... $5,197 $7,825 $10,235 $10,640 $2,659 $1,116
====== ====== ======= ======= ====== ======
Non-performing loans to total loans... 0.20% 0.44% 0.65% 0.84% 0.29% 0.10%
Non-performing assets to total
assets.............................. 0.30 0.44 0.55 0.58 0.23 0.09
</TABLE>
84
<PAGE> 87
Included in non-accrual first mortgage loans at December 31, 1997 are loans
with a carrying value of $5.2 million which were considered to be impaired and
which resulted from the acquisition of First Federal. There was no specific
reserve related to these, or any other, loans at that date or at any date
presented. There are no loans which were considered to be impaired at June 30,
2000 or December 31, 1999, 1998, 1996 or 1995. The average balance of impaired
loans was $3.9 million and $5.0 million in the years ended December 31, 1998 and
1997, respectively, and $0 for all other periods presented. No interest income
was recognized on any loan while in an impaired state.
At June 30, 2000, there were $971,323 of loans to borrowers where available
information causes management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and would indicate
that such loans were likely to be included as non-accrual, past due or impaired
(as defined in SFAS No. 114). However, no loss is anticipated at this time.
Mutual Savings has not had restructured loans at the dates presented.
With the exception of first mortgage loans insured or guaranteed by the
FHA, VA or Guaranteed Rural Housing (formerly FmHA), we stop accruing income on
loans when interest or principal payments are greater than 90 days in arrears or
earlier when the timely collectibility of such interest or principal is
doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited to income.
We may recognize income in the period that we collect it when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist.
Mutual Savings had $1.5 million and $3.7 million of non-accrual loans at June
30, 2000 and December 31, 1999, respectively. Interest income that would have
been recognized had such loans been performing in accordance with their
contractual terms totaled approximately $161,000 and $245,000 for the six months
ended June 30, 2000 and the year ended December 31, 1999, respectively. A total
of approximately $8,000 and $102,000 interest income was actually recorded on
such loans in the six months ended June 30, 2000 and the year ended December 31,
1999.
All commercial real estate loans which are greater than 90 days past due
are considered to be impaired. Impaired loans are individually assessed to
determine whether a loan's carrying value is in excess of the fair value of the
collateral or the present value of the loan's cash flows discounted at the
loan's effective interest rate.
At June 30, 2000 and December 31, 1999 and 1998, we had no loans classified
as impaired as defined in SFAS No. 114.
Foreclosed real estate consists of property we acquired through foreclosure
or deed in lieu of foreclosure. Foreclosed real estate properties are initially
recorded at the lower of the recorded investment in the loan or fair value.
Thereafter, we carry foreclosed real estate at fair value less estimated selling
costs. Foreclosed real estate is inspected periodically. Additional outside
appraisals are obtained if we consider that appropriate. Additional write-downs
may occur if the property value deteriorates. These additional write-downs are
charged directly to current operations.
85
<PAGE> 88
Allowance for Loan Losses. The following table presents the activity in our
allowance for loan losses at or for the periods indicated.
<TABLE>
<CAPTION>
AT, OR
FOR THE
SIX MONTHS
ENDED, AT OR FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ------- ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period........ $ 6,948 $ 6,855 $ 7,195 $3,921 $ 3,392 $ 2,942
------- ------- ------- ------ ------- -------
Provision for loan losses............. 236 350 637 1065 672 597
Other additions: purchase of First
Federal............................. -- -- -- 2449 -- --
------- ------- ------- ------ ------- -------
Charge-offs:
First mortgage loans................ 36 152 997 624 80 109
Consumer and other loans............ 78 189 223 127 77 51
------- ------- ------- ------ ------- -------
Total charge-offs................. 114 341 1220 751 157 160
Recoveries:
First mortgage loans................ 0 (40) (206) (479) -- --
Consumer and other loans............ (15) (44) (37) (32) (14) (13)
------- ------- ------- ------ ------- -------
Total recoveries.................. (15) (84) (243) (511) (14) (13)
------- ------- ------- ------ ------- -------
Net charge-offs..................... 99 257 977 240 143 147
------- ------- ------- ------ ------- -------
Balance at end of period.............. $ 7,085 $ 6,948 $ 6,855 $7,195 $ 3,921 $ 3,392
======= ======= ======= ====== ======= =======
Net charge-offs to average loans...... 0.01% 0.02% 0.08% 0.02% 0.02% 0.02%
Allowance for loan losses to total
loans............................... 0.63 0.64 0.66 0.57 0.48 0.43
Allowance for loan losses to
non-performing loans................ 319.14 144.54 101.86 68.65 163.31 433.21
</TABLE>
The allowance for loan losses has been determined in accordance with
generally accepted accounting principles, under which we are required to
maintain adequate allowances for loan losses. We are responsible for the timely
and periodic determination of the amount of the allowance required. We believe
that our allowance for loan losses is adequate to cover specifically
identifiable loan losses, as well as estimated losses inherent in our portfolio
for which certain losses are probable but not specifically identifiable.
Loan loss allowances are reviewed monthly. General allowances are
maintained by the following categories for performing loans to provide for
unidentified inherent losses in the portfolios:
- One-to-four family
- Consumer
- Multi-family and commercial real estate
- Commercial business
Allowance goals have been established by an internal risk evaluation by
loan category. Various factors are taken into consideration, including:
historical loss experience, economic factors and other factors, that, in
management's judgment would affect the collectibility of the portfolio as of the
evaluation date. Shortfalls in loan loss allowance are charged against
operations as provision for loan losses, to maintain reserves at the desired
levels.
The appropriateness of the allowance is reviewed by senior management on a
monthly basis based upon its evaluation of then-existing economic and business
conditions affecting the key lending areas of Mutual Savings. Other outside
factors such as credit quality trends, collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments and
recent loss experience in particular segments of the portfolio that existed as
of the balance sheet date and the impact that such conditions were believed to
have had on the collectibility of the loan are also considered. Our board of
86
<PAGE> 89
directors also reviews the loan loss allowances compared to the relative size of
the portfolio on a monthly basis.
Delinquent and Non-performing loans. One-to-four family loans delinquent
more than 90 days, multi-family and commercial real estate loans more than 60
days, consumer loans more than 90 days and commercial business loans more than
60 days are reviewed and analyzed by senior officers on an individual basis. Any
potential loss is charged against reserves by establishing a corresponding
specific reserve for that loan from the general reserve. In such an event, the
loan is then reduced by the amount of the specific reserve and a corresponding
amount is charged off to the allowance for losses on loans.
By following careful underwriting guidelines, Mutual Savings has
historically maintained low levels of non-performing loans to total loans. Our
ratio of non-performing loans to total loans at December 31, 1995 was 0.10%. It
increased after the acquisition of First Federal to a level of 0.84% at December
31, 1997. However, at December 31, 1999 the level dropped to 0.44%, and dropped
further to 0.20% at June 30, 2000.
We believe the primary risks inherent in our portfolio are possible
increases in interest rates, a possible decline in the economy, generally, and a
possible decline in real estate market values. Any one or a combination of these
events may adversely affect our loan portfolio resulting in increased
delinquencies and loan losses. Accordingly, and because of the increased
concentration of consumer loans, we have taken steps to increase our level of
loan loss allowances over the last 5 years. At June 30, 2000, the allowance for
loan losses as a percentage of total loans was .63% compared with 0.43% at
December 31, 1995. Furthermore, the increase in the allowance for loan losses
each year from 1995 to 1999 reflects our strategy of resolving non-performing
loans while providing adequate allowances for inherent losses in the portfolio
and identifying potential losses in a timely manner, as well as providing an
adequate allowance to reflect changes in the components of the portfolio during
that period.
Although we believe that we have established and maintained the allowance
for loan losses at adequate levels, future additions may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. One or more of these agencies,
specifically the FDIC or the OTS, may require us to increase the allowance for
loan losses or the valuation allowance for foreclosed real estate based on their
judgments of information available to them at the time of their examination,
thereby adversely affecting our results of operations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the six months
ended June 30, 2000, and the Years ended
87
<PAGE> 90
December 31, 1999 and 1998 -- Provision for Loan Losses." The following tables
represent our allocation of allowance for loan losses by loan category on the
dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, 2000
-------------------
PERCENTAGE
OF
LOANS IN
CATEGORY
TO TOTAL
LOAN CATEGORY AMOUNT LOANS
------------- ------ ----------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans
One-to four-family........................................ $4,624 63.74%
Other..................................................... 900 14.00%
------ ------
Total first mortgage loans........................ 5,524 77.74%
Commercial.................................................. 554 3.72%
Home equity lines........................................... 277 4.81%
Consumer & other............................................ 730 13.73%
Unallocated................................................. -- 0.00%
------ ------
Total allowance for loan losses................... $7,085 100.00%
====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans
One-to four-family...... $4,736 67.37% $5,189 70.56% $4,978 73.10% $2,644 68.39%
Other................... 822 12.01% 596 11.07% 1,198 11.43% 595 17.30%
------- ------ ------- ------ ------- ------ ------- ------
Total first
mortgage
loans........... 5,558 79.38% 5,785 81.63% 6,176 84.53% 3,239 85.69%
Commercial................ 520 3.57% 402 2.74% 283 1.48% 252 2.99%
Home equity lines......... 253 4.58% 229 4.36% 231 3.65% 166 3.94%
Consumer & other.......... 617 12.47% 439 11.27% 505 10.34% 264 7.38%
Unallocated............... -- 0.00% -- 0.00% -- 0.00% -- 0.00%
------- ------ ------- ------ ------- ------ ------- ------
Total allowance
for loan
losses.......... $6,948 100.00% $6,855 100.00% $7,195 100.00% $3,921 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
AT DECEMBER 31,
--------------------
1995
--------------------
PERCENTAGE
OF
LOANS IN
CATEGORY
TO TOTAL
LOAN CATEGORY AMOUNT LOANS
------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans
One-to four-family...... $2,346 70.10%
Other................... 530 18.04%
------- ------
Total first
mortgage
loans........... 2,876 88.14%
Commercial................ 173 2.14%
Home equity lines......... 137 3.39%
Consumer & other.......... 206 6.33%
Unallocated............... -- 0.00%
------- ------
Total allowance
for loan
losses.......... $3,392 100.00%
======= ======
</TABLE>
INVESTMENT ACTIVITIES
Investment Securities. The board of directors reviews and approves our
investment policy on an annual basis. Senior officers, as authorized by the
board of directors, implement this policy. The board of directors reviews our
investment activity on a monthly basis.
Our investment objectives are to meet legal liquidity requirements,
generate a favorable return on investments without undue compromise to our other
objectives as stated in the business plan and establish acceptable levels of
interest rate risk, credit risk and investment portfolio concentrations.
Wisconsin chartered savings banks have authority to invest in various types of
assets, including U.S. Treasury obligations, securities of various federal
agencies, State and Municipal obligations, mortgage-related securities, mortgage
derivative securities, certain time deposits of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements, loans of
federal funds, and, subject to certain limits, corporate debt and equity
securities, commercial paper and mutual funds.
Our investment policy allows participation in hedging strategies or the use
of financial futures, options or forward commitments or interest rate swaps but
only with prior approval of the board of directors and
88
<PAGE> 91
the State of Wisconsin, Department of Financial Institutions. We did not have
any such hedging transactions in place at June 30, 2000. Our investment policy
prohibits the purchase of non-investment grade bonds. Our investment policy also
provides that we will not engage in any practice that the Federal Financial
Institutions Examination Council considers to be an unsuitable investment
practice. In addition, the policy provides that we shall attempt to maintain
primary liquidity consisting of investments in cash, cash in banks, federal
funds purchased and securities with remaining maturities of less than six months
in an amount equal to 4.0% of average daily deposits. At June 30, 2000, our
primary liquidity ratio was 4.04%. For information regarding the carrying
values, yields and maturities of our investment securities and mortgage-related
securities, see "-- Carrying Values, Yields and Maturities."
We classify securities as trading, held to maturity, or available for sale
at the date of purchase. We currently do not have any held to maturity
securities, but if we did, they would be reported at cost, adjusted for
amortization of premium and accretion of discount. Available for sale securities
are reported at fair market value. We currently have no securities classified as
trading.
Mortgage-related Securities. Most of our mortgage-related securities are
directly or indirectly insured or guaranteed by GNMA, FHLMC or FNMA. The rest of
the securities are private collateralized mortgage obligations (CMO's). Private
collateralized mortgage obligations carry higher credit risks and higher yields
than collateralized mortgage obligations insured or guaranteed by agencies of
the U.S. Government. We classify our entire mortgage-related securities
portfolio as available for sale.
At June 30, 2000, mortgage-related securities available for sale totaled
$461.4 million, or 26.2% of total assets. At June 30, 2000, the mortgage-related
securities portfolio had a weighted average yield of 6.79%. Of the
mortgage-related securities we held at June 30, 2000, $398.7 million, or 86.4%,
had fixed rates and $62.7 million, or 13.6%, had adjustable-rates.
Mortgage-related securities at June 30, 2000 included real estate mortgage
investment conduits (REMICs), which are securities derived by reallocating cash
flows from mortgage pass-through securities or from pools of mortgage loans held
by a trust. REMICS are a form of, and are often referred to as CMO's.
Our REMICs have fixed and variable coupon rates ranging from 5.25% to 8.09%
and a weighted average yield of 6.76% at June 30, 2000. At June 30, 2000, REMICs
totaled $134.8 million, which constituted 29.2% of the mortgage-related
securities portfolio, or 7.7% of total assets. Our REMICs had an expected
average life of 8.7 years at June 30, 2000. For a further discussion of our
investment policies, including those for mortgage-related securities, see
"-- Investment Securities." Purchases of mortgage-related securities may decline
in the future to offset any significant increase in demand for one- to four-
family mortgage loans and other loans.
Mortgage-related securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-related securities are
more liquid than individual mortgage loans. In general, mortgage-related
securities issued or guaranteed by GNMA, FHLMC and FNMA are weighted at no more
than 20% for risk-based capital purposes, compared to the 50% risk weighting
assigned to most non-securitized residential mortgage loans.
While mortgage-related securities carry a reduced credit risk as compared
to whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates and
value of mortgage-related securities.
89
<PAGE> 92
The following table presents our investment securities and mortgage-related
securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- --------------------------------
2000 1999 1999 1998 1997
----------- ----------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR
SALE:
Carrying value at beginning of
period.............................. $ 57,763 $116,534 $116,534 $ 159,208 $ 159,513
-------- -------- -------- --------- ---------
Purchases............................. 19,675 20,728 21,481 381,899 376,634
Acquisition of First Federal.......... -- -- -- 36,457
Calls................................. -- (5,000) (50,393) (5,015)
Transfer from mutual funds to CMO..... -- (14,047) (14,047) -- --
Maturities............................ (20,000) (60,070) (65,000) (378,944) (409,346)
Sales................................. -- -- -- -- --
Premium amortization and discount
accretion, net...................... (57) (72) (182) 4,639 246
Decrease (increase) in unrealized
gains............................... 80 (525) (1,023) 125 719
-------- -------- -------- --------- ---------
Net decrease in investment
securities.......................... (302) (58,986) (58,771) (42,674) (305)
-------- -------- -------- --------- ---------
Carrying value at end of period....... $ 57,461 $ 57,548 $ 57,763 $ 116,534 $ 159,208
======== ======== ======== ========= =========
MORTGAGE-RELATED SECURITIES AVAILABLE
FOR SALE:
Carrying value at beginning of
period.............................. $374,100 $270,897 $270,897 $ 225,906 $ 90,452
-------- -------- -------- --------- ---------
Purchases............................. 115,412 34,123 213,504 119,548 72,071
Transfer from mutual funds to CMO..... -- 14,047 14,047 -- --
Acquisition of First Federal.......... -- -- -- -- 124,940
Sales................................. -- -- (53,682) -- (3,822)
Principal payments.................... (23,765) (35,602) (60,367) (77,407) (59,514)
Premium amortization and discount
accretion, net...................... 232 90 262 613 72
Decrease (increase) in unrealized
gains............................... (4,602) (5,768) (10,561) 2,237 1,707
-------- -------- -------- --------- ---------
Net increase in mortgage-related
securities.......................... 87,277 6,890 103,203 44,991 135,454
-------- -------- -------- --------- ---------
Carrying value at end of period....... $461,377 $277,787 $374,100 $ 270,897 $ 225,906
======== ======== ======== ========= =========
</TABLE>
90
<PAGE> 93
The following table presents the composition of our money market
investments, investment securities and mortgage-related securities portfolios at
the dates indicated. It also presents the coupon type for the mortgage-related
securities portfolio. For all securities and for all periods presented, the
carrying value is equal to fair value.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ------------------------------------
2000 1999 1998 1997
---------- ---------- ---------- ----------
CARRYING/ CARRYING/ CARRYING/ CARRYING/
FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS
Interest-earning deposits........................ $ 12,839 $132,592 $262,714 $ 41,305
Federal funds sold............................... -- 25,000 45,000 15,000
-------- -------- -------- --------
Total money market investments........... $ 12,839 $157,592 $307,714 $ 56,305
======== ======== ======== ========
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Mutual funds..................................... $ 29,299 $ 28,537 $ 40,885 $ 39,888
United States government and agencies............ 28,162 29,175 75,421 118,598
Asset-backed securities.......................... -- 51 228 722
-------- -------- -------- --------
Total investment securities available for
sale................................... $ 57,461 $ 57,763 $116,534 $159,208
======== ======== ======== ========
MORTGAGE-RELATED SECURITIES AVAILABLE FOR SALE BY
ISSUER:
Federal Home Loan Mortgage Corporation........... $ 65,004 $ 70,216 $ 43,717 $ 29,073
Federal National Mortgage Association............ 379,403 285,384 194,353 136,510
Private placement CMO's.......................... 16,472 17,927 31,994 59,118
Government National Mortgage Association......... 498 573 833 1,205
-------- -------- -------- --------
Total mortgage-related securities........ $461,377 $374,100 $270,897 $225,906
======== ======== ======== ========
BY COUPON TYPE:
Adjustable-rate.................................. $ 62,708 $ 59,506 $ 51,877 $ 51,704
Fixed-rate....................................... 398,669 314,594 219,020 174,202
-------- -------- -------- --------
Total mortgage-related securities........ $461,377 $374,100 $270,897 $225,906
======== ======== ======== ========
TOTAL INVESTMENT PORTFOLIO......................... $531,677 $589,455 $695,145 $441,419
======== ======== ======== ========
</TABLE>
91
<PAGE> 94
Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of our investment securities and mortgage-related
securities at June 30, 2000. Mortgage-related securities are presented by issuer
and by coupon type.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
---------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
Mutual funds............. $29,299 6.29% $ -- $ -- --%
United States government
and agencies........... 3,543 6.41% 24,619 5.97%
------- ------- -------
Total investment
securities..... $32,842 6.30% $24,619 5.97% $ --
======= ======= =======
MORTGAGE-RELATED
SECURITIES AVAILABLE
FOR SALE:
BY ISSUER:
GNMA pass-through
certificates......... $ 3 7.85% $ 54 7.61% $ 441 8.19%
FNMA pass-through
certificates......... -- -- 88 7.62% 6,584 5.88%
Private CMOs........... -- -- -- -- 1,588 6.17%
FHLMC pass-through
certificates......... 2 9.36% 120 8.11% 26 9.22%
FHLMC, FNMA and
GNMA-REMICs.......... -- -- -- -- 5,046 6.39%
------- ------- -------
Total mortgage-
related
securities..... $ 5 8.45% $ 262 7.84% $13,685 6.18%
======= ======= =======
BY COUPON TYPE:
Adjustable-rate.......... $ -- -- $ -- -- $ 4,782 6.44%
Fixed-rate............... 5 8.45% 262 7.84% 8,903 6.04%
------- ------- -------
Total mortgage-
related
securities..... $ 5 8.45% $ 262 7.84% $13,685 6.18%
======= ======= =======
Total investment and
mortgage-related
securities portfolio... $32,847 6.30% $24,881 5.99% $13,685 6.18%
======= ======= =======
<CAPTION>
AT JUNE 30, 2000
-----------------------------------------
MORE THAN TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
Mutual funds............. $ -- --% $ 29,299 6.29%
United States government
and agencies........... 28,162 6.03%
-------- --------
Total investment
securities..... $ -- $ 57,461 6.16%
======== ========
MORTGAGE-RELATED
SECURITIES AVAILABLE
FOR SALE:
BY ISSUER:
GNMA pass-through
certificates......... $ -- -- $ 498 8.13%
FNMA pass-through
certificates......... 307,306 6.86% 313,978 6.84%
Private CMOs........... 14,884 6.93% 16,472 6.86%
FHLMC pass-through
certificates......... 11,760 6.29% 11,908 6.32%
FHLMC, FNMA and
GNMA-REMICs.......... 113,475 6.72% 118,521 6.70%
-------- --------
Total mortgage-
related
securities..... $447,425 6.81% $461,377 6.79%
======== ========
BY COUPON TYPE:
Adjustable-rate.......... $ 57,926 7.06% $ 62,708 7.01%
Fixed-rate............... 389,499 6.78% 398,669 6.76%
-------- --------
Total mortgage-
related
securities..... $447,425 6.81% $461,377 6.79%
======== ========
Total investment and
mortgage-related
securities portfolio... $447,425 6.81% $518,838 6.72%
======== ========
</TABLE>
SOURCES OF FUNDS
General. Deposits, scheduled amortization and prepayments of loan principal
and mortgage-related securities, maturities and calls of investments securities,
Federal Home Loan Bank borrowings and funds provided by operations are our
primary sources of funds for use in lending, investing and for other general
purposes. We currently do not use reverse repurchase agreements as sources of
funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Deposits. We offer a variety of deposit accounts having a range of interest
rates and terms. We currently offer regular savings deposits (consisting of
passbook and statement savings accounts), interest-bearing demand accounts,
non-interest-bearing demand accounts, money market accounts and time deposits.
We also offer IRA and Keogh time deposit accounts.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from
92
<PAGE> 95
areas surrounding our offices and we rely primarily on paying competitive rates,
service and long-standing relationships with customers to attract and retain
these deposits. We do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings deposits, money market accounts and
demand accounts) represented 38.8% of total deposits on June 30, 2000. At June
30, 2000, time deposits with remaining terms to maturity of less than one year
amounted to $539.2 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Analysis of Net Interest
Income" for information relating to the average balances and costs of our
deposit accounts for the six months ended June 30, 2000 and 1999, and the years
ended December 31, 1999, 1998 and 1997.
The following table presents our deposit activity for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period..................... $1,343,007 $1,398,858
Net withdrawals........................................... (69,556) (39,529)
Interest credited, net of penalties....................... 27,162 27,990
---------- ----------
Total deposits at end of period........................... $1,300,613 $1,387,319
========== ==========
Net increase (decrease)................................... $ (42,394) $ (11,539)
========== ==========
Percentage increase (decrease)............................ (3.16)% (0.82)%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at beginning of period............ $1,398,858 $1,362,330 $ 994,283
Net withdrawals.................................. (110,285) (20,851) (62,748)
Acquisition of First Federal..................... -- -- 376,700
Interest credited, net of penalties.............. 54,434 57,379 54,095
---------- ---------- ----------
Total deposits at end of period.................. $1,343,007 $1,398,858 $1,362,330
========== ========== ==========
Net increase (decrease).......................... $ (55,851) $ 36,528 $ 368,047
========== ========== ==========
Percentage increase (decrease)................... (3.99)% 2.68% 37.02%
</TABLE>
At June 30, 2000, we had $63.8 million in time deposits with balances of
$100,000 and over maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
--------------- ------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $17,168
Over three months through six months........................ 7,487
Over six months through 12 months........................... 19,532
Over 12 months through 24 months............................ 14,625
Over 24 months through 36 months............................ 4,193
Over 36 months.............................................. 782
-------
Total....................................................... $63,787
=======
</TABLE>
93
<PAGE> 96
The following table presents the distribution of our deposit accounts at
the dates indicated by dollar amount and percent of portfolio, and the weighted
average nominal interest rate on each category of deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
AT JUNE 30, 2000 1999 1998
-------------------------------- -------------------------------- ---------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
---------- -------- -------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings.......................... $ 148,406 11.41% 2.43% $ 151,447 11.28% 2.41% $ 166,316 11.89%
Interest-bearing demand.......... 86,133 6.62% 1.05% 89,685 6.68% 1.05% 100,753 7.20%
Money market..................... 220,721 16.97% 5.27% 231,174 17.21% 4.90% 159,361 11.39%
Non-interest bearing demand...... 49,002 3.77% 0.00% 42,596 3.17% 0.00% 43,031 3.08%
---------- ------ ---------- ------ ---------- ------
Total.................... 504,262 38.77% 3.20% 514,902 38.34% 3.09% 469,461 33.56%
---------- ------ ---------- ------ ---------- ------
Certificates:
Time deposits with original
maturities of:
Three months or less......... 60,721 4.67% 5.01% 80,781 6.01% 5.07% 82,097 5.87%
Over three months to twelve
months..................... 141,737 10.90% 5.07% 198,154 14.76% 4.90% 160,681 11.49%
Over twelve months to
twenty-four months......... 399,933 30.75% 5.74% 401,053 29.87% 5.37% 517,495 36.99%
Over twenty-four months to
thirty-six months.......... 128,303 9.86% 6.16% 73,729 5.49% 5.62% 82,755 5.92%
Over thirty-six months to
forty-eight months......... 4,249 0.33% 5.72% 5,819 0.43% 5.73% 3,973 0.28%
Over forty-eight months to
sixty months............... 59,109 4.54% 5.88% 66,124 4.92% 5.94% 79,861 5.71%
Over sixty months............ 2,299 0.18% 6.36% 2,445 0.18% 6.35% 2,535 0.18%
---------- ------ ---------- ------ ---------- ------
Total time deposits...... 796,351 61.23% 5.65% 828,105 61.66% 5.31% 929,397 66.44%
---------- ------ ---------- ------ ---------- ------
Total deposits........... $1,300,613 100.00% 4.70% $1,343,007 100.00% 4.46% $1,398,858 100.00%
========== ====== ========== ====== ========== ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1998 1997
-------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENT AVERAGE
NOMINAL OF TOTAL NOMINAL
RATE AMOUNT DEPOSITS RATE
-------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Savings.......................... 2.41% $ 169,530 12.44% 2.85%
Interest-bearing demand.......... 1.05% 95,310 7.00% 1.41%
Money market..................... 4.61% 134,451 9.87% 4.64%
Non-interest bearing demand...... 0.00% 35,868 2.63% 0.00%
---------- ------
Total.................... 2.64% 435,159 31.94% 2.85%
---------- ------
Certificates:
Time deposits with original
maturities of:
Three months or less......... 5.00% 59,205 4.35% 5.29%
Over three months to twelve
months..................... 5.17% 204,864 15.04% 5.52%
Over twelve months to
twenty-four months......... 5.83% 433,152 31.79% 6.01%
Over twenty-four months to
thirty-six months.......... 5.46% 113,969 8.37% 5.77%
Over thirty-six months to
forty-eight months......... 5.73% 4,813 0.35% 5.84%
Over forty-eight months to
sixty months............... 5.98% 107,885 7.92% 5.93%
Over sixty months............ 6.34% 3,283 0.24% 6.21%
---------- ------
Total time deposits...... 5.63% 927,171 68.06% 5.82%
---------- ------
Total deposits........... 4.62% $1,362,330 100.00% 4.87%
========== ======
</TABLE>
94
<PAGE> 97
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at June 30, 2000 and December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Time deposit accounts:
3.99% or less...................................... $ 118 $ 232 $ 113 $ 366
4.00%-4.99%........................................ 118,794 231,747 79,861 3,909
5.00%-5.99%........................................ 433,073 530,748 590,164 541,854
6.00%-6.99%........................................ 241,541 63,808 257,491 378,791
7.00% or greater................................... 2,825 1,570 1,768 2,251
-------- -------- -------- --------
Total.................................... $796,351 $828,105 $929,397 $927,171
======== ======== ======== ========
</TABLE>
The following table presents, by rate category, the remaining period to
maturity of time deposit accounts outstanding as of June 30, 2000.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 2000
------------------------------------------------------------------------------------------
OVER SIX OVER ONE OVER TWO
WITHIN OVER THREE TO MONTHS TO TWO TO THREE OVER THREE
THREE MONTHS SIX MONTHS TO ONE YEAR YEARS YEARS YEARS TOTAL
------------ ------------- ----------- ---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Time deposit
accounts:
3.99% or less........ $ 116 $ -- $ 1 $ 1 $ -- $ -- $ 118
4.00%-4.99%.......... 59,939 31,876 19,534 6,886 383 176 118,794
5.00%-5.99%.......... 135,852 56,568 155,194 55,972 15,429 14,058 433,073
6.00%-6.99%.......... 6,978 4,673 68,443 126,537 30,129 4,781 241,541
7.00% or greater..... 5 -- 14 747 80 1,979 2,825
-------- -------- -------- -------- ------- ------- --------
Total...... $202,890 $ 93,117 $243,186 $190,143 $46,021 $20,994 $796,351
======== ======== ======== ======== ======= ======= ========
</TABLE>
Borrowings. We borrow funds to finance our lending and investing
activities. Substantially all of our borrowings take the form of advances from
the Federal Home Loan Bank of Chicago. At June 30, 2000 we had borrowings
totaling $31.1 million with maturities of less than one year. We have pledged
certain loans receivable as blanket collateral for these advances and future
advances. The Federal Home Loan Bank offers a variety of borrowing options with
fixed or variable rates, flexible repayment options and fixed or callable terms.
We choose the rate, repayment option and term to fit the purpose of the
borrowing.
OTHER FINANCIAL SERVICES
Mutual Savings, through its wholly-owned subsidiary Lake Financial and
Insurance Services, Inc., provides investment and insurance services to both
Mutual Savings' customers and the general public. Investment services include
tax deferred and tax free investments, mutual funds, and government securities.
Personal insurance, business insurance, life and disability insurance and
mortgage protection products are also offered by Lake Financial.
SUBSIDIARY ACTIVITIES
In addition to Lake Financial and Insurance Services, Inc., described
above, we have two active wholly-owned subsidiaries: Mutual Investment
Corporation and M C Development Ltd. Mutual Investment Corporation owns and
manages much of our investment portfolio. Mutual Savings has funded this
separate subsidiary to enhance the return on the portfolio. M C Development Ltd.
is involved in land development and sales. It owns two parcels of undeveloped
land consisting of 15 acres in Brown Deer, WI and 318 acres in Oconomowoc,
Wisconsin. See "Properties."
95
<PAGE> 98
PROPERTIES
Mutual Savings conducts its business through its executive office and 51
banking offices, which had an aggregate net book value of $24.2 million as of
December 31, 1999. The following table shows the location of Mutual Savings'
offices, whether they are owned or leased, and the expiration date of the leases
for the leased offices.
<TABLE>
<CAPTION>
ORIGINAL DATE LEASED
LEASED OR OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
-------- -------------- ------ -------------
<S> <C> <C> <C>
EXECUTIVE OFFICE:
4949 West Brown Deer Road....................... 1991 Owned
Brown Deer, WI 53223
MILWAUKEE METRO AREA:
Bayshore Mall................................... 1971 Leased 2009
5900 N. Port Washington Road
Glendale, WI 53217
Brookfield...................................... 1973* Owned
17100 W. Capitol Drive
Brookfield, WI 53005
Brookfield Square............................... 1975 Leased 2006
400 N. Moorland Road
Brookfield, WI 53005
Brown Deer...................................... 1979 Owned
4801 W. Brown Deer Road
Brown Deer, WI 53223
Capitol Drive................................... 1976 Owned
8050 W. Capitol Drive
Milwaukee, WI 53222
Cedarburg....................................... 1978* Leased 2006
W62 N248 Washington Avenue
Cedarburg, WI 53012
Downtown........................................ 1955 Owned
510 E. Wisconsin Avenue
Milwaukee, WI 53202
Grafton......................................... 1978 Owned
2030 Wisconsin Avenue
Grafton, WI 53024
Howell Avenue................................... 1977 Owned
3847 S. Howell Avenue
Milwaukee, WI 53207
Mayfair Mall.................................... 1959* Leased 2001
2500 N. Mayfair Road
Wauwatosa, WI 53226
Mequon.......................................... 1970* Owned
11249 N. Port Washington Road
Mequon, WI 53092
Oak Creek....................................... 1972 Owned
8780 S. Howell Avenue
Oak Creek, WI 53154
</TABLE>
96
<PAGE> 99
<TABLE>
<CAPTION>
ORIGINAL DATE LEASED
LEASED OR OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
-------- -------------- ------ -------------
<S> <C> <C> <C>
Oklahoma Avenue................................. 1982 Owned
6801 W. Oklahoma Avenue
Milwaukee, WI 53219
Sherman Park.................................... 1950* Owned
4812 W. Burleigh Street
Milwaukee, WI 53210
Southgate....................................... 1967 Owned
3340 S. 27th Street
Milwaukee, WI 53215
Southridge Mall................................. 1978 Leased 2002
5300 S. 76th Street
Greendale, WI 53219
Thiensville..................................... 1960* Owned
208 N. Main Street
Thiensville, WI 53092
West Allis...................................... 1976 Owned
10296 W. National Avenue
West Allis, WI 53227
MADISON AREA:
Downtown........................................ 1980 Leased 2003
23 S. Pinckney Street
Madison, WI 53703
West............................................ 1982 Leased 2011
5521 Odana Road
Madison, WI 53719
Middleton....................................... 1978 Owned
6209 Century Avenue
Middleton, WI 53562
Monona.......................................... 1981 Owned
5320 Monona Drive
Monona, WI 53716
FOX VALLEY AREA:
Appleton........................................ 1985 Leased 2004
4323 W. Wisconsin Avenue
Fox River Mall
Appleton, WI 54915
Neenah.......................................... 1974 Owned
101 W. Wisconsin Avenue
Neenah, WI 54956
JANESVILLE:....................................... 1973 Owned
2111 Holiday Drive
Janesville, WI 53545
SHEBOYGAN AREA:
Sheboygan....................................... 1973 Owned
801 N. 8th Street
Sheboygan, WI 53081
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
ORIGINAL DATE LEASED
LEASED OR OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
-------- -------------- ------ -------------
<S> <C> <C> <C>
Sheboygan Motor Bank.............................. 1984 Owned
730 N. 9th Street
Sheboygan, WI 53081
BEAVER DAM:....................................... 1975 Owned
130 W. Maple Avenue
Beaver Dam, WI 53916
BELOIT:........................................... 1971 Leased 2012
3 Beloit Mall Shopping Center
Beloit, WI 53511
BERLIN:........................................... 1973 Owned
103 E. Huron Street
Berlin, WI 54923
FOND DU LAC:...................................... 1973 Leased 2001
Forest Mall Shopping Center
Fond du Lac, WI 54935
PORTAGE:.......................................... 1976 Owned
145 E. Cook Street
Portage, WI 53901
EAU CLAIRE:
Downtown........................................ 1968* Owned
319 E. Grand Avenue
Eau Claire, WI 54701
Mall............................................ 1972* Owned
2812 Mall Drive
Eau Claire, WI 54701
Cub Foods....................................... 1996* Leased 2005
2717 Birch Street
Eau Claire, WI 54703
Pinehurst....................................... 1986* Owned
2722 Eddy Lane
Eau Claire, WI 54703
CHIPPEWA FALLS AREA:
Downtown........................................ 1975* Owned
35 W. Columbia
Chippewa Falls, WI 54729
Falls Pick'N Save............................... 1995* Leased 2005
303 Prairie View Road
Chippewa Falls, WI 54729
MENOMONIE AREA:
Downtown........................................ 1967* Owned
717 Main Street
Menomonie, WI 54751
North........................................... 1978* Owned
2409 Hils Ct. N.E
Menomonie, WI 54751
</TABLE>
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<PAGE> 101
<TABLE>
<CAPTION>
ORIGINAL DATE LEASED
LEASED OR OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
-------- -------------- ------ -------------
<S> <C> <C> <C>
RICE LAKE:........................................ 1979* Owned
2850 Pioneer Avenue
Rice Lake, WI 54868
BARRON:........................................... 1995* Owned
1512 E. Division Ave. (Hwy. 8)
Barron, WI 54812
BLOOMER:.......................................... 1995* Owned
1203 17th Avenue
Bloomer, WI 54724
CORNELL:.......................................... 1980* Leased month
422 Main Street to
Cornell, WI 54732 month
ELLSWORTH:........................................ 1975* Owned
385 W. Main Street
Ellsworth, WI 54011
HAYWARD:.......................................... 1984* Owned
10562 Kansas Avenue
Hayward, WI 54843
HUDSON:........................................... 1979* Owned
2000 Crestview Drive
Hudson, WI 54016
SPOONER:.......................................... 1995* Owned
500 Front Street
Spooner, WI 54801
ST. CROIX FALLS:.................................. 1980* Owned
144 Washington Street N
St. Croix Falls, WI 54024
STANLEY:.......................................... 1978* Owned
118 N. Broadway
Stanley, WI 54768
WOODBURY, MINNESOTA:.............................. 1995* Owned
8420 City Centre Drive
Woodbury, MN 55125
</TABLE>
---------------
* Date originally opened by an acquired institution
In addition, Mutual Savings owns two parcels of undeveloped land through
its MC Development subsidiary. The 15 acre Brown Deer parcel is comprised of
four lots consisting of 2.9 to 4.3 acres and was part of a larger property that
was acquired in 1988 to accommodate the construction of a new corporate
headquarters building. Each of the lots is available for sale and is designed to
accommodate 60,000 to 75,000 square foot office buildings. The net book value of
the four lots is $1,590,000. The 318 acre Oconomowoc parcel was held by an
acquired institution that obtained it through a foreclosure. It is located in an
area of the City of Oconomowoc that has seen considerable residential
development. All of the necessary utilities are available to the property and it
will be marketed for residential development in a manner that will attempt to
maximize its potential value. The parcel has a net book value of $345,000.
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<PAGE> 102
LEGAL PROCEEDINGS
Mutual Savings is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. We
believe that these routine legal proceedings, in the aggregate, are immaterial
to our financial condition and results of operations.
PERSONNEL
As of March 31, 2000, Mutual Savings had 488 full-time employees and 107
part-time employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be good.
MANAGEMENT
MANAGEMENT STRUCTURE
Bank Mutual's directors and executive officers initially will be persons
who are now directors or executive officers of Mutual Savings or First Northern
Savings. We expect that Bank Mutual will continue to have directors and
executive officers who have similar positions with Mutual Savings or First
Northern Savings unless and until there is a business reason to establish
separate management structures.
Under Mutual Savings' current form of organization, it is governed by a
board of directors which is chosen by its depositors. After the restructuring,
Mutual Savings will be governed by a board of directors elected by Bank Mutual
as its sole shareholder. In turn, the board of directors of Bank Mutual will be
chosen by its shareholders. Because the MHC will then own a majority of the
shares of Bank Mutual and because cumulative voting for directors will not be
permitted, the MHC will be in a position to elect all of the directors of Bank
Mutual. The directors of the MHC will be chosen by the deposits of Mutual
Savings. Initially, the board of directors of the MHC will be the same as the
board of directors of Bank Mutual.
COMPOSITION OF BOARDS OF DIRECTORS
Upon the restructuring, Bank Mutual will have a board of directors
consisting of eleven directors. Each director will belong to one of three
classes, which classes have staggered three-year terms of office. The classes
will be as nearly as equal as possible. At each of Bank Mutual's annual meetings
of shareholders, shareholders will elect directors to fill the seats of the
directors whose terms expire in that year and any other vacant seats.
The seven current directors of Mutual Savings will be initial directors of
the MHC and Bank Mutual. Under the First Northern merger agreement, Mutual
Savings has committed that four of the six directors of First Northern will be
elected to Bank Mutual and the MHC Board of Directors. Mutual Savings intends to
elect Michael D. Meeuwsen, the CEO of First Northern, as one of these directors;
the other three have not yet been chosen but will be designated by Mutual
Savings prior to the First Northern merger.
MUTUAL SAVINGS' CURRENT DIRECTORS
The following table presents the following information: the names of Mutual
Savings' directors, all of whom will be initial directors of Bank Mutual and the
MHC; their ages on August 15, 2000; their position(s) with Mutual Savings; the
years when they began serving as directors of Mutual Savings; and
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<PAGE> 103
when their terms of office as directors of Bank Mutual and the MHC will expire.
All of these persons will have begun service as Bank Mutual directors in 2000.
<TABLE>
<CAPTION>
MUTUAL BANK
SAVINGS MUTUAL
DIRECTOR TERM TO
NAME AGE POSITION(S) WITH MUTUAL SAVINGS SINCE EXPIRE
---- --- ------------------------------- -------- -------
<S> <C> <C> <C> <C>
Michael T. Crowley, Sr.(1)................ 87 Chairman and Director 1960 2001
Michael T. Crowley, Jr.(1)................ 57 President, CEO and Director 1970 2003
Thomas H. Buestrin........................ 64 Director 1995 2003
Raymond W. Dwyer, Jr. .................... 77 Director 1957 2001
Herbert W. Isermann....................... 83 Director 1982 2002
William J. Mielke......................... 53 Director 1988 2003
David J. Rolfs............................ 78 Director 1984 2002
</TABLE>
---------------
(1) Mr. Crowley, Sr. is the father of Mr. Crowley, Jr.
Mutual Savings expects that Michael D. Meeuwsen, First Northern's CEO, will
be one of the four First Northern director designees; his term will expire in
2003. Mutual Savings has not yet determined the other three designees. Once
these directors are added, Bank Mutual will have 11 directors.
OUR DIRECTORS' BACKGROUNDS
The business experience of each of Mutual Savings' directors is as follows:
Michael T. Crowley, Jr. is the president and chief executive officer of
Mutual Savings. He has served in those capacities since 1983 and 1985,
respectively. He also serves as a director of various Mutual Savings'
subsidiaries. Mr. Crowley, Jr. also is chairman and director of TYME
Corporation, an ATM network of which Mutual Savings is a member.
Michael T. Crowley, Sr. is chairman of the board and director of Mutual
Savings.
Thomas H. Buestrin is a real estate investor, property manager and real
estate developer with the firm of Buestrin, Allen & Associates Ltd. Mr. Buestrin
is president of that firm.
Raymond W. Dwyer, Jr. is retired. Prior to his retirement, he was a
practicing architect with R.W. Dwyer Architects.
William J. Mielke is a civil engineer with the firm Ruekert & Mielke Inc.
Mr. Mielke is president and CEO of that firm.
Herbert W. Isermann is retired. Prior to his retirement, he served as a
vice president of Winding Roofing Company, a roofing contracting firm.
David J. Rolfs is retired. Prior to his retirement, he was employed as
president of ABCO Dealers Inc., in the health care industry.
Michael D. Meeuwsen, age 46, is the president and chief executive officer
of First Northern and of First Northern Savings. Under the First Northern merger
agreement, Mr. Meeuwsen also will be elected as an additional director of Mutual
Savings upon the First Northern merger.
Unless we give prior experience, each of these individuals has held the
identified current position for at least five years.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Mutual Savings' board of directors currently meets on a monthly basis and
may hold additional special meetings. During 1999, Mutual Savings board held 12
regular meetings. Going forward, Bank
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<PAGE> 104
Mutual expects that its, and the MHC's, board will meet four times a year, with
special meetings as needed.
The board of directors of Bank Mutual will maintain Executive, Audit and
Compensation Committees. The Executive Committee will exercise the powers of the
board between its meetings. The Audit Committee will review the annual audit
prepared by the independent accountants, recommend the appointment of
accountants and receive reports from the internal audit department. It will
consist solely of independent directors. The Compensation Committee will provide
advice and recommendations to the Board of Directors in the areas of employee
salaries and benefit programs. It also will consist of independent directors.
Committee membership has not yet been determined.
The Bank Mutual bylaws provide that the board of directors as a whole will
act as the Nominating Committee. As such, the board will consider appropriate
nominees for any vacancy on the Bank Mutual board of directors, and shareholders
should forward any nominations to the board.
DIRECTOR COMPENSATION
Meeting Fees. Mutual Savings pays an annual retainer fee to each of its
non-management directors. Each of the directors receives a fee for attendance at
each board meeting. Each non-management director receives a fee for attendance
at each meeting of a committee of which the director is a member. Under an
arrangement pre-dating the establishment of the current payment structure, Mr.
Dwyer receives a fee for directors' and Executive Committee meetings for each
month regardless of attendance.
The following table sets forth the retainer and meeting fees in effect for
both 2000 and 1999:
<TABLE>
<S> <C>
Annual Retainer:........................................... $10,000
Meeting Fees:
Board.................................................... $ 1,000
Executive Committee...................................... $ 700
Audit Committee.......................................... none
Advertising Committee.................................... $ 150
Finance Committee........................................ $ 150
</TABLE>
Deferred Compensation. Mutual Savings also maintains a deferred
compensation plan for each of its non-management directors. Directors who have
provided at least five years of service to Mutual Savings will be paid $1,000
per month for 10 years after their retirement from the Mutual Savings' board.
All of the existing directors' benefits have vested. In the event a director
dies prior to completion of these payments, payments will go to the director's
heirs. Mutual Savings has funded these arrangements through "rabbi trust"
arrangements, and based on actuarial analyses believes these obligations are
adequately funded.
Bank Mutual. Going forward, the MHC and Bank Mutual will establish new
compensation packages for their directors. It is expected that the boards of
both entities will meet on the same day; there will not be duplicate payments
for board meetings held on the same day.
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<PAGE> 105
EXECUTIVE OFFICERS
The following table gives information about each of the executive officers
of Mutual Savings and the anticipated executive officers of Bank Mutual and the
MHC.
<TABLE>
<CAPTION>
AGE AT POSITION WITH POSITION WITH POSITION WITH
NAME 8/15/00 MUTUAL SAVINGS BANK MUTUAL THE MHC
---- ------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Michael T. Crowley, Jr......... 57 President and Chief Chairman and Chief President and Chief
Executive Officer Executive Officer Executive Officer
Michael D. Meeuwsen............ 46 -- President and Chief Executive Vice
Operating Officer President and Chief
Operating Officer
Michael T. Crowley, Sr......... 87 Chairman of the Board -- Chairman
Eugene H. Maurer, Jr........... 54 Senior Vice Senior Vice President Senior Vice
President, and Secretary President, Secretary
Secretary-Treasurer, and CFO
and Chief Financial
Officer
P. Terry Anderegg.............. 50 Senior Vice -- --
President-Retail
Banking
Christopher Callen............. 57 Senior Vice -- --
President-Lending
Rick B. Colberg................ 48 -- Chief Financial --
Officer
Marlene M. Scholz.............. 55 Senior Vice Senior Vice President Senior Vice President
President-Controller
</TABLE>
The business experience of each of these executive officers is as follows.
Unless we give prior experience, each of these individuals has held the
identified current position for at least five years.
Michael T. Crowley, Jr. is the president and chief executive officer of
Mutual Savings. He has served in those capacities since 1983 and 1985,
respectively. He also serves as a director of various Mutual Savings'
subsidiaries. Mr. Crowley, Jr. also is chairman and director of TYME
Corporation, an ATM network of which Mutual Savings is a member.
Michael D. Meeuwsen is the president and chief executive officer of First
Northern and of First Northern Savings.
Michael T. Crowley, Sr. is chairman of the board and director of Mutual
Savings.
Eugene H. Maurer, Jr. is the Senior Vice President and Secretary-Treasurer
of Mutual Savings. In that capacity, he is the principal financial officer of
Mutual Savings. Mr. Maurer also serves as an officer of several Mutual Savings'
subsidiaries.
P. Terry Anderegg is the Senior Vice President-Retail Banking of Mutual
Savings.
Christopher J. Callen is the Senior Vice President-Lending of Mutual
Savings. Prior to assuming that position in 1998, Mr. Callen was a banking
executive for Firstar Corporation for many years, and a self-employed consultant
of the banking industry from 1996 to 1998.
Rick B. Colberg is the Chief Financial Officer of First Northern and First
Northern Savings.
Marlene M. Scholz is the Senior Vice President-Controller of Mutual
Savings. In that capacity, she is Mutual Savings' principal accounting officer.
Ms. Scholz also serves as an officer of several Mutual Savings' subsidiaries.
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<PAGE> 106
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table provides information about
the compensation paid for 1999 to Mutual Savings' chief executive officer and to
the four other most highly compensated executive officers whose total annual
salary and bonus for 1999 was at least $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------------------
ALL OTHER
NAME AND SALARY BONUS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3)
------------------ ---- ------- ------ ------------
<S> <C> <C> <C> <C>
Michael T. Crowley, Jr. .................... 1999 573,556 -- 1,600
President and Chief 1998 573,556 16,485 1,600
Executive Officer 1997 547,060 40,408 1,613
Michael T. Crowley, Sr. .................... 1999 238,052 -- 1,280
Chairman 1998 238,052 6,780 1,447
1997 227,052 6,192 1,978
Donald T. Tietz(4).......................... 1999 198,040 -- --
Senior Executive Vice President -- 1998 207,040 -- 25,206
Northwest Region 1997 195,616 -- 38,841
Eugene H. Maurer, Jr........................ 1999 139,465 -- 1,435
Senior Vice President, Secretary/ 1998 133,965 4,018 1,382
Treasurer and Chief Financial Officer 1997 128,765 6,235 1,327
P. Terry Anderegg........................... 1999 139,265 -- 1,433
Senior Vice President -- 1998 133,765 4,012 1,362
Retail Banking 1997 128,565 7,468 1,346
</TABLE>
---------------
(1) Mutual Savings provides its executive officers with certain non-cash
benefits and perquisites. Management of Mutual Savings believes that the
aggregate value of these benefits for 1999 did not, in the case of any
executive officer, exceed $50,000 or 10% of the aggregate salary and annual
bonus reported for him in the Summary Compensation Table.
(2) Reflects payments earned during the year, and paid during the subsequent
year, under Mutual Savings' Management Incentive Plan, a non-qualified
performance based compensation plan.
(3) Includes the following components for 1999: employer contributions to the
Mutual Savings Bank Savings and Investment Plan, a qualified retirement plan
under section 401(k) of the IRS regulations, -- Mr. Crowley, Jr. $1,600; Mr.
Crowley, Sr. $1,280; Mr. Maurer $1,435; and Mr. Anderegg $1,433. Mr. Tietz'
prior year's amounts represented employer contributions to the First Federal
Bank of Eau Claire, F.S.B. Deferred Compensation Plan, a non-qualified
deferred compensation plan.
(4) Mr. Tietz retired on March 31, 2000.
DEFINED BENEFIT RETIREMENT PLANS
Mutual Savings maintains a qualified defined benefit pension plan that
covers substantially all employees who are age 21 or over and who have at least
one year of service. Pension benefits are based on the participant's average
annual compensation (salary and bonus) and years of credited service. Years of
credited service in the qualified defined benefit pension plan begin at date of
participation in the plan. Benefits are determined in the form of a ten year
certain and life annuity.
