<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
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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<S> <C> <C>
WISCONSIN 6035 39-0491685
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)*
</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:
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<S> <C>
KENNETH V. HALLETT KENNETH R. LEHMAN
QUARLES & BRADY LLP LUSE LEHMAN GORMAN POMERENK
411 EAST WISCONSIN AVENUE & SCHICK, A PROFESSIONAL CORPORATION
MILWAUKEE, WISCONSIN 53202 5335 WISCONSIN AVENUE, N.W., SUITE 400
(414) 277-5000 WASHINGTON, D.C. 20015
(202) 274-2000
</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 to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [ ]
<PAGE> 2
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(c) 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. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.
[ ]
* FEIN of Mutual Savings Bank. Bank Mutual is a corporation in formation
in a regulatory restructuring of Mutual Savings Bank, and has not yet
been assigned an employer ID number.
CALCULATION OF REGISTRATION FEE
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<CAPTION>
========================================================================================================================
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) PRICE (1) FEE (1)
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, $.01 PAR VALUE 8,641,781 SHARES $10.00 $86,417,810 $22,815
========================================================================================================================
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(1) ESTIMATED UNDER RULE 457.
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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PROSPECTUS
[Bank Mutual logo]
PROPOSED HOLDING COMPANY FOR MUTUAL SAVINGS BANK
UP TO 8,641,781 SHARES OF COMMON STOCK
Bank Mutual Corporation is a new corporation that is offering shares of its
common stock for sale. Mutual Savings Bank formed Bank Mutual to own Mutual
Savings Bank as part of a restructuring of its corporate form of organization.
Bank Mutual expects to acquire First Northern Savings Bank in a separate
transaction which will occur at the same time as the restructuring and stock
offering.
The shares of common stock to be issued to the public in this offering and in
the acquisition of First Northern Capital Corp. will represent less than half of
the to-be-outstanding common stock of Bank Mutual. More than half of the shares
of common stock will be issued to Mutual Savings Bancorp, MHC, a new company
formed by Mutual Savings.
The common stock of Bank Mutual will be listed for trading on the Nasdaq
National Market under the symbol "BKMU."
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TERMS OF THE OFFERING
PRICE: $10.00 PER SHARE
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<CAPTION>
Minimum Maximum
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<S> <C> <C>
Number of shares.............................................. 4,633,564 7,178,464
Marketing agent commissions and expenses...................... $ 2,923,000 $ 3,274,000
Net proceeds to Bank Mutual................................... $43,413,000 $68,511,000
Net proceeds per share to Bank Mutual......................... $ 9.37 $ 9.54
</TABLE>
We may sell up to 8,641,781 shares because of
regulatory considerations or changes in
market or economic conditions.
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PLEASE READ THE RISK FACTORS BEGINNING ON PAGE [ ].
THESE SHARES OF 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, AND ARE SUBJECT TO
INVESTMENT AND MARKET RISK.
NONE OF THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION
NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
[ ], 2000
[RYAN, BECK & CO. LOGO]
<PAGE> 4
[Map of Mutual Savings and First Northern Savings branch offices; inside front
cover]
SUMMARY
To more fully understand the offering, you should read this entire
document carefully, including the consolidated financial statements and the
notes to the consolidated financial statements.
OUR RESTRUCTURING, STOCK OFFERING AND FIRST NORTHERN MERGER
Mutual Savings Bank is restructuring into the mutual holding company
form of organization. As part of the restructuring, we formed Bank Mutual, a
stock holding company and Mutual Savings Bancorp, MHC, a mutual holding company,
which we call the MHC. Also as part of the transaction, Mutual Savings will
convert from a mutual to a stock savings bank. At the conclusion of the
restructuring, Bank Mutual will own all of the stock of Mutual Savings and, in
turn, will be partially owned by the MHC. Simultaneously with the restructuring,
we will complete two other transactions--a merger transaction and a stock
offering. As a result of the merger transaction, Bank Mutual will own First
Northern Savings, which will continue to operate under that name. In the stock
offering, Bank Mutual is hereby offering for sale to the public a substantial
portion of the shares of common stock not to be issued to the MHC in the
restructuring.
In significant part, the restructuring is being undertaken to
accommodate the First Northern merger.
MUTUAL
For convenient reference, when we use the term "Mutual" we refer
together to Mutual Savings, Bank Mutual and the MHC, and including First
Northern Savings after the First Northern merger.
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. We seek to
differentiate ourselves from our competitors by:
- creating financial security for our customers in ways that
continually emphasize quality, high value and uncompromising
integrity;
- providing our employees with an environment that encourages and
recognizes professional development, creativity and ambition; and
- supporting our communities in activities that improve the quality
of life for all of their residents.
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 March 31, 2000, it had assets of
$1.7 billion, deposits of $1.3 billion and equity of $163.9 million. By asset
size, it is
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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.
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 restructuring.
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.
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 $2.6
billion at March 31, 2000.
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.
FIRST NORTHERN
First Northern Savings Bank, S.A. is a Wisconsin-chartered stock
savings and loan association, with 19 branches located in northeastern
Wisconsin. First Northern Capital Corp. wholly owns First Northern Savings. At
March 31, 2000, First Northern had assets of $866.1 million, deposits of $567.7
million and shareholders' equity of $77.4 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 the transactions which Mutual contemplates, Bank Mutual will
acquire First Northern Capital Corp. simultaneously with completion of this
offering. Mutual Savings and First Northern have signed a merger agreement for
that acquisition. 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.
Mutual Savings does not expect to complete the restructuring and stock
offering if it does not believe that it will be able to complete the First
Northern merger. Mutual also does not expect to complete the First Northern
merger if it does not believe that it will be able to complete the restructuring
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and stock offering. For further information about First Northern and the merger,
see "The Parties" and "Index to Financial Statements-First Northern Data."
OPERATING STRATEGY
Mutual Savings' operating strategy is to succeed as a well-capitalized,
profitable community-oriented 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.
The following are operating strategy highlights.
- - - Customer Service - Products and Delivery Systems
Mutual provides convenient, quality service to customers. We leverage
our branch network by emphasizing a sales culture and providing
training and software to help our staff identify products that will
benefit their customers. We offer a variety of customer conveniences,
such as ATMs, 24-hour telebanking and a telephone "call center" to
address customer questions. We offer investment and insurance services
in order to attract new customers and build on existing relationships.
First Northern Savings offers similar customer services. Both banks
expect to establish internet banking services for retail and business
customers.
- - - Statewide Franchise
Our business plan includes building a state-wide banking organization.
To that end, we acquired First Federal Savings of Eau Claire in 1997,
which gained us access to favorable markets in western Wisconsin. With
the addition of First Northern, Bank Mutual will have $2.6 billion in
assets and a substantial presence in prosperous, growing northeastern
Wisconsin markets.
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- - - Lending Portfolio
Historically, Mutual Savings has concentrated on residential lending.
At March 31, 2000, 66.86% of our loan portfolio consisted of
one-to-four family residential mortgage loans. Consumer loans,
consisting primarily of home equity loans and lines of credit,
comprised 17.68% of the portfolio. The remainder of the portfolio
included multi-family, construction and commercial real estate mortgage
loans, and commercial business loans. At March 31, 2000,
one-to-four-family residential mortgage loans comprised 60.70% of First
Northern's portfolio, while consumer loans accounted for 25.62% of the
portfolio.
- - - Portfolio Diversification and Business Banking
Though residential loans pose less credit risk than other types of
loans, we have increased our emphasis on non-residential lending in
order to expand business opportunities and achieve the higher yields
and shorter terms of such loans. Consumer loans comprised 9.72% of
Mutual Savings' loan portfolio at December 31, 1995 and had grown to
17.68% of the portfolio at March 31, 2000. In 1999, we hired
experienced business bankers to expand our commercial business lending
and related services, such as deposit products. We enhanced our
commercial real estate capabilities by hiring additional experienced
lenders.
First Northern has also been expanding its consumer loan portfolio and,
in recent years, established a niche in indirect auto lending. Auto
loans comprised almost 50% of its consumer loans at March 31, 2000. In
1999, First Northern Savings commenced commercial business lending. We
believe that the attractive branch systems of both banks will
facilitate continued expansion of consumer, commercial real estate and
commercial business lending, while continuing to support a strong
residential lending presence.
- - - Asset Quality
Though we have diversified the loan portfolio, we remain committed to
conservative loan underwriting and credit review. Additionally, our
investments are comprised of highly-rated securities. As a result of
these practices and a stable economy, at March 31, 2000, our ratio of
non-performing assets to total assets was 0.37%, and our ratio of
allowance for losses to non-performing assets was 109.0%. These ratios
are favorable compared to most savings institutions. At March 31, 2000,
First Northern reported a ratio of non-performing assets to total
assets of 0.08% and a ratio of allowance for losses to non-performing
assets of 610.8%.
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- - - Core Deposits
We promote core deposits, such as savings and checking accounts,
because they are generally a lower cost and more stable source of funds
than time deposits. Additionally, unlike time deposits, they generate
fee income. Over the past several years, we steadily increased our
percentage of core deposits, which at March 31, 2000, accounted for
39.3% of Mutual's deposits. At that date, 37.3% of First Northern's
deposits were core deposits.
- - - Interest Rate Risk
We seek a balance between maximizing yield and limiting interest rate
risk, which is the risk that earnings will be reduced if market
interest rates fluctuate. Financial institutions face such risk because
liabilities generally have shorter terms to repricing than loans. To
limit this risk, we sell most long-term fixed rate loans that we
originate, while keeping in our portfolio the shorter term and
adjustable-rate loans. Additionally, we invest in adjustable-rate and
short-term securities. First Northern follows a similar policy.
- - - Cost Control
Controlling overhead expense is important to profitability. One of our
goals is to maintain a reasonable efficiency ratio, which is calculated
as net interest expense (excluding amortization of intangible assets)
to the sum of net interest income plus non-interest income. This ratio
was an annualized 61.37% at March 31, 2000. For First Northern, this
ratio was 59.45%.
- - - Capital Strength
By following the above business practices, Mutual Savings is
financially strong. Our equity to assets ratio was 9.41% at March 31,
2000. At that date, First Northern's ratio was 8.94%.
- - - Profitable Core Operations
Our core earnings primarily consists of net interest income, operating
expenses and non-interest income. Our business practices have resulted
in Mutual achieving increasing core earnings over the last several
years. In 1999, we recorded a charge, unrelated to core operations,
which reduced our results by $13.6 million. The charge was a special
write-off of impaired intangible assets related to the acquisition of
First Federal. Excluding the amortization of intangible assets, Mutual
Savings' return on average assets for 1999 was 0.63%. Mutual's
annualized return on assets, excluding amortization of intangible
assets, was 0.75% at March 31, 2000. For First Northern, these returns
were 0.96% and 0.78%, respectively.
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THE FIRST NORTHERN MERGER
Bank Mutual will acquire First Northern Savings in a merger
transaction. The consideration payable to First Northern shareholders will be
paid partly in cash and partly in Bank Mutual common stock. Before the merger
closes, Mutual will determine the relative proportion between cash and stock,
but the stock portion must be between 40% and 70% of the total consideration
paid. In this prospectus, we assume that 40% of the consideration will be Bank
Mutual stock; in that case, Bank Mutual will issue approximately 5,143,685
shares and pay approximately $77.2 million in cash. We also assume in all
calculations relating to the First Northern merger that the number of First
Northern shares outstanding is the number outstanding as of March 31, 2000.
The 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 merger will be accounted for as a purchase. Initially after the
restructuring, Bank Mutual expects to maintain First Northern Savings as a
subsidiary separate from Mutual Savings.
DESCRIPTION OF OUR STRUCTURE AFTER THE RESTRUCTURING
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, the offering and the First Northern merger:
The MHC Public Shareholders
50.1% 49.9%
Bank Mutual
Mutual Savings First Northern Savings
100% 100%
PERSONS WHO CAN ORDER STOCK IN THE OFFERING
Mutual is offering the shares of common stock of Bank Mutual in what we
call a "subscription offering." Subscription rights to purchase stock have been
granted to Mutual Savings' depositors in the order of priority listed below:
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(1) Depositors with accounts at Mutual Savings with total balances of
at least $50 on January 31, 1999;
(2) Our employee stock ownership plan;
(3) Depositors with accounts at Mutual Savings with total balances of
at least $50 on June 30, 2000;
(4) Any depositors of Mutual Savings on , 2000, the voting
record date, who do not qualify in earlier priorities; and
(5) Directors, officers and employees of Mutual Savings who do not
qualify in earlier priorities.
Also, under the First Northern merger agreement and our plan of
restructuring, shares of Bank Mutual common stock will be issued to First
Northern shareholders so that at least 40% of the consideration in the merger is
in the form of Bank Mutual common stock. Therefore, at least 5,143,685 shares
will be issued in the merger separately from shares offered in the stock
offering. However, if shares of Bank Mutual common stock are available after all
orders have been filled in the subscription offering, Bank Mutual may issue any
amount of such available shares to former First Northern shareholders, in lieu
of cash. Under no circumstances, however, will more than 70% of the
consideration in the First Northern merger be paid in shares of common stock.
The shares of Bank Mutual common stock not purchased in the
subscription offering or issued in the First Northern merger may be offered in
what we call a "community offering" in the following order of priority:
(1) "Residents" of the counties in which Mutual Savings or First
Northern Savings maintain an office; and
(2) Other members of the public to whom we deliver a prospectus.
The community offering, should it occur, will take place at the end of
the subscription offering or, at the discretion of Bank Mutual, concurrently
with or during the subscription offering.
TERMS OF THE OFFERING
We are offering for sale between 4,633,564 and 7,178,464 shares of
common stock of Bank Mutual. The number of shares we issue may increase to up to
8,641,781 shares as a result of regulatory considerations or changes in
financial markets. If we increase the number of shares we issue, you will not
have the opportunity to change or cancel your stock order. The offering price is
$10.00 per share. Ryan, Beck & Co., Inc. will use its best efforts to assist us
in selling our stock. Ryan, Beck is not obligated to take or purchase any shares
of common stock in the offering. See "The Restructuring and the Offering the
Offering."
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The offering range is based on an independent appraisal of Mutual's pro
forma market value prepared by RP Financial, LC, an appraisal firm experienced
in appraisals of savings institutions.
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RP Financial has estimated that in its opinion as of June 12, 2000, the
estimated pro forma market value of Mutual, assuming completion of the stock
offering and the First Northern merger, was between $144.5 million and $195.5
million, with a midpoint of $170.0 million.
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 5,143,685 shares to former shareholder of First Northern, the pro
forma market value of Mutual Savings ranged between $195.9 million and $246.9
million, with a midpoint pro forma market value of $221.4 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 percent of outstanding shares, while the MHC's
ownership will equal 50.1 percent. Given the 5,143,685 shares to be issued to
the former shareholders of First Northern, this results in an offering range of
between 4,633,564 and 7,178,464 shares, with a midpoint of 5,906,014 shares.
Following the stock offering and First Northern merger, shares outstanding to
the public will therefore range between 9,777,249 and 12,322,149, with a
midpoint of 11,049,699 shares. Total outstanding shares, held by the MHC and
public owners, will range between 19,593,685 and 24,693,685.
The appraisal was based in part upon Mutual Savings' financial
condition and operations, the financial condition and operations of First
Northern, the effect of the First Northern merger and the effect of the
additional capital Bank Mutual will raise from the sale of common stock. RP
Financial's independent appraisal will be updated before we complete our
restructuring.
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.
LIMITS ON YOUR PURCHASE OF THE COMMON STOCK
Your orders for common stock will be limited in the following ways:
- the minimum order is 25 shares;
- in each category of the offering, the maximum amount that an
individual may purchase is $1,000,000;
- in all categories of the offering combined the total amount that
an individual may purchase acting together with others is
$1,000,000; and
- if we receive orders for a greater number of shares than we are
offering, we will allocate the shares that we issue as described
in "The Restructuring and The Offering--Limitations on Common
Stock Purchases"; this may result in your receiving a smaller
number of shares than you ordered.
We may increase or decrease either of the maximum purchase limitations at our
discretion. For additional information on these purchase limitations, see "The
Restructuring and The Offering--Limitations on Common Stock Purchases."
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HOW YOU MAY PAY FOR YOUR SHARES
In the subscription offering and the community offering, as shown on
the stock order form, you may pay for your shares by:
- personal check, bank check or money order; or
- authorizing us to withdraw money from certain types of deposit
accounts that you maintain with Mutual Savings.
See "The Restructuring and The Offering -- Procedure for Purchasing Shares in
the Offerings" for additional information on how you may pay for your shares.
DEADLINE FOR ORDERS OF COMMON STOCK
If you wish to purchase shares, you must submit a properly completed
stock order form, together with payment for the shares, to the Stock Information
Center as indicated on the enclosed Stock Order Form. You must submit your Stock
Order Form by mail or overnight courier. You may not drop off your order forms
at any of our branch offices. Stock Order Forms must be received by 10:00 a.m.,
Central Time, on [ ], 2000, unless we extend this deadline. We may extend this
expiration date without notice to you, until [ ], 2000.
YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS
If you order stock in the subscription offering, you will be required
to state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your rights. Federal law
prohibits you from selling or giving away your subscription rights. We intend to
take legal action against anyone who sells or gives away their subscription
rights. We will not accept your order if we have reason to believe that you sold
or transferred your subscription rights. If anyone offers to give you money to
buy stock in your name, in exchange for later transferring the stock, or if
someone requests to share in proceeds upon your future sale of Bank Mutual
stock, please inform our Stock Information Center at (800) .
MARKET FOR THE COMMON STOCK
We expect the common stock to trade on the Nasdaq National Market under
the symbol "BKMU." Ryan, Beck intends to make a market in the common stock but
it is under no obligation to do so.
HOW WE INTEND TO USE THE PROCEEDS WE RAISE FROM THE OFFERING
Assuming we sell 5,906,014 shares in the offering and that we issue
5,143,683 shares to First Northern shareholders, we intend to use the net
proceeds from the offering as follows:
- $28.8 million will be used as part of the cash consideration to
First Northern shareholders in the First Northern merger,
reflecting that 60% of the consideration is paid in cash;
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- $8.8 million will be loaned to the Mutual employee stock ownership
plan to fund its purchase of common stock;
- $18.4 million will be retained by Bank Mutual.
The amount of cash needed for the First Northern merger will vary
between 30% and 60% of the total merger consideration reflecting 40% of their
consideration. Assuming that 60% of the total consideration is paid in cash, the
total cash payment will be approximately $77.2 million. Mutual will obtain the
additional funds to pay the balance of the purchase price, together with the
costs of the merger and required cash-out of First Northern stock options, from
Mutual Savings' and First Northern Savings' existing capital and earnings.
Bank Mutual may use some of the net proceeds of the offering as a
possible source of funds to pay dividends to shareholders, to repurchase common
stock, to finance the possible acquisition of other financial institutions and
other businesses that are related to banking, or for other general corporate
purposes.
OUR POLICY REGARDING DIVIDENDS
We currently plan to pay an annual cash dividend of $0.28 per share,
payable quarterly at $0.07 per share starting for the first full quarter we are
a public company, but not earlier than the first quarter of 2001. We do not
guarantee that we will pay dividends, or that we will not reduce or eliminate
dividends in future periods. Regulations which apply to financial institutions
also may affect the dividends which Mutual can pay.
OUR DIRECTORS, OFFICERS AND EMPLOYEES WILL HAVE ADDITIONAL COMPENSATION AND
BENEFIT PROGRAMS AFTER THE RESTRUCTURING
We are adding a new benefit plan for our officers and employees at no
cost to them, and will enter into new employment agreements.
- Employee Stock Ownership Plan. This plan will cover most of Mutual
Savings' employees, and may be extended to First Northern Savings'
and other Mutual employees. We will lend it money to buy up to 8%
of the shares we sell in the offering and issue in the First
Northern merger, combined. The ESOP will buy the shares either in
the offering or in the open market. The plan will allocate the
stock to employees over a ten-year period as additional
compensation for their services.
- Employment Agreements. Mutual Savings has employment agreements
with Michael T. Crowley, Sr. and Michael T. Crowley, Jr., which
will continue after the restructuring. If Mutual discharges either
of them without cause, or if either of them resigns because Mutual
does not meet its obligations under these agreements, it must make
a termination payment. Mutual is also entering into new employment
agreements with four other executive officers. The new employment
agreements will provide these officers with rights they do not
currently have to receive severance benefits in the event of their
actual or constructive discharge without cause.
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- First Northern Employment Agreements. In connection with the First
Northern merger, Mutual will assume the employment agreement of
First Northern's chief executive officer and offer to replace
existing employment agreements for the other executive officers of
First Northern. These agreements will have provisions similar to
those of the Mutual Savings employment agreements, except that Mr.
Meeuwsen's agreement is for a period of five years and the others
are for three years.
We also plan to add the following stock-based benefit plans for our
directors, officers and employees in the near future:
- Stock Option Plan. Under this plan, Mutual may grant officers,
directors and employees options to purchase Bank Mutual stock at a
price that is set on the date we grant the option. The price that
we set will not be less than our stock's current trading price
when we grant the options, so the options will have realizable
value only if our stock price increases. Recipients of options
will have up to ten years to exercise their options. If we
implement the stock option plan more than one year after
restructuring, it may also include provisions allowing payment
upon a change in control or retirement.
- Management Recognition Plan. This plan will allow selected Mutual
officers, directors and employees to receive shares of our stock,
without making any payment, if they work for us until the end of a
specified service period or attain other performance goals. If we
implement the management recognition plan more than one year after
restructuring, it may also include provisions allowing payment
upon a change in control or retirement.
Assuming we sell 5,906,014 shares in the offering and issue 5,143,685 shares in
the First Northern merger, we expect to ask our shareholders for approval to
grant options to purchase up to 1,104,970 of our shares and make stock grants
under a management recognition plan of up to 441,988 shares under the plans
described above. We will not implement a stock option plan or management
recognition plan unless shareholders approve them. We do not expect to ask Bank
Mutual shareholders to approve these plans until at least six months after we
complete the offering. We expect to obtain the shares we would need for these
plans in the stock offering and/or through stock repurchases on the open market
afterward.
The following table presents the dollar value of the shares that Mutual
expects to grant under the employee stock ownership plan and the contemplated
management recognition plan and of those underlying options to be granted under
the stock option plan, and the percentage of Bank Mutual's outstanding common
stock that will be represented by these shares, all assuming the issuances
discussed above. Mutual based the value of the shares for the employee stock
ownership plan and management recognition plan on a price of $10.00 per share in
this offering.
<TABLE>
<CAPTION>
Percentage of total
common stock issued
Value of in the offering and
Benefit Plan shares to be granted First Northern merger
------------ -------------------- ---------------------
(in millions)
<S> <C> <C>
Employee stock ownership plan............... $8.8 8%
Management recognition plan................. 4.4 4
Stock option plan........................... - * 10
----- --
$13.2 22%
</TABLE>
-12-
<PAGE> 15
------------------
*We expect that options will be granted at then-current market prices.
The fair value of the options will depend upon whether there is
subsequent appreciation in Bank Mutual's stock price, the amount of
that appreciation and other factors.
POSSIBLE CONVERSION OF THE MHC TO STOCK FORM
In the future, the MHC may convert from mutual to capital stock form,
in a transaction commonly known as a "full conversion." If MHC were to undertake
a full conversion, we expect that Bank Mutual's public shareholders would own
the same percentage of the resulting entity as they owned prior to the full
conversion. Any full conversion would need to be conducted under laws and
regulations then in effect, which could affect what Bank Mutual shareholders
would actually receive. The board of directors has no current plan to undertake
a full conversion transaction, and we cannot assure that one will occur. For a
description of this possible full conversion, see "The Restructuring and The
Offering --Possible Conversion of the MHC to Stock Form."
HOW YOU MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE OFFERING
If you have any questions regarding the offering or the restructuring,
please call the Stock Information Center at (800) , Monday through
Friday, between a.m. and p.m. Central Time.
-13-
<PAGE> 16
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 March 31, 2000 and for the three months ended
March 31, 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 prospectus at pages F-1 and ____, 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 MARCH 31, AT DECEMBER 31,
--------------- ----------------------------------------------------------------
2000 1999 1998 1997 1996 1995
--------------- ----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $1,742,184 $1,769,506 $1,872,862 $1,826,080 $1,169,271 $1,205,092
Loans 1,103,826 1,082,795 1,037,589 1,255,082 825,131 790,713
Investment securities available for sale 48,165 57,763 116,534 159,208 172,299 120,081
Mortgage-related securities available for sale 472,456 374,100 270,897 225,906 90,452 196,902
Total cash and cash equivalents 39,700 178,959 330,248 79,064 37,151 55,234
Federal Home Loan Bank stock 13,537 13,537 13,537 20,237 8,001 7,841
Intangible assets 11,261 11,496 29,786 32,589 -- --
Foreclosed real estate, net 2,729 3,018 3,505 159 716 572
Total deposits 1,319,188 1,343,007 1,398,858 1,362,330 994,283 1,004,559
Total borrowings 238,699 242,699 270,822 270,867 -- 25,000
Total equity 163,909 163,820 175,743 163,052 151,294 147,031
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, 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 $ 29,842 $ 29,151 $ 118,302 $ 125,470 $ 115,993 $ 81,674 $ 81,793
Total interest expense 18,179 19,127 75,337 80,017 72,194 49,595 50,390
--------------------- ----------------------------------------------------------
Net interest income 11,663 10,024 42,965 45,453 43,799 32,079 31,403
Provision for loan losses 76 39 350 637 1,065 672 597
--------------------- ----------------------------------------------------------
Net interest income after provision for 11,587 9,985 42,615 44,816 42,734 31,407 30,806
loan losses
--------------------- ----------------------------------------------------------
Non-interest income:
Fees and service charges 1,520 1,374 6,100 6,097 4,758 2,816 2,840
Gain on sale of loans, mortgage-related
securities and investment securities 8 270 655 1,025 474 333 563
Other non-interest income 302 282 1,229 1,318 927 520 406
--------------------- ----------------------------------------------------------
Total non-interest income 1,830 1,926 7,984 8,440 6,159 3,669 3,809
Non-interest expense:
Amortization of intangible assets 235 678 18,290 2,738 1,941 -- --
Other non-interest expense 8,281 8,281 32,989 32,783 30,145 29,904 22,790
--------------------- ----------------------------------------------------------
Income before income taxes 4,901 2,952 (680) 17,735 16,807 5,172 11,825
Income tax expense 1,855 1,111 3,803 6,584 6,622 1,671 4,181
--------------------- ----------------------------------------------------------
Net income (loss) $ 3,046 $ 1,841 $ (4,483) $ 11,151 $ 10,185 $ 3,501 $ 7,644
===================== ==========================================================
</TABLE>
-14-
<PAGE> 17
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, 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 0.70% 0.40% (0.24)% 0.60% 0.62% 0.29% 0.64%
Return on average assets excluding amortization 0.75 0.52 0.63 0.73 0.72 0.29 0.64
of intangible assets
Return on average equity 7.48 4.17 (2.55) 6.57 6.52 2.34 5.42
Return on average equity excluding 7.99 5.49 6.63 7.95 7.59 2.34 5.42
amortization of intangible assets
Net interest rate spread (a) 2.33 1.89 2.03 2.16 2.31 2.09 2.07
Net interest margin (b) 2.78 2.29 2.44 2.58 2.76 2.77 2.69
Non-interest income to average assets 0.42 0.42 0.43 0.46 0.37 0.31 0.32
Non-interest expense (excluding amortization of 1.89 1.79 1.79 1.77 1.82 1.97 1.90
intangible assets) as a percent of average assets
Efficiency ratio (c) 61.37 69.30 64.75 60.83 60.34 83.65 64.72
Average interest-earning assets to average 1.10x 1.09x 1.10x 1.09x 1.10x 1.16x 1.14x
interest-bearing liabilities
CAPITAL RATIOS:
Average equity to average assets 9.35% 9.52% 9.56% 9.17% 9.44% 12.54% 11.72%
Equity to assets 9.41 9.57 9.26 9.38 8.93 12.94 12.20
Leverage capital 9.25 8.00 8.66 7.78 7.40 12.69 12.26
Total risk-based capital 18.76 17.56 18.51 17.02 14.80 24.58 24.04
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.33% 0.28% 0.44% 0.65% 0.79% 0.24% 0.07%
Non-performing assets to total assets 0.37 0.46 0.44 0.55 0.55 0.19 0.07
Allowance for loan losses to non-performing loans 190.42 229.14 144.54 101.86 72.14 201.80 623.53
Allowance for loan losses to non-performing 109.02 88.79 88.74 66.98 71.01 178.15 386.77
assets
Allowance for loan losses to total loans 0.63 0.64 0.64 0.66 0.57 0.48 0.43
OTHER DATA:
Offices 51 52 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
balance of interest-bearing liabilities.
(b) "Net interest margin" means the average cost of 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.
-15-
<PAGE> 18
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 and for First Northern's three months
ended March 31, 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 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 MARCH 31, AT DECEMBER 31,
----------------- --------------------------------------------------------------
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 $866,068 $839,623 $719,713 $667,696 $615,503 $553,467
Loans 766,554 736,880 631,739 593,529 553,995 500,535
Loans held for sale 2,347 1,085 3,075 2,119 2,532 2,989
Investment securities available for sale 9,018 8,444 9,205 6,799 5,635 2,978
Mortgage-related securities available for sale 5,375 5,554 996 932 1,837 2,103
Total cash and cash equivalents 4,712 12,372 7,211 964 3,563 1,274
Federal Home Loan Bank stock 10,750 9,250 5,250 5,250 3,773 3,768
Intangible assets -- -- -- -- -- --
Foreclosed real estate, net 432 382 106 153 189 136
Total deposits 567,693 566,908 542,372 481,788 458,323 449,954
Total borrowings 211,484 185,899 91,977 103,277 77,272 21,000
Total equity 77,428 76,795 76,093 73,817 70,224 72,579
Book value per share $ 9.03 $ 8.98 $ 8.68 $ 8.35 $ 8.01 $ 7.97
Shares outstanding, net of treasury shares 8,573 8,549 8,765 8,846 8,775 9,110
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, 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 $14,596 $12,482 $52,770 $49,690 $46,596 $41,876 $39,205
Total interest expense 9,152 7,140 30,686 29,003 26,491 23,203 22,036
--------------------- ------------------------------------------------------------
Net interest income 5,444 5,342 22,084 20,687 20,105 18,673 16,989
Provision for loan losses 165 60 472 420 320 370 240
--------------------- ------------------------------------------------------------
Net interest income after provision for 5,279 5,282 21,612 20,267 19,785 18,303 16,749
loan losses
--------------------- ------------------------------------------------------------
Non-interest income:
Fees and service charges 503 405 1,829 1,735 1,791 1,548 1,403
Gain on sale of loans, mortgage-related
securities and investment securities 11 168 380 1,051 359 259 970
Other non-interest income 494 347 1,645 1,453 1,126 879 837
--------------------- ------------------------------------------------------------
Total non-interest income 1,008 920 3,854 4,239 3,276 2,686 3,210
Non-interest expense:
Amortization of intangible assets -- -- -- -- -- -- --
Other non-interest expense 3,836 3,488 14,564 14,071 13,374 15,939 12,651
--------------------- ------------------------------------------------------------
Income before income taxes 2,451 2,714 10,902 10,435 9,687 5,050 7,308
Income tax expense 795 923 3,525 3,606 3,651 1,767 2,718
--------------------- ------------------------------------------------------------
Net income $ 1,656 $ 1,791 $ 7,377 $ 6,829 $ 6,036 $ 3,283 $ 4,590
===================== ============================================================
Diluted net income per share $ 0.19 $ 0.20 $ 0.83 $ 0.75 $ 0.66 $ 0.36 $ 0.49
===================== ============================================================
</TABLE>
-16-
<PAGE> 19
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
MARCH 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% 0.99% 0.96% 0.98% 0.94% 0.56% 0.83%
Return on average equity 8.58 9.37 9.60 9.08 8.38 4.61 6.43
Net interest rate spread 2.38 2.74 2.69 2.73 2.83 2.86 2.69
Net interest margin 2.67 3.08 3.00 3.11 3.26 3.31 3.17
Non-interest income to average assets 0.47 0.51 0.50 0.61 0.51 0.46 0.58
Non-interest expense as a percent of average 1.81 1.93 1.89 2.03 2.09 2.72 2.27
assets
Efficiency ratio 59.45 55.70 56.15 56.45 57.20 74.62 62.63
Average interest-earning assets to average 106.60 108.30 107.60 108.70 109.90 110.90 111.60
interest-bearing liabilities
CAPITAL RATIOS:
Average equity to average assets 9.08% 10.55% 9.99% 10.83% 11.24% 12.14% 12.82%
Equity to assets 8.94 10.51 9.15 10.57 11.06 11.41 13.11
Leverage capital 8.10 9.57 8.60 9.60 10.20 10.50 12.90
Total risk-based capital 12.90 15.76 14.00 15.70 16.70 17.80 21.90
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.03% 0.18% 0.04% 0.05% 0.07% 0.13% 0.08%
Non-performing assets to total assets 0.08 0.18 0.08 0.06 0.09 0.15 0.10
Allowance for loan losses to non-performing loans 1,743.35 307.68 1,381.63 1,020.52 722.05 394.76 623.92
Allowance for loan losses to non-performing 610.83 276.65 588.86 781.19 535.75 314.79 470.76
assets
Allowance for loan losses to total loans 0.53 0.56 0.53 0.56 0.53 0.53 0.52
OTHER DATA:
Offices 19 19 19 19 19 20 20
</TABLE>
-17-
<PAGE> 20
RISK FACTORS
You should consider carefully the following risk factors before
deciding whether to invest in Bank Mutual's common stock.
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 "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 March 31, 2000, we owned $520.6 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, 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 decreases.
When rates decrease, fair value generally increases. As of March 31, 2000,
Mutual Savings' available for sale portfolio had an unrealized loss, because
fair value was $520.6 million and amortized cost was $534.7 million. At
March 31, 2000, First Northern Savings had an unrealized gain of $799,000 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.
-18-
<PAGE> 21
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
$50.9 million in intangible assets. Bank Mutual will amortize these intangible
assets over 20 years. As a result, earnings will be reduced by approximately
$2.5 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 hurt
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 $99.0 million of
indirect auto loans. 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.
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
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. 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. For more information regarding your lack of voting
control over Bank Mutual, see "Mutual Savings Bancorp, MHC" and "Restrictions on
Acquisition of Bank Mutual and Mutual Savings."
MUTUAL AND FIRST NORTHERN OPERATIONS 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, any problems, such as may occur in systems conversions, which could
arise if we decide to combine the two operations will be deferred until such
time as the integration occurs. Similarly, Mutual and First Northern may
-19-
<PAGE> 22
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.
THIS TRANSACTION IS UNIQUE, WHICH MAY AFFECT MARKET ACCEPTANCE
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 our operations or 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 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.
THE PRICE TO BOOK RATIO OF THE COMMON STOCK IS HIGHER THAN IN MOST CONVERSION
TRANSACTIONS
The offering price as a percentage of projected post-restructuring
tangible book value of the common stock sold as of March 31, 2000 ranges from
110.6% at the minimum of the offering range to 130.6% at the adjusted maximum of
the offering range. This price to pro forma tangible book value substantially
exceeds that of common stock sold both in:
- most mutual-to-stock conversions that do not involve the formation
of a mutual holding company, that is, "full conversions"; and
- most recent offerings by companies that are reorganizing into the
mutual holding company structure and are conducting a stock
offering.
Prospective investors should be aware that the relatively high price to pro
forma tangible book value may have an unfavorable effect on the after-market
performance of the common stock during the period immediately following the
offering. See "Pro Forma Data."
RECENTLY, THE STOCK MARKET HAS BEEN VOLATILE AND MUTUAL-TO-STOCK CONVERSION
OFFERINGS HAVE NOT PERFORMED WELL IN THE AFTERMARKET
Publicly traded stocks, including stocks of financial institutions,
have recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of the issuer. In
several cases, common stock issued by recently converted financial institutions
has traded at a price that is below the price at which such shares were sold in
the initial offerings of those companies. The purchase price of our common stock
sold in the 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, investor
perceptions of Bank Mutual, and general market for financial institution stocks
and economic conditions. Due to possible continued market volatility, we cannot
assure you that, following the stock offering, the trading price of our
-20-
<PAGE> 23
common stock will be at or above the $10.00 per share price in this stock
offering. You should consider investing in our common stock only if you have a
long-term investment horizon.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The discussions in this prospectus 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 prospectus for other factors which could
affect Bank Mutual's operations in the future. In particular, Bank Mutual's
Management's Discussion and Analyses of Financial Condition and Results of
Operations include discussions of factors affecting it.
THE PARTIES
MUTUAL SAVINGS BANK
Mutual Savings is a Wisconsin-chartered mutual savings bank, founded in
1892. Mutual Savings is the largest mutual savings bank in Wisconsin, and is one
of the largest in the country, based on asset size. Our deposits are insured by
the FDIC up to legal limits. We are examined and regulated by the Wisconsin
Department of Financial Institutions and the FDIC. However, as part of the
restructuring, Mutual Savings is converting into a federally chartered savings
bank. After our conversion to a federal charter, we will be examined and
regulated by the Office of Thrift Supervision. Mutual Savings' executive offices
are located at 4949 West Brown Deer Road, Brown Deer, Wisconsin 53223 and its
telephone number is (414) 354-1500.