Designated officers of Mutual Savings also participate in a non-qualified
defined benefit pension plan. This non-qualified plan provides monthly
supplemental benefits to participants which will be paid out of
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<PAGE> 107
unsecured corporate assets, or the rabbi trust established for this plan. The
amount of the non-qualified plan benefit in the form of a ten year certain and
life annuity is determined below:
- an amount calculated under Mutual Savings' qualified defined benefit
pension plan without regard to the limitations imposed by the Internal
Revenue Code on benefit or compensation amounts and without regard to
certain limitations on years of service; minus
- the pension benefit accrued in the qualified defined benefit pension
plan.
The following table shows the estimated annual benefits payable in ten year
certain and life annuity form for participants retiring on their normal
retirement date at age 65 with various combinations of years of service and
average annual compensation under the qualified defined benefit plan plus, for
those officers eligible to participate, the non-qualified plan. At June 30,
2000, accrued years of service for officers named in the summary compensation
table were: Mr. Crowley, Sr. -- 66 years; Mr. Crowley, Jr. -- 32 years; Mr.
Maurer -- 18 years; and Mr. Anderegg -- 6 years. Mr. Tietz had been covered by
the prior retirement plan of First Federal; accrued benefits under the Mutual
Savings plan were minimal.
<TABLE>
<CAPTION>
FINAL YEARS OF SERVICE(1)
AVERAGE ---------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 28,300 $ 37,700 $ 49,700 $ 61,600 $ 73,500 $ 83,600
150,000 44,000 58,600 77,000 95,400 113,800 128,900
200,000 59,600 79,500 104,400 129,300 154,200 174,300
250,000 75,300 100,400 131,800 163,100 194,500 219,600
300,000 91,000 121,300 159,200 197,000 234,800 265,000
350,000 106,700 142,200 186,500 230,800 275,100 310,300
400,000 122,300 163,100 213,900 264,700 315,500 355,700
450,000 138,000 184,000 241,300 298,500 355,800 401,000
500,000 153,700 204,900 268,700 332,400 396,100 446,400
550,000 169,400 225,800 296,000 366,200 436,400 491,700
600,000 185,000 246,700 323,400 400,100 476,800 537,100
650,000 200,700 267,600 350,800 433,900 517,100 582,400
700,000 216,400 288,500 378,200 467,800 557,400 627,800
750,000 232,100 309,400 405,500 501,600 597,700 673,100
</TABLE>
---------------
(1) Years of service in the non-qualified defined benefit pension plan begin at
date of hire. As of December 31, 1999, Mr. Crowley, Sr. has more than 66
years of service with Mutual Savings. The amount of his total annual accrued
benefit as of December 31, 1999 was approximately $308,000.
EMPLOYMENT AGREEMENTS
Mutual Savings has employment agreements with Messrs. Crowley Sr. and Jr.
and intends to enter into employment agreements with its other executive
officers and with two executive officers of Mutual Savings who will not be
executive officers of Bank Mutual. The initial terms of the employment
agreements will be three years. For Messrs. Crowley, each year the agreement may
be extended so that the agreement remains for three years upon agreement of Mr.
Crowley and by affirmative action of Mutual Savings' board of directors. For the
other executives, the end of the initial three year term and on each anniversary
date thereafter, the employment term may be extended for an additional year upon
agreement of the executive and by affirmative action taken by Mutual Saving's
Board of Directors. Under the employment agreements, each executive officer will
be entitled to a base salary which is reviewed annually based upon individual
performance and Mutual Saving's financial results, as well as benefits and
perquisites, in accordance with Mutual Saving's policies.
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<PAGE> 108
The following table is information as to the initial annual salary amounts
for each of the executive officers named above in the compensation table. These
amounts may be changed in subsequent years.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS ANNUAL SALARY
------------------ -------------
<S> <C>
Michael T. Crowley, Jr. ................................ $595,000
Michael T. Crowley, Sr. ................................ $240,000
Eugene H. Maurer........................................ $145,000
P. Terry Anderegg....................................... $145,000
</TABLE>
The employment agreements can be terminated at the election of the
executive officer or Mutual Savings at the expiration of the term, at any time
for cause, upon the occurrence of certain events specified by federal statute or
regulation, or as a result of the executive officer's retirement, disability or
death. Each employment agreement can also be voluntarily terminated without
cause by the executive officer or Mutual Savings. Each executive officer may
also terminate his employment agreement under certain circumstances following a
change in control.
Upon termination of an executive's employment at their election at the
expiration of the term of the employment agreements, the executive is entitled
to receive unpaid compensation for the period of employment plus accrued but
unused vacation time. Upon termination of employment at the election of Mutual
Savings at the expiration of the terms, the executives are entitled to receive
the same compensation as if they had voluntarily terminated at the end of the
term as well as an amount equal to 100% of their annual base salary at the date
of termination and certain benefits for a period of twelve months thereafter.
Upon each executive's death or retirement at age 65, the executive or the
executive's personal representative will receive his earned but unpaid base
salary and incentive compensation prorated to the end of the calendar month in
which such termination occurs and compensation for accrued but unused vacation
time. If the executive officer terminates employment voluntarily or is
terminated by Mutual Savings for cause, the executive shall not be entitled to
any compensation or benefits for any period after the date of termination.
If during the term Mutual Savings terminates an executive officer without
cause or the employment agreement is terminated by the executive officer for
cause, the executive would be entitled to receive 100% of base salary at the
time of termination through the end of a severance period. If the termination
occurs within the initial three year term of employment, the severance period
will be through the end of the initial three year term of employment, but not
less than one year, and if the termination shall occur after the expiration of
the initial three year term, the severance period will be one year. In the case
of Messrs. Crowley, the period is extended to 12 months beyond the current term
of employment, but not more than 36 months. Also, the executive officer would
continue to receive certain insurance and other benefits until twelve months
after the end of the term of employment. Mutual Savings must also pay to each
executive officer an additional lump sum cash payment in an amount equal to the
product of Mutual Savings' annual aggregate contributions for the benefit of the
executive officer to all qualified retirement plans in the year preceding
termination and the number of years in the severance period.
Under each employment agreement, the executive officer may also terminate
employment following a change in control of Mutual Savings, as defined in the
employment agreements under certain circumstances, including a reduction in
compensation or responsibilities. Upon any such termination as a result of a
change in control, each executive officer has a right to receive payments and
benefits as if a termination by Mutual Savings without cause had occurred.
However, under no circumstances may the aggregate amount of all severance
payments and termination benefits, computed on a present value basis, exceed an
amount which would cause the payments to be characterized as parachute payments
within the meaning of Section 280G(b)(2) of the Internal Revenue Code. That
section generally defines parachute payments to include any severance payments
and termination benefits which, on a present value basis, equal or exceed three
times the executive officer's average annual total compensation over a five-year
period immediately preceding the change in control.
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<PAGE> 109
OTHER COMPENSATION AGREEMENTS
Crowley Sr. Deferred Compensation Agreement. Mutual Savings has had a
deferred compensation arrangement with Mr. Crowley, Sr. for over 20 years under
which Mutual Savings agreed to defer a portion of Mr. Crowley's compensation in
exchange for compensation payments at the later date. The exact provisions have
been modified from time to time, most recently in a 1998 agreement. To fund this
obligation, Mutual Savings purchased a life insurance policy on the life of Mr.
Crowley, Sr. The policy is now fully paid.
Upon Mr. Crowley, Sr.'s retirement, he will receive a life income in
monthly installments, with a minimum of 240 monthly installments. The monthly
installments will be equal to the amount that would be payable to Mutual Savings
under the life insurance policy if Mutual Savings were to exercise a settlement
option under the policy for monthly life income, with a 240 month period
certain, with payments commencing as of the date of Mr. Crowley's retirement. If
Mr. Crowley were to die before retirement or receipt of 240 certain monthly
payments, the amounts otherwise payable to him will be paid in equal shares to
his two children (including Mr. Crowley, Jr.) or to their survivors.
Under certain circumstances, Mutual Savings may elect to make a lump sum or
other type of payment to Mr. Crowley or his heirs. Those payments would be based
upon other forms of payment which may be available under the life insurance
policy.
BENEFIT PLANS
Employee Stock Ownership Plan. This plan is a tax-qualified plan that
covers substantially all salaried employees who have at least one year of
service and have attained age 21 and will take effect at the completion of the
restructuring.
Bank Mutual intends to lend this plan enough money to purchase 8% of the
Bank Mutual shares issued to persons other than the MHC. The plan may purchase
all or part of these shares from Bank Mutual to the extent that shares are
available after filling the subscriptions of eligible account holders.
Alternatively, the plan may purchase all or part of these shares in private
transactions or on the open market after completion of the restructuring to the
extent that shares are available for purchase on reasonable terms. We have not
determined whether that purchase would be made directly from Bank Mutual in the
offering, or after completion of the restructuring. We expect to make that
determination immediately before the expiration date for submitting orders in
the offering. For this reason, we cannot assure you that the employee stock
ownership plan will purchase shares in the offering after the restructuring, or
that such purchases will occur during any particular time period or at any
particular price.
Although contributions to this plan will be discretionary, Mutual intends
to contribute enough money each year to make the required principal and interest
payments on the loan from Bank Mutual. It is expected that this loan will be for
a term of ten years and will call for level annual payments of principal. It is
anticipated that payments will be made quarterly and will include interest at
the prime rate. The plan will initially pledge the shares it purchases as
collateral for the loan and hold them in a suspense account.
The plan will not distribute the pledged shares immediately. Instead, it
will release a portion of the pledged shares annually. Assuming we complete the
restructuring before December 31, 2000, if the plan repays its loan as scheduled
over a 10-year term, we expect that 2.5% of the shares will be released in 2000,
10% of the shares will be released annually in 2001 through 2009, and the
remaining 7.5% of the shares will be released in 2010. The plan will allocate
the shares released each year among the accounts of participants in proportion
to their base salary for the year. For example, if a participant's base salary
for a year represents 1% of the total base salaries of all participants for the
year, the plan would allocate to that participant 1% of the shares released for
the year.
Participants will direct the voting of shares allocated to their individual
accounts. Shares in the suspense account will usually be voted in a way that
mirrors the votes which participants cast for shares in their individual
accounts.
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This plan may purchase additional shares in the future, and may do so using
borrowed funds, cash dividends, periodic employer contributions or other cash
flow.
Restoration Plan. Mutual Savings is also implementing a "restoration plan"
to compensate selected executive officers for any benefits under the ESOP and
the Mutual Savings Bank Savings and Investment Plan which they are unable to
receive because of limitations under the Internal Revenue Code (the "Code") on
contributions and benefits. The Code limits the salary deferrals that an
employee may contribute to the Savings Plan and also restricts the amount of
tax-qualified plan benefits that can be received by plan participants.
The restoration plan will permit eligible officers to defer compensation
which they are unable to contribute to the Savings Plan because of the Internal
Revenue Code limits. In addition, the restoration plan will provide benefits for
eligible officers based upon the allocations they would have received in the
ESOP and Savings Plan in the absence of the Code limitations. Under the Code,
only the first $170,000 of compensation may be considered in determining
benefits under tax-qualified plans (subject to annual cost-of-living
adjustments).
For example, under the ESOP, only the first $170,000 of earnings are
considered in determining ESOP benefits. Under the restoration plan, an
executive officer would receive an amount equal to the benefit that the officer
would have received under the ESOP in the absence of the compensation limit.
Therefore, if an executive officer had total compensation of $250,000, the
officer would receive an award equal to the average allocation percentage under
the ESOP for the $80,000 of compensation in excess of the Code limit.
Payments under the restoration plan would be made in cash. The are tax
deductible by the employer, but are included in the taxable compensation of the
officer receiving such a payment. The restoration plan would initially cover
Messrs. Crowley Sr. and Jr.
FUTURE STOCK BENEFIT PLANS
Stock Option Plan. Bank Mutual intends to implement a stock option plan for
Bank Mutual's directors, officers and employees after the restructuring.
Applicable regulations prohibit us from implementing this plan until six months
after the restructuring. If we implement this plan within one year after the
restructuring, applicable regulations require that we first obtain the approval
of the holders of a majority of the outstanding shares of Bank Mutual that are
not owned by the MHC. We have not decided whether we will implement this plan
before or after the one-year anniversary of the restructuring.
We expect to adopt a stock option plan that will authorize the Compensation
Committee to grant options to purchase up to 10% of the shares issued in the
restructuring and the First Northern merger, over a period of 10 years. The
Committee will decide which eligible participants will receive options and what
the terms of those options will be. However, no stock option will permit its
recipient to purchase shares at a price that is less than the fair market value
of a share on the date the option is granted, and no option will have a term
that is longer than 10 years.
If we implement a stock option plan before the first anniversary of the
restructuring, applicable regulations will require that we observe the following
restrictions:
- We must limit the total number of shares that are optioned to outside
directors to 30% of the shares authorized for the plan.
- We must also limit the number of options granted to any one outside
director to 5% of the shares authorized for the plan and the number of
shares that are optioned to any executive officer to 25% of the shares
that are authorized for the plan.
- We must not permit the options to become vested at a more rapid rate than
20% per year beginning on the first anniversary of shareholder approval
of the plan.
- We must not permit accelerated vesting for any reason other than death or
disability.
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After the first anniversary of the restructuring, we may amend the plan to
change or remove these restrictions. If we adopt a stock option plan within one
year after the restructuring, we expect to later amend the plan, subject to
shareholder approval, to remove these restrictions and to provide for
accelerated vesting in cases of retirement and change of control. We expect that
any other amendment to this plan, whether adopted before or after the first
anniversary of the plan's initial effective date will be subject to shareholder
approval if it would change the class of people eligible to receive benefits,
change the price they must pay for stock which they acquire under the plan, or
increase the number of shares available under the plan or increase the maximum
amount of stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce the MHC's ownership position to less than a majority of Bank Mutual's
outstanding shares, we expect to obtain most or all of the shares for this plan
through stock repurchases, in which case there would not be dilution to
then-existing shareholders.
We expect the stock option plan will permit the Committee to grant either
incentive stock options that qualify for special federal income tax treatment or
non-qualified stock options that do not qualify for special treatment. Incentive
stock options may be granted only to employees and will not create federal
income tax consequences when they are granted. If they are exercised during
employment or within three months after termination of employment, the exercise
will not create federal income tax consequences either. When the shares acquired
on exercise of an incentive stock option are resold, the seller must pay federal
income taxes on the amount by which the sales price exceeds the purchase price.
This amount will be taxed at capital gains rates if the sale occurs at least two
years after the option was granted and at least one year after the option was
exercised. Otherwise, it is taxed as ordinary income.
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock options.
Non-qualified stock options will not create federal income tax consequences when
they are granted. When they are exercised, federal income taxes must be paid on
the amount by which the fair market value of the shares acquired by exercising
the option exceeds the exercise price. When the shares acquired on exercise of a
non-qualified stock option are resold, the seller must pay federal income taxes
on the amount by which the sales price exceeds the purchase price plus the
amount included in ordinary income when the option was exercised. This amount
will be taxed at capital gains rates, which will vary depending upon the time
that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, we may be allowed a federal
income tax deduction for the same amount that the option holder includes in his
or her ordinary income. When an incentive stock option is exercised, there is no
tax deduction unless the shares acquired are resold sooner than two years after
the option was granted or one year after the option was exercised.
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers after the restructuring.
Applicable regulations prohibit us from implementing this plan until six months
after the restructuring. If we implement this plan within one year after the
restructuring, the regulations require that we first obtain the approval of the
holders of a majority of the outstanding shares of Bank Mutual that are not held
by the MHC. We have not decided whether we will implement this plan before or
after the one-year anniversary of the restructuring. We expect to adopt a
management recognition plan that will authorize the Compensation Committee to
make restricted stock awards of up to 3% of the shares issued to investors other
than the MHC. The Compensation Committee will decide which directors and
officers will receive restricted stock and what the terms of those awards will
be. If we implement a management recognition plan before the first anniversary
of the restructuring, applicable regulations will require that we observe the
following restrictions:
- We must limit the total number of shares that are awarded to outside
directors to 30% of the shares authorized for the plan.
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- We must also limit the number of shares that are awarded to any one
outside director to 5% of the shares authorized for the plan and the
number of shares that are awarded to any executive officer to 25% of the
shares that are authorized for the plan.
- We must not permit the awards to become vested at a more rapid rate than
20% per year beginning on the first anniversary of shareholder approval
of the plan.
- We must not permit accelerated vesting for any reason other than death or
disability.
After the first anniversary of the restructuring, we may amend the plan to
change or remove these restrictions. If we adopt a management recognition plan
within one year after the restructuring, we expect to amend the plan later,
subject to shareholder approval, to remove these restrictions and to provide for
accelerated vesting in cases of retirement and change of control. We expect that
any other amendment to this plan, whether adopted before or after the first
anniversary of the plan's initial effective date, will be subject to shareholder
approval if it would change the class of people eligible to receive benefits,
change the price they must pay for stock which they acquire under the plan, or
increase the number of shares available under the plan or increase the maximum
amount of stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce the MHC's ownership position to less than a majority of Bank Mutual's
outstanding shares, we expect to obtain most or all of the shares for this plan
through stock repurchases, to minimize dilution. Restricted stock awards under
this plan may feature employment restrictions that require continued employment
for a period of time for the award to be vested. They may feature restrictions
that require the achievement of specified corporate or individual performance
goals for the award to be vested. Or, they may feature a combination of
employment and performance restrictions. Awards are not vested unless the
specified employment restrictions and performance goals are met. However,
pending vesting, the award recipient may have voting and dividend rights. When
an award becomes vested, the recipient must include the current fair market
value of the vested shares in his income for federal income tax purposes. Bank
Mutual and Mutual Savings may be allowed a federal income tax deduction in the
same amount. Depending on the nature of the restrictions attached to the
restricted stock award, Bank Mutual and Mutual Savings may have to recognize a
compensation expense for accounting purposes ratably over the vesting period or
in a single charge when the performance conditions are satisfied.
LIMITATIONS ON FEDERAL TAX DEDUCTIONS FOR EXECUTIVE OFFICER COMPENSATION
As a private entity, Mutual Savings has been subject to federal tax rules
which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the restructuring, federal tax laws may limit this deduction
to $1 million each tax year for each executive officer named in the summary
compensation table in Bank Mutual's proxy statement for that year. This limit
will not apply to non-taxable compensation under various broad-based retirement
and fringe benefit plans, to compensation that is "qualified performance-based
compensation" under applicable law or to compensation that is paid in
satisfaction of commitments that arose before the restructuring. Bank Mutual and
Mutual Savings expect that the Compensation Committee will take this deduction
limitation into account with other relevant factors in establishing the
compensation levels of their executive officers and in setting the terms of
compensation programs. However, there is no assurance that all compensation paid
to our executive officers will be deductible for federal income tax purposes. To
the extent that compensation paid to any executive officer is not deductible,
the net after-tax cost of providing the compensation will be higher and the net
after-tax earnings of Bank Mutual and Mutual Savings will be reduced.
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CERTAIN TRANSACTIONS WITH MEMBERS OF OUR BOARD OF DIRECTORS AND EXECUTIVE
OFFICERS
Mutual Savings has had, and expects to continue to have, regular business
dealings with its officers and directors, as well as their associates in firms
which they serve in various capacities. Consistent with applicable law, Mutual's
policy is that transactions with its directors and executive officers be on
terms that are no more beneficial to the director or executive officer than
Mutual Savings would provide to unaffiliated third parties. Directors and
executive officers, and their associates, regularly deposit funds with Mutual
Savings; the deposits are on terms and conditions offered to other depositors.
To help prevent any inadvertent violations of its policy, Mutual Savings
discourages lending transactions between Mutual Savings and its insiders, but
loans are occasionally made. Certain of the directors and executive officers
have been indebted to Mutual Savings for loans made in the ordinary course of
business. All such loans have been on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons. These loans do not involve more than the normal
risk of collectibility or present other unfavorable futures.
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THE BANK MUTUAL RESTRUCTURING
GENERAL
Under the plan of restructuring, Mutual Savings will reorganize from a
Wisconsin-chartered mutual savings bank into a holding company structure in
which Mutual Savings' depositors will hold all of the voting and liquidation
rights in the MHC, which in turn will own a majority interest in Bank Mutual, a
mid-tier holding company. The remaining interest in Bank Mutual will be held by
public shareholders. Bank Mutual will wholly-own Mutual Savings, which will
convert from mutual form into a federally-chartered stock savings bank.
The plan of restructuring and the related plan of stock issuance remain
subject to final regulatory approval by the Office of Thrift Supervision. The
plan of restructuring also requires approval of the members of Mutual Savings.
After we receive all the required regulatory approvals and member approval, we
will complete the restructuring which we describe in this proxy
statement/prospectus.
We anticipate that the offering will be completed contemporaneously with or
immediately following the restructuring. We also intend to complete the First
Northern merger contemporaneously with or immediately following the
restructuring. Mutual Savings does not anticipate that it will complete the
restructuring if the offering and the First Northern merger cannot be completed.
Mutual Savings' board of directors initially approved Mutual Savings' plan
of restructuring on February 21, 2000. The board adopted the plan unanimously.
The plan of restructuring subsequently has been amended, also with unanimous
board approval, and when we refer to the plan of restructuring, it includes
amendments. For purposes of this discussion, we use "Stock Bank" to refer to
Mutual Savings in the post-restructuring stock form. References to Mutual
Savings include Mutual Savings in its current mutual form or in its
post-restructuring stock form, as indicated by the context.
DESCRIPTION OF THE RESTRUCTURING
Immediately prior to these transactions, Mutual Savings will have converted
to a federally-chartered mutual savings bank. Thereafter, a newly-formed,
federally-chartered, stock savings bank will merge with and into Mutual Savings.
The resulting Stock Bank will be a continuation of Mutual Savings. All of Mutual
Savings' interest in and to all property will vest in the Stock Bank, without
any further act. The Stock Bank will continue to have and be responsible for all
the rights, liabilities and obligations of Mutual Savings.
The MHC and Bank Mutual will not retain any assets of Mutual Savings that
are required by the Stock Bank in order to satisfy capital and reserve
requirements of federal law. All assets, rights, obligations and liabilities of
Mutual Savings that are not expressly retained by the MHC or Bank Mutual shall
be transferred to the Stock Bank. Mutual Savings will apply to the OTS to
allocate up to $100,000 in capital at the MHC level in connection with the
restructuring. In addition, Mutual Savings will contribute approximately $40.0
million to the initial capital of Bank Mutual, assuming the midpoint of the
offering range. This contributed capital, together with a substantial part of
the proceeds of the offering and funds from First Northern, will be used to pay
a portion of the consideration to First Northern shareholders in the First
Northern merger. Bank Mutual may distribute additional capital to the MHC
following the restructuring, subject to OTS regulations governing capital
distributions.
EFFECTS OF THE RESTRUCTURING
General. The Stock Bank will be authorized to exercise any and all powers
and rights of, and shall be subject to all limitations applicable to, stock
savings banks chartered under federal law. The initial board of directors of the
Stock Bank will be comprised of the existing directors of Mutual Savings, plus
Michael Meeuwsen, the chief executive officer of First Northern. Thereafter,
Bank Mutual, as the holder of shares of the Stock Bank's voting stock will elect
the Stock Bank's board of directors. We expect that
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present management of Mutual Savings will continue as the management of the
Stock Bank following the restructuring.
The restructuring will not affect Mutual Savings's present business of
accepting deposits and investing its funds in loans and other investments
permitted by law, except that all those functions will be assumed by the Stock
Bank. The restructuring will not result in any change in the existing services
provided to depositors and borrowers, or in its existing offices, management and
staff. The Stock Bank will be subject to regulation, supervision and examination
by the OTS and the FDIC.
Deposits and Loans. The Stock Bank will be owned by Bank Mutual. However,
the voting, ownership and liquidation rights of members of Mutual Savings will
become the rights of members of the MHC, subject to the conditions below.
Members of Mutual Savings at the effective date will automatically become the
members of the MHC. Each deposit account in Mutual Savings will then become a
deposit account in the Stock Bank in the same amount and upon the same terms and
conditions, except that each depositor will have ownership and membership rights
with respect to the MHC rather than the Stock Bank. All insured deposit accounts
of Mutual Savings that are transferred to the Stock Bank will continue to be
federally insured up to the legal maximum by the FDIC in the same manner as
prior to the restructuring. Any new deposit accounts established with the Stock
Bank after the restructuring will create membership and liquidation rights in
the MHC and will be federally insured up to the legal maximum by the FDIC. First
Northern depositors will not be members of the MHC.
All loans and other borrowings from Mutual Savings will retain the same
status with the Stock Bank after the restructuring as they had with Mutual
Savings immediately prior to it. Borrowers are not members of Mutual Savings and
will not have membership rights in the MHC.
Voting Rights. As a Wisconsin-chartered mutual savings bank, Mutual Savings
has no authority to issue capital stock and, thus, no shareholders. Control of
Mutual Savings in its mutual form is vested in the board of directors. After the
restructuring, the members of the board of directors of Mutual Savings, together
with four First Northern directors, will become the directors of MHC and Bank
Mutual. They will be elected in three-year staggered terms. The affairs of the
Stock Bank will be directed by its board of directors, and all voting rights as
to the Stock Bank will be vested exclusively in Bank Mutual, the holder of its
outstanding voting stock. The Stock Bank and Bank Mutual may issue any amount of
non-voting stock to persons other than the MHC.
Following the restructuring, Bank Mutual will have the power to issue
shares of common stock to persons other than the MHC. But so long as the MHC is
in existence, the MHC will be required to own at least a majority of the voting
stock of Bank Mutual. Because of its majority ownership interest in Bank Mutual,
and Bank Mutual's ownership of the Stock Bank, the MHC generally will be able to
elect all directors of Bank Mutual and generally will be able to control the
outcome of most matters presented to the shareholders of Mutual Savings and Bank
Mutual for vote.
As a federally chartered mutual holding company, the MHC will have no
authorized capital stock and, thus, no shareholders. The MHC will be controlled
by members (that is, the depositors) of Stock Bank, and most members have
granted proxies in favor of Mutual's management. The revocable proxies that
members of Mutual Savings have granted to the board of directors of Mutual
Savings, which confer on the board general authority to cast a member's vote on
matters presented to the members, will cover the member's votes as a member of
the MHC, and the authority shall be conferred on the board of directors of the
MHC. In addition, all persons who become depositors of the Stock Bank following
the restructuring will have membership rights with respect to the MHC. Borrowers
are not members of Mutual Savings and, thus, will not receive membership rights
in the MHC.
Liquidation Rights. Prior to the restructuring, holders of deposit accounts
in Mutual Savings would be entitled to distribution of any assets of Mutual
Savings remaining after the claims of such depositors and all other creditors
are satisfied. Following the restructuring, the holders of the common stock,
including the MHC, would be entitled to any assets remaining upon a liquidation.
Except through their
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liquidation interests in the MHC, discussed below, holders of deposit accounts
in Mutual Savings would have no interest in those assets.
In the event of a liquidation of the MHC following consummation of the
restructuring, holders of deposit accounts in Mutual Savings would be entitled,
pro rata to the value of their accounts, to distribution of any assets of the
MHC remaining after the claims of all creditors of the MHC are satisfied.
Shareholders of Bank Mutual will have no liquidation or other rights with
respect to the MHC in their capacities as such. There currently are no plans to
liquidate the Stock Bank or the MHC in the future.
Subscription and Preemptive Rights. Under OTS regulations, depositors of
Mutual Savings are entitled to priority subscription rights to purchase shares
of capital stock of the MHC in the event that the MHC converts from mutual to
stock form subsequent to the restructuring. Holders of the capital stock of Bank
Mutual shall not be entitled to preemptive rights with respect to any shares of
Bank Mutual that may be issued.
POSSIBLE CONVERSION OF THE MHC TO STOCK FORM
It is possible that, at some point in the future, we would make a "full
conversion" from the mutual to the stock form of organization. Mutual Savings'
plan of restructuring includes provisions which would govern treatment of
various constituencies' interests in such a full conversion.
The plan of restructuring includes provisions intended to protect Bank
Mutual shareholders. In general, the provisions provide that Bank Mutual
shareholders would generally receive, in any subsequent full conversion, the
percentage of ownership in a successor entity as they would hold in Bank Mutual
just prior to that conversion.
Under current OTS regulations, in the event of a full conversion,
depositors would have a first right to purchase any shares offered for sale by a
successor entity. The process for the offer and sale of any such shares would be
similar to the offering contemplated by the plan of restructuring, although
eligibility dates and purchase amounts, among other things, could differ. In
addition, the plan of restructuring provides that, in a full conversion, a first
priority for eligible account holders on January 31, 1999 with the same account
number and account title at the future eligibility date will be granted. These
account holders would have a right, before that of other depositors, to purchase
shares of any successor entity.
Bank Mutual cannot assure that there will be any subsequent full conversion
or when one might occur. Also, any full conversion will be subject to OTS or
other governmental regulations as then in effect. Those regulations may affect
the treatment of Mutual Savings' depositors and Bank Mutual shareholders in any
full conversion. We also expect that such a conversion would require the
approval of the MHC's members.
BUSINESS OF FIRST NORTHERN
First Northern Capital Corp. is a unitary savings and loan holding company
that was incorporated in Wisconsin in 1995 for the purpose of owning all the
outstanding stock of First Northern Savings Bank, S.A., a Wisconsin chartered
capital stock savings and loan association, which reorganized into the holding
company structure effective December 20, 1995. First Northern is based in Green
Bay, Wisconsin and conducts its business from 19 offices located in a
contiguous, eight-county (Brown, Marinette, Manitowoc, Door, Shawano, Outagamie,
Waupaca, and Calumet) area in northeastern Wisconsin.
First Northern Savings is the only direct subsidiary of First Northern and
is operations are the primary contributor to First Northern's earnings and
expenses. First Northern Savings' business consists primarily of attracting
deposits from the general public and originating loans throughout its
Northeastern Wisconsin branch network. Traditionally, First Northern Savings has
concentrated on originations of adjusted and fixed rate one-to-four family
mortgage loans and consumer loans, as well as five or more family residential,
commercial real estate, and short-term construction mortgage loans. Adjustable
interest rate mortgage loans are originated for First Northern's portfolio,
while 30 year fixed interest rate mortgage
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loans and primarily originated for sale in the secondary mortgage markets. Fixed
rate mortgage loans with terms of 15 and 20 years are retained in First
Northern's mortgage loan portfolio. At December 31, 1999, approximately 75% of
First Northern's mortgage loan portfolio was comprised of adjustable rate loans.
First Northern began a commercial banking division in 1999, which
originates commercial loans and commercial real estate loans. As of December 31,
1999, this division had originated commercial loans of $5.0 million and
commercial real estate loans of $14.4 million, which are reported in mortgage
loan originations.
First Northern lends primarily in its eight county market area. At December
31, 1999, approximately 99.2% of the total dollar amount of First Northern's
mortgage loans outstanding were on properties located in Wisconsin with the
other 0.8% representing properties located primarily in other midwestern states.
First Northern's loan portfolio of $759.2 million before deductions at December
31, 1999 was 90.4% by dollar volume of its total assets. As of that date,
approximately 63.4% by dollar volume of the loan portfolio consisted of
conventional first mortgage loans secured by one-to-four family residences, with
an additional 25.7% by dollar volume in consumer loans, 6.6% by dollar volume in
multi-family (more than four) residential properties, 3.2% by dollar volume in
commercial real estate properties, 0.6% by dollar volume in commercial loans,
and 0.5% by dollar volume in other properties.
First Northern Savings also has two active wholly owned subsidiaries and
one 50% owned subsidiary, as well as two inactive wholly owned subsidiaries.
Great Northern Financial Services Corporation, a wholly owned active subsidiary
of First Northern Savings, offers full brokerage services to the public,
including sales of tax deferred annuities and mutual funds, and sells credit
life and disability insurance. Another wholly owned active subsidiary, First
Northern Investments, Inc., manages a majority of First Northern Savings'
investments and purchases automobile loans from Savings Financial Corporation
and mortgage loans from First Northern Savings. SFC, the 50% owned subsidiary of
the Savings Bank originates, services, and sells automobile loans to First
Northern Investments, Inc., First Northern Savings, and its other parent
corporation.
This proxy statement/prospectus incorporates information about First
Northern by reference. This means that that information is considered to be
included in this document even though it is not actually included. The First
Northern information which is incorporated by reference in this proxy statement/
prospectus includes First Northern's historical financial information,
management's discussion and analysis, and other important information. For
further information about information which is incorporated by reference, and
how you can obtain copies, see "Other Information Which you Can Obtain."
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of Mutual Savings, before and after the
restructuring, and Bank Mutual, the MHC and First Northern Savings thereafter.
The description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
GENERAL
Mutual Savings is a Wisconsin chartered mutual savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation under the Savings Association Insurance Fund. Mutual
Savings currently is subject to extensive regulation, examination and
supervision by the Division of Savings Institutions of the Wisconsin Department
of Financial Institutions (the "Division") as its chartering agency, and by the
FDIC as the deposit insurer. Mutual Savings must file reports with the Division
and the FDIC concerning its activities and financial condition, and it must
obtain regulatory approval prior to entering into certain transactions, such as
mergers with, or acquisitions of, other depository institutions and opening or
acquiring branch offices.
The Division and the FDIC currently conduct periodic examinations to assess
Mutual Savings' compliance with various regulatory requirements. This regulation
and supervision establishes a comprehen-
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sive framework of activities in which a savings bank can engage and is intended
primarily for the protection of the deposit insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Following the restructuring, in which Mutual Savings and First Northern
Savings will convert to federally-chartered stock savings banks, and the Office
of Thrift Supervision (OTS) will become the primary regulator of both banks. The
FDIC will remain responsible for supervisory and enforcement activities and
examination policies with respect to the deposit insurance fund. Following the
restructuring, the Division will no longer be responsible for regulation or
supervision of Mutual Savings or First Northern Savings.
Upon completion of the restructuring, the MHC will become a federal mutual
holding company within the meaning of Section 10(o) of the Home Owners' Loan
Act. As such, the MHC will be required to register with and be subject to OTS
examination and supervision as well as certain reporting requirements. Following
the restructuring, Bank Mutual, as a federal stock corporation in a mutual
holding company structure, will be deemed a federal stock holding company within
the meaning of Section 10(o) of the Home Owners' Loan Act. Bank Mutual will be
required to register and file reports with the OTS and will be subject to
regulation and examination by the OTS. Bank Mutual will be required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the OTS, the FDIC, the
SEC, or through legislation, could have a material adverse impact on Mutual
Savings, Bank Mutual, and the MHC and their operations and shareholders.
Certain of the laws and regulations applicable to Mutual Savings, Bank
Mutual, the MHC and First Northern Savings are summarized below or elsewhere in
this proxy statement/prospectus. These summaries do not purport to be complete
and are qualified in their entirety by reference to such laws and regulations.
MUTUAL SAVINGS
State Regulation Prior to Restructuring
Activity Powers. Mutual Savings derives its lending, investment and other
activity powers primarily from the applicable provisions of Chapter 214 of the
Wisconsin Statutes and its related regulations. Under these laws and
regulations, savings banks, including Mutual Savings, generally may invest in:
- real estate mortgages;
- consumer and commercial loans;
- specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
- certain types of corporate equity securities; and
- certain other assets.
A savings bank may also exercise trust powers upon approval of the
Division. Wisconsin savings banks may also exercise any power or offer any
financially related product or service that any other provider of financial
products or services may undertake in Wisconsin, unless the Division determines
otherwise. The exercise of these lending, investment and activity powers are
limited by federal law and the related regulations. See "-- Federal Regulation
Prior to Restructuring -- Activity Restrictions on State-chartered Banks" below.
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Loans-to-One-Borrower Limitations. With certain specified exceptions, a
Wisconsin chartered savings bank may not make loans or extend credit to a single
borrower and to entities related to the borrower in an aggregate amount that
would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of Wisconsin laws and regulations. Mutual Savings currently
complies with applicable loans-to-one borrower limitations.
Minimum Capital Requirements. Under regulations of the Division, Wisconsin
savings banks must at all times maintain a net worth ratio in an amount not less
than 6.0%. For purposes of the regulation, the term "net worth ratio" means the
ratio, expressed as a percentage, the numerator of which is the result of
subtracting the savings bank's liabilities from its assets and adding to that
number unallocated, general loan loss reserves, but not loss reserves for
specific, identified losses, and the denominator of which is the savings bank's
assets. As of June 30, 2000, Mutual Savings' net worth ratio was 9.72%.
Examination and Enforcement. The Division may examine Mutual Savings
whenever it deems an examination advisable. The Division examines Mutual Savings
at least every 18 months. The Division may remove from a savings bank any
employee, agent or person affiliated with the savings bank if the Division finds
that the person has directly or indirectly violated any state or federal law,
regulation, rule or order regarding the operations of the savings bank or has
breached fiduciary or professional responsibilities to the savings bank.
MUTUAL SAVINGS
Federal Regulation Prior to Restructuring
Capital Requirements. FDIC regulations require savings banks, such as
Mutual Savings, to maintain minimum levels of capital. The FDIC regulations
define two tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common shareholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock, any
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets (other than qualifying servicing rights), and any net
unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for savings banks) under the Uniform
Financial Institutions Rating System, and that are not experiencing or
anticipating significant growth, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other savings banks, the minimum leverage
capital requirement is 4.0%, unless a higher leverage capital ratio is warranted
by the particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both
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quantitative and qualitative factors. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies have
also issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
On June 30, 2000 Mutual Savings exceeded the minimum capital adequacy
requirements; see "Capitalization."
Activity Restrictions on State-chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended (FDIA), which was added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits the
activities and investments of state-chartered FDIC insured banks and their
subsidiaries to those permissible for federally chartered national banks and
their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Regulations promulgated by the FDIC under Section 24 allow state-chartered
savings banks to engage in certain activities upon notice to the FDIC, if such
activities are conducted in a majority-owned subsidiary and meet certain other
regulatory conditions. Pursuant to these regulations, Mutual Savings currently
owns, through a subsidiary, four lots adjacent to its headquarters in Brown
Deer, Wisconsin and 318 acres of undeveloped land in Oconomowoc, Wisconsin.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
state savings banks, including Mutual Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state savings bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
- insolvency, whereby the assets of the bank are less than its liabilities
to depositors and others;
- substantial dissipation of assets or earnings through violations of law
or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business;
and
- insufficient capital, or the incurring or likely incurring of losses that
will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal
assistance.
Deposit Insurance. The deposit accounts held by Mutual Savings are insured
by the SAIF to a maximum of $100,000 as permitted by law. Insurance on deposits
may be terminated by the FDIC if it finds the Mutual Savings has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS as Mutual Savings' primary regulator.
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Pursuant to FDICIA, the FDIC established a system for setting deposit
insurance premiums based upon the risks a particular bank or savings association
posed to its deposit insurance funds. Under the risk-based deposit insurance
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending six months before the assessment period. The three capital
categories are (i) well capitalized, (ii) adequately capitalized and (iii)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Mutual Savings.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. The management of Mutual Savings does not know of any practice, condition,
or violation that might lead to termination of its deposit insurance.
Transactions with Affiliates. Transactions between an insured state savings
bank, such as Mutual Savings, and any of its affiliates are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or
entity that controls, is controlled by or is under common control with the bank.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for the purposes of Sections 23A and
23B; however, the Federal Reserve Board has proposed treating any subsidiary of
a bank that is engaged in activities not permissible for bank holding companies
under the Bank Holding Company Act of 1956 ("BHCA"), as an affiliate for
purposes of Section 23A and 23B. Sections 23A and 23B limit the extent to which
the bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such bank's capital stock and surplus,
and limit all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The statutory sections also require that all
such transactions be on terms that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any purchase
of assets or services by a bank from an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those that
would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in
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real estate or made for the purpose of financing the construction of a building
or other improvements to real estate. Under the joint regulations adopted by the
federal banking agencies, all insured depository institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards (including loan-to-value limits) that are clear and
measurable, loan administration procedures, and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
- for loans secured by raw land, the supervisory loan-to-value limit is 65%
of the value of the collateral;
- for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the supervisory
limit is 75%;
- for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
- for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
- for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property, including
non-owner occupied, one- to four-family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the Community Reinvestment Act (CRA), any
insured depository institution, including Mutual Savings, has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the FDIC, in
connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
Among other things, current CRA regulations replace the prior process-based
assessment factors with a new evaluation system that would rate an institution
based on its actual performance in meeting community needs. In particular, the
new evaluation system focuses on three tests:
- a lending test, to evaluate the institution's record of making loans in
its service areas;
- an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
- a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
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The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Mutual Savings
received a "satisfactory" overall rating in its most recent CRA examination.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
define the five capital categories as follows: Generally, an institution will be
treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a
well-capitalized institution. An institution that has total risk-based capital
of less than 8%, Tier 1 risk-based-capital of less than 4% or a leverage ratio
that is less than 4% (or less than 3% if the institution is rated a composite
"1" under the Uniform Financial Institutions Rating System) would be considered
to be "undercapitalized." An institution that has total risk-based capital of
less than 6%, Tier 1 capital of less than 3% or a leverage ratio that is less
than 3% would be considered to be "significantly undercapitalized," and an
institution that has a tangible capital to assets ratio equal to or less than 2%
would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
- an amount equal to five percent of the bank's total assets at the time it
became "undercapitalized"; and
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- the amount that is necessary (or would have been necessary) to bring the
bank into compliance with all capital standards applicable with respect
to such bank as of the time it fails to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depository bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under FDICIA, the FDIC
is required to appoint a receiver or a conservator for a critically
undercapitalized bank within 90 days after the bank becomes critically
undercapitalized or to take such other action that would better achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the bank continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an insider) and any of
certain entities affiliated with any such person (an insider's related interest)
are subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and
the insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to Mutual Savings' loans. See "-- Loans-to-One Borrower
Limitations." All loans by a bank to all insiders and insiders' related
interests in the aggregate may not exceed the bank's unimpaired capital and
unimpaired surplus. With certain exceptions, loans to an executive officer,
other than loans for the education of the officer's children and certain loans
secured by the officer's residence, may not exceed the lesser of $100,000 or the
greater of $25,000 or 2.5% of the bank's capital and unimpaired surplus.
Regulation O also requires that any proposed loan to an insider or a related
interest of that insider be approved in advance by a majority of the board of
directors of the bank, with any interested director not participating in the
voting, if such loan, when aggregated with any existing loans to that insider
and the insider's related interests, would exceed either $500,000 or the greater
of $25,000 or 5% of the bank's unimpaired capital and surplus. Generally, such
loans must be made on substantially the same terms as, and follow credit
underwriting procedures that are not less stringent than, those that are
prevailing at the time for comparable transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or
compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
MUTUAL SAVINGS AND FIRST NORTHERN SAVINGS
Federal Regulation Following Restructuring
General. As federally chartered, SAIF-insured savings banks, Mutual Savings
and First Northern Savings (together, the "Banks") will be subject to extensive
regulation by the OTS and the FDIC. Lending activities and other investments
must comply with federal statutory and regulatory requirements. This federal
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the SAIF of the FDIC and depositors. This regulatory structure gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies
regarding the classification of assets and the establishment of adequate loan
loss reserves.
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The OTS will regularly examine the Banks and prepare a report on its
examination findings to their boards of directors. The Banks' relationship with
its depositors and borrowers will also be regulated by federal law, especially
in such matters as the ownership of savings accounts and the form and content of
the Banks' mortgage documents.
The Banks will have to file reports with the OTS and the FDIC concerning
their activities and financial condition, and will have to obtain regulatory
approvals prior to entering into transactions such as mergers with or
acquisitions of other financial institutions. Any change in such regulations,
whether by the OTS, the FDIC or the United States Congress, could have a
material adverse impact on the Banks and their operations.
Regulation of the Banks following the restructuring will be comparable in
many respects to the regulation of Mutual Savings prior to the restructuring
described above with several key differences. Because of their conversion to a
federal savings bank charter, the Banks will no longer be subject to the
regulation or supervision of the Division. In addition, because of this charter
conversion, the OTS will become their primary federal regulator. Set forth below
are several material differences in the federal regulation and supervision of
the Banks after the restructuring as compared to its regulation before the
restructuring as described above.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards. The standards are tangible capital
equal to 1.5% of adjusted total assets, core capital equal to at least 3% of
total adjusted assets, and risk-based capital equal to 8% of total risk-weighted
assets. Mutual Savings' pro forma capital ratios are set forth under "Regulatory
Capital Compliance."
Tangible capital is defined as core capital less all intangible assets and
mortgage servicing rights. Core capital is defined as common shareholders'
equity, noncumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, nonwithdrawable accounts and
pledged deposits of mutual savings associations and qualifying supervisory
goodwill, less nonqualifying intangible assets and mortgage servicing rights.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includible in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
OTS rules require a deduction from capital for institutions which have
unacceptable levels of interest rate risk. The OTS calculates the sensitivity of
an institution's net portfolio value based on data submitted by the institution
in a schedule to its quarterly Thrift Financial Report and using the interest
rate risk measurement model adopted by the OTS. The amount of the interest rate
risk component, if any, is deducted from an institution's total capital in order
to determine if it meets its risk-based capital requirement. Federal savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are exempt from filing the interest rate risk schedule. However,
the OTS may require any exempt institution to file such schedule on a quarterly
basis and may be subject to an additional capital requirement based on its level
of interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including dividend payments.
The OTS rules regarding capital distributions, which were substantially
updated effective April 1, 1999, define the term "capital distribution" as a
distribution of cash or other property to a savings
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association's owners, made on account of their ownership. The definition
specifically excludes dividends consisting only of a savings association's
shares or rights to purchase shares, and payments that a mutual savings
association is required to make under the terms of a deposit instrument.
Under the revised OTS rules, capital distributions also include a savings
association's payment to repurchase, redeem, retire, or otherwise acquire any of
its shares or other ownership interests, any payment to repurchase, redeem or
otherwise acquire debt instruments included in its total capital, and any
extension of credit to finance an affiliate's acquisition of those shares or
interests. Additionally, a capital distribution includes any direct or indirect
payment of cash or other property to owners or affiliates made in connection
with a corporate restructuring. The revised rule also defines as a capital
distribution any transaction the OTS or the FDIC determines, by order or
regulation, to be in substance a distribution of capital.
A final category of capital distribution under the revised OTS rules is any
other distribution charged against a savings association's capital accounts if
the savings association would not be well capitalized following the
distribution. As such, the revised capital distribution rules of the OTS do not
apply to capital distributions by wholly-owned operating subsidiaries of savings
associations. This is true because generally, for reporting purposes, the
accounts of a wholly-owned subsidiary are consolidated with those of the parent
savings association and any distributions by such subsidiary would not affect
the capital levels of the parent savings association.
For regulatory capital purposes, where the consolidated subsidiary is not
wholly owned, the balance sheet account "minority interests in the equity
accounts of subsidiaries that are fully consolidated" may be included in Tier 1
capital and total capital if certain conditions are met. Distributions by such
consolidated subsidiaries to shareholders other than the savings association
reduce the cited balance sheet account and, therefore, reduce capital.
Consequently, distributions by subsidiaries that are not wholly owned by the
savings association are subject to the revised OTS capital distribution rules if
the savings association will not be well capitalized following the distribution.
The revised OTS rule requires all savings associations to file a notice or
an application for approval before making a capital distribution. A savings
association must file an application if the association is not eligible for
expedited treatment under the application processing rules of the OTS or the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years.
A savings association must file only a notice whenever an application is
not required under the above standards and any of the following criteria are
satisfied:
- the savings association will not be at least adequately capitalized
following the capital distribution;
- the capital distribution would reduce the amount of, or retire any part
of the savings association's common or preferred stock, or retire any
part of debt instruments such as notes or debentures included in the
savings association's capital;
- the proposed distribution would violate a prohibition contained in any
applicable statute, regulation, or agreement between the savings
association and the OTS, or the FDIC, or a condition imposed on the
savings association in an OTS-approved application or notice; or
- the savings association is a subsidiary of a savings and loan holding
company.
If neither the savings association nor the proposed capital distribution
meet any of the criteria listed in the previous paragraph, the savings
association is not required to file a notice or an application before making a
capital distribution.
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Under the revised rule, the OTS will review a savings association's notice
or application and may disapprove a notice or deny an application if the OTS
makes any of the following determinations:
- The savings association will be undercapitalized, significantly
undercapitalized, or critically undercapitalized under the prompt
corrective action regulations of the OTS following the capital
distribution;
- The proposed capital distribution raises safety and soundness concerns;
or
- The proposed capital distribution violates a prohibition contained in any
statute, regulation, agreement between the savings association and the
OTS (or the FDIC), or a condition imposed on the savings association in
an OTS-approved application or notice.
Qualified Thrift Lender Test. Federal savings associations must meet a
qualified thrift lender test or they become subject to operating restrictions.
Until recently, the chief restriction was the elimination of borrowing rights
from the Federal Home Loan Bank. However, with passage of the Gramm-Leach-Bliley
Financial Modernization Act of 1999 by Congress, the failure to maintain
qualified thrift lender status will not affect borrowing rights with the Federal
Home Loan Bank. Notwithstanding these changes, Mutual Savings anticipates that
it will maintain an appropriate level of investments consisting primarily of
residential mortgages, mortgage-backed securities and other mortgage-related
investment, and otherwise qualify as a qualified thrift lender. The required
percentage of these mortgage-related investments is 65% of portfolio assets.
Portfolio assets are all assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 10% of total
assets. Compliance with the qualified thrift lender test is determined on a
monthly basis in nine out of every twelve months.
Transactions With Affiliates. Generally, federal banking law requires that
transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, some transactions can
be restricted to an aggregate percentage of the savings institution's capital.
Collateral in specified amounts must usually be provided by affiliates in order
to receive loans from the savings institution. In addition, a savings
institution may not extend credit to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings institution as affiliates on a case-by-case basis. For a
more complete discussion of these restrictions, see "Mutual Savings -- Federal
Regulation Prior to Restructuring -- Transactions with Affiliates" above.
Liquidity Requirements. All federal savings institutions are required to
maintain an average daily balance of liquid assets equal to a percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. Depending on economic conditions and
savings flows of all savings institutions, the OTS can vary the liquidity
requirement from time to time between 4% and 10%. Monetary penalties may be
imposed on institutions for liquidity requirement violations.
Federal Home Loan Bank System. Following the restructuring, the Banks will
remain members of the Federal Home Loan Bank of Chicago, which is one of 12
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by financial institutions and proceeds derived
from the sale of consolidated obligations of the Federal Home Loan Bank System.