Serving over 80,000 households, Mutual Savings offers a full range of
savings, investment, checking and lending services. Our goal is to provide
continual high-quality service to our customers.
For further information on our operations and financial condition, see
"Business of Mutual Savings Bank."
BANK MUTUAL CORPORATION
Bank Mutual is a newly organized federally-chartered corporation. Bank
Mutual has not engaged in any business to date, except in connection with the
proposed restructuring and the First Northern merger. Upon completion of the
restructuring, Bank Mutual will serve as the holding company of Mutual Savings
and First Northern Savings. A majority of the outstanding shares of Bank
Mutual's common stock will be owned by the MHC. Bank Mutual's executive offices
are located at 4949 West Brown Deer Road, Milwaukee, Wisconsin 53223 and its
telephone number is (414) 354-1500.
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 $2.6
billion at March 31, 2000.
MUTUAL SAVINGS BANCORP, MHC
As part of our restructuring, Mutual Savings will organize Mutual
Savings Bancorp, MHC as a federally-chartered mutual savings bank holding
company which will be registered as a savings association holding company with
the OTS. Persons who had liquidation rights with respect to Mutual Savings as of
the date of the restructuring will continue to have liquidation rights solely
with respect to the MHC. Their liquidation rights in the
-21-
<PAGE> 24
MHC will exist as long as they maintain a deposit account at Mutual Savings. The
MHC's executive offices are located at 4949 West Brown Deer Road, Milwaukee,
Wisconsin 53223 and its telephone number is (414) 354-1500.
The MHC's principal assets will be the shares of common stock of Bank
Mutual it receives in the restructuring and approximately $100,000 it receives
as its initial capitalization. At the present time, we expect that the MHC will
not engage in any business activity other than its investment in a majority of
the common stock of Bank Mutual and the management of any cash dividends
received from Bank Mutual. Federal law and regulations require that as long as
the MHC is in existence it must own a majority of Bank Mutual's voting stock.
Federal law, regulations and the plan of restructuring would permit the MHC to
convert to the stock form of organization at some later time, but we have no
current plans for such a conversion. For additional information regarding a
stock conversion, see "The Restructuring and The Offering -- Possible Conversion
of the MHC to Stock Form."
FIRST NORTHERN SAVINGS; THE FIRST NORTHERN MERGER
In a separate transaction which will occur at the same time as Mutual's
restructuring, Bank Mutual will acquire First Northern Capital Corp., which is
the holding company of First Northern Savings Bank, SA, in a merger transaction.
First Northern Savings is a Wisconsin-chartered savings and loan association
headquartered in Green Bay, Wisconsin. First Northern Savings has 19 offices in
northeastern Wisconsin. First Northern had $866.1 million in total assets and
$567.7 million in deposits at March 31, 2000. For further information about
First Northern, including financial statements and management's discussion and
analysis, see "Index to Financial Statements - First Northern Data".
In the First Northern merger, each outstanding share of First Northern
common stock will be converted into either $15 in cash or 1.5 shares of Bank
Mutual common stock. The percent of shares converted into Bank Mutual common
stock will be between 40% and 70% of First Northern's outstanding shares; the
precise number will be chosen by Mutual. The balance of the shares will be
converted into cash. Assuming that, within that range, 40% of the shares of
First Northern common stock are to be converted into shares of Bank Mutual
common stock, approximately 5,143,685 shares of Bank Mutual common stock will be
issued to former First Northern shareholders and approximately $77.2 million
will be paid in cash for the balance of the shares. A portion of the cash 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. See "Pro
Forma Data" and "How We Intend to Use Proceeds from this Offering."
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 First Northern merger remains subject to regulatory and First
Northern shareholder approval and other closing conditions. Mutual does not
intend to complete the restructuring and the related offering if it does not
expect the First Northern merger to occur substantially simultaneously.
Similarly, Mutual does not expect to
-22-
<PAGE> 25
complete the First Northern merger unless the restructuring can be completed.
The First Northern merger will be a tax-free reorganization for Mutual and First
Northern.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds will depend on the total number of shares of common
stock we sell in the offering, which in turn will depend on RP Financial's
appraisal, regulatory and market considerations, and the expenses incurred in
connection with the offering. Although we will not be able to determine the
actual net proceeds from the sale of the common stock until we complete the
offering, we estimate the net proceeds to be between $43.4 million and $82.9
million.
Bank Mutual intends to use the net proceeds from the offering as
follows:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
4,633,564 5,906,014 7,178,464 8,641,781
Shares Shares Shares Shares
---------- ---------- ----------- -----------
(In millions)
<S> <C> <C> <C> <C>
Offering proceeds (c)..................................... $46.3 $59.1 $71.8 $86.4
Offering expenses......................................... (2.9) (3.1) (3.3) (3.5)
----------------------------------------------------------------
Net offering proceeds..................................... 43.4 56.0 68.5 82.9
Transfers from banks (a).................................. 54.5 48.4 43.1 36.5
Identified uses of proceeds:
Cash payments in the First Northern merger (a) (b)... (77.2) (77.2) (77.2) (77.2)
Loan to employee stock ownership plan (c)............ (7.8) (8.8) (9.9) (11.0)
----------------------------------------------------------------
Proceeds remaining for general Bank Mutual
corporate purposes................................... $12.9 $18.4 $24.5 $31.2
- - --------------------
</TABLE>
(a) The cash portion of the purchase price in the First Northern merger
will exceed the proceeds of the stock offering. As a result it is
anticipated that Mutual Savings and First Northern Savings will
transfer funds to Bank Mutual sufficient to complete the transaction
and provide working cash to Bank Mutual.
(b) Assumes 40% of First Northern's shares are converted into Bank Mutual
common stock. If the percentage is higher, the total number of shares
sold in this offering will be lower, but correspondingly less cash will
be used to fund the cash payments in the First Northern merger.
(c) If the employee stock ownership plan buys shares in the market after
the restructuring instead of in the offering, the purchase price of
those shares may be less or more than the $10.00 per share offering
price, which would vary the amount of proceeds used for this purpose.
The net proceeds of the offering are not expected to be sufficient to
fund the entire cash consideration payable in the First Northern merger. The
amount of additional cash needed will depend upon the percent of First Northern
shares that are converted into cash. Mutual expects to obtain the additional
cash needed from Mutual Savings and First Northern Savings.
The net proceeds may vary because total shares sold and total expenses
may be more or less than our estimates. For example:
-23-
<PAGE> 26
- Our expenses would increase if a syndicated community offering
is used to sell shares not purchased in the subscription
offering and community offering.
- The net proceeds will vary if the offering range is adjusted
to reflect a change in the estimated pro forma market value of
Bank Mutual.
- Similarly, if greater than 40% of the consideration in the
First Northern merger is Bank Mutual common stock, a portion
of the offering shares will be provided to First Northern
shareholders rather than sold to subscribers and, therefore,
the net offering proceeds will be less; however, there will be
a corresponding reduction in the amount of proceeds needed for
cash payments to First Northern shareholders.
- Payments for shares made through withdrawals from existing
deposit accounts will not result in the receipt of new funds
for investment by Mutual, but will result in a reduction of
Mutual Savings' deposits and interest expense as funds are
withdrawn from subscribers' accounts.
BANK MUTUAL MAY USE THE PROCEEDS IT RETAINS FROM THE OFFERING:
- to pay dividends to shareholders;
- to repurchase shares of common stock issued in the offering
and the First Northern merger;
- to finance the possible acquisition of financial institutions
or other businesses that are related to banking;
- to make equity or debt investments in Mutual Savings or First
Northern Savings;
- to invest in securities; and
- for general corporate purposes.
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, that 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, these subsidiaries will
not be permitted to pay dividends on their capital stock if, among other things,
their capital would be reduced below the amount required for the liquidation
account. See "The Restructuring and The Offering -- Effects of the Restructuring
- - -- Liquidation Rights."
-24-
<PAGE> 27
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. See "Taxation."
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.
MARKET FOR BANK MUTUAL COMMON STOCK
Mutual has not previously issued common stock, so there is no market
for the common stock. We have received conditional approval to have our common
stock quoted on the Nasdaq National Market under the symbol "BKMU" after the
restructuring. 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.
In connection with Mutual's restructuring, Mutual has obtained an
appraisal from RP Financial which Mutual used in establishing a $10.00 per share
offering price. See "The Restructuring and the Offering -- Stock Pricing and
Number of Shares to be Issued." However, an appraisal is not a prediction of the
future market value of Bank Mutual shares.
-25-
<PAGE> 28
REGULATORY CAPITAL COMPLIANCE
At March 31, 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 March 31, 2000, on a historical and pro
forma basis. We have assumed that the indicated number of shares were sold as of
March 31, 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, $36.3
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 $4.8 million of non-recurring merger-related expenses.
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
-----------------------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
--------- ---------- --------- ---------
4,633,564 5,906,014 7,178,464 8,641,781
Historical Shares Sold Shares Sold Shares Sold Shares Sold
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a)
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
===================================================================================================
GAAP Capital (b) $163,909 9.41% $119,809 7.06% $123,809 7.27% $127,509 7.48% $131,809 7.71%
===================================================================================================
Tier I Leverage Capital:
Capital level $160,879 9.25% $116,779 6.89% $120,799 7.11% $124,479 7.45% $128,779 7.54%
Requirement (c) 69,575 4.00 67,811 4.00 67,971 4.00 68,119 4.00 68,291 4.00
---------------------------------------------------------------------------------------------------
Excess $ 91,304 5.25% $ 48,968 2.89% $ 85,312 3.11% $ 56,360 3.45% $ 60,488 3.54%
===================================================================================================
Tier I Risk-based Capital:
Capital level $160,879 17.98% $116,779 13.18% $120,779 13.62% $124,479 14.03% $128,779 14.50%
Requirement (c) 35,788 4.00 35,435 4.00 35,467 4.00 35,497 4.00 35,531 4.00
---------------------------------------------------------------------------------------------------
Excess $ 84,847 13.98% $ 81,344 9.18% $ 85,312 9.62% $ 88,982 10.03% $ 93,248 10.50%
===================================================================================================
Total Risk based Capital:
Capital level $167,839 18.76% $123,727 13.97% $127,727 14.41% $131,427 14.81% $135,727 15.28%
Requirement (c) 71,576 8.00 70,870 8.00 70,934 8.00 70,993 8.00 71,062 8.00
---------------------------------------------------------------------------------------------------
Excess $ 96,263 10.76% $ 52,857 5.97% $ 56,793 6.41% $ 60,434 6.81% $ 64,665 7.28%
===================================================================================================
</TABLE>
-26-
<PAGE> 29
<TABLE>
<CAPTION>
First Northern Savings
---------------------------------------------------------------------------------------------------
Proforma
-----------------------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
--------- ---------- --------- ---------
4,633,564 5,906,014 7,178,464 8,641,781
Historical Shares Sold Shares Sold Shares Sold Shares Sold
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a)
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital (b)
$70,730 8.23% $105,103 11.67% $107,203 11.88% $108,803 12.03% $111,103 12.26%
===================================================================================================
Tier I Leverage Capital:
Capital level $69,842 8.07% $ 53,333 6.29% $ 55,433 6.52% $ 57,033 6.69% $ 59,333 6.94%
Requirement (c) 34,599 4.00 33,938 4.00 34,022 4.00 34,086 4.00 34,178 4.00
Excess ---------------------------------------------------------------------------------------------------
$35,243 4.07% $ 19,395 2.29% $ 21,411 2.52% $ 22,947 2.69% $ 25,155 2.94%
===================================================================================================
Tier I Risk-based Capital:
Capital level $69,842 12.21% $ 53,333 8.61% $ 55,433 8.94% $ 57,033 9.20% $ 59,333 9.56%
Requirement (c) 22,873 4.00 24,775 4.00 24,792 4.00 24,805 4.00 24,823 4.00
Excess ---------------------------------------------------------------------------------------------------
$46,969 8.21% $ 28,558 4.61% $ 30,641 4.94% $ 32,228 5.20% $ 34,510 5.56%
===================================================================================================
Total Risk based Capital:
Capital level $73,904 12.92% $ 60,281 9.73% $ 62,381 10.06% $ 63,981 10.32% $ 66,281 10.68%
Requirement (c) 45,746 8.00 49,551 8.00 49,584 8.00 49,610 8.00 49,647 8.00
Excess ---------------------------------------------------------------------------------------------------
$28,158 4.92% $ 10,730 1.73% $ 12,797 2.06% $ 14,371 2.32% $ 16,634 2.68%
===================================================================================================
</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%.
-27-
<PAGE> 30
CAPITALIZATION
The following table presents the pro forma historical deposits, borrowings and
capitalization of Mutual Savings and First Northern at March 31, 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) $1,319,188 $567,693 $ 575 $1,887,456
==========================================================
Borrowings $ 238,699 $211,484 $ (1,375) $ 448,808
==========================================================
Shareholders' equity:
Common stock, $.01 par value -
shares to be issued in stock
offering as reflected $ - $ 9,135 $ (9,084) $ 51(d)
Additional paid-in-capital - 8,528 35,142 43,670
Retained earnings (e) 172,792 65,180 (65,280) 172,692
Accumulated other comprehensive income (8,883) 415 (415) (8,883)
Treasury stock, at cost (g) - (5,830) 5,830 -
Less: -
Common stock acquired by the employee
stock ownership plan (h) - - - -
Common stock acquired by the
management recognition plan (i) - - - -
----------------------------------------------------------
Total shareholders' equity $ 163,909 $ 77,428 $(33,807) $ 207,530
==========================================================
<CAPTION>
Bank Mutual - Pro forma Consolidated
Based Upon Sale at $10.00 Per Share
-----------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
4,633,546 5,906,014 7,178,464 8,641,781
Shares Shares Shares Shares (a)
---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits (b) $1,887,456 $1,887,456 $1,887,456 $1,887,456
===============================================================
Borrowings $ 448,808 $ 448,808 $ 448,808 $ 448,808
===============================================================
Shareholders' equity:
Common stock, $.01 par value -
shares to be issued in stock
offering as reflected $ 196(c) $ 221(c) $ 247(c) $ 276(c)
Additional paid-in-capital 130,938 139,462 148,235 158,387
Retained earnings (e) 128,692(f) 132,692(f) 136,442(f) 140,692(f)
Accumulated other comprehensive income (8,883) (8,883) (8,883) (8,883)
Treasury stock, at cost (g)
Less:
Common stock acquired by the employee
stock ownership plan (h) (7,822) (8,840) (9,858) (11,028)
Common stock acquired by the
management recognition plan (i) (3,911) (4,420) (4,929) (5,514)
---------------------------------------------------------------
Total shareholders' equity $239,210 $ 250,232 $ 261,254 $ 273,930
===============================================================
</TABLE>
-28-
<PAGE> 31
BANK MUTUAL CAPITALIZATION FOOTNOTES
(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 5,143,685 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 Ban k Mutual in the amount of $44.0 million, $40.0
million, $36.3 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 4% 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.
-29-
<PAGE> 32
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 March 31, 2000 and cash is paid for 60% of First Northern shares
outstanding on March 31, 2000. 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 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. 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.
-30-
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
Fair Value
Historic Historic Pre-Stock and Pre-Stock
Mutual First Offering Merger Offering
Savings Northern Combined Adjustments Merged
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS (In thousands)
Cash and cash equivalents $ 39,700 $ 4,712 $ 44,412 $(85,472) a, b $ (41,060)
Investments 520,621 50,934 571,555 (560) c 570,995
Loans, net 1,105,947 768,901 1,874,848 (6,625) c 1,868,223
Office properties and equipment 26,509 7,752 34,261 3,340 c 37,601
Intangible assets 11,261 - 11,261 50,883 c 62,144
Other assets 38,146 33,769 71,915 3,927 b,c 75,842
--------------------------------------------------------------------------------------------
Total assets $1,742,184 $866,068 $2,608,252 $(34,507) $2,573,745
============================================================================================
LIABILITIES AND EQUITY
Liabilities:
Deposits $1,319,188 $567,693 $1,886,881 $ 575 c $1,877,456
Borrowings 238,699 211,484 450,183 (1,375) c 448,808
Other liabilities 20,388 9,463 29,851 - 29,851
--------------------------------------------------------------------------------------------
Total liabilities 1,578,275 788,640 2,366,915 (800) 2,366,115
Shareholders' equity 163,909 77,428 241,337 (33,907)a, b, c 207,530
--------------------------------------------------------------------------------------------
Total liabilities and equity $1,742,184 $866,068 $2,608,252 $(34,607) $2,573,645
============================================================================================
</TABLE>
-31-
<PAGE> 34
BANK MUTUAL BANCORP
PRO FORMA BALANCE SHEET FOOTNOTES
MARCH 31, 2000
a. Assumes that First Northern shares are exchanged for 60% cash and 40% Bank
Mutual shares based on a value of $15 per share for each First Northern
share outstanding. Adjusted outstanding First Northern shares used to
calculate book value per common share is 8,572,808, resulting in the
issuance of 5,143,685 shares of Bank Mutual and the payment of $77.2
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 $8.3 million, $6.2 million net of tax effect, which will be
charged to earnings concurrent with the First Northern merger and which
consist of the following (in thousands):
<TABLE>
<S> <C>
Merger related professional fees* $ 925
Costs of acquisition* 500
Buy-back of outstanding options 5,642
Restructuring charges 500
Benefit plan accruals 750
-----------------
8,317
Tax benefit 2,109
-----------------
Total estimated non-recurring charges $6,208
=================
</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 available
information. The following sets forth the purchase accounting adjustments
made to reflect First Northern's assets and liabilities to fair values at
March 31, 2000 (in thousands):
<TABLE>
<S> <C> <C>
Historical net assets $ 77,428
Investments (560)
Loans receivable (6,625)
Office properties and repossessed assets 3,340
Other assets - loan servicing rights 907
Other assets - income tax benefit 911
Deposits (575)
Borrowings 1,375
---------------
76,201
Purchase price - cash $ 77,155
Purchase price - stock* 43,721
Acquisition costs 6,208
-------------
(127,084)
Cost in excess of net assets of business acquired $ 50,882
===============
</TABLE>
* The shares to be issued to First Northern shareholders have been recorded
at fair value, to reflect an approximate 15% discount to reflect the size
of the block of stock issued and the estimated issuance costs and market
discount ordinarily incurred with the issuance of a substantial and
similarly sized block of shares.
-32-
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED
COMBINED PRE-STOCK OFFERING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Restructuring
Historic Historic Pre-Stock Fair Value Pre-Stock
Mutual First Offering and Merger Offering
Savings Northern Combined Adjustments Merged (a)
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $29,842 $14,956 $44,438 $ (980) b, c $43,458
Interest expense 18,179 9,152 27,331 - 27,331
-----------------------------------------------------------------------------------
Net interest income 11,633 5,444 17,107 (980) 16,127
Provision for losses on loans 77 165 242 - 242
-----------------------------------------------------------------------------------
Net interest income after provision for 11,586 5,279 16,865 (980) 15,885
losses on loans
Total noninterest income 1,830 1,008 2,838 - 2,838
Total noninterest expenses 8,515 3,835 12,350 636 d 12,986
-----------------------------------------------------------------------------------
Income before income taxes 4,901 2,452 7,353 (1,616) 5,737
Income taxes 1,855 795 2,651 (392) e 2,259
-----------------------------------------------------------------------------------
Net income $3,046 $ 1,657 $ 4,702 $(1,224) $ 3,478
===================================================================================
</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 $85.6 million of cash outflows
related to the First Northern merger at 6.26%, which represents the yield
on the one year U.S. treasury note as of March 31, 2000.
c Reflects amortization of intangible assets from the First Northern merger
over a 20 year life using the straight-line method.
d Reflects the amortization of the fair market value adjustment on
significant purchase accounting adjustments related to loans receivable of
$6.625 million amortization straight-line over 5 years.
e The following tables sets forth the tax effects of the pro forma
adjustments. (No tax benefit is attributable to amortization of intangible
assets.) All adjustments assume a 40.0% marginal tax rate.
Tax benefit on foregone interest revenue $ 536
Tax accrual on investment discount accretion (144)
--------
$ 392
========
-33-
<PAGE> 36
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 Adjustments Merged (a)
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $118,302 $52,770 $171,072 $(3,637) b, c $167,425
Interest expense 75,337 30,686 106,023 - 106,023
-----------------------------------------------------------------------------------
Net interest income 42,965 22,084 65,049 (3,637) 61,412
Provision for losses on loans 350 472 822 - 822
-----------------------------------------------------------------------------------
Net interest income after provision 42,615 21,612 64,227 (3,637) 60,590
for losses on loans
Total noninterest income 7,984 3,854 11,838 - 11,838
Total noninterest expenses 51,279 d 14,564 65,843 e 2,576 e 68,419
-----------------------------------------------------------------------------------
Income before income taxes (680) 10,902 10,222 (6,213) 4,009
Income taxes 3,803 3,525 7,328 (1,455) f 5,873
-----------------------------------------------------------------------------------
Net income $ (4,483) $ 7,377 $ 2,894 $(4,758) $(1,864)
===================================================================================
</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 $85.6 million of cash outflows
related to the First Northern merger at 5.93%, 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
significant purchase accounting adjustments related to loans receivable of
$6.6 million amortization straight-line over 5 years.
d In 1999, non-interest expense includes a special write off of intangible
assets of $15.6 million which Mutual deemed to be impared. 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.
e Reflects amortization of intangible assets of $51.5 million from the First
Northern merger over a 20 year life using the straight-line method.
Tax benefit on foregone interest revenue $2,030
Tax accrual on investment discount accretion (575)
-------------
$1,455
=============
-34-
<PAGE> 37
PRO FORMA DATA REFLECTING THE STOCK OFFERING
In the following tables, we provide unaudited pro forma condensed
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 not be affected by the restructuring and will be
reflected in the successor stock savings bank's financial statements based upon
their historical amounts.
-35-
<PAGE> 38
BANK MUTUAL CORPORATION
STOCK OFFERING
MARCH 31, 2000
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
-----------------------------------------------------------------
4,633,564 5,906,014 7,178,464 8,641,781
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 $ 46,336 $ 59,060 $ 71,785 $ 86,418
Less marketing fees and other issuance expenses (2,923) (3,098) (3,274) (3,476)
-----------------------------------------------------------------
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (3,911) (4,420) (4,929) (5,514)
-----------------------------------------------------------------
Estimated adjusted net proceeds (b) $ 31,680 $ 42,702 $ 53,724 $ 66,399
=================================================================
Combined net income:
Historical combined (c) $ 3,478 $ 3,478 $ 3,478 $ 3,478
Interest income (d) 297 401 504 623
ESOP (e) (117) (133) (148) (165)
MRP (f) (117) (133) (148) (165)
-----------------------------------------------------------------
Pro forma income 3,541 3,614 3,687 3,771
Amortization of intangible assets 871 871 871 871
-----------------------------------------------------------------
Pro forma net income before amortization of intangible assets $ 4,412 $ 4,485 $ 4,558 $ 4,642
=================================================================
Earnings per share:
Historical combined (c) $ 0.19 $ 0.17 $ 0.15 $ 0.13
Interest income (d) 0.02 0.02 0.02 0.02
ESOP (e) (0.01) (0.01) (0.01) (0.01)
MRP (f) (0.01) (0.01) (0.01) -
-----------------------------------------------------------------
Pro forma basic and diluted earnings per share 0.19 0.17 0.16 0.15
Amortization of intangible assets 0.05 0.04 0.04 0.04
=================================================================
Pro forma basic and diluted earnings per share before
amortization of intangible assets $ 0.24 $ 0.22 $ 0.20 $ 0.18
=================================================================
Pro forma basic P/E ratio (g) 13.0x 14.4x 15.8x 17.2x
=================================================================
Pro forma basic P/E ratio
before amortization of intangible assets (g) 10.4x 11.6x 12.7x 14.0x
=================================================================
Number of shares used in calculating net income per share (h) 18,439,970 20,839,821 23,239,672 25,999,500
=================================================================
Shareholders' equity:
Historical combined (c) $ 207,530 $ 207,530 $ 207,530 $ 207,530
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (e) (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (f) (3,911) (4,420) (4,929) (5,514)
-----------------------------------------------------------------
Proforma shareholder's equity (i) 239,210 250,232 261,254 273,929
Unamortized intangible assets (62,144) (62,144) (62,144) (62,144)
=================================================================
Proforma tangible shareholder's equity (i) $ 177,066 $ 188,088 $ 199,110 $ 211,785
=================================================================
Shareholders' equity per share:
Historical combined $ 10.59 $ 9.37 $ 8.40 $ 7.51
Estimated net proceeds 2.22 2.53 2.77 3.00
Less: Common stock acquired by ESOP (e) (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by MRP (f) (0.20) (0.20) (0.19) (0.19)
-----------------------------------------------------------------
Pro forma shareholders' equity per share (h)(i) 12.21 11.30 10.58 9.92
Unamortized intangible assets 3.17 2.81 2.52 2.25
-----------------------------------------------------------------
Pro forma tangible shareholders' equity per share (h)(i) $ 9.04 $ 8.49 $ 8.06 $ 7.67
=================================================================
Pro forma price to book value ratio 81.90% 88.50% 94.61% 100.91%
=================================================================
Pro forma price to tangible book value ratio 110.62% 117.79% 124.22% 130.55%
=================================================================
Number of shares used in equity per share calculations (h) 19,593,685 22,143,685 24,693,685 27,626,185
=================================================================
</TABLE>
-36-
<PAGE> 39
BANK MUTUAL CORPORATION
PRO FORMA FOR STOCK OFFERING
MARCH 31, 2000
(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 conversion and stock offering is completed or to fill
the order of the ESOP.
(b) Estimated adjusted proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by Mutual
Savings' ESOP and (ii) the value of the shares to
be purchased by Mutual Savings' recognition plan after the conversion 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
$2,345,000 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 and shareholders' equity of
Mutual Savings and First Northern for the three months ended March 31,
2000, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of Bank Mutual at 6.26%, which represents the one year U. S.
treasury note rate at March 31, 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 ESOP
(782,180, 883,976, 985,772, and 1,102,837 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 ESOP from
Bank Mutual. Mutual Savings intends to make quarterly contributions to the
ESOP 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 ESOP is payable over ten years in equal installments
of principle with the ESOP shares having an average fair value of $10.00
per share; (ii) that the loan to the ESOP bears interest at the Mutual
Savings' prime interest rate; (iii) that the ESOP 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) that 19,555, 22,099, 24,644 and 27,571
shares are committed to be released with respect to the quarter ended March
31, 2000, at the minimum, midpoint, maximum and adjusted maximum,
respectively; (v) only the ESOP 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 (f) the effective tax rate is 40.0% for the period.
(f) Bank Mutual assumes that 4% of the shares of common stock issued in the
conversion, stock offering and merger will be purchased by the recognition
plan
-37-
<PAGE> 40
(391,090, 441,988, 492,886, and 551,419 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 quarter ended March 31, 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 19,555,
22,099, 24,644 and 27,571 shares vest for the period ended March 31, 2000
at the minimum, midpoint, maximum and adjusted maximum, respectively.
(g) 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, $102.2 million, $113.3 million and
$126.0 million, respectively, which were invested at 5.93%, 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 $16.86 $15.92 $15.17 $14.48
Pro forma tangible shareholders' equity
per share $13.69 $13.11 $12.65 $12.23
Pro forma price to book value ratio 59.31% 62.83% 65.93% 69.08%
Pro forma price to tangible book value ratio
Pro forma basic earnings per share 73.05% 76.28% 79.05% 81.79%
Pro forma basic earnings per share before $ .24 $ .22 $ .20 $ .19
amortization of intangible assets
Pro forma basic P/E ratio $ .29 $ .26 $ .24 $ .22
Pro forma basic P/E ratio before 10.4x 11.4x 12.2x 13.2x
amortization of intangible assets
8.7x 9.5x 10.3x 11.1x
</TABLE>
(h) 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 ESOP 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
-38-
<PAGE> 41
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 4,633,564 5,906,014 7,178,464 8,641,781
Shares issued to First Northern 5,143,685 5,143,685 5,143,685 5,143,685
shareholders
Shares issued to MHC 9,816,436 11,093,986 12,371,536 13,840,719
--------- ---------- ---------- ----------
Total shares outstanding and used in 19,593,685 22,143,685 24,693,685 27,626,185
calculating book value per share
Less shares sold to ESOP (782,180) (883,976) (985,772) (1,102,837)
Less recognition plan shares (391,090) (441,988) (492,886) (551,419)
Plus ESOP shares 9,777 11,050 12,322 13,785
assumed committed to be released
Plus recognition plan shares assumed 9,777 11,050 12,322 13,785
vested ---------------- -------------- ---------------- ---------------
Number of shares used in calculating
basic and diluted earnings per share 18,439,969 20,839,821 23,239,671 25,999,499
================ ============== ================ ===============
</TABLE>
(i) 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.
-39-
<PAGE> 42
Bank Mutual Corporation
Stock Offering
December 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
----------------------------------------------------------------
4,633,564 5,906,014 7,178,464 8,641,781
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 $ 46,336 $ 59,060 $ 71,785 $ 86,418
Less marketing fees and other issuance expenses (2,923) (3,098) (3,274) (3,476)
----------------------------------------------------------------
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (3,911) (4,420) (4,929) (5,514)
----------------------------------------------------------------
Estimated adjusted net proceeds (b) $ 31,680 $ 42,702 $ 53,724 $ 66,399
================================================================
Combined net income (loss):
Historical combined (c) $ (1,864) $ (1,864) $ (1,864) $ (1,864)
Interest income (d) 1,127 1,519 1,912 2,362
ESOP (e) (469) (530) (591) (662)
MRP (f) (469) (530) (591) (662)
----------------------------------------------------------------
Pro forma income (loss) (1,675) (1,405) (1,135) (825)
Amortization and write-off of intangible assets 20,866 20,866 20,866 20,866
----------------------------------------------------------------
Pro forma net income before amortization and
write-off of intangible assets $ 19,191 $ 19,461 $ 19,731 $ 20,041
================================================================
Earnings (loss) per share:
Historical combined (c) $ (0.10) $ (0.09) $ (0.08) $ (0.07)
Interest income (d) 0.06 0.07 0.08 0.09
ESOP (e) (0.03) (0.03) (0.03) (0.03)
MRP (f) (0.02) (0.02) (0.02) (0.02)
----------------------------------------------------------------
Pro forma basic earnings (loss) per share (0.09) (0.07) (0.05) (0.03)
Amortization and write-off of intangible assets 1.13 1.00 0.90 0.80
----------------------------------------------------------------
Pro forma basic earnings per share before
amortization and write-off of intangible assets
$ 1.04 $ 0.93 $ 0.85 $ 0.77
================================================================
Pro forma basic P/E ratio (g) NM NM NM NM
================================================================
Pro forma basic P/E ratio
before amortization of intangible assets (g) 9.6x 10.7x 11.8x 13.0x
================================================================
Number of shares used in calculating net income per share (i) 18,498,633 20,906,119 23,313,604 26,082,213
================================================================
Shareholder's equity:
Historical combined (h) $ 207,441 $ 207,441 $ 207,441 $ 207,441
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (e) (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (f) (3,911) (4,420) (4,929) (5,514)
----------------------------------------------------------------
Proforma shareholder's equity (j) 239,121 250,143 261,165 273,840
Unamortized intangible assets (63,012) (63,012) (63,012) (63,012)
----------------------------------------------------------------
Proforma tangible shareholder's equity (j) $ 176,109 $ 187,131 $ 198,153 $ 210,828
================================================================
Shareholder's equity per share:
Historical combined (i) $ 10.59 $ 9.37 $ 8.40 $ 7.51
Estimated net proceeds 2.21 2.53 2.78 3.00
Less: Common stock acquired by ESOP (e) (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by MRP (f) (0.20) (0.20) (0.20) (0.20)
----------------------------------------------------------------
Pro forma shareholder's equity per share (i)(j) 12.20 11.30 10.58 9.91
Unamortized intangible assets 3.22 2.85 2.56 2.28
----------------------------------------------------------------
Pro forma tangible shareholder's equity per share (i)(j) $ 8.99 $ 8.45 $ 8.02 $ 7.63
================================================================
Pro forma price to book value ratio 81.90% 88.50% 94.61% 100.91%
================================================================
Pro forma price to tangible book value ratio 111.23% 118.34% 124.69% 131.06%
================================================================
Number of shares used in equity per share calculations (h) 19,593,685 22,143,685 24,693,685 27,626,185
================================================================
</TABLE>
-40-
<PAGE> 43
BANK MUTUAL CORPORATION
PRO FORMA FOR STOCK OFFERING
DECEMBER 31, 1999
(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 conversion 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 conversion
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 conversion 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
$2,345,000 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 year ended December 31, 1999, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of Bank Mutual at 5.93%, 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
ESOP (782,180, 883,976, 985,772 and 1,102,837 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
ESOP from Bank Mutual. Mutual Savings intends to make quarterly
contributions to the ESOP 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 ESOP is payable over ten years in
equal installments of principle with the ESOP shares having an average fair
value of $10.00 per share; (ii) that the loan to the ESOP bears interest at
the Mutual Savings' prime interest rate; (iii) that the ESOP 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 78,218, 88,398, 98,577 and 110,284
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 ESOP 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 4% of the shares of common stock issued in the
conversion, stock offering and merger will be purchased by the recognition
plan (39l,090, 441,988, 492,886, and 551,419 shares at the minimum,
midpoint, maximum
-41-
<PAGE> 44
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 78,218, 88,398, 98,577 and 110,284
shares vested for the year ended December 31, 1999 at the minimum,
midpoint, maximum and adjusted maximum, respectively.
(g) 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, $102.2 million, $113.3 million and
$126.0 million, respectively, which were invested at 5.93%, 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 $16.86 $15.91 $15.16 $14.47
Pro forma tangible shareholders' equity
per share $13.64 $13.07 $12.61 $12.19
Pro forma price to book value ratio 59.33% 62.85% 65.95% 69.09%
Pro forma price to tangible book value ratio 73.32% 76.53% 79.29% 82.02%
Pro forma basic earnings per share $ .06 $ .08 $ .10 $ .11
Pro forma basic earnings per share before
amortization of intangible assets $ 1.22 $ 1.11 $ 1.03 $ .94
Pro forma basic P/E ratio NM NM NM NM
Pro forma basic P/E ratio before
amortization of intangible assets 8.2x 9.0x 9.8x 10.6x
</TABLE>
(h) Consists of equity of Mutual Savings at December 31, 1999 plus capital of
$43,721,000 issued to former shareholders' assuming 40% of the shares are
exchanged less $100,000 of initial capitalization of MHC.
(i) 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 ESOP 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
-42-
<PAGE> 45
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
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 conversion 4,633,564 5,906,014 7,178,464 8,641,781
Shares issued to First Northern 5,143,685 5,143,685 5,143,685 5,143,685
shareholders
Shares issued to MHC 9,816,436 11,093,986 12,371,536 13,840,719
--------- ---------- ---------- ----------
Total shares outstanding and used in 19,593,685 22,143,685 24,693,685 27,626,185
calculating book value per share
Less shares sold to ESOP (782,180) (883,976) (985,772) (1,102,837)
Less recognition plan shares (391,090) (441,988) (492,886) (551,419)
Plus ESOP shares 39,109 44,199 49,289 55,142
assumed committed to be released
Plus recognition plan shares assumed 39,109 44,199 49,289 55,142
vested
----------------------------------------------------------------
Number of shares used in calculating
basic and diluted earnings per share 18,498,633 20,906,119 23,313,605 26,082,214
================================================================
</TABLE>
(j) 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
-43-
<PAGE> 46
established by Mutual Savings or First Northern Savings for federal income
tax purposes in the event of a liquidation.
-44-
<PAGE> 47
CERTAIN EFFECTS OF THE FIRST NORTHERN MERGER ON MUTUAL
On a pro forma basis at March 31, 2000, assuming completion of the
First Northern merger, the restructuring and the stock offering, Bank Mutual
would have had total assets of $2.6 billion, total deposits of $1.9 billion, net
loans of $1.9 billion, total shareholders' equity of $250.2 million. For further
pro forma information, see "Pro Forma Data."
Management of Mutual Savings believes that the First Northern merger
will be advantageous to Mutual's competitive posture, joining two banks with
contiguous market areas and compatible business philosophies and product mix.
The merger will permit Mutual 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.
Mutual considers 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 Mutual to expand products and
services and take advantage of greater cross-selling opportunities.
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.
Mutual Savings believes 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.
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<PAGE> 48
The following table presents the distribution of Mutual Savings' and First
Northern Savings' deposit accounts at March 31, 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 $ 150,901 11.44% 2.41% $72,307 12.80% 2.40%
Interest-bearing demand 89,141 6.76% 1.05% 39,569 7.01% 1.12%
Money market 230,051 17.44% 4.91% 68,253 12.08% 4.55%
Demand 48,403 3.67% 0.00% 30,362 5.38% 0.00%
------------- ---------- ------------ ----------- ----------- --------------
Total 518,496 39.30% 3.06% 210,491 37.27% 2.51%
------------- ---------- ----------- -----------
Certificates:
Time deposits with original
maturities of:
Three months or less 72,565 5.50% 5.06% 22,585 4.00% 5.61%
Over three months to
twelve months 168,333 12.77% 4.99% 86,197 15.26% 5.59%
Over twelve months to
twenty-four months 373,917 28.35% 5.47% 162,620 28.78% 5.60%
Over twenty-four
months to thirty-six months 116,313 8.82% 6.06% 44,587 7.89% 5.66%
Over thirty-six months
to forty-eight months 5,392 0.41% 5.74% 30,759 5.45% 6.00%
Over forty-eight months
to sixty months 61,765 4.68% 5.89% 7,626 1.35% 5.52%
Over sixty months 2,407 0.18% 6.37% -- --
------------- ---------- ------------ ----------- ----------- --------------
Total time deposits 800,692 60.70% 5.46% 354,374 62.73% 5.64%
------------- ---------- ------------ ----------- ----------- --------------
Total deposits $ 1,319,188 100.00% 4.52% $ 567,693 100.00% 4.47%
============= ========== =========== ===========
</TABLE>
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, Mutual expects 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.
Mutual expects 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, Mutual does not expect that changes, if any,
which may be made by First Northern Savings will cause a significant deposit run
off.
-46-
<PAGE> 49
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 portfolio at March
31, 2000. We have used several specific categories in this table than we have in
other tables in this prospectus to help illustrate the comparison between the
two institutions.
<TABLE>
<CAPTION>
--------------------------------------- ----------------------------------------
FIRST NORTHERN
MUTUAL SAVINGS 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 $ 752,259 66.86% $ 478,359 60.70%
Multi-family 53,853 4.79 37,361 4.74
Commercial real estate 55,085 4.9 19,717 2.50
Construction and development 27,908 2.48 41,096 5.21
---------- ---------- --------- --------
Total first mortgage real
estate loans $ 889,105 79.03% 7.28% $ 576,533 73.15% 7.01%
---------- ---------- --------- --------
Consumer and other loans:
Consumer loans:
Fixed equity $ 97,820 8.69% 8.12% $ 63,324 8.04% 8.19%
Home equity lines of credit 51,982 4.62 8.28 18,803 2.39 9.82
Student 28,598 2.54 8.35 * -- --
Automobile 5,492 0.49 8.70 98,973 12.56 7.30
Home improvement 10,449 0.93 8.17 ** -- --
Other 4,607 0.41 8.67 20,693 2.63 9.19
---------- --------- --------- --------- -------- --------
Total consumer loans 198,948 17.68 8.23 201,798 25.62 8.01
---------- --------- --------- --------- -------- --------
Commercial business loans 37,038 3.28 7.81 9,724 1.23 8.53
---------- --------- --------- --------- -------- --------
Total consumer and other loans 235,986 20.97 8.61 211,522 26.85 8.03
---------- --------- --------- --------- -------- --------
Total loans receivable $1,125,091 100% 7.46% $ 788,055 100.00% 7.29%
========== =========
Less:
Undisbursed loan proceeds 14,233 16,961
Deferred fees and discounts 72 478
Allowance for losses 6960 4062
---------- ---------
Total loans receivable, net $1,105,947 $ 768,901
========== =========
Non-performing loans as a percent 0.33% 0.03%
of total loans
Non-performing assets as a percent 0.37% 0.07%
of total assets
</TABLE>
* 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."
-47-
<PAGE> 50
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; Mutual expects to continue the program after
the First Northern merger. First Northern Savings' "other" consumer loans
include loans secured by boats, recreational vehicles and snowmobiles 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.
Mutual believes that, over time, the First Northern merger will provide
additional lending opportunities to the combined enterprise. Mutual intends to
augment its consumer lending with programs currently offered by First Northern
Savings. Similarly, Mutual believes 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. Mutual also expects 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.
-48-
<PAGE> 51
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 prospectus, and
the other statistical data provided elsewhere in this 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.
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.
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
-49-
<PAGE> 52
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, a relatively high proportion of the portfolio is retained in
securities, with concentration in fixed rate investments having a weighted
average remaining life of 83 months at March 31, 2000. We believe these
strategies have reduced income due to lower initial yields on these investments
in comparison to longer term fixed rate investments. However, we believe that
reducing our exposure to interest rate fluctuations will enhance long-term
profitability.
For the first quarter of 2000, we originated $4.1 million of fixed
rate, one-to-four family first mortgage loans, or 18.9% of total one-to-four
family first mortgage originations, of which we sold $1.1 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 March 31, 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;
- 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:
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<PAGE> 53
- 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 March 31, 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 $97.5 million. This
represented a negative cumulative one-year interest rate sensitivity gap of
(5.6%), and a ratio of interest-earning assets maturing or repricing within one
year to interest-bearing liabilities maturing or repricing within one year of
85.4%. By maintaining a low gap percentage, we decrease the impact on earnings
due to fluctuations in market interest rates. For the time frame of the gap, our
assets and liabilities are generally repricing at the same time.
The following table presents the amounts of our interest-earning assets
and interest-bearing liabilities outstanding at March 31, 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:
Mortgage loans: 15.5%
Consumer loans: 49.8%
Commercial loans: 39.6%
2. Anticipated cash flows for mortgage-related securities were
obtained from an independent outside source.
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<PAGE> 54
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.
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<PAGE> 55
<TABLE>
<CAPTION>
AT MARCH 31, 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)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable
Mortgage loans:
Fixed $ 13,849 $ 46,288 $ 106,095 $ 83,268 $ 196,091 $ 445,591
Adjustable 51,198 154,170 94,575 99,472 29,866 429,281
Other loans 62,400 57,306 116,280 -- -- 235,986
Securities:
Interest earning deposits 21,457 21,457
Non-mortgage 39,448 -- -- 10,101 49,549
Mortgage-related fixed 13,077 37,501 97,752 92,036 183,579 423,945
Mortgage-related adjustable 61,234 -- -- -- -- 61,234
Other interest-earning assets 13,558 13,558
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 276,221 295,265 414,702 284,877 409,536 1,680,601
---------- ---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts 2,218 6,136 13,791 10,940 56,056 89,141
Savings accounts 8,129 21,841 43,244 27,764 49,923 150,901
Money market accounts 6,419 16,913 39,108 31,709 135,902 230,051
Time deposits 233,607 328,522 219,642 18,921 -- 800,692
Advance payments by borrowers for taxes -- 7,049 -- -- -- 7,049
and insurance
---------- ---------- ---------- ---------- ---------- ----------
Other borrowings 5,005 33,147 200,450 97 -- 238,699
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 255,378 $ 413,608 $ 516,235 $ 89,431 241,881 1,516,533
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 20,843 $ (118,343) $ (101,533) $ 195,446 $ 167,655 $ 164,068
==========
Cumulative interest rate sensitivity gap $ 20,843 $ (97,500) $ (199,033) $ (3,587) $ 164,068
Cumulative interest rate sensitivity gap
as a percentage total assets 1.20% (5.60)% (11.42)% (0.21)% (9.42)%
Cumulative interest-earning assets as a
percentage of interest bearing liabilities 108.16% 85.43% (83.21)% (99.72)% (110.82)%
</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.
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
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<PAGE> 56
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 March 31, 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
PRESENT VALUE OF EQUITY 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 $ 185,792 $(33,888) (15.43) % 11.26 % (11.69) %
+100 205,089 (14,591) (6.64) 12.16 (4.63)
0 219,680 - 0.00 12.75 0.00
- - -100 215,838 (3,842) (1.75) 12.28 (3.69)
- - -200 193,045 (26,635) (12.12) 10.79 (15.37)
</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.
-54-
<PAGE> 57
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 table presents certain information
regarding Mutual Savings' financial condition and net interest income for the
quarters ended March 31, 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>
QUARTERS ENDED MARCH 31,
-------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
ACTUAL OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE BALANCE PAID RATE BALANCE PAID RATE
------- ------- ------- ------- ----------- -------- --------
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $1,105,947 $1,097,134 $ 20,341 7.42 % $1,056,052 19,811 7.50 %
Mortgage-related securities 472,456 455,873 7,699 6.76 % 265,834 4,199 6.32 %
Investment securities and interest- 69,622 110,101 1,566 5.69 % 417,194 4,932 4.73 %
earning deposits
Federal Home Loan Bank stock 13,537 13,537 236 6.97 % 13,637 209 6.18 %
--------- ---------- ---------- ----- ---------- ------ ----
Total interest-earning assets 1,661,562 1,676,645 29,842 7.12 % 1,752,617 29,151 6.65 %
Non-interest-earning assets 80,622 65,886 99,561
========= ========== ==========
Total assets 1,742,184 1,742,531 1,852,178
--------- --------- ----------
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 150,901 $ 150,667 900 2.39 % $ 165,208 $ 985 2.38 %
Money market accounts 230,051 229,413 2,802 4.89 % 169,056 1,989 4.71 %
Interest-bearing demand accounts 89,141 87,556 225 1.03 % 89,628 234 1.04 %
Time deposits 800,692 813,807 10,851 5.33 % 909,933 12,381 5.44 %
---------- ---------- ---------- ----- ---------- ------ ----
Total deposits 1,270,785 1,281,443 14,778 4.61 % 1,333,825 15,589 4.67 %
Escrows 7,049 4,334 26 2.40 % 4,259 27 2.54 %
Borrowings 238,699 231,748 3,375 5.83 % 270,820 3,511 5.19 %
---------- ---------- ---------- ----- ---------- ------ ----
Total interest-bearing liabilities 1,516,533 1,517,525 18,179 4.79 % 1,608,904 19,127 4.76 %
---------- ---------- ---------- ----- --------- ------ ----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 48,403 41,028 40,351
Other non-interest-bearing 13,339 21,075 26,536
liabilities ---------- ---------- ---------
Total non-interest-bearing 61,742 62,103 66,887
liabilities ---------- ---------- ---------
Total liabilities 1,578,275 1,579,628 1,675,791
Equity 163,909 162,903 176,387
---------- ---------- ---------
Total liabilities and equity 1,742,184 1,742,531 1,852,178
========== ========== =========
Net interest income/net interest rate
spread $ 11,663 2.33 % $ 10,024 1.89 %
========== ==========
Net interest-earning assets/net
interest margin $ 159,120 2.78 % $ 143,713 2.29 %
========== ======= ========== =====
Average interest-earnings assets to 1.10x 1.09x
average interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE
BALANCE EARNED/PAID COST BALANCE EARNED/PAID COST BALANCE
------- ----------- ------- ------- ----------- ------- -------
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $1,069,568 $ 79,623 7.44 % $1,159,786 $ 90,092 7.77 % $1,212,945
Mortgage-related securities 290,772 18,479 6.36 % 238,338 15,664 6.57 % 159,259
Investment securities and interest- 383,630 19,294 5.03 % 347,115 18,681 5.38 % 193,665
earning deposits
Federal Home Loan Bank stock 13,537 906 6.69 % 15,640 1,033 6.6 % 18,206
---------- ---------- ---------- --------- -----------
Total interest-earning assets 1,757,507 118,302 6.73 % 1,760,879 125,470 7.13 % 1,584,075
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
Money market accounts 203,924 9,796 4.80 % 141,860 6,571 4.63 % 119,283
-----
Interest-bearing demand accounts 89,139 940 1.05 % 90,211 1,070 1.19 % 83,127
Time deposits 872,824 46,470 5.32 % 927,241 53,327 5.75 % 863,534
---------- ---------- ----- ---------- ---------- ----- -----------
Total deposits 1,328,989 61,091 4.60 % 1,328,277 65,236 4.91 % 1,234,942
Escrows 12,227 313 2.56 % 13,143 344 2.62 % 15,674
Borrowings 263,400 13,933 5.29 % 270,838 14,437 5.33 % 191,346
---------- ---------- ------ ---------- ---------- ------ -----------
Total interest-bearing liabilities 1,604,616 75,337 4.7 % 1,612,258 80,017 4.96 % 1,441,962
---------- ---------- ------ ---------- ---------- ------ -----------
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 43,402 39,714 31,969
Other non-interest-bearing 14,098 28,307 24,260
liabilities
---------- ---------- -----------
Total non-interest-bearing 57,500 68,021 56,229
liabilities
---------- ---------- -----------
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 %
========== ===== =========
Net interest-earning assets/net
interest margin $ 152,891 2.44 % $ 148,621 2.58 % $ 142,113
========== ===== ========== ===========
Average interest-earnings assets to 1.10x 1.09x
average interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997
--------------------------------
AVERAGE
INTEREST YIELD/
EARMED/PAID COST
----------- -------
ASSETS:
INTEREST-EARNING ASSETS:
<S> <C> <C>
Loans receivable (1) $ 93,628 7.72 %
Mortgage-related securities 10,250 6.44 %
Investment securities and interest- 10,940 5.65 %
earning deposits
Federal Home Loan Bank stock 1,175 6.45 %
---------- -----
Total interest-earning assets 115,993 7.32 %
Non-interest-earning assets
Total assets
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 4,696 2.78 %
Money market accounts 5,458 4.58 %
Interest-bearing demand accounts 1,137 1.37 %
Time deposits 49,626 5.75 %
---------- -----
Total deposits 60,917 4.93 %
Escrows 380 2.42 %
Borrowings 10,897 5.69 %
---------- -----
Total interest-bearing liabilities 72,194 5.01 %
---------- -----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits
Other non-interest-bearing
liabilities
Total non-interest-bearing
liabilities
Total liabilities
Equity
Total liabilities and equity
Net interest income/net interest rate
spread $ 43,799 2.31 %
==========
Net interest-earning assets/net
interest margin 2.76 %
Average interest-earnings assets to 1.10x
average interest-bearing liabilities
</TABLE>
<PAGE> 58
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>
QUARTERS ENDED MARCH 31,
2000 COMPARED TO 1999
------------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------------
VOLUME RATE NET
---------- ---------- ---------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C>
Loans receivable $ 764 $ (234) $ 530
Mortgage-related securities 3,191 309 3,500
Investment securities (4,649) 1,283 (3,366)
Federal Home Loan Bank Stock -- 27 27
------- ------- -------
Total (694) 1,385 691
------- ------- -------
INTEREST-BEARING LIABILITIES:
Savings deposits $ (87) $ 2 $ (85)
Money market accounts 734 79 813
Interest bearing demand accounts (5) (4) (9)
Time deposits (1,286) (244) (1,530)
Escrows 0 (1) (1)
Borrowings (621) 485 (136)
------- ------- --------
Total (1,265) 317 (948)
------- ------- --------
Net change in net interest income $ 571 $ 1,068 $ 1,639
======= ======= ========
</TABLE>
<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)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
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>
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<PAGE> 59
COMPARISONS OF FINANCIAL CONDITION
AT MARCH 31, 2000 AND DECEMBER 31, 1999
Mutual Savings' total assets decreased $27.3 million, or 1.5% at March 31,
2000 from $1.77 billion at December 31, 1999.
At March 31, 2000, loans increased $21.0 million, or 1.9%. Investment
securities available for sale decreased $9.6 million, or 16.6%. Mortgage-related
securities increased $98.4 million, or 26.3%, to $472.5 million at March 31,
2000 from $374.1 million at December 31, 1999. The change in loans reflects an
increase of $11.3 million in one- to four-family first mortgage loans and an
increase of $9.7 million in consumer loans and other loans. Loan originations
were supplemented by the purchase of mortgage-related securities. Cash and cash
equivalents decreased from $180.0 million to $39.7 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 quarter
ended March 31, 2000.
The reduction in total assets was primarily the result of a reduction of
$23.8 million, or 1.8%, in total deposits to $1.32 billion at March 31, 2000
from $1.34 billion at December 31, 1999. Interest-bearing deposits decreased
$31.0 million or 2.4%, to $1.27 billion at March 31, 2000. Non-interest-bearing
deposits increased $5.8 million, or 14.1% 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.
Equity increased $100,000, or .5%, to $163.9 million at March 31, 2000,
from $163.8 million at December 31, 1999. The increase resulted from net income
of $3.0 million for the three months ended March 31, 2000, partially offset by a
$2.9 million unrealized loss on securities available for sale, primarily
resulting from increasing market interest rates.
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
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<PAGE> 60
million at December 31, 1999 from $310.1 million at December 31, 1998. Also,
borrowings decreased $28.2 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
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
General. Net income for the quarter ended March 31, 2000 was $3.0 million
compared with $1.8 million for the quarter ended March 31, 1999. The $1.2
million, or 66.7% increase is primarily attributable to a $1.6 million increase
in net interest income and a $443,000 decrease in the amortization of intangible
assets, which was offset in part by a $744,000 increase in income taxes.
Net Interest Income. Net interest income increased $1.6 million, or 16.4%,
to $11.6 million for the first quarter of 2000 compared with $10.0 million for
the first quarter of 1999 primarily due to decreased interest expense. On an
annualized basis, our net interest spread increased to 2.33% for the quarter
ended March 31, 2000 from 1.90% for the comparable quarter of 1999.
Additionally, our annualized net interest margin increased to 2.78% from 2.29%.
Interest Income. Total interest income increased $691,000, or 2.3% to $29.8
million for the quarter ended March 31, 2000 compared with $29.1 million for the
quarter ended March 31, 1999. Interest on first mortgage loans decreased
$368,000 or 2.3%, to $15.5 million interest on consumer loans increased $868,000
million, or 24.3%, to $4.6 million, interest on investments decreased $3.3
million, or 64.9%, to $1.6 million, and interest on mortgage-related securities
increased $3.5 million, or 83.3%, to $7.7 million for the three months ended
March 31, 2000 compared with the corresponding prior year quarter.
The average balance of total interest-earning assets decreased $76.0
million or 4.3% to $1.7 billion for the three months ended March 31, 2000
compared with $1.8 billion for the corresponding quarter of the prior year. This
decrease was primarily attributable to a $2.6 million, or 0.3%, increase in the
average balance of first mortgage loans, to $867.2 million, a $38.4 million, or
20.1% increase to $229.9 million in the average balance of consumer loans, a
$307.0 million, or 73.6% decrease to $110.1 million in the average balance of
investment securities, and a $190.0 million, or 71.5%, increase to $455.9
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 three months ended March 31, 2000, the impact on interest income
from the decrease in the average balance of total interest-earning assets was
offset by a 47 basis point increase in the annualized average yield on total
interest-earning assets to 7.12% compared with 6.65% for the corresponding
quarter 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 three months ended March 31, 2000.
Interest Expense. Interest expense on deposits decreased $812,000, or 5.2%,
to $14.8 million for the first quarter of 2000 from $15.6 million for the first
quarter of 1999. Interest on time deposits, which accounted for 73.4% of
interest on deposits for the quarter ended March 31, 2000, decreased $1.5
million, or 12.4%, to $10.9 million from the corresponding period of the prior
year.
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<PAGE> 61
The average balance of total interest-bearing liabilities decreased $91.4
million, or 5.7%, to $1.52 billion for the three months ended March 31, 2000
compared with $1.61 billion for the corresponding quarter of the prior year. We
experienced a decrease of $52.4 million to $1.28 billion in the average balance
of deposits and a decrease of $39.0 million to $231.7 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 3 basis point
increase in the annualized average cost of total interest-bearing liabilities to
4.79% compared with 4.76% for the first quarter of 1999. The annualized average
cost of deposits decreased five basis points to 4.61% compared with 4.66% for
the first quarter of 1999, reflecting our decision to allow the highest yielding
deposits to run off. The annualized average cost of borrowings increased 64
basis points to 5.83% for the first quarter of 2000, compared with 5.19% 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 $76,000 for the
first quarter of 2000 and $39,000 for the corresponding period of the prior
year. The allowance for loan losses at March 31, 2000 was $7.0 million, or
190.4% of non-performing loans. Non-performing loans at March 31, 2000 were $3.7
million compared with $4.8 million at March 31, 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 6.6%, or $96,000, to $1.83
million for the first quarter of 2000 from $1.93 million for the first quarter
of 1999. The decrease in non-interest income is primarily attributable to a
decrease in gain on the sale of loans as a result of decreased loan originations
of fixed-rate mortgage loans with maturities greater than 15 years. The
origination of longer-term fixed-rate mortgages decreased due to the higher
interest rate environment.
Non-Interest Expense. Total non-interest expense, consisting primarily of
salaries and employee benefits, occupancy expense and other operating expenses,
decreased $443,000, to $8.28 million, for the quarter ended March 31, 2000
compared with $8.33 million for the quarter ended March 31, 1999. This was
principally because amortization of intangible assets decreased $443,000 to
$235,000, for the quarter ended March 31, 2000 compared with $678,000 for the
comparable quarter of 1999.
Our efficiency ratio, excluding amortization of intangible assets, for the
first quarter of 2000 was 61.37% compared with 69.30% for the corresponding
period in 1999. Our non-interest expense to average assets ratio was 1.89% for
the three months ended March 31, 2000 and 1.79% for the three months ended March
31, 1999.
Income Taxes. Income tax expense increased $744,000, or 67.0%, to $1.9
million for the three months ended March 31, 2000 compared with $1.1 million for
the three months ended March 31, 1999, due to an increase in income before tax
expense. The effective tax rate was 37.85% and 37.64% for the three months ended
March 31, 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. The increase in amortization of
intangible assets was related to a valuation of the unidentifiable intangible
assets and deposit base intangible accounts resulting from the purchase of First
Federal Bancshares of Eau Claire in 1997. At that time, as a result of the
purchase method of accounting used in the transaction, intangible assets were
generated. It is the responsibility of management to re-evaluate the carrying
value of intangible assets on a periodic basis. This valuation process was
performed in the fourth quarter of 1999.
-59-
<PAGE> 62
Using a present value calculation of the anticipated net income flows of future
years for the assets acquired, it was determined that the assets were overvalued
by $15.6 million. Accordingly, a write down was booked at that time. The effect
was a $13.6 million reduction in net income. 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 $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
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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.
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
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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 5 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 37 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 81.7% 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 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 an
increase in charge-offs resulting from the additional losses recognized on loans
acquired in the purchase of First Federal. 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 $2.2 million, or 35.5%, from $6.2 million for 1997. The overall
increase is partially due to 1998 including a full year of income
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resulting from the purchase of First Federal compared to 1997, which included 9
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 24.4%, 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 1.11%, 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 Bancshares 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 23.4% 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.
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 quarter of 2000, we originated and purchased loans of $74.4
million, and purchased $114 million in mortgage- related securities and $10
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
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$588.0 million during 1998. Maturities and calls of investment securities
totaled $65.0 million during 1999 and $378.9 million during 1998. Sales of
loans, mortgage-related securities and investment securities provided cash flows
of $111.1 million during 1999 and $116.8 million during 1998.
At March 31, 2000, Mutual Savings had outstanding loan commitments to
borrowers of approximately $24.0 million, unused commercial lines of credit of
approximately $1.5 million and available home equity and overdraft lines of
credit of approximately $65.0 million. There were no outstanding commitments to
purchase securities at March 31, 2000. Total deposits decreased $23.8 million in
the first quarter 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 $545.3 million at
March 31, 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 March 31, 2000, we exceeded each of the applicable regulatory capital
requirements. Our leverage (tier 1) capital was $160.9 million, or 9.25%, at
March 31, 2000. In order to be classified as "well-capitalized" by the FDIC we
were required to have leverage (tier 1) capital of $87.0 million, or 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 March 31, 2000, we had a risk-based
total capital ratio of 18.76%. 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 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
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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, 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.
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
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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, Mutual will significantly expand
its 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 March 31, 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 Saving's 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 targeted the northeastern part of Wisconsin for a larger
presence. Mutual 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 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
does. Similarly, many competitors offer services that Mutual Savings does not
provide. For example, Mutual Savings does not provide trust or money management
services. However, Mutual does have 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 has also competed
with traditional financial institutions. However,
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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 March 31, 2000, our loan portfolio totaled $1.1 billion, of which $889.1
million, or 79.0%, were first mortgage loans. Included in that total were $888.1
million of loans due after one year, of which 49.6% were adjustable rate
mortgage or ARM loans and 50.4% were fixed-rate loans with a weighted average
remaining maturity of 150 months. The remainder of our loans at March 31, 2000,
amounting to $236.0 million, or 21.0% of total loans, consisted of consumer
loans ($198.9 million or 17.7%) and commercial business loans ($37.0 million or
3.3%).
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 MARCH 31,
-------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------------- ----------- ----------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One to four-family $ 752,259 66.86 % $ 743,993 67.37 % $ 742,231 70.56 %
Multi-family 53,853 4.79 53,777 4.87 53,521 5.09
Commercial 55,085 4.90 52,375 4.74 40,922 3.89
Construction and development 27,908 2.48 26,530 2.40 21,939 2.09
---------- ------ ---------- ------ ---------- ------
Total first mortgage real
estate loans $ 889,105 79.03 876,675 79.38 858,613 81.63
---------- ------ ---------- ------ ---------- ------
Consumer and other loans:
Consumer loans:
Fixed equity 97,820 8.69 89,315 8.09 67,629 6.42
Home equity lines of credit 51,982 4.62 50,618 4.58 45,827 4.36
Student 28,598 2.54 28,371 2.57 29,634 2.82
Home improvement 10,449 0.93 9,920 0.90 8,373 0.80
Other 10,099 0.90 10,028 0.91 12,970 1.23
---------- ------ ---------- ------ ---------- ------
Total consumer loans 198,948 17.68 188,252 17.05 164,433 15.63
---------- ------ ---------- ------ ---------- ------
Commercial business loans 37,038 3.28 39,488 3.57 28,839 2.74
---------- ------ ---------- ------ ---------- ------
Total consumer and other loans 235,986 20.97 227,740 20.62 193,272 18.37
Total loans receivable 1,125,091 100.00 % 1,104,415 100.00 % 1,051,885 100.00 %
Less:
Undisbursed loan proceeds 14,233 14,658 7,001
Deferred fees and discounts 72 14 440
Allowance for losses 6,960 6,948 6,855
Total loans receivable, net $1,103,826 $1,082,795 $1,037,589
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- -----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ----------- ---------- ------------- ---------
(DOLLARS IN THOUSANDS)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One to four-family $ 930,011 73.1 % $ 577,612 68.39 % $ 566,990 70.1 %
Multi-family 68,811 5.41 74,446 8.81 74,024 9.15
Commercial 51,739 4.07 49,624 5.88 48,390 5.98
Construction and development 24,774 1.95 22,082 2.61 23,496 2.91
---------- ------ --------- ------ --------- ------
Total first mortgage real
estate loans 1,075,335 84.53 723,764 85.69 712,900 88.14
---------- ------ --------- ------ --------- ------
Consumer and other loans:
Consumer loans:
Fixed equity 74,196 5.83 40,150 4.74 29,849 3.69
Home equity lines of credit 46,380 3.65 33,245 3.94 27,440 3.39
Student 29,425 2.31 9,428 1.12 9,757 1.21
Home improvement 8,128 0.64 6,411 0.76 6,039 0.75
Other 19,893 1.56 6,355 0.75 5,512 0.68
---------- ------ --------- ------ --------- -----
Total consumer loans 178,022 13.99 95,589 11.32 78,597 9.72
---------- ------ --------- ------ --------- -----
Commercial business loans 18,866 1.48 25,231 2.99 17,281 2.14
---------- ------ --------- ------ --------- -----
Total consumer and other loans 196,888 15.47 120,820 14.31 95,878 11.86
---------- ------ --------- ------ --------- -----
Total loans receivable 1,272,223 100.00 % 844,584 100.00 % 808,778 100.00 %
Less:
Undisbursed loan proceeds 8,788 14,563 13,271
Deferred fees and discounts 1,158 969 1,402
Allowance for losses 7,195 3,921 3,392
Total loans receivable, net $1,255,082 $ 825,131 $ 790,713
========== ========= =========
</TABLE>
At March 31, 2000, $757.1 million of our one-to-four family first mortgage
loans were pledged as collateral under a blanket pledge to the Federal Home Loan
Bank of Chicago.
Loan Maturity. The following table presents the contractual maturity of our
loans at Mach 31, 2000. The table does not include the effect of prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on first mortgage loans totaled $26.3 million for the first quarter
of 2000, $179.1 million for fiscal 1999, $390.1 million for fiscal 1998 and
236.2 million for fiscal 1997.
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<PAGE> 71
<TABLE>
<CAPTION>
AT MARCH 31, 2000
-----------------------------------------------
FIRST MORTGAGE CONSUMER AND
LOANS OTHER LOANS TOTAL
---------------- ------------- -------------
(IN THOUSANDS)
AMOUNTS DUE:
<S> <C> <C> <C>
Within one year $ 973 $ 21,913 $ 22,886
---------- ---------- ----------
After one year --
One to two years 3,361 16,054 19,415
Two to three years 11,232 17,871 29,103
Three to five years 21,127 35,015 56,142
Five to ten years 143,626 94,262 237,888
Ten to twenty years 390,790 50,731 441,521
Over twenty years 317,996 140 318,136
---------- ---------- ----------
Total due after one year 888,132 214,073 1,102,205
---------- ---------- ----------
Total loans $ 889,105 $ 235,986 1,125,091
========== ==========
LESS
Undisbursed loan proceeds 14,233
Deferred loan fees 72
Allowance for loan losses 6,960
----------
Net loans $1,103,826
==========
</TABLE>
The following table presents, as of March 31, 2000, the dollar amount of
all loans, due after March 31, 2001, and whether these loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 2001
-------------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loans $ 447,411 $ 440,702 $ 888,131
Consumer and other loans 107,972 106,102 214,074
---------- ---------- ----------
Total loans due after one year $ 555,383 $ 546,822 $1,102,205
========== ========== ==========
</TABLE>
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<PAGE> 72
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------------
2000 1999 1999 1998 1997
--------------- ------------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance outstanding at beginning of 1,104,956 $1,079,608 $1,079,608 $1,285,620 $ 848,941
--------------- ------------- ----------- ------------ ------------
ORIGINATIONS
First mortgage 26,605 54,352 171,071 309,606 170,268
Consumer and other loans 32,341 27,962 146,837 118,711 96,871
--------------- ------------- ----------- ------------ ------------
Total originations 58,946 82,314 317,908 428,317 267,139
--------------- ------------- ----------- ------------ ------------
PURCHASES
One-to four-family first mortgage 15,425 24,258 56,943 -- 1,034
Acquisition of First Federal -- -- -- -- 539,655
Total purchase 15,425 24,258 56,943 -- 540,689
--------------- ------------- ----------- ------------ ------------
LESS:
Principal payments:
First mortgage loans 26,338 58,853 179,103 389,179 237,113
Consumer and other loan 24,143 29,298 111,196 120,460 90,856
--------------- ------------- ----------- ------------ ------------
Total principal payment 50,481 88,151 290,299 509,639 327,969
--------------- ------------- ----------- ------------ ------------
Transfers to foreclosed real estate 496 268 1,773 7,887 391
--------------- ------------- ----------- ------------ ------------
Loan sales--first mortgage 1,138 30,218 57,431 116,803 42,789
--------------- ------------- ----------- ------------ ------------
Balance outstanding at end of period $ 1,127,212 $1,067,543 $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 March 31, 2000,
$752.3 million or 66.9% 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 quarter 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.
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
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<PAGE> 73
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 quarter of 2000 was $110,000.
The overall average size of our one- to four- family first mortgage loans was
approximately $60,000 at March 31, 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 fluctuates 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 e
monthly payments to fund principal and interest as well as private mortgage
insurance and flood insurance, if applicable. e 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.
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
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<PAGE> 74
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 credit worthiness 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 first mortgage loans amounted to $152.7 million in
1999, $288.5 million in 1998 and $163.5 million in 1997, and $22.0 million in
the first quarter 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
AMOUNT ORIGINATIONS
------ ------------
PERIOD (DOLLARS IN MILLIONS)
------
<S> <C> <C>
Quarter ended March 31, 2000 $ 2.9 11.0%
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 March 31, 2000, $198.9 million, or 17.7%, 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 March 31,
2000, we had $160.2 million or 80.5% of the consumer loan portfolio in such
loans. Underwriting procedures for these loans include a comprehensive review of
the loan application, and require an acceptable credit rating and verification
of the value of the equity in the home and income of the
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<PAGE> 75
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 quarter
ended March 31, 2000 we originated approximately $14 million of fixed rate
loans. These loans carry a weighted average written term of 8 years and a fixed
rate ranging from 6.95% to 12.25%. We also offer variable rate home equity and
home improvement loans. At March 31, 2000, $29.8 million or 27.5% 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 $52.0 million, or
26.1% of total consumer loans at March 31, 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 March 31, 2000, student loans amounted to $28.6 million, or 14.4% 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 March 31, 2000, $1.3 million or approximately 0.55% 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 March 31, 2000 our
multi-family and commercial real estate loan portfolio consisted of 160 loans
totaling $108.9 million or 9.7% 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.
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<PAGE> 76
At March 31, 2000, the largest outstanding loan on a multi-family
property was $7.1 million on a 240 unit apartment project located in Milwaukee,
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 March 31, 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 March 31, 2000, our commercial business
loan portfolio consisted of loans totaling $37.0 million or 3.3% 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 11.5% 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 thousand are reviewed annually. The largest commercial
business loan at March 31, 2000 had an outstanding balance of $13.5 million and
was secured by equipment and chattel paper. All payments under commercial
business loans were current as of March 31, 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
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<PAGE> 77
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 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.
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<PAGE> 78
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 foreclosed real estate. The
following table presents information regarding loans delinquent for 60 days or
longer:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 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 21 $ 880 24 $ 2,090 27 $ 1,739 43 $ 3,182
Other first mortgages 1 376 5 416 1 223 2 354
Consumer and other loans 92 650 263 1,280 111 457 238 1,163
-------- ---------- -------- ---------- ------- ---------- ------- ----------
Total delinquent loans (60 days and
over) 114 $ 1,906 292 $ 3,786 139 $ 2,419 283 $ 4,699
======== ========== ======== ========== ======= ========== ======= ==========
Delinquent loans (60 days and over) to
total loans 0.17 % 0.34 % 0.23 % 0.44%
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
90 DAYS 90 DAYS 90 DAYS
or More 60-89 DAYS
60-89 DAYS OR MORE 60-89 DAYS OR MORE
--------------- ------------- ------------- -------------- -------------- --------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family first mortgages 19 $ 691 42 $ 3,629 37 $ 1,589 96 $5,986 31 $ 1,427 70 $ 5,388
Other first mortgages - - 6 793 - - 1 73 - - 2 4,412
Consumer and other loans 112 495 215 979 121 660 221 913 146 707 297 1,469
----- ------ ----- ------- ----- ------- ----- -------- ----- ------- ----- --------
Total delinquent loans (60 days
and over) 131 $1,186 263 $ 5,401 158 $ 2,249 318 $6,972 177 $ 2,134 369 $ 11,269
===== ====== ===== ======= ===== ======= ===== ======== ===== ======= ===== ========
Delinquent loans (60 days and over)
to total loans 0.11% 0.49% 0.21% 0.65% 0.17% 0.88%
</TABLE>
Our $3.8 million in loans delinquent 90 days or more at March 31, 2000 were
comprised primarily of 24 one- to four-family first mortgage loans (including
FHA/VA first mortgage loans) with an average principal balance of approximately
$87,000. The largest non-performing asset at March 31, 2000 was a high-rise
condominium in Bloomington, Minnesota. The property is carried as foreclosed
real estate in the amount of $1.6 million, net of a specific loss allowance.
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 March 31, 2000,
nineteen residential units remained to be sold, including four residential units
that were under contract of sale. Mutual Savings does not anticipate further
loss.
-76-
<PAGE> 79
Non-performing assets totaled $6.4 million at March 31, 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 MARCH AT DECEMBER 31,
31,
---------- -------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans $ 2,483 $ 3,572 $ 2,937 $ 9,003 $ 1,764 $ 416
Non-accrual consumer and other loans 119 83 176 158 21
Accruing loans delinquent 90 days or more 1,053 1,152 3,617 813 158 128
-------- -------- -------- -------- -------- --------
Total non-performing loans 3,655 4,807 6,730 9,974 1,943 544
Foreclosed real estate, net 2,729 3,018 3,505 159 258 333
-------- -------- -------- -------- -------- --------
Total non-performing assets $ 6,384 $ 7,825 $ 10,235 $ 10,133 $ 2,201 $ 877
======== ======== ======== ======== ======== ========
Non-performing loans to total loans 0.33% 0.44% 0.65% 0.79% 0.24% 0.07%
Non-performing assets to total assets 0.37 0.44 0.55 0.55 0.19 0.07
</TABLE>
The large increase in non-performing assets in 1997 is primarily a result of the
acquisition of First Federal in that year.
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.
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 March 31, 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.
-77-
<PAGE> 80
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
QUARTER
ENDED, AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------- --------------------------------------------------------
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 76 350 637 1,065 672 597
Other additions: purchase of First
Federal - - 2,449
----------- ----------- ----------- -------- --------- ---------
Charge-offs:
First mortgage loans 36 152 997 624 80 109
Consumer and other loans 35 189 223 127 77 51
----------- ----------- ----------- -------- --------- ---------
Total charge-offs 71 341 1,220 751 157 160
Recoveries:
First mortgage loans 0 (40) (206) (479) - -
Consumer and other loans (7) (44) (37) (32) (14) (13)
----------- ----------- ----------- -------- --------- ---------
Total recoveries (7) (84) (243) (511) (14) (13)
----------- ----------- ----------- -------- --------- ---------
Net charge-offs 64 257 977 240 143 147
----------- ----------- ----------- -------- --------- ---------
Balance at end of period $ 6,960 $ 6,948 $ 6,855 $ 7,195 $ 3,921 $ 3,392
=========== =========== =========== ======== ========= =========
Net charge-offs to average loans 0.01 % 0.03 % 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 190.42 144.54 101.86 72.14 201.8 623.53
non-performing loans
</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
directors also reviews the loan loss allowances compared to the relative size of
the portfolio on a monthly basis.