It makes loans to members pursuant to policies and procedures established by the
board of directors of the Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the Federal
Home Loan Bank of Chicago in an amount equal to at least 1% of our aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 20% of our outstanding advances,
whichever is larger. Mutual Savings and First Northern Savings currently are in
compliance with this requirement and will be in compliance following the
restructuring. The Federal Home Loan Bank
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imposes various limitations on advances such as limiting the amount of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
Under the recently enacted Gramm-Leach-Bliley Financial Modernization Act
of 1999, Mutual Savings and First Northern Savings are voluntary members of the
Federal Home Loan Bank of Chicago. The banks could withdraw or significantly
reduce their stock ownership in the Federal Home Loan Bank of Chicago, although
they have no current intention to do so. In the past, the Federal Home Loan
Banks provided funds for programs to resolve the problems created by troubled
savings institutions and also contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of Federal Home Loan Bank dividends paid and could
continue to do so in the future.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their checking, NOW, and Super NOW checking accounts and non-personal
time deposits. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve System may be used to satisfy the OTS liquidity
requirements. Savings institutions have authority to borrow from the Federal
Reserve System "discount window," but Federal Reserve System policy generally
requires savings institutions to exhaust all other sources before borrowing from
the Federal Reserve System.
BANK MUTUAL REGULATION
After the restructuring, Bank Mutual, as a federal stock corporation in a
mutual holding company structure, will be deemed a federal mutual holding
company within the meaning of Section 10(o) of the Home Owners' Loan Act. Bank
Mutual will be required to register and file reports with the OTS and will be
subject to regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over Bank Mutual and any nonsavings institution
subsidiary. The OTS can restrict or prohibit activities that it determines to be
a serious risk to Bank Mutual. This OTS regulation is intended primarily for the
protection of Mutual Savings' depositors and not for the benefit of you, as Bank
Mutual's shareholders.
Bank Mutual will also be subject to the regulation and supervision of the
SEC and will be required to file certain reports with, and otherwise comply
with, the rules and regulations of the SEC. Certain of the SEC's rules and
regulations are designed to protect you, as Bank Mutual's shareholders.
ACQUISITION OF BANK MUTUAL
Under federal law, no person may acquire control of Bank Mutual, Mutual
Savings, or First Northern Savings without first obtaining, as summarized below,
the approval of such acquisition of control by the OTS (or another federal
banking regulator).
Under the federal Change in Bank Control Act and the Savings and Loan
Holding Company Act, any person, including a company, or group acting in
concert, seeking to acquire 10% or more of the outstanding shares of Bank Mutual
must file a notice with the OTS. In addition, any person or group acting in
concert seeking to acquire more than 25% of the outstanding shares of Bank
Mutual's common stock will be required to obtain the prior approval of the OTS.
Under regulations, the OTS generally has 60 days within which to act on such
applications, taking into consideration certain factors, including the financial
and managerial resources of the acquiror, the convenience and needs of the
communities served by Bank Mutual, Mutual Savings and First Northern Savings,
and the antitrust effects of the acquisition.
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RESTRICTIONS ON ACQUISITION OF BANK MUTUAL
GENERAL
The plan of restructuring provides for the conversion of Mutual Savings
from the mutual to the stock form of organization and the formation of a stock
holding company and a mutual holding company. See "The
Restructuring -- General." Certain provisions in Bank Mutual's charter and
bylaws and in its benefit plans and agreements entered into in connection with
the restructuring, together with provisions of federal law and certain governing
regulatory restrictions, may have anti-takeover effects.
MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure will restrict the ability of our
shareholders to effect a change of control of management because, as long as the
MHC remains in existence as a mutual savings bank holding company, it will
control a majority of Bank Mutual's voting stock. Moreover, the directors of the
MHC initially will be the directors of Bank Mutual. The MHC will be able to
elect all of the members of the Board of Directors of Bank Mutual, and as a
general matter, will be able to control the outcome of all matters presented to
the shareholders of Bank Mutual for a vote. See "The Restructuring -- Possible
Conversion of the MHC to Stock Form."
CHANGE IN BANK CONTROL
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
federal savings bank unless the OTS has been given 60 days prior written notice.
Federal law provides that no company may acquire control of a bank holding
company without the prior approval of the OTS. Any company that acquires control
becomes a "thrift holding company" subject to registration, examination and
regulation by the OTS.
Pursuant to federal regulations, control is conclusively deemed to have
occurred when an entity, among other things, has acquired more than 25 percent
of any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have occurred, subject to rebuttal, upon the acquisition of more
than 10 percent of any class of voting stock, or of more than 25 percent of any
class of stock, of a federal savings bank, where certain enumerated control
factors are also present in the acquisition.
The OTS may prohibit an acquisition of control if:
(1) it would result in a monopoly or substantially lessen competition;
(2) the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of the
public to permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of stock by one or more
tax-qualified employee stock benefits plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
BANK MUTUAL'S CHARTER AND BYLAWS
General. Bank Mutual's charter and bylaws are available at Mutual's
administrative office or by writing or calling us, 4949 West Brown Deer Road,
Brown Deer, Wisconsin 53223, telephone number (414) 354-1500.
Classified Board of Directors and Related Provisions. Bank Mutual's board
of directors is divided into three classes which are as nearly equal in number
as possible. Directors serve for terms of three years. As
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a result, each year, only one-third of the directors are eligible to be elected
and it would take at least two years to elect a majority of our directors.
Restrictions on Voting of Securities. The charter provides that for five
years after the restructuring any shares of common stock beneficially owned
directly or indirectly in excess of 10% by any person, other than the MHC, will
not be counted as shares entitled to vote, shall not be voted by any person or
counted as voting shares in connection with any matter submitted to shareholders
for a vote, and shall not be counted as outstanding for purposes of determining
a quorum or the affirmative vote necessary to approve any matter submitted to
the Shareholders for a vote. It is possible for such a person to have voting
authority for less than 10% of our shares, depending on how the shares are
registered.
Prohibition Against Cumulative Voting. Bank Mutual's charter does not
permit cumulative voting by shareholders in the election of directors. Therefor,
the holders of a majority of the shares voted at a meeting, thus precluding a
majority shareholder from obtaining representation on the board of directors
unless the minority shareholder is able to obtain the support of a majority. In
accordance with the law governing mutual holding companies, the MHC must remain
the majority holder of Bank Mutual's voting stock.
Additional Anti-Takeover Provisions. The provisions described above are not
the only provisions of our charter and bylaws having an anti-takeover effect.
For example, the charter authorizes the issuance of up to two million shares of
preferred stock, which conceivably would represent an additional class of stock
required to approve any proposed acquisition. This preferred stock, none of
which has been issued, together with authorized but unissued shares of the
common stock could represent additional capital required to be purchased by the
acquiror. Bank Mutual's charter authorizes the issuance of up to 100 million
shares of the common stock.
In addition to discouraging a takeover attempt which a majority of our
shareholders might determine to be in their best interest or in which our
shareholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult. It is possible that incumbent officers and directors might be
able to retain their positions (at least until their term of office expires)
even though a majority of our shareholders, other than the mutual holding
company, desires a change.
The provisions described above are intended to reduce Bank Mutual's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its board of directors. The
provisions of the employment agreements, the change of control agreements, the
management recognition plan and the stock option plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by Bank
Mutual and its subsidiaries in the event of a takeover. See
"Management -- Employment Agreements," and "-- Future Stock Benefit
Plans -- Stock Option Plan."
Bank Mutual's board of directors believes that the provisions of the
charter, bylaws and benefit plans to be established are in the best interests of
Bank Mutual and its shareholders. An unsolicited non-negotiated proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the board of directors believes it is in the best
interests of Bank Mutual and its shareholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts. It is also
the board of directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of Mutual and that otherwise is in the best interests of all shareholders.
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RIGHTS OF BANK MUTUAL SHAREHOLDERS;
COMPARISON TO FIRST NORTHERN SHARES
Upon consummation of the merger, the shareholders of First Northern will
become shareholders of Bank Mutual. The rights of the Bank Mutual shareholders
are governed by federal law and Bank Mutual's charter and bylaws. Among other
things, Bank Mutual's charter and bylaws provide that, if consistent with
federal law, Bank Mutual will be governed by corporate law provisions of
Wisconsin law, as if it were a Wisconsin corporation. Mutual has made an
exception to that requirement for various antitakeover laws under Wisconsin law;
see "Antitakeover Laws" below.
Bank Mutual is authorized to issue 100 million shares of common stock, par
value $0.01 per share, and 10 million shares of preferred stock, $0.01 par
value. The common stock represents nonwithdrawable capital, will not be in an
account of insurable type and will not be insured by the FDIC or any other
governmental agency.
The rights of the First Northern shareholders presently are governed by
Wisconsin law and the First Northern restated articles of incorporation and
bylaws. These rights differ in certain respects and the material differences are
summarized below.
NO PREEMPTIVE RIGHTS
Neither the holders of Bank Mutual common stock nor First Northern common
stock have any preemptive rights with respect to any shares issued by the
companies. Any subsequent stock issuance by Bank Mutual, however, may only be
effected through a stock issuance plan approved by the OTS which would grant
subscription priorities to the MHC's members unless Bank Mutual demonstrates
that a non-conforming stock issuance would be more beneficial to it.
LIQUIDATION RIGHTS; REDEMPTION
In the event of any liquidation, dissolution or winding up of Bank Mutual,
the holders of its common stock generally would be entitled to receive, after
payment of all liabilities and any preferred stock preferences, all assets of
Bank Mutual available for distribution. Common stock is not subject to any
redemption provisions. Similar provisions apply for First Northern.
Federal regulations require that, so long as the MHC remains in place, it
must hold a majority of the outstanding shares of Bank Mutual common stock.
That, in general, will give the MHC the right to control significant decisions
and transactions involving Bank Mutual. First Northern does not have a similar
controlling person.
TREATMENT UPON FULL CONVERSION
In the event that Bank Mutual would make a full conversion of the MHC to
the stock form of organization, the plan of restructuring includes provisions
intended to protect Bank Mutual shareholders. In general, they provide that Bank
Mutual shareholders would receive, in any subsequent full conversion, the same
percentage of ownership of a successor entity as they would hold in Bank Mutual
prior to that conversion. See "The Restructuring -- Possible Conversion of the
MHC to Stock Form."
Bank Mutual cannot assure that there will be a subsequent full conversion.
Also, any such full conversion will be subject to OTS, or other governmental
regulations as then in effect. Those regulations may affect the treatment of
Bank Mutual shareholders in any full conversion, and could have the effect of
disadvantaging Bank Mutual shareholders.
VOTING RIGHTS
Holders of Bank Mutual common stock will have one vote for each share held
by them on all matters which are representative to shareholder's vote. There is
an exception to this rule during the first five years of Bank Mutual's existence
for persons or entities, other than the MHC, which come to acquire more than
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10% of Bank Mutual's common stock. In that case, shares in excess of 10% of Bank
Mutual's outstanding common stock will not have any voting rights.
Shares of First Northern common stock have one share per vote on each
matter as considered by shareholders except in the case of restrictions on
certain 20% or greater shareholders imposed by Wisconsin law. See "Anti-takeover
Laws -- Control Share Voting Restrictions" below.
Neither Bank Mutual's nor First Northern's shareholders have cumulative
rights in the election of directors. Because the MHC will always own more than
50% of the shares of Bank Mutual, it will control the election of directors.
STATUTORY SHAREHOLDER LIABILITY
Under Wisconsin law, shareholders of corporations which are either
organized or qualified to do business in the state of Wisconsin may be
personally liable for unpaid compensation claims by employees, for up to six
month services in any one case. As a Wisconsin corporation, shares of First
Northern common stock have been subject to this employee wage statute.
Non-Wisconsin corporations which are qualified to do business in Wisconsin have
been judicially determined to be subject to this law. However, it has not been
judicially determined whether federally-chartered entities, such as Bank Mutual,
may be made subject to the Wisconsin statute.
BOARD OF DIRECTORS
The Bank Mutual bylaws provide that its board of directors shall consist of
eleven members. The directors are classified into three classes, which are to be
as nearly equal in size as possible. Each class is elected for a three-year
term, and one of the classes of the board of directors is subject to election at
each annual meeting of Bank Mutual shareholders. The First Northern articles and
bylaws provide for a size to be determined by the board of directors; First
Northern directors are also elected by class for three-year terms.
The Bank Mutual bylaws also provide that a director may be removed only for
cause by a vote of the holders of majority of shares entitled to vote.
Vacancies on the Bank Mutual board of directors, whether by resignation of
a director or by the establishment of an increase in the number of directors,
may be filled by action of the remaining directors of Bank Mutual. However, the
directors so elected only serve until the next meeting of shareholders. In First
Northern's case, under Wisconsin law, directors elected by the Board may serve
the remaining term of the class.
Directors of Bank Mutual must own not less than 100 shares of Bank Mutual
common stock. First Northern does not have an equivalent share ownership
requirement.
SPECIAL MEETINGS OF SHAREHOLDERS
Under Bank Mutual's charter, until five years after the Mutual
restructuring, special meetings of shareholders of Bank Mutual may only be
called upon the direction of the board of directors. Thereafter, special
meetings may be called by the Chairman of the Board, the president and majority
of the directors, or upon the written request of holders of not less than 1/10th
of all the outstanding shares of capital stock. Wisconsin law provides rights to
First Northern shareholders similar to those which will apply to Bank Mutual
after 2005.
The Bank Mutual board of directors will act as a nominating committee for
the selecting of management nominees for election of directors. With certain
exceptions in the case of vacancies, nominating committee must deliver written
nominations to the secretary at least 20 days prior to the date of the annual
meeting. No nominations for directors except for those made by the nominating
committee will be voted upon at the annual meeting unless other nominations by
shareholders are made in writing
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and delivered to Bank Mutual at least five days prior to the date of the annual
meeting. First Northern's nominating committee is also its entire board of
directors.
PREFERRED STOCK
The Bank Mutual charter authorizes the issuance of preferred stock, in one
or more classes with the rights and preferences of shareholders of those classes
to be determined by the Board of Directors. First Northern's articles of
incorporation similarly authorize preferred stock. In both cases, if the
companies were to issue shares of preferred stock, their holders would have
dividend and liquidation rights prior to those holders of common stock, and
would have such voting rights as were determined by the Board of Directors.
APPROVAL OF FUNDAMENTAL TRANSACTIONS
Corporate combination transactions such as mergers, sales of substantially
all assets, or dissolution of the corporation, would require the approval of the
holders of a majority of the outstanding shares of Bank Mutual common stock.
Because the MHC would own a majority, it would control the decisions on these
matters. Majority vote would also be required for similar transactions for First
Northern, except in the case where Wisconsin law would require a higher
percentage in the case of certain combinations with affiliates. See
"Anti-takeover Laws" below.
Similarly, the approval of the majority of outstanding shares is required
for an amendment to the Bank Mutual charter. A similar vote is required for
amendment to First Northern's Articles of Incorporation. In the event either
company had issued shares of preferred stock, preferred shareholders may have
rights to vote as a class on certain types of amendments.
DISSENTERS' RIGHTS
Because its securities trade on the Nasdaq Stock Market, Wisconsin law does
not generally give First Northern shareholders dissenters' rights in most
transactions. Because Bank Mutual has provided that it will be subject to
Wisconsin corporate law provisions, so long as Bank Mutual has a class of
securities traded on the Nasdaq Stock Market or an exchange, its shareholders
also will not have dissenters' rights in most corporate transactions.
ANTI-TAKEOVER LAWS
As discussed above, there are certain provisions of Bank Mutual charter and
bylaws which could impede a takeover. For example, as discussed above, Bank
Mutual will have a classified board of directors and directors may not be
removed by shareholders without cause. Further, the control by the MHC will, in
and of itself, have the effect of restricting a takeover of Bank Mutual.
Additionally, for five years, Bank Mutual articles and bylaws restrict the
voting power of any party other than the MHC which would own more than 10% of
Bank Mutual common stock and restrict the calling of special meetings by
shareholders. While First Northern also has a classified board of directors, the
other provisions intended to inhibit a takeover do not apply to First Northern.
Although Bank Mutual has provided in its charter and bylaws that it will be
subject to Wisconsin corporate law provisions, its charter provides that it is
not subject to various provisions of the Wisconsin Business Corporation Law
which may impede takeovers. First Northern has been subject to those laws.
Therefore, the followings laws will be no longer applicable.
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Business Combination Statute. Sections 180.1140 to 180.1144 of the
Wisconsin Business Corporation Law regulate a broad range of business
combinations between a resident domestic corporation and an interested
stockholder. A business combination is defined to include any of the following
transactions:
- merger or share exchange;
- sale, lease, exchange, mortgage, pledge, transfer, or other disposition
of assets equal to 5% or more of the market value of the stock or assets
of the company or 10% of its earning power or income;
- issuance of stock or rights to purchase stock with a market value equal
to 5% or more of the outstanding stock; and
- adoption of a plan of liquidation or dissolution.
A resident domestic corporation is defined to mean a Wisconsin corporation
that has a class of voting stock that is registered or traded on a national
securities exchange or that is registered under Section 12(g) of the Exchange
Act and that, as of the relevant date, satisfies any of the following:
- its principal offices are located in Wisconsin;
- it has significant business operations located in Wisconsin;
- more than 10% of the holders of record of its shares are residents of
Wisconsin; or
- more than 10% of its shares are held of record by residents of Wisconsin.
First Northern is a resident domestic corporation for purposes of the Wisconsin
anti-takeover laws.
An interested stockholder is defined to mean a person who beneficially
owns, directly or indirectly, 10% of the voting power of the outstanding voting
stock of a corporation or who is an affiliate or associate of the corporation
and beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years.
Under this law, First Northern cannot engage in a business combination with
an interested stockholder for a period of three years following the date such
person becomes an interested stockholder, unless the board of directors approved
the business combination or the acquisition of the stock that resulted in the
person becoming an interested stockholder before such acquisition. First
Northern may engage in a business combination with an interested stockholder
after the three-year period with respect to that stockholder expires only if one
or more of the following conditions is satisfied:
- the board of directors approved the acquisition of the stock prior to
such stockholder's acquisition date;
- the business combination is approved by a majority of the outstanding
voting stock not beneficially owned by the interested stockholder; or
- the consideration to be received by shareholders meets certain fair price
requirements of the statute with respect to form and amount.
Fair Price Statute. The Wisconsin Business Corporation Law also provides,
in Sections 180.1130 to 180.1133, that certain mergers, share exchanges or
sales, leases, exchanges or other dispositions of assets in a transaction
involving a significant shareholder and a resident domestic corporation require
a supermajority vote of shareholders in addition to any approval otherwise
required, unless shareholders receive a fair price for their shares that
satisfies a statutory formula. A significant shareholder for this purpose is
defined as a person or group who beneficially owns, directly or indirectly, 10%
or more of the voting stock of the corporation, or is an affiliate of the
corporation and beneficially owned, directly or indirectly, 10% or more of the
voting stock of the corporation within the last two years. Any such business
combination must be approved by 80% of the voting power of the corporation's
stock and at least two-thirds of the voting power of the corporation's stock not
beneficially held by the significant shareholder
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who is party to the relevant transaction or any of its affiliates or associates,
in each case voting together as a single group, unless the following fair price
standards have been met:
- the aggregate value of the per share consideration is equal to the higher
of:
- the highest price paid for any common shares of the corporation by the
significant shareholder in the transaction in which it became a
significant shareholder or within two years before the date of the
business combination;
- the market value of the corporation's shares on the date of commencement
of any tender offer by the significant shareholder, the date on which
the person became a significant shareholder or the date of the first
public announcement of the proposed business combination, whichever is
higher; or
- the highest preferential liquidation or dissolution distribution to
which holders of the shares would be entitled; and
- either cash, or the form of consideration used by the significant
shareholder to acquire the largest number of shares, is offered.
Control Share Voting Restrictions. Under Section 180.1150 of the Wisconsin
Business Corporation Law, unless otherwise provided in the articles of
incorporation, the voting power of shares, of a resident domestic corporation,
held by any person or group of persons acting together in excess of 20% of the
voting power in the election of directors is limited (in voting on any matter)
to 10% of the full voting power of those shares. This restriction does not apply
to shares acquired directly from the resident domestic corporation, in certain
specified transactions, or in a transaction in which the corporation's
shareholders have approved restoration of the full voting power of the otherwise
restricted shares. Because of the 10% threshold contained in Wisconsin's
business combination statute discussed above, this control share threshold of
20% may not be triggered unless the board of directors first approves a
transaction that permits the shareholder to exceed the 10% ownership level.
Defensive Action Restrictions. Section 180.1134 of the Wisconsin Business
Corporation Law provides that, in addition to the vote otherwise required by law
or the articles of incorporation of a resident domestic corporation, the
approval of the holders of a majority of the shares entitled to vote is required
before such corporation can take certain action while a takeover offer is being
made or after a takeover offer has been publicly announced and before it is
concluded. This statute requires shareholder approval for the corporation to do
either of the following:
- acquire more than 5% of its outstanding voting shares at a price above
the market price from any individual or organization that owns more than
3% of the outstanding voting shares and has held such shares for less
than two years, unless a similar offer is made to acquire all voting
shares and all securities which may be converted into voting shares; or
- sell or option assets of the corporation which amount to 10% or more of
the market value of the corporation, unless the corporation has at least
three independent directors (directors who are not officers or employees)
and a majority of the independent directors vote not to have this
provision apply to the corporation.
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PRO FORMA FINANCIAL DATA
PRO FORMA DATA REFLECTING THE FIRST NORTHERN MERGER
In the following tables, we provide unaudited pro forma condensed combined
financial data of Bank Mutual and subsidiaries which includes the historical
data for Mutual Savings and First Northern plus adjustments to give effect to
the First Northern merger. The data are based on an assumption that Bank Mutual
common shares are issued for 40% of First Northern shares outstanding on June
30, 2000 and cash is paid for 60% of First Northern shares outstanding on June
30, 2000. We assume that shares had been sold at the beginning of the period and
the net proceeds from the offering had been invested at the indicated rate which
represents the yield on the one-year U.S. Government securities on the indicated
date. The yield on the one-year U.S. Government securities was used rather than
the arithmetic average of the average yield on total interest-earning assets and
the average rate paid on deposits, because the yield on one-year U.S. Government
securities is believed to be more reflective of market interest rates.
Additional assumptions are discussed in the notes that follow the table.
Operating results data assumes that this transaction occurred on the first day
of each period shown, whereas financial condition data assumes that this
transaction occurred at the date indicated. The per share information is
calculated assuming the number of shares outstanding is unchanged throughout
each respective time period.
In accordance with generally accepted accounting principles the First
Northern merger will be accounted for using the purchase method. Accordingly,
the recorded assets and liabilities of Mutual Savings will be carried forward at
their recorded amounts and the historical operating results of Mutual Savings
will be unchanged for the prior periods being reported on. However, the assets
and liabilities of First Northern will be adjusted to fair value at the date of
the merger. To the extent that the purchase price, consisting of the number of
shares of Bank Mutual to be issued to former First Northern shareholders at fair
value plus cash to be paid to former First Northern shareholders, exceeds the
fair value of the net assets of First Northern at the merger date, that excess
will be reported as an intangible asset to be amortized to the consolidated
income of Bank Mutual in future periods. Further, the purchase accounting method
results in the operating results of First Northern only being included in the
consolidated income of Bank Mutual beginning from the date of the merger.
We present this pro forma data as an illustration only. It does not
necessarily indicate the financial position or financial results that would have
actually been reported if the restructuring and merger had occurred as of, or
at, the beginning of the periods presented, nor does it necessarily indicate
future financial position or results of operations. The pro forma results of
operations neither assume nor incorporate any benefits from cost savings or
synergies of operations of the combined companies. The effects of the stock
offering are reflected in "Pro Forma Data Reflecting the Stock Offering" below
and the following tables should be read in conjunction with that information.
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UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
FAIR VALUE
HISTORIC HISTORIC PRE-STOCK AND PRE-STOCK
MUTUAL FIRST OFFERING MERGER OFFERING
SAVINGS NORTHERN COMBINED ADJUSTMENTS MERGED
---------- -------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..... $ 31,817 $ 11,234 $ 43,051 $(83,960)(a)(b) $ (40,909)
Investments................... 518,838 52,680 571,518 (553)(c) 570,965
Loans, net.................... 1,129,619 797,177 1,926,796 (9,809)(c) 1,916,987
Office properties and
equipment................... 26,727 8,092 34,819 3,340(c) 38,159
Intangible assets............. 11,027 -- 11,027 58,554(c) 69,581
Other assets.................. 41,142 35,692 76,834 5,581(b)(c) 82,415
---------- -------- ---------- -------- ----------
Total assets............. $1,759,170 $904,875 $2,664,045 $(26,847) $2,637,198
========== ======== ========== ======== ==========
LIABILITIES AND EQUITY
Liabilities:
Deposits.................... $1,300,613 $568,625 $1,869,238 $ (9)(c) $1,869,229
Borrowings.................. 264,667 247,353 512,020 (1,389)(c) 510,631
Other liabilities........... 26,302 13,293 39,595 -- 39,595
---------- -------- ---------- -------- ----------
Total liabilities... 1,591,582 829,271 2,420,853 (1,398) 2,419,455
Shareholders' equity.......... 167,588 75,604 243,192 (25,449)(a)(b)(c) 217,743
---------- -------- ---------- -------- ----------
Total liabilities and
equity................. $1,759,170 $904,875 $2,664,045 $(26,847) $2,637,198
========== ======== ========== ======== ==========
</TABLE>
-------------------------
(a) Assumes that First Northern shares are exchanged for 60% cash and 40% Bank
Mutual shares based on a value of $15.00 per share for each First Northern
share outstanding. Adjusted outstanding First Northern shares used to
calculate book value per common share is 8,375,808, resulting in the
issuance of 5,025,485 shares of Bank Mutual and the payment of $75.4
million of cash to former First Northern shareholders. Also reflected is
the $100,000 capital contribution to form the MHC.
(b) Adjustment to record the effects of estimated non-recurring merger-related
charges of $8.5 million, $5.7 million net of tax effect, which will be
charged to earnings of First Northern immediately prior to the First
Northern merger and which consist of the following (in thousands):
<TABLE>
<S> <C>
Merger related professional fees*........................... $1,000
Costs of acquisition*....................................... 500
Buy-back of outstanding options............................. 5,728
Restructuring charges....................................... 500
Benefit plan accruals....................................... 750
------
8,478
Tax benefit................................................. 2,791
------
Total estimated non-recurring charges....................... $5,687
======
</TABLE>
-------------------------
* Amount not tax effected as it is not deductible for federal and state
income tax purposes.
(c) Under purchase accounting, First Northern's assets and liabilities are to
be adjusted to their estimated fair values. The estimated fair value
adjustments have been determined by Mutual based upon
135
<PAGE> 138
available information. The following sets forth the purchase accounting
adjustments made to reflect First Northern's assets and liabilities to fair
values at June 30, 2000 (in thousands):
<TABLE>
<S> <C> <C>
Historical shareholders' equity......................... $75,604
Investments............................................. (553)
Loans receivable........................................ (9,809)
Office properties and repossessed assets................ 3,340
Other assets -- loan servicing rights................... 900
Other assets -- income tax benefit...................... 1,890
Deposits................................................ 9
Borrowings.............................................. 1,389
-------
Adjusted shareholders' equity...................... 72,770
Purchase price -- cash.................................. $ 75,382
Purchase price -- stock................................. 50,255
Acquisition costs....................................... 5,687
---------
131,324
Cost in excess of net assets of business acquired....... $58,554
=======
</TABLE>
136
<PAGE> 139
UNAUDITED PRO FORMA CONDENSED
COMBINED PRE-STOCK OFFERING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
RESTRUCTURING
HISTORIC HISTORIC PRE-STOCK FAIR VALUE PRE-STOCK
MUTUAL FIRST OFFERING AND MERGER OFFERING
SAVINGS NORTHERN COMBINED(a) ADJUSTMENTS MERGED
-------- -------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................... $60,482 $30,051 $90,533 $(1,554)(b)(c) $88,979
Interest expense.................. 37,061 19,186 56,247 (233)(d) 56,014
------- ------- ------- ------- -------
Net interest income............... 23,421 10,865 34,286 (1,321) 32,965
Provision for losses on loans..... 236 330 566 -- 566
------- ------- ------- ------- -------
Net interest income after
provision for losses on loans... 23,185 10,535 33,720 (1,321) 32,399
Total non-interest income......... 4,016 2,104 6,120 (64)(e) 6,056
Total non-interest expenses....... 16,686 7,694 24,380 1,478(f)(g) 25,858
------- ------- ------- ------- -------
Income before income taxes........ 10,515 4,945 15,460 (2,863) 12,597
Income taxes...................... 4,001 1,569 5,570 (560)(h) 5,010
------- ------- ------- ------- -------
Net income........................ $ 6,514 $ 3,376 $ 9,890 $(2,303) $ 7,587
======= ======= ======= ======= =======
</TABLE>
-------------------------
(a) Reflects the historical combined earnings of Mutual Savings and First
Northern prior to the stock offering of Bank Mutual.
(b) Reflects the loss of interest revenue on $84.0 million of cash outflows
related to the First Northern merger at 6.17% (3.70% net of tax at the
40.0% effective rate), which represents the yield on the one year U.S.
treasury note as of June 30, 2000.
(c) Reflects the amortization of the fair market value adjustment of loans and
investments using the interest method over the estimated remaining life.
(d) Reflects accretion of discount related to deposits and borrowings using the
interest method over the estimated remaining life.
(e) Reflects amortization of loan servicing rights over a seven year period.
(f) Reflects additional depreciation resulting from write-up in value of office
properties over 30 years using the straight-line method.
(g) Reflects amortization of intangible assets from the First Northern merger
over a 20 year life using the straight-line method.
(h) Tax effect a 40.0% marginal tax rate of pro forma adjustments, except for
intangible amortization, which has no tax effect.
137
<PAGE> 140
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
RESTRUCTURING
HISTORIC HISTORIC PRE-STOCK FAIR VALUE PRE-STOCK
MUTUAL FIRST OFFERING AND MERGER OFFERING
SAVINGS NORTHERN COMBINED(A) ADJUSTMENTS MERGED
-------- -------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income.................... $118,302 $52,770 $171,072 $ (2,907)(b,c) $168,165
Interest expense................... 75,337 30,686 106,023 (466)(d) 105,557
-------- ------- -------- -------- --------
Net interest income................ 42,965 22,084 65,049 (2,441) 62,608
Provision for losses on loans...... 350 472 822 -- 822
-------- ------- -------- -------- --------
Net interest income after provision
for losses on loans.............. 42,615 21,612 64,227 (2,441) 61,786
Total non-interest income.......... 7,984 3,854 11,838 (129)(e) 11,709
Total non-interest expenses........ 51,279(h) 14,564 65,843 2,896(f)(g) 68,739
-------- ------- -------- -------- --------
Income before income taxes......... (680) 10,902 10,222 (5,466) 4,756
Income taxes....................... 3,803 3,525 7,328 (1,039)(i) 6,289
-------- ------- -------- -------- --------
Net income......................... $ (4,483)(h) $ 7,377 $ 2,894 $ (4,427) $ (1,533)
======== ======= ======== ======== ========
</TABLE>
-------------------------
(a) Reflects the historical combined earnings of Mutual Savings and First
Northern prior to the stock offering of Bank Mutual.
(b) Reflects loss of interest revenue on $84.0 million of cash outflows related
to the First Northern merger at 5.93% (3.56% net of tax at 40% effective
rate), which represents the yield on the one year U.S. treasury note as of
December 31, 1999.
(c) Reflects the amortization of the fair market value adjustment on loans and
investments using the interest method over the estimated remaining life.
(d) Reflects accretion of discount related to deposits and borrowings using the
interest method over the estimated remaining life.
(e) Reflects amortization of loan servicing rights over a seven year period.
(f) Reflects additional depreciation resulting from write-up in value of office
properties over 30 years using the straight-line method.
(g) Reflects amortization of intangible assets from the First Northern merger
over a 20 year life using straight-line method.
(h) In 1999, non-interest expense includes a special write-off of intangible
assets of $15.6 million which Mutual deemed to be impaired. The intangible
assets resulted from the 1997 acquisition of First Federal. The
net-of-income tax effect on net income of the write-off in 1999 was a
decrease of $13.6 million.
(i) Tax effect at 40.0% marginal tax rate of pro forma adjustments, except for
intangible amortization, which has no tax effect.
PRO FORMA DATA REFLECTING THE STOCK OFFERING
In the following tables, we provide unaudited pro forma condensed combined
financial data of, and assumptions relating to, Bank Mutual reflecting the stock
offering. The data assumes that the First Northern merger has also occurred;
detailed effects of the First Northern merger are reflected in the pro forma
data on the preceding pages.
In accordance with generally accepted accounting principles, the
restructuring will be accounted for at historical cost in a manner similar to
pooling of interest accounting in accordance with generally accepted accounting
principles. Accordingly, the carrying value of Mutual Savings' assets,
liabilities and equity will
138
<PAGE> 141
not be affected by the restructuring and will be reflected in the successor
stock savings bank's financial statements based upon their historical amounts.
We present this pro forma data as an illustration only. It does not
necessarily indicate the financial position or financial results that would have
actually been reported if the restructuring and merger had occurred as of, or
at, the beginning of the periods presented, nor do they necessarily indicate
future financial position or results of operations. The pro forma results of
operations neither assume nor incorporate any benefits from cost savings or
synergies of operations of the combined companies.
BANK MUTUAL CORPORATION
STOCK OFFERING
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
4,692,782 5,965,232 7,237,682 8,701,000
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(a)
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross proceeds............................ $ 46,928 $ 59,652 $ 72,377 $ 87,010
Less marketing fees and other issuance
expenses................................ (3,462) (3,638) (3,813) (4,015)
----------- ----------- ----------- -----------
Estimated net proceeds.................... 43,466 56,014 68,564 82,995
Less: Common stock acquired by ESOP....... (7,775) (8,793) (9,811) (10,981)
Less: Common stock to be acquired by
MRP..................................... (2,915) (3,297) (3,679) (4,118)
----------- ----------- ----------- -----------
Estimated adjusted net proceeds(b)........ $ 32,776 $ 43,925 $ 55,074 $ 67,896
=========== =========== =========== ===========
Combined net income:
Historical combined(c).................. $ 7,587 $ 7,587 $ 7,587 $ 7,587
Interest income(d)...................... 607 813 1,019 1,257
ESOP(e)................................. (233) (264) (294) (329)
MRP(f).................................. (175) (198) (221) (247)
----------- ----------- ----------- -----------
Pro forma income.......................... $ 7,786 $ 7,938 $ 8,091 $ 8,267
=========== =========== =========== ===========
Earnings per share:
Historical combined(c).................. $ 0.41 $ 0.36 $ 0.33 $ 0.29
Interest income(d)...................... 0.03 0.04 0.04 0.05
ESOP(e)................................. (0.01) (0.01) (0.01) (0.01)
MRP(f).................................. (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma basic and diluted earnings per
share(g)(h)(j).......................... $ 0.42 $ 0.38 $ 0.35 $ 0.32
=========== =========== =========== ===========
Pro forma basic P/E ratio(g)(h)........... 11.9x 13.2x 14.3x 15.6x
=========== =========== =========== ===========
Number of shares used in calculating net
income per share(j)..................... 18,440,490 20,854,973 23,269,458 26,046,114
=========== =========== =========== ===========
Shareholders' equity:
Historical combined(i).................. $ 217,743 $ 217,743 $ 217,743 $ 217,743
Estimated net proceeds.................. 43,466 56,014 68,564 82,995
Less: Common stock acquired by ESOP(e).. (7,775) (8,793) (9,811) (10,981)
Less: Common stock to be acquired by
MRP(f)............................... (2,915) (3,297) (3,679) (4,118)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(k)......... $ 250,519 $ 261,668 $ 272,817 $ 285,639
=========== =========== =========== ===========
</TABLE>
139
<PAGE> 142
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
4,692,782 5,965,232 7,237,682 8,701,000
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(a)
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Shareholders' equity per share:
Historical combined..................... $ 11.18 $ 9.89 $ 8.86 $ 7.92
Estimated net proceeds.................. 2.23 2.54 2.79 3.02
Less: Common stock acquired by ESOP(e).. (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by
MRP(f)............................... (0.15) (0.15) (0.15) (0.15)
----------- ----------- ----------- -----------
Pro forma shareholders' equity per
share(g)(h)(j).......................... $ 12.87 $ 11.88 $ 11.10 $ 10.38
=========== =========== =========== ===========
Pro forma price to book value
ratio(g)(h)............................. 77.76% 84.18% 90.09% 96.34%
=========== =========== =========== ===========
Number of shares used in equity per share
calculations(j)......................... 19,475,485 22,025,485 24,575,485 27,507,985
=========== =========== =========== ===========
</TABLE>
-------------------------
(a) Assumes an increase in the number of shares due to a 15% increase in the
maximum of the offering range to reflect changes in market and financial
conditions before the restructuring and stock offering is completed or to
fill the order of the employee stock ownership plan.
(b) Estimated adjusted proceeds consist of the estimated net stock offering
proceeds, minus (i) the proceeds attributable to the purchase by Mutual
Savings' employee stock ownership plan and (ii) the value of the shares to
be purchased by Mutual Savings' recognition plan after the restructuring
and stock offering, subject to shareholder approval, at an assumed purchase
price of $10.00 per share. Marketing fees and other issuance expenses
consist of legal, accounting, printing and other fixed costs totaling
$2,875,000 plus variable marketing fees based on 1.50% of gross proceeds
less shares to be acquired by the ESOP.
(c) Reflects the combined historical net earnings of Mutual Savings and First
Northern for the six months ended June 30, 2000, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of Bank Mutual at 6.17%, (3.70% net of income tax at 40.0%
effective rate) which represents the one year U. S. treasury note rate at
June 30, 2000.
(e) Bank Mutual assumes that 8% of the shares of common stock issued in the
restructuring, stock offering and merger will be purchased by the employee
stock ownership plan (771,461, 879,257, 981,053 and 1,098,119 shares at the
minimum, midpoint, maximum and adjusted maximum, respectively). Bank Mutual
also assumes that the funds used to acquire such shares will be borrowed by
the employee stock ownership plan from Bank Mutual. Mutual Savings intends
to make quarterly contributions to the employee stock ownership plan over a
ten-year period in an amount at least equal to the principle and interest
requirements of the debt. The pro forma earnings assumes (i) that the loan
to the employee stock ownership plan is payable over ten years in equal
installments of principle with the employee stock ownership plan shares
having an average fair value of $10.00 per share; (ii) that the loan to the
employee stock ownership plan bears interest at the Mutual Savings' prime
interest rate; (iii) that the employee stock ownership plan expense for the
period is equivalent to the principal payment for the period and are made
throughout the period (the interest expense paid by the Mutual Savings and
the interest income recognized by the Bank Mutual on the ESOP debt are
eliminated in consolidation); (iv) 38,873, 43,963, 49,053 and 54,906 shares
are committed to be released with respect to the six months ended June 30,
2000, at the minimum, midpoint, maximum and adjusted maximum, respectively;
(v) only the employee stock ownership plan shares committed to be released
during the period are considered outstanding for the purposes of the
earnings per share
140
<PAGE> 143
calculations based on the average shares to be released during the year;
and (f) the effective tax rate is 40.0% for the period.
(f) Bank Mutual assumes that 3% of the shares of common stock issued in the
stock offering and merger will be purchased by the recognition plan
(291,548, 329,722, 367,895 and 411,795 shares at the minimum, midpoint,
maximum and adjusted maximum respectively), assuming that: (a) shareholder
approval of the recognition plan is received; (b) the shares were acquired
by the recognition plan at the beginning of the period presented in open
market purchases at $10.00 per share; (c) the amortized expense for the six
months ended June 30, 2000 is 5% (based on a five year amortization using
the straight line method) of the amount contributed which is equal to the
vested portion of the shares based on the average shares to be vested
during the year; and (d) the effective tax rate applicable to such employee
compensation expense is 40.0%. Unvested shares under the recognition plan
are excluded from the basic earnings per share calculation and included in
the diluted earnings per share calculation only if they are dilutive under
the treasury stock method. Bank Mutual assumes that 20% of the recognition
plan shares vest annually and that 29,155, 32,972, 36,790 and 41,180 shares
vest for the period ended June 30, 2000 at the minimum, midpoint, maximum
and adjusted maximum, respectively.
(g) Net income or loss and stockholders' equity include current period
amortization or end of period unamortized balances, respectively, of
intangible assets resulting from the proposed Merger and previous business
combinations involving Mutual Savings. The following table presents the net
income or loss and stockholders equity, and related per share amounts,
excluding amortization or balances of these intangible assets;
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Pro forma tangible shareholders'
equity per share................... $ 9.29 $ 8.72 $ 8.27 $ 7.85
Pro forma price to tangible book
value ratio........................ 107.64% 114.68% 120.92% 127.39%
Pro forma basic earnings per share
before amortization of intangible
assets............................. $ 0.51 $ 0.46 $ 0.42 $ 0.38
Pro forma basic P/E ratio before
amortization of intangible
assets............................. 9.8x 10.9x 11.9x 13.2x
</TABLE>
(h) Assuming Bank Mutual were to fully convert, resulting in additional
estimated adjusted net proceeds at the minimum, midpoint, maximum and
adjusted maximum of $91.1 million, $102.8 million, $114.0 million and
$126.3 million, respectively, which were invested at 6.17% (3.70% net of
income tax at 40.0% effective rate), which represents the one year U. S.
treasury note rate as of March 31, 2000, less tax effects, and all other
assumptions noted above remained unchanged, the following ratios and
amounts would result;
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
------- -------- ------- --------
<S> <C> <C> <C> <C>
Pro forma shareholders' equity per share..... $17.54 $16.54 $15.73 $14.97
Pro forma tangible shareholders' equity per
share...................................... $13.96 $13.38 $12.90 $12.44
Pro forma price to book value ratio.......... 57.03% 60.45% 63.55% 66.78%
Pro forma price to tangible book value
ratio...................................... 71.62% 74.72% 77.50% 80.36%
Pro forma basic earnings per share........... $ 0.52 $ 0.47 $ 0.44 $ 0.41
Pro forma basic earnings per share before
amortization of intangible assets.......... $ 0.61 $ 0.56 $ 0.51 $ 0.47
Pro forma basic P/E ratio.................... 9.7x 10.5x 11.4x 12.2x
Pro forma basic P/E ratio before amortization
of intangible assets....................... 8.2x 9.0x 9.7x 10.5x
Management does not have plans for a full conversion in the immediate future, and we
cannot assure that one will occur in the future.
</TABLE>
141
<PAGE> 144
(i) Consists of equity of Mutual Savings at June 30, 2000 plus capital of
$50,254,850 issued to former shareholders assuming 40% of the shares are
exchanged less $100,000 of initial capitalization of MHC.
(j) Basic earnings per share calculations are determined by (i) starting with
the number of shares assumed to be sold in the conversion and stock
offering excluding shares to be acquired by the ESOP and recognition plan,
(ii) adding the number of shares to be issued to shareholders of First
Northern, (iii) adding the number of shares to be issued to MHC, (iv)
adding the average employee stock ownership plan shares that have been
committed for release during the period, and (v) adding the average
recognition plan shares assumed vested during the period. The unvested
recognition plan shares are deemed to be for future services and not
dilutive under the treasury stock method. Book value per share calculations
are determined by (i) starting with the number of shares assumed to be sold
in the stock offering (ii) adding the number of shares to be issued to
First Northern shareholders and (iii) adding the number of shares to be
issued to MHC. Set forth below is a reconciliation of the number of shares
used in making the earnings per share and book value per share
calculations:
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares issued in stock offering...... 4,692,782 5,965,232 7,237,682 8,701,000
Shares issued to First Northern
shareholders....................... 5,025,485 5,025,485 5,025,485 5,025,485
Shares issued to MHC................. 9,757,218 11,034,768 12,312,318 13,781,500
---------- ---------- ---------- ----------
Total shares outstanding and used in
calculating book value per share... 19,475,485 22,025,485 24,575,485 27,507,985
Less shares sold to employee stock
ownership plan..................... (777,461) (879,257) (981,053) (1,098,119)
Less recognition plan shares......... (291,548) (329,722) (367,895) (411,795)
Plus average employee stock ownership
plan shares assumed committed to be
released........................... 19,437 21,981 24,526 27,453
Plus average recognition plan shares
assumed vested..................... 14,577 16,486 18,395 20,590
---------- ---------- ---------- ----------
Number of shares used in calculating
basic and diluted earnings per
share.............................. 18,440,490 20,854,973 23,269,458 26,046,114
========== ========== ========== ==========
</TABLE>
(k) The retained earnings of Mutual Savings will be substantially restricted
after the restructuring. See "The Restructuring and the Offering -- Effects
of the Restructuring -- Liquidation Rights." Pro forma shareholders' equity
and pro forma shareholders' equity per share do not give effect to the
liquidation account or the bad debt reserves established by Mutual Savings
or First Northern Savings for federal income tax purposes in the event of a
liquidation.
142
<PAGE> 145
BANK MUTUAL CORPORATION
STOCK OFFERING
AT OR FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
4,692,782 5,965,232 7,237,682 8,701,000
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(a)
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross proceeds............................ $ 46,928 $ 59,652 $ 72,377 $ 87,010
Less marketing fees and other issuance
expenses................................ (3,462) (3,638) (3,813) (4,015)
----------- ----------- ----------- -----------
Estimated net proceeds.................... 43,466 56,014 68,564 82,995
Less: Common stock acquired by ESOP....... (7,775) (8,793) (9,811) (10,981)
Less: Common stock to be acquired by
MRP..................................... (2,915) (3,297) (3,679) (4,118)
----------- ----------- ----------- -----------
Estimated adjusted net proceeds(b)........ $ 32,776 $ 43,925 $ 55,074 $ 67,896
=========== =========== =========== ===========
Combined net income (loss):
Historical combined(c).................. $ (1,533) $ (1,533) $ (1,533) $ (1,533)
Interest income(d)...................... 1,166 1,563 1,960 2,416
ESOP(e)................................. (467) (528) (589) (659)
MRP(f).................................. (350) (396) (441) (494)
----------- ----------- ----------- -----------
Pro forma income (loss)................... $ (1,184) $ (894) $ (603) $ (270)
=========== =========== =========== ===========
Earnings (loss) per share:
Historical combined(c).................. $ (0.08) $ (0.07) $ (0.07) $ (0.06)
Interest income(d)...................... 0.06 0.07 0.08 0.09
ESOP(e)................................. (0.03) (0.03) (0.03) (0.03)
MRP(f).................................. (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma basic earnings (loss) per
share(g)(h)............................. $ (0.06) $ (0.04) $ (0.03) $ (0.01)
=========== =========== =========== ===========
Pro forma basic P/E ratio(g)(h)........... NM NM NM NM
=========== =========== =========== ===========
Number of shares used in calculating net
income per share(j)..................... 18,474,504 20,893,441 23,312,380 26,094,157
=========== =========== =========== ===========
Shareholders' equity:
Historical combined(i).................. $ 207,441 $ 207,441 $ 207,441 $ 207,441
Estimated net proceeds.................. 43,466 56,014 68,564 82,995
Less: Common stock acquired by ESOP(e).. (7,775) (8,793) (9,811) (10,981)
Less: Common stock to be acquired by
MRP(f)............................... (2,915) (3,297) (3,679) (4,118)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(k)......... $ 240,217 $ 251,366 $ 262,515 $ 275,337
=========== =========== =========== ===========
Shareholders' equity per share:
Historical combined(i).................. $ 10.65 $ 9.42 $ 8.44 $ 7.54
Estimated net proceeds.................. 2.23 2.54 2.79 3.02
Less: Common stock acquired by ESOP(e).. (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by
MRP(f)............................... (0.15) (0.15) (0.15) (0.15)
----------- ----------- ----------- -----------
Pro forma shareholders' equity per
share(g)(h)(j).......................... $ 12.33 $ 11.41 $ 10.68 $ 10.01
=========== =========== =========== ===========
Pro forma price to book value
ratio(g)(h)............................. 81.10% 87.64% 93.63% 99.90%
=========== =========== =========== ===========
Number of shares used in equity per share
calculations(j)......................... 19,475,485 22,025,485 24,575,485 27,507,985
=========== =========== =========== ===========
</TABLE>
-------------------------
143
<PAGE> 146
(a) Assumes an increase in the number of shares due to a 15% increase in the
maximum of the offering range to reflect changes in market and financial
conditions before the restructuring and stock offering is completed or to
fill the order of the employee stock ownership plan.
(b) Estimated adjusted proceeds consist of the estimated net stock offering
proceeds, minus (i) the proceeds attributable to the purchase by Mutual
Savings' employee stock ownership plan and (ii) the value of the shares to
be purchased by Mutual Savings' recognition plan after the restructuring
and stock offering, subject to shareholder approval, at an assumed purchase
price of $10.00 per share. Marketing fees and other issuance expenses
consist of legal, accounting, printing and other fixed costs totaling
$2,875,050 plus variable marketing fees based on 1.50% of gross proceeds
less shares to be acquired by the ESOP.
(c) Reflects the combined historical net earnings of Mutual Savings and First
Northern for the year ended December 31, 1999, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of the Company at 5.93% (3.56% net of income tax at 40.0%
effective rate), which represents the one year U.S. treasury note rate as
of December 31, 1999.
(e) Bank Mutual assumes that 8% of the shares of common stock issued in the
restructuring, the stock offering and the merger will be purchased by the
employee stock ownership plan (777,461, 879,257, 981,053 and 1,098,119
shares at the minimum, midpoint, maximum and adjusted maximum,
respectively). Bank Mutual also assumes that the funds used to acquire such
shares will be borrowed by the employee stock ownership plan from Bank
Mutual. Mutual Savings intends to make quarterly contributions to the
employee stock ownership plan over a ten-year period in an amount at least
equal to the principle and interest requirements of the debt. The pro forma
earnings assumes (i) that the loan to the employee stock ownership plan is
payable over ten years in equal installments of principle with the employee
stock ownership plan shares having an average fair value of $10.00 per
share; (ii) that the loan to the employee stock ownership plan bears
interest at the Mutual Savings' prime interest rate; (iii) that the
employee stock ownership plan expense for the period is equivalent to the
principal payment for the period and is made throughout the period (the
interest expense paid by the Mutual Savings and the interest income
recognized by Bank Mutual on the ESOP debt are eliminated in
consolidation); (iv) that 77,746, 87,926, 98,105 and 109,812 shares were
committed to be released with respect to the year ended December 31, 1999,
at the minimum, midpoint, maximum and adjusted maximum, respectively; (v)
only the employee stock ownership plan shares committed to be released
during the period are considered outstanding for the purposes of the
earnings per share calculations based on the average shares to be released
during the year; and (vi) the effective tax rate is 40.0% for the period.