-78-
<PAGE> 81
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.
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 of acquisition of First Federal to a level of 0.97% at
December 31, 1998. However, at December 31, 1999 the level dropped to 0.44%, and
further dropped to 0.37% at March 31, 2000, reflecting the resolution of the
majority of the problem loans acquired.
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 March 31, 2000, the allowance for
loan losses as a percentage of total loans was 0.63% 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.
-79-
<PAGE> 82
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Comparison of Operating Results for the quarter ended
March 31, 2000, and the Years Ended 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 MARCH 31, 2000
-----------------------
PERCENTAGE
OF
LOANS
IN
CATEGORY
TO TOTAL
LOAN CATEGORY AMOUNT LOANS
- - ------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans
One-to four-family $ 4,697 66.86%
Other 819 12.17%
---------- -----------
Total first mortgage loans 5,516 79.03%
Commercial 495 3.29%
Home equity lines 263 4.62%
Consumer & other 686 13.06%
Unallocated 0 0.00%
---------- -----------
Total allowance for loan losses $ 6,960 100.00%
========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------ ------------------- ----------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- - ------------- ---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <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 73.11% $ 2,644 68.39% $ 2,346 70.10%
Other 822 12.01% 596 11.07% 1,198 11.42% 595 17.30% 530 18.04%
---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
Total first mortgage
loans 5,558 79.38% 5,785 81.63% 6,176 84.53% 3,239 85.69% 2,876 88.14%
Commercial 520 3.57% 402 2.74% 283 1.48% 252 2.99% 173 2.14%
Home equity lines 253 4.58% 229 4.36% 231 3.65% 166 3.94% 137 3.39%
Consumer & other 617 12.47% 439 11.27% 505 10.34% 264 7.38% 206 6.33%
Unallocated 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
Total allowance for $ 6,948 100.00% $ 6,855 100.00% $ 7,195 100.00% $ 3,921 100.00% $ 3,392 100.00%
loan losses ========== ======== ======== ========= ========= ========= ========= ======== ========= =========
</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.
-80-
<PAGE> 83
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 the State of
Wisconsin, Department of Financial Institutions. We did not have any such
hedging transactions in place at March 31, 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 March 31, 2000, our primary
liquidity ratio was 4.0%. 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).
We classify our entire mortgage-related securities portfolio as available for
sale.
At March 31, 2000, mortgage-related securities available for sale
totaled $472.5 million, or 27.1% of total assets. At March 31, 2000, the
mortgage-related securities portfolio had a weighted average yield of 6.77%. Of
the mortgage-related securities we held at March 31, 2000, $409.3 million, or
86.6%, had fixed rates and $63.1 million, or 13.4%, had adjustable-rates.
Mortgage-related securities at March 31, 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 5.47% to
8.00% and a weighted average yield of 6.68% at March 31, 2000. At March 31,
2000, REMICs totaled $139.1 million, which constituted 29.4% of the
mortgage-related securities portfolio, or 8.0% of total assets. Our REMICs had
an expected average life of 8.3 years at March 31, 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.
-81-
<PAGE> 84
The following table presents our investment securities and
mortgage-related securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
MARCH 31, 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 10,000 20,000 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) - -
Maturities (20,000) (60,000) (65,000) (378,944) (409,346)
Sales - - - - -
Premium amortization and discount accretion, net 364 378 (182) 4,639 246
Decrease (increase) in unrealized gains 38 (213) (1,023) 135 719
------------ ------------- ----------- ------------ -------------
Net increase in investment securities (9,598) (44,835) (58,771) (42,674) (305)
------------ ------------- ----------- ------------ -------------
Carrying value at end of period $ 48,165 $ 71,699 $ 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 114,420 20,234 213,504 119,548 72,071
Transfer from mutual funds to CMO - - 14,047 - -
Acquisition of First Federal - - - - 124,940
Sales - - (53,682) - (3,820)
Principal payments (11,359) (20,127) (60,367) (77,407) (59,514)
Premium amortization and discount accretion, net 120 41 262 613 72
Decrease (increase) in unrealized gains (4,825) (1,064) (10,561) 2,237 1,705
------------ ------------- ----------- ------------ -------------
Net increase in mortgage-related securities 98,356 (916) 103,203 44,991 135,454
------------ ------------- ----------- ------------ -------------
Carrying value at end of period $ 472,456 $ 269,981 $ 374,100 $ 270,897 $ 225,906
============ ============= =========== ============ =============
</TABLE>
-82-
<PAGE> 85
The following table presents the composition of our money market investments,
investment securities and mortgage-related securities portfolios in dollar
amount and in percentage of each investment type 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,
MARCH 31, -------------------------------------------
2000 1999 1998 1997
-------------- -------------------------------------------
(Dollars in thousands)
Carrying/ Carrying/ Carrying/ Carrying/
Fair Value Fair Value Fair Value Fair Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS
Interest-earning deposits $ 21,457 $ 132,592 $ 262,714 $ 41,305
Federal funds sold - 25,000 45,000 15,000
============== ============ ============ ==============
Total money market investments $ 21,457 $ 157,592 $ 307,714 $ 56,305
============== ============ ============ ==============
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Mutual funds $ 28,928 $ 28,537 $ 40,885 $ 39,888
United States government and agencies 19,237 29,175 75,421 118,598
Asset-backed securities - 51 228 722
============== ============ ============ ==============
Total investment securities available for sale $ 48,165 $ 57,763 $ 116,534 $159,208
============== ============ ============ ==============
MORTGAGE-RELATED SECURITIES AVAILABLE FOR SALE
BY ISSUER:
Federal Home Loan Mortgage Corporation $ 67,697 $ 70,216 $ 43,717 $ 29,073
Federal National Mortgage Association 387,194 285,384 194,353 136,510
Private placement CMO's 17,032 17,927 31,994 59,118
Government National Mortgage Association 533 573 833 1,205
============== ============ ============ ==============
Total mortgage-related securities $ 472,456 $ 374,100 $ 270,897 $225,906
============== ============ ============ ==============
BY COUPON TYPE:
Adjustable-rate 63,133 $ 59,506 $ 51,877 $ 51,704
Fixed-rate 409,323 314,594 219,020 174,202
============== ============ ============ ==============
Total mortgage-related securities $ 472,456 $ 374,100 $ 270,897 $225,906
============== ============ ============ ==============
TOTAL INVESTMENT PORTFOLIO $ 542,078 $ 589,455 $ 695,145 $441,419
============== ============ ============ ==============
</TABLE>
-83-
<PAGE> 86
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 March 31, 2000. Mortgage-related securities are presented by
issuer and by coupon type.
<TABLE>
<CAPTION>
AT MARCH 31, 2000
--------------------------------------------------------------------------------------------
More than Five
More than One Year Years to More than
One Year or Less to Five Years Ten Years Ten Years Total
------------------ ------------------ ---------------- --------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------------------ ------------------ ---------------- --------------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE
FOR SALE:
Mutual funds 28,928 5.83 % - - - % - - % 28,928 5.83 %
United States government and
agencies - - 19,237 5.66 % 19,237 5.66
------- -------- --------
Total investment securities $28,928 5.83 $ 19,237 5.66 $ - $ - $ 48,165 5.76
======= ======== ======= ======== ========
MORTGAGE-RELATED SECURITIES AVAILABLE
FOR SALE:
BY ISSUER:
GNMA pass-through certificates 3 7.89 177 7.81 413 8.21 - - 533 8.12
FNMA pass-through certificates - - 104 7.61 6,879 5.87 313,617 6.86 320,600 6.84
Private CMOs - - - - 1,615 6.50 15,417 6.91 17,032 6.87
FHLMC pass-through certificates 1 9.09 141 8.05 28 9.16 12,092 6.30 12,262 6.33
FHLMC, FNMA and GNMA-REMICs - - - - 5,326 6.22 116,703 6.65 122,029 6.63
------- -------- ------- -------- --------
Total mortgage-related
securities $ 4 8.19 $ 362 7.85 $14,261 6.15 $457,829 6.79 $472,456 6.77
======= ======== ======= ======== ========
BY COUPON TYPE:
Adjustable-rate 0 - - - 4,807 6.31 58,326 6.83 63,133 6.79
Fixed-rate 4 8.19 362 7.85 9,454 6.07 399,503 6.79 409,323 6.76
------- -------- ------- -------- --------
Total mortgage-related
securities $ 4 8.19 $ 362 7.85 $14,261 6.15 $457,829 6.79 $472,456 6.77
======= ======== ======= ======== ========
TOTAL INVESTMENT AND
MORTGAGE-RELATED SECURITIES
PORTFOLIO $28,932 5.83 % $ 19,599 5.70 % $14,261 6.15% $457,829 6.79% $520,621 6.68 %
======= ======== ======= ======== ========
</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 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 39.3% of total deposits on March 31, 2000. At
March 31, 2000, time deposits with remaining terms to maturity of less than one
year amounted to $545.3 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Analysis of Net Interest Income"
for
-84-
<PAGE> 87
information relating to the average balances and costs of our deposit accounts
for the quarters ended March 31, 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 QUARTERS ENDED MARCH 31,
-----------------------------------------------
2000 1999
---------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period $1,343,007 $1,398,858
Net deposits (withdrawals) (37,593) (33,757)
Acquisition of First Federal - -
Interest credited, net of penalties 13,774 14,263
---------------------- -------------------
Total deposits at end of period $1,319,188 $1,379,364
====================== ===================
Net increase (decrease) $ (23,819) $ (19,494)
====================== ===================
Percentage increase (decrease) (1.77) % (1.39) %
</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 deposits (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 March 31, 2000, we had $60.9 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 $ 16,834
Over three months through six months 9,226
Over six months through 12 months 15,362
Over 12 months through 24 months 15,277
Over 24 months through 36 months 3,176
Over 36 months 986
----------------------------
Total $ 60,861
============================
</TABLE>
-85-
<PAGE> 88
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 MARCH 31, AT DECEMBER 31,
------------------------------------------ ----------------------------------------
2000 1999
------------------------------------------ ----------------------------------------
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 $ 150,901 11.44% 2.41% $ 151,447 11.28% 2.41%
Interest-bearing demand 89,141 6.76% 1.05% 89,685 6.68% 1.05%
Money market 230,051 17.44% 4.91% 231,174 17.21% 4.90%
Non-interest bearing 48,403 .67% 0.00% 42,596 3.17% 0.00%
---------- -------- -------- -------- ---------- -------
Total 518,496 39.30% 3.06% 514,902 38.34% 3.09%
---------- -------- -------- ----------
Certificates:
Time deposits with original
maturities of:
Three months or less 72,565 5.50% 5.06% 80,781 6.01% 5.07%
Over three months to
twelve months 168,333 12.77% 4.99% 198,154 14.76% 4.90%
Over twelve months to
twenty-four months 373,917 28.35% 5.47% 401,053 29.87% 5.37%
Over twenty-four
months to thirty-six 116,313 8.82% 6.06% 73,729 5.49% 5.62%
months
Over thirty-six months
to forty-eight months 5,392 0.41% 5.74% 5,819 0.43% 5.73%
Over forty-eight months
to sixty months 61,765 4.68% 5.89% 66,124 4.92% 5.94%
Over sixty months 2,407 0.18% 6.37% 2,445 0.18% 6.35%
----------- ---------- --------- ---------- --------- --------
Total time deposits 800,692 60.70% 5.46% 828,105 61.66% 5.31%
----------- ---------- ---------- ---------
Total deposits $1,319,188 100.00% 4.52% $1,343,007 100.00% 4.46%
=========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
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 $ 166,316 11.89% 2.41% $ 169,530 12.44% 2.85%
Interest-bearing demand 100,753 7.20% 1.05% 95,310 7.00% 1.41%
Money market 159,361 11.39% 4.61% 134,451 9.87% 4.64%
Non-interest bearing 43,031 3.08% 0.00% 35,868 2.63% 0.00%
------------ --------- --------- ---------- ----------- -------
Total 469,461 33.56% 2.64% 435,159 31.94% 2.85%
------------ --------- ---------- -----------
Certificates:
Time deposits with original
maturities of:
Three months or less 82,097 5.87% 5.00% 59,205 4.35% 5.29%
Over three months to
twelve months 160,681 11.49% 5.17% 204,864 15.04% 5.52%
Over twelve months to
twenty-four months 517,495 36.99% 5.83% 433,152 31.79% 6.01%
Over twenty-four
months to thirty-six
months 82,755 5.92% 5.46% 113,969 8.37% 5.77%
Over thirty-six months
to forty-eight months 3,973 0.28% 5.73% 4,813 0.35% 5.84%
Over forty-eight months
to sixty months 79,861 5.71% 5.98% 107,885 7.92% 5.93%
Over sixty months 2,535 0.18% 6.34% 3,283 0.24% 6.21%
---------- -------- ------- ---------- --------- ------
Total time deposits 929,397 66.44% 5.63% 927,171 68.06% 5.82%
---------- -------- ---------- ---------
Total deposits $1,398,858 100.00% 4.62% $1,362,330 100.00% 4.87%
========== ======== ========== =========
</TABLE>
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<PAGE> 89
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at March 31, 2000 and December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------ ---------------------------------------------------------------
2000 1999 1998 1997
------------------ ---------------- -------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Time deposit accounts:
3.99% or less $ 120 $ 232 $ 113 $ 366
4.00% - 4.99% 188,407 231,747 79,861 3,909
5.00% - 5.99% 459,334 530,748 590,164 541,854
6.00% - 6.99% 151,548 63,808 257,491 378,791
7.00% or greater 1,283 1,570 1,768 2,251
------------------ ---------------- -------------------- ----------------------
Total $ 800,692 $ 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 March 31, 2000.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 2000
--------------------------------------------------------------------------------------------------
OVER OVER OVER
WITHIN OVER THREE TO SIX MONTHS ONE TO TWO 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 $ 95 $ 25 $ 120
4.00% - 4.99% 79,112 54,607 39,038 14,312 1,112 227 188,408
5.00% - 5.99% 115,795 75,948 125,374 112,212 14,554 15,451 459,334
6.00% - 6.99% 6,388 6,031 42,592 69,064 24,996 2,477 151,548
7.00% or greater 316 - - - 168 798 1,282
----------------- --------------- ------------- ------------ -------------- ---------- -----------
Total $ 201,706 $ 136,586 $ 207,004 $ 195,613 $ 40,830 $ 18,953 $ 800,692
================= =============== ============= ============ ============== ========== ===========
</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 March 31, 2000 we had no borrowings 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, though its wholly-owned subsidiary Lake Financial and
Insurance Services, Inc., provides investment and insurance services to both
Mutual 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
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<PAGE> 90
owns and manages much of our investment portfolio. Mutual 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, WI.
See "Properties".
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 OR LEASED 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
</TABLE>
-88-
<PAGE> 91
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- ------------- ---------- ------------
<S> <C> <C> <C>
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
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
</TABLE>
-89-
<PAGE> 92
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
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
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
</TABLE>
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<PAGE> 93
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
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
RICE LAKE: 1979* Owned
2850 Pioneer Avenue
Rice Lake, WI 54868
BARRON: 1995* Owned
1512 E. Division Ave. (Hwy. 8)
Barron, WI 54812
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
BLOOMER: 1995* Owned
1203 17th Avenue
Bloomer, WI 54724
CORNELL: 1980* Leased month to month
422 Main Street
Cornell, WI 54732
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.
-92-
<PAGE> 95
LEGAL PROCEEDINGS
Mutual 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 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 the depositors of Mutual. 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 not less than five nor more than 15 directors. Each will belong to
one of three classes which was staggered three-year term 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
has committed that four of the six directors of First Northern will be elected
to Bank Mutual and the MHC Board of Directors. Mutual 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 prior to the
First Northern merger.
MUTUAL'S 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; the
years when they began serving as directors of Mutual Savings; and 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.
-93-
<PAGE> 96
<TABLE>
<CAPTION>
MUTUAL MUTUAL
SAVINGS FIRST
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 2002
Thomas H. Buestrin 64 Director 1995 2001
Raymond W. Dwyer, Jr. 77 Director 1957 2003
Herbert W. Isermann 83 Director 1982 2003
William J. Mielke 53 Director 1988 2002
David J. Rolfs 78 Director 1984 2002
</TABLE>
- - ------------------
(1) Mr. Crowley, Sr. is the father of Mr. Crowley, Jr.
Mutual expects that Michael D. Meeuwsen, First Northern's CEO, will be one
of the four First Northern director designees; his term will expire in 200_.
Mutual has not yet determined the other three designees.
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.
-94-
<PAGE> 97
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 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.
-95-
<PAGE> 98
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.
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 Executive Chairman and Chief President and
Officer Executive Officer Chief 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 President, Senior Vice Senior Vice
Secretary-Treasurer, and President and President,
Chief Financial Officer Secretary Secretary and
CFO
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 President- Senior Vice Senior Vice
Controller President President
</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.
-96-
<PAGE> 99
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 services 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. COLBERT 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.
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>
Michael T. Crowley, Jr. 1999 573,556 - 1,600
President and Chief Executive Officer 1998 573,556 16,485 1,600
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- Retail Banking 1998 133,765 4,012 1,362
1997 128,565 7,468 1,346
</TABLE>
- - ------------------
(1) Mutual Savings Bank 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.
-97-
<PAGE> 100
(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
nonqualified defined benefit pension plan. This nonqualified plan provides
monthly supplemental benefits to participants which will be paid out of
unsecured corporate assets, or the rabbi trust established for this plan. The
amount of the nonqualified 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 nonqualified plan. At March 31,
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
</TABLE>
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<PAGE> 101
<TABLE>
<CAPTION>
Final Years of Service(1)
Average ---------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 nonqualified 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. 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.
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.
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<PAGE> 102
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 Saving's 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.
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
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<PAGE> 103
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 September 30, 2000, if the plan repays its loan as
scheduled over a 10-year term, we expect that 5% of the shares will be released
in 2000, 10% of the shares will be released annually in 2001 through 2009, and
the remaining 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.
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 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.
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<PAGE> 104
FUTURE STOCK BENEFIT PLANS
Stock Option Plan. Bank Mutual intends to implement a stock option plan
for 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.
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.
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<PAGE> 105
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
anon-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, Mutual 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 4% 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.
- 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
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<PAGE> 106
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.
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 collectability or present other unfavorable futures.
PROPOSED PURCHASES OF COMMON STOCK BY MANAGEMENT
The following table presents, for each member of Mutual Savings' board
of directors and executive officers, the amount of stock they wish to purchase
in the offering. We have assumed that a sufficient number of shares will be
available to satisfy their subscriptions. The amounts include shares that may be
purchased through individual retirement accounts and by associates of members of
our Board of Directors and executive officers.
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<PAGE> 107
The table does not reflect the number of shares which management may
acquire under the employee stock ownership plan or any non tax-qualified
stock-based benefit plan, nor as a result of issuance of Bank Mutual common
stock in the First Northern merger. Mutual is not aware of any First Northern
stock ownership by its officers and directors.
None of the members of our board of directors or executive officers
expect to purchase more than % of Bank Mutual's common stock. Collectively,
the current members of the board of directors and executive officers expect to
purchase a total of shares, or % of shares sold in the offering,
assuming the sale of 5,906,014 shares of common stock.
<TABLE>
<CAPTION>
DOLLAR NUMBER
NAME AMOUNT OF SHARES
- - ---- ------ ---------
<S> <C> <C>
Michael T. Crowley, Sr.
Michael T. Crowley, Jr.
Thomas H. Buestrin
R.W. Dwyer, Jr.
Herbert W. Isermann
William J. Mielke
David J. Rolfs
Eugene H. Maurer, Jr.
P. Terry Anderegg
Christopher Callen
Marlene M. Scholz
</TABLE>
In addition, four of the current directors of First Northern will
become directors of Bank Mutual. The six First Northern directors currently own
a total of approximately 1.0 million outstanding shares of First Northern common
stock. Only four out of the six persons will become directors of Bank Mutual,
and we cannot assure that all of their current First Northern shares will be
converted into Bank Mutual shares in the First Northern merger. However, we
expect that the four persons chosen as directors will elect to receive at least
some shares of Bank Mutual common stock in the First Northern merger, thus
increasing management ownership going forward.
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 comprehensive framework of
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<PAGE> 108
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 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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<PAGE> 109
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 March 31, 2000, Mutual Savings' net worth ratio was 9.81%.
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.
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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 quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the o 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 March 31, 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
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- 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.
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.
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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 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
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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.
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
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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
- 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 depositary 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.
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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.
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 its 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,
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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 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
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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.
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
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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 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 noninterest 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.
MHC REGULATION
General. Upon completion of the restructuring, MHC will become a
federal mutual holding company within the meaning of Section 10(o) of the Home
Owners' Loan Act. As such, MHC will be required to register with and be subject
to OTS examination and supervision as well as reporting requirements. In
addition, the OTS will have enforcement authority over the MHC and its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
bank.
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Permitted Activities. A mutual holding company is permitted to, among
other things:
- invest in the stock of a savings institution;
- acquire a mutual institution through the merger of such
institution into a savings institution subsidiary of such mutual
holding company or an interim savings institution of such mutual
holding company;
- merge with or acquire another mutual holding company, one of
whose subsidiaries is a savings institution;
- acquire non-controlling amounts of the stock of savings
institutions and savings institution holding companies, subject
to various restrictions;
- invest in a corporation the capital stock of which is available
for purchase by a savings institution under federal law or under
the law of any state where the subsidiary savings institution or
institutions have their home offices;
- furnish or perform management services for a savings institution
subsidiary;
- hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary;
- hold or manage properties used or occupied by a savings
institution subsidiary; and
- act as a trustee under deed or trust.
As a result of the Gramm-Leach-Bliley Financial Modernization Act of
1999, the activities of a newly formed mutual holding company are restricted to
those of a financial nature permitting securities and insurance activities as
well as affiliations with financial companies such as insurance and securities
firms.
Waiver of Dividends. It has been the policy of a number of mutual
holding companies to waive the receipt of dividends declared by their savings
institution subsidiaries or mid-tier stock holding companies. Under OTS
regulations, the MHC may waive dividends from Bank Mutual only if the MHC
provides the OTS with written notice of its intent to waive its rights to
receive dividends 30 days prior to the proposed date of payment of the dividend
and the OTS does not object to such waiver. The OTS will not object to the
waiver if the following two determinations are made:
- the waiver would not be detrimental to the safe and sound
operation of the savings association; and
- the board of directors of the MHC expressly determines that
waiver of the dividend by the MHC is consistent with the
directors' fiduciary duties to the mutual members of the MHC.
Initially following the restructuring, the MHC expects to waive
dividends declared by Bank Mutual. The proposed management of the MHC believes
this is consistent with fiduciary duties owed to members of the MHC; among other
reasons, certain adverse tax consequences that would result from payment of the
dividend to the MHC. In addition, management believes that capital held in Bank
Mutual will be as productive, if not more productive, than capital held at the
MHC level.
If the MHC waives any dividend from Bank Mutual, then Bank Mutual would
pay such dividend only to its public shareholders. The MHC's decision as to
whether to waive a particular dividend will depend on a number of factors,
including its capital needs, the investment alternatives available to the MHC as
compared to those available to Bank Mutual, and the possibility of regulatory
approvals.
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
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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 BankS 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.
TAXATION
GENERAL. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the federal tax rules
applicable to Mutual Savings, the MHC or Bank Mutual. In addition, this
discussion does not consider the effect of foreign, state and local taxes. For
federal income tax purposes, Mutual Savings reports its income on the basis of a
taxable year ending December 31, uses the accrual method of accounting, and is
generally subject to federal income taxation in the same manner as other
corporations. Following the restructuring, Bank Mutual, Mutual Savings and First
Northern Savings will constitute an affiliated group of corporations and,
therefore, will be eligible to report their income on a consolidated basis.
Because the MHC will own less than 80% of the common stock of Bank Mutual, it
will not be a member of that affiliated group and will report its income on a
separate return.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986,
as amended, imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of
which Mutual Savings currently has none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, Mutual
Savings' AMTI is increased by an amount equal to 75% of the amount by which
Mutual Savings' adjusted current earnings exceeds it AMTI, determined without
regard to this adjustment and prior to reduction for net operating losses.
ELIMINATION OF DIVIDENDS; DIVIDENDS RECEIVED DEDUCTION. Bank Mutual may
exclude from its income 100% of dividends received from Mutual Savings and First
Northern as a member of the same affiliated group of corporations. Because,
following the restructuring, the MHC will not be a member of the affiliated
group, it will not qualify for such 100% dividends exclusion, but will be
entitled to deduct 80% of the dividends it receives from Bank Mutual so long as
it owns more than 20% of the common stock of Bank Mutual.
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THE RESTRUCTURING AND THE OFFERING
GENERAL
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. Under the plan, 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 plan of stock issuance remain subject
to 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 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.
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
Following receipt of all required regulatory approvals and approval of
the plan of restructuring by the members, the restructuring will be effected in
a manner approved by the OTS that is consistent with the purposes of the plan of
restructuring and applicable law.
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' right, title and interest in and to all property
will, by operation of law, immediately vest in the stock bank, without the
necessity of any conveyance or transfer and without any further act. The Stock
Bank will have, hold, and enjoy the same in its right and fully and to the same
extent as the same was possessed, held, and enjoyed by Mutual Savings, although
in the merger all stock of the MHC held by Mutual Savings will be cancelled. The
Stock Bank will continue to have, succeed to, and be responsible for all the
rights, liabilities, and obligations of Mutual Savings and will maintain its
headquarters operations at Mutual Savings's present location.
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
whatever nature of Mutual Savings that are not expressly retained by the MHC or
Bank Mutual shall be deemed 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
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distribute additional capital to the MHC following the restructuring, subject to
OTS regulations governing capital distributions. Mutual Savings and First
Northern Savings are expected to pay dividends to Bank Mutual following the
restructuring, in accordance with the OTS regulations.
EFFECTS OF THE RESTRUCTURING
GENERAL. The Stock Bank will be authorized to exercise any and all
powers, rights and privileges 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. It is expected that
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, upon the effective date of the restructuring, the voting, ownership and
liquidation rights of members of Mutual Savings will become the rights of
members of the MHC, subject to the conditions specified below. Members of Mutual
Savings at the effective date will automatically become the members of the MHC.
Each deposit account in Mutual Savings at the effective date will become a
deposit account in the Stock Bank in the same amount and upon the same terms and
conditions, except that the holder of each such deposit account will have
ownership and membership rights with respect to the MHC rather than the Stock
Bank for so long as such holder maintains a deposit account with 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 deposit accounts existing in Mutual Savings immediately
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 shall retain the
same status with the Stock Bank after the restructuring as they had with Mutual
Savings immediately prior to the restructuring. Borrowers are not members of
Mutual Savings and, accordingly, 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.
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. By virtue 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 resolution by vote, excluding certain matters related to stock
compensation plans and certain votes regarding a conversion to stock form by the
MHC. The Stock Bank and Bank Mutual may issue any amount of non-voting stock to
persons other than the MHC.
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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. According to regulations of the
OTS, the revocable proxies that members of Mutual Savings have granted to the
board of directors of Mutual Savings, which confer on the board of directors of
Mutual Savings general authority to cast a member's vote on any and all matters
presented to the members, shall be deemed to cover the member's votes as a
member of the MHC, and such authority shall be conferred on the board of
directors of the MHC. The plan of restructuring also provides for the transfer
of proxy rights to the board of directors of the MHC. Accordingly, the board of
the MHC will, in effect, be able to govern the operations of the MHC, and hence
Mutual Savings, notwithstanding objections raised by members of the MHC, so long
as the board of directors has been appointed proxy for a majority of the
outstanding votes of members of the MHC, and such proxies have not been revoked.
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. In the event of a voluntary liquidation of Mutual
Savings 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, to the extent of their deposit
balances, 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, dissolution or winding-up of Mutual Savings
and, except through their liquidation interests in the MHC, discussed below,
holders of deposit accounts in Mutual Savings would have no interest in any such
assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up 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. Federal law and regulations require that any mutual savings bank
which converts to a stock savings bank set aside a "liquidation account"
representing its net worth as of the time of conversion. While former members of
the mutual savings bank would have a right under some circumstances to
participate in a distribution of this account upon a liquidation of the savings
bank, the possibility of such a liquidation ever occurring is extremely remote.
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.
If, at some point in the future, the MHC converted to stock ownership,
Mutual Savings' depositors will continue to have specified rights to purchase
shares of the resulting entity. The plan of restructuring provides that
outstanding shares of Bank Mutual would be converted into shares of a surviving
entity in manner which would reflect the proportionate interest of the public
shareholders in Bank Mutual as compared to MHC's interest. Mutual Savings'
depositors on the January 31, 1999 eligibility record date with the same account
number and account title at a future eligibility date would have first priority
in any full conversion subscription offering to Mutual Savings' depositors, with
other depositors on a specified future eligibility date having the next
priority. Any future full conversion would be subject to government rules and
regulations as then in effect, and we cannot assure that full conversion would
occur.
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POSSIBLE CONVERSION OF THE MHC TO STOCK FORM
It is possible that at some point in the future, Mutual would make a
"full conversion" from the mutual to the stock form of organization. The plan of
restructuring pursuant to which Mutual Savings is effecting the current
restructuring includes provisions which would govern treatment of various
constituencies' interest 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.
FEDERAL TAX CONSEQUENCES OF THE RESTRUCTURING
The following is a discussion of the material federal income tax
consequences of the restructuring of Mutual Savings. This discussion is for
general information only and does not address all tax consequences of the
restructuring. In addition, no information is provided with respect to the tax
consequences of the restructuring under applicable foreign, state or local laws.
The restructuring will be accomplished as follows:
(a) Mutual Savings will convert from a state-chartered savings bank
to a federal savings bank.
(b) Mutual Savings will form the MHC, a federally-chartered mutual
holding company which will be subject to regulation by OTS. The
MHC will form a transitory federal stock savings bank
("Transitory"). Mutual Savings has owned all of the shares of
Bank Mutual and will contribute those shares to the MHC. The MHC
will thereupon own all of the stock of both Bank Mutual and
Transitory.
(c) Mutual Savings will convert to a federal stock savings bank. The
depositors of Mutual Savings will receive deposit accounts in
Stock Bank with the same terms and conditions as their deposit
accounts in Mutual Savings.
(d) Transitory will merge into Stock Bank in a transaction in which
the MHC will receive all of the stock of Stock Bank. Stock Bank
will be the surviving corporation in the merger.
(e) The MHC will transfer the stock of Stock Bank to Bank Mutual so
that Bank Mutual will hold all of the stock of Stock Bank, and
the MHC will initially own 100% of the shares of common stock of
Bank Mutual. The former depositors of Mutual Savings will hold
all of the liquidation interests
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and voting rights in the MHC, for so long as, and to the extent,
they continue to maintain their qualifying deposits with Stock
Bank.
(f) Simultaneously with the First Northern merger, Bank Mutual will
issue shares of its stock to the public and the Bank Mutual
employee benefit plans for cash in the subscription offering at
the price to purchasers at $10 per share.
(g) The initially issued stock of Stock Bank, which will be
constructively received by the former Mutual Savings' depositors
when Mutual Savings becomes a stock savings bank under step (c)
above, will be issued to the MHC in exchange for liquidation
interests in the MHC which will be held by Mutual Savings'
depositors.
In addition, as a result of the First Northern merger, Bank Mutual will
be the sole shareholder of First Northern Savings.
Bank Mutual will concurrently offer for sale shares of its common stock
pursuant to the plan of restructuring. The amount of Bank Mutual common stock to
be offered to the public will be determined so that the total Bank Mutual issued
to First Northern shareholders in the First Northern Merger, the public, and
reserved for options or the other compensation programs for directors and
employees of Bank Mutual and its subsidiaries will constitute less than 49.9% of
the total common stock of Bank Mutual. The balance of the common stock of Bank
Mutual will be owned by the MHC. As a result of these transactions:
- Mutual Savings and First Northern Savings will be a wholly owned
subsidiary of Bank Mutual;
- Bank Mutual will be a majority owned subsidiary of the MHC; and
- the depositors of Mutual Savings will hold liquidation interests
in the MHC.
Under this structure:
- the conversion of Mutual Savings from a state-chartered mutual
savings bank to a federal savings bank, and then to a federal
stock savings bank, is intended to be a reorganization under
Section 368(a)(1)(F) of the Code;
- the exchange of the shares of Mutual Savings' initial common
stock deemed constructively received by depositors for
liquidation interests and voting rights in the MHC is intended
to be part of a tax-free exchange under Section 351 of the Code;
and
- the First Northern merger is intended to be a reorganization
under Section 368(a)(1)(A) of the Code.
Under the plan of restructuring, consummation of the restructuring is
conditioned upon, among other things, the prior receipt by Mutual Savings of
either a private letter ruling from the IRS or an opinion of Mutual Savings'
counsel as to the federal income tax consequences of the restructuring to Mutual
Savings (in both its mutual and stock form), the MHC, Bank Mutual and the
eligible account holders and supplemental account holders. In Rev. Proc. 2000-3,
2000-1 I.R.B. 103, the IRS announced that it will not rule on whether a
transaction qualifies as a tax-free reorganization under Section 368(a)(1)(F) of
the Code or as a tax-free exchange of stock for stock in the formation of a
holding company under Section 351 of the Code, but that it will rule on
significant subissues that must be resolved to determine whether the transaction
qualifies under either of these Code sections.
Based in part upon certain representations of Mutual Savings and First
Northern and customary assumptions, Quarles & Brady LLP, Mutual's counsel, will
issue its opinion regarding certain federal income tax consequences of the
restructuring. Mutual Savings has requested a private letter ruling from the IRS
regarding certain significant subissues associated with the restructuring.
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In the following discussion, "Mutual Bank" refers to Mutual Savings
before the restructuring and "Stock Bank" refers to Mutual Savings after the
restructuring. With regard to the restructuring, Quarles & Brady will issue its
opinion to the effect that:
(1) the conversion of Mutual Savings from a state-chartered mutual
savings bank to a federal savings bank, and then to a federal
stock savings bank, will constitute a "reorganization" under
Section 368(a)(1)(F) of the Code, and Mutual Savings (in either
its status as Mutual Bank or Stock Bank) will not recognize gain
or loss as a result of the reorganization;
(2) the basis of each asset of Mutual Bank received by Stock Bank in
the reorganization will be the same as Mutual Bank's basis for
such asset immediately prior to the reorganization;
(3) the holding period of each asset of Mutual Bank received by
Stock Bank in the reorganization will include the period during
which such asset was held by Mutual Bank prior to the
reorganization;
(4) Mutual Bank's depositors will recognize no gain or loss upon
their constructive receipt of shares of Stock Bank common stock
solely in exchange for their interests (i.e., liquidation
interests and voting rights) in Mutual Bank;
(5) no gain or loss will be recognized by the depositors of Mutual
Savings (formerly Mutual Bank) upon the transfer to the MHC of
shares of Stock Bank common stock they constructively receive in
the reorganization in exchange for interests (i.e., liquidation
interests and voting rights) in the MHC;
(6) no gain or loss will be recognized by depositors of Mutual Bank
upon the issuance to them of deposits in Stock Bank in the same
dollar amount as their deposits in the Mutual Bank;
(7) no gain or loss will be recognized by those that purchase shares
of Bank Mutual in the subscription offering upon the transfer of
cash to Bank Mutual in exchange for shares of common stock of
Bank Mutual; and
(8) no gain or loss will be recognized by Bank Mutual upon the
issuance of shares of Bank Mutual in exchange for cash in the
subscription offering.
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' position.
ACCOUNTING CONSEQUENCES
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 not be affected by the restructuring and
will be reflected in the Stock Bank's financial statements at their historical
amounts.
The First Northern merger will be accounted for as a purchase in
accordance with generally accepted accounting principles. Accordingly, the
assets and liabilities of First Northern will be initially carried on all
applicable financial statements at fair value as of the merger date and the
excess of the purchase price over the fair value of the net assets will be
recorded as an intangible asset to be amortized in future periods.
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CONDITIONS TO THE RESTRUCTURING
Consummation of the restructuring is subject to the receipt of all
requisite regulatory approvals, including various approvals of the OTS. We
cannot assure that all regulatory approvals will be received. Receipt of such
approvals from the OTS will not constitute a recommendation or endorsement of
the plan of restructuring or the related stock issuance plan by the OTS.
Completion also is subject to approval by a majority of the total number of
votes entitled to be cast by members of Mutual Savings at the special meeting
called for voting on the plan of restructuring. We must also receive rulings by
the IRS and/or opinions of Mutual Savings' attorneys with respect to the tax
consequences of the restructuring. See "Federal and State Tax Consequences of
the Restructuring."
AMENDMENT OR TERMINATION OF THE PLAN OF RESTRUCTURING
If necessary or desirable, the terms of the plan of restructuring may
be substantively amended by the board of directors of Mutual Savings as a result
of comments from regulatory authorities or otherwise prior to the solicitation
of proxies from the members, and at any time thereafter with the concurrence of
the OTS. The plan of restructuring may be terminated by the board of directors
at any time prior to the special meeting and at any time thereafter with the
concurrence of the OTS. In its discretion, the board of directors may modify or
terminate the plan of restructuring upon the order of the regulatory authorities
or to conform to new mandatory regulations of the OTS, without a resolicitation
of proxies or another meeting of the members, if the OTS concurs that such
resolicitation is not required. However, any material amendment of the terms of
the plan of restructuring that relate to the restructuring that occurs after the
special meeting shall require a resolicitation of members. The plan of
restructuring will be terminated if not completed within 24 months from the date
upon which the members of Mutual Savings approve it, and such period may not be
extended by Mutual Savings.
The related stock issuance plan also may be amended or terminated.
Unless an extension is granted by the OTS, the stock issuance plan shall be
terminated if not completed within 90 days of the date of approval of the stock
issuance plan by the OTS.
THE OFFERING
Contemporaneously with the restructuring, Bank Mutual is offering
shares of its common stock to persons other than the MHC. Bank Mutual is
offering between a minimum of 4,633,564 shares and a maximum of 7,178,464 shares
of common stock in the offering, subject to adjustment to up to 8,641,781 shares
in the event the estimated pro forma market value of the common stock has
increased at the conclusion of the offering. The shares sold in the offering
will be in addition to shares which will be issued by Bank Mutual in the First
Northern merger.
The offering will expire at 10:00 a.m., Central Time, on the expiration
date, unless extended by Mutual Savings. A minimum purchase of 25 shares of
common stock is required in order to participate in the offering. Bank Mutual
may cancel the offering at any time, and orders for common stock that have been
submitted prior thereto are subject to cancellation under such circumstances.
As described in more detail below, non-transferable rights to subscribe
for the common stock in the subscription offering have been granted to certain
persons according to certain preference categories. Subject to the prior rights
of holders of subscription rights and the requirements of the First Northern
merger, Mutual Savings may also offer shares of common stock in a community
offering to certain members of the general public. Mutual Savings may reject, in
whole or in part, orders received in the community offering in its sole
discretion.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription
offering will expire at 10:00 a.m., Central Time, on __________, 2000, unless we
extend this period for up to 45 days. We may further extend this period for
additional 60 day periods with the approval of the OTS. Subscription rights
which have not been exercised prior to the expiration date, as extended, will
become void. If an extension beyond _________, 2000 is
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granted, Mutual Savings will resolicit subscribers, notifying them of the
extension of time and of their rights to change or cancel their orders. Each
subsequent extension may not exceed 60 days, and all extensions, in the
aggregate, may not last beyond _____________, 2002.
If all shares have not been subscribed for by the expiration date, as
extended, all funds delivered to Mutual Savings will be returned promptly with
interest at our passbook savings rate and all deposit account withdrawal
authorizations will be canceled.
SUBSCRIPTION OFFERING. In accordance with OTS regulations, subscription
rights have been granted pursuant to the stock issuance plan to the following
persons, the eligible subscribers, in the following order of priority:
(1) Eligible Account Holders--depositors with aggregate account
balances of $50 or more on deposit ("qualifying deposit") at
Mutual Savings as of January 31, 1999;
(2) the Mutual employee stock ownership plan, the "ESOP";
(3) Supplemental Eligible Account Holders--depositors, other than
officers or directors of Mutual Savings or any of their
associates, with a qualifying deposit, as of June 30, 2000);
(4) Other Members--depositors as of __________, 2000, the voting
record date, who are not Eligible Account Holders or
Supplemental Eligible Holders; and
(5) directors, officers and employees of Mutual Savings who do not
qualify in earlier priorities.
Subscription rights are non-transferable and have been granted to
eligible subscribers without charge. No one is required to purchase any shares
of common stock in the subscription offering. All subscriptions received will be
subject to the availability of common stock after satisfaction of subscriptions
of all eligible subscribers having prior rights in the subscription offering and
to the maximum purchase limitations and other terms and conditions set forth in
the stock issuance plan. See "Limitations on Common Stock Purchases." Among the
limitations are:
Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment, non-transferable rights to
subscribe for common stock in an amount of up to $1.0 million, or 100,000
shares.
If there are not sufficient shares available to satisfy all
subscriptions by eligible account holders, shares first will be allocated so as
to permit each subscribing eligible account holder to purchase a number of
shares sufficient to make such eligible account holder's total allocation equal
to the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining eligible account
holders whose subscriptions remain unfilled in the proportion that the amount of
their respective qualifying deposit bears to the total amount of qualifying
deposits of all eligible account holders whose subscriptions remain unfilled.
However, no fractional shares shall be issued.
The subscription rights of eligible account holders who are also
directors or officers of Mutual Savings or their associates will be subordinated
to the subscription rights of other eligible account holders to the extent
attributable to increased deposits in the one-year period preceding January 31,
1999.
Priority 2: The Employee Stock Ownership Plan. On a second priority
basis the Mutual ESOP will receive, without payment therefor, non-transferable
subscription rights to purchase up to 8% of the common stock to be issued in the
offering and the First Northern merger. As a tax-qualified employee benefit
plan, the ESOP expects to purchase 8% of those shares. Subscriptions by the ESOP
will not be aggregated with shares of common stock purchased directly by or
which are otherwise attributable to any other participants in the offering,
including subscriptions of any of Mutual Savings' directors, officers or
employee. It has not been determined whether the ESOP will subscribe for shares
in the offering or purchase shares in private transactions or on the open market
after completion of the offering.
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Priority 3: Supplemental Eligible Account Holders. To the extent that
there are shares remaining after satisfaction of the subscriptions by eligible
account holders and the ESOP, shares will be made available to supplemental
eligible account holders. Subject to that allocation, each supplemental account
holder will receive non-transferable rights to subscribe for common stock in an
amount of up to $1.0 million.
If there are not sufficient shares available to satisfy all
subscriptions by supplemental eligible account holders, available shares first
will be allocated among subscribing supplemental eligible account holders so as
to permit each supplemental eligible account holder to purchase a number of
shares sufficient to make such supplemental eligible account holder's total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated among the remaining
supplemental eligible account holders whose subscriptions remain unfilled in the
proportion that the amount of their respective qualifying deposit bears to the
total amount of qualifying deposits of all supplemental eligible account holders
whose subscriptions remain unfilled. However, no fractional shares shall be
issued.
Priority 4: Other Members. To the extent that there are shares
remaining after satisfaction of the subscriptions by eligible account holders,
the ESOP and supplemental eligible account holders, shares will be made
available to other members. Each will receive non-transferable rights to
subscribe for common stock in an amount of up to $1.0 million.
If there are not sufficient shares available to satisfy all
subscriptions by other members, available shares first will be allocated among
subscribing other members so as to permit each other member to purchase a number
of shares sufficient to make such other member's total allocation equal to the
lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining other members whose
subscriptions remain unfilled in the proportion that the amount of their
respective qualifying deposit bears to the total amount of qualifying deposits
of all other members whose subscriptions remain unfilled. No fractional shares
shall be issued.
Priority 5: Employees, Officers and Directors. On a fifth priority
basis, each employee, officer and director of Mutual Savings at the time of the
offering who is not eligible in the preceding priority categories shall receive
non-transferable subscription rights to subscribe for common stock in an amount
up to $1.0 million.
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
stock issuance plan reside. However, we are not required to offer stock in the
subscription offering to any person who resides in a foreign country.
FIRST NORTHERN MERGER. In connection with the First Northern merger,
Bank Mutual will issue shares to the First Northern shareholders as part of the
consideration for that transaction. Bank Mutual will issue to First Northern
shareholders at least the minimum number of shares needed to complete that
merger, and those shares will not be part of the stock offering. In addition, in
the event that shares remain available after the subscription offering, Bank
Mutual may set aside those shares and issue them in the First Northern merger,
rather than including them in the community offering or syndicated community
offering.
COMMUNITY OFFERING. Subject to the availability of shares of common
stock after satisfaction of all subscriptions of eligible account holders, the
ESOP, supplemental eligible account holders, other members, and officers,
directors and employees, and any shares set aside for First Northern
shareholders, the remaining shares of the common stock may be offered in a
community offering to the public, with a preference to persons who are residents
of the counties where Mutual Savings or First Northern Savings maintain an
office. No individual who purchases common stock in the community offering may
subscribe for more than $1.0 million, or 100,000 shares.
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MUTUAL SAVINGS RESERVES THE RIGHT TO ACCEPT OR REJECT, IN WHOLE OR IN
PART, ANY OR ALL ORDERS IN THE COMMUNITY OFFERING, EITHER AT THE TIME OF RECEIPT
OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE TERMINATION OF THE OFFERING.
IF A PART OF YOUR ORDER IS REJECTED, YOU MAY NOT CANCEL THE REMAINDER OF YOUR
ORDER.
The counties in which Mutual Savings or First Northern Savings maintain
offices are Milwaukee, Barron, Brown, Calumet, Chippewa, Columbia, Dane, Dodge,
Door, Dunn, Eau Claire, Fond du Lac, Green Lake, Manitowoc, Marinette,
Outagamie, Ozaukee, Pierce, Polk, Rock, St. Croix, Sawyer, Shawano, Sheboygan,
Washburn, Waukesha, Waupaca and Winnebago Counties in Wisconsin, and Washington
County in Minnesota.
The term "residents" includes persons who occupy a dwelling within
these counties and have established an ongoing physical presence in it, together
with an indication that such presence is not merely transitory in nature. To the
extent the person is a corporation or other business entity, the principal place
of business or headquarters shall be in these counties. We may utilize depositor
or loan records or such other evidence to make a determination as to whether a
person is a resident. In all cases, the determination of resident status will be
made by us in our sole discretion. No person may purchase more than $1.0 million
of common stock in the community offering. Allocation of shares if an o
oversubscription occurs will give preference to persons residing in the counties
listed above, and will be made in an o equitable manner determined by us.
The community offering, if any, may commence concurrently with, during
or subsequent to the subscription offering and shall terminate no later than 45
days after the expiration of the subscription offering, unless extended by
Mutual Savings, with the approval of the OTS, if necessary. We may terminate the
community offering as soon as we have received orders in sufficient amount for
us to issue at least the minimum number of shares required to be issued,
4,633,564 shares.
SYNDICATED COMMUNITY OFFERING. If any stock remains unsold in the
subscription and community offerings, we expect to use the services of
broker-dealers to sell such shares on a best efforts basis in a syndicated
community offering to be managed by Ryan, Beck. A syndicated community offering
may be conducted instead of or in addition to a community offering. It is
contemplated that no person may purchase more than $1.0 million of common stock
in the syndicated community offering.
Neither Ryan, Beck nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering. However, Ryan, Beck has agreed to use its best efforts in
the sale of shares in any syndicated community offering. The syndicated
community offering may commence during the community offering, if any, or after
the community offering is terminated. We may terminate the syndicated community
offering at any time, but it must terminate no more than 45 days following the
expiration of the subscription offering, unless extended by Mutual Savings with
the approval of the OTS.
If for any reason a syndicated community offering cannot be effected or
is not advisable and any shares remain unsold after the subscription and
community offerings, if any, Mutual will seek to make other arrangements for the
sale of the remaining shares. These other arrangements will be subject to the
approval of the OTS and to compliance with applicable state and federal
securities laws.
MUTUAL SAVINGS RESERVES THE RIGHT TO ACCEPT OR REJECT, IN WHOLE OR IN
PART, ANY OR ALL ORDERS IN THE SYNDICATED COMMUNITY OFFERING, EITHER AT THE TIME
OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE TERMINATION OF
THE OFFERING.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The plan of restructuring requires that the purchase price of the
common stock must be based on the appraised pro forma market value of the common
stock, as determined on the basis of an independent valuation. Mutual Savings
and Bank Mutual have retained RP Financial to make the independent valuation. RP
Financial's
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fees for its services in making such appraisal (and a business plan relating to
the restructuring and stock offering) are estimated to be $120,000, plus
expenses. Mutual Savings and Bank Mutual will indemnify RP Financial and its
employees and affiliates against losses, including any losses in connection with
claims under federal securities laws, arising out of its services as appraiser,
except where RP Financial's liability results form its negligence or bad faith.
RP Financial made its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
- - - the present and projected operating results and financial condition of
Bank Mutual, Mutual Savings, First Northern, and the economic and
demographic conditions in Mutual Savings' and First Northern's existing
market area;
- - - certain historical, financial and other information relating to Mutual
Savings and First Northern;
- - - a comparative evaluation of the operating and financial statistics of
Mutual Savings and First Northern with those of other publicly traded
mutual holding companies;
- - - the aggregate size of the offering and issuance of common stock;
- - - the impact of the stock offering and merger on Mutual Savings' net
worth and earnings potential;
- - - the proposed dividend policy of Bank Mutual and Mutual Savings; and
- - - the trading market for securities of comparable institutions and
general conditions in the market for such securities;
In its review of the appraisal provided by RP Financial, the board of
directors of Mutual Savings reviewed the methodologies and the appropriateness
of the assumptions used by RP Financial in addition to the factors listed above,
and the board of directors believes that such assumptions were reasonable.
RP Financial has estimated that in its opinion as of June 12, 2000, the
estimated pro forma market value of Mutual, assuming completion of the stock
offering and the First Northern merger, was between $144.5 million and $195.5
million, with a midpoint of $170.0 million.
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 5,143,685 shares to former shareholder of First Northern, the pro
forma market value of Mutual Savings ranged between $195.9 million and $246.9
million, with a midpoint pro forma market value of $221.4 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 percent of outstanding g shares, while the MHC's
ownership will equal 50.1 percent. Given the 5,143,685 shares to be issued to
the former g shareholders of First Northern, this results in an offering range
of between 4,633,564 and 7,178,464 shares, with a g midpoint of 5,906,014
shares. Following the stock offering and First Northern merger, shares
outstanding to the public g will therefore range between 9,777,249 and
12,322,149, with a midpoint of 11,049,699 shares. Total outstanding g shares,
held by the MHC and public owners, will range between 19,593,685 and 24,693,685.
The appraisal was based in part upon Mutual Savings' financial
condition and operations, the financial g condition and operations of First
Northern, the effect of the First Northern merger and the effect of the
additional capital Bank Mutual will raise from the sale of common stock. RP
Financial's independent appraisal will be updated before we complete our
restructuring.
The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, RP Financial has relied upon and
assumed the accuracy and completeness of financial and statistical information
provided by Mutual Savings or First Northern. RP Financial did not independently
verify the consolidated financial statements and other information provided by
Mutual Savings or First Northern, nor did RP Financial value independently the
assets or liabilities of Mutual Savings or First Northern. The independent
valuation considers Mutual Savings only
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as a going concern and should not be considered as an indication of the
liquidation value of Mutual Savings. Moreover, because such independent
valuation is based on estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing the common stock will be able to sell such shares at a price
equal to or greater than the $10.00 per share purchase price in the offering.
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.
The maximum of the estimated valuation range may be increased up to 15%
and the number of shares of common stock to be issued in the restructuring and
offering may be increased to 27,626,185 shares and 8,641,781 shares,
respectively due to regulatory considerations, changes in the market and general
financial and economic conditions without the resolicitation of subscribers. See
"--Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the estimated valuation range to fill unfilled orders in the offering.
We may not sell any shares of common stock unless RP Financial confirms
to Mutual Savings, Bank Mutual, and the OTS that, to the best of its knowledge,
nothing of a material nature has occurred which, taking into account all
relevant factors, would cause RP Financial to conclude that the aggregate value
of the common stock is incompatible with its estimate of the pro forma market
value of the common stock at the conclusion of the offering.
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the minimum of the estimated valuation range, Mutual Savings and
Bank Mutual, after consulting with the OTS, may:
(1) terminate the plan and return all funds promptly with interest
at Mutual Savings' passbook rate of interest on payments made by
check, bank check or money order;
(2) establish a new estimated valuation range and either:
(a) hold a new stock offering; or
(b) provide subscribers the opportunity to change or cancel
their orders (a "resolicitation");
(3) take such other actions as permitted by the OTS in order to
complete the restructuring.
If a resolicitation is commenced, unless an affirmative response is received
from a subscriber within a designated period of time, all funds will be promptly
returned to the subscriber as described above.
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed memorandum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection at
the main office of Mutual Savings.
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MARKETING ARRANGEMENTS
Ryan, Beck & Co. Inc. We have engaged Ryan, Beck as financial and
marketing agent in connection with the offering of the common stock. Ryan, Beck
has agreed to use its best efforts to assist us with the solicitation of
subscriptions for shares of common stock in the offering.
Ryan, Beck will receive an advisory and administrative fee of $100,000
and a marketing fee of 1.5% of the dollar amount of shares issued in the
subscription and community offering, excluding any shares that are used as
merger consideration. If shares which otherwise could be sold in the community
offering are set aside for use in the First Northern merger, Ryan, Beck will
also be paid a 1.5% fee, up to a maximum of $100,000, with respect to those
shares; no fee will be payable to Ryan, Beck in respect of other shares issued
in the First Northern merger in addition to the community offering. No marketing
fee will be paid related to the sale of common stock to officers, directors or
employees of Mutual Savings, or members of their immediate families or to the
ESOP. If there is a syndicated community offering, we will also pay Ryan, Beck a
management fee equal to 1.5% of the dollar amount of common stock sold in the
syndicated community offering, which fee, along with fees payable by us to any
broker-dealers including Ryan, Beck, for the shares they sell, will not exceed
5.5% of the aggregate purchase price of the common stock sold in the syndicated
community offering. Ryan, Beck will also be reimbursed for its reasonable
out-of-pocket expenses, up to $35,000 and its legal fees, up to $75,000.
Directors, Officers and Employees. Directors and officers of Mutual
Savings may participate in the solicitation of offers to purchase common stock.
Other employees of Mutual Savings may participate in the offering in ministerial
capacities or provide clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase common stock or
provide advice regarding the purchase of common stock. Mutual Savings will rely
on Rule 3a4-1 under the Exchange Act, and sales of common stock will be
conducted within the requirements of Rule 3a4-1, so as to permit directors,
officers and employees to participate in the sale of common stock. No director,
officer or employee of Mutual Savings will be compensated in connection with his
or her participation by the payment of commissions or other remuneration based
either directly or indirectly on transactions in common stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
Use of Order Forms. To purchase shares in the subscription offering and
the community offering, an executed order form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
a subscriber's deposit accounts at Mutual Savings (which must be given by
completing the appropriate blanks on the stock order form), must be received by
Mutual Savings by 10:00 a.m., Central Time, on the indicated expiration date,
unless extended. You may submit your order form by mail using the return
envelope provided or by overnight courier to the indicated address, or by
bringing your order form to our stock information center in our headquarters
office. Stock order forms which are not received by such time or are executed
defectively or are received without full payment (or correct withdrawal
instructions) are not required to be accepted. In addition, we are not obligated
to accept orders submitted on photocopied or facsimilied order forms. We have
the power to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that we will do so.
Once received, an executed order form may not be modified, amended or
rescinded without our consent unless we conduct a resolicitation of subscribers.
If resolicitation is commenced, subscribers will have an opportunity to change
or cancel their orders. Unless an affirmative response is received from a
subscriber within a designated timeframe, all funds will be promptly returned to
the subscriber with interest at Mutual Savings' passbook savings rate and all
account withdrawal authorizations will be canceled.
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In order to ensure that eligible account holders, supplemental eligible
account holders and other members are properly identified as to their stock
purchase eligibility, depositors must list on the stock order form all deposit
accounts as of the applicable eligibility record date, giving all names on each
account and the account numbers.
To ensure that each purchaser received a prospectus at least 48 hours
prior to the expiration date for the offering, in accordance with Rule 15c2-8 of
the Exchange Act, no prospectus will be mailed later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Order forms will only be distributed when preceded or
accompanied by a prospectus.
Payment for Shares. Payment for subscriptions may be made by personal
check, bank check, money order or by authorization of withdrawal from your
current deposit accounts maintained at Mutual Savings. Interest will be paid on
payments made by check, bank check or money order at our passbook savings rate
of interest from the date payment is received until the completion or
termination of the restructuring. If payment is made by authorization of
withdrawal from a deposit account, the funds authorized to be withdrawn will
remain in the account and continue to accrue interest at the contractual rate
until completion or termination of the restructuring, but a hold immediately
will be placed on such funds, thereby making them unavailable to the depositor.
Mutual Savings will waive any applicable penalties for early withdrawal
from certificates of deposit. If the remaining balance in a certificate account
is reduced below the applicable minimal balance requirement at the time that the
funds are transferred under the authorization, the certificate will be canceled
at the time of the withdrawal, without penalty, and the remaining balance will
be converted into a statement savings account and will earn interest at the
statement savings rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes. Rather, the ESOP may pay for such shares of common stock
subscribed for at the $10.00 per share purchase price upon completion of the
offering; provided, that there is in force from the time of its subscription
until such time, a loan commitment acceptable to Mutual Savings from an
unrelated financial institution or from Bank Mutual to lend to the ESOP the
aggregate purchase price of the shares for which it subscribed. Bank Mutual
intends to provide such a loan to the ESOP.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the subscription and community offerings,
provided that such IRAs are not maintained at Mutual Savings. Persons with IRAs
maintained at Mutual Savings must have their accounts transferred to an
unaffiliated institution or broker-dealer to purchase shares of common stock in
the subscription and community offerings. In addition, the provisions of ERISA
and IRS regulations require that officers, trustees and ten percent shareholders
who use self-directed IRA funds to purchase shares of common stock in the
subscription and community offerings make such purchase for the exclusive
benefit of the IRAs. Assistance on how to transfer IRAs maintained at Mutual
Savings can be obtained from the Stock Information Center. Depositors interested
in using funds in an IRA to purchase common stock should contact the Stock
Information Center as soon as possible.
Certificate Delivery. Certificates representing shares of common stock
purchased will be mailed to purchasers to the address specified by subscribers
on properly completed order forms, as soon as practicable following completion
of the offering. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
STOCK INFORMATION CENTER
If you have any questions regarding the offering or the restructuring,
please call the Stock Information Center at 800-_______, from 9:00 a.m. to 4:00
p.m., Central Time, Monday through Friday.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
Regulations prohibit any person with subscription rights from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the stock
issuance plan or the shares of common stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for such person's account. Each person exercising subscription rights will
be required to certify that the purchase is solely for such person's own account
and there is no agreement or understanding regarding the sale or transfer of
such shares. The regulations also prohibit any person from offering or making an
announcement of an offer or an intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the restructuring.
We will pursue any and all legal and equitable remedies (including
forfeiture) in the event we become aware of the transfer of subscription rights
and will not honor orders known by us to involve the transfer of such rights.
LIMITATIONS ON COMMON STOCK PURCHASES
The stock issuance plan includes the following limitations on the
number of shares of common stock which may be purchased in the offering:
(1) No subscription for fewer than 25 shares will be accepted;
(2) No fractional shares will be issued;
(3) Purchasers in the subscription offering may subscribe for common
stock in an amount up to $1,000,000.
(4) The tax-qualified employee benefit plans are permitted to
purchase up to 8% of the shares of common stock issued in the
offering and the merger and, as a tax-qualified employee benefit
plan, the ESOP intends to purchase 8% of the shares of common
stock issued in the offering and the First Northern merger;
(5) The current officers and directors of Mutual Savings and their
associates, in the aggregate, excluding purchases by the
tax-qualified employee benefit plans, may purchase up to 25% of
the shares of stock issued in the offering and the First
Northern merger. Each officer and director who does not qualify
as an eligible account holder, supplemental eligible account
holder or other member will be subject to the same purchase
limitations as eligible account holders, supplemental eligible
account holders and other members;
(6) Persons purchasing shares of common stock in the community
offering or in the syndicated community offering may purchase
common stock in an amount up to $1,000,000; and
(7) Except for the tax-qualified employee benefit plans, the maximum
amount of shares of common stock purchased in all categories of
the offering combined by any person, together with associates
of, and groups of persons acting in concert with, such person,
shall not exceed $1,000,000.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the maximum purchase amounts may be altered by
Bank Mutual, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, to the following
amounts: (i) increased, including to a level above 5% of the shares offered in
the offering, so long as orders exceeding 5% shall not in the aggregate, exceed
10% of the shares offered, or (ii) decreased to not less than 0.1% of the number
of shares of stock offered in
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the offering and issued in the First Northern merger, or 12,322,149 shares. If
the purchase limitations are increased, subscribers for the maximum amount in
the subscription offering and, at Mutual Savings' discretion certain other large
subscribers will be given the opportunity to increase their subscriptions up to
the then applicable limit. Requests to purchase additional shares of common
stock under this provision will be determined by and in the sole discretion of
the Board of Directors of Mutual Savings and if necessary, allocated giving
priority in accordance with the priorities set forth in the plan of stock
issuance and described in this prospectus.
If we sell more than 7,178,464 shares, the additional shares will be
allocated in accordance with the following priority:
- to fill the ESOP's subscription;
- if there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders;
- if there is an oversubscription at the Supplemental Eligible
Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders;
- if there is an oversubscription at the Other Member level, to
fill unfilled subscriptions of Other Members;
- at Mutual's discretion, for issuance in the First Northern
merger; and
- to fill unfilled subscriptions in the community offering.
We have the sole discretion to determine whether prospective purchasers
are "associates" or "acting in concert," in accordance with the terms of the
stock issuance plan. Directors and officers are not treated as associates of
each other solely by virtue of holding such positions. The term "associate" of a
person is defined to mean:
(1) any corporation or organization (other than Mutual) of which
such person is a director, officer or partner or is directly or
indirectly, the beneficial owner of 10% or more of any class of
equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity; provided, however, that any
tax-qualified or non-tax-qualified employee plan will not be
deemed to be an associate of any director, or officer of Mutual,
for purposes of aggregating total shares that may be acquired or
held by directors and officers and their associates; and
(3) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of Mutual or any affiliate thereof; and
"Acting in concert" means: (a) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or (b) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement whether written or otherwise. A person or company which acts in
concert with another person or company ("other party") shall also be deemed to
be acting in concert with any person or company who is also acting in concert
with that other party, except that any tax-qualified employee stock benefit plan
as defined in 12 C.F.R. ss. 563b.2(a)(39) will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the plan will be aggregated.
We have the right in our sole discretion to reject any order submitted
by a person whose representations we believe to be false or who we otherwise
believe, either alone or acting in concert with others, is violating or
circumventing, or intends to violate or circumvent, the terms and conditions of
the stock issuance plan.
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The aggregate amount of Bank Mutual voting stock outstanding owned by
other than the MHC, as long as it exists, must be less than 50%.
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE RESTRUCTURING
All shares of common stock purchased in connection with the offering by
an officer or director of Mutual Savings will be subject to a restriction that
the shares not be sold for a period of one year following the date of purchase,
except in the event of the death or incompetence of such officer or director.
Each certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that the
transfer agent for Bank Mutual is to disregard any such attempted transfer. The
directors and officers of Bank Mutual and Mutual Savings will also be subject to
the federal insider trading rules and any other applicable requirements of the
federal securities laws.
Purchases of outstanding shares of common stock of Bank Mutual by
directors or officers of Bank Mutual or Mutual Savings and their associates
during the three-year period following restructuring may be made only through a
broker or dealer registered with the SEC, except with the prior written approval
of the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1% of the outstanding common stock, or purchases of common
stock made and held by an tax-qualified or non-tax-qualified employee plan of
Mutual.
CONDITIONS TO THE OFFERING
Completion of the offering is subject to:
- consummation of the restructuring, which requires, without
limitation, the receipt of various approvals from the OTS, the
approval of Mutual Savings members and the receipt of IRS
rulings and/or opinions of Mutual Savings' attorneys as to the
tax consequences of the restructuring;
- the receipt of all required federal approvals and clearances for
the issuance of common stock in the offering, including without
limitation the approval of the OTS and the SEC; and
- the sale in the offering, or issuance to a First Northern
shareholders, of a minimum of 4,633,564 shares of common stock
offered.
In the event that the conditions mentioned above are not satisfied, all
funds received will be promptly returned with interest at Mutual Savings'
passbook rate and all withdrawal authorizations will be canceled.
The restructuring, the offering and the First Northern merger are
interdependent. Mutual does not expect that any transaction will occur without
the others.
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 and The
Offering -- 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.
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<PAGE> 138
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 and The
Offering -- 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,
Milwaukee, 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 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
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<PAGE> 139
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.
DESCRIPTION OF CAPITAL STOCK OF BANK MUTUAL
Bank Mutual is authorized to issue 100 million shares of common stock,
par value $.01 per share, and ten million shares of preferred stock, $.01 par
value per share. We currently expect to issue between 19.6 million and 27.6
million shares of common stock in the restructuring and the First Northern
merger, including between 9.8 million and 13.8 million shares to persons other
than the MHC. See "Capitalization."
Upon payment of the purchase price, shares of common stock issued in
the offering will be fully paid and non-assessable. Under the Wisconsin
Business Corporation Law, shareholders of Wisconsin-chartered corporations
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<PAGE> 140
are liable for claims to employees for services, not to exceed six months
services in any one case, up to the consideration which they have paid for their
shares of common stock. The Wisconsin Supreme Court has applied this statute to
corporations which are not organized in Wisconsin but are qualified to do
business in the state. While Bank Mutual believes that these provisions may not
necessarily apply to federally-chartered entities, there has not been a judicial
determination of that result.
NO PREEMPTIVE RIGHTS
The holders of Bank Mutual common stock do not have any preemptive
rights with respect to any shares issued by the company. 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.
TREATMENT UPON FULL CONVERSION
In the event that 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 and the Offering - 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 presented to a shareholders' 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 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.
See "Restrictions on Acquisition of Bank Mutual -- Bank Mutual's Charter and
Bylaws."
Bank Mutual's shareholders do not have cumulative rights in the
election of directors. Because the MHC will always own more than 50% of the
voting shares of Bank Mutual, it will control the election of directors.
BOARD OF DIRECTORS
The Bank Mutual charter and bylaws provide that its board of directors
shall consist of not less than 5 no more than 15 directors, and determined from
time to time by the board of directors. 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.
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<PAGE> 141
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.
Directors of Bank Mutual must own not less than 100 shares of Bank
Mutual common stock.
SPECIAL MEETINGS OF SHAREHOLDERS
Under Bank Mutual's charter, until five years after the 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, the president and majority of the directors, or upon the
written request of holders of not less than 10% of all the outstanding shares of
capital stock.
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 and delivered to Bank Mutual at least five days
prior to the date of the annual meeting.
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. If the company 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 all the
decisions on these matters. Similarly, the approval of the majority of
outstanding shares is required for an amendment to the Bank Mutual certificate
of incorporation. In the event Mutual had issued shares of preferred stock,
preferred shareholders may have rights to vote as a class on certain types of
amendments.
DISSENTERS' RIGHTS
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 will not have
dissenters' rights in most corporate transactions.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the restructuring and federal taxation will be
passed upon for us by Quarles & Brady LLP, Milwaukee, Wisconsin.
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<PAGE> 142
Certain legal matters will be passed upon for Ryan, Beck & Co. by Luse Lehman
Gorman Pomerenk & Schick, A Professional Corporation.
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 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 Bertelsen 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 included First Northern's
financial statements for that period in the prospectus and elsewhere in the
registration statement in reliance on Wipfli Ullrich Bertelsen 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. We have included those
First Northern financial statements in this 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.
RP Financial has consented to the publication in this document of a
summary of its letter to Mutual Savings setting forth its opinion as to the
estimated pro forma market value of Mutual Savings in the converted form and its
opinion setting forth the value of subscription rights and to the use of its
name and statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
Bank Mutual's common stock is being registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended. We will be subject to
the information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. Bank Mutual may not deregister the common stock under the Exchange Act for
a period of at least three years following the restructuring.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
After the offering, Bank Mutual will be subject to the informational
requirements of the Exchange Act and must file reports and other information
with the SEC.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933 with respect to the common stock offered in this
document. As permitted by the rules and regulations of the SEC, this document
does not contain all the information set forth in the registration statement.
You may examine this information without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain copies of this material from the SEC at prescribed rates. You may
obtain information on the operations of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains
reports, proxy and information statements and other information regarding
registrants, including Bank Mutual, that file electronically with the SEC. The
address for this web site is "www.sec.gov."
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<PAGE> 143
The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions and are not necessarily complete; each such
statement is qualified by reference to such contract or document. Mutual Savings
has filed notice of mutual holding company reorganization with the Office of
Thrift Supervision. In addition, Mutual Savings has filed copies of that
application with the FDIC. This prospectus omits certain information contained
in those applications.
You may inspect copies of RP Financial's appraisal and any amendments
to it at the main office of Mutual Savings Bank. The appraisal report is also an
exhibit to the registration statement, but was not filed electronically and is
not available on the EDGAR system.
A copy of Bank Mutual's certificate of incorporation and bylaws, as
well as those of Mutual Savings and the MHC, are available without charge from
Mutual Savings. Copies of the plan of restructuring are also available from
Mutual Savings without charge. If you have any questions regarding the offering
or the restructuring, or would like copies of these documents, please call the
Stock Information Center at (800) ________, from 9:00 a.m. to 4:00 p.m., Central
Time, Monday through Friday. The Stock Information Center is located at Mutual
Savings' headquarters, 4949 West Brown Deer Road, Brown Deer, Wisconsin 53223.
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<PAGE> 144
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
MUTUAL SAVINGS BANK
Independent Auditors' Report.............................................................. F-1
Consolidated Statements of Financial Condition at March 31, 2000 (unaudited) and
December 31, 1999 and 1998.............................................................. F-2
Consolidated Statements of Income for the three months ended March 31, 2000 and 1999
and for each of the Three Years Ended December 31, 1999, 1998 and 1997.................. F-3
Consolidated Statements of Changes in Equity for the three months ended March 31, 2000
and 1999 and for each of the three years ended December 31, 1999, 1998 and 1997......... F-4
Consolidated Statements for Cash Flows for the three months ended March 31, 2000
and 1999 and for each of the three years ended December 31, 1999, 1998 and 1997......... F-5
Notes to Consolidated Financial Statements................................................ F-8
BANK MUTUAL AND THE MHC
Financial statements of the MHC and Bank Mutual have not been provided because they have
conducted no operations and have not yet been organized.
FIRST NORTHERN DATA
EXCERPTS FROM ANNUAL REPORT ON FORM 10-K
Financial Statements:
Independent Auditors' Reports........................................................... FN-1
Consolidated Statements of Financial Condition at December 31, 1999 and 1998............ FN-3
Consolidated Statements of Income for each of the Three Years Ended
December 31, 1999, 1998 and 1997...................................................... FN-5
Consolidated Statements of Stockholders' Equity for each of the three years ended
December 31, 1999, 1998 and 1997...................................................... FN-6
Consolidated Statements for Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997...................................................... FN-7
Notes to Consolidated Financial Statements.............................................. FN-9
Management's Discussion and Analysis...................................................... FN-33
Business (selected portions).............................................................. FN-48
EXCERPTS FROM QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
Unaudited Interim Period Financial Statements:
Consolidated Balance Sheet as of March 31, 2000........................................ FN-71
Consolidated Statements of Income for the three months ended March 31, 2000
and 1999............................................................................. FN-72
Consolidated Statements of Stockholders' Equity for each fo the months ended
March 31, 2000 and 1999.............................................................. FN-73
Consolidated Statements of Cash Flows for each of the three months ended
March 31, 2000 and 1999.............................................................. FN-74
Notes to Unaudited Interim Period Consolidated Financial Statements.................... FN-75
Management's Discussion and Analysis..................................................... FN-80
</TABLE>
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<PAGE> 145
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> 146
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Financial Condition
(In Thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
ASSETS (Unaudited)
Cash and due from banks $ 18,243 $ 21,367 $ 22,534
Federal funds sold -- 25,000 45,000
Interest-earning deposits 21,457 132,592 262,714
-----------------------------------------
Cash and cash equivalents 39,700 178,959 330,248
Securities available-for-sale, at fair value:
Investment securities 48,165 57,763 116,534
Mortgage-related securities 472,456 374,100 270,897
Loans held for sale 2,121 541 27,723
Loans receivable, net 1,103,826 1,082,795 1,037,589
Real estate owned 4,664 4,953 5,440
Premises and equipment 26,509 26,871 27,567
Federal Home Loan Bank stock, at cost 13,537 13,537 13,537
Accrued interest receivable 9,095 8,620 8,035
Intangible assets 11,261 11,496 29,786
Other assets 10,850 9,871 5,506
-----------------------------------------
$ 1,742,184 $ 1,769,506 $ 1,872,862
=========================================
LIABILITIES AND EQUITY
Liabilities:
Deposits $ 1,319,188 $ 1,343,007 $ 1,398,858
Borrowings 238,699 242,699 270,822
Advance payments by borrowers for taxes
and insurance 7,049 1,661 1,710
Other liabilities 13,339 18,319 25,729
-----------------------------------------
1,578,275 1,605,686 1,697,119
Equity:
Retained earnings 172,792 169,746 174,229
Net unrealized gain (loss) on securities
available-for-sale (8,883) (5,926) 1,514
-----------------------------------------
163,909 163,820 175,743
Contingencies (Notes 13 and 14)
-----------------------------------------
$ 1,742,184 $ 1,769,506 $ 1,872,862
=========================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 147
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income: (Unaudited)
Loans, including fees $ 20,341 $ 19,811 $ 79,623 $ 90,092 $ 93,628
Investments 1,802 5,141 20,200 19,714 12,115
Mortgage-related securities 7,699 4,199 18,479 15,664 10,250
-------------------------------------------------------------
Total interest income 29,842 29,151 118,302 125,470 115,993
Interest expense:
Deposits 14,778 15,589 61,091 65,236 60,917
Borrowings 3,375 3,511 13,933 14,437 10,897
Advance payments by borrowers
for taxes and insurance 26 27 313 344 380
-------------------------------------------------------------
Total interest expense 18,179 19,127 75,337 80,017 72,194
-------------------------------------------------------------
Net interest income 11,663 10,024 42,965 45,453 43,799
Provision for losses on loans 76 39 350 637 1,065
-------------------------------------------------------------
Net interest income after provision
for losses on loans 11,587 9,985 42,615 44,816 42,734
Noninterest income:
Service charges on deposits 661 642 2,813 2,630 2,413
Brokerage commissions 492 337 1,826 1,228 984
Servicing fees on loans sold 101 115 447 577 588
Loan fees and service charges 266 280 1,014 1,662 773
Gain on sales of loans 8 305 497 1,025 486
Gain (loss) on sales of securities -- (35) 158 -- (12)
Other 302 282 1,229 1,318 927
-------------------------------------------------------------
Total noninterest income 1,830 1,926 7,984 8,440 6,159
Noninterest expenses:
Compensation, payroll taxes and
other employee benefits 4,417 4,292 17,158 16,638 15,346
Occupancy 1,365 1,428 5,550 5,580 5,288
Federal deposit insurance
premiums 73 211 820 837 822
Marketing 615 498 1,864 2,158 2,375
Data processing 373 227 1,329 1,260 1,213
Amortization of intangibles 235 678 18,290 2,738 1,941
Other 1,438 1,625 6,268 6,310 5,101
-------------------------------------------------------------
Total noninterest expenses 8,516 8,959 51,279 35,521 32,086
-------------------------------------------------------------
Income (loss) before income taxes 4,901 2,952 (680) 17,735 16,807
Income taxes 1,855 1,111 3,803 6,584 6,622
-------------------------------------------------------------
Net income (loss) $ 3,046 $ 1,841 $ (4,483) $ 11,151 $ 10,185
=============================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 148
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Changes in Equity
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Retained Available- Total
Earnings For-Sale Equity
-------------------------------------------------------
<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) 3,046 - 3,046
Other comprehensive income:
Change in net unrealized gain (loss)
on securities available-for-sale,
net of deferred income tax benefit
of $1,830 (unaudited) - (2,957) (2,957)
------------------
Total comprehensive income (unaudited) - - 89
-------------------------------------------------------
Balances at March 31, 2000 (unaudited) $172,792 $(8,883) $163,909
=======================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 149
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $3,046 $1,841 $ (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 76 39 350 637 1,065
Provision for depreciation 478 439 1,840 2,033 1,816
Deferred income tax benefit 3,356 842 (3,886) (630) (710)
Amortization of intangibles 235 678 18,290 2,738 1,941
Net discount amortization on securities (484) (419) (80) (5,242) (318)
Loans originated for sale (2,715) (28,354) (47,427) (131,082) (52,006)
Proceeds from sales of loans originated
for sale 1,138 30,523 57,358 117,770 43,478
Net gain on sales of loans (3) (305) (497) (1,025) (486)
Net (gain) loss on sale of
available-for-sale securities - 35 (378) - 12
Purchases of trading account assets - - (39,215) (5,066) -
Proceeds from sales of trading account
assets - - 38,995 5,067 -
Net loss on sale of trading account assets
- - 220 1 -
Decrease in other liabilities (4,980) (11,692) (7,410) (1,573) (94)
(Increase) decrease in other assets (979) 1,646 3,665 (2,355) 9,039
(Increase) decrease in accrued interest
receivable (475) 287 (585) 1,425 (3,533)
Other (1,580) (1,962) 587 513 (882)
------------------------------------------------------------------------
Net cash provided (used) by operating
activities (2,887) (6,402) 17,344 (5,638) 9,507
INVESTING ACTIVITIES
Proceeds from maturities and sales of
investment securities 20,000 65,000 65,000 429,337 397,619
Purchases of investment securities (10,000) (20,000) (20,000) (380,489) (376,634)
Proceeds from maturities and sales of
mortgage-related securities - - 54,060 - 3,822
Purchases of mortgage-related securities (114,420) (20,234) (213,504) (119,548) (72,071)
</TABLE>
See accompanying notes.