(f) Bank Mutual assumes that 3% of the shares of common stock issued in the
stock offering and merger will be purchased by the recognition plan
(291,548, 329,722, 367,895 and 411,795 shares at the minimum, midpoint,
maximum and adjusted maximum, respectively), assuming that: (a) shareholder
approval of the recognition plan is received; (b) the shares were acquired
by the recognition plan at the beginning of the period presented in open
market purchases at $10.00 per share; (c) the amortized expense for the
year ended December 31, 1999 is 20% (based on a five year amortization
using the straight line method) of the amount contributed which is equal to
the vested portion of the shares based on the average shares to be vested
during the year; and (d) the effective tax rate applicable to such employee
compensation expense is 40.0%. Unvested shares under the recognition plan
are excluded from the basic earnings per share calculation and included in
the diluted earnings per share calculation only if they are dilutive under
the treasury stock method. Bank Mutual assumes that 20% of the recognition
plan shares vest annually and that 58,310, 65,944, 73,579 and 82,359 shares
vested for the year ended December 31, 1999 at the minimum, midpoint,
maximum and adjusted maximum, respectively.
(g) Net income or loss and stockholders' equity include current period
amortization or end of period unamortized balances, respectively, of
intangible assets resulting from the proposed Merger and previous business
combinations involving Mutual Savings. The following table presents the net
income
144
<PAGE> 147
or loss and stockholders equity, and related per share amounts, excluding
amortization or balances of these intangible assets;
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
------- -------- ------- --------
<S> <C> <C> <C> <C>
Pro forma tangible shareholders' equity per
share.......................................... $ 8.80 $ 8.29 $ 7.88 $ 7.51
Pro forma price to tangible book value ratio..... 113.64% 120.63% 126.90% 133.16%
Pro forma basic earnings per share before
amortization of intangible assets.............. $ 0.96 $ 0.87 $ 0.79 $ 0.72
Pro forma basic P/E ratio before amortization of
intangible assets.............................. 10.4x 11.5x 12.7x 13.9x
</TABLE>
(h) Assuming Bank Mutual were to fully convert, resulting in additional
estimated adjusted net proceeds at the minimum, midpoint, maximum and
adjusted maximum of $91.0 million, $102.2 million, $113.3 million and
$126.2 million, respectively, which were invested at 5.93%, (3.56% net of
income tax at 40.0% effective rate), which represents the one year U.S.
treasury note rate as of December 31, 1999, less tax effects, and all other
assumptions noted above remained unchanged, the following ratios and
amounts would result;
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
------- -------- ------- --------
<S> <C> <C> <C> <C>
Pro forma shareholders' equity per share......... $17.00 $16.05 $15.29 $14.60
Pro forma tangible shareholders' equity per
share.......................................... $13.77 $13.19 $12.73 $12.31
Pro forma price to book value ratio.............. 58.81% 62.30% 65.38% 68.50%
Pro forma price to tangible book value ratio..... 72.63% 75.82% 78.55% 81.25%
Pro forma basic earnings per share............... $ 0.09 $ 0.11 $ 0.12 $ 0.14
Pro forma basic earnings per share before
amortization of intangible assets.............. $ 1.15 $ 1.05 $ 0.97 $ 0.89
Pro forma basic P/E ratio........................ 111.1x 90.9x 83.3x 71.4x
Pro forma basic P/E ratio before amortization of
intangible assets.............................. 8.7x 9.5x 10.3x 11.2x
Management does not have plans for a full conversion in the immediate future, and we
cannot assure that one will occur in the future.
</TABLE>
(i) Consists of equity of Mutual Savings at December 31, 1999 plus capital of
$50,254,850 issued to former shareholders' assuming 40% of the shares are
exchanged less $100,000 of initial capitalization of MHC.
(j) Basic earnings per share calculations are determined by (i) starting with
the number of shares assumed to be sold in the conversion and stock
offering, excluding shares to be acquired by the ESOP and recognition plan,
(ii) adding the number of shares to be issued to shareholders of First
Northern, (iii) adding the number of shares to be issued to MHC, (iv)
adding the average employee stock ownership plan shares that have been
committed for release during the period, and (v) adding the average
recognition plan shares assumed vested during the period. The unvested
recognition plan shares were deemed to be for future services and not
dilutive under the treasury stock method. Book value per share calculations
are determined by (i) starting with the number of shares assumed to be sold
in the stock offering, (ii) adding the number of shares to be issued to
First Northern
145
<PAGE> 148
shareholders and (iii) adding the number of shares to be issued to MHC. Set
forth below is a reconciliation of the number of shares used in making the
per share calculations:
<TABLE>
<CAPTION>
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares issued in stock offering...... 4,692,782 5,965,232 7,237,682 8,701,000
Shares issued to First Northern
shareholders....................... 5,025,485 5,025,485 5,025,485 5,025,485
Shares issued to MHC................. 9,757,218 11,034,768 12,312,318 13,781,500
---------- ---------- ---------- ----------
Total shares outstanding and used in
calculating book value per share... 19,475,485 22,025,485 24,575,485 27,507,985
Less shares sold to employee stock
ownership plan..................... (777,461) (879,257) (981,053) (1,098,119)
Less recognition plan shares......... (291,548) (329,722) (367,895) (411,795)
Plus average employee stock ownership
plan shares assumed committed to be
released........................... 38,873 43,963 49,053 54,906
Plus average recognition plan shares
assumed vested..................... 29,155 32,972 36,790 41,179
---------- ---------- ---------- ----------
Number of shares used in calculating
basic and diluted earnings per
share.............................. 18,474,504 20,893,441 23,312,380 26,094,157
========== ========== ========== ==========
</TABLE>
(k) The retained earnings of Mutual Savings will be substantially restricted
after the restructuring. See "The Restructuring and the Offering -- Effects
of the Restructuring -- Liquidation Rights." Pro forma shareholders' equity
and pro forma shareholders' equity per share do not give effect to the
liquidation account or the bad debt reserves established by Mutual Savings
or First Northern Savings for federal income tax purposes in the event of a
liquidation.
146
<PAGE> 149
REGULATORY CAPITAL COMPLIANCE
At June 30, 2000, Mutual Savings and First Northern Savings exceeded all
regulatory capital requirements. Set forth below is a summary of the capital
computed under generally accepted accounting principles and the compliance with
regulatory capital standards at June 30, 2000, on a historical and pro forma
basis. We have assumed that the indicated number of shares were sold as of June
30, 2000 and shares were issued to First Northern shareholders in conjunction
with the merger agreement. We assumed that Mutual Savings received none of the
proceeds from the offering. We further assume that in conjunction with the
initial capitalization of Bank Mutual, that capital will be transferred to Bank
Mutual in the amounts of $44.0 million, $40.0 million, $36.0 million and $32.0
million from Mutual Savings and $10.5 million, $8.4 million, $6.8 million and
$4.5 million from First Northern Savings at the minimum, midpoint, maximum and
adjusted maximum, respectively, and that MHC is initially capitalized by a
transfer from Mutual Savings of $100,000 in all pro forma cases. Finally, we
assume that First Northern Savings' capital will be reduced by $4.2 million of
non-recurring merger-related expenses, net of income tax benefit.
After the restructuring, the stock offering and the First Northern merger,
we believe that Mutual Savings and First Northern Savings will continue to
exceed all applicable regulatory capital requirements. For a discussion of the
capital requirements applicable to Mutual Savings, see "Regulation -- Mutual
Savings and First Northern Savings Federal Regulation Following Restructuring"
<TABLE>
<CAPTION>
MUTUAL SAVINGS
------------------------------------------------------------------
PROFORMA
------------------------------------------------------------------
MINIMUM MIDPOINT
-------------------- --------------------
4,692,782 5,965,232
HISTORICAL SHARES SOLD SHARES SOLD
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(a) AMOUNT ASSETS(a) AMOUNT ASSETS(a)
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(b)............. $167,588 9.53% $123,488 7.20% $127,488 7.42%
======== ===== ======== ===== ======== =====
Tier I Leverage Capital:
Capital level............. $164,513 9.37% $120,413 7.03% $124,413 7.25%
Requirement(c)............ 70,244 4.00 68,480 4.00 68,640 4.00
-------- ----- -------- ----- -------- -----
Excess.................... $ 94,269 5.37% $ 51,933 3.03% $ 55,773 3.25%
======== ===== ======== ===== ======== =====
Tier I Risk-based Capital:
Capital level............. $164,513 17.92% $120,413 13.24% $124,413 13.67%
Requirement............... 36,727 4.00 36,727 4.00 36,727 4.00
-------- ----- -------- ----- -------- -----
Excess.................... $127,786 13.92% $ 83,686 9.24% $ 87,686 9.67%
======== ===== ======== ===== ======== =====
Total Risk-based Capital:
Capital level............. $171,598 18.69% $127,498 14.02% $131,498 14.45%
Requirement............... 73,453 8.00 73,453 8.00 73,453 8.00
-------- ----- -------- ----- -------- -----
Excess.................... $ 98,145 10.69% $ 54,045 6.02% $ 58,045 6.45%
======== ===== ======== ===== ======== =====
<CAPTION>
MUTUAL SAVINGS
-------------------------------------------
PROFORMA
-------------------------------------------
MAXIMUM ADJUSTED MAXIMUM
-------------------- --------------------
7,237,682 8,701,000
SHARES SOLD SHARES SOLD
-------------------- --------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(a) AMOUNT ASSETS(a)
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP Capital(b)............. $131,488 7.63% $135,488 7.84%
======== ===== ======== =====
Tier I Leverage Capital:
Capital level............. $128,413 7.47% $132,413 7.68%
Requirement(c)............ 68,800 4.00 68,960 4.00
-------- ----- -------- -----
Excess.................... $ 59,613 3.47% $ 63,453 3.68%
======== ===== ======== =====
Tier I Risk-based Capital:
Capital level............. $128,413 14.10% $132,413 14.52%
Requirement............... 36,727 4.00 36,727 4.00
-------- ----- -------- -----
Excess.................... $ 91,686 10.10% $ 95,686 10.52%
======== ===== ======== =====
Total Risk-based Capital:
Capital level............. $135,498 14.87% $139,498 15.30%
Requirement............... 73,453 8.00 73,453 8.00
-------- ----- -------- -----
Excess.................... $ 62,045 6.87% $ 66,045 7.30%
======== ===== ======== =====
</TABLE>
147
<PAGE> 150
REGULATORY CAPITAL COMPLIANCE -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST NORTHERN SAVINGS
-----------------------------------------------------------------
PROFORMA
-----------------------------------------------------------------
MINIMUM MIDPOINT
-------------------- --------------------
4,692,782 5,965,232
HISTORICAL SHARES SOLD SHARES SOLD
------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(a) AMOUNT ASSETS(a) AMOUNT ASSETS(a)
------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(b).............. $71,480 7.90% $112,513 11.89% $114,613 12.08%
======= ===== ======== ===== ======== =====
Tier I Leverage Capital:
Capital level.............. $70,787 7.82% $ 53,269 6.00% $ 55,369 6.23%
Requirement(c)............. 36,170 4.00 35,485 4.00 35,569 4.00
------- ----- -------- ----- -------- -----
Excess..................... $34,617 3.82% $ 17,784 2.00% $ 19,800 2.23%
======= ===== ======== ===== ======== =====
Tier I Risk-based Capital:
Capital level.............. $70,787 11.87% $ 53,269 8.96% $ 55,369 9.31%
Requirement................ 23,852 4.00 23,768 4.00 23,784 4.00
------- ----- -------- ----- -------- -----
Excess..................... $46,935 7.87% $ 29,501 4.96% $ 31,585 5.31%
======= ===== ======== ===== ======== =====
Total Risk-based Capital:
Capital level.............. $74,979 12.57% $ 60,217 10.13% $ 62,317 10.48%
Requirement................ 47,703 8.00 47,535 8.00 47,569 8.00
------- ----- -------- ----- -------- -----
Excess..................... $27,276 4.57% 12,682 2.13% $ 14,748 2.48%
======= ===== ======== ===== ======== =====
<CAPTION>
FIRST NORTHERN SAVINGS
-------------------------------------------
PROFORMA
-------------------------------------------
MAXIMUM ADJUSTED MAXIMUM
-------------------- --------------------
7,237,682 8,701,000
SHARES SOLD SHARES SOLD
-------------------- --------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(a) AMOUNT ASSETS(a)
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP Capital(b).............. $116,213 12.23% $118,513 12.44%
======== ===== ======== =====
Tier I Leverage Capital:
Capital level.............. $ 56,969 6.40% $ 59,269 6.64%
Requirement(c)............. 35,633 4.00 35,725 4.00
-------- ----- -------- -----
Excess..................... $ 21,336 2.40% $ 23,544 2.64%
======== ===== ======== =====
Tier I Risk-based Capital:
Capital level.............. $ 56,969 9.58% $ 59,269 9.95%
Requirement................ 23,797 4.00 23,816 4.00
-------- ----- -------- -----
Excess..................... $ 33,172 5.58% $ 35,453 5.95%
======== ===== ======== =====
Total Risk-based Capital:
Capital level.............. $ 63,917 10.74% $ 66,217 11.12%
Requirement................ 47,594 8.00 47,631 8.00
-------- ----- -------- -----
Excess..................... $ 16,323 2.74% $ 18,586 3.12%
======== ===== ======== =====
</TABLE>
-------------------------
(a) Leverage capital levels are shown as a percentage of "average assets" and "
risk-based capital" levels are calculated on the basis of a percentage of
"risk-weighted assets", as each is defined in bank regulations.
(b) GAAP is defined as generally accepted accounting principles.
(c) The current leverage capital requirement for savings banks is 4%-5% of total
adjusted assets. For savings banks that receive the highest supervisory
ratings for safety and soundness and that are not experiencing or
anticipating significant growth, the leverage capital requirement is 3%.
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<PAGE> 151
CAPITALIZATION
The following table presents the pro forma historical deposits, borrowings
and capitalization of Mutual Savings and First Northern at June 30, 2000, and
the pro forma consolidated deposits, borrowings and capitalization of Bank
Mutual consolidated with Mutual Savings and First Northern, including the
issuance of stock to First Northern shareholders in accordance with the merger
agreement and other assumptions set forth under "Pro Forma Data." We also show
pro forma consolidated deposits, borrowings and capitalization of Bank Mutual
after giving effect to the stock offering based upon the sale of the number of
shares shown below. A change in the number of shares sold in the offering may
materially affect the capitalization:
<TABLE>
<CAPTION>
PRO FORMA
RESTRUCTURING, COMBINED
HISTORICAL HISTORICAL FAIR VALUE CONSOLIDATED
MUTUAL FIRST AND MERGER REFLECTING
SAVINGS NORTHERN ADJUSTMENTS MERGER
---------- ---------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits(b)........................ $1,300,613 $568,625 $ (9) $1,869,229
========== ======== ======== ==========
Borrowings......................... $ 264,667 $247,353 $ (1,389) $ 510,631
========== ======== ======== ==========
Shareholders' equity:
Cumulative preferred stock, $.01
par value; authorized 10,000,000
shares; no shares outstanding.... -- -- -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
shares to be issued in stock
offering as reflected............ $ -- $ 9,135 $ (9,084) $ 51(d)
Additional paid-in-capital......... -- 8,528 41,676 50,204
Retained earnings(e)............... 176,260 65,971 (66,071) 176,160
Accumulated other comprehensive
income........................... (8,672) 381 (381) (8,672)
Treasury stock, at cost(g)......... -- (8,411) 8,411 --
Less:
Common stock acquired by the
employee stock ownership
plan(h).......................... -- -- -- --
Common stock acquired by the
management recognition plan(i)... -- -- -- --
---------- -------- -------- ----------
Total shareholders'
equity................. $ 167,588 $ 75,604 $(25,449) $ 217,743
========== ======== ======== ==========
<CAPTION>
BANK MUTUAL -- PRO FORMA CONSOLIDATED
BASED UPON SALE AT $10.00 PER SHARE
----------------------------------------------------
ADJUSTED
MINIMUM MIDPOINT MAXIMUM MAXIMUM
---------- ---------- ---------- ----------
4,692,782 5,965,232 7,237,682 8,701,000
SHARES SHARES SHARES SHARES(a)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits(b)........................ $1,869,229 $1,869,229 $1,869,229 $1,869,229
========== ========== ========== ==========
Borrowings......................... $ 510,631 $ 510,631 $ 510,631 $ 510,631
========== ========== ========== ==========
Shareholders' equity:
Cumulative preferred stock, $.01
par value; authorized 10,000,000
shares; no shares outstanding.... -- -- -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
shares to be issued in stock
offering as reflected............ $ 195(c) $ 220(c) $ 246(c) $ 275(c)
Additional paid-in-capital......... 137,526 146,049 154,573 164,975
Retained earnings(e)............... 132,160(f) 136,160(f) 140,160(f) 144,160(f)
Accumulated other comprehensive
income........................... (8,672) (8,672) (8,672) (8,672)
Treasury stock, at cost(g).........
Less:
Common stock acquired by the
employee stock ownership
plan(h).......................... (7,775) (8,793) (9,811) (10,981)
Common stock acquired by the
management recognition plan(i)... (2,915) (3,297) (3,679) (4,118)
---------- ---------- ---------- ----------
Total shareholders'
equity................. $ 250,519 $ 261,667 $ 272,817 $ 285,639
========== ========== ========== ==========
</TABLE>
-------------------------
149
<PAGE> 152
(a) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of general regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offering.
(b) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals from deposit accounts would
reduce pro forma deposits by the amount of such withdrawals.
(c) Reflects the sale of the indicated number of shares plus shares issued to
MHC equal to 50.1% of the total shares outstanding.
(d) Reflects the issuance of 5,025,485 Bank Mutual shares to shareholders of
First Northern at a value of $10.00 per share in accordance with the merger
agreement, using the purchase method of accounting.
(e) The retained earnings of Mutual Savings will be substantially restricted
after the offering.
(f) Reflects the reduction in retained earnings related to the initial
capitalization of Bank Mutual in the amount of $44.0 million, $40.0
million, $36.0 million and $32.0 million at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively.
(g) Assumes the cancellation of First Northern's treasury shares at the time of
the consummation of the merger.
(h) Assumes that 8% of the shares sold in connection with the offering and
issued to shareholders of First Northern will be purchased by the employee
stock ownership plan and the funds used to acquire the employee stock
ownership plan shares will be borrowed from Bank Mutual. The common stock
acquired by the employee ownership plan is reflected as a reduction of
shareholders' equity. If the employee stock ownership plan buys shares in
the market after the reorganization, the purchase price of the those shares
may be less or more that the $10.00 offering price.
(i) Assumes that, subsequent to the offering, an amount equal to 3% of the
shares of common stock issued in the offering is purchased by a management
recognition plan through open market purchases. The proposed management
recognition plan is intended to be adopted by Bank Mutual and presented for
approval of shareholders at a meeting of shareholders to be held at least
six months following completion of the offering. The common stock purchased
by the management recognition plan is reflected as a reduction of
shareholders' equity.
CERTAIN EFFECTS OF THE FIRST NORTHERN MERGER ON BANK MUTUAL
On a pro forma basis at June 30, 2000, assuming completion of the First
Northern merger, the restructuring and the stock offering, Bank Mutual would
have had total assets of $2.7 billion, total deposits of $1.9 billion, net loans
of $1.9 billion and total shareholders' equity of $261.7 million. For further
pro forma information, see "Pro Forma Data."
Management of Mutual Savings believes that the First Northern merger will
be advantageous to our competitive posture, joining two banks with contiguous
market areas and compatible business philosophies and product mix. The merger
will permit us to expand into growing northeastern Wisconsin markets at a fair
consideration and in a more efficient manner than establishing new branches.
Initially, the two banks will continue to operate separately. There is no
current intention to combine the two banks, although business plans could change
in the future.
We consider the experienced, forward-looking management of First Northern
to be a benefit of the merger. First Northern's CEO and three other board
members will join the board of Bank Mutual. It is anticipated that the merger
will allow the banks to eliminate certain duplicative costs and to achieve
potential economies of scale over time through the increased size and
efficiencies of the combined entity. Similarly, the increased size and
geographical market area should, over time, allow us to expand products and
services and take advantage of greater cross-selling opportunities.
150
<PAGE> 153
GEOGRAPHIC EXPANSION
Mutual Savings and First Northern Savings currently operate in markets that
are, for the most part, contiguous and complementary to each other. Most of
Mutual Savings' offices are located in the southeastern, south central and
western part of Wisconsin. While Mutual has a relatively small presence in
northeastern Wisconsin, all of First Northern Savings' offices are located in
that area of the state. In particular, First Northern has a substantial presence
in the Fox River Valley region, and also includes surrounding rural and vacation
areas. The Fox River Valley region is anchored by the cities of Green Bay, where
First Northern has its headquarters and a substantial presence, and Appleton,
where Mutual Savings has its offices in the area. See "Business of Mutual
Savings Bank -- Market Area." The First Northern acquisition would substantially
increase Mutual's presence in the northeastern part of the state, while Mutual
Savings expects that it would also retain its current offices in the region
after the First Northern merger.
We believe that the northeastern part of Wisconsin is an attractive area
for growth. It is the third largest population concentration in the state, and
includes a variety of commercial, industrial, service and recreational
businesses.
IMPACT ON DEPOSITS
Mutual Savings and First Northern Savings have relatively similar deposit
mixes and interest rates paid on those deposits.
The following table presents the distribution of Mutual Savings' and First
Northern Savings' deposit accounts at June 30, 2000 by dollar amount and percent
of portfolio, and the weighted average interest rate on each category of
deposits.
<TABLE>
<CAPTION>
MUTUAL SAVINGS FIRST NORTHERN SAVINGS
-------------------------------- ------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings........................... $ 148,406 11.41% 2.43% $ 72,253 12.71% 2.40%
Interest-bearing demand........... 86,133 6.62 1.05 40,709 7.16 1.12
Money market...................... 220,721 16.97 5.27 70,817 12.45 4.97
Non-interest bearing demand....... 49,002 3.77 0.00 30,819 5.42 0.00
---------- ------ ---- -------- ------ ----
Total........................ 504,262 38.77% 3.20% 214,598 37.74% 2.66%
---------- ------ -------- ------
Certificates:
Time deposits with original
maturities of:
Three months or less............ 60,721 4.67% 5.02% 21,758 3.83% 6.10%
Over three months to twelve
months....................... 141,737 10.90 5.07 75,557 13.29 5.85
Over twelve months to
twenty-four months........... 399,933 30.75 5.74 169,544 29.80 5.86
Over twenty-four months to
thirty-six months............ 128,303 9.86 6.16 53,885 9.48 5.90
Over thirty-six months to
forty-eight months........... 4,249 0.33 5.72 27,340 4.81 5.98
Over forty-eight months to sixty
months....................... 59,109 4.54 5.88 5,943 1.05 5.58
Over sixty months............... 2,299 0.18 6.36 -- -- --
---------- ------ ---- -------- ------ ----
Total time deposits.......... 796,351 61.23% 5.65% 354,027 62.26% 5.88%
---------- ------ ---- -------- ------ ----
Total deposits............... $1,300,613 100.00% 4.70% $568,625 100.00% 4.66%
========== ====== ======== ======
</TABLE>
151
<PAGE> 154
In addition to having a similar deposit mix, Mutual Savings and First
Northern Savings offer similar, although not identical, deposit products. Even
though Mutual Savings and First Northern Savings are expected to initially
operate as separate financial institutions, we expect that certain deposit
products which currently are offered by only one of the savings banks may now be
offered by both. Thus, both Mutual Savings and First Northern Savings will have
the benefit of the other's experience.
We expect that customer retention will be maximized because both the
institutions anticipate keeping open all branch offices after the merger, under
the existing names. Because the two companies have relatively similar deposit
and pricing strategies, we do not expect that changes, if any, which may be made
by First Northern Savings will cause a significant deposit run off.
IMPACT ON LOAN PORTFOLIO
Mutual Savings' and First Northern Savings' loan products and lending
operations are relatively similar, although Mutual Savings has a higher
percentage of first mortgage loans than First Northern Savings, and First
Northern Savings has a higher percentage of consumer loans. The following table
presents the composition of Mutual Savings' and First Northern Savings' loan
portfolios in dollar amounts and in percentages of the total portfolios at June
30, 2000. We have used several different categories in this table than we have
used in the other tables in this proxy statement/prospectus to help illustrate
the comparison between the two institutions.
<TABLE>
<CAPTION>
MUTUAL SAVINGS FIRST NORTHERN SAVINGS
------------------------------- -----------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE
AMOUNT TOTAL RATE AMOUNT TOTAL RATE
---------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four family.......... $ 733,958 63.74% $489,180 59.84%
Multi-family................ 65,105 5.65 37,843 4.63
Commercial real estate...... 65,267 5.67 22,727 2.78
Construction and
development............... 30,840 2.68 47,004 5.75
---------- ------ -------- ------
Total first mortgage real
estate loans........... $ 895,170 77.74% 7.34% $596,754 73.00% 7.13%
---------- ------ -------- ------
Consumer and other loans:
Consumer loans:
Fixed equity................ $ 108,811 9.45% 8.19% $ 67,485 8.26% 8.29%
Home equity lines of
credit.................... 55,371 4.81 8.33 20,987 2.57 10.07
Education................... 27,698 2.41 8.83 * -- --
Automobile.................. 5,609 0.49 8.64 98,326 12.03 7.40
Home improvement............ 12,134 1.05 8.20 ** -- --
Other....................... 3,827 0.33 8.86 23,207 2.84 9.18
---------- ------ ---- -------- ------ -----
Total consumer loans...... 213,450 18.54 8.33 210,005 25.70 8.15
---------- ------ ---- -------- ------ -----
Commercial business loans... 42,815 3.72 8.06 10,661 1.30 9.17
---------- ------ ---- -------- ------ -----
Total consumer and other
loans.................. 256,265 22.26 8.29 220,666 27.00 8.20
---------- ------ ---- -------- ------ -----
Total loans receivable.... $1,151,435 100.00% 7.55% $817,420 100.00% 7.43%
========== ========
Less:
Undisbursed loan proceeds... 16,368 17,667
Deferred fees and
discounts................. (5) 4,218
Allowance for losses........ 7,085 441
---------- --------
Total loans receivable,
net.................... $1,127,987 $795,094
========== ========
Non-performing loans as a
percent of total loans...... 0.20% 0.03%
Non-performing assets as a
percent of total assets..... 0.30% 0.08%
</TABLE>
152
<PAGE> 155
-------------------------
* First Northern Savings generally makes student loans for resale rather than
retaining them in its portfolio.
** First Northern Savings does not separately categorize home improvement loans.
However, these loans are included in "fixed equity" and "home equity lines of
credit."
First Northern Savings has a higher level of consumer loans than Mutual
Savings, particularly of automobile loans. Most of these are indirect automobile
loans originated by First Northern through a joint venture with another
financial institution. First Northern Savings has experienced minimal
delinquencies under this program; Bank Mutual expects to continue the program
after the First Northern merger. First Northern Savings' "other" consumer loans
include loans secured by boats and recreational vehicles as a consequence of the
vacation and recreational regions which are served by First Northern.
The weighted average interest rates on Mutual Savings' and First Northern
Savings' loans is generally consistent by loan type, with several exceptions.
The average rate on First Northern Savings' home equity lines of credit is
higher than Mutual Savings', primarily as a result of the lower average credit
line. Conversely, the weighted average rate on First Northern's automobile loans
is lower than Mutual Savings'. That difference results both because First
Northern's joint venture company absorbs losses on this portfolio, which are
then reflected at First Northern in the net yield rather than as written off
assets, and as a result of the more aggressive automobile loan pricing by that
joint venture.
Both First Northern's and Mutual Savings' non-performing loan and asset
ratios reflect strong asset quality.
We believe that, over time, the First Northern merger will provide
additional lending opportunities to the combined enterprise. Mutual Savings
intends to augment its consumer lending with programs currently offered by First
Northern Savings. Similarly, we believe that the expanded customer and
geographical base will provide further opportunities for commercial real estate
and commercial business lending in which Mutual Savings and First Northern
Savings intend to expand. We also expect to minimize customer disruption to
First Northern Savings' customers by retaining First Northern Savings as a
separate entity, whose local loan officers will retain authority to make most
credit decisions in its market area. Also, a larger institution will be better
able to diversify its portfolio since it has a larger customer base, can more
readily hire experienced staff, and leverage greater resources.
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<PAGE> 156
MARKET FOR BANK MUTUAL COMMON STOCK
Bank Mutual has not previously issued common stock, so there is no market
for the common stock. We have applied to have our common stock quoted on the
Nasdaq National Market under the symbol "BKMU" after the restructuring. We will
receive that approval before we complete the merger. Ryan, Beck has advised us
that it intends to make a market in the common stock following the
restructuring, but is under no obligation to do so. We will encourage and assist
additional market makers to make a market in our common stock.
Making a market involves maintaining bid and asked quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices. Various securities laws and other regulatory requirements apply
to these activities. Additionally, the development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is
not within our control, or that of any market maker. The number of active buyers
and sellers of the common stock at any particular time may be limited. Under
such circumstances, you could have difficulty selling your shares on short
notice and you should not view the common stock as a short-term investment. We
cannot assure you that an active and liquid trading market for the common stock
will develop or that, if it develops, it will continue, nor can we assure you
that if you purchase shares you will be able to sell them at or above $10.00 per
share.
HOW MUTUAL DETERMINED ITS OFFERING RANGE AND $10.00 PRICE PER SHARE IN ITS STOCK
OFFERING
The offering range in the stock offering which Bank Mutual is conducting in
conjunction with its restructuring is based on an independent appraisal of
Mutual Savings' pro forma market value prepared by RP Financial LC, an appraisal
firm experienced in appraisals of savings institutions.
RP Financial has estimated that in its opinion as of August 25, 2000 the
estimated pro forma market value of Bank Mutual was between $144.5 million and
$195.5 million, with a midpoint of $170.0 million.
The appraisal incorporated an analysis of a peer group of publicly-traded
mutual holding company institutions that RP Financial considered to be
comparable to Mutual Savings, including an evaluation of the average and median
price-to-earnings, price-to-core earnings, price-to-book value,
price-to-tangible book value and price-to-assets ratios indicated by the market
prices of the peer group companies, with such ratios adjusted to their fully
converted equivalent basis. RP Financial applied the peer group's fully
converted pricing ratios, as adjusted for certain qualitative valuation
adjustments to account for differences between Mutual Savings and the peer
group, to Mutual Savings' pro forma earnings, core earnings, book value,
tangible book value and assets to derive the estimated pro forma market value of
Mutual Savings.
The appraisal placed the greatest weight on the price-to-earnings
approaches to valuation, but also considered the price-to-book value approaches
and price-to-assets approach. Compared to the average fully converted pricing
ratios of the peer group, Mutual Savings' pro forma fully converted ratios at
the estimated pro forma market value indicated a discount of 5% based on the
price-to-core earnings approach, a discount of 22% based on the price-to-book
value approach, a discount of 7% based on the price-to-tangible book value
approach, and a discount of 45% based on the price-to-assets approach. The
estimated appraised value and the resulting discounts relative to the peer
group's fully converted pricing ratios took into consideration the potential
benefits of the restructuring and the merger. The appraisal also noted Mutual
Savings' fully converted pro forma price-to-book value and price-to-tangible
book value ratios reflected premiums relative to the issuance pricing of recent
conversion and mutual holding company transactions. Compared to the recent
conversion and mutual holding company transactions, Mutual Savings has more
assets, greater market value and anticipated liquidity in the shares, and a more
leveraged balance sheet (resulting in a lower tangible equity-to-assets ratio),
which all contributed to the premium price-to-book value and price-to-tangible
book value ratios indicated relative to the recent conversions and mutual
holding companies.
The board of directors of Mutual Savings has determined to sell shares in
the stock offering at $10.00 share. Based on that price, assuming the issuance
of 5,025,485 shares to former shareholders of First Northern, the pro forma
market value of Mutual Savings ranged between $194.8 million and
154
<PAGE> 157
$245.8 million, with a midpoint pro forma market value of $220.2 million. This
is the "estimated valuation range." The stock issuance plan provides that total
outstanding shares must reflect the estimated valuation range and that public
ownership will equal 49.9% of outstanding shares, while the MHC's ownership will
equal 50.1%. Given the 5,025,485 shares to be issued to the former shareholders
of First Northern, this results in an offering range of between 4,692,782 and
7,237,682 shares, with a midpoint of 5,965,232 shares. Following the stock
offering and First Northern merger, shares outstanding to the public will
therefore range between 9,718,267 and 12,263,167, with a midpoint of 10,990,717
shares. Total outstanding shares, held by the MHC and public owners, will range
between 19,475,485 and 24,575,485.
The $10.00 price per share was chosen by Mutual Savings' board of directors
because it is the price per share most commonly used in stock offerings
involving conversions and reorganizations of savings institutions.
MUTUAL'S POLICY REGARDING DIVIDENDS
Bank Mutual currently plans to pay shareholders a cash dividend at an
annual rate of $0.28 per share. The dividend would be declared and payable
quarterly at a rate of $0.07 per share, starting for the first full quarter we
are a public company, but not earlier than the first quarter of 2001. The
payment of dividends will be subject to the determination of our board of
directors, which will take into account, among other factors, our financial
condition, results of operations, tax considerations, industry standards,
economic conditions and regulatory restrictions that affect the payment of
dividends by Mutual Savings and First Northern Savings to Bank Mutual. Bank
Mutual must also comply with regulations that govern the level of dividends
which may pay as well as the regulatory capital requirements of Bank Mutual as a
savings bank holding company. We cannot guarantee that we will pay dividends or
that, if paid, we will not reduce or eliminate dividends in the future.
If Bank Mutual pays dividends to its shareholders, it will be required to
pay dividends to the MHC unless the MHC elects to waive dividends. We currently
anticipate that initially the MHC will waive dividends paid by Bank Mutual. Any
decision to waive dividends will be subject to regulatory approval. If the OTS
does not permit the dividend waiver, it is possible that Bank Mutual would need
to lower the amount of dividends in order to retain sufficient capital at Bank
Mutual. See "Regulation -- MHC Regulation -- Waiver of Dividends."
As the principal assets of Bank Mutual, Mutual Savings and First Northern
Savings will provide the principal sources of funds for the payment of dividends
by Bank Mutual. Federal law provides that dividends may be paid by Mutual
Savings and First Northern Savings, as federal institutions, only out of net
income and unrestricted capital surplus. However, First Northern Savings will
not be permitted to pay dividends on its capital stock if, among other things,
its capital would be reduced below the amount required for its liquidation
account. See "The Restructuring -- Effects of the Restructuring -- Liquidation
Rights."
Any payment of dividends by Mutual Savings or First Northern to Bank Mutual
which would be deemed to be drawn out of their bad debt reserves would require a
payment of taxes at the then-current tax rate by them on the amount of earnings
deemed to be removed from bad debt reserves for such distribution. Mutual
Savings and First Northern do not intend to make any distribution to Bank Mutual
that would create this type of a tax liability.
Bank Mutual and Mutual Savings have also committed to the OTS in connection
with the reorganization, that during the one-year period following the
completion of the restructuring, Bank Mutual will not declare an extraordinary
dividend to shareholders which would be treated by recipient shareholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the OTS.
155
<PAGE> 158
LEGAL OPINIONS
The legality of the Bank Mutual common stock to be issued in the merger,
and certain federal income tax consequences of the merger, are being passed upon
on behalf of Bank Mutual by Quarles & Brady LLP, Milwaukee, Wisconsin.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Mutual Savings'
consolidated financial statements at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, as set forth in their
report. We have included Mutual Savings' financial statements in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
Wipfli Ullrich Bertelson LLP, independent auditors, have audited First
Northern's consolidated financial statements at December 31, 1999 and for the
year then ended, as set forth in their report. We have incorporated by reference
First Northern's financial statements for that period in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Wipfli Ullrich Bertelson LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of First Northern as of December 31, 1998 and for each of
the two years in the period ended December 31, 1998 included in their Annual
Report on Form 10-K for the year ended December 31, 1999, as set forth in their
report. That report is incorporated by reference in this proxy
statement/prospectus and elsewhere in the registration statement. First
Northern's financial statements for the periods indicated are incorporated by
reference in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
On September 9, 1999, the Audit Committee of the First Northern board of
directors recommended to the board the replacement of Ernst & Young LLP with
Wipfli Ullrich Bertelson LLP as First Northern's independent certified public
accountants for the year ended December 31, 1999. On September 16, 1999, the
board accepted and approved the Audit Committee's recommendation. Ernst & Young
LLP was notified of its dismissal, and Wipfli Ullrich Bertelson LLP of its
engagement, on September 22, 1999. During 1997 and 1998 and through September
22, 1999, (a) there were no disagreements with Ernst & Young LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused that firm to make reference
to the subject matter of the disagreement in connection with its report and (b)
there were no "reportable events" (as defined in SEC Regulation S-K Item
304(a)(1)(v)). Ernst & Young LLP's report on First Northern's financial
statements for 1997 and 1998 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope, or
accounting principles.
OTHER INFORMATION WHICH YOU CAN OBTAIN
First Northern is a public company, and must provide information to the
public under the Securities Exchange Act of 1934. Therefore, First Northern
files reports, proxy statements and other information with the Securities and
Exchange Commission. You may inspect and copy these materials at the
Commission's public reference facilities, which are located at:
- Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
- 7 World Trade Center, New York, New York 10048, and
- Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
You may also obtain copies of these documents by writing to the Commission's
Public Reference Section, Washington, D.C. 20549; in that case, you will be
charged for the copies at the rates which the
156
<PAGE> 159
Commission sets. You may also obtain copies from the Commission's Web site
(http://www.sec.gov). Because First Northern common stock is traded on the
Nasdaq Stock Market, you can inspect material filed by it at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006.
This proxy statement/prospectus "incorporates by reference" the filings
named below. That means that the contents of those documents are considered to
be part of this proxy statement/prospectus even though they are not actually
included with it. Bank Mutual or First Northern will provide you with a copy of
any of those documents without charge if you are a First Northern record
shareholder, or if you are a beneficial owner of securities which are held in
street name. They will not necessarily provide exhibits unless those exhibits
are specifically incorporated by reference in the document. You can obtain
copies of the documents by writing to First Northern, 201 North Monroe Avenue,
P.O. Box 23100, Green Bay, Wisconsin 54305-3100, Attn: Marla J. Carr, or by
calling Ms. Carr, First Northern's corporate secretary, at (920) 437-7101. You
should request the information by October 12, 2000 to help assure that you
receive it before the special meeting.
This proxy statement/prospectus incorporates by reference the following
documents. Each of them has been filed by First Northern with the Commission as
required by the Exchange Act:
- Form 10-K for the year ended December 31, 1999;
- Forms 10-Q for the quarters ended March 31, 2000 and June 30, 2000; and
- First Northern's current report on Form 8-K dated February 21, 2000.
This proxy statement/prospectus also incorporates all reports and definitive
proxy or information statements filed by First Northern under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this proxy
statement/prospectus. They will be incorporated by reference into this proxy
statement/ prospectus from the date on which First Northern files such
documents.
Bank Mutual has filed a registration statement on Form S-4 under the
Securities Act with the Commission which covers the shares of common stock
described in this proxy statement/prospectus. The registration statement has
information in addition to the information in this proxy statement/prospectus.
You may obtain that additional information at the addresses above. This proxy
statement/prospectus, and the documents which this proxy statement/prospectus
incorporates by reference, describe certain contracts or other documents. These
descriptions describe their material terms. By their nature, though, they are
summaries, and are not necessarily complete. If you wish further information
rather than this summary, you should review a copy of the document if Bank
Mutual has filed it as an exhibit to the registration statement. When Bank
Mutual has filed a document as an exhibit, a complete reading of the document
will provide you more information than a summary. Bank Mutual is not responsible
if you fail to read the full document.
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<PAGE> 160
INDEX TO FINANCIAL STATEMENTS
BANK MUTUAL AND MUTUAL
For pro forma financial information about Bank Mutual giving effect to the
merger with First Northern, see "Pro Forma Financial Information."
The following financial statements of Mutual Savings are included in this
Proxy Statement/ Prospectus. Mutual Savings may be considered a predecessor to
Bank Mutual. Because Bank Mutual has not conducted operations, separate
financial statements for it are not included.
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
MUTUAL SAVINGS BANK
Independent Auditors' Report.............................. F-1
Consolidated Statements of Financial Condition at June 30,
2000 (unaudited) and December 31, 1999 and 1998........ F-2
Consolidated Statements of Income for the six months ended
June 30, 2000 and 1999
(unaudited) and for each of the three years ended December
31, 1999, 1998 and 1997................................ F-3
Consolidated Statements of Changes in Equity for the six
months ended June 30, 2000 and 1999 (unaudited) and for
each of the three years ended December 31, 1999, 1998
and 1997............................................... F-4
Consolidated Statements for Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited) and for each
of the three years ended December 31, 1999, 1998 and
1997................................................... F-5
Notes to Consolidated Financial Statements................ F-7
No additional schedules are required or included.
</TABLE>
FIRST NORTHERN
First Northern's historical financial statements and other financial
information are incorporated by reference in this proxy statement/prospectus
from First Northern's filings with the Securities and Exchange Commission. See
"Other Information Which You Can Obtain."
158
<PAGE> 161
MUTUAL SAVINGS BANK
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mutual Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Mutual Savings Bank (the Bank) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
equity and cash flows for the three years ended December 31, 1999. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Bank and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for three years ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Milwaukee, Wisconsin
March 7, 2000
F-1
<PAGE> 162
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ------------------------
2000 1999 1998
----------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.................................. $ 18,978 $ 21,367 $ 22,534
Federal funds sold....................................... -- 25,000 45,000
Interest-earning deposits................................ 12,839 132,592 262,714
---------- ---------- ----------
Cash and cash equivalents................................ 31,817 178,959 330,248
Securities available-for-sale, at fair value:
Investment securities.................................. 57,461 57,763 116,534
Mortgage-related securities............................ 461,377 374,100 270,897
Loans held for sale...................................... 1,632 541 27,723
Loans receivable, net.................................... 1,127,987 1,082,795 1,037,589
Real estate owned........................................ 4,912 4,953 5,440
Premises and equipment................................... 26,727 26,871 27,567
Federal Home Loan Bank stock, at cost.................... 14,585 13,537 13,537
Accrued interest receivable.............................. 9,602 8,620 8,035
Intangible assets........................................ 11,027 11,496 29,786
Other assets............................................. 12,043 9,871 5,506
---------- ---------- ----------
$1,759,170 $1,769,506 $1,872,862
========== ========== ==========
LIABILITIES AND EQUITY
Liabilities:
Deposits............................................... $1,300,613 $1,343,007 $1,398,858
Borrowings............................................. 264,667 242,699 270,822
Advance payments by borrowers for taxes and
insurance........................................... 13,012 1,661 1,710
Other liabilities...................................... 13,290 18,319 25,729
---------- ---------- ----------
1,591,582 1,605,686 1,697,119
Equity:
Retained earnings...................................... 176,260 169,746 174,229
Net unrealized gain (loss) on securities
available-for-sale.................................. (8,672) (5,926) 1,514
---------- ---------- ----------
167,588 163,820 175,743
Commitments and Contingencies (Notes 13 and 14)
---------- ---------- ----------
$1,759,170 $1,769,506 $1,872,862
========== ========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 163
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------ --------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees..................... $41,403 $39,737 $ 79,623 $ 90,092 $ 93,628
Investments............................... 3,219 10,413 20,200 19,714 12,115
Mortgage-related securities............... 15,860 8,503 18,479 15,664 10,250
------- ------- -------- -------- --------
Total interest income....................... 60,482 58,653 118,302 125,470 115,993
Interest expense:
Deposits.................................. 29,739 30,985 61,091 65,236 60,917
Borrowings................................ 7,232 7,045 13,933 14,437 10,897
Advance payments by borrowers for taxes
and insurance.......................... 90 98 313 344 380
------- ------- -------- -------- --------
Total interest expense...................... 37,061 38,128 75,337 80,017 72,194
------- ------- -------- -------- --------
Net interest income......................... 23,421 20,525 42,965 45,453 43,799
Provision for losses on loans............... 236 203 350 637 1,065
------- ------- -------- -------- --------
Net interest income after provision for
losses on loans........................... 23,185 20,322 42,615 44,816 42,734
Noninterest income:
Service charges on deposits............... 1,413 1,332 2,813 2,630 2,413
Brokerage commissions..................... 994 827 1,826 1,228 984
Servicing fees on loans sold.............. 205 229 447 577 588
Loan fees and service charges............. 497 549 1,014 1,662 773
Gain on sales of loans.................... 43 436 497 1,025 486
Gain (loss) on sales of securities........ -- (108) 158 -- (12)
Other..................................... 864 634 1,229 1,318 927
------- ------- -------- -------- --------
Total noninterest income.................... 4,016 3,899 7,984 8,440 6,159
Noninterest expenses:
Compensation, payroll taxes and other
employee benefits...................... 8,624 8,539 17,158 16,638 15,346
Occupancy................................. 2,595 2,846 5,550 5,580 5,288
Federal deposit insurance premiums........ 142 416 820 837 822
Marketing................................. 1,256 1,137 1,864 2,158 2,375
Data processing........................... 741 575 1,329 1,260 1,213
Amortization of intangibles............... 469 1,355 18,290 2,738 1,941
Other..................................... 2,859 3,077 6,268 6,310 5,101
------- ------- -------- -------- --------
Total noninterest expenses.................. 16,686 17,945 51,279 35,521 32,086
------- ------- -------- -------- --------
Income (loss) before income taxes........... 10,515 6,276 (680) 17,735 16,807
Income taxes................................ 4,001 2,386 3,803 6,584 6,622
------- ------- -------- -------- --------
Net income (loss)........................... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 164
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
SECURITIES
RETAINED AVAILABLE- TOTAL
EARNINGS FOR-SALE EQUITY
-------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at January 1, 1997................................ $152,893 $(1,599) $151,297
Comprehensive income:
Net income............................................ 10,185 -- 10,185
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
liability of $850................................ -- 1,573 1,573
-------- ------- --------
Total comprehensive income............................... 12,691
-------- ------- --------
Balances at December 31, 1997.............................. 163,078 (26) 163,052
Comprehensive income:
Net income............................................ 11,151 -- 11,151
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
liability of $832................................ -- 1,540 1,540
-------- ------- --------
Total comprehensive income............................... 12,691
-------- ------- --------
Balances at December 31, 1998.............................. 174,229 1,514 175,743
Comprehensive income:
Net loss.............................................. (4,483) (4,483)
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
benefit of $4,144................................ -- (7,440) (7,440)
-------- ------- --------
Total comprehensive loss................................. (11,923)
-------- ------- --------
Balances at December 31, 1999.............................. 169,746 (5,926) 163,820
Comprehensive income:
Net income (unaudited)................................ 6,514 -- 6,514
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
benefit of $1,774 (unaudited).................... -- (2,746) (2,746)
-------- ------- --------
Total comprehensive income (unaudited)................... -- -- 3,768
-------- ------- --------
Balances at June 30, 2000 (unaudited)...................... $176,260 $(8,672) $167,588
======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 165
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)..................... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Provision for losses on loans....... 236 203 350 637 1,065
Provision for depreciation.......... 790 953 1,840 2,033 1,816
Deferred income tax benefit......... 1,774 1,192 (3,886) (630) (710)
Amortization of intangibles......... 469 1,355 18,290 2,738 1,941
Net discount amortization on
securities....................... (175) (18) (80) (5,242) (318)
Loans originated for sale........... (6,031) (45,405) (47,427) (131,082) (52,006)
Proceeds from sales of loans
originated for sale.............. 4,983 47,116 57,358 117,770 43,478
Net gain on sales of loans.......... (43) (436) (497) (1,025) (486)
Net (gain) loss on sale of
available-for-sale securities.... -- -- (378) -- 12
Purchases of trading account
assets........................... -- (24,827) (39,215) (5,066) --
Proceeds from sales of trading
account assets................... -- 24,719 38,995 5,067 --
Net loss on sale of trading
account assets................... -- 108 220 1 --
Decrease in other liabilities....... (5,029) (13,060) (7,410) (1,573) (94)
(Increase) decrease in other
assets........................... (2,172) (30) 3,665 (2,355) 9,039
(Increase) decrease in accrued
interest receivable.............. (982) (293) (585) 1,425 (3,533)
Other............................... (220) 1,006 587 513 (882)
--------- -------- --------- --------- ---------
Net cash provided (used) by operating
activities.......................... 114 (3,527) 17,344 (5,638) 9,507
Investing Activities
Proceeds from maturities and sales of
investment securities............... 20,000 65,070 65,000 429,337 397,619
Purchases of investment securities.... (18,808) (20,000) (20,000) (380,489) (376,634)
Proceeds from sales of
mortgage-related securities......... -- -- 54,060 -- 3,822
Purchases of mortgage-related
securities.......................... (115,412) (34,123) (213,504) (119,548) (72,071)
Net (purchases) sales of investments
in mutual funds..................... (867) (728) (1,481) (1,410) 16,742
Principal payments on mortgage-related
securities.......................... 23,765 35,602 60,367 77,407 59,514
Net (increase) decrease in loans
receivable.......................... (47,101) (7,290) (29,581) 208,864 96,953
Proceeds from sale of foreclosed
properties.......................... 1,936 1,147 1,673 3,438 627
Proceeds from sale of (purchase of)
Federal Home Loan Bank stock........ (1,048) -- -- 6,700 277
</TABLE>
F-5
<PAGE> 166
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchases of office properties and
equipment........................... (646) (497) (1,173) (3,141) (1,854)
Sales of office properties and
equipment........................... -- -- 29 -- --
Business acquisition, net of cash and
cash equivalents acquired of
$8,328.............................. -- -- -- -- (118,164)
--------- -------- --------- --------- ---------
Net cash provided (used) by investing
activities.......................... (138,181) 39,181 (84,610) 221,158 6,831
Financing Activities
Net increase (decrease) in deposits... (42,394) (11,539) (55,851) 36,528 (8,653)
Net decrease (increase) in short-term
borrowings.......................... 26,000 -- -- -- (208,194)
Proceeds from long-term borrowings.... 33,000 -- -- -- 228,000
Repayments on long-term borrowings.... (37,032) (123) (28,123) (45) --
Net increase (decrease) in advance
payments by borrowers for taxes and
insurance........................... 11,351 11,407 (49) (819) 1,636
--------- -------- --------- --------- ---------
Net cash provided (used) by financing
activities.......................... (9,075) (255) (84,023) 35,664 12,789
--------- -------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents......................... (147,142) 35,399 (151,289) 251,184 29,127
Cash and cash equivalents at beginning
of period........................... 178,959 330,248 330,248 79,064 49,937
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of
period.............................. 31,817 365,647 $ 178,959 $ 330,248 $ 79,064
========= ======== ========= ========= =========
Supplemental information:
Interest paid on deposits........... $ 28,256 $ 29,166 $ 61,220 $ 65,315 $ 61,598
Income taxes paid................... 4,058 3,092 6,678 7,859 5,530
Loans transferred to other real
estate owned..................... 1,673 951 1,773 7,975 178
Loans transferred from loans held
for sale to portfolio............ -- 19,171 17,748 17 --
Mutual fund liquidation proceeds.... -- 14,047 14,047 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE> 167
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Mutual Savings Bank (the Bank) provides a full range of financial services
to customers through its branch locations in Wisconsin. The Bank is subject to
competition from other financial institutions and is also subject to the
regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Bank
and its wholly owned subsidiaries, Lake Financial and Insurance Services (Lake),
Mutual Investment Company (MIC) and MC Development Ltd. (MD). Lake provides
investment and insurance services, MIC owns and manages an investment portfolio
for the benefit of Mutual, and MD holds, for sale, title to certain parcels of
developed and undeveloped real estate. Significant intercompany accounts and
transactions have been eliminated in consolidation.