F-5
<PAGE> 150
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net (purchases) sales of investments in mutual
funds (421) (363) (1,481) (1,410) 16,742
Principal repayments on mortgage-related
securities 11,359 20,127 60,367 77,407 59,514
Net (increase) decrease in loans receivable (21,107) 10,307 (29,581) 208,864 96,953
Proceeds from sale of foreclosed properties 764 307 1,673 3,438 627
Proceeds from sale of Federal Home Loan
Bank stock - - - 6,700 277
Purchases of office properties and equipment (116) (191) (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 (113,941) 54,953 (84,610) 221,158 6,831
FINANCING ACTIVITIES
Net increase (decrease) in deposits (23,819) (19,494) (55,851) 36,528 (8,653)
Net decrease in short-term borrowings - - - - (208,194)
Proceeds from long-term borrowings 11,000 - - - 228,000
Repayments on long-term borrowings (15,000) (2) (28,123) (45) -
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 5,388 5,392 (49) (819) 1,636
------------------------------------------------------------------------
Net cash provided (used) by financing
activities (22,431) (14,104) (84,023) 35,664 12,789
------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (139,259) 34,447 (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 $ 39,700 $364,695 $ 178,959 $330,248 $ 79,064
========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 151
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental information:
Interest paid on deposits $14,249 $14,778 $ 61,220 $ 65,315 $61,598
Income taxes paid 18 818 6,678 7,859 5,530
Loans transferred to other real estate
owned 540 284 1,773 7,975 178
Loans transferred from loans held for sale
to portfolio - - 17,748 17 -
Mutual fund liquidation proceeds - - 14,047 - -
</TABLE>
See accompanying notes.
F-7
<PAGE> 152
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 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. Significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
F-8
<PAGE> 153
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are recorded as an asset when loans are sold with
servicing rights retained. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on a
current market interest rate.
F-9
<PAGE> 154
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST AND FEES ON LOANS
Allowances of $214 (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 March 31, 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 specific and general valuation
allowances. The Bank establishes specific valuation allowances on loans it
considers to be impaired. A loan is considered impaired when the carrying amount
of the loan exceeds the present value of the expected future cash flows,
discounted at the loan's original effective interest rate, or the fair value of
the underlying collateral. A specific valuation allowance is established for an
amount equal to the impairment. 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 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. Management may transfer amounts between specific
and general valuation allowances as considered necessary. The allowance reflects
management's best estimate of the amount necessary to provide for the impairment
of loans, as well as other 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.
F-10
<PAGE> 155
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties acquired through, or in lieu of, loan foreclosure are
recorded at the lower of cost or fair value less estimated costs to sell. Costs
related to the development and improvement of property are capitalized, whereas
costs related to holding the property are expensed. Gains on sales are
recognized based on the carrying value when the earnings process is
substantially complete. Losses on sales not previously provided for are
recognized upon closing of the sale.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at amortized
cost. Buildings and equipment are depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over the
shorter of their useful lives or lease terms. 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.
F-11
<PAGE> 156
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-12
<PAGE> 157
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $235 (unaudited) and $678
(unaudited) for the three-month periods ended March 31, 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 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
F-13
<PAGE> 158
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
2. BUSINESS COMBINATIONS (CONTINUED)
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 $11,261,
(unaudited) $11,496 and $29,786 at March 31, 2000, and December 31, 1999 and
1998, respectively.
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 March 31, 2000 (Unaudited):
U.S. government and federal agency obligation $ 20,101 $ - $ (864) $ 19,237
Asset-backed securities - - - -
Mutual funds 29,448 - (520) 28,928
- - -----------------------------------------------------------------------------------------------------------
Total investment securities 49,549 - (1,384) 48,165
- - -----------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation 70,366 9 (2,678) 67,697
Federal National Mortgage Association 397,021 484 (10,311) 387,194
Private Placement CMOs 17,266 1 (235) 17,032
Government National Mortgage Association 526 8 (1) 533
- - -----------------------------------------------------------------------------------------------------------
Total mortgage-related securities 485,179 502 (13,225) 472,456
- - -----------------------------------------------------------------------------------------------------------
Total $534,728 $502 $(14,609) $520,621
===========================================================================================================
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>
F-14
<PAGE> 159
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
3. SECURITIES (CONTINUED)
<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>
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>
MARCH 31 2000
------------------------------------
Amortized
Cost Fair Value
------------------------------------
(Unaudited)
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 20,101 19,237
Mutual funds 29,448 28,928
Mortgage-related securities 485,179 472,456
------------------------------------
$534,728 $520,621
====================================
</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-15
<PAGE> 160
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 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>
MARCH 31 2000
-----------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense amount
-----------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Change in unrealized losses on available-for-
sale securities $(4,787) $(1,830) $(2,957)
Less: reclassification adjustment for gains
realized in net income - - -
-----------------------------------------------------
Change in net unrealized losses recognized in
other comprehensive income $(4,787) $(1,830) $(2,957)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------------------------------------
Before Tax Net-of-
Tax (Benefit) 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 Net-of-
Tax (Benefit) 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>
F-16
<PAGE> 161
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 1997
-------------------------------------------------
Before Tax Net-of-
Tax (Benefit) 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>
Total proceeds and gross realized gains and losses from sale of
available-for-sale securities were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 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 - 35 - - 15
</TABLE>
Net losses of $0 (unaudited), $0 (unaudited) and $220 were recognized in income
from sales of securities classified as trading for the three months ended March
31, 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 March
31, 2000 (unaudited) and December 31, 1999 and 1998, were pledged to secure
public funds.
F-17
<PAGE> 162
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
First mortgage loans $ 861,197 $ 850,145 $ 836,674
Fixed equity 105,371 96,824 78,244
Home equity line of credit loans 51,982 50,618 45,827
Education loans 28,598 28,371 29,634
Commercial loans 37,038 39,488 28,839
Construction loans 27,908 26,530 21,939
Home improvement loans 10,449 9,920 8,373
Other loans 2,548 2,519 2,355
------------------------------------------------------
1,125,091 1,104,415 1,051,885
Less:
Undisbursed loan proceeds 14,233 14,658 7,001
Allowance for losses on loans 6,960 6,948 6,855
Unearned loan fees and discounts 72 14 440
-------------------------------------------------------
21,265 21,620 14,296
-------------------------------------------------------
$ 1,103,826 $ 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>
THREE MONTHS YEAR ENDED
ENDED MARCH 31 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 76 39 350 637 1,065
Allowance of acquired business - - - - 2,449
Charge-offs, net of recoveries (64) (52) (257) (977) (240)
---------------------------------------------------------------------
Balance at end of year $6,960 $6,842 $6,948 $6,855 $7,195
=====================================================================
</TABLE>
F-18
<PAGE> 163
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
4. LOANS RECEIVABLE (CONTINUED)
The unpaid principal balance of loans serviced for others were $282,771
(unaudited), $287,789, $279,759 and $250,496 at March 31, 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>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Acquired by foreclosure or in lieu of foreclosure $2,729 $3,018 $3,505
Acquired for development or resale 1,935 1,935 1,935
-----------------------------------------------
$4,664 $4,953 $5,440
===============================================
</TABLE>
6. ACCRUED INTEREST
Accrued interest on loans and investments are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Mortgage-related securities $2,406 $1,787 $1,174
Investment securities 300 814 821
Loans receivable 6,389 6,019 6,040
-----------------------------------------------
$9,095 $8,620 $8,035
===============================================
</TABLE>
F-19
<PAGE> 164
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continuted)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land and land improvements $ 6,969 $ 6,969 $ 6,889
Office buildings 25,305 25,292 25,177
Furniture, equipment and automobiles 12,094 12,060 11,759
Leasehold and parking lot improvements 1,203 1,203 1,442
-------------------------------------------------
45,571 45,524 45,267
Less allowances for depreciation and amortization 19,062 18,653 17,700
-------------------------------------------------
$26,509 $26,871 $27,567
=================================================
</TABLE>
Depreciation expense for the three months ended March 31, 2000 and 1999 and the
years ended 1999, 1998 and 1997, was $478 (unaudited), $439 (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>
MARCH 31 DECEMBER 31
2000 1999
------------------------------------
(Unaudited)
<S> <C> <C>
2000 $ 649 $ 870
2001 660 660
2002 446 446
2003 417 417
2004 390 390
Thereafter 1,364 1,364
------------------------------------
Total $3,926 $4,147
====================================
</TABLE>
F-20
<PAGE> 165
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
7. PREMISES AND EQUIPMENT (CONTINUED)
Total rental expenses totaled $136 (unaudited), $149 (unaudited), $609, $639 and
$682 for the three months ended March 31, 2000 and 1999 and the years ended
1999, 1998 and 1997, respectively.
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Checking accounts:
Non-interest-bearing $ 48,403 $ 42,596 $ 43,031
Interest-bearing 89,141 89,685 100,753
------------------------------------------------------
137,544 132,281 143,784
Money market accounts 230,051 231,174 159,361
Savings accounts 150,901 151,447 166,316
Certificate accounts:
Due within one year 545,295 593,512 638,596
After one but within two years 195,614 178,431 237,113
After two but within three years 40,830 34,716 30,129
After three but within four years 10,453 11,535 10,479
After four but within five years 8,500 9,868 11,583
After five years - 43 1,497
------------------------------------------------------
800,692 828,105 929,397
------------------------------------------------------
$1,319,188 $1,343,007 $1,398,858
======================================================
</TABLE>
The aggregate amount of certificate accounts with balances of one hundred
thousand dollars or more is approximately $60,861 (unaudited), $62,223 and
$70,513 at March 31, 2000 and December 31, 1999 and 1998, respectively.
F-21
<PAGE> 166
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
8. DEPOSITS (CONTINUED)
Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest-bearing
checking accounts $ 225 $ 234 $ 940 $ 1,070 $ 1,137
Money market accounts 2,802 1,989 9,796 6,571 5,458
Savings accounts 900 985 3,885 4,268 4,696
Certificate accounts 10,851 12,381 46,470 53,327 49,626
------------------------------------------------------------------------------
$14,778 $15,589 $61,091 $65,236 $60,917
==============================================================================
</TABLE>
9. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
MARCH 31 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 $ 5,152 6.35% $ 42,152 6.53% $ 42,170 5.77%
2001 33,000 6.07 - - - -
2002 - - - 203,000 5.20
2003 547 4.39 547 5.11 569 4.65
2004 200,000 5.70 200,000 5.70 - -
Thereafter - - - - 25,000 4.98
Other borrowings - - - - 83 10.25
------------ ------------ -----------
$238,699 $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.
F-22
<PAGE> 167
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
9. BORROWINGS (CONTINUED)
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 $13,537 at March 31, 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 of total assets
must meet a minimum standard. Management believes, as of March 31, 2000 and
December 31, 1999, that the Bank meets all capital adequacy requirements to
which it is subject.
F-23
<PAGE> 168
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
As of March 31, 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
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000 (unaudited):
Total capital
(to risk-weighted assets) $167,839 18.76% $ 71,576 8.00% $89,470 10.00%
Tier 1 capital
(to risk-weighted assets) 160,879 17.98% 35,788 4.00% 53,682 6.00%
Tier 1 capital
(to average assets) 160,879 9.25% 69,580 4.00% 86,975 5.00%
State of Wisconsin capital
(to total assets) 167,839 9.60% 104,941 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>
F-24
<PAGE> 169
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ----------------------- ---------------------
<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>
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 March 31, 2000 (Unaudited):
Equity per financial statements $163,909 $163,909 $163,909
Unrealized losses on investments
(excluding unrealized loss on mutual
funds) 8,363 8,363 8,363
Intangibles (11,261) (11,261) (11,261)
Mortgage servicing rights (132) (132) (132)
Allowance for loan losses 6,960 - 6,960
-------------------------------------------------------------
Regulatory capital $167,839 $160,879 $167,839
=============================================================
</TABLE>
F-25
<PAGE> 170
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Risk- Tier I State of
Based (Core) Wisconsin
Capital Capital Capital
-------------------------------------------------------------
<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 $21 (unaudited) and $19 (unaudited) in the three months ended
March 31, 2000 and 1999, and $68 in 1999 and $56 in 1998.
F-26
<PAGE> 171
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
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
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.
F-27
<PAGE> 172
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
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-28
<PAGE> 173
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 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 $264 (unaudited) and $266 (unaudited) in
the three months ended March 31, 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.
F-29
<PAGE> 174
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
12. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEARS ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $1,789 $1,173 $ 6,896 $7,010 $ 7,041
State 79 (56) 793 204 291
------------------------------------------------------------------------------
1,868 1,117 7,689 7,214 7,332
Deferred expense (benefit):
Federal (10) (5) (3,120) (786) (1,007)
State (3) (1) (766) 156 297
------------------------------------------------------------------------------
(13) (6) (3,886) (630) (710)
------------------------------------------------------------------------------
$1,855 $1,111 $ 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.
The income tax provision differs from the provision computed at the federal
statutory corporate rate for three months ended March 31, 2000 and 1999 and the
years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for
income taxes $4,901 $ 2,952 $ (680) $17,735 $16,807
====================================================================
Tax expense at federal statutory rate
$1,715 $ 1,034 $ (238) $ 6,207 $ 5,882
Increase (decrease) in taxes
resulting from:
State income taxes - Net of
federal tax benefit 50 (37) 21 382 382
Nondeductible intangible
amortization 82 108 3,487 490 351
Other 8 6 533 (495) 7
</TABLE>
F-30
<PAGE> 175
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
<TABLE>
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for income taxes $1,855 $ 1,111 $ 3,803 $ 6,584 $ 6,622
====================================================================
</TABLE>
F-31
<PAGE> 176
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Bank's deferred tax assets and liabilities as of March 31,
2000 and December 31, are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
State net operating losses $ 26 $ 26 $ 26 $ 238
Loan loss reserves 2,068 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 5,224 3,394 - 78
Other 1,322 1,252 297 402
------------------------------------------------------
Total deferred tax assets 9,932 8,151 3,298 3,527
------------------------------------------------------
Deferred tax liabilities:
Property and equipment depreciation 1,057 1,057 1,196 1,200
FHLB stock dividends 546 555 544 820
Purchase accounting adjustments 1,558 1,611 3,910 4,407
Unrealized gain on investment securities - - 750 -
------------------------------------------------------
Total deferred tax liabilities 3,161 3,223 6,400 6,427
------------------------------------------------------
Net deferred tax asset (liability) $6,771 $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 March 31, 2000 (unaudited) and
December 31, 1999. If, in the future, the Bank no longer qualifies as a bank for
tax purposes, income taxes of approximately $19,500 would be imposed.
F-32
<PAGE> 177
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
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 March 31, 2000 and December 31,
1999 and 1998, respectively. The Bank continues to receive interest payments on
the collateral.
At March 31, 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 March
31, 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.
F-33
<PAGE> 178
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Unused consumer lines of credit $64,914 $63,461 $59,406
Unused commercial lines of credit 1,494 1,003 946
Commitments to extend credit:
Fixed rate 11,824 7,418 19,445
Adjustable rate 12,184 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 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 $147 (unaudited), $0 and $17,030
at March 31, 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.
F-34
<PAGE> 179
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 oneto 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.
F-35
<PAGE> 180
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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>
MARCH 31 DECEMBER 31 DECEMBER 31
2000 1999 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 $ 39,700 $ 39,700 $ 178,959 $ 178,959 $ 330,248 $ 330,248
Investment and
mortgage-related 520,621 520,621 431,863 431,863 387,431 387,431
securities
Loans receivable, net 1,103,826 1,083,747 1,082,795 1,067,333 1,045,046 1,056,232
Loans held for sale 2,121 2,121 541 541 27,723 27,723
Federal Home Loan Bank stock
13,537 13,537 13,537 13,537 13,537 13,537
Accrued interest
receivable 9,095 9,095 8,620 8,620 8,035 8,035
Deposits and accrued
interest 1,319,188 1,248,942 1,343,007 1,298,038 1,398,858 1,381,119
Advance payments by
borrowers 7,049 7,049 1,661 1,661 1,710 1,710
Borrowings 238,699 236,366 242,699 194,443 270,822 230,233
</TABLE>
F-36
<PAGE> 181
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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
F-37
<PAGE> 182
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
16. MERGER AND CONVERSION (CONTINUED)
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 March
31, 2000 (unaudited) and December 31, 1999, no 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.
F-38
<PAGE> 183
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
16. MERGER AND CONVERSION (CONTINUED)
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.
F-39
<PAGE> 184
FIRST NORTHERN DATA
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
First Northern Capital Corp.
Green Bay, Wisconsin
We have audited the accompanying consolidated statement of financial condition
of First Northern Capital Corp. and Subsidiaries as of December 31, 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements of First Northern Capital Corp. and Subsidiaries as of and for each
of the two years in the period ended December 31, 1998, were audited by other
auditors whose report dated January 22, 1999, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Northern Capital Corp. and Subsidiaries at December 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
January 21, 2000 (except for
Note 17, as to which the date
is February 22, 2000)
Green Bay, Wisconsin
FN-1
<PAGE> 185
Report of Independent Auditors
Board of Directors and Stockholders
First Northern Capital Corp.
We have audited the accompanying consolidated statements of financial condition
of First Northern Capital Corp. (the "Company") and subsidiaries as of December
31, 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company'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 a reasonable assurance about whether the financial statements are free
of material misstatement. An audit also 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 Company and
subsidiaries at December 31, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with auditing standards generally accepted in
the United States.
Ernst & Young LLP
/s/ Ernst & Young LLP
January 22, 1999
Milwaukee, Wisconsin
FN-2
<PAGE> 186
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
---------------------------
ASSETS 1999 1998
- - -------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Cash $8,043 $6,350
Interest-earning deposits 4,329 861
- - -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 12,372 7,211
Securities available-for-sale, at fair value:
Investment securities 8,444 9,205
Mortgage-related securities 5,554 996
Securities held-to-maturity:
Investment securities (estimated fair value of $25,644 in 1999 and $23,935 in 1998) 26,215 23,741
Mortgage-related securities (estimated fair value of $9,976 in 1999 and $11,594 in 1998) 10,048 11,522
Loans held-for-sale 1,085 3,075
Loans receivable 736,880 631,739
Accrued interest receivable 4,229 3,686
Foreclosed properties and repossessed assets 382 106
Office properties and equipment 7,463 7,573
Federal Home Loan Bank stock 9,250 5,250
Life insurance policies 13,548 12,514
Other assets 4,153 3,095
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $839,623 $719,713
===============================================================================================================================
</TABLE>
FN-3
<PAGE> 187
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- - -------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Liabilities:
Deposits $566,908 $542,372
Borrowings 185,899 91,977
Advance payments by borrowers for taxes and insurance 3,887 3,433
Other liabilities 6,134 5,838
- - -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 762,828 643,620
- - -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Cumulative preferred stock - $1 par value:
Authorized - 10,000,000 shares, no shares outstanding
Common stock - $1 par value:
Authorized - 30,000,000 shares
Issued - 9,134,735 shares
Outstanding - 8,548,658 shares in 1999 and 8,764,945 shares in 1998 9,135 9,135
Additional paid-in capital 8,780 9,126
Retained earnings 64,468 60,582
Accumulated other comprehensive income 479 960
Treasury stock at cost - 586,077 shares in 1999 and 369,790 shares in 1998 (6,067) (3,710)
- - -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 76,795 76,093
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $839,623 $719,713
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. FN-4
<PAGE> 188
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------
1999 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Interest and dividend income:
Loans $49,448 $46,783 $43,972
Investment securities 2,336 2,138 1,844
Interest-earning deposits 82 147 45
Mortgage-related securities 904 622 735
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 52,770 49,690 46,596
- - ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 23,559 23,270 21,437
Borrowings 6,964 5,578 4,905
Advance payments by borrowers for taxes and insurance 163 155 149
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 30,686 29,003 26,491
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income 22,084 20,687 20,105
Provision for loan losses 472 420 320
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,612 20,267 19,785
- - ------------------------------------------------------------------------------------------------------------------------------
Other income:
Fees on serviced loans 179 167 313
Loan fees and service charges 236 268 251
Deposit account service charges 1,414 1,300 1,227
Insurance commissions 329 292 324
Gains on sales of loans 380 1,042 359
Gain on sales of securities - 9 -
Other 1,316 1,161 802
- - ------------------------------------------------------------------------------------------------------------------------------
Total other income 3,854 4,239 3,276
- - ------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation, payroll taxes, and other employee benefits 7,882 7,804 7,266
Federal insurance premiums 321 301 284
Occupancy 981 862 875
Data processing 1,616 1,476 1,403
Furniture and equipment 409 459 480
Telephone and postage 431 438 471
Marketing 475 409 370
Other 2,449 2,322 2,225
- - ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 14,564 14,071 13,374
- - ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 10,902 10,435 9,687
Provision for income taxes 3,525 3,606 3,651
- - ------------------------------------------------------------------------------------------------------------------------------
Net income $7,377 $6,829 $6,036
==============================================================================================================================
Earnings per share - Basic $0.85 $0.77 $0.68
==============================================================================================================================
Earnings per share - Diluted $0.83 $0.75 $0.66
==============================================================================================================================
Cash dividends paid per share $0.40 $0.36 $0.32
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FN-5
<PAGE> 189
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
---------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $9,136 $9,841 $53,735 $385 ($2,873) $70,224
Comprehensive income:
Net income 6,036 6,036
Other comprehensive income 229 229
------------
Total comprehensive income 6,265
Cash dividends ($0.32 per share) (2,826) (2,826)
Purchase of treasury stock (441) (441)
Exercise of stock options (403) 998 595
- - ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,136 9,438 56,945 614 (2,316) 73,817
Comprehensive income:
Net income 6,829 6,829
Other comprehensive income 346 346
------------
Total comprehensive income 7,175
Cash dividends ($0.36 per share) (3,192) (3,192)
Retirement of common stock (1) (17) (18)
Purchase of treasury stock (2,333) (2,333)
Exercise of stock options (295) 939 644
- - ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 9,135 9,126 60,582 960 (3,710) 76,093
Comprehensive income:
Net income 7,377 7,377
Other comprehensive loss (481) (481)
------------
Total comprehensive income 6,896
Cash dividends ($0.40 per share) (3,491) (3,491)
Purchase of treasury stock (2,935) (2,935)
Exercise of stock options (346) 578 232
- - ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $9,135 $8,780 $64,468 $479 ($6,067) $76,795
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FN-6
<PAGE> 190
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $7,377 $ 6,829 $ 6,036
- - ------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Provision for losses on loans 472 420 320
Provision for depreciation and amortization 886 859 873
Gains on sales of loans (380) (1,042) (359)
Gain on sale of securities - (9) -
Loans originated for sale (20,135) (66,527) (20,746)
Proceeds from loan sales 22,505 66,613 21,159
Increase in interest receivable (543) (40) (351)
Increase in interest payable 110 194 165
Increase in other assets (1,171) (1,277) (7,314)
Increase (decrease) in other liabilities (131) 995 824
- - ------------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,613 186 (5,429)
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,990 7,015 607
- - ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investment securities 2,800 1,500 2,000
Proceeds from maturities of held-to-maturity investment securities 10,184 16,701 4,800
Purchases of available-for-sale investment securities (2,590) (2,794) (2,740)
Purchases of held-to-maturity investment securities (12,713) (21,982) (9,471)
Principal repayments on available-for-sale mortgage-related securities 88 933 901
Principal repayments on held-to-maturity mortgage-related securities 3,073 1,949 621
Purchase of available-for-sale mortgage-related securities (2,982) (998) -
Purchase of held-to-maturity mortgage-related securities (3,453) (2,779) (1,977)
Proceeds from the sale of securities - 2,251 -
Net increase in loans receivable (106,014) (38,774) (39,963)
Purchases of office properties and equipment (776) (428) (839)
Purchase of Federal Home Loan Bank stock (4,000) (750) (1,477)
Redemption of Federal Home Loan Bank stock - 750 -
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (116,383) (44,421) (48,145)
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
FN-7
<PAGE> 191
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 24,426 $ 60,390 $ 23,300
Net increase (decrease) in short-term borrowings 63,943 (20,050) 9,080
Proceeds from long-term borrowings 80,270 35,750 63,825
Repayment of long-term borrowings (50,291) (27,000) (46,900)
Net increase (decrease) in advance payments by borrowers for taxes and insurance 454 (428) (1,586)
Cash dividends (3,491) (3,192) (2,826)
Purchase of treasury stock (2,935) (2,333) (441)
Retirement of common stock - (18) -
Proceeds from exercise of stock options 178 534 487
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 112,554 43,653 44,939
- - ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,161 6,247 (2,599)
Cash and cash equivalents at beginning of year 7,211 964 3,563
- - ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $12,372 $7,211 $964
==============================================================================================================================
SUPPLEMENTAL INFORMATION TO THE STATEMENTS OF CASH FLOWS:
Cash paid during the year for:
Interest on deposits $22,449 $22,911 $21,273
Interest on borrowings 6,601 5,515 4,799
Income taxes 3,570 3,842 3,212
Loans transferred to foreclosed properties and repossessed assets 554 315 387
</TABLE>
See accompanying notes to consolidated financial statements.
FN-8
<PAGE> 192
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Northern Capital Corp.
and Subsidiaries (the "Company") conform to generally accepted
accounting principles and general practices within the financial
institution industry. Significant accounting and reporting policies
are summarized below.
Business - The Company provides a full range of financial services to
individual and corporate customers in Northeastern Wisconsin through
First Northern Savings Bank (the "Savings Bank"). The Company is
subject to competition from other traditional and nontraditional
financial institutions and is also subject to the regulations of
certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of First Northern Capital Corp., its
wholly owned subsidiary, First Northern Savings Bank, and the Savings
Bank's wholly owned subsidiaries, First Northern Investment, Inc. and
Great Northern Financial Services Corporation. All significant
intercompany balances and transactions have been eliminated.
Investment in the Savings Bank's 50% owned subsidiary Savings
Financial Corporation, which is not material, is accounted for on the
equity method.
Use of Estimates in Preparation of Financial Statements - The
preparation of the accompanying consolidated financial statements of
First Northern Capital Corp. and Subsidiaries in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that directly affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results may differ from these estimates.
Cash and Cash Equivalents - The Company considers its interest-earning
deposits, which have a maturity of three months or less when
purchased, to be cash equivalents.
Investment and Mortgage-Related Securities - Management determines the
appropriate classification of securities at the time of purchase.
Securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Securities
not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair
value with the unrealized gains and losses, net of tax, reported as
accumulated other comprehensive income (loss) within stockholders'
equity until realized. Interest and dividends are included in interest
income from securities as earned. Realized gains and losses and
declines in value judged to be other than temporary are included in
net gains and losses from sales of investment and mortgage-related
securities. The cost of securities sold is based on the
specific-identification method.
Fair values of many securities are estimates based on financial
methods or prices paid for similar securities. It is possible interest
rates could change considerably resulting in a material change in the
estimated fair value.
Federal Home Loan Bank Stock - The Company's investment in Federal
Home Loan Bank (FHLB) stock is carried at cost which is its redeemable
(fair) value since the market for this stock is restricted.
Loans Held-for-Sale - Loans held-for-sale consist of the current
origination of certain fixed-rate mortgage loans and education loans
which are recorded at the lower of aggregate cost or fair value. Fees
received from the borrower and certain direct loan-origination costs
are deferred and recorded as an adjustment of the sale price. A gain
or loss is recognized at the time of the sale reflecting the present
value of the difference between the contractual interest rate of the
loans sold and the yield to the investor, adjusted for the initial
value of mortgage servicing rights.
FN-9
<PAGE> 193
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable and Related Interest Income - Interest on loans is
accrued and credited to income as earned. Accrual of interest is
generally discontinued either when reasonable doubt exists as to the
full, timely collection of interest or principal or when a loan
becomes contractually past due by 90 days or more with respect to
interest or principal. At that time, any accrued but uncollected
interest is reversed and additional income is recorded only to the
extent that payments are received and the collection of principal is
reasonably assured. Loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time, and the ultimate
collectibility of the total contractual principal and interest is
reasonably assured. The balance of nonperforming loans was not
material to the consolidated financial statements at December 31, 1999
and 1998.
Loan Fees and Related Costs - Certain loan-origination fees,
commitment fees, and direct loan-origination costs are being deferred
and net amounts amortized as an adjustment of the related loan's
yield. The Savings Bank is amortizing these amounts into interest
income, using the level-yield method, over the contractual life of the
related loan. Other loan-origination and commitment fees not required
to be recognized as a yield adjustment are included in loan fees.
Allowances for Loan Losses - Allowances for loan losses are provided
based on past experience and prevailing market conditions.
Management's evaluation of loss considers various factors including,
but not limited to, general economic conditions, loan portfolio
composition, and prior loss experience. This evaluation is inherently
subjective since it requires material estimates that may be
susceptible to significant change. Loans are charged against the
allowance for loan losses when management believes the collectibility
of the principal is unlikely. In addition, various regulatory agencies
periodically review the allowance for loan losses. These agencies may
require additions to the allowance for loan losses based on their
judgments of collectibility.
The Company considers loans secured by one- to four-unit residential
properties and all consumer loans to be large groups of
smaller-balance homogenous loans. These loans are collectively
evaluated in the analysis of the adequacy of the allowance for loan
losses.
The Company's commercial and five or more family residential portfolio
is subject to a loan-by-loan analysis of the adequacy of the allowance
for loan losses and impairment. These loans are considered impaired
when, based on current information, it is probable the Company will
not collect all amounts due in accordance with the contractual terms
of the loan agreement. The value of impaired loans is based on
discounted cash flows of expected future payments using the loan's
internal effective interest rate or the fair value of the collateral
if the loan is collateral dependent. The Company did not have any
impaired loans during 1999, 1998, or 1997.
In management's judgment, the allowance for loan losses is adequate to
cover probable losses relating to specifically identified loans, as
well as probable losses inherent in the balance of the loan portfolio.
Mortgage Servicing Rights - The Company recognizes mortgage servicing
rights on loans that are originated and subsequently sold or
securitized and servicing is retained. A portion of the cost of the
loans is required to be allocated to the servicing rights based on the
relative fair values of the loans and the servicing rights. The
Company amortizes these mortgage servicing rights over the period of
estimated net servicing revenue. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current
market interest rate.
Office Properties and Equipment - Office properties and equipment are
stated at cost. Maintenance and repair costs are charged to expense as
incurred. Gains or losses on disposition of office properties and
equipment are reflected in income or expense, respectively.
Depreciation is computed on the straight-line method and is based on
the estimated useful lives of the assets. The cost of leasehold
improvements is amortized using the straight-line method over the
lesser of the term of the respective lease or estimated economic life
of the improvements.
FN-10
<PAGE> 194
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Life Insurance Policies - Investments in life insurance policies owned
by the Company are carried at the amount that could be realized under
the insurance contract.
Income Taxes - The Company files one consolidated federal income tax
return. Federal income tax expense (credit) is allocated to each
subsidiary based on an intercompany tax sharing agreement. The
subsidiaries file separate state franchise tax returns as applicable.
Deferred income taxes have been provided under the liability method.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the current enacted tax rates which will be
in effect when these differences are expected to reverse. Deferred tax
expense (benefit) is the result of changes in the deferred tax asset
and liability.
Advertising Costs - Advertising costs are expensed as incurred.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes
unrealized gains and losses on securities available-for-sale, net of
tax, which are recognized as a separate component of equity,
accumulated other comprehensive income.
Reclassifications - Certain reclassifications have been made to the
1998 and 1997 consolidated financial statements to conform to the 1999
classifications.
Future Accounting Change - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities. This statement requires an entity to recognize all
derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This
statement is effective for fiscal years beginning after June 15, 2000,
as amended by SFAS No. 137. The effect of adoption of this statement
on the consolidated financial statements of the Company is dependent
on the amount and nature of derivatives in place at the time of
adoption. Management does not anticipate the adoption of this
statement will have a material effect on the financial position or
operating results of the Company.
FN-11
<PAGE> 195
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Investment securities:
U.S. government and agency securities $6,737 $6 $86 $6,657
Asset management funds 563 17 546
FHLMC stock 33 1,097 1,130
Equity securities 111 111
- - -----------------------------------------------------------------------------------------------------------------
Total investment securities 7,444 1,103 103 8,444
- - -----------------------------------------------------------------------------------------------------------------
Mortgage-related securities:
Federal Home Loan Mortgage Corporation 1,938 92 1,846
Federal National Mortgage Association 1,862 1,862
Government National Mortgage Association 1,955 109 1,846
- - -----------------------------------------------------------------------------------------------------------------
Total mortgage-related securities 5,755 - 201 5,554
- - -----------------------------------------------------------------------------------------------------------------
Total $13,199 $1,103 $304 $13,998
=================================================================================================================
DECEMBER 31, 1998
Investment securities:
U.S. government and agency securities $7,041 $88 $4 $7,125
Asset management funds 535 1 534
FHLMC stock 33 1,513 1,546
- - -----------------------------------------------------------------------------------------------------------------
Total investment securities 7,609 1,601 5 9,205
- - -----------------------------------------------------------------------------------------------------------------
Mortgage-related securities - Federal Home Loan
Mortgage Corporation 998 2 996
- - -----------------------------------------------------------------------------------------------------------------
Total $8,607 $1,601 $7 $10,201
=================================================================================================================
</TABLE>
FN-12
<PAGE> 196
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES AVAILABLE-FOR-SALE (Continued)
Sales of securities available-for-sale resulted in total proceeds of
$2,251,000 and gross realized gains of $9,000 in 1998. There were no
sales of securities available-for-sale in 1999 or 1997.