The unaudited consolidated financial statements as of June 30, 2000 and for
the six months then ended have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenues
and expenses for the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Bank considers federal funds sold and interest-bearing deposits that
have original maturities of three months or less to be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-RELATED SECURITIES
TRADING ACCOUNT ASSETS
Trading account assets are held for resale in anticipation of short-term
market movements. Trading account assets are stated at fair value. Gains and
losses are included in net gain or loss on sales of securities and are based on
the specific identification method. There were no trading account assets at
December 31, 1999 or 1998 or June 30, 2000.
SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities, equity securities and investments in
mutual funds not classified as trading are classified as
F-7
<PAGE> 168
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported in a separate component of
equity.
The amortized cost of securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity, or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income from investments.
Interest and dividends are included in interest income from investments.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gain (loss) on sales of securities and are
based on the specific identification method.
Stock of the Federal Home Loan Bank (FHLB) is carried at cost which is its
redeemable value.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale, which generally consist of current production of
certain fixed-rate first mortgage loans, are recorded at the lower of aggregate
cost or market value. Fees received from the borrower are deferred and recorded
as an adjustment of the carrying value. Loans held for sale may be transferred
to loans held for investment when the Bank has both the ability and intent to
hold the loans for the foreseeable future or until maturity. Upon transfer, any
difference between the carrying amount of the loan and its outstanding principal
balance is recognized as an adjustment to yield by the interest method.
INTEREST AND FEES ON LOANS
Allowances of $161 (unaudited), $228 and $172 are established for accrued
but uncollected interest on mortgage loans for which any payments were more than
90 days past due at June 30, 2000 and December 31, 1999 and 1998, respectively.
Interest previously accrued on these loans is removed from income at that time.
Payments received, if any, on these loans are recorded as principal reduction or
as interest based on management's judgment as to ultimate collectibility of all
contractual future principal and interest payments.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the related loans' yield.
The Bank amortizes these amounts using the level yield method over the estimated
life of the related loans.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is composed of general valuation
allowances. The Bank may establish a specific valuation allowance on loans it
considers impaired but in such event the loan is reduced by the amount of the
specific allowance and a corresponding amount is charged off to the allowance
for losses on loans. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will not be able to collect
all amounts due according to the contractual terms of the loan agreement. When
the carrying amount of the loan exceeds (1) the present value of the expected
cash flows, discounted at the loan's original effective interest rate, or (2)
the fair value of the underlying collateral, a specific valuation allowance is
recorded for such excess. The adjusted balance of the loan is adjusted
(decreased) to reflect significant changes in the estimated fair value of
collateral, the estimated amount and timing of an impaired loan's expected
future cash flows, or if actual cash flows that differ significantly from
expected future cash flows. General valuation allowances are based on an
evaluation of the various risk components that are inherent in the credit
portfolio. The risk components that are
F-8
<PAGE> 169
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
evaluated include past loan loss experience; the level of non-performing and
classified assets; current economic conditions; volume, growth and composition
of the loan portfolio; adverse situations that may affect borrowers' ability to
repay; the estimated value of any underlying collateral; peer group comparisons;
regulatory guidance; and other relevant factors.
The allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. The allowance reflects management's best
estimate of the amount necessary to provide for the credit risks of the Bank.
The allowance is based on a risk model developed and implemented by management
and approved by the Bank's Board of Directors.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties acquired through, or in lieu of, loan foreclosure are
recorded at the lower of cost or fair value less estimated costs to sell. Costs
related to the development and improvement of property are capitalized, whereas
costs related to holding the property are expensed.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and furniture, equipment and automobiles are amortized
over their estimated useful lives (40 to 45 years and 3 to 10 years,
respectively) using the straight line method. Leasehold improvements are
amortized over the shorter of their useful lives or the lease terms (generally
10 years). The Bank reviews buildings, leasehold improvements and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment exists when the
estimated undiscounted cash flows for the property is less than its carrying
value. If identified, an impairment loss is recognized through a charge to
earnings based on the fair value of the property.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, results from acquisitions made by the Bank. The Bank's
goodwill is being amortized to operating expense using the straight-line method
over 15 years. Other intangible assets are amortized over their estimated useful
lives, generally 7-10 years. The carrying amount of goodwill and other
intangible assets are reviewed if facts and circumstances indicate that it may
be impaired. If this review indicates that it is not recoverable, as determined
based on the estimated undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying amount of the goodwill is reduced
for the estimated shortfall of the cash flows discounted at the average cost of
capital for thrift institutions as compared to the carrying value.
INCOME TAXES
The Bank files a consolidated federal income tax return and separate, or
combined, state income tax returns, depending on the state. Income taxes are
accounted for using the "asset and liability" method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
that will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Bank's income tax returns. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date of the change. A valuation allowance is provided for any deferred
tax asset for which it is more likely
F-9
<PAGE> 170
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
than not that the asset will not be realized. Changes in valuation allowances
are recorded as a component of income.
PENSION COSTS
The Bank's net periodic pension cost consists of the expected cost of
benefits earned by employees during the current period and an interest cost on
the projected benefit obligation, reduced by the expected earnings on assets
held by the retirement plan, amortization of transitional assets over a period
of 15 years (beginning in 1987), amortization of prior service cost and by
amortization of recognized actuarial gains and losses over the estimated future
service period of existing plan participants.
SEGMENT INFORMATION
The Bank has determined that it has one reportable segment -- community
banking. The Bank offers a range of financial products and services to external
customers, including: accepting deposits from the general public; originating
residential, consumer and limited types of commercial loans (primarily loans
secured by multi-family properties); and marketing annuities and other insurance
products. Revenues for each of these products are disclosed in the consolidated
statements of income.
PENDING ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of SFAS No. 133," which delays the implementation date of SFAS No. 133 for
one year, to fiscal years beginning after June 15, 2000, provide a comprehensive
and consistent standard for the recognition of derivatives and hedging
activities. SFAS 133 requires all derivatives to be recorded on the balance
sheet at fair value. However, special accounting is provided for certain
derivatives that meet the definition of hedges. Changes in the fair value of
derivatives that do not meet the definition of hedges are required to be
reported in earnings in the period of change. The Bank does not use derivative
financial instruments such as futures, swaps, caps, floors, options or interest
or principal only strips of similar instruments. Therefore, SFAS No. 133 is not
expected to have a significant impact on the Bank. The Bank will implement this
statement on January 1, 2001.
2. BUSINESS COMBINATIONS
On March 31, 1997, the Bank completed the acquisition of First Federal
Bancshares of Eau Claire, Inc. (First Federal) in a cash transaction for $125.1
million. The transaction has been accounted for as a purchase. First Federal was
the parent company of First Federal Bank of Eau Claire, F.S.B. First Federal had
total assets of $730.7 million as of March 31, 1997. This acquisition resulted
in the recording of identifiable intangibles (value of deposit base) of $10.4
million and goodwill (unidentifiable intangible asset) of $24.1 million. The
results of operations of the acquired company are included in the consolidated
financial statements from the date of acquisition.
Scheduled amortization of intangibles was $2,711, $2,738 and $1,941 for the
years ended December 31, 1999, 1998 and 1997, and $469 (unaudited) and $1,355
(unaudited) for the six-month periods ended June 30, 2000 and 1999 respectively.
In 1999, increased competition for deposits from alternate investment products,
increases in interest rates which negatively impacted the volume of new loan
originations and credit standards more stringent than those used by the acquiree
caused management to
F-10
<PAGE> 171
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS -- (CONTINUED)
revise cash flow estimates to be realized from the acquired business.
Accordingly, $15,579 of intangibles were written off for the estimated shortfall
of the cash flows discounted at the average cost of capital for thrift
institutions as compared to the carrying value. This write-off is included in
amortization of intangibles on the statement of income. The unamortized balance
of goodwill and intangible assets was $11,027 (unaudited), $11,496 and $29,786
at March 31, 2000, and December 31, 1999 and 1998, respectively.
F-11
<PAGE> 172
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At June 30, 2000 (Unaudited):
U.S. government and federal agency obligation..... $ 28,909 $ 26 $ (773) $ 28,162
Asset-backed securities........................... -- -- -- --
Mutual funds...................................... 29,894 -- (595) 29,299
-------- ---- -------- --------
Total investment securities.................... 58,803 26 (1,368) 57,461
-------- ---- -------- --------
Federal Home Loan Mortgage Corporation............ 67,880 28 (2,904) 65,004
Federal National Mortgage Association............. 388,707 798 (10,102) 379,403
Private Placement CMOs............................ 16,798 1 (327) 16,472
Government National Mortgage Association.......... 492 7 (1) 498
-------- ---- -------- --------
Total mortgage-related securities.............. 473,877 834 (13,334) 461,377
-------- ---- -------- --------
Total.......................................... $532,680 $860 $(14,702) $518,838
======== ==== ======== ========
At December 31, 1999:
U.S. government and federal agency obligations.... $ 30,107 $ -- $ (932) $ 29,175
Asset-backed securities........................... 51 -- -- 51
Mutual funds...................................... 29,027 -- (490) 28,537
-------- ---- -------- --------
Total investment securities.................... 59,185 -- (1,422) 57,763
-------- ---- -------- --------
Federal Home Loan Mortgage Corporation............ 72,763 94 (2,641) 70,216
Federal National Mortgage Association............. 290,785 745 (6,146) 285,384
Private Placement CMOs............................ 17,884 65 (22) 17,927
Government National Mortgage Association.......... 566 8 (1) 573
-------- ---- -------- --------
Total mortgage-related securities.............. 381,998 912 (8,810) 374,100
-------- ---- -------- --------
Total.......................................... $441,183 $912 $(10,232) $431,863
======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At December 31, 1998:
U.S. government and federal agency obligations.... $ 75,113 $ 308 $ -- $ 75,421
Asset-backed securities........................... 228 -- -- 228
Mutual funds...................................... 41,592 -- (707) 40,885
-------- ------ ----- --------
Total investment securities.................... 116,933 308 (707) 116,534
-------- ------ ----- --------
Federal Home Loan Mortgage Corporation............ 43,607 168 (58) 43,717
Federal National Mortgage Association............. 192,200 2,250 (97) 194,353
Private Placement CMOs............................ 31,630 370 (6) 31,994
Government National Mortgage Association.......... 797 36 -- 833
-------- ------ ----- --------
Total mortgage-related securities.............. 268,234 2,824 (161) 270,897
-------- ------ ----- --------
Total.......................................... $385,167 $3,132 $(868) $387,431
======== ====== ===== ========
</TABLE>
F-12
<PAGE> 173
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
The amortized cost and fair values of securities by contractual maturity
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.
<TABLE>
<CAPTION>
JUNE 30 2000
-----------------------
AMORTIZED
COST FAIR VALUE
--------- ----------
(UNAUDITED)
<S> <C> <C>
Due in one year or less..................................... $ 3,543 $ 3,543
Due after one year through five years....................... 25,366 24,619
Mutual funds................................................ 29,894 29,299
Mortgage-related securities................................. 473,877 461,377
-------- --------
$532,680 $518,838
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------
AMORTIZED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 10,000 $ 9,925
Due after one year through five years....................... 20,158 19,301
Mutual funds................................................ 29,027 28,537
Mortgage-related securities................................. 381,998 374,100
-------- --------
$441,183 $431,863
======== ========
</TABLE>
F-13
<PAGE> 174
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
A reconciliation of the gross change in the unrealized gain or loss on
available-for-sale securities to the change in unrealized gain or loss on
available-for-sale securities reported as a component of comprehensive income
follows:
<TABLE>
<CAPTION>
JUNE 30 2000
-------------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Change in unrealized losses on available-for-sale
securities................................................ $(13,842) $(5,170) $(8,672)
Less: reclassification adjustment for gains realized in net
income.................................................... -- -- --
-------- ------- -------
Change in net unrealized losses recognized in other
comprehensive
income.................................................... $(13,842) $(5,170) $(8,672)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized losses on available-for-sale
securities................................................ $(11,962) $(4,276) $(7,686)
Less: reclassification adjustment for gains realized in net
income.................................................... (378) (132) (246)
-------- ------- -------
Change in net unrealized losses recognized in other
comprehensive
income.................................................... $(11,584) $(4,144) $(7,440)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1998
-------------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized gains on available-for-sale
securities................................................ $2,372 $832 $1,540
Less: reclassification adjustment for gains (losses)
realized in net
income.................................................... -- -- --
------ ---- ------
Change in net unrealized gains recognized in other
comprehensive income...................................... $2,372 $832 $1,540
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1997
---------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized gains on available-for-sale
securities................................................ $2,435 $855 $1,580
Less: reclassification adjustment for losses realized in net
income.................................................... 12 5 7
------ ---- ------
Change in net unrealized gains recognized in other
comprehensive
income.................................................... $2,423 $850 $1,573
====== ==== ======
</TABLE>
F-14
<PAGE> 175
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
Total proceeds and gross realized gains and losses from sale of
available-for-sale securities were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED
----------------- -------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds............................................... $-- $ $54,060 $-- $3,825
Gross gains............................................ -- -- 378 -- 3
Gross losses........................................... -- -- -- -- 15
</TABLE>
Net losses of $0 (unaudited), $108 (unaudited) and $220 were recognized in
income from sales of securities classified as trading for the six months ended
June 30, 2000 and 1999 and the year ended December 31, 1999. There were no
realized net gains or losses on trading securities in 1998 or 1997 and no
unrealized gains or losses recognized in income related to trading securities
for any period presented.
Investment securities with a fair value of approximately $10 million at
June 30, 2000 (unaudited) and December 31, 1999 and 1998, were pledged to secure
public funds.
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
First mortgage loans:
One to four-family..................................... $ 733,958 $ 743,993 $ 742,231
Multi-family........................................... 65,105 53,777 53,521
Commercial............................................. 65,267 52,375 40,922
Construction and development........................... 30,840 26,530 21,939
---------- ---------- ----------
Total first mortgage real estate loans................. 895,170 876,675 858,613
---------- ---------- ----------
Consumer and other loans:
Consumer loans:
Fixed equity........................................ 108,811 89,315 67,629
Home equity lines of credit......................... 55,371 50,618 45,827
Student............................................. 27,698 28,371 29,634
Home improvement.................................... 12,134 9,920 8,373
Other............................................... 9,436 10,028 12,970
Total consumer loans.............................. 213,450 188,252 164,433
---------- ---------- ----------
Commercial business loans.............................. 42,815 39,488 28,839
---------- ---------- ----------
Total consumer and other loans...................... 256,265 227,740 193,272
Total loans receivable.............................. 1,151,435 1,104,415 1,051,885
</TABLE>
F-15
<PAGE> 176
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
4. LOANS RECEIVABLE -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Less:
Undisbursed loan proceeds.............................. 16,368 14,658 7,001
Allowance for losses on loans.......................... 7,085 6,948 6,855
Unearned loan fees and discounts....................... 5 14 440
---------- ---------- ----------
23,448 21,620 14,296
---------- ---------- ----------
$1,127,987 $1,082,795 $1,037,589
========== ========== ==========
</TABLE>
The Bank's first mortgage loans, fixed equity, home equity lines of credit
and home improvement loans are primarily secured by properties housing one to
four families which are generally located in the Bank's local lending areas in
Wisconsin.
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30 DECEMBER 31
---------------- -------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................. $6,948 $6,855 $6,855 $7,195 $3,921
Provisions.................................... 236 247 350 637 1,065
Allowance of acquired business................ -- -- -- -- 2,449
Charge-offs................................... (114) (127) (341) (1,220) (751)
Recoveries.................................... 15 18 84 243 511
------ ------ ------ ------ ------
Balance at end of year........................ $7,085 $6,949 $6,948 $6,855 $7,195
====== ====== ====== ====== ======
</TABLE>
There are no loans which are considered to be impaired at June 30, 2000,
December 31, 1999 or December 31, 1998.
The unpaid principal balance of loans serviced for others were $278,057
(unaudited), $287,789, $279,759 and $250,496 at June 30, 2000 and December 31,
1999, 1998 and 1997, respectively. These loans are not reflected in the
consolidated financial statements.
5. REAL ESTATE OWNED
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Acquired by foreclosure or in lieu of foreclosure........... $2,977 $3,018 $3,505
Acquired for development or resale.......................... 1,935 1,935 1,935
------ ------ ------
$4,912 $4,953 $5,440
====== ====== ======
</TABLE>
F-16
<PAGE> 177
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
6. ACCRUED INTEREST
Accrued interest on loans and investments are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Mortgage-related securities................................. $2,484 $1,787 $1,174
Investment securities....................................... 553 814 821
Loans receivable............................................ 6,565 6,019 6,040
------ ------ ------
$9,602 $8,620 $8,035
====== ====== ======
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Land........................................................ $ 6,969 $ 6,969 $ 6,889
Office buildings............................................ 25,840 25,292 25,177
Furniture, equipment and automobiles........................ 12,015 12,060 11,759
Leasehold improvements...................................... 1,203 1,203 1,442
------- ------- -------
46,027 45,524 45,267
Less allowances for depreciation and amortization........... 19,300 18,653 17,700
------- ------- -------
$26,727 $26,871 $27,567
======= ======= =======
</TABLE>
Depreciation expense for the six months ended June 30, 2000 and 1999 and
the years ended 1999, 1998 and 1997, was $790 (unaudited), $935 (unaudited),
$1,840, $2,033 and $1,816, respectively.
The Bank leases various branch offices, office facilities and equipment
under noncancellable operating leases which expire on various dates through
2012. Future minimum payments under noncancelable operating leases with initial
or remaining terms of one year or more for the years indicated are as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- -----------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
2000........................................................ $ 435 $ 870
2001........................................................ 660 660
2002........................................................ 446 446
2003........................................................ 417 417
2004........................................................ 390 390
Thereafter.................................................. 1,364 1,364
------ ------
Total..................................................... $3,712 $4,147
====== ======
</TABLE>
Total rental expenses totaled $273 (unaudited), $302 (unaudited), $609,
$639 and $682 for the six months ended June 30, 2000 and 1999 and the years
ended 1999, 1998 and 1997, respectively.
F-17
<PAGE> 178
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Checking accounts:
Non-interest-bearing................................... $ 49,002 $ 42,596 $ 43,031
Interest-bearing....................................... 86,134 89,685 100,753
---------- ---------- ----------
135,136 132,281 143,784
Money market accounts.................................... 220,725 231,174 159,361
Savings accounts......................................... 148,401 151,447 166,316
Certificate accounts:
Due within one year.................................... 539,156 593,512 638,596
After one but within two years......................... 190,143 178,431 237,113
After two but within three years....................... 46,057 34,716 30,129
After three but within four years...................... 10,593 11,535 10,479
After four but within five years....................... 10,397 9,868 11,583
After five years....................................... 5 43 1,497
---------- ---------- ----------
796,351 828,105 929,397
---------- ---------- ----------
$1,300,613 $1,343,007 $1,398,858
========== ========== ==========
</TABLE>
The aggregate amount of certificate accounts with balances of one hundred
thousand dollars or more is approximately $63,787 (unaudited), $62,223 and
$70,513 at June 30, 2000 and December 31, 1999 and 1998, respectively.
Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
------------------ -----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest-bearing checking accounts............. $ 452 $ 472 $ 940 $ 1,070 $ 1,137
Money market accounts.......................... 5,656 4,315 9,796 6,571 5,458
Savings accounts............................... 1,786 1,981 3,885 4,268 4,696
Certificate accounts........................... 21,845 24,217 46,470 53,327 49,626
------- ------- ------- ------- -------
$29,739 $30,985 $61,091 $65,236 $60,917
======= ======= ======= ======= =======
</TABLE>
The deposit accounts are insured by the FDIC to a maximum of $100,000 for
each insured depositor in accordance with applicable law and regulation.
F-18
<PAGE> 179
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
9. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
--------------------- ----------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- --------- ------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank advances
maturing:
2000....................... $ 31,147 7.07% $ 42,152 6.53% $ 42,170 5.77%
2001....................... 33,000 6.59 -- -- -- --
2002....................... -- -- -- -- 203,000 5.20
2003....................... 520 4.30 547 5.11 569 4.65
2004....................... 200,000 5.70 200,000 5.70 -- --
Thereafter................. -- -- 25,000 4.98
Other borrowings................ -- -- 83 10.25
-------- -------- --------
$264,667 $242,699 $270,822
======== ======== ========
</TABLE>
Advances that mature in the year 2004 consist of borrowings that are
redeemable at the option of the FHLB beginning at various times in 2001.
The Bank is required to maintain unencumbered mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. The Bank's borrowings at the FHLB are limited to the
lesser of 35% of total assets or 60% of the book value of certain mortgage
loans. In addition, these notes are collateralized by FHLB stock of $14,585 at
June 30, 2000 (unaudited) and December 31, 1999.
10. EQUITY
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary, actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
As a state-chartered savings bank, the Bank is required to meet minimum
capital levels established by the State of Wisconsin in addition to federal
regulations.
Quantitative measures established by federal regulation to ensure adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as these terms are defined in regulations)
to risk-weighted assets (as these terms are defined in regulations), and of Tier
I capital (as these terms are defined in regulations) to average assets (as
these terms are defined in regulations). For the state of Wisconsin, total
capital (as these terms are defined in regulations) as a ratio
F-19
<PAGE> 180
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
10. EQUITY -- (CONTINUED)
of total assets must meet a minimum standard. Management believes, as of June
30, 2000 and December 31, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 2000 and December 31, 1999 and 1998, the most recent
notification from the State of Wisconsin categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. The
Bank is not aware of any conditions or events which would change their status as
well capitalized. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000 (unaudited):
Total capital (to risk-weighted assets)... $171,598 18.69% $73,453 8.00% $91,817 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 164,513 17.92% 36,727 4.00% 55,090 6.00%
Tier 1 capital (to average assets)........ 164,513 9.37% 69,967 4.00% 87,458 5.00%
State of Wisconsin capital (to total
assets)................................ 171,598 9.72% 105,918 6.00% N/A N/A
As of December 31, 1999:
Total capital (to risk-weighted assets)... $164,565 18.51% $71,143 8.00% $88,928 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 157,617 17.72% 35,571 4.00% 53,357 6.00%
Tier 1 capital (to average assets)........ 157,617 8.66% 72,770 4.00% 90,962 5.00%
State of Wisconsin capital (to total
assets)................................ 164,565 9.26% 106,587 6.00% N/A N/A
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-weighted assets)... $150,439 17.02% $70,728 8.00% $88,409 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 143,584 16.24% 35,364 4.00% 53,046 6.00%
Tier 1 capital (to average assets)........ 143,584 7.78% 73,798 4.00% 92,248 5.00%
State of Wisconsin capital (to total
assets)................................ 150,439 8.00% 112,783 6.00% N/A N/A
</TABLE>
F-20
<PAGE> 181
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
10. EQUITY -- (CONTINUED)
Following are reconciliations of the Bank's equity under generally accepted
accounting principles to capital as determined by regulators:
<TABLE>
<CAPTION>
RISK- TIER I STATE OF
BASED (CORE) WISCONSIN
CAPITAL CAPITAL CAPITAL
------- ------- ---------
<S> <C> <C> <C>
As of June 30, 2000 (Unaudited):
Equity per financial statements........................... $167,588 $167,588 $167,588
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. 8,077 8,077 8,077
Intangibles............................................... (11,027) (11,027) (11,027)
Mortgage servicing rights................................. (125) (125) (125)
Allowance for loan losses................................. 7,085 -- 7,085
-------- -------- --------
Regulatory capital.......................................... $171,598 $164,513 $171,598
======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C>
As of December 31, 1999:
Equity per financial statements........................... $163,820 $163,820 $163,820
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. 5,436 5,436 5,436
Intangibles............................................... (11,496) (11,496) (11,496)
Mortgage servicing rights................................. (143) (143) (143)
Allowance for loan losses................................. 6,948 -- 6,948
-------- -------- --------
Regulatory capital.......................................... $164,565 $157,617 $164,565
======== ======== ========
As of December 31, 1998:
Equity per financial statements........................... $175,743 $175,743 $175,743
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. (2,221) (2,221) (2,221)
Intangibles............................................... (29,786) (29,786) (29,786)
Mortgage servicing rights................................. (152) (152) (152)
Allowance for loan losses................................. 6,855 -- 6,855
-------- -------- --------
Regulatory capital.......................................... $150,439 $143,584 $150,439
======== ======== ========
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank has a discretionary, defined-contribution savings plan (the Plan).
The Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code
and provides employees meeting certain minimum age and service requirements the
ability to make contributions to the Plan on a pretax basis. The Bank may then
match a percentage of the employee's contributions. Matching contributions made
by the Bank were $39 (unaudited) and $36 (unaudited) in the six months ended
June 30, 2000 and 1999, $68 in 1999, $56 in 1998 and $52 in 1997.
The Bank also has a defined-benefit pension plan covering employees meeting
certain minimum age and service requirements and a supplemental pension plan for
certain qualifying employees. The benefits are generally based on years of
service and the employee's compensation during the last five years of
F-21
<PAGE> 182
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
employment. The Bank's funding policy is to contribute annually the amount
necessary to satisfy the requirements of the Employee Retirement Income Security
Act of 1974.
Plan assets which consist primarily of immediate participation guarantee
contracts with an insurance company are actively managed by investment
professionals.
The following tables set forth the Plan's funded status and net periodic
benefit cost for 1999 and 1998. No such information is available relative to
interim periods.
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year..................... $13,916 $10,878
Service cost................................................ 659 632
Interest cost............................................... 934 798
Plan amendments............................................. -- 1,118
Actuarial (gain) loss....................................... (1,629) 704
Benefits paid............................................... (328) (214)
------- -------
Benefit obligation at end of year........................... $13,552 $13,916
======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year.............. $13,218 $11,057
Actual return on plan assets................................ 333 963
Employer contributions...................................... 996 1,412
Benefits paid............................................... (328) (214)
------- -------
Fair value of plan assets at end of year.................... $14,219 $13,218
======= =======
Funded Status
Funded (underfunded) status at end of year.................. $ 668 $ (698)
Unrecognized net actuarial gain (loss)...................... (239) 791
Unrecognized prior service cost............................. 1,028 1,230
Unrecognized net transition asset........................... (101) (151)
------- -------
Prepaid benefit cost........................................ $ 1,356 $ 1,172
======= =======
Weighted average assumptions used in cost calculations:
Discount rate............................................. 6.75% 7.00%
Rate of increase in compensation levels................... 5.50% 5.50%
Expected long-term rate of return on plan assets.......... 7.50% 7.50%
======= =======
</TABLE>
F-22
<PAGE> 183
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost................................................ $ 659 $ 632 $ 503
Interest cost............................................... 934 797 690
Expected return on plan assets.............................. (986) (824) (715)
Amortization of transition asset............................ (50) (50) (50)
Amortization of prior service cost.......................... 202 144 76
Recognized actuarial loss................................... 54 24 29
----- ----- -----
Total net periodic benefit cost............................. $ 813 $ 723 $ 533
===== ===== =====
</TABLE>
The supplemental pension plan had a projected benefit obligation of $3,110
and $3,247 and assets aggregating $2,777 and $2,521 at December 31, 1999 and
1998, respectively.
Total net periodic pension expense was $513 (unaudited) and $438
(unaudited) in the six months ended June 30, 2000 and 1999, respectively.
The Bank acquired an ESOP with the acquisition of First Federal which
covered substantially all former employees of First Federal with two or more
years of employment and who were at least 21 years of age. The cash proceeds
received by the ESOP in connection with the merger were used to prepay the
unpaid principal and interest outstanding under the ESOP. The remaining cash
balance has been invested in a mutual fund. An allocation was made to the
participants' accounts as of December 31, 1998 and the final allocation was made
as of December 31, 1999. The Bank is in the process of applying for a
determination letter to terminate the Plan and anticipates that all assets will
be available for distribution in a lump sum during 2000.
12. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31
---------------- ----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal......................................... $3,706 $2,456 $ 6,896 $7,010 $ 7,041
State........................................... 187 (76) 793 204 291
------ ------ ------- ------ -------
3,893 2,380 7,689 7,214 7,332
Deferred expense (benefit):
Federal......................................... 87 5 (3,120) (786) (1,007)
State........................................... 21 1 (766) 156 297
------ ------ ------- ------ -------
108 6 (3,886) (630) (710)
------ ------ ------- ------ -------
$4,001 $2,386 $ 3,803 $6,584 $ 6,622
====== ====== ======= ====== =======
</TABLE>
For state income tax purposes, the subsidiaries of the Bank have net
business loss carryovers of $487 available to offset against future income which
expire through 2013.
F-23
<PAGE> 184
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
12. INCOME TAXES -- (CONTINUED)
The income tax provision differs from the provision computed at the federal
statutory corporate rate for six months ended June 30, 2000 and 1999 and the
years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
----------------- ----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for income
taxes.......................................... $10,515 $6,276 $ (680) $17,735 $16,807
======= ====== ====== ======= =======
Tax expense at federal statutory rate............ $ 3,680 $2,197 $ (238) $ 6,207 $ 5,882
Increase (decrease) in taxes resulting from:
State income taxes -- Net of federal tax
benefit..................................... 135 (49) 21 382 382
Nondeductible intangible amortization.......... 164 216 3,487 490 351
Other.......................................... 22 24 533 (495) 7
------- ------ ------ ------- -------
Provision for income taxes....................... $ 4,001 $2,386 $3,803 $ 6,584 $ 6,622
======= ====== ====== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Bank's deferred tax assets and liabilities as of June 30, 2000
and December 31, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------------------
2000 1999 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
State net operating losses........................... $ 26 $ 26 $ 26 $ 238
Loan loss reserves................................... 1,886 2,103 1,673 1,274
Deferred loan fees................................... 51 225 155 370
Pension.............................................. 1,241 1,151 1,147 1,165
Unrealized loss on investment securities............. 5,170 3,394 -- 78
Other................................................ 1,371 1,252 297 402
------ ------ ------- -------
Total deferred tax assets.............................. 9,745 8,151 3,298 3,527
------ ------ ------- -------
Deferred tax liabilities:
Property and equipment depreciation.................. 1,057 1,057 1,196 1,200
FHLB stock dividends................................. 556 555 544 820
Purchase accounting adjustments...................... 1,536 1,611 3,910 4,407
Unrealized gain on investment securities............. -- -- 750 --
------ ------ ------- -------
Total deferred tax liabilities......................... 3,149 3,223 6,400 6,427
------ ------ ------- -------
Net deferred tax asset (liability)..................... $6,596 $4,928 $(3,102) $(2,900)
====== ====== ======= =======
</TABLE>
The Bank qualified under provisions of the Internal Revenue Code that
permitted it to deduct from taxable income an allowance for bad debts that
differed from the provision for such losses charged to income for financial
reporting purposes. Accordingly, no provision for federal income taxes has been
made for approximately $48,592 of retained income as of June 30, 2000
(unaudited) and December 31, 1999. If,
F-24
<PAGE> 185
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
12. INCOME TAXES -- (CONTINUED)
in the future, the Bank no longer qualifies as a bank for tax purposes, income
taxes of approximately $19,500 would be imposed.
13. CONTINGENT LIABILITY
The Bank has entered into an agreement whereby, for an initial fee and
annual fee, certain of its United States Treasury notes are pledged as
collateral for an Industrial Development Revenue Bond which was issued by a
local municipality to finance commercial real estate owned by a third party,
unrelated to the Bank. Under the terms of the agreement, the Bank must maintain
with a trustee collateral with a fair market value, as defined, aggregating
128%, 135% and 135% or more of the sum of the outstanding principal balance of
the bonds plus accrued interest on the outstanding principal at June 30, 2000
and December 31, 1999 and 1998, respectively. The Bank continues to receive
interest payments on the collateral.
At June 30, 2000 (unaudited) and December 31, 1999 and 1998, United States
Treasury notes with outstanding principal balances aggregating approximately
$10,000 were held by the trustee as collateral for these bonds which had an
outstanding principal balance of $5,165 (unaudited), $5,165 and $5,410 for June
30, 2000 and December 31, 1999 and 1998, respectively. The third-party borrower
is not in default on any scheduled payments due under the bond issue which has a
scheduled maturity of on December 15, 2009.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract amounts reflect the extent of involvement the Bank has in particular
classes of financial instruments and also represents the Bank's maximum exposure
to credit loss.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Unused consumer lines of credit............................. $66,958 $63,461 $59,406
Unused commercial lines of credit........................... 1,480 1,003 946
Commitments to extend credit:
Fixed rate ((7.625-9.25) in 2000; 6.60%-8.25% in 1999 and
6.15%-7.25% in 1998)................................... 10,496 7,418 19,445
Adjustable rate........................................... 17,344 7,595 4,003
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. As some commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates the collateral needed and creditworthiness
of each customer on a case by case basis. The
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<PAGE> 186
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (CONTINUED)
Bank generally extends credit only on a secured basis. Collateral obtained
varies, but consists principally of one-to four-family residences.
Forward commitments to sell mortgage loans of $2,274 (unaudited), $0 and
$17,030 at June 30, 2000 and December 31, 1999 and 1998, respectively, represent
commitments obtained by the Bank from a secondary market agency to purchase
mortgages from the Bank and place them in a mortgage-backed security pool with a
defined yield. Commitments to sell loans expose the Bank to interest rate risk
if market rates of interest decrease during the commitment period. Commitments
to sell loans are made to mitigate interest rate risk on commitments to
originate loans and loans held for sale.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about certain financial instruments,
whether or not recognized in the consolidated financial statements, for which it
is practicable to estimate the value, is summarized below. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from this disclosure. Accordingly, the aggregate fair
value of amounts presented does not represent the underlying value of the Bank
and is not particularly relevant to predicting the Bank's future earnings or
cash flows.
The following methods and assumptions are used by the Bank in estimating
its fair value disclosures of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the statements
of financial condition for cash and cash equivalents approximate those assets'
fair values.
Investment and Mortgage-Related Securities: Fair values for these
securities are based on quoted market prices or such prices of comparable
instruments.
Loans Receivable and Loans Held-for-Sale: The fair value of one- to
four-family fixed rate mortgage loans was determined based on the current market
price for securities collateralized by similar loans. For variable rate one to
four-family mortgage, consumer and other loans that re-price frequently and with
no significant change in credit risk, carrying values approximate fair values.
The fair value for fixed rate commercial real estate, rental property mortgage,
consumer and other loans was estimated by projecting cash flows at market
interest rates.
Federal Home Loan Bank Stock: Federal Home Loan Bank stock is carried at
cost, which is its redeemable (fair) value, since the market for this stock is
restricted.
Accrued Interest Receivable: The carrying value of accrued interest
receivable approximates fair value.
Deposits and Advance Payments by Borrowers for Taxes and Insurance: The
fair values disclosed for variable rate investment accounts, NOW accounts,
passbook accounts, money market certificates, accrued interest and advance
payments by borrowers for taxes and insurance are equal to the carrying amounts
at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash
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<PAGE> 187
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
flow calculation that applies interest rates currently offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings: The fair value of long-term borrowings is estimated using
discounted cash flow calculations with the discount rates equal to interest
rates currently being offered for borrowings with similar terms and maturities.
Commitments to Extend Credit and Forward Commitments to Sell Loans: The
fair value of these commitments is considered to approximate the carrying values
due to the short-term nature of these commitments.
<TABLE>
<CAPTION>
JUNE 30 2000 DECEMBER 31 1999 DECEMBER 31 1998
------------------------ ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents... $ 31,817 $ 31,817 $ 178,959 $ 178,959 $ 330,248 $ 330,248
Investment and mortgage-
related securities........ 518,838 518,838 431,863 431,863 387,431 387,431
Loans receivable, net....... 1,127,987 1,106,015 1,082,795 1,067,333 1,045,046 1,056,232
Loans held for sale......... 1,632 1,632 541 541 27,723 27,723
Federal Home Loan
Bank stock................ 14,585 14,585 13,537 13,537 13,537 13,537
Accrued interest
receivable................ 9,602 9,602 8,620 8,620 8,035 8,035
Deposits and accrued
interest.................. 1,300,613 1,238,606 1,343,007 1,298,038 1,398,858 1,381,119
Advance payments by
borrowers................. 13,012 13,012 1,661 1,661 1,710 1,710
Borrowings.................. 264,667 262,843 242,699 194,443 270,822 230,233
</TABLE>
The preceding table does not include any amount for the value of any
off-balance-sheet items (see Note 14) since the fair value of these items is not
significant.
16. MERGER AND CONVERSION
On February 21, 2000, Mutual and First Northern Capital Corp. (First
Northern), entered into an Agreement and Plan of Merger (the Merger Agreement).
The Merger Agreement has been approved by the boards of directors of Mutual and
First Northern.
To accomplish the transaction Mutual also adopted a plan of restructuring
in which it will reorganize into a mutual holding company (MHC) in which
Mutual's depositors will hold all of the voting rights. The MHC in turn will
form and own the majority interest in a subsidiary, a mid-tier stock holding
company (Mid-Tier HC). The balance of the shares of Common Stock will be offered
for sale to Mutual's depositors and issued to First Northern shareholders in the
Merger. As a result of the reorganization and merger, First Northern Capital
Corp will merge with and into Mid-Tier HC and, Mutual Savings Bank and First
Northern Savings Bank, S.A., will become wholly owned subsidiaries of Mid-Tier
HC.
Subject to the terms and conditions of the Merger Agreement, at the time of
the Merger, each outstanding share of First Northern common stock (First
Northern Common Stock), will be converted into the right to receive cash in the
amount of $15.00, or 1.5 shares of common stock, par value $.01 per
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<PAGE> 188
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
16. MERGER AND CONVERSION -- (CONTINUED)
share, of Mid-Tier HC Common Stock or a combination of cash and shares of
Mid-Tier HC Common Stock (Merger Consideration). Prior to the closing date,
Mutual will select the percentage of the total Merger Consideration to be paid
in Common Stock, which may not be less than 40% or more than 70%; the balance
will be paid in cash. The remaining shares of the Mid-Tier HC will be offered
for sale to Mutual's depositors, pursuant to the terms of a Plan of
Restructuring. The Restructuring will be accounted for as a pooling of
interests, whereas the merger will be accounted for as a purchase.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions set forth in the Merger Agreement, including approval by the
shareholders of First Northern and approval by the Office of Thrift Supervision,
the Federal Deposit Insurance Corporation and the Administrator of the Division
of Savings Institutions of the Wisconsin Department of Financial Institutions as
to both the Restructuring and the Merger. The depositors of Mutual must also
approve Mutual's Plan of Restructuring. The Merger is also subject to receipt of
an opinion of counsel to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
and the receipt of an opinion of counsel or a private letter ruling from the
Internal Revenue Service as to the federal income tax treatment of certain
transactions contemplated by the Merger Agreement. In addition, the Merger is
conditioned upon the approval for listing on the NASDAQ National Market of the
shares of Common Stock to be issued in the Merger, which shares will be
registered under the Securities Act of 1933 by a registration statement to be
filed with the Securities and Exchange Commission.
The amount and pricing of the proposed stock offering will be based upon an
independent appraisal of the Bank. In connection with the conversion, the costs
of issuing the common stock will be deducted from the sale proceeds. At June 30,
2000 and December 31, 1999, $749,000 (unaudited) and $0 of costs related to the
conversion have been capitalized. In the event that the consummation of the
conversion or merger do not occur, any recorded costs will be expensed.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its net worth as of the date of the latest consolidated
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders, if any, who continue to
maintain their deposit accounts at the Bank after the conversion.
The liquidation account will be reduced annually to the extent that
eligible account holders and supplemental eligible account holders, if any, have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or a supplemental
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder and supplemental eligible
account holder, if any, will be entitled to receive balances for accounts then
held.
Concurrently with the execution of the Merger Agreement, in order to induce
Mutual to enter into the Merger Agreement, the parties entered into a Stock
Option Agreement by which First Northern granted to Mutual an irrevocable option
to purchase up to 1,708,675 shares of First Northern Common Stock, which equals
19.9% of the number of shares of First Northern Common Stock outstanding on
February 21, 2000, at an exercise price of $9.0375 per share. The option would
become exercisable under certain circumstances if First Northern becomes the
subject of a third-party proposal for a competing transaction.
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<PAGE> 189
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MUTUAL SAVINGS BANK,
OV CORP.
AND
FIRST NORTHERN CAPITAL CORP.
DATED AS OF FEBRUARY 21, 2000
Note to readers:
Bank Mutual Corporation will assume the rights and obligations of "OV
Corp." in this agreement when the merger becomes effective. Therefore, Bank
Mutual Corporation is the "Merger Corp." and will be the "Survivor" under this
agreement.
<PAGE> 190
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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RECITALS 1
ARTICLE I
DEFINITIONS 1
1.1 Acquisition 2
1.2 Acquisition Proposal 2
1.3 Affiliate 2
1.4 Affiliate Letter 3
1.5 Agreement 3
1.6 Announcement 3
1.7 Bank 3
1.8 Buildings 3
1.9 CERCLA 3
1.10 Closing 3
1.11 Closing Date 3
1.12 Code 3
1.13 Confidentiality Agreement 3
1.14 Contracts 3
1.15 Control 3
1.16 Disclosure Schedules 4
1.17 Employee Benefit Plans 4
1.18 Environmental Claim 4
1.19 Environmental Laws 4
1.20 Environmental Permits 4
1.21 Equipment 4
1.22 ERISA 5
1.23 Exchange Act 5
1.24 FDIC 5
1.25 FHLB of Chicago 5
1.26 First Northern 5
1.27 First Northern Closing Certificate 5
1.28 First Northern Common Stock 5
1.29 First Northern Counsel Opinion 5
1.30 First Northern Disclosure Schedule 5
1.31 First Northern Executives 5
1.32 First Northern Existing Contracts 5
1.33 First Northern Existing Employment Agreements 5
1.34 First Northern Existing Indebtedness 6
1.35 First Northern Existing Liens 6
</TABLE>
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<PAGE> 191
<TABLE>
<CAPTION>
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<S> <C>
1.36 First Northern Existing Litigation 6
1.37 First Northern Existing Plans 6
1.38 First Northern Meeting 6
1.39 First Northern Real Estate 6
1.40 First Northern Replacement Employment Agreement 6
1.41 First Northern Shareholders 6
1.42 First Northern Stock Option Plans 7
1.43 First Northern Stock Options 7
1.44 First Northern Subsidiaries 7
1.45 Fraction Payment 7
1.46 Hazardous Materials 7
1.47 HOLA 7
1.48 Indebtedness 7
1.49 Investment Securities 7
1.50 IRS 7
1.51 Knowledge 7
1.52 Law 8
1.53 Lien 8
1.54 Material Adverse Effect 8
1.55 Material Contract 8
1.56 Merger 9
1.57 Merger Corp 9
1.58 Mutual 9
1.59 Mutual Closing Certificate 9
1.60 Mutual Counsel Opinion 9
1.61 Mutual Disclosure Schedule 9
1.62 Mutual Existing Contracts 9
1.63 Mutual Existing Litigation 9
1.64 Mutual Real Estate 9
1.65 NASDAQ/NMS 10
1.66 OTS 10
1.67 Permits 10
1.68 Permitted Liens 10
1.69 Person 10
1.70 Proxy Statement 10
1.71 Registration Statement 10
1.72 Regulatory Approvals 10
1.73 Release 10
1.74 SAIF 10
1.75 SEC 10
1.76 Securities Act 10
1.77 Section 180.0622(2)(b) 11
</TABLE>
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<PAGE> 192
<TABLE>
<CAPTION>
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<S> <C>
1.78 Stock Option Agreement 11
1.79 Subsidiary 11
1.80 Survivor 11
1.81 Survivor Common Stock 11
1.82 WBCL 11
1.83 Wisconsin Agency 11
1.84 Year 2000 Compliant 11
1.85 Other Defined Terms 12
ARTICLE II
THE MERGER 13
2.1 The Merger 13
2.2 Effect of the Merger 13
2.3 Effective Time 13
2.4 Articles and Bylaws of Survivor 14
2.5 Charter and Bylaws of the Bank; Offices of 14
the Bank
2.6 Directors and Officers of Survivor 14
2.7 Capital Stock of Merger Corp. 14
2.8 Conversion of First Northern Common Stock 15
2.9 Exchange of First Northern Certificates 19
2.10 Reorganization 22
2.11 No Dissenting Shares 23
2.12 Meeting of First Northern Shareholders 23
2.13 Liquidation Account and Sub-Accounts 23
2.14 Restructuring 24
2.15 Anti-Dilution Provisions 25
2.16 Alternative Structure 25
ARTICLE III
OTHER AGREEMENTS 25
3.1 Confidentiality; Access 25
3.2 Disclosure Schedules 26
3.3 Duties Concerning Representations 27
3.4 Deliveries of Information; Consultation 27
3.5 Directors' and Officers' Indemnification 28
and Insurance
3.6 Letters of Accountants 29
3.7 Legal Conditions to Merger 29
3.8 Stock Listings 30
3.9 Announcements 30
3.10 Best Efforts 30
3.11 Employee And Managerial Matters 30
3.12 Employee Benefit Matters 31
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
3.13 Conformance to Reserve Policies 32
3.14 Conduct of Mutual's Business and Authorization,
Reservation and Listing of Common Stock 32
3.15 Affiliates 33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST NORTHERN 33
4.1 Organization and Qualification; Subsidiaries 33
4.2 Articles of Incorporation and Bylaws 34
4.3 Capitalization 34
4.4 Authorization: Enforceability 35
4.5 No Violation or Conflict 35
4.6 Title to Assets; Leases 35
4.7 Litigation 36
4.8 Securities and Banking Reports; Books and Records 36
4.9 Absence of Certain Changes 37
4.10 Buildings and Equipment 38
4.11 First Northern Existing Contracts 38
4.12 Investment Securities 38
4.13 Contingent and Undisclosed Liabilities 38
4.14 Insurance Policies 38
4.15 Employee Benefit Plans 39
4.16 No Violation of Law 40
4.17 Brokers 40
4.18 Taxes 41
4.19 Real Estate 41
4.20 Governmental Approvals 42
4.21 No Pending Acquisitions 42
4.22 Labor Matters 42
4.23 Indebtedness 43
4.24 Permits 43
4.25 Disclosure 43
4.26 Information Supplied 43
4.27 Vote Required 44
4.28 Opinion of Financial Advisor 44
4.29 Environmental Protection 44
4.30 Year 2000 Compliant 45
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MUTUAL AND MERGER CORP.
45
5.1 Organization and Capitalization; Business 45
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
5.2 Authorization; Enforceability 46
5.3 No Violation or Conflict 46
5.4 Litigation 46
5.5 Brokers 47
5.6 Governmental Approvals 47
5.7 Disclosure 47
5.8 Information Supplied 47
5.9 Opinion of Financial Advisor 47
5.10 Cash Payment 47
5.11 Compliance with Laws 48
5.12 Consummation 48
5.13 Banking Reports; Books and Records 48
5.14 Absence of Certain Changes 48
5.15 Mutual Existing Contracts 49
5.16 Contingent and Undisclosed Liabilities 49
5.17 Taxes 49
5.18 Real Estate 50
5.19 No Pending Acquisitions 50
5.20 Environmental Protection 51
5.21 Year 2000 Compliant 51
ARTICLE VI
CONDUCT OF BUSINESS BY FIRST NORTHERN PENDING THE MERGER 52
6.1 Carry on in Regular Course 52
6.2 Use of Assets 52
6.3 No Default 52
6.4 Insurance Policies 52
6.5 Employment Matters 52
6.6 Contracts and Commitments 52
6.7 Indebtedness; Investments 53
6.8 Preservation of Relationships 53
6.9 Compliance with Laws 53
6.10 Taxes 53
6.11 Amendments 53
6.12 Issuance of Stock; Dividends; Redemptions 53
6.13 Policy Changes 53
6.14 Acquisition Transactions 53
ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER 54
7.1 Conditions to Each Parties Obligations to 54
Effect the Merger 55
7.2 Conditions to Obligation of Mutual
</TABLE>
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<TABLE>
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<S> <C>
7.3 Conditions to Obligation of First Northern 57
ARTICLE VIII
TERMINATION; MISCELLANEOUS 59
8.1 Termination 59
8.2 Rights on Termination; Waiver 59
8.3 Survival of Representations, Warranties and
Covenants 60
8.4 Entire Agreement; Amendment 60
8.5 Expenses 60
8.6 Governing Law 61
8.7 Assignment 61
8.8 Notices 61
8.9 Counterparts; Headings 62
8.10 Interpretation 62
8.11 Severability 62
8.12 Specific Performance 62
8.13 No Reliance 62
8.14 Further Assurances 62
</TABLE>
<TABLE>
EXHIBITS
<S> <C>
Exhibit 1 - Form of Affiliate's Letters
Exhibit 2 - Form of First Northern Closing Certificate
Exhibit 3 - Form of First Northern Counsel Opinion
Exhibit 4 - Form of First Northern Replacement Employment Agreement
Exhibit 5 - Form of Mutual Closing Certificate
Exhibit 6 - Form of Mutual Counsel Opinion
</TABLE>
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<PAGE> 196
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of this 21st day of February,
2000 by and among MUTUAL SAVINGS BANK, OV CORP. and FIRST NORTHERN CAPITAL CORP.