At December 31, 1999, U.S. government and agency securities
available-for-sale have the following maturities:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $2,748 $2,754
Due after one year through five years 3,989 3,903
- - -----------------------------------------------------------------------------------------------------------------
Total U.S. government and agency securities $6,737 $6,657
=================================================================================================================
</TABLE>
Expected maturities for mortgage-related securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
The amortized cost and estimated fair value of investment securities
available-for-sale pledged to secure public deposits, short-term borrowings, and
for other purposes required by law were $6,383,000 and $6,110,000, respectively,
as of December 31, 1999.
NOTE 3 SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair value of securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Investment securities:
U.S. government and agency securities $25,216 $571 $24,645
Corporate bond 999 999
- - -----------------------------------------------------------------------------------------------------------------
Total investment securities 26,215 - 571 25,644
- - -----------------------------------------------------------------------------------------------------------------
Mortgage-related securities:
Federal Home Loan Mortgage Corporation 6,192 15 60 6,147
Federal National Mortgage Association 3,856 1 28 3,829
- - -----------------------------------------------------------------------------------------------------------------
Total mortgage-related securities 10,048 16 88 9,976
- - -----------------------------------------------------------------------------------------------------------------
Total $36,263 $16 $659 $35,620
=================================================================================================================
</TABLE>
FN-13
<PAGE> 197
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SECURITIES HELD-TO-MATURITY (Continued)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Investment securities - U.S. government and
agency securities $23,741 $205 $11 $23,935
- - -----------------------------------------------------------------------------------------------------------------
Mortgage-related securities:
Federal Home Loan Mortgage Corporation 7,347 61 7,408
Federal National Mortgage Association 4,175 19 8 4,186
- - -----------------------------------------------------------------------------------------------------------------
Total mortgage-related securities 11,522 80 8 11,594
- - -----------------------------------------------------------------------------------------------------------------
Total $35,263 $285 $19 $35,529
=================================================================================================================
</TABLE>
There were no sales of securities held-to-maturity in 1999, 1998, or 1997.
At December 31, 1999, investment securities held-to-maturity have the following
maturities:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $4,700 $4,689
Due after one year through five years 18,899 18,510
Due after five years through ten years 2,616 2,445
- - -----------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity $26,215 $25,644
=================================================================================================================
</TABLE>
Expected maturities for mortgage-related securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
The amortized cost and estimated fair value of investment securities
held-to-maturity pledged to secure public deposits, short-term borrowings, and
for other purposes required by law were $5,389,000 and $5,258,000, respectively,
as of December 31, 1999.
FN-14
<PAGE> 198
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
First mortgage loans:
One- to four-family residential $465,737 $416,974
Five or more family residential 35,815 32,013
Commercial real estate 17,699 7,546
Construction 36,668 29,937
Other 3,769 3,129
- - -----------------------------------------------------------------------------------------------------------------
Total first mortgage loans 559,688 489,599
- - -----------------------------------------------------------------------------------------------------------------
Consumer loans:
Consumer 20,153 18,416
Second mortgage 78,223 66,426
Automobile 96,356 73,502
- - -----------------------------------------------------------------------------------------------------------------
Total consumer loans 194,732 158,344
- - -----------------------------------------------------------------------------------------------------------------
Commercial loans 4,771
-
- - -----------------------------------------------------------------------------------------------------------------
Gross loans 759,191 647,943
- - -----------------------------------------------------------------------------------------------------------------
Less:
Undisbursed loan proceeds 17,852 11,750
Allowance for loan losses 3,910 3,531
Unearned loan fees 549 923
- - -----------------------------------------------------------------------------------------------------------------
Deductions 22,311 16,204
- - -----------------------------------------------------------------------------------------------------------------
Total loans receivable $736,880 $631,739
=================================================================================================================
</TABLE>
The majority of the Company's lending activity is with borrowers within its
primary market area of Northeastern Wisconsin.
Loans serviced for investors were $151,374,000, $150,161,000, and $126,980,000
at December 31, 1999, 1998, and 1997, respectively. These loans are not
reflected in the consolidated financial statements. A mortgage servicing rights
asset is generated on loans originated and subsequently sold. The balance of
mortgage servicing rights is included with other assets on the consolidated
statements of financial condition and is immaterial to the consolidated
statements of financial condition as of December 31, 1999 and 1998. There was no
impairment of mortgage servicing rights and the carrying value of mortgage
servicing rights approximates the fair market value at December 31, 1999 and
1998.
FN-15
<PAGE> 199
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE (Continued)
A summary of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $3,531 $3,177 $2,937
Provisions 472 420 320
Loans charged off (122) (99) (101)
Recoveries on loans 29 33 21
- - -----------------------------------------------------------------------------------------------------------------
Balance at end of year $3,910 $3,531 $3,177
=================================================================================================================
</TABLE>
NOTE 5 OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Land $2,045 $2,045
Buildings and improvements 7,067 7,052
Furniture and equipment 2,767 2,891
Leasehold improvements 31 74
- - -----------------------------------------------------------------------------------------------------------------
Cost 11,910 12,062
Less - Accumulated depreciation and amortization 4,447 4,489
- - -----------------------------------------------------------------------------------------------------------------
Net depreciated value $7,463 $7,573
=================================================================================================================
</TABLE>
FN-16
<PAGE> 200
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 DEPOSITS
Deposits are summarized at December 31 as follows:
<TABLE>
<CAPTION>
1999 1998
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Passbook $68,832 $65,887
Negotiable order of withdrawal accounts:
Non-interest-bearing 29,530 25,747
Interest-bearing 40,649 43,526
Variable rate insured money market accounts 67,317 64,938
Certificate accounts:
4.00% to 4.99% 36,930 42,348
5.00% to 5.99% 282,742 206,600
6.00% to 7.99% 38,085 90,613
- - -----------------------------------------------------------------------------------------------------------------
Subtotal certificate accounts 357,757 339,561
- - -----------------------------------------------------------------------------------------------------------------
Subtotal deposits 564,085 539,659
Accrued interest 2,823 2,713
- - -----------------------------------------------------------------------------------------------------------------
Total deposits $566,908 $542,372
=================================================================================================================
Weighted average interest rate 4.33% 4.35%
=================================================================================================================
</TABLE>
Aggregate annual maturities of certificate accounts at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
2000 $247,348
2001 78,691
2002 23,585
2003 3,165
2004 4,968
- - ----------------------------------------------------------------------------------------------------
Total $357,757
====================================================================================================
</TABLE>
Deposit accounts with balances greater than $100,000 were $75,157,000 and
$68,685,000 at December 31, 1999 and 1998, respectively.
FN-17
<PAGE> 201
FIRST NORTHERN CAPITAL CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 BORROWINGS
Borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- - ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances maturing in:
1999 $15,200 5.88%
2000 $48,555 5.94% 20,375 5.69%
2001 15,965 5.82% 10,900 5.88%
2002 11,934 5.82% 18,000 5.43%
2003 11,325 5.75% 11,325 5.75%
2004 20,000 5.81%
2008 1,025 5.90% 8,025 4.99%
2009 5,000 5.15%
Open line of credit 68,595 4.74% 7,675 5.13%
- - ----------------------------------------------------------------------------------------------------------------
Total FHLB advances 182,399 5.42% 91,500 5.59%
Federal Reserve Bank line of credit 3,500 4.54% 477 4.12%
- - ----------------------------------------------------------------------------------------------------------------
Totals $185,899 5.41% $91,977 5.58%
================================================================================================================
</TABLE>
The Company is required to maintain as collateral unencumbered one- to
four-family mortgage loans such that the outstanding balance of FHLB advances
does not exceed 60% of the book value of this collateral. The FHLB advances are
also collateralized by the FHLB stock owned by the Company. The variable rate
term FHLB advances at December 31, 1999, which are included above, total
$30,000,000 and are at interest rates tied to the one-month LIBOR index.
The Company is a Treasury Tax & Loan (TT&L) depository for the Federal Reserve
Bank (FRB), and as such, it accepts TT&L deposits. The Company is allowed to
borrow these deposits from the FRB until they are called. The interest rate is
the federal funds rate less 25 basis points. U.S. Treasury Securities with a
face value greater than or equal to the amount borrowed are pledged as a
condition of borrowing TT&L deposits.
At December 31, 1999, the Company had an irrevocable letter of credit
outstanding with the FHLB for $725,000. This letter of credit is pledged against
a municipal deposit with the Company. No amounts have been drawn against the
letter of credit by the Company.
FN-18
<PAGE> 202
FIRST NORTHERN CAPITAL CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $3,540 $3,333 $2,802
State 120 432 577
- - -----------------------------------------------------------------------------------------------------------------
Total current 3,660 3,765 3,379
- - -----------------------------------------------------------------------------------------------------------------
Deferred tax expense (credit):
Federal (108) (127) 209
State (27) (32) 63
- - -----------------------------------------------------------------------------------------------------------------
Total deferred (135) (159) 272
- - -----------------------------------------------------------------------------------------------------------------
Total provision for income taxes $3,525 $3,606 $3,651
=================================================================================================================
</TABLE>
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- - -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income before provision for income taxes $10,902 100 $10,435 100 $9,687 100
=================================================================================================================
Tax expense at federal statutory rate $3,707 34 $3,552 34 $3,294 34
Increase (decrease) in taxes resulting from:
State income taxes - Net of federal
tax benefit 57 1 264 3 422 4
Cash surrender value of life insurance in
excess of premiums (227) (225) (2) (61) (1)
(2)
Other (12) - 15 - (4) -
- - -----------------------------------------------------------------------------------------------------------------
Provision for income taxes $3,525 33 $3,606 35 $3,651 37
=================================================================================================================
</TABLE>
FN-19
<PAGE> 203
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 INCOME TAXES (Continued)
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The major components of net deferred
tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Deferred compensation $1,041 $1,010
Allowance for loan losses 1,066 830
Excess servicing gains 31 41
Other 14 4
- - -----------------------------------------------------------------------------------------------------------------
Total deferred tax assets 2,152 1,885
- - -----------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan fees 576 429
Mortgage servicing rights 239 262
FHLB stock dividends 159 164
Depreciation and amortization 163 174
Unrealized securities gains 320 634
Other 59 35
- - -----------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,516 1,698
- - -----------------------------------------------------------------------------------------------------------------
Net deferred tax asset $636 $187
=================================================================================================================
</TABLE>
NOTE 9 EMPLOYEE BENEFIT PLANS
The Company has a participatory defined contribution 401(k) plan. The
plan covers all employees with at least one year of service and who
have attained age 21. The Company annually contributes 3% of an
employee's gross earnings and may fund an additional discretionary
dollar amount to the plan. The Company also matches 50% of the first
4% of the amount of each employee's contribution. In addition, each
employee may contribute amounts in excess of 4%, up to the lesser of
15% of compensation or federal tax limits, with no Company
participation. Total expense relating to this plan for 1999, 1998, and
1997 was $459,000, $442,000, and $379,000, respectively.
The Company has an unfunded deferred retirement plan for directors.
All members of the Company's Board of Directors are eligible under the
plan. Directors of predecessor institutions who are members of an
advisory board are eligible at the discretion of the Company.
Currently, there are four advisory board members in the plan. The
Company also has supplemental retirement plans for several of its
executives. Total expense relating to these plans for 1999, 1998, and
1997 was $360,000, $809,000, and $513,000, respectively. The Company
does not, as a policy, offer postretirement benefits other than the
plans discussed above.
The Company has stock option plans which provide for the grant of
incentive stock options, nonqualified stock options, stock
appreciation rights (SARSs), or restricted stock. The plans provide
that incentive stock option prices will not be less than the fair
market value of the stock at the grant date and nonqualified stock
option prices shall not be less than 90% of the fair value of the
stock at the grant date. Options granted are eligible to be exercised
equally over a three-year period. All options expire no later than ten
years from the grant date.
FN-20
<PAGE> 204
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 EMPLOYEE BENEFIT PLANS (Continued)
The fair value of each option granted is estimated on the grant date
using the Black-Scholes methodology. The following assumptions were
made in estimating fair value for options granted for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 3.00% 3.00% 4.50%
Risk-free interest rate 6.86% 5.41% 5.75%
Weighted average expected life (years) 7.0 7.0 7.0
Expected volatility 23.9% 22.2% 20.2%
</TABLE>
The weighted average fair value of options granted as of their grant
date, using the assumptions shown above, was computed at $3.49, $3.11,
and $1.45 per share for options granted in 1999, 1998, and 1997,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
and directors' stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee and directors' stock options.
No compensation cost has been recognized for the plan. Had
compensation cost been determined on the basis of fair value, net
income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Net income:
As reported $7,377 $6,829 $6,036
==========================================================================
Pro forma $7,139 $6,665 $5,953
==========================================================================
Earnings per share:
As reported:
Basic $0.85 $0.77 $0.68
Diluted 0.83 0.75 0.66
Pro forma:
Basic 0.82 0.75 0.67
Diluted 0.80 0.73 0.65
</TABLE>
FN-21
<PAGE> 205
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 EMPLOYEE BENEFIT PLANS (Continued)
A summary of stock option transactions for each of the three years in
the period ended December 31, 1999, is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 607,620 $1.77 - $8.38 $5.19
Granted 113,000 $1.77 - $7.88 8.36
Exercised (121,618) $1.77 - $7.88 4.09
------------------------------------------------- --------------------
Balance at December 31, 1997 599,002 $1.77 - $8.38 6.02
Granted 95,600 $12.75 - $13.25 13.14
Exercised (100,138) $1.77 - $8.38 5.34
------------------------------------------------- --------------------
Balance at December 31, 1998 594,464 $1.77 - $13.25 7.27
Granted 106,000 $11.875 - $12.50 12.39
Exercised (50,314) $1.77 - $8.25 3.53
Expired (3,600) $12.75 12.75
------------------------------------------------- --------------------
Balance at December 31, 1999 646,550 $1.77 - $13.25 $8.38
================================================= ====================
</TABLE>
The following is a summary of the options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE - YEARS PRICE NUMBER PRICE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.77 - $2.94 43,150 2.3 $2.82 43,150 $2.82
$3.06 - $4.78 79,600 2.3 4.08 79,600 4.08
$6.38 - $8.38 325,800 6.3 7.51 294,333 7.42
$11.875 - $13.25 198,000 9.5 12.75 30,667 13.15
-----------------------------------------------------------------------------------------------------------------
Total 646,550 6.5 $8.38 447,750 $6.77
=================================================================================================================
</TABLE>
NOTE 10 STOCKHOLDERS' EQUITY
The Board of Directors of the Company is authorized to issue
cumulative preferred stock in series and to establish the relative
rights and preferences of each series with respect to rates,
redemption rights and prices, conversion terms, voluntary liquidation
rights, and voting powers. Cumulative preferred stock will rank prior
to common stock as to dividend rights and liquidation preferences.
Under Wisconsin state law, preferred stockholders are entitled to vote
as a separate class or series in certain circumstances, including any
amendment which would adversely change the specific terms of such
series of stock or which would create or enlarge any class or series
ranking prior thereto in rights and preferences (excluding
substituting the surviving entity in a merger or consolidation of the
Company).
FN-22
<PAGE> 206
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 STOCKHOLDERS' EQUITY (Continued)
The Savings Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by regulators that, if
undertaken, could have a direct material effect on the Savings Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank
must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Savings Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by federal and state regulation to
ensure capital adequacy require the Savings Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital to risk-weighted assets and of Tier I capital to average
assets. Management believes, as of December 31, 1999, that the Savings
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Savings Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Savings Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the Savings Bank's category.
The Savings Bank's actual and regulatory capital amounts (in
thousands) and ratios are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- - -------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- - -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999:
Risk-based capital (to risk-weighted assets) $76,326 14.0% >=$43,770 >=8.0% >=$54,713 >=10.0%
Tier I (core) capital (to risk-weighted assets) $72,416 13.2% >=$21,885 >=4.0% >=$32,828 >=6.0%
Tier I (core) capital (to adjusted assets) $72,416 8.6% >=$33,546 >=4.0% >=$41,783 >=5.0%
Tangible equity (to tangible assets) $72,416 8.6% >=$33,546 >=4.0% >=$41,783 >=5.0%
State of Wisconsin capital (to total assets) $77,197 9.2% >=$50,377 >=6.0% N/A N/A
DECEMBER 31, 1998:
Risk-based capital (to risk-weighted assets) $72,055 15.7% >=$36,620 >=8.0% >=$45,775 >=10.0%
Tier I (core) capital (to risk-weighted assets) $68,524 15.0% >=$18,310 >=4.0% >=$27,465 >=6.0%
Tier I (core) capital (to adjusted assets) $68,524 9.6% >=$28,697 >=4.0% >=$35,872 >=5.0%
Tangible equity (to tangible assets) $68,524 9.6% >=$28,697 >=4.0% >=$35,872 >=5.0%
State of Wisconsin capital (to total assets) $73,414 10.2% >=$43,181 >=6.0% N/A N/A
</TABLE>
FN-23
<PAGE> 207
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 STOCKHOLDERS' EQUITY (Continued)
Following are reconciliations of the Savings Bank's stockholder's
equity under generally accepted accounting principles to capital as
determined by regulations:
<TABLE>
<CAPTION>
RISK- TIER I STATE OF
BASED (CORE) WISCONSIN
CAPITAL CAPITAL CAPITAL
- - -----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
As of December 31, 1999:
Regulatory capital $76,326 $72,416 $77,197
Unrealized gains on available-for-sale securities 479 479
Investments in and advances to nonincludable subsidiaries 392 392
Allowance for loan losses (3,910) (3,910)
- - -----------------------------------------------------------------------------------------------------------------
Stockholder's equity (First Northern Savings Bank only) $73,287 $73,287 $73,287
=================================================================================================================
Stockholders' equity (First Northern Capital Corp.) $76,795 $76,795 $76,795
=================================================================================================================
As of December 31, 1998:
Regulatory capital $72,055 $68,524 $73,414
Unrealized gains on available-for-sale securities 960 960
Investments in and advances to nonincludable subsidiaries 399 399
Allowance for loan losses (3,531) (3,531)
- - -----------------------------------------------------------------------------------------------------------------
Stockholder's equity (First Northern Savings Bank only) $69,883 $69,883 $69,883
=================================================================================================================
Stockholders' equity (First Northern Capital Corp.) $76,093 $76,093 $76,093
=================================================================================================================
</TABLE>
The capital distribution regulations allow a well-capitalized bank to
make capital distributions during a calendar year up to 100% of its
net income to date plus the amount that would reduce by one half its
surplus capital ratio at the beginning of the calendar year. Any
distributions in excess of that amount requires prior OTS notice, with
the opportunity for OTS to object to the distribution.
Unlike the Savings Bank, the Company is not subject to these
regulatory capital requirements or restrictions on the payment of
dividends to it stockholders. However, the source of its future
dividends may depend upon dividends from the Savings Bank.
On October 18, 1996, the Company began a second stock repurchase
program for its common stock to be used for the exercise of stock
options. The program concluded on October 20, 1997, with a total of
60,800 shares being purchased at an average price of $8.62 per share.
A third stock repurchase program began March 20, 1998, for up to
446,101 shares. The program concluded on December 31, 1999, with a
total of 446,101 shares being repurchased at an average price of
$11.81 per share.
FN-24
<PAGE> 208
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is shown in the consolidated statements of
stockholders' equity. The Company's accumulated other comprehensive
income is comprised of the unrealized gain or loss on securities
available-for-sale. The following shows the activity in accumulated
other comprehensive income:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Accumulated other comprehensive income at beginning of year $960 $614 $385
-------------------------------------------------------------------------------------------------------
Activity:
Unrealized gain (loss) on securities available-for-sale (795) 577 382
Tax impact 314 (231) (153)
-------------------------------------------------------------------------------------------------------
Net change in unrealized gain (loss) on securities available-for-sale (481) 346 229
-------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income at end of year $479 $960 $614
=======================================================================================================
</TABLE>
NOTE 12 EARNINGS PER SHARE
The following shows the computation of the basic and diluted earnings
per share for the years ended December 31:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EARNINGS
NUMBER OF PER
NET INCOME SHARES SHARE
--------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
1999
Earnings per share - Basic $7,377 8,704,183 $0.85
==============
Effect of stock options - Net 176,782
-------------------------------------------------------------------------------------------------
Earnings per share - Diluted $7,377 8,880,965 $0.83
==============================================================================================================
1998
Earnings per share - Basic $6,829 8,851,486 $0.77
==============
Effect of stock options - Net 241,167
-------------------------------------------------------------------------------------------------
Earnings per share - Diluted $6,829 9,092,653 $0.75
==============================================================================================================
1997
Earnings per share - Basic $6,036 8,834,937 $0.68
==============
Effect of stock options - Net 245,300
-------------------------------------------------------------------------------------------------
Earnings per share - Diluted $6,036 9,080,237 $0.66
===============================================================================================================
</TABLE>
FN-25
<PAGE> 209
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 SEGMENT INFORMATION
First Northern Capital Corp., through a branch network of its
subsidiary, First Northern Savings Bank, provides a full range of
consumer and commercial financial institution services to individuals
and businesses in Northeastern Wisconsin. These services include
demand, time, and savings deposits; safe deposit services; credit
cards; notary services; night depository; money orders, traveler's
checks, and cashier's checks; savings bonds; secured and unsecured
consumer, commercial, and real estate loans; ATM processing; cash
management; and financial planning.
While the Company's chief decision-makers monitor the revenue streams
of various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's financial institution operations are
considered by management to be aggregated in one reportable operating
segment.
NOTE 14 COMMITMENTS
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to
extend credit and forward commitments to sell mortgage loans. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
statements of financial condition. The contract amounts reflect the
extent of involvement the Company has in the particular class of
financial instrument. The Company's maximum exposure to credit loss
for commitments to extend credit is represented by the contract amount
of those instruments. For forward commitments to sell loans, the
contract amounts do not represent exposure to credit loss.
Off-balance-sheet financial instruments whose contract amounts
represent credit and/or interest rate risk at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed rate (8.25% to 8.50% in 1999 and 6.375% to 7.50% in 1998) $178 $4,656
Adjustable rate (6.50% to 7.75% in 1999 and 5.75% to 8.00% in 1998) 2,554 3,618
Commitments to sell mortgage loans - 4,103
Unused overdraft protection lines of credit for checking accounts 1,462 1,522
Unused home equity lines of credit 19,327 15,819
Unused commercial real estate line of credit 3,195 102
Unused commercial letters of credit 513 841
Unused credit card lines of credit 6,606 4,577
</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
Company evaluates the creditworthiness of each customer on a
case-by-case basis. The Company generally extends credit only on a
secured basis. Collateral obtained varies, but consists primarily of
one- to four-family residences.
Commitments to extend credit on a fixed-rate basis expose the Company
to a certain amount of interest rate risk if market rates of interest
substantially increase during the commitment period.
Forward commitments to sell mortgage loans represent commitments
obtained by the Company from a secondary market agency to purchase
mortgages from the Company and place them in a mortgage-related
security pool with a defined yield. Commitments to sell loans expose
the Company 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 the existing loan portfolio and on
commitments to extend credit.
FN-26
<PAGE> 210
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 COMMITMENTS (Continued)
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to
customers. The commitments are structured to allow for 100%
collateralization on all standby letters of credit.
The Company has no investments in nor is a party to transactions
involving derivative investments, except mortgage-related securities
which represent minimal risk to the Company.
NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions for the Company's
financial instruments are summarized below.
Cash and Cash Equivalents - The carrying values approximate the fair
values for these assets.
Investment and Mortgage-Related Securities - Fair values are based on
quoted market prices where available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Receivable and Loans Held-for-Sale - For certain homogeneous
categories of loans, such as fixed-rate residential mortgages, fair
value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings.
Accrued Interest Receivable and Payable - The carrying amounts
reported in the consolidated statements of financial condition
approximate their fair values.
Federal Home Loan Bank Stock - Fair value for the Federal Home Loan
Bank stock is based on its redeemable (carrying) value, as a market
for this stock is restricted.
Deposits - The fair value of deposits with no stated maturity, such as
passbooks, negotiable order of withdrawal accounts, and variable rate
insured money market accounts, is the amount payable on demand on the
reporting date. The fair value of fixed-rate, fixed-maturity,
certificate accounts is estimated using discounted cash flows with
discount rates at interest rates currently offered for deposits of
similar remaining maturities.
Borrowings - Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt. The fair value of borrowed funds due on demand is
the amount payable at the reporting date. The fair value of borrowed
funds with fixed terms is estimated using discounted cash flows with
discount rates at interest rates currently offered by lenders for
similar remaining maturities.
Off-Balance-Sheet Instruments - The fair value of commitments is
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements,
the current interest rates, and the present creditworthiness of the
counterparties. Since this amount is immaterial, no amounts for fair
value are presented.
FN-27
<PAGE> 211
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying value and estimated fair value of financial instruments
at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $12,372 $12,372 $7,211 $7,211
Securities 50,261 49,618 45,464 45,730
Federal Home Loan Bank stock 9,250 9,250 5,250 5,250
Total loans - Net 737,965 700,493 634,814 636,243
Accrued interest receivable 4,229 4,229 3,686 3,686
----------------------------------------------------------------------------------------------------------------
Total financial assets $814,077 $775,962 $696,425 $698,120
================================================================================================================
Financial liabilities:
Deposits $564,085 $565,121 $539,659 $541,866
Accrued interest payable 2,823 2,823 2,713 2,713
Borrowed funds 185,899 184,559 91,977 92,522
----------------------------------------------------------------------------------------------------------------
Total financial liabilities $752,807 $752,503 $634,349 $637,101
================================================================================================================
</TABLE>
Limitations - Fair value estimates are made at a specific point in
time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters that could affect the estimates. Fair value estimates are
based on existing on- and off-balance-sheet financial instruments
without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not
considered financial instruments. Deposits with no stated maturities
are defined as having a fair value equivalent to the amount payable on
demand. This prohibits adjusting fair value derived from retaining
those deposits for an expected future period of time. This component,
commonly referred to as a deposit base intangible, is neither
considered in the above amounts nor is it recorded as an intangible
asset on the statement of financial condition. Significant assets and
liabilities that are not considered financial assets and liabilities
include office properties and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
FN-28
<PAGE> 212
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31
--------------------------
ASSETS 1999 1998
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Cash $3,129 $5,998
Investment in subsidiaries 73,287 69,883
Other 393 228
-----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $76,809 $76,109
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
Liabilities:
Other liabilities $14 $16
-----------------------------------------------------------------------------------------------------------------
Total liabilities 14 16
-----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 9,135 9,135
Additional paid-in capital 8,780 9,126
Retained earnings 64,468 60,582
Accumulated comprehensive income 479 960
Treasury stock at cost (6,067) (3,710)
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 76,795 76,093
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $76,809 $76,109
=================================================================================================================
</TABLE>
FN-29
<PAGE> 213
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income $168 $249 $170
Equity in earnings of subsidiary 7,384 6,751 6,010
-----------------------------------------------------------------------------------------------------------------
Total income 7,552 7,000 6,180
-----------------------------------------------------------------------------------------------------------------
Compensation 12 12 12
Other operating expenses 158 109 115
-----------------------------------------------------------------------------------------------------------------
Total expenses 170 121 127
-----------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,382 6,879 6,053
Provision for income taxes 5 50 17
-----------------------------------------------------------------------------------------------------------------
Net income $7,377 $6,829 $6,036
=================================================================================================================
</TABLE>
FN-30
<PAGE> 214
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $7,377 $6,829 $6,036
-----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in earnings of subsidiary (7,384) (6,751) (6,010)
Change in other operating assets and liabilities (3) 47 29
-----------------------------------------------------------------------------------------------------------------
Total adjustments (7,387) (6,704) (5,981)
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (10) 125 55
-----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Dividends received from subsidiary 3,500 6,355 2,915
Purchase of investment available-for-sale (111) - -
-----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 3,389 6,355 2,915
-----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (3,491) (3,192) (2,826)
Purchase of treasury stock (2,935) (2,333) (441)
Retirement of common stock - (18) -
Proceeds from exercise of stock options 178 534 487
-----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,248) (5,009) (2,780)
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (2,869) 1,471 190
Cash at beginning of year 5,998 4,527 4,337
-----------------------------------------------------------------------------------------------------------------
Cash at end of year $3,129 $5,998 $4,527
=================================================================================================================
</TABLE>
FN-31
<PAGE> 215
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 SUBSEQUENT EVENT
On February 21, 2000, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Mutual Savings Bank
("Mutual"), a Wisconsin-chartered mutual savings bank and OV Corp.
(the "Merger Corp."), a wholly owned subsidiary of Mutual organized
for the purpose of effecting the transactions contemplated by the
Merger Agreement. The Merger Corp. will be the surviving corporation.
The Merger Agreement provides for the acquisition of the Company by
Mutual through a merger of the Company with and into the Merger Corp.
Subject to the terms and conditions of the Merger Agreement, at the
time of the merger, each outstanding share of the Company's common
stock will be converted into the right to receive cash in the amount
of $15.00 or 1.5 shares of common stock of the Merger Corp. or a
combination of cash and shares of the Merger Corp.
In connection with the Merger, the Company and Mutual will engage in a
restructuring. As part of the restructuring, Mutual will form a mutual
holding company. The mutual holding company will own a majority of the
Merger Corp.'s common stock. The balance of the shares of the Merger
Corp. will be offered for sale to Mutual's depositors and issued to
First Northern stockholders in the Merger. As a result of the
restructuring, the Savings Bank and Mutual will become wholly owned
subsidiaries of the Merger Corp.
The Merger and subsequent restructuring are subject to approval by the
stockholders of the Company, depositors of Mutual, and various
regulatory agencies.
Concurrent with the execution of the Merger Agreement, the parties
entered into a Stock Option Agreement by which the Company granted
Mutual an irrevocable option to purchase up to 1,708,675 share of the
Company's stock equal to 19.9% of the number of shares of the
Company's stock outstanding on February 21, 2000, at an exercise price
of $9.0375 per share. The option would become exercisable under
certain circumstances if the Company becomes the subject of a third
party proposal for a competing transaction.
FN-32
<PAGE> 216
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
First Northern Capital Corp. (the "Company" or "First Northern") is a
unitary savings and loan holding company, of which First Northern Savings Bank,
S.A. (the "Savings Bank"), a Wisconsin chartered capital stock savings and loan
association, is a wholly owned subsidiary.
The Savings Bank was reorganized into First Northern on December 20,
1995, with each outstanding share of the Savings Bank's common stock converted
into one share of the Company's common stock (the "Reorganization").
Consequently, the holders of all the outstanding stock of the Savings Bank
acquired the same proportionate ownership interest in First Northern as they had
held in the Savings Bank. The consolidated capital, assets, liabilities, income
and other financial data of First Northern immediately following the
Reorganization were substantially the same as those of the Savings Bank
immediately prior to consummation of the Reorganization.
The Savings Bank is the only direct subsidiary of the Company and its
operations are the primary contributor to the Company's earnings and expenses.
The Savings Bank's business consists primarily of attracting deposits from the
general public and originating loans throughout its Northeastern Wisconsin
branch network. Great Northern Financial Services Corporation ("GNFSC"), a
wholly owned subsidiary of the Savings Bank, offers full brokerage services to
the public through a network agreement with a registered broker-dealer and sells
tax deferred annuities, credit life and disability insurance. Another wholly
owned Savings Bank subsidiary, First Northern Investments, Inc. ("FNII"),
manages a majority of the Savings Bank's investments, purchases automobile loans
from Savings Financial Corp. ("SFC") and mortgage loan participations from its
parent. SFC, which is 50% owned by the Savings Bank, originates, services and
sells automobile loans to FNII and its other parent corporation.
In connection with the following discussion, see the financial data in
Item 1 and "Cautionary Factors" in Item 1 of this document regarding
forward-looking statements and factors that could impact the business and
financial prospects of the Company.
MERGER AGREEMENT
On February 21, 2000, First Northern entered into a Merger Agreement
with Mutual Savings Bank which provides for the acquisition of First Northern by
Mutual. See Item 1. "Business--Merger Agreement with Mutual Saving Bank.", which
is incorporated by reference herein.
BALANCE SHEET ANALYSIS
LIQUIDITY. The Company's primary sources of funds are deposits (retail and
wholesale), proceeds from principal and interest payments on loans, advances
from the Federal Home Loan Bank (the "FHLB") of Chicago, and, to a lesser
extent, maturities of investment securities and short-term investments, sales of
loans, repurchase agreements, and operations. While scheduled loan repayments
and maturing investments are a relatively predictable source of funds, deposit
flows and loan prepayments are influenced to a great extent by interest rates,
general economic conditions, and competition.
Federal regulations historically have required First Northern to
maintain minimum levels of liquid assets such as cash, certain time deposits,
U.S. government and agency securities, and other obligations generally having
remaining maturities of less than five years. Liquidity requirements have varied
from time to time based upon economic conditions and deposit flows. The current
requirement is 4% of the preceding calendar month's average net withdrawable
deposits and borrowings payable on demand or in one year or less ("liquidity
base") or of the average daily balance of the liquidity base during the
preceding quarter. The Company's total liquidity ratio at December 31, 1999 was
5.45% and 5.49% at December 31, 1998. The liquidity ratio decreased at year-end
1999 as compared to year-end 1998 as a result of funding loan originations.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of: (i) expected loan demand; (ii) expected deposit
flows; (iii) yields available on interest-earning deposits; and (iv) the
objectives of its asset/liability management program. Excess liquidity is
generally invested in interest-earning overnight deposits and short- to
intermediate-term U.S. Government and agency obligations. If the Savings Bank
requires funds beyond its ability to generate them from operations, it can
borrow from the FHLB of Chicago (See "Borrowings").
FN-33
<PAGE> 217
INVESTMENT AND MORTGAGE-RELATED SECURITIES. A substantial portion of the
Company's investment securities (approximately $32.4 million at December 31,
1999 and $33.3 million at December 31, 1998) are held and managed by FNII. (See
Notes to Consolidated Financial Statements -- Note 2 and Note 3 -- Securities
Available-for-Sale and Securities Held-to-Maturity.)
Interest-earning deposits increased $3.5 million in 1999 as a result of
placing excess funds in overnight deposits until the funds (usually a day) are
needed.
The securities available-for-sale increased to $14.0 million at
December 31, 1999, from $10.2 million at December 31, 1998. The increase in 1999
is the result of reinvesting interest earned on the investments held in
available-for-sale into additional securities and the purchasing of additional
mortgage-related securities. First Northern purchases mortgage-backed and
mortgage-related securities that are guaranteed by government sponsored
enterprises such as FHLMC, FNMA and GNMA.
The securities held-to-maturity increased to $36.3 million at December
31, 1999 from $35.3 million at December 31, 1998, as a result of reinvesting
interest earned on the investments held-to-maturity.
LENDING ACTIVITIES. First Northern has traditionally concentrated on the
origination of adjustable and fixed interest rate one- to four-family mortgage
loans and consumer loans throughout its 19 offices. First Northern also
originates construction, more than four-family ("multi-family") residential,
commercial real estate loans and beginning in 1999, commercial loans. In
addition, the Savings Bank will purchase one- to four-family and multi-family
mortgage loans from other sources primarily within the State of Wisconsin.
Adjustable interest rate mortgage loans are originated for First Northern's
portfolio while fixed interest rate mortgage loans, particularly those with
terms greater than 20 years, are primarily originated for sale in the secondary
mortgage market. First Northern retains 15 and 20 year fixed interest rate
mortgage loan originations in its portfolio. At December 31, 1999, approximately
75% of First Northern's mortgage loan portfolio were interest rate adjustable as
compared to 76% at December 31, 1998.
First Northern originates a variety of adjustable and fixed interest
rate mortgage loan products based upon market demands and general economic
conditions. Adjustable indexed interest rate mortgage loans at December 31,
1999, contain an interest rate adjustment provision tied to the national monthly
median cost of funds ratio for Savings Association Insurance Fund ("SAIF")
insured institutions, plus an additional mark-up of 2.95% to 4.25% (the "index")
which varies with the mortgage loan product. Interest rates on indexed mortgage
loans are adjusted, up or down, on predetermined dates fixed by contract, in
relation to and based on the index or market interest rates. In the first six
months of 1999, First Northern adjusted interest rates on indexed mortgage loans
downward at or before the contractual interest rate adjustment date in response
to decreasing market interest rates. If the adjustable indexed mortgage loans
interest rates had not been decreased, these mortgage loans would have
refinanced to a fixed interest rate mortgage loan or another indexed mortgage
loan at a lesser interest rate. In the second quarter of 1999, the increasing
market interest rates allowed First Northern to increase interest rates on
certain mortgage loans. In 1999, First Northern decreased interest rates on
approximately $28.0 million of its mortgage loans and increased interest rates
on approximately $43.0 million of its mortgage loans.
Adjustable indexed interest rate mortgage loans have an initial period,
ranging from one to five years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
1% to 2%, while aggregate lifetime interest rate increases over the term of the
loan are currently at 6% above the original mortgage loan interest rate.
First Northern's origination of second mortgage loans, automobile,
boat, recreational vehicle and other types of consumer loans, which are
generally of shorter maturities than first mortgage loans, enhances the matching
of maturities of its assets and liabilities and offer a higher yield. Second
mortgage loans are offered on both a fixed and adjustable interest rate basis;
other consumer loans are generally offered on a fixed interest rate basis.
At December 31, 1999, approximately 23% and as of December 31, 1998,
approximately 35% of First Northern's consumer loan portfolio was interest rate
adjustable.
First Northern added commercial lending to its existing product lines
in the second quarter of 1999. To manage the commercial banking department,
First Northern hired an experienced commercial loan manager. During 1999, $5.0
million of commercial loans were originated as well as $14.4 million of
commercial real state loans which are reported in the mortgage loan
originations.