RECITALS
WHEREAS, the respective Boards of Directors of Mutual, Merger Corp. and
First Northern have approved this Agreement by the requisite vote imposed by
Law, and deem it advisable and in the best interest of their respective
institutions and members or stockholders, as the case may be, to consummate the
reorganization provided for herein, pursuant to which First Northern will merge
with and into Merger Corp., the surviving institution, and in connection
therewith the stockholders of First Northern will receive Survivor Common Stock
and/or cash in exchange for their shares of First Northern Common Stock;
WHEREAS, concurrently with this Agreement and as a condition and an
inducement to the willingness of Mutual to enter into this Agreement, First
Northern and Mutual are entering into a Stock Option Agreement granting Mutual,
under the conditions set forth therein, the option to purchase shares of
newly-issued First Northern Common Stock;
WHEREAS, the Board of Directors of First Northern has directed that
this Agreement and the transactions described in this Agreement be submitted for
approval at the First Northern Meeting;
WHEREAS, the Merger will be conducted in connection with the
Restructuring; and
WHEREAS, the transactions provided herein are subject to various
regulatory approvals and other conditions specified herein;
NOW, THEREFORE, in consideration of the Recitals and of the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
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<PAGE> 197
1.1 Acquisition. "Acquisition" shall mean any of the following
involving First Northern or the Bank on the one hand, or Mutual on the other
hand, other than the Merger or the Restructuring:
(a) any merger, consolidation, share exchange, business combination or
other similar transaction;
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of assets in a single transaction or series of
related transactions, excluding from this calculation any such transactions
undertaken in the ordinary course of business and consistent with past practice;
(c) any sale of 10% or more of the outstanding shares of capital stock
(or securities convertible or exchangeable into or otherwise evidencing, or an
agreement or instrument evidencing, the right to acquire capital stock);
(d) any tender offer or exchange offer for 10% or more of the
outstanding shares of capital stock or the filing of a registration statement
under the Securities Act in connection therewith;
(e) In the case of First Northern, any solicitation of proxies in
opposition to approval by its shareholders of the Merger or the Stock Option
Agreement;
(f) The filing of an acquisition application (or the giving of
acquisition notice), whether in draft or final form, under HOLA with respect to
it;
(g) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act and the rules and regulations of
the SEC promulgated thereunder) shall have been formed which beneficially owns
or has the right to acquire beneficial ownership of, 10% or more of the then
outstanding shares of capital stock; or
(h) any public announcement of a proposal, plan or intention to do any
of the foregoing.
1.2 Acquisition Proposal. "Acquisition Proposal" shall mean the
making of any proposal by any Person concerning an Acquisition.
1.3 Affiliate. "Affiliate" shall mean, with respect to any Person, any
other Person who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the first Person,
including without limitation all directors and executive officers of the first
Person.
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<PAGE> 198
1.4 Affiliate Letter. "Affiliate Letter" shall mean a letter from each
Affiliate of First Northern substantially in the form of Exhibit 1 attached to
this Agreement.
1.5 Agreement. "Agreement" shall mean this Agreement and Plan of Merger,
together with the Exhibits attached hereto and together with the Disclosure
Schedules, as the same may be amended or supplemented from time to time in
accordance with the terms hereof.
1.6 Announcement. "Announcement" shall mean any public notice, release,
statement or other communication to employees, suppliers, customers, members,
stockholders, the general public, the press or any securities exchange or
quotation system relating to the negotiation and preparation of this Agreement
or the transactions contemplated hereby.
1.7 Bank. "Bank" shall mean First Northern Savings Bank, S.A., a
Wisconsin-chartered savings and loan association which is a wholly-owned
subsidiary of First Northern.
1.8 Buildings. "Buildings" shall mean all buildings, fixtures, structures
and improvements (including without limitation stand-alone automated teller
machines or similar devices) used by a Person or an Affiliate and located on the
Person's Real Estate.
1.9 CERCLA. "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as the same may be in effect from time
to time.
1.10 Closing. "Closing" shall mean the conference to be held at 10:00 A.M.,
Central Time, on the Closing Date at the offices of Quarles & Brady LLP, 411
East Wisconsin Avenue, Milwaukee, Wisconsin 53202, or such other time and place
as the parties may mutually agree to in writing, at which the transactions
contemplated by this Agreement shall be consummated.
1.11 Closing Date. "Closing Date" shall mean the date of the Effective Time
or such other date as the parties may mutually agree to in writing.
1.12 Code. "Code" shall mean the Internal Revenue Code of 1986, as the same
may be in effect from time to time.
1.13 Confidentiality Agreement. "Confidentiality Agreement" shall mean the
letter agreement regarding confidentiality and related issues between Mutual and
First Northern dated January 11, 2000.
1.14 Contracts. "Contracts" shall mean all of the contracts, agreements,
leases, relationships and commitments, written or oral, to which the relevant
Person is a party or by which it is bound.
1.15 Control. "Control," as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and
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<PAGE> 199
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise. "Control," as used with respect to securities or other
property, shall mean the power to exercise or direct the exercise of any voting
rights associated therewith, or the power to dispose or direct the disposition
thereof, or both.
1.16 Disclosure Schedules. "Disclosure Schedules" shall mean the First
Northern Disclosure Schedule and the Mutual Disclosure Schedule.
1.17 Employee Benefit Plans. "Employee Benefit Plans" shall mean any
pension plan, profit sharing plan, bonus plan, incentive compensation plan,
deferred compensation plan, stock ownership plan, stock purchase plan, stock
option plan, stock appreciation plan, employee benefit plan, employee benefit
policy, retirement plan, fringe benefit program, insurance plan, severance plan,
disability plan, health care plan, sick leave plan, death benefit plan, or any
other plan or program to provide retirement income, fringe benefits or other
benefits to former or current employees of the relevant Person.
1.18 Environmental Claim. "Environmental Claim" shall mean any and all
administrative, regulatory or judicial actions, suits, demands, demand letters,
directives, claims, Liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any Person alleging potential
liability (including, without limitation, potential liability for enforcement,
investigatory costs, cleanup costs, governmental response costs, removal costs,
remedial costs, natural resources damages, property damages, personal injuries,
or penalties) arising out of, based on or resulting from: (A) the presence, or
release into the environment, of any Hazardous Materials at any location,
whether or not owned by a Person or any of its Subsidiaries; or (B)
circumstances forming the basis of any violation or alleged violation, of any
Environmental Law; or (C) any and all claims by any Person seeking damages,
contribution, indemnification, cost, recovery, compensation or injunctive relief
resulting from the presence or Release of any Hazardous Materials.
1.19 Environmental Laws. "Environmental Laws" shall mean all federal,
state, local or foreign statute, Law, rule, ordinance, code, policy, guideline,
rule of common law and regulations relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), including, without
limitation, Laws and regulations relating to Releases or threatened Releases of
Hazardous Materials, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials.
1.20 Environmental Permits. "Environmental Permits" shall mean
environmental, health and safety permits and governmental authorizations
necessary for their operations of a Person under Environmental Laws.
1.21 Equipment. "Equipment" shall mean all equipment, boilers, furniture,
fixtures, motor vehicles, furnishings, office equipment, computers and other
items of tangible personal
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property owned by the relevant Person which are either presently used, or are
used on the Closing Date, by the relevant Person in the conduct of its business.
1.22 ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as the same may be in effect from time to time.
1.23 Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as the same may be in effect from time to time.
1.24 FDIC. "FDIC" shall mean the Federal Deposit Insurance
Corporation.
1.25 FHLB of Chicago. "FHLB of Chicago" shall mean the Federal Home
Loan Bank of Chicago, Illinois.
1.26 First Northern. "First Northern" shall mean First Northern
Capital Corp., a Wisconsin corporation which is registered as a unitary
savings and loan holding company under HOLA and the rules and regulations
of the OTS promulgated thereunder.
1.27 First Northern Closing Certificate. "First Northern Closing
Certificate" shall mean the Closing Certificate of First Northern in
substantially the form of Exhibit 2 attached to this Agreement.
1.28 First Northern Common Stock. "First Northern Common Stock" shall
mean all of the authorized shares of common stock, $1.00 par value per
share, of First Northern.
1.29 First Northern Counsel Opinion. "First Northern Counsel Opinion"
shall mean an opinion of Schiff Hardin & Waite in substantially the form of
Exhibit 3 attached to this Agreement.
1.30 First Northern Disclosure Schedule. "First Northern Disclosure
Schedule" shall mean the disclosure schedule, dated the date of this
Agreement, delivered by First Northern to Mutual contemporaneously with the
execution and delivery of this Agreement and as the same may be amended
from time to time after the date of this Agreement and prior to the Closing
Date in accordance with the terms of this Agreement.
1.31 First Northern Executives. "First Northern Executives" shall mean
the individuals who serve as executive officers of First Northern or the
Bank.
1.32 First Northern Existing Contracts. "First Northern Existing
Contracts" shall mean those Contracts which are listed pursuant to Section
4.11 of this Agreement on the First Northern Disclosure Schedule.
1.33 First Northern Existing Employment Agreements. "First Northern
Existing Employment Agreements" shall mean the employment agreements by and
between the Bank or
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First Northern and any of the First Northern Executives, identified on the First
Northern Disclosure Schedule.
1.34 First Northern Existing Indebtedness. "First Northern Existing
Indebtedness" shall mean all Indebtedness of First Northern and the First
Northern Subsidiaries, all of which is listed on the First Northern
Disclosure Schedule.
1.35 First Northern Existing Liens. "First Northern Existing Liens"
shall mean all Liens affecting any of the assets and properties of First
Northern or any First Northern Subsidiary except for Liens for current
taxes not yet due and payable, pledges to secure deposits and such
imperfections of title, easements and other encumbrances, if any, as do not
materially detract from the value of or substantially interfere with the
present use of the property affected thereby, all of which are listed and
briefly described on the First Northern Disclosure Schedule.
1.36 First Northern Existing Litigation. "First Northern Existing
Litigation" shall mean all pending or, to the Knowledge of First Northern,
threatened claims, suits, audit inquiries, charges, workers compensation
claims, litigation, arbitrations, proceedings, governmental investigations,
citations and actions of any kind against First Northern or any First
Northern Subsidiary, or affecting any assets or the business of First
Northern or any First Northern Subsidiary, all of which are listed and
briefly described on the First Northern Disclosure Schedule.
1.37 First Northern Existing Plans. "First Northern Existing Plans"
shall mean all Employee Benefit Plans of First Northern and the First
Northern Subsidiaries and any Employee Benefit Plans of such entities that
have been terminated since January 1, 1997, all of which are listed on the
First Northern Disclosure Schedule.
1.38 First Northern Meeting. "First Northern Meeting" shall mean the
special or annual meeting of the First Northern Shareholders for the
purpose of approving the Merger, this Agreement and the transactions
contemplated by this Agreement, and for such other purposes as may be
necessary or desirable.
1.39 First Northern Real Estate. "First Northern Real Estate" shall
mean the parcels of real property identified in the legal descriptions set
forth in the First Northern Disclosure Schedule.
1.40 First Northern Replacement Employment Agreement. "First Northern
Replacement Employment Agreement" shall mean an employment agreement in
substantially the form of Exhibit 4 attached to this Agreement, to be
entered into at the Closing and to be effective as of the Effective Time,
by and between the Bank and any one or more of the First Northern
Executives, all as provided in Section 3.11 of this Agreement.
1.41 First Northern Shareholders. "First Northern Shareholders" shall
mean all Persons owning shares of First Northern Common Stock on the
relevant date of inquiry.
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1.42 First Northern Stock Option Plans. "First Northern Stock Option
Plans" shall mean the First Northern Capital Corp. 1999 Stock Plan, and the
following plans of the Bank, as assumed by First Northern: 1984 Stock
Option Plan, 1989 Executive Stock Option Plan, 1989 Directors' Stock Option
Plan, 1994 Executive Stock Plan, and 1994 Directors' Stock Option Plan.
1.43 First Northern Stock Options. "First Northern Stock Options"
shall mean all options to purchase shares of First Northern Common Stock
granted pursuant to the First Northern Stock Option Plans which are
outstanding as of the relevant time of inquiry, whether or not such options
are exercisable prior to the Effective Time.
1.44 First Northern Subsidiaries. "First Northern Subsidiaries" shall
mean those Subsidiaries of First Northern listed on the First Northern
Disclosure Schedule pursuant to Section 4.1(c) of this Agreement.
1.45 Fraction Payment. "Fraction Payment" shall mean any cash paid for
fractional share interests paid pursuant to Section 2.9(e) of this
Agreement.
1.46 Hazardous Materials. "Hazardous Materials" shall mean: (A) any
petroleum or petroleum products, radioactive materials, asbestos in any
form that is or could become friable, urea formaldehyde foam insulation,
and transformers or other equipment that contain dielectric fluid
containing regulated levels of polychlorinated biphenyls (PCBs) and radon
gas; and (B) any chemicals, materials or substances which are now defined
as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes, restricted
hazardous wastes," "toxic substances," "toxic pollutants," or words of
similar import, under any Environmental Law; and (C) any other chemical,
material, substance or waste, exposure to which is now prohibited, limited
or regulated by any governmental authority.
1.47 HOLA. "HOLA" shall mean the Home Owners' Loan Act of 1933, as the
same may be in effect from time to time, including the rules and
regulations of the OTS promulgated thereunder.
1.48 Indebtedness. "Indebtedness" shall mean all liabilities or
obligations (except deposit accounts) of the relevant Person, whether
primary or secondary, absolute or contingent: (a) for borrowed money; (b)
evidenced by notes, bonds, debentures or similar instruments; or (c)
secured by Liens on any assets of the relevant Person.
1.49 Investment Securities. "Investment Securities" shall mean all
investment securities of the relevant Person permitted to be held by the
relevant Person under Law.
1.50 IRS. "IRS" shall mean the United States Internal Revenue Service.
1.51 Knowledge. "Knowledge" of a Person shall mean, for purposes of
this Agreement, when any fact or matter is stated to be "to the Knowledge"
of that Person or words of
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similar import, the actual knowledge of the existence or nonexistence of such
fact or matter by the executive officers and the Person and its Subsidiaries.
1.52 Law. "Law" shall mean any federal, state, local or other law,
rule, regulation, policy or governmental requirement of any kind, and the rules,
regulations and orders promulgated thereunder by any regulatory agencies or
other Persons.
1.53 Lien. "Lien" shall mean, with respect to any asset: (a) any
mortgage, pledge, lien, charge, claim, restriction, reservation, condition,
easement, covenant, lease, encroachment, title defect, imposition, security
interest or other encumbrance of any kind; and (b) the interest of a vendor or
lessor under any conditional sale agreement, financing lease or other title
retention agreement relating to such asset.
1.54 Material Adverse Effect. "Material Adverse Effect" shall mean any
change or effect that is or is reasonably likely to be materially adverse to the
business, operations, properties (including intangible properties), condition
(financial or otherwise), assets, liabilities (including contingent liabilities)
or prospects of the relevant Person and its Subsidiaries, taken as a whole.
1.55 Material Contract. "Material Contract" shall mean any Contract of
a Person or any of its subsidiaries which constitutes:
(a) a lease of, or agreement to purchase or sell, any capital
assets involving in excess of $50,000 as to any asset or $100,000 in the
aggregate;
(b) any management, consulting, employment, personal service,
severance, agency or other contract or contracts providing for employment or
rendition of services and which: (i) are in writing, or (ii) create other than
an at will employment relationship; or (iii) provide for any commission, bonus,
profit sharing, incentive, retirement, consulting or additional compensation;
(c) any agreements or notes evidencing any Indebtedness;
(d) a power of attorney (whether revocable or irrevocable) given
to any other person by the Person that is in force;
(e) an agreement by the Person not to compete in any business or
in any geographical area;
(f) an agreement restricting the Person's right to use or
disclose any information in its possession;
(g) a partnership, joint venture or similar arrangement;
(h) a license involving payments in excess of $1,000;
(i)an agreement or arrangement with any Affiliate which is not a
Subsidiary;
(j) an agreement for data processing services;
(k) any assistance agreement, supervisory agreement, memorandum
of understanding, consent order, cease and desist order or other regulatory
order or decree with or by the SEC, OTS, FDIC, Wisconsin Agency or any other
regulatory authority; or
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(l) any other agreement or set of related agreements or series of
agreements which: (i) involve an amount in excess of $50,000 on an annual basis
or $100,000 in the aggregate; or (ii) is not in the ordinary course of business
of the Person or any Subsidiary of the Person.
1.56 Merger. "Merger" shall mean the merger of First Northern with and
into Merger Corp. pursuant to this Agreement.
1.57 Merger Corp. "Merger Corp." shall mean OV Corp., a Wisconsin
corporation organized as a wholly-owned subsidiary of Mutual for the purpose of
effecting the transactions contemplated by this Agreement. (Merger Corp. is the
same corporate entity as Survivor, but the term "Merger Corp." is intended to be
used primarily to designate the entity prior to the Merger.)
1.58 Mutual. "Mutual" shall mean Mutual Savings Bank, a mutual savings
bank chartered under Chapter 214 of the Wisconsin Statutes, and shall include
any successor savings bank pursuant to the Restructuring.
1.59 Mutual Closing Certificate. "Mutual Closing Certificate" shall
mean the Closing Certificate of Mutual and Merger Corp. in substantially the
form of Exhibit 5 attached to this Agreement.
1.60 Mutual Counsel Opinion. "Mutual Counsel Opinion" shall mean the
opinion of Quarles & Brady LLP in substantially the form of Exhibit 6 attached
to this Agreement.
1.61 Mutual Disclosure Schedule. "Mutual Disclosure Schedule" shall
mean the disclosure schedule, dated the date of this Agreement, delivered by
Mutual to First Northern contemporaneously with the execution and delivery of
this Agreement and as the same may be amended from time to time after the date
of this Agreement and prior to the Closing Date in accordance with the terms of
this Agreement.
1.62 Mutual Existing Contracts. "Mutual Existing Contracts" shall mean
those Contracts which are listed pursuant to Section 5.15 of this Agreement on
the Mutual Disclosure Schedule.
1.63 Mutual Existing Litigation. "Mutual Existing Litigation" shall
mean all pending or, to the Knowledge of Mutual, threatened claims, suits, audit
inquiries, charges, workers compensation claims, litigation, arbitrations,
proceedings, governmental investigations, citations and actions of any kind
against Mutual or any Mutual Subsidiary, or affecting any assets or the business
of Mutual or any Mutual Subsidiary, all of which are listed and briefly
described on the Mutual Disclosure Schedule.
1.64 Mutual Real Estate. "Mutual Real Estate" shall mean the parcels of
real property identified in the legal descriptions set forth in the First
Northern Disclosure Schedule.
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1.65 NASDAQ/NMS. "NASDAQ/NMS" shall mean the National Association of
Securities Dealers Automated Quotations National Market System.
1.66 OTS. "OTS" shall mean the Office of Thrift Supervision,
Department of the Treasury, or any successor agency.
1.67 Permits. "Permits" shall mean all licenses, permits, approvals,
franchises, qualifications, permissions, agreements, orders and governmental
authorizations required for the conduct of the business of the relevant Person.
1.68 Permitted Liens. "Permitted Liens" shall mean those First
Northern or Mutual Existing Liens which are expressly noted as Permitted Liens
on a Disclosure Schedule.
1.69 Person. "Person" shall mean a natural person, corporation, bank,
trust, partnership, association, governmental entity, agency or branch or
department thereof, or any other legal entity.
1.70 Proxy Statement. "Proxy Statement" shall mean the proxy statement
of First Northern to be filed with the SEC and to be distributed to the First
Northern Shareholders in connection with the First Northern Special Meeting and
the approval of the Merger by the First Northern Shareholders, which shall also
constitute the prospectus of Survivor filed as a part of the Registration
Statement.
1.71 Registration Statement. "Registration Statement" shall mean a
registration statement on Form S-4 (or other appropriate form) to be filed under
the Securities Act by Survivor in connection with the Merger for purposes of
registering any shares of Survivor Common Stock to be issued in the Merger
pursuant to this Agreement.
1.72 Regulatory Approvals. "Regulatory Approvals" shall mean all of
the approvals which are conditions precedent to consummating the Merger and the
Restructuring, as specified in Section 7.1(c) of this Agreement.
1.73 Release. "Release" shall mean any release, spill, emission,
leaking, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the atmosphere, soil, surface water, groundwater or property.
1.74 SAIF. "SAIF" shall mean the Savings Association Insurance Fund of
the FDIC.
1.75 SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
1.76 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as the same may be in effect from time to time.
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1.77 Section 180.0622(2)(b). "Section 180.0622(2)(b)" shall mean WBCL
Section 180.0622(2)(b), including judicial interpretations thereof and of former
WBCL Section 180.04(6), its predecessor statute.
1.78 Stock Option Agreement. "Stock Option Agreement" shall mean the
Stock Option Agreement, of even date herewith, being entered into by and between
First Northern and Mutual concurrently with their execution and delivery of this
Agreement.
1.79 Subsidiary. "Subsidiary" shall mean any corporation, financial
institution, joint venture, partnership, limited liability company, trust or
other business entity: (i) 25% or more of any outstanding class of whose voting
interests is directly or indirectly owned by the relevant Person, or is held by
it with power to vote; (ii) the election of a majority of whose directors,
trustees, general partners or comparable governing body is controlled in any
manner by the relevant Person; or (iii) with respect to the management or
policies of which the relevant Person has the power, directly or indirectly, to
exercise a controlling influence. Subsidiary shall include an indirect
Subsidiary of the relevant Person which is controlled in any manner specified
above through one or more corporations or financial institutions which are
themselves Subsidiaries.
1.80 Survivor. "Survivor" shall have the meaning specified in Section
2.1 of this Agreement. (Survivor is the same corporate entity as Merger Corp.,
but the term "Survivor" is intended to be used primarily to designate the entity
as the surviving corporation in the Merger.)
1.81 Survivor Common Stock. "Survivor Common Stock" shall mean the
Common Stock, $.01 par value, of Survivor after the Merger.
1.82 WBCL. "WBCL" shall mean the Wisconsin Business Corporation Law.
1.83 Wisconsin Agency. "Wisconsin Agency" shall mean the Administrator
of the Division of Savings Institutions of the Wisconsin Department of Financial
Institutions, or any successor agency.
1.84 Year 2000 Compliant. "Year 2000 Compliant" shall mean, with
respect to material hardware and software systems, that such hardware and
software is designed to be used prior to, during, and after the calendar Year
2000 A.D., recognize the "leap day" therein, and such hardware and software used
during each such time period will accurately receive, provide and process
date/time data from, into and between the years 1999 and 2000, and all
subsequent years, and will not malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other hardware and software, used in combination with the hardware and software
of the affected Person, properly exchanges date/time data with the hardware and
software of the affected Person.
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1.85 Other Defined Terms. The following additional terms are defined
in the specific Section to which they relate:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Cash Election 2.8(e)
Cash Election Shares 2.8(f)
Cash Fraction 2.8(f)(ii)(A)
Cash Percentage 2.8(a)(i)
Cash Value 2.8(a)(ii)
COBRA 3.12(e)
Conversion Notice 2.8(b)
Disclosure Schedule Change 3.2(d)
Effective Time 2.3
Election Deadline 2.8(l)
Exchange Agent 2.9(a)
Exchange Fund 2.9(a)
Exchange Ratio 2.8(a)(iii)
First Northern Approvals 4.1
First Northern Certificates 2.8(i)
First Northern Reports 4.8
Form of Election 2.8(e)
Indemnified Liabilities 3.5(a)
Indemnified Parties 3.5(a)
Initial Mailing Record Date 2.8(i)
Letter of Transmittal 2.9(b)(i)
Maximum Cash Number 2.8(a)(iv)
Maximum Stock Number 2.8(a)(v)
Merger Consideration 2.8(a)(vi)
MHC 2.14(c)
Mixed Election 2.8(e)
Mixed Election Shares 2.8(f)
Mutual Reports 5.13
Non-Election 2.8(e)
Non-Election Shares 2.8(f)(i)
Restructuring 2.14
Representative 2.8(e)
Stock Bank 2.14(d)
Stock Election 2.8(e)
Stock Election Shares 2.8(f)(i)
Stock Fraction 2.8(g)(ii)(A)
Stock Percentage 2.8(a)(vii)
Transitory 2.14(c)
</TABLE>
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ARTICLE II
THE MERGER
2.1 The Merger. This Agreement provides for the merger of First
Northern with and into Merger Corp., whereby the stock of First Northern and
Merger Corp. outstanding as of the Effective Time will be converted as described
herein. As of the Effective Time, First Northern will be merged with and into
Merger Corp. which, as the surviving corporation ("Survivor"), shall remain a
Wisconsin business corporation and become registered under HOLA as a savings and
loan holding company and, in such capacity, shall be governed by the laws of the
State of Wisconsin and federal laws applicable to registered savings and loan
holding companies and subsidiary holding companies of federal mutual holding
companies, including rules and regulations of regulatory authorities thereunder.
The separate existence of First Northern shall thereupon cease. The Merger shall
be effected pursuant to the provisions of federal Law and the WBCL, and shall
have the effects provided in the WBCL.
2.2 Effect of the Merger.
(a) At the Effective Time, the effect of the Merger shall be as
provided in the WBCL, including the effects described in Sections 2.2(b) and
2.2(c) of this Agreement.
(b) The corporate identity, existence, purposes, powers,
franchises, privileges, assets, properties and rights of both First Northern and
Merger Corp. shall be merged into and continued in Survivor, and Survivor shall
be fully vested therewith.
(c) At the Effective Time, Survivor shall succeed to or
continue, without other transfer, and shall possess and enjoy, all the rights,
privileges, assets, properties, powers and franchises both of a public and a
private nature, and shall be subject to all the restrictions, disabilities and
duties of First Northern and Merger Corp., and all the rights, privileges,
assets, properties, powers and franchises of First Northern or Merger Corp. and
all property, real, personal and mixed, tangible or intangible, and all debts
due to First Northern or Merger Corp. on whatever account, shall be vested in
Survivor; and all rights, privileges, assets, properties, powers and franchises,
and all and every other interest shall be thereafter as effectively the property
of Survivor as they were of First Northern or Merger Corp.; and the title to or
any interest in any real estate vested by deed or otherwise in First Northern or
Merger Corp. shall not revert or be in any way impaired by reason of the Merger;
provided, however, that all rights of creditors and Liens upon any property of
either First Northern or Merger Corp. shall be preserved unimpaired, and all
debts, liabilities and duties of First Northern or Merger Corp. shall
thenceforth attach to Survivor and may be enforced against Survivor to the same
extent as if said debts, liabilities and duties had been incurred or contracted
by Survivor.
2.3 Effective Time. The consummation of the Merger shall be effected
as promptly as practicable after the satisfaction or waiver of the conditions
set forth in Article VII of this Agreement. The Merger shall become effective on
the date and time specified in Articles of Merger to be filed with the Wisconsin
Department of Financial Institutions. The date and time
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on which the Merger shall become effective is referred to in this Agreement as
the "Effective Time."
2.4 Articles and Bylaws of Survivor.
(a) The Articles of Incorporation of Merger Corp. as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of Survivor until amended in accordance with Law. (The parties contemplate
amendment of Merger Corp.'s articles of incorporation prior to the Effective
Time to, among other things, change its name and authorize additional shares.)
(b) The Bylaws of Merger Corp. as in effect immediately prior to
the Effective Time shall be the Bylaws of Survivor until amended in accordance
with Law, except that the name of the corporation identified therein shall be
changed to as provided in Section 2.4(a) hereof.
2.5 Charter and Bylaws of the Bank; Offices of the Bank.
(a) The Charter and Bylaws of the Bank in force immediately
prior to the Effective Time initially shall be the Charter and Bylaws of the
Bank immediately following the Effective Time.
(b) The location of the main office of the Bank immediately
prior to the Effective Time initially shall continue as the main office of the
Bank immediately following the Effective Time, and the location of each of the
Bank's branch offices immediately prior to the Effective Time shall continue as
a branch location of the Bank immediately following the Effective Time.
2.6 Directors and Officers of Survivor. As of the Effective Time, the
directors of Survivor shall be: (a) the duly qualified and acting directors of
Merger Corp. immediately prior to the Effective Time (who will be the same as
the directors of Mutual at such date) plus (b) four additional directors who
shall have been directors of First Northern prior to the Effective Time and who
shall be designated in writing by Mutual to First Northern at least five
business days prior to the Effective Time. The officers of Merger Corp.
immediately prior to the Effective Time shall be the officers of Survivor, in
all cases to hold office as provided in the Bylaws of Survivor. The directors of
Survivor shall promptly thereafter take the actions described in Section 3.11(b)
hereof to elect additional officers.
2.7 Capital Stock of Merger Corp. At the Effective Time, each share of
common stock of Merger Corp. then issued and outstanding, without any action on
the part of the holder thereof, shall remain an issued and outstanding share of
Survivor Common Stock.
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2.8 Conversion of First Northern Common Stock.
(a) Definitions. As used in this Agreement:
(i) "Cash Percentage" shall mean that percentage equal to:
(A) 100%; minus (B) the Stock Percentage.
(ii) "Cash Value" shall mean $15.00.
(iii) "Exchange Ratio" shall mean 1.5.
(iv) "Maximum Cash Number" shall mean that number equal to:
(A) (1) the Cash Percentage; multiplied by (2) the
number of shares of First Northern Common Stock issued and outstanding
immediately prior to the Effective Time; minus
(B) the number of shares of First Northern Common
Stock to be exchanged for Fraction Payments.
(v) "Maximum Stock Number" shall mean that number equal
to: (A) the Stock Percentage; multiplied by (B) the number of shares of First
Northern Common Stock issued and outstanding immediately prior to the Effective
Time.
(vi) "Merger Consideration" shall mean the shares of
Survivor Common Stock issuable pursuant to this Section 2.8 of this Agreement
and cash payable pursuant to this Section 2.8 of this Agreement.
(vii) "Stock Percentage" shall mean that percentage selected
by Mutual in the Conversion Notice which shall be (at the option of Mutual) any
percentage between and including 40% and 70%.
(b) Conversion Notice. At least three business days prior to the
Closing Date, Mutual shall send a notice to First Northern (the "Conversion
Notice") which specifies Mutual's election as to the amounts of the Cash
Percentage and the Stock Percentage. The parties shall then proceed to close the
transactions described in this Agreement on the basis of such election
identified in the Conversion Notice.
(c) Conversion. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Corp., First Northern, Mutual or
the holders of First Northern Common Stock, each share of First Northern Common
Stock issued and outstanding at the Effective Time (except for treasury stock
which shall be canceled as described in Section 2.8(m) of this Agreement) shall
be converted into and become the right to receive:
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(i) cash in the amount of the Cash Value; or
(ii) that number of shares of Survivor Common Stock equal
to the Exchange Ratio; or
(iii) a combination of cash and shares of Survivor Common
Stock determined in accordance with the provisions of this Section 2.8 of this
Agreement.
(d) Maximum Numbers. The number of shares of First Northern
Common Stock to be converted into the right to receive Survivor Common Stock in
the Merger shall equal the Maximum Stock Number. The number of shares of First
Northern Common Stock to be converted into the right to receive cash in the
Merger shall equal the Maximum Cash Number. Notwithstanding any other provisions
of this Agreement, at least 40% of the number of shares of First Northern Common
Stock issued and outstanding immediately prior to the Effective Time shall be
converted into whole shares of Survivor Common Stock.
(e) Elections. Subject to the allocation and election procedures
set forth in this Section 2.8 of this Agreement, each record holder immediately
prior to the Effective Time of shares of First Northern Common Stock will be
entitled in respect to all of the shares of First Northern Common Stock owned by
such holder: (i) to elect to receive cash for such shares (a "Cash Election");
(ii) to elect to receive Survivor Common Stock for such shares (a "Stock
Election"); (iii) to indicate that such record holder has no preference as to
the receipt of cash or Survivor Common Stock for such shares (a "Non-Election");
or (iv) as to First Northern Shareholders holding not less than 170 shares of
First Northern Common Stock, to elect to receive a combination of cash and
Survivor Common Stock, with the percentage of such shares of First Northern
Common Stock equal to the lesser of (x) the Stock Percentage and (y) 50%
converted into Survivor Common Stock and the balance converted into cash (a
"Mixed Election"). All such elections shall be made on a form designed by
Mutual, which is reasonably satisfactory to First Northern, for that purpose (a
"Form of Election"). Holders of record of shares of First Northern Common Stock
who hold such shares as nominees, trustees or in other representative capacities
(a "Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the shares
of First Northern Common Stock held by each Representative for a particular
beneficial owner. Shareholders who are not Representatives must make a single
election for all shares of First Northern Common Stock held by them.
(f) Cash Elections in Excess of Maximum Cash Number. If the
aggregate number of shares covered by Cash Elections (the "Cash Election
Shares") together with the portion of shares to be converted into cash pursuant
to Mixed Elections exceeds the Maximum Cash Number:
(i) each share of First Northern Common Stock covered by a
Stock Election (the "Stock Election Shares") and each share of First Northern
Common Stock covered by a Non-Election (the "Non-Election Shares") shall be
converted into the right to receive a
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number of shares of Survivor Common Stock equal to the Exchange Ratio, and each
share of First Northern Common Stock covered by a Mixed Election (the "Mixed
Election Shares") shall be converted as provided in the Mixed Election; and
(ii) each Cash Election Share shall be converted into the
right to receive:
(A) an amount in cash, without interest, equal to: (1)
the Cash Value; multiplied by (2) a fraction (the "Cash Fraction"), the
numerator of which shall be the difference between (I) the Maximum Cash Number
and (II) the product of the number of Mixed Election Shares times the Cash
Percentage and the denominator of which shall be the total number of Cash
Election Shares; and
(B) a number of shares of Survivor Common Stock equal
to: (1) the Exchange Ratio; multiplied by (2) a fraction equal to one minus the
Cash Fraction.
(C) Notwithstanding the foregoing provisions, to avoid
the ongoing expense of very small shareholder accounts, prior to the Effective
Time, Mutual and First Northern may agree that, notwithstanding the foregoing
proration, the shares of First Northern Common Stock of any First Northern
Shareholder who has made a Cash Election and who as a result of the foregoing
proration would otherwise receive fewer than 25 (or such smaller number as may
be agreed upon by Mutual and First Northern) shares of Survivor Common Stock
shall have their First Northern Common Stock converted solely into cash. In that
event, the proportions of cash and Survivor Common Stock to be received by other
First Northern Shareholders who have made a Cash Election shall be appropriately
adjusted to reflect a pro rata allocation of remaining available cash and
Survivor Common Stock among such other First Northern Shareholders.
(g) Stock Elections in Excess of Maximum Stock Number. If the
aggregate number of Stock Election Shares, together with the portion of shares
to be converted into shares of Survivor Common Stock pursuant to Mixed Elections
exceeds the Maximum Stock Number:
(i) each Cash Election Share and each Non-Election Share
shall be converted into the right to receive cash in the amount of the Cash
Value, and each Mixed Election Share shall be converted as provided in the Mixed
Election; and
(ii) each Stock Election Share shall be converted into the
right to receive:
(A) a number of shares of Survivor Common Stock equal
to: (1) the Exchange Ratio; multiplied by (2) a fraction (the "Stock Fraction"),
the numerator of which shall be the difference between (I) the Maximum Stock
Number and (II) the product of the number of Mixed Election Shares times the
Stock Percentage and the denominator of which shall be the total number of Stock
Election Shares, and
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(B) an amount in cash, without interest, equal to: (1)
the Cash Value; multiplied by (2) a fraction equal to one minus the Stock
Fraction.
(h) Other. In the event that neither Section 2.8(f) or 2.8(g) of
this Agreement is applicable: (i) each Cash Election Share shall be converted
into the right to receive cash in the amount of the Cash Value; (ii) each Stock
Election Share shall be converted into the right to receive a number of shares
of Survivor Common Stock equal to the Exchange Ratio; and (iii) each
Non-Election Share shall be converted into the right to receive shares of
Survivor Common Stock and the right to receive cash on a proportionate basis so
that the total number of shares of First Northern Common Stock converted into
the right to receive shares of Survivor Common Stock and cash, respectively,
approximate the Maximum Stock Number and the Maximum Cash Number, respectively,
as closely as possible.
(i) Initial Mailing. Mutual and First Northern will mail a Form
of Election to all holders of record of shares of First Northern Common Stock as
of a date mutually agreed to by First Northern and Mutual (the "Initial Mailing
Record Date") which shall be approximately 45 calendar days prior to the
anticipated Effective Time. Elections shall be made by holders of First Northern
Common Stock by mailing to the Exchange Agent a Form of Election. To be
effective, a Form of Election must be properly completed, signed and submitted
to the Exchange Agent and accompanied by the certificates representing the
shares of First Northern Common Stock ("First Northern Certificates") as to
which the election is being made (or by an appropriate guarantee of delivery of
such certificates as set forth in such Form of Election from a member of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, provided such certificates are in fact
delivered by the time set forth in such guarantee of delivery). Mutual will have
the discretion, which it may delegate in whole or in part to the Exchange Agent,
to determine whether Forms of Election have been properly completed, signed and
submitted or revoked and to disregard immaterial defects in Forms of Election.
The decision of Mutual (or the Exchange Agent) in such matters shall be
conclusive and binding. Neither Mutual nor the Exchange Agent will be under any
obligation to notify any Person of any defect in a Form of Election submitted to
the Exchange Agent. The Exchange Agent shall also make all computations
contemplated by this Section 2.8 of this Agreement and all such computations
shall be conclusive and binding on the holders of First Northern Common Stock
absent manifest error in any such computation.
(j) Nonsubmittal. For the purposes hereof, a holder of First
Northern Common Stock who does not submit a Form of Election which is received
by the Exchange Agent prior to the Election Deadline shall be deemed to have
made a Non-Election. If Mutual or the Exchange Agent shall determine that any
purported Cash Election or Stock Election was not properly made, such purported
Cash Election or Stock Election shall be deemed to be of no force and effect and
the Person making such purported Cash Election or Stock Election shall, for all
purposes hereof, be deemed to have made a Non-Election.
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(k) Subsequent Mailings. Mutual and First Northern shall each
use its reasonable best efforts to promptly mail the Form of Election to all
Persons who become holders of First Northern Common Stock during the period
between the Initial Mailing Record Date and 10:00 a.m. New York time, on the
date ten calendar days prior to the anticipated Effective Time and to make the
Form of Election available to all Persons who become holders of First Northern
Common Stock subsequent to such day and no later than the close of business on
the third business day prior to the Effective Time.
(l) Election Deadline. A Form of Election must be received by
the Exchange Agent by the close of business on the third business day prior to
the Effective Time (the "Election Deadline") in order to be effective. All
elections will be irrevocable.
(m) Treasury Stock. Any shares of First Northern Common Stock
that are owned by First Northern or any First Northern Subsidiary, except in a
fiduciary capacity, at the Effective Time shall be canceled and retired and
cease to exist and no cash or shares of Survivor Common Stock shall be issued or
delivered in exchange therefor.
(n) Adjustment. In the event that, prior to the Effective Time,
there is a reclassification, stock split or stock dividend with respect to
outstanding Survivor Common Stock or outstanding First Northern Common Stock, an
appropriate and proportionate adjustment, if any, shall be made to any or one or
more of the Cash Value or the Exchange Ratio.
2.9 Exchange of First Northern Certificates.
(a) Exchange Agent. As of the Effective Time, Survivor shall
deposit, or shall cause to be deposited, with a bank or trust company designated
by Survivor and reasonably acceptable to First Northern (the "Exchange Agent"),
for the benefit of the holders of shares of First Northern Common Stock, for
exchange in accordance with this Article II of this Agreement through the
Exchange Agent: (i) certificates representing the aggregate number of shares of
Survivor Common Stock issuable pursuant to Section 2.8 of this Agreement; and
(ii) cash representing the aggregate amount of cash payable pursuant to Section
2.8 of this Agreement; (such certificates for shares of Survivor Common Stock,
together with any dividends or distributions with respect thereto, such cash and
any Fraction Payment, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures.
(i) At or promptly after the Effective Time, Survivor shall
cause the Exchange Agent to mail to each holder of record of a First Northern
Certificate which immediately prior to the Effective Time of Merger represented
outstanding shares of First Northern Common Stock and which was not submitted to
the Exchange Agent with a duly executed and completed Form of Election: (A) a
letter of transmittal ("Letter of Transmittal") which shall specify that
delivery shall be effected, and risk of loss and title to the First Northern
Certificates shall pass, only upon delivery of the First Northern Certificates
to the Exchange
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Agent and which shall be in such form and have such other customary provisions
as Survivor may reasonably specify and which are reasonably acceptable to First
Northern; and (B) instructions to effect the surrender of the First Northern
Certificates in exchange for cash or shares of Survivor Common Stock, or both,
as described in this Agreement.
(ii) Upon surrender of a First Northern Certificate for
cancellation to the Exchange Agent together with either a Form of Election or a
Letter of Transmittal, in each case duly executed, and with such other documents
as the Exchange Agent may reasonably require, the holder of such First Northern
Certificate shall be entitled to receive, and Survivor shall cause the Exchange
Agent to promptly deliver in exchange therefor after the Effective Time: (A) a
certificate representing that number of whole shares of Survivor Common Stock to
which such holder is entitled to receive in respect of such First Northern
Certificate pursuant to Section 2.8 of this Agreement; and (B) a check
representing the cash that such holder is entitled to receive in respect of such
First Northern Certificate pursuant to Section 2.8 of this Agreement; and (C) a
check for any Fraction Payment. The First Northern Certificate so surrendered
shall forthwith be canceled; provided, however, that fractional share interests
of any one holder shall be aggregated to maximize the number of whole shares of
Survivor Common Stock to be issued and minimize the Fraction Payments.
(iii) In the event of a transfer of ownership of shares of
First Northern Common Stock which is not registered in the transfer records of
First Northern, a certificate representing the proper number of shares of
Survivor Common Stock, a check for the proper amount of cash that such holder is
entitled to receive in respect of such First Northern Certificate pursuant to
Section 2.8 of this Agreement and any Fraction Payment, shall be delivered to
the transferee if the First Northern Certificate which represented such shares
of First Northern Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid.
(iv) No interest will be paid or accrued on the cash and
shares of Survivor Common Stock to be issued pursuant to this Agreement, the
cash in lieu of fractional shares, if any, and unpaid dividends and
distributions on the shares of Survivor Common Stock, if any, payable to First
Northern Shareholders.
(v) If any First Northern Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such First Northern Certificate to be lost, stolen or destroyed
and, if required by Survivor in its reasonable discretion, the posting by such
Person of a bond in such reasonable amount as Survivor may direct as indemnity
against any claim that may be made against it with respect to such First
Northern Certificate, the Exchange Agent will deliver in exchange for such lost,
stolen or destroyed First Northern Certificate, a certificate representing the
proper number of shares of Survivor Common Stock and a check for the cash, in
each case that such First Northern Shareholder has the right to receive pursuant
to Section 2.8 of this Agreement, and the Fraction Payment, if any, with respect
to the shares of First Northern Common Stock formerly represented
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thereby, and unpaid dividends and distributions on the shares of Survivor Common
Stock, if any, as provided in this Article II of this Agreement.
(vi) Until surrendered as contemplated by this Section 2.9
of this Agreement, each First Northern Certificate shall be deemed at all times
after the Effective Time to represent only the right to receive upon surrender
only the cash or shares of Survivor Common Stock, or both, and any Fraction
Payment.
(c) Distributions with Respect to Unexchanged Shares. If any
Survivor Common Stock is issued pursuant to the Merger, no dividends or other
distributions declared or made after the Effective Time with respect to Survivor
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered First Northern Certificate with respect to the
shares of Survivor Common Stock represented thereby, and no Fraction Payment
shall be paid to any such holder, until the holder of such First Northern
Certificate has surrendered such First Northern Certificate to the Exchange
Agent. Subject to the effect of any applicable Law, following the surrender of
any such First Northern Certificate, there shall be paid to the holder of the
surrendered First Northern Certificate, without interest: (i) promptly, any
Fraction Payment to which such holder is entitled and the amount of dividends or
other distributions with a record date after the Effective Time of Merger
theretofore paid with respect to such whole shares of Survivor Common Stock; and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date occurring after surrender payable with respect to such whole
shares of Survivor Common Stock.
(d) No Further Rights in First Northern Common Stock. All shares
of Survivor Common Stock issued and cash paid upon conversion of the First
Northern Common Stock in accordance with the terms of this Agreement shall be
deemed to have been issued and paid in full satisfaction of all rights
pertaining to the First Northern Common Stock.
(e) No Fractional Shares. No fractional shares of Survivor
Common Stock shall be issued in the Merger. All fractional share interests of a
holder of more than one First Northern Certificate at the Effective Time shall
be aggregated. If a fractional share interest results after such aggregation,
each holder of a fractional interest shall be paid an amount in cash equal to
the product obtained by multiplying such fractional interest by the Cash Value.
Promptly after the determination of the amount of cash to be paid to holders of
fractional interests, the Exchange Agent shall notify Survivor and Survivor
shall deliver such amounts to such holders subject to and in accordance with the
terms of Section 2.9(c) of this Agreement.
(f) Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund as directed by Survivor. Any interest and
other income resulting from such investments shall be paid to Survivor. In the
event the cash in the Exchange Fund shall be insufficient to fully satisfy all
of the payment obligations to be made by the Exchange Agent hereunder, then
Survivor shall promptly deposit cash into the Exchange Fund in an
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amount which is equal to the deficiency in the amount of cash required to fully
satisfy such payment obligations.
(g) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the First Northern Shareholders after twelve
(12) months after the Effective Time shall be delivered to Survivor, upon
demand, and any First Northern Shareholders who have not theretofore complied
with this Article II of this Agreement shall thereafter look only to Survivor
for payment of their claim for cash or shares of Survivor Common Stock, or both,
any cash in lieu of fractional share interests and any dividends or
distributions with respect thereto.
(h) No Liability. Neither the Exchange Agent nor any party to
this Agreement shall be liable to any First Northern Shareholder for any shares
of First Northern Common Stock or Survivor Common Stock (or dividends or
distributions with respect thereto) or cash delivered in accordance with
applicable Law to a public official pursuant to any abandoned property, escheat
or similar Law.
(i) Withholding Rights. Survivor shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any First Northern Shareholder such amounts as Survivor is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax Law. To the extent that amounts are so
withheld by Survivor, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the First Northern Shareholder in respect
of which such deduction and withholding was made by Survivor.
(j) Uncertificated Shares. Notwithstanding any other provision
of this Agreement, the Form of Election and the Letter of Transmittal may, at
the option of Survivor, provide for the ability of a holder of one or more First
Northern Certificates to elect that Survivor Common Stock to be received in
exchange for the First Northern Common Stock formerly represented by such
surrendered First Northern Certificates be issued in uncertificated form.
(k) Stock Transfer Books. At the Effective Time, the stock
transfer books of First Northern shall be closed and there shall be no further
registration of transfers of shares of First Northern Common Stock thereafter on
the records of First Northern. From and after the Effective Time, the holders of
First Northern Certificates outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such shares of First Northern
Common Stock except as otherwise provided in this Agreement or by Law.
2.10 Reorganization. The parties intend that this Agreement be a plan
of reorganization within the meaning of Section 368(a) of the Code and that the
Merger be a tax-free reorganization under Section 368(a) of the Code to the
extent that shares of First Northern Common Stock are exchanged for shares of
Survivor Common Stock as described in this Agreement. No party shall voluntarily
take or cause to be taken any action which would disqualify the Merger as a
tax-free reorganization under Section 368 of the Code.
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2.11 No Dissenting Shares. The parties acknowledge that under the WBCL,
the First Northern Shareholders are not entitled to dissent from the Merger and
are not entitled to require appraisal of their First Northern Common Stock.
2.12 Meeting of First Northern Shareholders.
(a) First Northern will promptly take all steps necessary to
cause the First Northern Meeting to be duly called, noticed, and held as soon as
practicable for the purpose of voting to approve this Agreement, the Stock
Option Agreement (if required), the Merger and all matters related thereto.
First Northern will use its best efforts to secure the required approval of its
Shareholders.
(b) Merger Corp. and First Northern will prepare and file with
the SEC the Registration Statement and the Proxy Statement, respectively, as
soon as reasonably practicable after the date of this Agreement. Merger Corp.,
Mutual and First Northern shall use reasonable best efforts to cause the Proxy
Statement to be cleared for mailing, and the Registration Statement to be
declared effective under the Securities Act as promptly as practicable after
such filing. First Northern will cause to be mailed to its Shareholders a notice
of the Meeting and the Proxy Statement as soon as practicable thereafter. Merger
Corp., Mutual and First Northern shall also take such action as may be
reasonably required to cause any shares of Survivor Common Stock issuable
pursuant to the Merger to be registered or to obtain an exemption from
registration or qualification under applicable state "blue sky" or securities
Laws; provided, however, that Merger Corp. shall not be required to qualify as a
foreign corporation or to file any general consent to service of process under
the Laws of any jurisdiction. Each party to this Agreement will furnish to the
other parties all information concerning itself as each such other party or its
counsel may reasonably request and which is required or customary for inclusion
in the Proxy Statement and the Registration Statement.
(c) The Proxy Statement shall include the recommendation of the
Board of Directors of First Northern in favor of the Merger; provided, however,
that if the Board of Directors of First Northern shall, in good faith and after
receiving the written opinion of its legal counsel, determine that to make such
a recommendation would be a violation of its fiduciary obligations under
applicable Law, then the Board of Directors of First Northern shall not be
obligated to make any such recommendation.
2.13 Liquidation Account and Sub-Accounts. The liquidation account and
sub-account balances of the Bank shall be continued for the benefit of certain
account holders of the Bank who maintain their accounts in the Bank in the event
of a complete liquidation of the Bank. The liquidation account balance shall be
subject to downward adjustment to the extent of any downward adjustment to any
sub-account balance in accordance with Section 563b.3(f) of the regulations of
the OTS. A distribution of each sub-account balance may be made only in the
event of a complete liquidation of the Bank and only out of funds available for
such purpose after payment of all creditors but before any payments to
stockholders.
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2.14 Restructuring. In connection with the Merger, Mutual and First
Northern will conduct a series of transactions, as set forth below (the
"Restructuring"):
(a) Mutual will convert from a state-chartered savings bank to a
federal savings bank.
(b) Bank will convert from a state-chartered savings and loan
association to a federal savings bank.
(c) Mutual will form a mutual holding company ("MHC"). MHC will
also form a transitory federal stock savings bank ("Transitory"). Mutual will
contribute the shares of Merger Corp. to MHC. MHC would thereupon own all of the
stock of both Merger Corp. and Transitory.
(d) Mutual will convert to a federal stock savings bank ("Stock
Bank"). Mutual's depositors would receive deposit accounts in Stock Bank with
the same terms and conditions as their deposit accounts in Mutual.
(e) Transitory would merge into Stock Bank in a transaction in
which MHC would receive all of the stock of Stock Bank.
(f) MHC would transfer the stock of Stock Bank to Merger Corp.
so that Merger Corp. would hold all of the stock of Stock Bank, and MHC would
initially own 100% of the shares of common stock of Merger Corp. The former
depositors of Mutual would hold all of the liquidation and voting interest in
MHC, for so long as, and to the extent, they continue to maintain their deposits
with Stock Bank.
(g) Simultaneously with the Merger, Survivor would issue shares
of its stock to the public and the Survivor Employee Benefit Plans for cash, at
the price to purchasers of $10.00 per share.
(h) As a result of the Merger, Survivor will be the sole
stockholder of Bank.
Therefore, as a result of the Restructuring and the Merger, Bank and
Stock Bank would become "sister" corporations owned by Survivor. MHC would own
at least 51% of the stock of Survivor, and the new public shareholders, the
former shareholders of First Northern and Survivor Employee Benefit Plans would
together own 49% or less of the stock of Survivor.
The amount of Survivor Common Stock to be offered to the public would be
determined so that the total of Survivor Common Stock issued to First Northern
Shareholders, new investors and reserved for options or the other compensation
programs for directors and employees of Survivor and its Subsidiaries would
constitute less than 50% of the total Survivor Common Stock, and the balance
would be owned by MHC.
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The Restructuring is subject to certain regulatory approvals. After the
Restructuring is effected, Mutual agrees that it will assume and timely
discharge any and all obligations, covenants and agreements of First Northern
under this Agreement which are to be performed or discharged after the Effective
Time, but which have not been fully performed or discharged as of the time the
Restructuring is effected. Mutual agrees, however, that it will not alter the
structure of the Restructuring as described herein if it would: (i) alter,
change or reduce the amount of the consideration to be paid to holders of First
Northern Common Stock or the manner or basis upon which such exchange is made;
(ii) have an adverse federal or state income tax consequence to First Northern,
or any of the shareholders of First Northern; (iii) have an adverse effect on
the shareholders of First Northern Common Stock; or (iv) would be likely to
delay or jeopardize receipt of the Regulatory Approvals or satisfaction of any
of the conditions to the Merger set forth in Article VII.
2.15 Anti-Dilution Provisions. In the event that between the date of
this Agreement and the Effective Time the issued and outstanding shares of First
Northern Common Stock shall have been changed into a different number of shares
as a result of a stock split, reverse stock split, stock dividend,
recapitalization, reclassification or other similar transaction, or in the event
the number of authorized and unissued shares of First Northern Common Stock
subject to issuance upon the exercise of outstanding First Northern Stock
Options shall have changed between the date of this Agreement and the Effective
Time as the result of the granting of additional First Northern Stock Options,
then the per share merger consideration shall be adjusted appropriately, so long
as the aggregate consideration remains the same.
2.16 Alternative Structure. Notwithstanding anything in this Agreement
to the contrary, Mutual may specify (subject to First Northern's approval, which
shall not be unreasonably withheld) that any of its or MHC's direct or indirect
subsidiaries, and First Northern and any of its direct or indirect subsidiaries
shall enter into transactions other than those described in this Article II, in
order to effect the purposes of this Agreement, and Mutual and First Northern
shall take all action necessary and appropriate to effect, or cause to be
affected, such transactions; provided, however, that (i) other than a change in
structure required by a regulatory agency having jurisdiction over the
transactions contemplated by this Agreement, no such specification shall
materially and adversely affect the timing of the consummation of the
transactions contemplated herein; or (ii) no such specifications shall
materially and adversely affect the tax effect or economic benefits of the
Merger to the holders of First Northern Common Stock or to Mutual's members or
the fundamental structure of the mid-tier holding company in the Restructuring.
Such alternative structure may include substitution of a federally chartered
holding company for Merger Corp., if required by relevant regulators.
ARTICLE III
OTHER AGREEMENTS
3.1 Confidentiality; Access. The Confidentiality Agreement shall remain
in full force and effect, except that numbered paragraph 4 thereof ("Other
Discussions") shall be superceded
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by this Agreement and of no further force and effect. Upon reasonable notice,
each of First Northern and Mutual shall afford to the other's officers,
employees, accountants, legal counsel and other representatives access, during
normal business hours, to all of its and its Subsidiaries' properties, books,
contracts, commitments and records; provided that First Northern and Mutual
shall have the right to redact any information from such materials which relates
to assessments, analyses or discussions of a possible Acquisition engaged in by
it prior to the date of this Agreement, or which, relates to matters or issues
concerning its evaluation of the Merger or its obligations under this Agreement,
or that would impair its Board of Directors' ability to discharge its fiduciary
duties.
3.2 Disclosure Schedules.
(a) Contemporaneously with the execution and delivery of this
Agreement, First Northern is delivering to Mutual the First Northern Disclosure
Schedule, which is accompanied by a certificate signed by the Chief Executive
Officer and Secretary of First Northern stating that the First Northern
Disclosure Schedule is being delivered pursuant to this Agreement and is the
First Northern Disclosure Schedule referred to in this Agreement. The First
Northern Disclosure Schedule is deemed to constitute an integral part of this
Agreement and to modify the representations, warranties, covenants or agreements
of First Northern contained in this Agreement to the extent that such
representations, warranties, covenants or agreements expressly refer to the
First Northern Disclosure Schedule.
(b) Contemporaneously with the execution and delivery of this
Agreement, Mutual is delivering to First Northern the Mutual Disclosure
Schedule, which is accompanied by a certificate signed by the Chief Executive
Officer and Secretary of Mutual stating that the Mutual Disclosure Schedule is
being delivered pursuant to this Agreement and is the Mutual Disclosure Schedule
referred to in this Agreement. The Mutual Disclosure Schedule is deemed to
constitute an integral part of this Agreement and to modify the representations,
warranties, covenants or agreements of Mutual contained in this Agreement to the
extent that such representations, warranties, covenants or agreements expressly
refer to the Mutual Disclosure Schedule.
(c) All capitalized terms used in the Disclosure Schedules shall
have the definitions specified in this Agreement. All descriptions or listings
of documents contained in the Disclosure Schedules are qualified in their
entirety by reference to the documents so described, true copies of which
heretofore have been delivered or made available to the other. Except as
expressly stated to the contrary in the Disclosure Schedules, disclosure of a
matter or document in a Disclosure Schedule shall not be deemed to be an
acknowledgment that such matter is material or outside the ordinary course of
business of the disclosing party. Disclosure of any matter or event in any of
the schedules included in Disclosure Schedule shall be deemed disclosure for
purposes of any and all other schedules included therein without the need of
specific cross reference or duplication, provided, however, that disclosure of
an agreement or other document in a listing of agreements or documents without
any summary or description of
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the substance thereof shall be deemed disclosure only for purposes of the
schedule in which such agreement or other document is listed.
(d) Updates. Prior to the Closing Date, each party shall, to the
extent a matter required to be reported occurs, update its Disclosure Schedule
on a monthly basis by written notice to the other to reflect any matters which
have occurred from and after the date of this Agreement which, if existing on
the date of this Agreement, would have been required to be described in the
Disclosure Schedule. If requested by the recipient within 14 calendar days after
receipt by it of an update to the other's Disclosure Schedule, the party
providing the update shall meet and discuss with the recipient any update to the
Disclosure Schedule which, in the reasonable judgment of the recipient, has or
may reasonably be expected to have a Material Adverse Effect on the disclosing
party or which may in any manner be materially adverse to the recipient (a
"Disclosure Schedule Change").
3.3 Duties Concerning Representations. Each party to this Agreement
shall: (a) to the extent within its control, use best efforts to cause all of
its representations and warranties contained in this Agreement to be true and
correct in all respects at the Effective Time with the same force and effect as
if such representations and warranties had been made on and as of the Effective
Time; and (b) use best efforts to cause all of the conditions precedent set
forth in Article VII of this Agreement to be satisfied. Neither party shall take
any action, nor agree to commit to take any action, which would or reasonably
can be expected to: (i) adversely affect the ability of either Mutual or First
Northern to obtain the Regulatory Approvals; (ii) adversely affect a party's
ability to perform its covenants or agreements under this Agreement; or (iii)
result in any of the conditions to the Merger set forth in Article VII not being
satisfied.
3.4 Deliveries of Information; Consultation. From time to time prior
to the Effective Time, and subject to the limitations on access rights under
Section 3.1 of this Agreement and to the Confidentiality Agreement:
(a) Deliveries. First Northern and Mutual shall furnish promptly
to the other: (i) a copy of each significant report, schedule and other document
filed by or received by it or its Subsidiaries pursuant to the requirements of
federal or state securities or financial institution Laws or any other
applicable Laws promptly after such documents are available; (ii) its
consolidated monthly financial statements (as prepared in accordance with its
normal accounting procedures) promptly after such financial statements are
available; (iii) a summary of any action taken by its, or its Subsidiaries',
Boards of Directors, or any committee thereof; and (iv) all other significant
information concerning its and its Subsidiaries' business, properties and
personnel as the other may reasonably request.
(b) Consultation. Representatives of First Northern and Mutual
shall confer and consult with one another on a regular and frequent basis to
report on operational matters and the general status of First Northern's and
Mutual's ongoing business operations.
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(c) Regulatory Matters. Representatives of First Northern and
Mutual shall discuss with one another any matters directly affecting them in
which any state or federal regulator of First Northern or Mutual or any of their
Subsidiaries, is involved.
(d) Litigation. Each party to this Agreement shall provide
prompt notice to the other party of any litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind which may be
commenced, threatened or proposed by any Person concerning the legality,
validity or propriety of the transactions contemplated by this Agreement. If any
such litigation is commenced against any party to this Agreement, the parties
shall cooperate in all respects in connection with such litigation.
3.5 Directors' and Officers' Indemnification and Insurance.
(a) Survivor's Indemnification. From and after the Effective
Time, Survivor shall indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer, director or employee of First Northern or any First
Northern Subsidiary (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement with the approval of Survivor (which approval shall not be
unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation which is based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director, officer
or employee of First Northern or any First Northern Subsidiary, whether
pertaining to any matter existing or occurring at or prior to the Effective
Time, but only if filed, initiated, asserted or claimed prior to, or at or
within five years after, the Effective Time ("Indemnified Liabilities"),
including all Indemnified Liabilities based in whole or in part, or arising in
whole or in part out of, or pertaining to, this Agreement or the transactions
contemplated hereby, in each case to the full extent First Northern would have
been permitted under the WBCL and First Northern's Articles of Incorporation and
Bylaws (as amended and in effect as of the date of this Agreement) to indemnify
such person, and Survivor shall pay expenses in advance of the final disposition
of any such action or proceeding to each Indemnified Party to the full extent
permitted by Law upon receipt of any affirmation and undertaking required by
Section 180.0853 of the WBCL. Without limiting the foregoing, in the event any
such claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether brought before or within five years after the
Effective Time): (x) any counsel retained by the Indemnified Parties for any
period after the Effective Time shall be reasonably satisfactory to Survivor;
(y) after the Effective Time, Survivor shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; and (z) after the Effective Time, Survivor will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that Survivor shall not be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 3.5, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify Survivor (but the failure so to notify
Survivor shall not relieve it from any liability which it may have under this
Section 3.5 except to the extent such failure materially prejudices such party),
and shall deliver to Survivor the affirmation and undertaking,
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if any, required by Section 180.0853 of the WBCL. The Indemnified Parties as a
group may retain only one law firm to represent them with respect to each such
matter unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties.
(b) Director and Officer Insurance. Survivor shall use
reasonable efforts to obtain, after the Effective Time, directors' and officers'
liability insurance coverage for the officers and directors of Survivor, for
itself or as part of an affiliated group with MHC, to the extent that the same
is economically practicable. Such insurance shall cover directors and officers
of the Bank to the same extent as it covers directors and officers of other
subsidiaries of Survivor or MHC.
(c) Parties Benefitted. The provisions of this Section 3.5 are
intended to be for the benefit of, and shall be enforceable by, each Indemnified
Party, his or her heirs and his or her representatives, and shall survive the
Effective Time and any merger, consolidation or reorganization of Survivor,
including the Restructuring.
3.6 Letters of Accountants. First Northern shall use its best efforts
to cause to be delivered to Mutual a letter of Wipfli Ullrich Bertelson LLP,
First Northern's independent auditors, dated a date within three business days
before the date on which the Registration Statement is declared effective, and
addressed to Mutual, in form and substance reasonably satisfactory to Mutual and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement and proxy statements similar to the Proxy Statement.
Mutual shall use its best efforts to cause to be delivered to First Northern a
letter of Ernst & Young LLP, Mutual's independent auditors, dated a date within
three business days before the date on which the Registration Statement is
declared effective, and addressed to Mutual and First Northern, in form and
substance reasonably satisfactory to Mutual and First Northern and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement
and proxy statements similar to the Proxy Statement.
3.7 Legal Conditions to Merger. Each party to this Agreement will: (a)
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger (including
making all filings and requests in connection with the Regulatory Approvals and
furnishing all information required in connection therewith); (b) promptly
cooperate with and furnish information to the other party in connection with any
such requirements imposed upon any of them in connection with the Merger; and
(c) take all reasonable actions necessary to obtain (and will cooperate with the
other party in obtaining) any consent, authorization, order or approval of, or
any exemption by, any governmental entity or other public or private Person,
required to be obtained by the parties to this Agreement in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
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3.8 Stock Listings. First Northern shall use its best efforts to
maintain the listing of First Northern Common Stock on the NASDAQ/NMS through
the Effective Time. It is the intention of the parties that by taking this
action First Northern Shareholders will not be entitled to any dissenters' or
appraisal rights under applicable Law as a result of the Merger and the
transactions contemplated by this Agreement.
3.9 Announcements. Subject to each party's disclosure obligations
imposed by Law, First Northern and Mutual will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated hereby and shall not issue any public Announcement or statement
with respect thereto prior to consultation with the other party.
3.10 Best Efforts. Subject to the terms and conditions of this
Agreement and subject to the fiduciary duties of the Board of Directors of each
party, each of the parties agrees to use its best efforts to take, or cause to
be taken, all action and to do, or cause to be done, all things necessary or
advisable to consummate the transactions contemplated by this Agreement.
3.11 Employee And Managerial Matters.
(a) Employees. The Bank will continue to employ substantially
all present employees who are employed without employment contracts as employees
at will, subject to the determinations of Bank management and the Bank's and
Survivor's boards of directors.
(b) Survivor Executive Officers. Promptly after the Effective
Time, the Survivor Board of Directors shall meet to elect additional executive
officers of Survivor so that at least 40% of the Survivor executive officers are
executive officers of First Northern prior to the Effective Time. Such
individuals shall be designated by Mutual prior to the time the Proxy Statement
is mailed to First Northern Shareholders.
(c) First Northern Replacement Employment Agreements. The Bank
shall, with respect to each of the First Northern Executives who is a party to a
First Northern Existing Employment Agreement, use its best efforts to cause them
to enter into a First Northern Replacement Employment Agreement; provided,
however, that the First Northern Existing Employment Agreement of the chief
executive officer of First Northern shall be retained subject to the provisions
of Section 7.2(h) hereof.
(d) Bank Officers and Directors. As of the Effective Time, the
directors and executive officers of the Bank shall continue to be those persons
serving in such capacities prior to the Effective Time. Promptly thereafter, the
chief executive officer of Mutual shall be elected as an additional director of
the Bank. In addition, promptly thereafter, the chief executive officer of First
Northern shall be elected as an additional director of the Stock Bank.
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3.12 Employee Benefit Matters.
(a) First Northern Stock Option Plans. Prior to the Effective
Time, First Northern shall take any and all actions necessary so that, effective
as of the Effective Time, the First Northern Stock Option Plans will be
terminated, there shall be no outstanding stock options of First Northern (other
than the Stock Option Agreement), and any and all shares reserved for issuance
in connection with the exercise of options granted under any such First Northern
Stock Option Plan (including those reserved for issuance upon the exercise of
First Northern Stock Options granted prior to, and outstanding as of, the
Effective Time) shall be free of all restrictions associated with such
reservation and shall constitute authorized and unissued shares of First
Northern Common Stock; provided, however, that any and all shares subject to
First Northern Stock Options that are exercised prior to the Effective Time
shall not be deemed to constitute authorized and unissued shares of First
Northern Common Stock.
(b) First Northern 401(k) Plan. The First Northern 401(k)
Retirement Plan shall continue, except to the extent inconsistent with Law,
after the Merger for employees of Bank until such time as it is combined with,
or replaced by, a retirement or similar benefit plan covering employees of all
Affiliates of MHC. For purposes of determining eligibility to participate and
vesting under the Survivor's 401(k) plan or a 401(k) plan covering employees of
all Affiliates of MHC, service with First Northern or an Affiliate of First
Northern shall be treated as service with MHC; provided, however, that such
service shall not be recognized to the extent that such recognition would result
in a duplication of benefits.
(c) Health and Welfare Benefits. After the Merger, Survivor
shall continue, except to the extent not consistent with Law, the Bank's health
and welfare benefit plans, programs, insurance and policies, until such time as
they are replaced by programs or benefits common to all employees of Affiliates
of MHC; provided, however, no coverage of any of the Bank's continuing employees
or their dependents shall terminate under any of the Bank's health and welfare
benefit plans, programs, insurance and policies prior to the time such employees
and dependents become eligible to participate in the programs and benefits
common to substantially all employees of Affiliates of MHC and their dependents.
(d) Replacement. With respect to each employee and health and
welfare benefit plan or program that replaces a First Northern Existing Plan,
for purposes of determining eligibility to participate and vesting, service with
First Northern or an Affiliate of First Northern shall be treated as service
with Survivor; provided, however, that such service shall not be recognized to
the extent that such recognition would result in a duplication of benefits. Such
service shall also apply for purposes of satisfying any waiting periods,
actively-at-work requirements, and evidence of insurability requirements. No
pre-existing condition limitations will apply to any of the Bank's employees or
their dependents who were participants in the First Northern Existing Plans
comparable to the plan in question at the Closing Date. Each of the Bank's
continuing employees and their dependents shall be given credit for amounts paid
under a corresponding benefit plan during the same period for purposes of
applying deductibles,
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co-payments and out-of-pocket maximums as though such amounts had been in
accordance with the terms and conditions of the corresponding First Northern
Existing Plan.
(e) COBRA. Until the Effective Time, First Northern shall be
liable for all obligations for continued health coverage pursuant to Section
4980B of the Code and Sections 601 through 609 of ERISA ("COBRA") with respect
to each First Northern qualifying beneficiary (as defined in COBRA) who incurs a
qualifying event (as defined in COBRA) before the Effective Time. Survivor shall
be liable for (i) all obligations for continued health coverage under COBRA with
respect to each First Northern qualified beneficiary (as defined in COBRA) who
incurs a qualifying event (as defined in COBRA) from and after the Effective
Time, and (ii) for continued health coverage under COBRA from and after the
Effective Time for each First Northern qualified beneficiary who incurs a
qualifying event before the Effective Time.
3.13 Conformance to Reserve Policies. First Northern shall cause the
Bank to establish such additional accruals and reserves as may be necessary, in
the reasonable judgment of Mutual, to conform the Bank's general valuation
allowances to Mutual's asset classification policy, as well as to reflect the
costs and expenses of First Northern with respect to the Merger and the other
transactions contemplated by this Agreement; provided, however, that First
Northern shall not be required to cause the Bank to take any such action until
the Regulatory Approvals have been received, shareholders have approved this
Agreement and the Merger at the meeting specified in Section 2.12 of this
Agreement and First Northern is reasonably satisfied that the Merger will be
consummated. First Northern's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose nor shall any condition set forth in Section 7.2 of this
Agreement be considered unsatisfied as a consequence of any modification or
changes undertaken by the Bank, after notice to and non-objection by Mutual, in
order for First Northern to comply with the requirements of this Section 3.13.
3.14 Conduct of Mutual's Business and Authorization, Reservation and
Listing of Common Stock. Mutual will maintain its corporate existence in good
standing and conduct its business so as to be able to consummate the
transactions contemplated by the Agreement. Mutual shall, in the event it
becomes aware of the impending or threatened occurrence of any event or
condition which would cause or constitute a breach (or would have caused or
constituted a breach had such event occurred or been known prior to the date
hereof) of any of its representations, warranties, covenants or agreements
contained or referred to herein or which would or would be reasonably likely to
cause Mutual not to be able to satisfy any condition set forth in Sections 7.1
or 7.3 of this Agreement, give prompt written notice thereof to First Northern
and use its best efforts to prevent or promptly remedy the same. By appropriate
resolution, the Board of Directors of Survivor shall, prior to the Effective
Time, authorize and reserve the required number of shares of Survivor Common
Stock to be issued pursuant to this Agreement. Survivor also shall use all
reasonable efforts to cause the shares of Survivor Common Stock to be issued
pursuant to this Agreement to be approved for listing on the NASDAQ/NMS subject
to official notice of issuance, prior to the Effective Time.
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3.15 Affiliates. Not later than 10 calendar days after the date of the
First Northern Meeting, First Northern shall deliver to Mutual a letter
identifying, to the best of First Northern's Knowledge, all Persons who were
Affiliates at the date of the First Northern Meeting. First Northern shall
furnish such information and documents as Mutual may reasonably request for the
purposes of reviewing such list. First Northern shall advise the Affiliates of
the resale restrictions imposed by applicable securities Laws and shall use
reasonable best efforts to obtain from the Affiliates an executed Affiliate
Letter for delivery to Mutual prior to or at the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST NORTHERN
First Northern hereby represents and warrants to Mutual and Merger
Corp. that:
4.1 Organization and Qualification; Subsidiaries.
(a) First Northern is a corporation duly organized, validly
existing and in active status under the Laws of the State of Wisconsin, and is a
registered savings and loan holding company under HOLA. The Bank is a Wisconsin
capital stock savings and loan association duly organized, validly existing and
in good standing under the Laws of the state of Wisconsin. The deposits of the
Bank are insured by the SAIF of the FDIC as permitted by federal Law, and the
Bank has paid all premiums and assessments required thereunder. The Bank is a
member in good standing of the FHLB of Chicago. Each of the other First Northern
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the state of its incorporation. Each of First Northern and the First
Northern Subsidiaries has the requisite corporate power and authority and is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates, approvals and orders ("First Northern
Approvals") necessary to own, lease and operate its properties and to carry on
its business as it is now being conducted, including appropriate authorizations
from the OTS, the FDIC and the Wisconsin Agency, except where a failure to be so
organized, existing and in good standing or to have such power, authority and
First Northern Approvals would not, individually or in the aggregate, have a
Material Adverse Effect on First Northern, and neither First Northern nor any
First Northern Subsidiary has received any notice of proceedings relating to the
revocation or modification of any First Northern Approvals.
(b) First Northern and each First Northern Subsidiary is duly
qualified or licensed as a foreign corporation to conduct business, and is in
good standing (or the equivalent thereof) in each jurisdiction where the
character of the properties it owns, leases or operates or the nature of the
activities it conducts make such qualification or licensing necessary, except
for such failures to be so duly qualified and licensed and in good standing that
would not, either individually or in the aggregate, have a Material Adverse
Effect on First Northern.
(c) A true and complete list of all Subsidiaries of First
Northern (the "First Northern Subsidiaries"), together with (i) First Northern's
direct or indirect percentage ownership
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of each First Northern Subsidiary; (ii) the jurisdiction in which the First
Northern Subsidiaries are incorporated; and (iii) a description of the principal
business activities conducted by each First Northern Subsidiary, is set forth in
the First Northern Disclosure Schedule. Except as set forth in the First
Northern Disclosure Schedule, First Northern and/or one or more of the First
Northern Subsidiaries owns beneficially and of record all of the outstanding
shares of capital stock of each of the First Northern Subsidiaries. Except for
the Subsidiaries identified in the First Northern Disclosure Schedule, First
Northern does not directly or indirectly own any equity or similar interests in,
or any interests convertible into or exchangeable or exercisable for any equity
or similar interest in, any corporation, partnership, limited liability company,
joint venture or other business association or entity other than in the ordinary
course of business, and in no event in excess of 10% of the outstanding equity
or voting securities of such entity.
4.2 Articles of Incorporation and Bylaws. First Northern heretofore has
furnished to Mutual a complete and correct copy of the Articles of Incorporation
and Bylaws, as amended or restated, of First Northern and of each First Northern
Subsidiary. Such Articles of Incorporation and Bylaws are in full force and
effect. Neither First Northern nor any First Northern Subsidiary is in violation
of any of the provisions of its Articles of Incorporation or Bylaws.
4.3 Capitalization. The authorized capital stock of First Northern
consists of 30,000,000 shares of First Northern Common Stock and 10,000,000
shares of cumulative preferred stock, par value $1.00 per share. As of February
15, 2000, (a)8,586,308 shares of First Northern Common Stock are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
non-assessable, except as otherwise provided by Section 180.0622(2)(b), and not
issued in violation of any preemptive right of any First Northern Shareholder,
(b) 548,427 shares of First Northern Common Stock are held in the treasury of
First Northern, (c) 755,900 shares of First Northern Common Stock are subject to
issuance pursuant to outstanding First Northern Stock Options, and (d) 753,000
shares of First Northern Common Stock are reserved for future issuance pursuant
to the First Northern Stock Option Plans, and there has been no change in such
amounts thereafter except for changes resulting from the exercise or termination
after such date, if any, of First Northern Stock Options included in (c) above.
As of the date of this Agreement, no shares of First Northern's preferred stock
are issued and outstanding. Except as set forth in clauses (c) and (d) above, as
of the date of this Agreement First Northern has not granted any options,
warrants or other rights, agreements, arrangements or commitments of any
character, including without limitation voting agreements or arrangements,
relating to the issued or unissued capital stock of First Northern or any First
Northern Subsidiary or obligating First Northern or any First Northern
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, First Northern or any First Northern Subsidiary. All shares of
First Northern Common Stock subject to issuance as described in the foregoing,
upon issue on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable, except as otherwise provided in Section 180.0622(2)(b), and will
not be issued in violation of any preemptive right of any First Northern
Shareholder. Except as described in the First Northern Disclosure Schedule,
there are no obligations, contingent or otherwise, of First Northern or any
First Northern Subsidiary to repurchase, redeem or otherwise acquire any shares
of First Northern Common Stock or the
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capital stock of any First Northern Subsidiary or to provide funds to or make
any investment (in the form of a loan, capital contribution or otherwise) in any
First Northern Subsidiary or any other entity. Each of the outstanding shares of
capital stock of each First Northern Subsidiary is duly authorized, validly
issued, fully paid and nonassessable, except, where applicable, as provided in
Section 180.0622(2)(b), and such shares owned by First Northern or another First
Northern Subsidiary are owned free and clear of all security interests, liens,
claims, pledges, agreements, limitations of First Northern's voting rights,
charges or other encumbrances of any nature whatsoever.
4.4 Authorization: Enforceability. The entering into, execution,
delivery and performance of this Agreement and all of the documents and
instruments required by this Agreement to be executed and delivered by First
Northern are within the corporate power of First Northern, and: (a) have been
duly and validly authorized by the requisite vote of the Board of Directors of
First Northern; and (b) upon the approval of the First Northern Shareholders and
receipt of all Regulatory Approvals, shall be duly and validly authorized by all
necessary corporate action. This Agreement is, and the other documents and
instruments required by this Agreement to be executed and delivered by First
Northern or the Bank will be, when executed and delivered by First Northern and
the Bank, the valid and binding obligations of First Northern and the Bank,
enforceable against each of them in accordance with their respective terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Laws generally affecting the
rights of creditors and subject to general equity principles.
4.5 No Violation or Conflict. Subject to the receipt of the Regulatory
Approvals, the execution, delivery and performance of this Agreement and all of
the documents and instruments required by this Agreement to be executed and
delivered by First Northern do not and will not conflict with or result in a
breach of any Law, the Articles of Incorporation or Bylaws of First Northern, or
the Articles of Incorporation or Bylaws of the Bank or any other First Northern
Subsidiary, constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any First Northern
Existing Contract or any First Northern Permit, or the creation of any Lien upon
any of the properties or assets of First Northern or any First Northern
Subsidiary, in each case which would have a Material Adverse Effect on First
Northern.
4.6 Title to Assets; Leases. Except for the First Northern Existing
Liens, the Permitted Liens on the Closing Date, Liens for current taxes not yet
due and payable, pledges to secure deposits and such imperfections of title,
easements and other encumbrances, if any, as do not materially detract from the
value of or substantially interfere with the present use of the property
affected thereby, First Northern owns good and marketable title to the assets
and properties which it owns or purports to own, free and clear of any and all
Liens. There is not, under any leases pursuant to which First Northern or any of
the First Northern Subsidiaries leases from others real or personal property,
any default by First Northern, any First Northern Subsidiary or, to the best of
First Northern's Knowledge, any other party thereto, or any event
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which with notice or lapse of time or both would constitute such a default in
each case which would have a Material Adverse Effect on First Northern.
4.7 Litigation. Except for the First Northern Existing Litigation: (a)
neither First Northern nor any First Northern Subsidiary is subject to any
material continuing order of, or written agreement or memorandum of
understanding with, or, to the Knowledge of First Northern, any continuing
material investigation by, any federal or state savings and loan or insurance
authority or other governmental entity, or any judgment, order, writ,
injunction, decree or award of any governmental entity or arbitrator, including,
without limitation, cease and desist or other orders of any savings and loan
regulatory authority; (b) there is no claim, litigation, arbitration,
proceeding, governmental investigation, citation or action of any kind pending
or, to the Knowledge of First Northern, proposed or threatened, against or
relating to First Northern or any First Northern Subsidiary, nor to the
Knowledge of First Northern is there any basis known for any such material
action; (c) there are no actions, suits or proceedings pending or, to the
knowledge of First Northern, proposed or threatened, against First Northern by
any Person which question the legality, validity or propriety of the
transactions contemplated by this Agreement; and (d) there are no uncured
material violations or violations with respect to which material refunds or
restitutions may be required, cited in any compliance report to First Northern
or any First Northern Subsidiary as a result of an examination by any regulatory
authority.
4.8 Securities and Banking Reports; Books and Records.
(a) Since January 1, 1997, First Northern and the Bank have filed
all reports, registration statements, definitive proxy statements and
prospectuses, together with any amendments required to be made with respect
thereto, that were and are required to be filed under the Securities Act,
Exchange Act or any other Law with: (i) the SEC; (ii) the OTS; (iii) the FHLB of
Chicago; (iv) the FDIC; (v) the Wisconsin Agency; and (vi) any other applicable
state securities or savings and loan authorities (all such reports, statements
and prospectuses are collectively referred to herein as the "First Northern
Reports"). When filed, each of the First Northern Reports complied as to form
and substance in all material respects with the requirements of applicable Laws.
(b) Each of the consolidated audited financial statements and
consolidated unaudited interim financial statements (including, in each case,
any related notes thereto) of First Northern included in the First Northern
Reports filed with the SEC have been or will be, as the case may be, prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto and except
with respect to consolidated unaudited interim statements as permitted by SEC
Form 10-Q) and each fairly presents the consolidated financial condition of
First Northern as of the respective dates thereof and the consolidated income,
equity and cash flows for the periods then ended, subject, in the case of the
consolidated unaudited interim financial statements, to normal year-end and
audit adjustments and any other adjustments described therein.
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(c) The minute books of First Northern and the First Northern
Subsidiaries contain accurate and complete records of all meetings and actions
taken by written consent by their respective shareholders and Boards of
Directors (including all committees of such Boards), and all signatures
contained therein are the true signatures of the Persons whose signatures they
purport to be. The share transfer books of First Northern are correct, complete
and current in all respects. The accounting books and records of First Northern:
(i) are in all material respects correct and complete; (ii) are current in a
manner consistent with past practice; and (iii) have recorded therein all the
properties and assets and liabilities of First Northern.
4.9 Absence of Certain Changes. Except as set forth in the First
Northern Disclosure Schedule, since December 31, 1999 there has not been any:
(a) change in the financial condition, properties, business or
results of operations of First Northern or any First Northern Subsidiary having
a Material Adverse Effect on First Northern;
(b) damage, destruction or loss (whether or not covered by
insurance) with respect to any assets of First Northern or any First Northern
Subsidiary having a Material Adverse Effect on First Northern;
(c) transactions by First Northern or any First Northern
Subsidiary outside the ordinary course of their respective businesses or
inconsistent with past practices, except for the transactions contemplated by
this Agreement;
(d) except for regular quarterly cash dividends of $0.11 per
share on First Northern Common Stock with usual record and payment dates,
declaration or payment or setting aside the payment of any dividend or any
distribution in respect of the capital stock of First Northern or any direct or
indirect redemption, purchase or other acquisition of any such stock by First
Northern;
(e) allocations to the accounts of any directors, officers or
employees of First Northern or of any First Northern Subsidiary pursuant to any
of the First Northern Existing Plans other than in the normal course and in
accordance with the terms of the First Northern Existing Plans (none of which
have been amended or established subsequent to December 31, 1999);
(f) contribution to, increase in, or establishment of any
Employee Benefit Plan (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), or any other increase in the compensation payable or to become payable
to any officers, directors or key employees of First Northern or any First
Northern Subsidiary other than in the normal course and in accordance with the
terms of the First Northern Existing Plans (none of which have been amended or
established subsequent to December 31, 1999); or
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(g) change in the method of accounting or accounting practices of
First Northern or any First Northern Subsidiary.
4.10 Buildings and Equipment. Except as set forth in the First Northern
Disclosure Schedule: (a) the Buildings and the Equipment of First Northern and
the First Northern Subsidiaries are in good operating condition and repair,
reasonable wear and tear excepted; (b) are adequately insured for the nature of
First Northern's business with the self-insured retentions specified on the
First Northern Disclosure Schedule; (c) such assets and their use conform in all
material respects to applicable Laws; and (d) no notice of any violation of any
building, zoning or other Law relating to such assets or their use has been
received by First Northern or any First Northern Subsidiary.
4.11 First Northern Existing Contracts. The First Northern Disclosure
Schedule lists and briefly describes each Material Contract (the "First Northern
Existing Contracts") to which First Northern or a First Northern Subsidiary is a
party or by which its assets are bound. First Northern and each First Northern
Subsidiary has fully performed each term, covenant and condition of each First
Northern Existing Contract which is to be performed by it at or before the date
hereof, except where such non-performance would not have a Material Adverse
Effect on First Northern.
4.12 Investment Securities. Except as set forth on the First Northern
Disclosure Schedule, First Northern and the First Northern Subsidiaries do not
own, and does not have any right or obligation to acquire, any Investment
Securities.
4.13 Contingent and Undisclosed Liabilities. First Northern and the
First Northern Subsidiaries have no material liabilities of any nature
(contingent or otherwise) except for those which: (a) are disclosed in the First
Northern Reports or in the First Northern Disclosure Schedule or in this
Agreement; or (b) arise in the ordinary course of business since December 31,
1999 and are not required to be disclosed in the First Northern Reports or
pursuant to this Agreement or the First Northern Disclosure Schedule.
4.14 Insurance Policies. All real and personal property owned or leased
by First Northern or any First Northern Subsidiary has been and is being insured
against, and First Northern or the respective First Northern Subsidiary
maintains liability insurance against, such insurable risks and in such amounts
as set forth in the First Northern Disclosure Schedule. Such Insurance Policies
constitute all insurance coverage owned by First Northern or any First Northern
Subsidiary and are in full force and effect and First Northern or any First
Northern Subsidiary has not received notice of and is not otherwise aware of any
cancellation or threat of cancellation of such insurance. Except as described in
the First Northern Disclosure Schedule, no property damage, personal injury or
liability claims have been made, or are pending, against First Northern or any
First Northern Subsidiary that are not covered by insurance. Within the past two
(2) years, no insurance company has canceled any insurance (of any type)
maintained by First Northern or any First Northern Subsidiary. Neither First
Northern nor any First Northern Subsidiary has any liability for unpaid premiums
or premium adjustments for any
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insurance policy. To the Knowledge of First Northern, the cost of any insurance
currently maintained by First Northern or any First Northern Subsidiary will not
increase significantly upon renewal other than increases consistent with the
general upward trend in the cost of obtaining insurance.
4.15 Employee Benefit Plans.
(a) Except for the First Northern Existing Plans, First
Northern does not maintain, nor is it bound by, any Employee Benefit Plan. First
Northern has furnished Mutual with a complete and accurate copy of each First
Northern Existing Plan and a complete and accurate copy of each material
document prepared in connection with each such First Northern Existing Plan,
including, without limitation and where applicable, a copy of (i) each trust or
other funding arrangement, (ii) the most recent summary plan description and all
summaries of material modifications applicable thereto, (iii) the most recently
filed IRS Form 5500, (iv) the most recently received IRS determination letter,
and (v) the most recently prepared actuarial report and financial statement.
(b) Except as indicated on the First Northern Disclosure
Schedule, no member of First Northern's "controlled group," within the meaning
of Section 4001(a)(14) of ERISA, maintains or contributes to, or within the two
years preceding the Effective Time has maintained or contributed to, an employee
pension benefit plan subject to Title IV of ERISA. Except as indicated on the
First Northern Disclosure Schedule, none of the First Northern Existing Plans or
First Northern Existing Contracts obligates First Northern or any First Northern
Subsidiary to pay material separation, severance, termination or similar-type
benefits solely as a result of any transaction contemplated by this Agreement or
as a result of a "change in control," within the meaning of such term under
Section 280G of the Code. Except as indicated on the First Northern Disclosure
Schedule, none of the First Northern Existing Plans or First Northern Existing
Contracts provides for or promises retiree medical, disability or life insurance
benefits to any current or former employee, officer or director of First
Northern or any First Northern Subsidiary. Each of the First Northern Existing
Plans is subject only to the Laws of the United States or a political
subdivision thereof.
(c) Each First Northern Existing Plan has always been operated
in material compliance with the requirements of all applicable Law, and all
persons who participate in the operation of such First Northern Existing Plans
and all First Northern Existing Plan "fiduciaries" (within the meaning of
Section 3(21) of ERISA) have always acted in material compliance with the
provisions of all applicable Law. First Northern and all of the First Northern
Subsidiaries have performed in all material respects all obligations required to
be performed by any of them under, are not in any material respect in default
under or in violation of, and have no knowledge of any material default or
violation by any party to, any First Northern Existing Plan. No legal action,
suit or claim is pending or, to the knowledge of First Northern, threatened with
respect to any First Northern Existing Plan (other than claims for benefits in
the ordinary course) and no fact or event exists to the knowledge of First
Northern that could give rise to any such action, suit or claim.
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(d) Except as set forth on the First Northern Disclosure
Schedule, each First Northern Existing Plan that is intended to be qualified
under Section 401(a) of the Code or Section 401(k) of the Code has received a
favorable determination letter from the IRS that it is so qualified, and to the
Knowledge of First Northern no fact or event has occurred since the date of such
determination letter from the IRS to adversely affect the qualified status of
any such First Northern Existing Plan. No trust maintained or contributed to by
First Northern or any First Northern Subsidiary is intended to be qualified as a
voluntary employees' beneficiary association or is intended to be exempt from
federal income taxation under Section 501(c)(9) of the Code.
(e) There has been no non-exempt prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) with
respect to any First Northern Existing Plan. First Northern and each of the
First Northern Subsidiaries has not incurred any liability for any excise tax
arising under Section 4972 or 4980B of the Code and no fact or event exists that
could give rise to any such liability.
(f) All contributions, premiums or payments required to be
made with respect to any First Northern Existing Plan have been made on or
before their due dates. There is no accumulated funding deficiency, within the
meaning of ERISA or the Code, in connection with the First Northern Existing
Plans and no reportable event, as defined in ERISA, has occurred in connection
with the First Northern Existing Plans. First Northern and the First Northern
Subsidiaries are not contributing to, and have not contributed to any
multi-employer plan, as defined in ERISA.
(g) No representation and warranty set forth in this Section
4.15 shall be deemed to be breached unless such breach, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect on
First Northern.
4.16 No Violation of Law. Except as set forth in the First Northern
Disclosure Schedule, neither First Northern, any First Northern Subsidiary nor
any of the assets of First Northern or the First Northern Subsidiaries
materially violate or conflict with any Law, any First Northern Permits, or any
decree, judgment or order, or any zoning, building line restriction, planning,
use or other similar restriction, in each case which would have a Material
Adverse Effect on First Northern.
4.17 Brokers. Except for fees to Keefe, Bruyette & Woods, Inc.,
First Northern's financial advisor, neither First Northern nor any First
Northern Subsidiary has incurred any brokers', finders', financial advisor or
any similar fee in connection with the transactions contemplated by this
Agreement. The First Northern Disclosure Schedule contains a list of all fees to
be paid to such advisor in connection with the transactions contemplated by this
Agreement.
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4.18 Taxes.
(a) Except as disclosed in the First Northern Disclosure
Schedule and except as may arise as a result of the transactions contemplated by
this Agreement: First Northern and the First Northern Subsidiaries have timely
and properly filed all federal, state, local and foreign tax returns (including
but not limited to income, franchise, sales, payroll, employee withholding and
social security and unemployment) which were required to be filed except where
the failure to have filed timely or properly would not have a Material Adverse
Effect on First Northern; First Northern and the First Northern Subsidiaries
have paid or made adequate provision, in reserves reflected in its financial
statements included in the First Northern Reports in accordance with generally
accepted accounting principles, for the payment of all taxes (including interest
and penalties) and withholding amounts owed by them or assessable against them;
no tax deficiencies have been assessed or proposed against First Northern or any
First Northern Subsidiary and to the Knowledge of First Northern there is no
basis in fact for the assessment of any tax or penalty tax against First
Northern or any First Northern Subsidiary.
(b) As of the date of this Agreement, except as disclosed in
the First Northern Disclosure Schedule, there are no fiscal years of First
Northern currently under examination by the IRS or the Wisconsin Department of
Revenue, and none of the open years has been examined by the IRS or the
Wisconsin Department of Revenue. First Northern and the First Northern
Subsidiaries have not consented to any extension of the statute of limitation
with respect to any open tax returns.
(c) There are no tax Liens upon any property or assets of
First Northern or any First Northern Subsidiary except for Liens for current
taxes not yet due and payable.
(d) As soon as practicable after the date of this Agreement,
First Northern and the First Northern Subsidiaries will deliver to Mutual
correct and complete copies of all tax returns and reports of First Northern
filed for all periods not barred by the applicable statute of limitations. No
examination or audit of any tax return or report for any period not closed by
audit or not barred by the applicable statute of limitations has occurred, no
such examination is in progress and, to the Knowledge of First Northern, no such
examination or audit is planned.
(e) Except where the failure to withhold, pay or file would
not have a Material Adverse Effect on First Northern, First Northern and the
First Northern Subsidiaries have properly withheld and timely paid all
withholding and employment taxes which they were required to withhold and pay
relating to salaries, compensation and other amounts heretofore paid to their
employees or other Persons. All Forms W-2 and 1099 required to be filed with
respect thereto have been timely and properly filed.
4.19 Real Estate. The First Northern Real Estate: (a) constitutes
all real property and improvements (or interest therein, including without
limitation easements, licenses or similar arrangements authorizing First
Northern or a First Northern Subsidiary to place, maintain, operate and/or use
an automated teller machine or similar device on real property of a third-
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party) leased or owned by First Northern or any First Northern Subsidiary; (b)
other than with respect to First Northern or any First Northern Subsidiary as
lessee, is not subject to any leases or tenancies of any kind; (c) is not in the
possession of any adverse possessors; (d) has direct access to and from a public
road or street; (e) except for violations that would not have a Material Adverse
Effect on First Northern, is used in a manner which is consistent with
applicable Law; (f) is, and has been since the date of possession thereof by
First Northern or any First Northern Subsidiary, in the peaceful possession of
First Northern or any First Northern Subsidiary; (g) is served by all water,
sewer, electrical, telephone, drainage and other utilities required for the
normal operations of the Buildings of First Northern and the First Northern
Subsidiaries and the First Northern Real Estate; (h) except as disclosed in the
First Northern Disclosure Schedule, to the Knowledge of First Northern, is not
located in an area designated as a flood plain or wetland; (i) is not subject to
any outstanding special assessment; (j) is not subject to any zoning, ordinance,
decrees or other Laws which would materially restrict or prohibit Mutual from
continuing the operations presently conducted thereon by First Northern or any
First Northern Subsidiary; (k) is not subject to any interest of any Person
under an easement, contract, option or mineral rights or other agreements which
would have a Material Adverse Effect on First Northern; (l) is not subject to
any presently pending condemnation proceedings, nor to First Northern's
Knowledge, are such proceedings threatened against the First Northern Real
Estate.
4.20 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required in connection with the
execution, delivery and performance of this Agreement by First Northern or any
First Northern Subsidiary, except for the Regulatory Approvals and except for
consent the failure of which to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on First Northern.
4.21 No Pending Acquisitions. Except for this Agreement, First Northern
is not a party to or bound by any agreement, undertaking or commitment with
respect to an Acquisition on the date of this Agreement.
4.22 Labor Matters.
(a) Except as disclosed on the First Northern Disclosure Schedule
(or in an updated First Northern Disclosure Schedule with respect to vacations
in (iii) below), there is no present or former employee of First Northern or any
First Northern Subsidiary who has any claim against any of such entities
(whether under Law, under any employee agreement or otherwise) on account of or
for: (i) overtime pay, other than overtime pay for the current payroll period;
(ii) wages or salaries, other than wages or salaries for the current payroll
period; or (iii) vacations, sick leave, time off or pay in lieu of vacation,
sick leave or time off, other than vacation, sick leave or time off (or pay in
lieu thereof) earned in the twelve-month period immediately preceding the date
of this Agreement or incurred in the ordinary course of business and appearing
as a liability on the most recent financial statements included in the First
Northern Reports.
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(b) There are no pending and unresolved claims by any Person
against First Northern or any First Northern Subsidiary arising out of any Law
relating to discrimination against employees or employee practices or
occupational or safety and health standards. There is no pending or, to the
knowledge of First Northern, threatened, nor has First Northern or any First
Northern Subsidiary, since January 1, 1995, experienced any, labor dispute,
strike or work stoppage which affected, affects or may affect the business of
First Northern or any First Northern Subsidiary or which did, may or would
interfere with the continued operation of First Northern or any First Northern
Subsidiary.
(c) Neither First Northern nor any First Northern Subsidiary
is a party to any collective bargaining agreement. There is not now pending or,
to the Knowledge of First Northern, threatened, any charge or complaint against
First Northern or any First Northern Subsidiary by or before the National Labor
Relations Board or any representative thereof, or any comparable state agency or
authority. No union organizing activities are in process, or to First Northern's
Knowledge contemplated, and no petitions have been filed for union organization
or representation of employees of First Northern or any First Northern
Subsidiary, and First Northern and the First Northern Subsidiaries have not
committed any unfair labor practices which have not heretofore been corrected
and fully remedied.
4.23 Indebtedness. Except for the First Northern Existing
Indebtedness, First Northern has no Indebtedness.
4.24 Permits. The Permits described on the Disclosure Schedule
constitute all Permits which First Northern and the First Northern Subsidiaries
currently have and need for the conduct of their respective businesses as
currently conducted, except for such Permits the failure of which to have would
not have a Material Adverse Effect on First Northern.
4.25 Disclosure. No statement of fact by First Northern contained
in this Agreement, the First Northern Disclosure Schedule, or any other document
furnished or to be furnished by First Northern contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or therein contained, in
the light of the circumstances under which they were made, not misleading as of
the date to which it speaks.
4.26 Information Supplied. None of the information supplied or to
be supplied by First Northern for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement will, at the date the Registration
Statement becomes effective, the date(s) the Proxy Statement is mailed to the
First Northern Shareholders and at the time(s) of the First Northern Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations of the SEC
thereunder.
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4.27 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of First Northern Common Stock is the only
vote of the holders of any class or series of capital stock or other securities
of First Northern necessary to approve the Merger, this Agreement and the
transactions contemplated by this Agreement.
4.28 Opinion of Financial Advisor. First Northern has received the
opinion of Keefe, Bruyette & Woods, Inc. as of the date of this Agreement, to
the effect that the consideration to be received in the Merger by the First
Northern Shareholders is fair to the First Northern Shareholders from a
financial point of view.
4.29 Environmental Protection.
(a) Except as set forth in the First Northern Disclosure
Schedule, First Northern and the First Northern Subsidiaries: (i) are in
material compliance with all applicable Environmental Laws; and (ii) have not
received any communication (written or oral), from a governmental authority or
other Person, that alleges that First Northern is not in compliance with
applicable Environmental Laws.
(b) Except as set forth in the First Northern Disclosure
Schedule, First Northern and the First Northern Subsidiaries have obtained all
Environmental Permits, and all such Environmental Permits are in good standing
and First Northern and the First Northern Subsidiaries are in material
compliance with all terms and conditions of their Environmental Permits.
(c) Except as set forth in the First Northern Disclosure
Schedule, there is no Environmental Claim pending or, to the Knowledge of First
Northern, threatened against First Northern, any First Northern Subsidiary or
against any Person whose liability for any Environmental Claim First Northern or
any First Northern Subsidiary has or may have retained or assumed either
contractually or by operation of Law, or against any real or personal property
or operations which First Northern or any First Northern Subsidiary owns, leases
or manages.
(d) Except as set forth in the First Northern Disclosure
Schedule, there have been no Releases of any Hazardous Material by First
Northern or by any Person on real property owned (including REO properties of
the Bank), used, leased or operated by First Northern or any of the First
Northern Subsidiaries.
(e) No real property at any time owned (including REO
properties of the Bank), operated, used or controlled by First Northern or any
First Northern Subsidiary is currently listed on the National Priorities List or
the Comprehensive Environmental Response, Compensation and Liability Information
System, both promulgated under the CERCLA, or on any comparable state list, and,
except as described in the First Northern Disclosure Schedule, First Northern
has not received any written notice from any Person under or relating to CERCLA
or any comparable state or local Law relating to potential listing on such
lists.
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(f) Except as set forth in the First Northern Disclosure
Schedule, to the Knowledge of First Northern, no off-site location at which
First Northern or any First Northern Subsidiary has disposed or arranged for the
disposal of any waste is listed on the National Priorities List or on any
comparable state list and neither First Northern nor any First Northern
Subsidiary has received any written notice from any Person with respect to any
off-site location, of potential or actual liability or a written request for
information from any Person under or relating to CERCLA or any comparable state
or local Law.
4.30 Year 2000 Compliant. All of the material computer hardware and
software systems of, or used by, First Northern and the First Northern
Subsidiaries (including, without limitation, those related to their facilities,
equipment, quality control activities, accounting and bookkeeping records and
record keeping activities) are Year 2000 Compliant, except where the failure to
be Year 2000 Compliant would not have a Material Adverse Effect on First
Northern.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MUTUAL AND MERGER CORP.
Mutual and Merger Corp. hereby jointly and severally represent and
warrant to First Northern that:
5.1 Organization and Capitalization; Business.
(a) Mutual is a mutual savings bank duly organized, validly
existing and in good standing under Chapter 214 of the Wisconsin Statutes. The
deposits of Mutual are insured by the SAIF of the FDIC as permitted by federal
Law, and Mutual has paid all premiums and assessments required thereunder.
Mutual is a member in good standing of the FHLB of Chicago.
(b) Mutual has full corporate power and authority and those
Permits necessary to carry on its business as it is now conducted and to own,
lease and operate its assets and properties.
(c) Merger Corp. is a corporation duly organized, validly
existing and in active status under the Laws of the State of Wisconsin. Prior to
the date of this Agreement, Merger Corp. engaged in no business other than
matters necessary to the organization and incorporation of Merger Corp. and to
authorize Merger Corp. to enter into, execute and deliver this Agreement. The
authorized capital stock of Merger Corp. consists of 9,000 shares of common
stock, $.01 par value per share. As of the date of this Agreement, 100 shares of
Merger Corp.'s common stock are issued and outstanding, all of which are duly
authorized, validly issued, fully paid, and non-assessable, except as otherwise
provided by Section 180.0622(2)(b), and are owned by Mutual.
(d) Prior to Closing, the Articles of Incorporation of Merger
Corp. will be changed so that the authorized capital stock of Survivor may
include shares of preferred stock,
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$.01 par value, and will include at least a sufficient number of shares of
Survivor Common Stock to permit the Merger and the Restructuring. Upon
completion of the Restructuring, not less than 51% of shares of Survivor Common
Stock will be owned by MHC. All the outstanding shares of Survivor Common Stock,
and all shares of Survivor Common Stock to be issued in the Merger, will be duly
authorized, validly issued, fully paid and non-assessable, except as otherwise
provided by Section 180.0622(2)(b).
(e) Copies of the Articles of Incorporation and Bylaws of
Mutual and of Merger Corp. have been delivered to First Northern. Such copies
are complete and correct copies of such documents, and are in full force and
effect. Neither Mutual nor Merger Corp. are in violation of any of the
provisions of their Articles of Incorporation or Bylaws.
5.2 Authorization; Enforceability. The entering into, execution,
delivery and performance of this Agreement and all of the documents and
instruments required by this Agreement to be executed and delivered by Mutual or
Merger Corp. are within the corporate power of Mutual or Merger Corp., as the
case may be, and: (a) have been duly and validly authorized by the requisite
vote of the Board of Directors of Mutual and, where required, by the Board of
Directors and sole shareholder of Merger Corp.; and (b) upon receipt of all
Regulatory Approvals, shall be duly and validly authorized by all necessary
corporate action on the part of both Mutual and Merger Corp. This Agreement is,
and the other documents and instruments required by this Agreement to be
executed and delivered by Mutual or Merger Corp. will be, when executed and
delivered by Mutual or Merger Corp., as the case may be, the valid and binding
obligations of Mutual or Merger Corp., as the case may be, enforceable against
Mutual or Merger Corp., as the case may be, in accordance with their respective
terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar Laws generally
affecting the rights of creditors and subject to general equity principles.
5.3 No Violation or Conflict. Subject to the receipt of the
Regulatory Approvals, the execution, delivery and performance of this Agreement
and all of the documents and instruments required by this Agreement to be
executed and delivered by Mutual or Merger Corp. do not and will not conflict
with or result in a breach of any Law or the Articles of Incorporation or Bylaws
of Mutual or Merger Corp. or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any Contract
of Mutual or Merger Corp. or any Permit held by or the creation of any Lien upon
any of the properties or assets of Mutual or Merger Corp.
5.4 Litigation. Except for the Mutual Existing Litigation: (a)
neither Mutual nor any Mutual Subsidiary is subject to any continuing order of,
or written agreement or memorandum of understanding with, or, to the Knowledge
of Mutual, any continuing material investigation by, any federal or state
savings and loan or insurance authority or other governmental entity, or any
judgment, order, writ, injunction, decree or award of any governmental entity or
arbitrator, including, without limitation, cease and desist or other orders of
any savings and loan regulatory authority; (b) there is no claim, litigation,
arbitration, proceeding, governmental investigation,
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citation or action of any kind pending or, to the Knowledge of Mutual, proposed
or threatened, against or relating to Mutual or any Mutual Subsidiary, nor is to
the Knowledge of Mutual is there any basis for any such material action; (c)
there are no actions, suits or proceedings pending or, to the Knowledge of
Mutual, proposed or threatened, against Mutual by any Person which question the
legality, validity or propriety of the transactions contemplated by this
Agreement; and (d) there are no uncured material violations or violations with
respect to which material refunds or restitutions may be required, cited in any
compliance report to Mutual or any Mutual Subsidiary as a result of an
examination by any regulatory authority.
5.5 Brokers. Except for fees to Ryan, Beck & Co. and RP Financial,
L.L.C., Mutual's marketing and financial advisors, neither Mutual nor Merger
Corp. has incurred any brokers', finders', financial advisor or any similar fee
in connection with the transactions contemplated by this Agreement. The Mutual
Disclosure Schedule contains a list of all agreements with such advisors, copies
of which have been provided to First Northern.
5.6 Governmental Approvals. Other than the Regulatory Approvals, no
permission, approval, determination, consent or waiver by, or any declaration,
filing or registration with, any governmental or regulatory authority is
required in connection with the execution, delivery and performance of this
Agreement by Mutual or Merger Corp.
5.7 Disclosure. No statement of fact by Mutual contained in this
Agreement, the Omaha Disclosure Schedule or any other document furnished or to
be furnished by Mutual contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein contained, in the light of the
circumstances under which they were made, not misleading as of the date to which
it speaks.
5.8 Information Supplied. None of the information supplied or to be
supplied by Mutual for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement will, at the date the Registration
Statement becomes effective, the date(s) the Proxy Statement is mailed to the
First Northern Shareholders and at the time(s) of the First Northern Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
5.9 Opinion of Financial Advisor. Mutual has received the opinion of
RP Financial, L.L.C., as of the date of this Agreement, to the effect that the
consideration to be paid in the Merger by Mutual is fair to Mutual and its
members from a financial point of view.
5.10 Cash Payment. Mutual has sufficient funds or has financing
arranged as part of the Restructuring to pay the cash payment required under
Section 2.8 of this Agreement and such payment will not cause Mutual or Survivor
to fail to meet any regulatory capital requirements to which it is subject.
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5.11 Compliance with Laws. Mutual is in compliance in all material
respects with all applicable Laws.
5.12 Consummation. Mutual has no reason to believe that it will be
unable to obtain the Regulatory Approvals.
5.13 Banking Reports; Books and Records.
(a) Since January 1, 1997, Mutual has filed all reports,
together with any amendments required to be made with respect thereto, that were
and are required to be filed under any Law with: (i) the OTS; (ii) the FHLB of
Chicago; (iii) the FDIC; (iv) the Wisconsin Agency; and (v) any other applicable
state securities or savings bank authorities (all such reports and other
documents are collectively referred to herein as the "Mutual Reports"). When
filed, each of the Mutual Reports complied as to form and substance in all
material respects with the requirements of applicable Laws.
(b) Each of the consolidated audited financial statements and
consolidated unaudited interim financial statements (including, in each case,
any related notes thereto) of Mutual included in the Mutual Reports have been or
will be, as the case may be, prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto and except with respect to consolidated
unaudited interim statements) and each fairly presents the consolidated
financial condition of Mutual as of the respective dates thereof and the
consolidated income, equity and cash flows for the periods then ended, subject,
in the case of the consolidated unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein.
(c) The minute books of Mutual and the Mutual Subsidiaries
contain accurate and complete records of all meetings and actions taken by
written consent by their respective shareholders and Boards of Directors
(including all committees of such Boards), and all signatures contained therein
are the true signatures of the Persons whose signatures they purport to be. The
accounting books and records of Mutual: (i) are in all material respects correct
and complete; (ii) are current in a manner consistent with past practice; and
(iii) have recorded therein all the properties and assets and liabilities of
Mutual.
5.14 Absence of Certain Changes. Except as set forth in the Mutual
Disclosure Schedule, since December 31, 1998 there has not been any:
(a) change in the financial condition, properties, business or
results of operations of Mutual or any Mutual Subsidiary having a Material
Adverse Effect on Mutual;
(b) damage, destruction or loss (whether or not covered by
insurance) with respect to any assets of Mutual or any Mutual Subsidiary having
a Material Adverse Effect on Mutual;
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(c) transactions by Mutual or any Mutual Subsidiary outside
the ordinary course of their respective businesses or inconsistent with past
practices, except for the transactions contemplated by this Agreement; or
(d) change in the method of accounting or accounting practices
of Mutual or any Mutual Subsidiary.
5.15 Mutual Existing Contracts. The Mutual Disclosure Schedule
lists and briefly describes each Material Contract (the "Mutual Existing
Contracts") to which Mutual or a Mutual Subsidiary is a party or by which its
assets are bound. Mutual and each Mutual Subsidiary has fully performed each
term, covenant and condition of each Mutual Existing Contract which is to be
performed by it at or before the date hereof, except where such non-performance
would not have a Material Adverse Effect on Mutual.
5.16 Contingent and Undisclosed Liabilities. Mutual and the Mutual
Subsidiaries have no material liabilities of any nature (contingent or
otherwise) except for those which: (a) are disclosed in the Mutual Reports or in
the Mutual Disclosure Schedule or in this Agreement; or (b) arise in the
ordinary course of business since December 31, 1998 and are not required to be
disclosed in the Mutual Reports or pursuant to this Agreement or the Mutual
Disclosure Schedule.
5.17 Taxes.
(a) Except as disclosed in the Mutual Disclosure Schedule and
except as may arise as a result of the transactions contemplated by this
Agreement: Mutual and the Mutual Subsidiaries have timely and properly filed all
federal, state, local and foreign tax returns (including but not limited to
income, franchise, sales, payroll, employee withholding and social security and
unemployment) which were required to be filed except where the failure to have
filed timely or properly would not have a Material Adverse Effect on Mutual;
Mutual and the Mutual Subsidiaries have paid or made adequate provision, in
reserves reflected in its financial statements included in the Mutual Reports in
accordance with generally accepted accounting principles, for the payment of all
taxes (including interest and penalties) and withholding amounts owed by them or
assessable against them; no tax deficiencies have been assessed or proposed
against Mutual or any Mutual Subsidiary and to the Knowledge of Mutual there is
no basis in fact for the assessment of any tax or penalty tax against Mutual or
any Mutual Subsidiary.
(b) As of the date of this Agreement, except as disclosed in
the Mutual Disclosure Schedule, there are no fiscal years of Mutual currently
under examination by the IRS or the Wisconsin Department of Revenue, and none of
the open years has been examined by the IRS or the Wisconsin Department of
Revenue. Mutual and the Mutual Subsidiaries have not consented to any extension
of the statute of limitation with respect to any open tax returns.
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(c) There are no tax Liens upon any property or assets of
Mutual or any Mutual Subsidiary except for Liens for current taxes not yet due
and payable.
(d) As soon as practicable after the date of this Agreement,
Mutual and the Mutual Subsidiaries will deliver to First Northern correct and
complete copies of all tax returns and reports of Mutual filed for all periods
not barred by the applicable statute of limitations. No examination or audit of
any tax return or report for any period not closed by audit or not barred by the
applicable statute of limitations has occurred, no such examination is in
progress and, to the Knowledge of Mutual, no such examination or audit is
planned.
(e) Except where the failure to withhold, pay or file would
not have a Material Adverse Effect on Mutual, Mutual and the Mutual Subsidiaries
have properly withheld and timely paid all withholding and employment taxes
which they were required to withhold and pay relating to salaries, compensation
and other amounts heretofore paid to their employees or other Persons. All Forms
W-2 and 1099 required to be filed with respect thereto have been timely and
properly filed.
5.18 Real Estate. The Mutual Real Estate: (a) constitutes all real
property and improvements (or interest therein, including without limitation
easements, licenses or similar arrangements authorizing Mutual or a Mutual
Subsidiary to place, maintain, operate and/or use an automated teller machine or
similar device on real property of a third-party) leased or owned by Mutual or
any Mutual Subsidiary; (b) other than with respect to Mutual or any Mutual
Subsidiary as lessee, is not subject to any leases or tenancies of any kind; (c)
is not in the possession of any adverse possessors; (d) has direct access to and
from a public road or street; (e) is used in a manner which is consistent with
applicable Law; (f) is, and has been since the date of possession thereof by
Mutual or any Mutual Subsidiary, in the peaceful possession of Mutual or any
Mutual Subsidiary; (g) is served by all water, sewer, electrical, telephone,
drainage and other utilities required for the normal operations of the Buildings
of Mutual and the Mutual Subsidiaries and the Mutual Real Estate; (h) except as
disclosed in the Mutual Disclosure Schedule, to the Knowledge of Mutual, is not
located in an area designated as a flood plain or wetland; (i) is not subject to
any outstanding special assessment; (j) is not subject to any zoning, ordinance,
decrees or other Laws which would materially restrict or prohibit Mutual from
continuing the operations presently conducted thereon by Mutual or any Mutual
Subsidiary; (k) is not subject to any interest of any Person under an easement,
contract, option or mineral rights or other agreements which would have a
Material Adverse Effect on Mutual; (l) is not subject to any presently pending
condemnation proceedings, nor to Mutual's Knowledge, are such proceedings
threatened against the Mutual Real Estate.
5.19 No Pending Acquisitions. Except for this Agreement, Mutual is
not a party to or bound by any agreement, undertaking or commitment with respect
to an Acquisition on the date of this Agreement.
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5.20 Environmental Protection.
(a) Except as set forth in the Mutual Disclosure Schedule,
Mutual and the Mutual Subsidiaries: (i) are in material compliance with all
applicable Environmental Laws; and (ii) have not received any communication
(written or oral), from a governmental authority or other Person, that alleges
that Mutual is not in compliance with applicable Environmental Laws.
(b) Except as set forth in the Mutual Disclosure Schedule,
Mutual and the Mutual Subsidiaries have obtained all Environmental Permits and
all such Environmental Permits are in good standing and Mutual and the Mutual
Subsidiaries are in material compliance with all terms and conditions of their
Environmental Permits.
(c) Except as set forth in the Mutual Disclosure Schedule,
there is no Environmental Claim pending or, to the Knowledge of Mutual,
threatened against Mutual, any Mutual Subsidiary or against any Person whose
liability for any Environmental Claim Mutual or any Mutual Subsidiary has or may
have retained or assumed either contractually or by operation of Law, or against
any real or personal property or operations which Mutual or any Mutual
Subsidiary owns, leases or manages.
(d) Except as set forth in the Mutual Disclosure Schedule,
there have been no Releases of any Hazardous Material by Mutual or by any Person
on real property owned (including REO properties of Mutual), used, leased or
operated by Mutual or any of the Mutual Subsidiaries.
(e) No real property at any time owned (including REO
properties of Mutual), operated, used or controlled by Mutual or any Mutual
Subsidiary is currently listed on the National Priorities List or the
Comprehensive Environmental Response, Compensation and Liability Information
System, both promulgated under the CERCLA, or on any comparable state list, and,
except as described in the Mutual Disclosure Schedule, Mutual has not received
any written notice from any Person under or relating to CERCLA or any comparable
state or local Law relating to potential listing on such lists.
(f) Except as set forth in the Mutual Disclosure Schedule, to
the Knowledge of Mutual, no off-site location at which Mutual or any Mutual
Subsidiary has disposed or arranged for the disposal of any waste is listed on
the National Priorities List or on any comparable state list and neither Mutual
nor any Mutual Subsidiary has received any written notice from any Person with
respect to any off-site location, of potential or actual liability or a written
request for information from any Person under or relating to CERCLA or any
comparable state or local Law.
5.21 Year 2000 Compliant. All of the material computer hardware and
software systems of, or used by, Mutual and the Mutual Subsidiaries (including,
without limitation, those related to their facilities, equipment, quality
control activities, accounting and bookkeeping
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records and record keeping activities) are Year 2000 Compliant, except where the
failure to be Year 2000 Compliant would not have a Material Adverse Effect on
Mutual.
ARTICLE VI
CONDUCT OF BUSINESS BY FIRST NORTHERN PENDING THE MERGER
From and after the date of this Agreement and until the Effective Time,
except as required by this Agreement, or as required for the Merger or the
Restructuring, without the prior written consent of an executive officer of
Mutual, First Northern and the First Northern Subsidiaries shall:
6.1 Carry on in Regular Course. Diligently carry on their business in
the regular course and substantially in the same manner as heretofore conducted
and shall not make or institute any unusual or novel methods of lending,
investing, purchasing, selling, leasing, managing, accounting or operating.
6.2 Use of Assets. Use, manage, operate, maintain and repair all of
their assets and properties in a normal business manner.
6.3 No Default. Not do any act or omit to do any act, or permit any act
or omission to act, which will cause a breach of any of the First Northern
Existing Contracts, except where such breach would not have a Material Adverse
Effect on First Northern and the First Northern Subsidiaries taken as a whole.
6.4 Insurance Policies. Use reasonable efforts to maintain all of its
Insurance Policies in full force and effect, except as mutually agreed to by
First Northern and Mutual.
6.5 Employment Matters. Not: (a) except as described in the First
Northern Disclosure Schedule, grant any increase in the rate of pay of any of
their employees that exceeds $10,000 individually or $100,000 in the aggregate;
(b) institute or amend any Employee Benefit Plan, except as expressly
contemplated under this Agreement; (c) enter into or modify any written
employment arrangement with any Person except as described in Sections 3.11, 7.2
and 7.3; (d) make any discretionary contributions to any of the First Northern
Existing Plans; or (e) make any allocation to the account of any participant(s)
in any of the First Northern Existing Plans, other than in the normal course and
in accordance with the terms of the relevant First Northern Existing Plan or
except as expressly contemplated by this Agreement.
6.6 Contracts and Commitments. Not enter into any contract or
commitment or engage in any transaction not in the usual and ordinary course of
business and consistent with First Northern's normal business practices and not
purchase, lease, sell or dispose of any capital asset, except for such capital
asset transactions which individually do not involve a dollar amount in excess
of $50,000 and which together do not involve an aggregate dollar amount in
excess of $100,000.
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6.7 Indebtedness; Investments. Not create, incur, invest in or assume
any Indebtedness or Investment Securities not in the usual and ordinary course
of business; and not, without the prior written consent of Mutual, incur costs
and expenses in connection with the transactions contemplated by this Agreement
which materially exceed the estimate set forth in the First Northern Disclosure
Schedule pursuant to Section 8.5 of this Agreement.
6.8 Preservation of Relationships. Use their best efforts to preserve
their business organizations intact, to retain the services of their present
officers and key employees and to preserve the goodwill of depositors, borrowers
and other customers, suppliers, creditors and others having business
relationships with First Northern.
6.9 Compliance with Laws. Comply with all applicable Laws, except for
such noncompliances which would not individually or in the aggregate have a
Material Adverse Effect on First Northern and the First Northern Subsidiaries
taken as a whole.
6.10 Taxes. Timely and properly file all federal, state, local and
foreign tax returns which are required to be filed, and shall pay or make
provision for the payment of all taxes owed by it as reflected on such returns.
6.11 Amendments. Not amend First Northern's Articles of Incorporation
or Bylaws, or the Articles of Incorporation or Bylaws of the Bank or any other
First Northern Subsidiary, except as mutually agreed to by First Northern and
Mutual or as required by Law.
6.12 Issuance of Stock; Dividends; Redemptions. Not: (a) issue any
additional shares of stock of any class or grant any warrants, options
(including any options pursuant to any First Northern Stock Option Plan) or
rights to subscribe for or acquire any additional shares of stock of any class
other than the issuance of First Northern Common Stock issuable upon exercise of
First Northern Stock Options outstanding as of the date of this Agreement; (b)
except as provided below, declare or pay any dividend or make any capital or
surplus distributions of any nature, except for First Northern's regular
quarterly cash dividends not exceeding $0.11 per share for each outstanding
share of First Northern Common Stock; or (c) recapitalize or reclassify any of
their capital stock or liquidate in whole or in part.
6.13 Policy Changes. Not make a material change in any lending,
investment, liability, management or other material policies concerning their
business or operations, except as required by Law or as required by the Board of
Directors of First Northern in the exercise of its fiduciary duties.
6.14 Acquisition Transactions. Promptly following the execution of this
Agreement, First Northern shall take affirmative steps necessary to discontinue,
and thereafter not initiate, solicit or knowingly encourage (including by way of
furnishing any information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal, or negotiate with
any person in furtherance of such inquires or to obtain an Acquisition Proposal,
or agree to endorse, or endorse,
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any Acquisition Proposal, or authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by First Northern or any of the First Northern
Subsidiaries to take any such action, and First Northern shall promptly notify
Mutual orally, and confirm in writing, subject to disclosure being consistent
with the fiduciary duties of the Board of Directors of First Northern, all of
the relevant details relating to all inquiries and proposals which First
Northern or a First Northern Subsidiary may receive relating to any of such
matters; provided, however, that nothing contained in this Section 6.14 shall
prohibit the Board of Directors of First Northern from: (a) furnishing or
permitting any of its officers, directors, employees, investment bankers,
financial advisors, attorneys, accountants or other representatives to furnish
information to any party that requests information as to First Northern and/or
the Bank or take any other action if (i) the Board of Directors of First
Northern, upon the written opinion of its legal counsel, determines in good
faith that such action is required for the Board of Directors of First Northern
to comply with its fiduciary duties to shareholders imposed by applicable Laws,
(ii) prior to furnishing such information to such party, First Northern receives
from such party an executed confidentiality agreement in reasonably customary
form, and (iii) First Northern gives Mutual prior written notice that
information will be furnished; or (b) complying with Rules 14d-2 and 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER
7.1 Conditions to Each Parties Obligations to Effect the Merger. The
respective obligations of Mutual and First Northern to effect the transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing and as of the Effective Time of the following conditions
precedent:
(a) No Litigation. No suit, action or other proceeding shall
be pending or overtly threatened before any court in which the consummation of
the transactions contemplated by this Agreement is restrained or enjoined or in
which the relief requested is to restrain, enjoin or prohibit the consummation
of the transactions contemplated by this Agreement and, in either case, where in
the reasonable judgment of either Mutual or First Northern, such suit, action or
other proceeding, is likely to have a material adverse effect with respect to
such party's interest.
(b) Approval of First Northern Shareholders. This Agreement
and the Merger shall have received the requisite approval and authorization of
the First Northern Shareholders.
(c) Regulatory Approvals.
(i) The Merger, this Agreement, the transactions
contemplated hereby, shall have been approved by the OTS, the FDIC, the
Wisconsin Agency, and any other governmental entities whose approval is
necessary, all conditions required to be satisfied prior to the Effective Time
imposed by the terms of such approvals shall have been satisfied, and all
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waiting periods relating to such approvals shall have expired. The
Restructuring, except for the step set forth in Section 2.14(b) of this
Agreement which shall not be a condition precedent to completion of the Merger,
also shall have been approved by the OTS, the FDIC and the Wisconsin Agency, and
any other governmental entity whose approval is necessary in order for Mutual to
proceed with the Restructuring.
(ii) No permission, approval, determination, consent
or waiver received pursuant to Section 7.1(c)(i) of this Agreement shall contain
any condition applicable to Mutual which is, in the reasonable judgment of
Mutual, materially burdensome upon the conduct of Mutual's business or which
would so adversely impact the economic and business benefits of the Merger or
the Restructuring to Mutual so as to render it inadvisable to proceed with the
Merger or the Restructuring.
(d) Restructuring. The Restructuring shall have occurred,
except for any part thereof which can occur only simultaneously with or
subsequent to the Merger and the step set forth in Section 2.14(b) of the
Agreement which shall not be a condition precedent to completion of the Merger.
All such events which shall occur simultaneously with the Closing shall occur
simultaneously with Closing.
(e) Tax Matters. Mutual and First Northern shall have received
(a) an opinion of Quarles & Brady LLP, counsel to Mutual, or a private letter
ruling from the Internal Revenue Service, to the effect that (i) the transfer by
First Northern of its assets to Merger Corp. pursuant to the Merger and, as
described in the definition of the Restructuring, the transfer by MHC of the
stock of Stock Bank to Merger Corp. and the issuance of shares of stock of
Merger Corp. to the public for cash will be treated for federal income tax
purposes as a transaction within the provisions of ss. 351(a) of the Code and
(b) an opinion of Quarles & Brady LLP that the Merger will constitute a
reorganization within the meaning of ss. 368(a) of the Code.
(f) NASDAQ/NMS. Shares of Survivor Common Stock shall have
been approved for quotation on the NASDAQ/NMS.
7.2 Conditions to Obligation of Mutual. The obligation of Mutual to
effect the transactions contemplated by this Agreement shall be subject to the
fulfillment at or prior to the Closing and as of the Effective Time of the
following additional conditions precedent:
(a) Compliance with Agreement. First Northern shall have
performed and complied in all material respects with all of its covenants,
agreements and other obligations under this Agreement which are to be performed
or complied with by it prior to or on the Closing Date and as of the Effective
Time.
(b) Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to Mutual, and First Northern shall have made
available to Mutual for examination the originals or true and
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correct copies of all documents Mutual may reasonably request in connection with
the transactions contemplated by this Agreement.
(c) Representations and Warranties of First Northern. Each of
the representations and warranties of First Northern contained in Article IV of
this Agreement, after giving effect to any update to the First Northern
Disclosure Schedule Change, shall be true and correct, as of the Effective Time
with the same force and effect as though made on and as of the Effective Time,
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such date), and
except for those breaches which individually or in the aggregate do not or would
not be reasonably likely to have a Material Adverse Effect on First Northern.
(d) No Material Adverse Change. During the period from the
date of this Agreement to the Closing Date and as of the Effective Time there
shall not have occurred, and there shall not exist on the Closing Date and as of
the Effective Time, any condition(s) or fact(s) having individually or in the
aggregate a Material Adverse Effect (irrespective of whether any such condition
or fact was disclosed in a First Northern Disclosure Schedule Change) on First
Northern.
(e) Deliveries at Closing. First Northern shall have delivered
to Mutual the following documents, each properly executed and dated the Closing
Date: (i) the First Northern Closing Certificate; and (ii) the First Northern
Counsel Opinion.
(f) Other Documents. First Northern shall have delivered to
Mutual such certificates and documents of officers of First Northern and public
officials as shall be reasonably requested by Mutual to establish the existence
of First Northern and the due authorization of this Agreement and the
transactions contemplated by this Agreement by First Northern.
(g) Accountant Letters. Mutual shall have received a copy of
each of the following letters from Wipfli Ullrich Bertelson LLP, each of which
shall be in form and substance reasonably satisfactory to Mutual and shall
contain information concerning the financial condition of First Northern: (i)
the letter described in Section 3.6 of this Agreement; (ii) a similar letter
dated the Closing Date.
(h) First Northern Replacement Employment Agreements. Except
with respect to First Northern's chief executive officer and up to two
additional First Northern Executives, First Northern shall have delivered to
Mutual, with respect to each of the First Northern Executives who have First
Northern Existing Employment Agreements in effect on the Closing Date, a First
Northern Replacement Employment Agreement in each case dated as of the Closing
Date and executed on behalf of the Bank by a duly authorized officer and by the
appropriate First Northern Executive. The Chief Executive Officer of First
Northern shall have delivered to the Bank and Mutual a waiver, reasonably
acceptable in form and substance to Mutual, of the provisions of his First
Northern Existing Employment Agreement, which would create severance or other
accelerated benefits thereunder as a result of the Merger and the
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transactions relating thereto, and shall have entered into a non-competition
agreement with provisions substantially identical to those of Article III of the
First Northern Replacement Employment Agreement.
(i) Stock Listing. First Northern Common Stock shall continue
to have been listed on the NASDAQ/NMS.
(j) First Northern Stock Options. First Northern shall have,
prior to the Closing Date and with the written consent (if necessary) of the
First Northern Stock Option holder, cashed out each of such holder's First
Northern Stock Options without the exercise thereof at a price equal to the
difference between the Cash Value and the exercise price of such option. In the
event that a holder of a First Northern Stock Option fails to take any action,
the holder of such First Northern Stock Option shall be deemed to have agreed to
have his or her First Northern Stock Option cashed out in accordance with this
subsection 7.2(j). In recognition of the requirement that such options be
converted to cash without an ability to elect stock and not be carried forward
into the Survivor, to the extent that options are cashed out pursuant to this
section 7.2(j), First Northern may provide an additional payment equal to not
more than 25% of such difference between the Cash Value and the exercise price
of any such option; provided, however, that in no event shall the net total
amount of such additional payments, after the expected corporate tax deduction,
to all holders of First Northern Stock Options exceed $755,000. In any event, as
of the Closing Date there shall be no outstanding First Northern Stock Options
other than the Stock Option Agreement.
7.3 Conditions to Obligation of First Northern. The obligation of First
Northern to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing and as of the Effective
Time of the following additional conditions precedent:
(a) Compliance with Agreement. Mutual and Merger Corp. each
shall have performed and complied in all material respects with all of its
covenants, agreements and other obligations under this Agreement which are to be
performed or complied with by it prior to or on the Closing Date and as of the
Effective Time.
(b) Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to First Northern, and Mutual shall have made
available to First Northern for examination the originals or true and correct
copies of all documents which First Northern may reasonably request in
connection with the transactions contemplated by this Agreement.
(c) Representations and Warranties of Mutual and Merger Corp.
Each of the representations and warranties of Mutual and Merger Corp. contained
in Article V of this Agreement, after giving effect to any Mutual Disclosure
Schedule Change, shall be true and correct as of the Effective Time with the
same force and effect as though made on and as of the
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Effective Time, except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date), and except for those breaches which individually or in the aggregate
do not or would not be reasonably likely to have a Material Adverse Effect on
Mutual.
(d) No Material Adverse Change. During the period from the
date of this Agreement to the Closing Date and as of the Effective Time there
shall not have occurred, and there shall not exist on the Closing Date and as of
the Effective Time, any condition(s) or fact(s) having individually or in the
aggregate a Material Adverse Effect (irrespective of whether any such condition
or fact was disclosed in a Mutual Disclosure Schedule Change) on Mutual.
(e) Deliveries at Closing. Mutual shall have delivered to
First Northern the following documents, each properly executed and dated the
Closing Date: (i) the Mutual Closing Certificate; and (ii) the Mutual Counsel
Opinion.
(f) Other Documents. Mutual shall have delivered to First
Northern such certificates and documents of officers of Mutual and of public
officials as shall be reasonably requested by First Northern to establish the
existence of Mutual and the due authorization of this Agreement and the
transactions contemplated by this Agreement by Mutual.
(g) Opinion of Financial Advisor. First Northern shall have
received the opinion of Keefe, Bruyette & Woods, Inc. dated the date on which
the First Northern Proxy Statement is first mailed to First Northern
Shareholders, to the effect that the consideration to be received in the Merger
by the First Northern Shareholders is fair to the First Northern Shareholders
from a financial point of view and such option shall not have been withdrawn as
of the Closing Date.
(h) First Northern Replacement Employment Agreements. Pursuant
to Section 3.11 of this Agreement, the Bank shall have offered to each of the
First Northern Executives who have a First Northern Existing Employment
Agreement a First Northern Replacement Employment Agreement, in each case dated
as of the Closing Date, except as contemplated by Section 7.2(h).
(i) Accountant Letters. First Northern shall have received a
copy of each of the following letters from Ernst & Young LLP, each of which
shall be in form and substance reasonably satisfactory to First Northern and
shall contain information concerning the financial condition of Mutual: (i) the
letter described in Section 3.6 of this Agreement; (ii) a similar letter dated
the Closing Date.
(j) Non-Competition Agreement. The Chief Executive Officer of
Mutual shall have entered into a non-competition agreement with Mutual with
provisions substantively identical to those of Article III of the First Northern
Replacement Employment Agreement, but substituting "Milwaukee County" for "Brown
County."
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ARTICLE VIII
TERMINATION; MISCELLANEOUS
8.1 Termination. This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time prior to the Closing
(whether before or after approval of this Agreement by the First Northern
Shareholders), as follows:
(a) by mutual written agreement of Mutual and First Northern;
(b) by Mutual if any of the conditions set forth in Sections
7.1 or 7.2 of this Agreement shall not have been fulfilled by the Closing, or
within 30 days after receipt of a First Northern Disclosure Schedule Change
indicating a First Northern Material Adverse Effect which cannot be reasonably
expected to be cured;
(c) by First Northern if any of the conditions set forth in
Sections 7.1 or 7.3 of this Agreement shall not have been fulfilled by the
Closing, or within 30 days after receipt of a Mutual Disclosure Schedule Change
indicating a Mutual Material Adverse Effect which cannot be reasonably expected
to be cured;
(d) by either Mutual or First Northern if the Closing has not
occurred on or before 11:59 p.m. on January 16, 2001.
(e) by First Northern, upon five days' prior written notice to
Mutual, if, as a result of an Acquisition Proposal by a Person other than Mutual
or an Affiliate of Mutual, the Board of Directors of First Northern determines
in good faith and upon the written opinion of its legal counsel that its
fiduciary duties to shareholders require that such Acquisition Proposal be
accepted, but in such case subject to all of Mutual's rights hereunder and under
the Stock Option Agreement.
8.2 Rights on Termination; Waiver. The representations, warranties,
covenants, agreements and other obligations of the parties set forth in this
Agreement shall terminate upon the termination of this Agreement pursuant to
Section 8.1 hereof, except that the agreements set forth in Section 3.1, and
Article VIII of this Agreement shall survive any such termination indefinitely,
and each party to this Agreement shall retain any and all remedies which it may
have for breach of contract provided by Law based on another party's willful
failure to comply with the terms of this Agreement. If any of the conditions set
forth in Sections 7.1 and 7.2 of this Agreement have not been satisfied, Mutual
may nevertheless elect to proceed with the consummation of the transactions
contemplated by this Agreement and if any of the conditions set forth in
Sections 7.1 and 7.3 of this Agreement have not been satisfied, First Northern
may nevertheless elect to proceed with the consummation of the transactions
contemplated by this Agreement. Any such election to proceed shall be evidenced
by a certificate signed on behalf of the waiving party by an officer of that
party.
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8.3 Survival of Representations, Warranties and Covenants. The
representations, warranties, covenants, agreements and other obligations of the
parties set forth in this Agreement shall terminate at the Effective Time,
except the covenants, agreements, and other obligations of the parties which by
their terms or nature are contemplated to be performed after the Effective Time
shall survive the Effective Time indefinitely.
8.4 Entire Agreement; Amendment. This Agreement, the Stock Option
Agreement, the Confidentiality Agreement and the other documents referred to in
this Agreement and required to be delivered pursuant to this Agreement
constitute the entire agreement among the parties pertaining to the subject
matter of this Agreement, and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions of the parties, whether
oral or written, and there are no warranties, representations or other
agreements between the parties in connection with the subject matter of this
Agreement, except as specifically set forth in this Agreement. This Agreement
may be amended by the parties at any time before or after approval of this
Agreement by the First Northern Shareholders, except that after such approval no
amendment shall be made without the further approval of the First Northern
Shareholders if such amendment: (a) reduces the consideration to be received by
First Northern Shareholders; or (b) otherwise materially adversely affects the
rights of the First Northern Shareholders. No amendment, supplement,
modification, waiver or termination of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
8.5 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated by this Agreement shall be paid by
the party incurring such expenses. The First Northern Disclosure Schedule and
Mutual Disclosure Schedule includes an estimate by First Northern and Mutual,
respectively, of all costs and expenses incurred or to be incurred by each in
connection with the transactions contemplated by this Agreement. Notwithstanding
the foregoing, in the event Mutual terminates this Agreement pursuant to Section
8.1(b) on account of First Northern having willfully breached one or more of the
conditions set forth in Section 7.2(a) or 7.2(c) of this Agreement, or if First
Northern terminates this Agreement pursuant to Section 8.1(c) hereof on account
of Mutual having willfully breached one or more of the conditions set forth in
Section 7.3(a) or 7.3(c) of this Agreement, then, in addition to any other
rights or remedies such party (the "non-breaching party") shall have against the
other party (the "breaching party") under this Agreement or at law or in equity,
the non-breaching party shall have the right to recover from the breaching
party, up to $500,000 in the case of First Northern's expenses and up to $1.4
million in the case of, Mutual's expenses, all reasonable and necessary expenses
incurred by the non-breaching party exclusively for the purpose of entering into
this Agreement and consummating the transactions contemplated hereby. In
addition, Mutual shall be reimbursed for its expenses, as provided above, in
addition to its other remedies in the event that First Northern terminates this
Agreement pursuant to Section 8.1(e) hereof.
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8.6 Governing Law. This Agreement shall be construed and interpreted
according to the Laws of the State of Wisconsin.
8.7 Assignment. This Agreement and the Stock Option Agreement shall
not be assigned by operation of law or otherwise, except that each of Mutual and
Merger Corp. may assign all or any of its rights hereunder and thereunder to any
Affiliate in connection with the Restructuring or as provided in Section 2.16
hereof, provided that no such assignment shall relieve Mutual or Merger Corp. of
its obligations hereunder.
8.8 Notices. All communications or notices required or permitted by
this Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an officer of a party by personal
delivery or telephonic facsimile transmission (receipt electronically confirmed)
or two days after deposited in the United States mail, certified or registered
mail, postage prepaid, return receipt requested, and addressed as follows,
unless and until any of such parties notifies the others in accordance with this
Section of a change of address:
IF TO MUTUAL OR MERGER CORP.: Mutual Savings Bank
Attn: Michael T. Crowley, Jr.
President and Chief Executive Officer
4949 West Brown Deer Road
Milwaukee, WI 53223
Fax No: (414) 362-6195
with a copy to:
Quarles & Brady LLP
Attention: James D. Friedman
411 East Wisconsin Avenue
Milwaukee, WI 53202
Fax No: (414) 291-3552
IF TO FIRST NORTHERN: First Northern Capital Corp.
Attn: Michael D. Meeuwsen
President and Chief Executive Officer
201 N. Monroe Avenue
Green Bay, WI 54305
Fax No: (920) 437-1581
-61-
<PAGE> 257
with a copy to:
Schiff Hardin & Waite
Attn: Christopher J. Zinski
6600 Sears Tower
Chicago, IL 60606
Fax No.: (312) 258-5600
8.9 Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Table of Contents
and Article and Section headings in this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
8.10 Interpretation. Unless the context requires otherwise, all words
used in this Agreement in the singular number shall extend to and include the
plural, all words in the plural number shall extend to and include the singular,
and all words in any gender shall extend to and include all genders.
8.11 Severability. If any provision, clause, or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement. If, however, any provision of this
Agreement is held invalid by a court of competent jurisdiction, then the parties
hereto shall in good faith amend this Agreement to include an alternative
provision that accomplishes a result which is not materially different.
8.12 Specific Performance. The parties agree that the assets and
business of First Northern as a going concern constitute unique property. There
is no adequate remedy at Law for the damage which any party might sustain for
failure of the other parties to consummate the Merger and the transactions
contemplated by this Agreement, and accordingly, each party shall be entitled,
at its option, to the remedy of specific performance to enforce the Merger
pursuant to this Agreement.
8.13 No Reliance. Except for the parties to this Agreement, any
Indemnified Parties under Section 3.5 of this Agreement and any assignees
permitted by Section 8.7 of this Agreement: (a) no Person is entitled to rely on
any of the representations, warranties and agreements of the parties contained
in this Agreement; and (b) the parties assume no liability to any Person because
of any reliance on the representations, warranties and agreements of the parties
contained in this Agreement.
8.14 Further Assurances. If, at any time after the Effective Time,
any further action is necessary or desirable to carry out the purposes of this
Agreement and to vest Survivor with full
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<PAGE> 258
right, title and possession to all assets, properties, rights, privileges,
powers and franchises of either Merger Corp. or First Northern, the officers of
Survivor are fully authorized to take any such action in the name of Merger
Corp. or First Northern.
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<PAGE> 259
IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Merger to be duly executed as of the day and year first above written.
MUTUAL SAVINGS BANK
By: /s/ Michael T. Crowley, Jr.
-------------------------------------
Michael T. Crowley, Jr.
President and Chief Executive Officer
Attest:
/s/ Eugene H. Maurer, Jr.
-----------------------------------------------
Eugene H. Maurer, Jr., Secretary
OV CORP.
By: /s/ Michael T. Crowley, Jr.
-------------------------------------
Michael T. Crowley, Jr.
President
Attest:
/s/ Eugene H. Maurer, Jr.
-----------------------------------------------
Eugene H. Maurer, Jr., Secretary
FIRST NORTHERN CAPITAL CORP.
By: /s/ Michael D. Meeuwsen
-------------------------------------
Michael D. Meeuwsen
President and Chief Executive Officer
Attest:
/s/ Marla J. Carr
-----------------------------------------------
Marla J. Carr, Secretary
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<PAGE> 260
[KEEFE, BRUYETTE & WOODS, INC.]
APPENDIX B
Proxy Date, 2000
The Board of Directors
First Northern Capital Corp.
201 N. Monroe Avenue
Green Bay, Wisconsin 54305
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the stockholders of First Northern Capital
Corp. ("First Northern") of the total consideration (the "Merger Consideration")
offered in the proposed merger (the "Merger"), whereby Mutual Savings Bank
("Mutual") will acquire First Northern through a newly formed two tier mutual
holding company, Bank Mutual Corporation ("Bank Mutual"), pursuant to the
Agreement and Plan of Merger, dated as of February 21, 2000, between First
Northern, Mutual and a predecessor of Bank Mutual (the "Agreement"). Pursuant to
the terms of the Agreement, each outstanding share of common stock, par value
$1.00 per share, of First Northern will be converted into the right to receive a
number of shares of common stock, par value $0.01 per share, of Bank Mutual
("Bank Mutual Common Stock") and/or cash determined as set forth in the
Agreement. First Northern stockholders may elect to receive either Bank Mutual
Common Stock and/or cash, subject to certain procedures contained in the
Agreement, as to which procedures Keefe, Bruyette & Woods, Inc. ("KBW")
expresses no opinion.
KBW, as part of its investment banking business, is continually engaged in
the valuation of financial institutions and financial institution holding
companies and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for various other purposes. As
specialists in the securities of banking companies, we have experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
our business as a broker-dealer, we may, from time to time purchase securities
from, and sell securities to, First Northern, Mutual and Bank Mutual, and as a
market maker in securities, we may from time to time have a long or short
position in, and buy or sell, debt or equity securities of First Northern or
Bank Mutual for our own account and for the accounts of our customers. To the
extent we have any such position as of the date of this opinion it has been
disclosed to First Northern. We have acted exclusively for the Board of
Directors of First Northern in rendering this fairness opinion and will receive
a fee from First Northern for our services.
In connection with this opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition of First Northern,
Mutual and Bank Mutual and the Merger, including among other things, the
following: (i) the Agreement; (ii) the Annual Reports to Stockholders and Annual
Reports on Form 10-K for the three years ended December 31, 1999 of First
Northern; (iii) certain interim reports to stockholders and Quarterly Reports on
Form 10-Q of First Northern and certain other communications from First Northern
to their stockholders; (iv) First Northern and Mutual's annual and quarterly
financial reports submitted to various regulatory agencies; and (v) other
financial information concerning the businesses and operations of First
Northern, Mutual and Bank Mutual furnished to us by First Northern, Mutual and
Bank Mutual for purposes of our analysis. We have also held discussions with
senior management of First Northern, Mutual and Bank Mutual regarding the past
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<PAGE> 261
and current business operations, regulatory relations, financial condition and
future prospects of their respective companies and such other matters, as we
have deemed relevant to our inquiry. In addition, we have compared certain
financial and stock market information for First Northern with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the banking industry and performed such other studies and analyses as we
considered appropriate.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of First Northern, Mutual and
Bank Mutual as to the reasonableness and achievability of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgments of such managements and
that such forecasts and projections will be realized in the amounts and in the
time periods currently estimated by such managements. We are not experts in the
independent verification of the adequacy of allowances for loan and lease losses
and we have assumed, with your consent, that the aggregate allowances for loan
and lease losses for First Northern and Mutual are adequate to cover such
losses. In rendering our opinion, we have not made or obtained any evaluations
or appraisals of the property of First Northern or Mutual.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of First
Northern and Mutual; (ii) the assets and liabilities of First Northern and
Mutual; and (iii) the nature and terms of certain other merger transactions
involving banking companies. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and knowledge of
the banking industry generally. Our opinion is necessarily based upon conditions
as they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration offered in the Merger is fair, from a
financial point of view, to the stockholders of First Northern.
Very truly yours,
Keefe, Bruyette & Woods, Inc.
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<PAGE> 262
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Bank Mutual will be incorporated under federal law, and indemnification of
its directors will be governed by federal law, and OTS regulations thereunder.
Federal regulations define areas for indemnity coverage by federal savings
banks, such as Mutual Savings (the "Bank") as follows:
(a) Any person against who any action is brought or threatened because
that person is or was a director or officer of the Bank shall be
indemnified by the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by such person in defending or settling
such action, or in enforcing his or her rights to indemnification if the
person attains a favorable judgment in such enforcement action, which
may be advanced in certain instances.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this paragraph are
met:
(i) The Bank shall make the indemnification provided by
subparagraph (a) in connection with any such action which results in a
final judgment on the merits in favor of such officer or director.
(ii) The Bank shall make the indemnification provided by
subparagraph (a) in case of settlement of such action, final judgment
against such director or officer or final judgment in favor of such
director or officer other than on the merits, if a majority of the
disinterested directors of the Bank determines that such a director or
officer was acting in good faith within the scope of his or her
employment or authority as he or she could reasonably have believed
under the circumstances was in the best interest of the Bank or its
members.
(c) As used in this paragraph:
(i) "action" means any judicial or administrative proceeding, or
threatened proceeding, whether civil, criminal, or otherwise, including
any appeal or other proceeding for review;
(ii) "final judgment" means a judgment, decree, or order which is
not appealable and as to which the period for appeal has expired with no
appeal taken:
(iii) "settlement" includes the entry of a judgment by consent or
by confession or a plea of guilty or nolo contendere.
Regulations promulgated by the OTS would subject Bank Mutual to the same
indemnification regulations applicable to the Bank as described above.
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such, and Bank Mutual and the MHC will
continue coverage, which is intended to be increased to reflect Bank Mutual's
status as a publicly-traded company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index following the Signatures page in this Registration
Statement, which Exhibit Index is incorporated herein by reference.
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<PAGE> 263
ITEM 22.UNDERTAKINGS.
Bank Mutual hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referred
to in Item 20 of this Registration Statement, or otherwise, Bank Mutual has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Bank Mutual of expenses
incurred
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<PAGE> 264
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, Bank Mutual will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
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<PAGE> 265
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Village of Brown
Deer, State of Wisconsin, on August 29, 2000.
BANK MUTUAL CORPORATION
(Registrant)
By: /s/ MICHAEL T. CROWLEY, JR.
----------------------------------
Michael T. Crowley, Jr.
Chairman and Chief Executive
Officer of Mutual Savings Bank,
which is forming Bank Mutual
Corporation pursuant to the Plan
of Reorganization
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.*
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MICHAEL T. CROWLEY, JR. Chairman and Chief Executive Officer;
----------------------------------------------------- Director
Michael T. Crowley, Jr.
/s/ EUGENE H. MAURER, JR. Senior Vice President and Chief Financial
----------------------------------------------------- Officer (principal financial officer)
Eugene H. Maurer, Jr.
/s/ MARLENE M. SCHOLZ Controller (principal accounting officer)
-----------------------------------------------------
Marlene M. Scholz
THOMAS H. BUESTRIN** Director
-----------------------------------------------------
Thomas H. Buestrin
MICHAEL T. CROWLEY, SR.** Director
-----------------------------------------------------
Michael T. Crowley, Sr.
R.W. DWYER, JR.** Director
-----------------------------------------------------
R.W. Dwyer, Jr.
HERBERT W. ISERMANN** Director
-----------------------------------------------------
Herbert W. Isermann
WILLIAM J. MIELKE** Director
-----------------------------------------------------
William J. Mielke
DAVID J. ROLFS** Director
-----------------------------------------------------
David J. Rolfs
</TABLE>
---------------
* Each of the above signatures is affixed as of August 29, 2000. Capacities
indicated are with Mutual Savings Bank, which is forming Bank Mutual
Corporation pursuant to the Plan of Reorganization.
** By:/s/ MICHAEL T. CROWLEY, JR.
------------------------------
Michael T. Crowley, Jr.,
attorney-in-fact
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<PAGE> 266
BANK MUTUAL
("BANK MUTUAL" OR THE "REGISTRANT")
EXHIBIT INDEX
TO
FORM S-4 REGISTRATION STATEMENT
The following exhibits are filed with or incorporated by reference in this
Registration Statement:
<TABLE>
<CAPTION>
INCORPORATED HEREIN
EXHIBIT DESCRIPTION BY REFERENCE TO PREVIOUSLY FILED FILED HEREWITH
------- ----------- ------------------- ---------------- --------------
<C> <S> <C> <C> <C>
2.1 -- Agreement and Plan of Appendix A to the Proxy
Merger, dated as of Statement/Prospectus
February 21, 2000, contained in this
by and among Registration Statement
Mutual Savings Bank,
OV Corp. and
First Northern Capital
Corporation
3(i) -- Articles of Exhibit 3(i) to Bank
Incorporation of Bank Mutual's Registration
Mutual Statement on Form S-1,
No. 333-39362, as
amended ("Bank Mutual
S-1")
3(ii) -- Bylaws of Bank Mutual Exhibit 3(ii) to Bank
Mutual S-1
4.1 -- Articles of Exhibit 3(i) above
Incorporation of Bank
Mutual
4.2 -- Stock Issuance Plan of Exhibit 4.2 to
Mutual Savings, as Bank Mutual S-1
amended and restated
July 31, 2000
4.3 -- Plan of Restructuring Exhibit 2.1 to
from Mutual Savings Bank Bank Mutual S-1
to Mutual Holding
Company of Mutual
Savings Bank, as
amended and restated
July 31, 2000
5.1 -- Opinion of Quarles & X
Brady LLP as to the
legality of the
securities being
registered
8.1 -- Opinion of Quarles & X
Brady LLP as to the tax
consequences of the
transaction
23.1 -- Consent of Ernst & X
Young LLP, Bank
Mutual's independent
accountants
23.2 -- Consent of Wipfli X
Ullrich Bertelson LLP,
First Northern's
independent accountants
23.3 -- Consents of Quarles & Contained in Exhibits 5.1
Brady LLP and 8.1
</TABLE>
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<PAGE> 267
<TABLE>
<CAPTION>
INCORPORATED HEREIN
EXHIBIT DESCRIPTION BY REFERENCE TO PREVIOUSLY FILED FILED HEREWITH
------- ----------- ------------------- ---------------- --------------
<C> <S> <C> <C> <C>
23.4 -- Consent of Keefe, X
Bruyette & Woods, Inc.,
financial advisor to
First Northern
23.5 -- Consent of Michael D. X
Meeuwsen (director
designee)
23.6 -- Consent of Ernst & Contained in Exhibit 23.1
Young LLP, First
Northern's former
independent accountants
24.1 -- Powers of Attorney On Signatures
page
99.1 -- Form of proxy to be X
used in connection with
the Special Meeting of
Shareholders of First
Northern
99.2 -- Opinion of Keefe, Appendix B to the Proxy
Bruyette & Woods, Inc. Statement/Prospectus
99.3 -- Election Form and X
instructions
</TABLE>
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