FN-34
<PAGE> 218
The following table sets forth First Northern's mortgage, consumer and
commercial loan originations and purchases:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS AND PURCHASES
DURING THE YEAR ENDED DECEMBER 31
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans originated and purchased :
Construction - residential $ 46,226 $ 31,115
Construction - commercial real estate 1,540 5,930
Loans on existing property 80,051 59,021
Refinancing 62,432 153,614
Other loans 2,739 2,049
--------- ---------
Total mortgage loans originated and purchased 192,988 251,729
Consumer loans originated and purchased:
Consumer 10,831 9,912
Second mortgage 47,415 38,747
Automobile 72,264 48,661
Education 2,143 2,317
--------- ---------
Total consumer loans originated and purchased 132,653 99,637
--------- ---------
Commercial loans originated and purchased 5,032
--------- ---------
Total loans originated and purchased $ 330,673 $ 351,366
========= =========
</TABLE>
The dollar volume of First Northern's mortgage loan originations and
purchases decreased in 1999 as compared to 1998 primarily as a result of a
decline in the mortgage loan refinancing activity. In addition, First Northern
continued to purchase mortgage loans in 1999 primarily from other Wisconsin
financial institutions. In 1999, First Northern purchased $31.9 million of one-
to four-family residential loans, $1.5 million of multi-family loans and $3.5
million of commercial real estate loans as compared to $15.0 million of one- to
four-family residential, $1.7 million of multi-family and $0.6 million of
commercial real estate loans in 1998. First Northern purchases loans when
interest rates on these loans provide an opportunity to incrementally add to the
profitability of the Company.
First Northern's growth in the dollar amount of mortgage loans
outstanding was $70.1 million or 14.3% for 1999 as compared to $38.7 million or
8.6% in 1998. The increase in the 1999 mortgage loan portfolio was the result of
more adjustable interest rate mortgage loan originations which are retained in
the portfolio, as opposed to 30 year fixed interest rate mortgage loan
originations which are sold in the secondary market, and reduced mortgage loan
refinancings.
At December 31, 1999, First Northern had approximately $140.2 million
fixed interest rate mortgage loans in its mortgage loan portfolio, compared to
approximately $116.0 million of fixed interest rate mortgage loans at December
31, 1998.
In 1999, First Northern sold $20.1 million of fixed interest rate
mortgage loans as compared to $63.2 million in 1998. This decrease was the
result of increasing interest rates on fixed interest rate mortgage loans and a
shift in consumer preference toward adjustable interest rate mortgage loans.
The consumer loan portfolio at December 31, 1999, increased $36.4
million as compared to December 31, 1998 as a result of increased consumer loan
originations and purchases. The increase in consumer loan originations of $33.0
million was the result of increased second mortgage loan originations and an
increase in the dollar amount of loan purchases from SFC. In 1999, First
Northern and FNII purchased $63.7 million of automobile loans from SFC as
compared to $40.9 million in 1998. This increase in purchases from SFC was the
result of continued growth in the indirect automobile loan market. SFC
originates indirect automobile loans in the State of Wisconsin and sells these
loans to the Savings Bank or FNII and the other SFC shareholder while retaining
the servicing of such loans.
FN-35
<PAGE> 219
ASSET QUALITY. First Northern currently classifies any loan on which a payment
is 90 days or more past due as non-performing. The following table summarizes
non-performing loans and assets:
<TABLE>
<CAPTION>
NON-PERFORMING LOANS AND ASSETS
AT DECEMBER 31
1999 1998
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual mortgage loans $243 $223
Non-accrual consumer loans 40 123
------ -----
Total non-performing loans 283 346
Properties subject to foreclosure 318 68
Foreclosed properties and repossessed assets 63 38
------ ------
Total non-performing assets $664 $452
==== ====
Non-performing loans as a percent of total loans .04% .05%
=== ===
Non-performing assets as a percent of total assets .08% .06%
=== ===
</TABLE>
Total non-performing loans and assets increased in dollar amount in
1999 as compared to 1998, but decreased as a percentage of total loans. This low
level of non-performing loans, as compared to state and national averages, was
the result of the stable economy in First Northern's market areas and
management's continued emphasis to maintain non-performing assets at low levels.
Management also believes that allowances for losses on loans, real
estate owned and repossessed assets are adequate. While management uses
available information to recognize losses on loans, real estate owned and
repossessed assets, future additions to the allowances may be necessary based on
changes in economic conditions or regulatory requirements.
A summary of the general loan loss allowances is shown below:
<TABLE>
<CAPTION>
GENERAL LOAN LOSS ALLOWANCES
AT OR FOR THE YEAR ENDED DECEMBER 31
1999 1998 1997
----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of the year $3,531 $3,177 $2,937
Provisions 472 420 320
Charge-offs (122) (99) (101)
Recoveries 29 33 21
--------- --------- ---------
Balance at the end of the year $3,910 $3,531 $3,177
====== ====== ======
Allowance as a percent of
total loans .53% .56% .53%
=== === ===
Allowance as a percent of
non-performing loans 1,381.63% 1,020.52% 722.05%
======== ======== ======
Allowance as a percent of
total assets .47% .49% .48%
=== === ===
Allowance as a percent of
non-performing assets 588.86% 781.19% 535.75%
====== ====== ======
</TABLE>
FN-36
<PAGE> 220
LIFE INSURANCE POLICIES. Life insurance policies or bank owned life insurance
("BOLI") increased $1.0 million in 1999 primarily as a result of the increased
value. BOLI is long-term life insurance on the lives of certain current and past
Savings Bank employees where the insurance policy benefits and ownership are
retained by the Savings Bank. The cash value accumulation on BOLI is permanently
tax deferred if the policy is held to the participant's death. Management
believes this is an effective method to help offset a portion of future employee
benefit costs.
DEPOSITS. Deposits increased $24.5 million or 4.5% in 1999 as compared to $60.6
million or 12.6% in 1998. Deposit growth moderated in 1999 primarily as a result
of the investment returns on competing investments in which consumers placed
their funds. As of December 31, 1999 deposits totaled $566.9 million or 74.3% of
total liabilities.
First Northern experienced modest deposit growth in 1999 as a result
of; (i) Northeastern Wisconsin continuing to have good economic growth which has
created new customers; and (ii) the utilization of wholesale and jumbo deposits.
Competition for retail deposits in First Northern's market area has been and
will continue to be very strong.
First Northern establishes savings deposit interest rates to be
competitive in each market area and to maintain a favorable interest rate
spread. The deposit acquisition philosophy continues to be that an increase in
deposit dollars will be sought only if the increase is incrementally profitable.
Due to competition for retail deposits, First Northern will continue to
seek alternative sources of funding, including wholesale and jumbo ($90,000 or
more) deposits. At December 31, 1999, First Northern had a total of $53.2
million of wholesale brokered, corporate and municipal jumbo deposits as
compared to $32.1 million at the end of 1998. Jumbo and wholesale deposits
accounted for 86% of the deposit increase for 1999 and at times, were obtained
at a slightly lower cost than retail deposits. This strategy of acquiring
wholesale and jumbo deposits continues to be an integral part of the Savings
Bank's deposit acquisition strategy for 2000.
First Northern established an internet site (www.firstnorthern.com) in
1999 and utilized other websites to publicize deposit interest rates. Management
believes the website aided in the acquisition of jumbo deposits. The First
Northern website is anticipated to develop into another distribution channel for
First Northern products and services in the year 2000 and beyond.
First Northern believes that the household checking account is the
basic account upon which further customer banking relationships can be
developed. First Northern utilized aggressive pricing and marketing of the
checking account and has been able to become the "primary financial institution"
for many households. First Northern will continue to emphasize the number of
households using First Northern's checking account services which is anticipated
to increase associated non-interest fee income.
To enhance this checking account relationship and to increase
non-interest fee income, First Northern continued to expand its First Northern
CheckCard (Debit Card) base. The First Northern CheckCard offers a checking
account customer the opportunity to access a checking account anywhere in the
world where VISA is accepted. First Northern aggressively marketed the First
Northern CheckCard since 1997 and as a result of this aggressive marketing
philosophy, the CheckCard has gained greater customer acceptance and increased
product profitability.
New deposit opportunities will be available as a result of the addition
of the Commercial Banking Department in 1999. Efforts to obtain commercial
checking and other commercial investments from new and existing commercial
customers will be an area of emphasis for First Northern.
The Taxpayers Relief Act of 1997 continues to offer investors and
homeowners significant tax planning opportunities ranging from income tax
savings, estate tax savings, lower capital gains rates, retirement and education
benefits, and the elimination of certain taxes altogether. Although First
Northern had anticipated that the new Roth and Education Individual Retirement
Account would result in higher deposit growth, First Northern did not experience
a significant deposit growth in these retirement accounts for the second
straight year. Educational efforts will continue to be made to communicate the
advantages of the Roth and Education Individual Retirement Accounts to existing
and potential customers.
The GNFSC Investment Center, established in April, 1995, posted a fifth
straight year of profitability. Profits for 1999 were a record for the
Investment Center. The Investment Center offers non-insured deposit products,
such as fixed and variable tax-deferred annuities, stocks, mutual funds and
brokerage products through a network agreement with a registered broker-dealer.
FN-37
<PAGE> 221
The establishment of the Investment Center has resulted in increased customer
retention and new customer relationships through the existing Savings Bank's
branch network.
First Northern's objective is to create a one-stop family financial
banking center by offering a wide selection of checking accounts, short,
intermediate and long-term certificates of deposit, insured retirement accounts,
mutual funds, other investments and mortgage and consumer loans to meet a wide
variety of customer needs.
BORROWINGS. Borrowings, primarily from the FHLB of Chicago, increased $93.9
million at December 31, 1999, as compared to December 31, 1998, as a result of
the Savings Bank's loan growth and modest deposit growth. The borrowings have
maturities ranging from overnight to approximately nine years (See Notes to
Consolidated Financial Statements -- Note 7-Borrowings). Management anticipates
it will continue to utilize borrowings to fund its growth in interest-earning
assets in 2000.
STOCKHOLDERS' EQUITY. First Northern's stockholders' equity to total assets
ratio at December 31, 1999, was 9.15%, as compared to 10.57% at December 31,
1998. First Northern employs methods which are intended to increase
interest-earning assets and thus reduce the percentage of equity to total assets
(known as leveraging). In addition to interest-earning asset growth, the Company
has also repurchased its stock. The first stock repurchase program, which began
in March of 1996 and was completed in September 1996, resulted in the repurchase
of 456,934 shares at an average cost of $7.91 per share. A second stock
repurchase program which began in October 1996 authorized the repurchase of
438,114 shares. The second stock repurchase program repurchased 60,800 shares at
an average cost of $8.62 per share before it expired in October 1997. A third
stock repurchase program was implemented in March of 1998 which authorized the
repurchase of up to 446,101 shares. At December 31, 1999, all 446,101 shares
authorized to be repurchased were at an average cost of $11.81 per share. First
Northern may implement additional stock repurchase programs in the future if it
is determined to be economically prudent and with the consent of Mutual per the
Merger Agreement.
The Wisconsin Department of Financial Institutions--Division of Savings
Institutions, which regulates the Savings Bank, requires maintenance of a
minimum of six percent equity to total assets. In addition, the Office of Thrift
Supervision ("OTS") capital rules require the Savings Bank to meet certain
capital standards: (i) tier I (core) capital to risk-weighted assets; (ii)
risk-based capital to risk-weighted assets; and (iii) tier I (core) capital to
adjusted assets. The Savings Bank meets and exceeds all regulatory capital
standards (See Notes to Consolidated Financial Statements--Note
10--Stockholders' Equity).
FN-38
<PAGE> 222
ASSET AND LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide
liquidity and maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Interest rate risk is the imbalance between
interest-earning assets and interest-bearing liabilities at a given maturity or
repricing date and is commonly referred to as the interest rate gap (the "gap").
A positive gap exists when there are more assets than liabilities maturing or
repricing within the same time frame. A negative gap occurs when there are more
liabilities than assets maturing or repricing within the same time frame. The
following chart reflects First Northern's gap position as of December 31, 1999:
<TABLE>
<CAPTION>
CUMULATIVE GAP POSITION
-----------------------------------------------------------
(DOLLARS IN THOUSANDS)
3 MONTHS 4 TO 12 1 TO 5 OVER
OR LESS MONTHS YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) $ 26,677 $ 212,205 $221,665 $81,289 $541,836
Consumer loans (2) 58,651 58,566 67,003 11,597 195,817
Commercial loans 3,730 75 966 0 4,771
Investment securities (3) 28,666 6,975 20,816 0 56,457
Mortgage-related securities (4) 780 3,100 8,017 3,906 15,803
Interest-earning deposits 4,230 99 0 0 4,329
------------ ------------- ------------- ----------- -----------
Total rate-sensitive assets 122,734 281,020 318,467 96,792 819,013
Interest-bearing liabilities:
Passbook accounts (5) 2,118 6,354 24,428 35,933 68,832
NOW & variable rate insured
money market accounts (5) 60,676 4,864 20,596 51,360 137,496
Time deposits (5) 112,860 168,264 76,633 0 357,757
Advance payments by borrowers
for taxes and insurance 1,944 1,943 0 0 3,887
Borrowings 108,161 40,773 35,940 1,025 185,899
---------- ----------- ---------- --------- ---------
Total rate-sensitive liabilities 285,759 222,198 157,597 88,318 753,871
---------- ---------- --------- -------- ---------
Gap $(163,025) $ 58,822 $160,870 $ 8,474 $ 65,142
========= ========== ======== ======== =========
Cumulative gap $(163,025) $(104,202) $ 56,667 $65,142
========= ========= ========= =======
Cumulative gap as a percentage
of total assets (19.4)% (12.4)% 6.7% 7.8%
===== ===== === ===
</TABLE>
(1) Excludes undisbursed loan proceeds of $17,852.
(2) Includes $1,085 of education loans held for sale.
(3) Includes $9,250 of FHLB stock; includes $13,548 of life insurance
policies; excludes unrealized gains or losses.
(4) Excludes unrealized gains or losses.
(5) Does not include accrued interest, which totals $2,823 for all
deposits.
The calculation of a gap position is subjective by nature and requires
management to make a number of assumptions as to when an asset or liability will
reprice or mature. Assumptions used in estimating the maturity/repricing amounts
and dates of the more significant asset and liability categories include: (i)
investment securities - based upon contractual maturities and if applicable,
call dates; (ii) loans - based upon contractual maturities, repricing date, if
applicable, scheduled repayments of principal and projected prepayments of
principal based upon the Company's historical experience; (iii) mortgage-related
securities based upon an average of Wall Street estimates for prepayment speeds;
and (iv) deposits based upon contractual maturities and various decay rates
applied to the remaining deposit dollars. The decay rate, which varies with
deposit product, is based on historical decay rates of First Northern.
FN-39
<PAGE> 223
First Northern's overall asset and liability management goal is to
maximize long-term profitability and returns to stockholders. First Northern's
current strategy is to: (i) originate and retain adjustable interest rate
mortgage loans; (ii) originate and retain 15 and 20 year fixed interest rate
mortgage loans; (iii) originate and sell most 30 year fixed interest rate
mortgage loans; (iv) originate shorter maturity consumer loans; (v) emphasize
the origination of adjustable interest rate home equity loans; (vi) counsel
depositors to balance their deposits between short-, intermediate-, and
long-term deposits; and (vii) offer new and attractive deposits and investment
opportunities. In addition, borrowings with various terms are used to reach the
targeted asset/liability mix. Currently, management's strategic goal for
asset/liability management is to maintain a cumulative one (1) year gap within a
range of a positive 10% to a negative 20%. Management believes this is an
appropriate level to achieve First Northern's long-term goals, while controlling
interest rate risk.
IMPACT OF YEAR 2000
First Northern did not experience any problems to its critical
operating systems on January 1, 2000. First Northern had tested and/or upgraded
its systems (such as software, hardware, telephones, voicemail, heating,
ventilating, air conditioners, alarms etc.) throughout 1999. The Company
anticipated that all modifications, upgrades or replacement of all systems would
not exceed $170,000 (pre-tax). At December 31, 1999, approximately $148,000
(pre-tax) had been spent. First Northern will continue to monitor its systems
during 2000.
GRAMM-LEACH-BLILEY ACT
Management anticipates the Gramm-Leach-Bliley Act will not have a
significant impact on First Northern's operations in the near future; however,
management will continue to evaluate and look for opportunities as a result of
the Act and is unable to predict the impact on its operations at this time. See
Item 1. "Business--Regulation--Federal Regulation of Holding
Companies--Gramm-Leach-Bliley Act."
FN-40
<PAGE> 224
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets, the
resultant yields, and the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made since First Northern does not have any tax exempt investments. Average
balances are derived from average daily balances. The yield on securities
available-for-sale are included in investment securities and mortgage-related
securities and yields are calculated on the historical basis. The yields and
rates are established by dividing income or expense dollars by the average
balance of the asset or liability.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET, INTEREST AND RATE PAID
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE EARNED/PAID RATE BALANCE EARNED/PAID RATE
-------- ----------- ------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans ......................... $500,111 $35,164 7.03% $456,977 $33,510 7.33%
Consumer loans ......................... 175,577 13,816 7.87 160,706 13,273 8.26
Commercial Loans ....................... 5,454 468 8.58
Investment securities .................. 38,789 2,336 6.02 34,828 2,138 6.14
Interest-earning deposits .............. 1,702 82 4.82 2,623 147 5.60
Mortgage-related securities ............ 14,765 904 6.12 9,996 622 6.22
-------- ------- ---- -------- ------- ----
TOTAL .................................. 736,398 52,770 7.17 665,130 49,690 7.47
Interest-bearing liabilities:
Passbook accounts ...................... 70,425 1,385 1.97 63,643 1,364 2.14
NOW and variable rate insured
money market accounts ................ 132,629 3,085 2.33 117,944 2,927 2.48
Time deposits .......................... 350,423 19,090 5.45 327,674 18,979 5.79
Advance payments by borrowers
for taxes and insurance .............. 7,002 162 2.31 6,680 155 2.32
Borrowings ............................. 124,186 6,964 5.61 95,890 5,578 5.82
-------- ------- ---- -------- ------- ----
TOTAL .................................. 684,665 30,686 4.48 611,831 29,003 4.74
-------- ------- ---- -------- ------- ----
Net interest-earning assets
and interest rate spread ............... $ 51,733 2.69% $ 53,299 2.73%
======== ==== ======== ====
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets ................ $736,398 $22,084 3.00% $665,130 $20,687 3.11%
======== ======= ==== ======== ======= ====
Average interest-earning assets........... 107.6% 108.7%
to interest-bearing liabilities ===== =====
<CAPTION>
AVERAGE BALANCE SHEET, INTEREST AND RATE PAID
YEAR ENDED DECEMBER 31
---------------------------------------------
1997
--------------------------------------------
AVERAGE INTEREST YIELD/
BALANCE EARNED/PAID RATE
------- ----------- -------
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans ......................... $426,748 31,443 7.37%
Consumer loans ......................... 148,614 12,529 8.43
Commercial Loans .............
Investment securities .................. 29,154 1,844 6.33
Interest-earning deposits .............. 762 45 5.91
Mortgage-related securities ............ 11,558 735 6.36
------- ------- ----
TOTAL .................................. 616,836 46,596 7.55
Interest-bearing liabilities:
Passbook accounts ...................... 60,057 1,322 2.20
NOW and variable rate insured
money market accounts ................ 104,665 2,536 2.42
Time deposits .......................... 307,423 17,579 5.72
Advance payments by borrowers
for taxes and insurance .............. 6,652 149 2.24
Borrowings ............................. 82,644 4,905 5.94
-------- ------- ----
TOTAL .................................. 561,441 26,491 4.72
-------- ------- ----
Net interest-earning assets
and interest rate spread ............... $ 55,395 2.83%
======== ====
Average interest-earning
assets, net interest income
and net yield on average
interest-earning assets ................ $616,836 20,105 3.26%
======== ======= ====
Average interest-earning assets
to interest-bearing liabilities.......... 109.9%
=====
</TABLE>
(1) For the purpose of these computations, non-accruing loans and loans
held-for-sale are included in the average loan amounts outstanding.
FN-41
<PAGE> 225
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The interaction of changes in volume and rates earned or paid with
regard to interest-earning assets and interest-bearing liabilities has a
significant impact on net income between periods. The volume of interest-earning
dollars in loans and investments compared to the volume of interest-bearing
dollars in deposits and borrowings, combined with the interest rate spread,
produces the changes in net interest income between periods.
Information in the table below is provided in each category with
respect to (i) changes attributable to rate (changes in rate multiplied by prior
volume), (ii) changes attributable to volume (changes in volume multiplied by
prior rate, and (iii) changes attributable to changes in rate/volume (changes in
rate multiplied by changes in volume). 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>
RATE VOLUME ANALYSIS
YEAR ENDED DECEMBER 31
1999 VS 1998
-------------------------------------------------------------
INCREASE (DECREASE) DUE TO:
-------------------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $(1,371) $3,154 $ (129) $1,654
Consumer loans (627) 1,228 (58) 543
Commercial loans 468 468
Investment securities (42) 245 (5) 198
Interest-earning deposits (20) (52) 7 (65)
Mortgage-related securities (10) 297 (5) 282
------- ------ ------ ------
TOTAL $(2,070) $4,872 $ 278 3,080
======= ====== ====== ------
Interest-bearing liabilities:
Passbook accounts $ (108) $ 141 $ (12) 21
NOW and variable rate insured
money market accounts (177) 357 (22) 158
Time deposits (1,114) 1,302 (77) 111
Advance payments by borrowers
for taxes and insurance (1) 8 7
Borrowings (201) 1,646 (59) 1,386
------- ------ ------ ------
TOTAL $(1,601) $3,454 $ (170) 1,683
======= ====== ====== ------
Net change in net interest income $1,397
======
</TABLE>
FN-42
<PAGE> 226
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
YEAR ENDED DECEMBER 31
1998 VS 1997
------------------------------------------------------------
INCREASE (DECREASE) DUE TO:
------------------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $(171) $2,250 $(12) $2,067
Consumer loans (253) 1,018 (21) 744
Commercial loans
Investment securities (55) 360 (11) 294
Interest-earning deposits (2) 110 (6) 102
Mortgage-related securities (16) (99) 2 (113)
----- ------ ---- ------
TOTAL $(497) $3,639 $(48) 3,094
===== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $ (36) $ 80 $ (2) 42
NOW and variable rate insured
money market accounts 63 320 8 391
Time deposits 215 1,171 14 1,400
Advance payments by borrowers
for taxes and insurance 5 1 6
Borrowings (99) 788 (16) 673
----- ------ ---- ------
TOTAL $ 148 $2,360 $ 4 2,512
===== ====== ==== ------
Net change in net interest income $ 582
======
</TABLE>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
YEAR ENDED DECEMBER 31
1997 VS 1996
------------------------------------------------------------
INCREASE (DECREASE) DUE TO:
------------------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(IN THOUSANDS)
Interest-earning assets:
<S> <C> <C> <C> <C>
Mortgage loans $763 $1,801 $ 48 $2,612
Consumer loans (88) 1,908 (16) 1,804
Commercial loans
Investment securities 15 245 2 262
Interest-earning deposits 6 (25) (2) (21)
Mortgage-related securities (14) 79 (2) 63
---- ------ ---- ------
TOTAL $682 $4,008 $ 30 4,720
==== ====== ==== ------
Interest-bearing liabilities:
Passbook accounts $(23) $ 33 $ (1) 9
NOW and variable rate insured
money market accounts 92 54 2 148
Time deposits 175 852 9 1,036
Advance payments by borrowers
for taxes and insurance (2) (11) (13)
Borrowings 77 1,976 55 2,108
---- ------ ---- ------
TOTAL $319 $2,904 $ 65 3,288
==== ====== ==== ------
Net change in net interest income $1,432
======
</TABLE>
FN-43
<PAGE> 227
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998.
GENERAL. Net income increased $548,000 in 1999 primarily as a result of an
increase in interest-earning assets and a reduction in the effective income tax
rate. Offsetting some of the increase in net income was a reduction of the gains
on the sales of loans and a compression of the net interest margin. The net
interest margin decreased as a result of the cost of new deposits and maturing
deposits increasing faster than the interest earned on the loan portfolio.
INTEREST INCOME. Interest income on mortgage loans increased $1.7 million as a
result of increased dollars outstanding in the mortgage portfolio. The average
mortgage loan portfolio increased $43.1 million in 1999. The average interest
rate decreased in 1999 to 7.03% from 7.33% in 1998 primarily as the result of:
(i) mortgage loans being originated at interest rates below the existing
mortgage loan yield and (ii) downward interest rate adjustments to qualified
interest rate adjustable mortgage loans in the first six months of 1999. As
market interest rates increased, mortgage loan originations in the fourth
quarter of 1999 equaled or exceeded the yield on the mortgage loan portfolio and
in the third and fourth quarter of 1999 interest rates on qualified adjustable
interest rate mortgage loans were increased.
Interest income on consumer loans increased $543,000 as a result of an
increase in the average portfolio of $14.9 million. The average interest rate on
the consumer loan portfolio decreased to 7.87% in 1999 as compared to 8.26% in
1998 as a result of consumer loan originations being at interest rates below the
yield on the consumer loan portfolio. Consumer loan origination interest rates
exceeded the yield on the consumer loan portfolio beginning in the second half
of 1999.
Interest income on commercial loans was $468,000. The commercial loan
portfolio had an average portfolio yield of 8.58% in 1999. First Northern began
originating commercial loans late in the second quarter of 1999.
Investment securities and mortgage-related interest income increased in
1999 as a result of increased dollars outstanding. First Northern purchases
investment securities and mortgage-related securities when it incrementally adds
to the overall profitability of the Company or to aid in its interest rate risk
management.
Interest-earning deposit interest income decreased $65,000 in 1999
primarily as the result of decreased interest-earning deposits outstanding.
INTEREST EXPENSE. Interest on deposits increased $289,000 in 1999 as a result of
increased deposits. Average deposits increased $44.2 million and the average
cost of deposits decreased to 4.26% in 1999 from 4.57% in 1998. First Northern
continued to utilize wholesale deposits in 1999 as a method to acquire deposits.
There are times when wholesale deposits are a more cost effective method to
acquire funds than retail deposits or borrowings.
Borrowings continued to increase in 1999 and as a result, the interest
expense on borrowings increased $1.4 million. The increases in interest-earning
assets in 1999 and the modest growth in deposits necessitated the increase in
borrowings. It is anticipated by the Company that borrowings will continue to be
utilized throughout 2000 to fund its growth in interest-earning assets. First
Northern primarily borrows from the FHLB of Chicago.
Advance payments by borrowers for taxes and insurance ("escrow")
interest expense increased in 1999 as a result of increased escrow dollars
outstanding. The escrow interest rate for 1999 was 2.74% as compared to 2.83%
for 1998. The escrow interest rate for 2000 will be 2.51%.
PROVISIONS FOR LOAN LOSSES. The provision for loan losses increased $52,000 in
1999 primarily as a result of the growth in the loan portfolio and the
composition of the loan portfolio specifically, the addition of commercial
loans. The total loan loss allowance at December 31, 1999, is $3,910,000 or .53%
of the total loan portfolio at December 31, 1999, as compared to $3,531,000 or
.56% of the total loan portfolio at December 31, 1998.
OTHER INCOME. Fees on serviced loans increased $12,000 primarily as a result of
the increased dollar amount of serviced loans and a reduction in the dollar
amount of mortgage loan prepayments. At December 31, 1999, First Northern
serviced $151.4 million in loans as compared to $150.2 million at the end of
1998. As the principal of a mortgage loan which was sold with servicing retained
prepays or repays, the mortgage servicing asset is reduced and netted against
the fees on serviced loans thereby reducing the income on serviced loans. As
mortgage loan repayments or prepayments decrease, the reduction to the mortgage
servicing asset is reduced as well as the reduction to the income on serviced
loans.
FN-44
<PAGE> 228
Loan fees and service charges income decreased $32,000 as a result of
decreased Wisconsin Housing and Economic Development Authority ("WHEDA") loans
originations. First Northern originates mortgage loans for WHEDA and receives a
fee for each origination. During 1999 the dollar amount of WHEDA originations
decreased as a result of lack of consumer demand for the product.
Deposit account service charges increased $114,000 primarily as the
result of: (i) the increased number of NOW(checking) accounts and their
associated fees; and (ii) customer usage of the CheckCard. CheckCard is a debit
card where each time the Savings Bank's CheckCard is used a fee, which varies
with each merchant, is paid to the Savings Bank by the debit card company. The
Savings Bank promotes the use of its debit card by direct mail and internal
promotions.
Insurance commissions increased $37,000 primarily as a result of
increased bonuses received from insurance carriers. First Northern attained a
pre-determined threshold of insurance sales and insurance losses were below
another threshold thereby earning approximately $85,700 in insurance bonuses in
1999. Insurance bonuses in 1998 were $0.
Gains on the sales of loans decreased $662,000 as a result of reduced
mortgage loan sales. The Savings Bank sold $20.1 million of mortgage loans in
1999 as compared to $63.2 million in 1998. (See Financial Condition--Balance
Sheet--Lending Activities)
Other non-interest income increased $155,000 primarily as the result of
life insurance owned by First Northern. First Northern purchased life insurance
to partially offset the future cost of employee or director benefits. Interest
earned on life insurance in 1999 was $714,000.
OPERATING EXPENSES: Compensation expense increased $78,000 as a result of salary
and benefit costs increases and the 1998 increased accruals for the director
deferred retirement plan and supplemental executive retirement plan.
Federal deposit insurance premiums increased $20,000 as a result of
increased deposits.
Occupancy expense increased $119,000 as a result of the Savings Bank's
rental of approximately 14,000 square feet of additional office space in
downtown Green Bay, which began in the third quarter of 1999. First Northern
consolidated several of its back office support departments that had been
located in three separate First Northern locations as a result of the growth in
these areas.
Data Processing expense increased $140,000 as the result of: (i)
accelerated depreciation of $45,000 on personal computers ("PCs"); (ii)
increased cost associated with First Northern's service bureau; (iii)
depreciation of new teller software; and (iv) cost of data processing supplies.
Furniture and equipment expense decreased $50,000 primarily as the
result of a decrease in the cost of furniture and equipment service contracts
and depreciation expense. Service contract expense was decreased as a result of
eliminating individual service contracts and placing certain furniture and
equipment under an insurance service agreement. Depreciation expense was
decreased as a result of certain furniture and equipment that became fully
depreciated.
Marketing expense increased $66,000 to promote loan and deposit
products. First Northern believes that growth in lending and deposits volumes is
facilitated by increased marketing of those products.
Other expenses increased $127,000 as a result of increased costs
associated with the operations of SFC, costs associated with the operation of
the debit card and the reversal by the Petroleum Environmental Clean-up Fund of
a reimbursement, in the amount of $53,700, for environmental clean-up costs of a
lot at a subdivision owned by GNFSC. First Northern is presently appealing this
reversal.
INCOME TAXES. The effective income tax rate for 1999 was 32.3% as compared to
34.6% for 1998. The decrease in the effective income tax rate was the result of
the life insurance policies owned by First Northern and an increase in the
earnings of FNII, which is not subject to state income taxes. Since First
Northern intends to hold the life insurance until the participants' death, the
life insurance interest income is not taxable. In addition, First Northern moved
its indirect automobile loan portfolio to FNII at the beginning of the second
quarter of 1998, which has reduced state franchise taxes. In March 1999, First
Northern sold approximately $56.3 million in mortgage loan participations to
FNII to further reduce its state franchise tax.
FN-45
<PAGE> 229
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997.
GENERAL. Net income increased $793,000 in 1998 primarily as a result of the
dollar increase in interest-earning assets, gains from the sales of loans and a
reduction in the effective income tax rate.
INTEREST INCOME. Interest income on mortgage loans increased $2,067,000 as a
result of increased dollars outstanding in the mortgage loan portfolio. The
average interest rate earned decreased as a result of: (i) mortgage loans being
originated at interest rates below the existing mortgage loan portfolio yield;
(ii) downward interest rate adjustments to certain mortgage loans in its
portfolio before their scheduled adjustment dates in response to the refinancing
of existing adjustable interest rate mortgage loans; and (iii) the prepayments
of mortgage loans with higher than market interest rates.
Interest income on consumer loans increased $744,000 as a result of an
increase of $12.1 million of consumer loans outstanding throughout 1998. The
average interest rate earned on the consumer portfolio decreased to 8.26% in
1998 as compared to 8.43% in 1997 as a result of: (i) consumer loan originations
at interest rates that were below the existing yield on the consumer loan
portfolio; (ii) decreases in some of First Northern's consumer loans which use
the prime interest rate as an index; and (iii) prepayments to consumer loans
that are at interest rates above market interest rates.
Investment securities and interest-earning deposits interest income
increased $294,000 and $102,000 respectively, as a result of increased dollars
outstanding.
The increase in the dollar amount of interest-earning deposits is the
result of excess funds above the funding needs for loans and operations, being
invested in short-term certificates of deposits or in overnight investments.
These additional funds were created by strong deposit gains and sales of loans.
Interest on mortgage-related securities decreased $113,000 as a result
of prepayment and repayments to the underlying collateral (mortgage loans). The
average interest rate earned on mortgage-related securities decreased to 6.22%
from 6.36% primarily as the result of prepayments and repayments to higher than
market interest rate securities and the purchase of mortgage-related securities
at lower interest rates than existing yields on the mortgage-related securities
portfolio.
INTEREST EXPENSE. Interest expense on deposits increased $1,833,000 as a result
of increased deposits. First Northern utilizes various time deposit terms and
interest rates to attract new deposits and in 1998, utilized wholesale deposits
as a method to acquire less expensive deposits.
Interest expense on borrowings increased $673,000 in 1998 primarily as
a result of increased average borrowings outstanding. First Northern primarily
borrows from the FHLB of Chicago.
Advance payments by borrowers for taxes and insurance ("escrow")
interest expense increased modestly in 1998 as a result of the increased number
of escrow accounts that were interest-bearing. Although the interest rate paid
on escrow accounts of 2.83% was the same in 1998 as it was in 1997, and the
average dollars in escrow were approximately equal, a number of non
interest-bearing escrow accounts were replaced by interest-bearing escrow
accounts thus increasing interest expense. The escrow interest rate for 1999 is
2.74%.
PROVISIONS FOR LOAN LOSSES. First Northern provided an additional $420,000 to
loan loss allowances in 1998. The total loan loss allowance at December 31,
1998, is $3,531,000 or .56% of the total loan portfolio at December 31, 1998, as
compared to $3,177,000 or .53% of the total loan portfolio at December 31, 1997.
OTHER INCOME. Fees on serviced loans decreased $146,000 primarily as the result
of the amortization of the mortgage servicing asset in accordance with Financial
Accounting Standards (?FASB") No. 122, ?Accounting for Mortgage Servicing
Rights." As the principal of a mortgage loan which was sold with servicing
retained repays or prepays, the mortgage servicing asset is reduced and netted
against the fees on serviced loans, thereby reducing the income on serviced
loans. In 1998, the amortization of the mortgage loan servicing asset amounted
to $215,000 and $38,900 in 1997.
Deposit account service charges increased $73,000 primarily as the
result of: (i) the increased number of NOW(checking) accounts and their
associated fees; and (ii) customer usage of CheckCard.
Insurance commissions decreased $32,000 primarily as a result of a
reduction in the bonus received from insurance carriers.
FN-46
<PAGE> 230
Gains on the sales of loans increased $683,000 as a result of increased
loan sales. Loan sales in 1998 were $65.6 million as compared to $21.2 million
in 1997.
Other non-interest income increased $359,000 primarily as the result of
BOLI. In December 1997, First Northern purchased $7.4 million of life insurance
to partially offset the future cost of employee benefits. Interest earned on the
$7.4 million of life insurance in 1998 was $396,000.
OPERATING EXPENSES. Compensation expense increased $538,000 as a result of
normal salary increases, the addition of 5 full-time equivalent employees and
increased accruals for the director deferred retirement plan and supplemental
executive retirement plan.
Federal deposit insurance premiums increased $17,000 as a result of
increased deposits and in 1997, the receipt of a $15,000 refund of deposit
insurance premiums paid from prior periods.
Data processing expense increased $73,000 primarily from increased
depreciation expense and service contract expense on data processing equipment.
Furniture and equipment expense decreased $21,000 as a result of a
number of pieces of furniture and equipment being fully depreciated at the end
of 1997.
Telephone and postage expenses decreased $33,000 by negotiating a
reduction to the cost of long distance calls and an increase in expense
deferrals associated with the substantial increase in loan originations.
Incremental telephone and postage expenses associated with loan originations are
deferred and amortized back against interest income over the life of the loan,
which results in an adjustment to the loan yield.
Marketing expense increased $39,000 as a result of increased
advertising and marketing of deposit and loan products. First Northern believes
the growth in lending and deposit volumes is facilitated by increased marketing
of those products and hence, increased costs.
Other expenses increased $96,000 as a result of increased costs
associated with the operations of SFC, costs associated with the issuance and
operations of the debit card and an increase in bad checks and customer fraud.
INCOME TAXES. The effective income tax rate for 1998 is 34.6% as compared to
37.7% for 1997. This decrease in the effective income tax rate is primarily the
result of earnings on BOLI for which no income tax provision is provided and the
increase in earnings at FNII which is not subject to state income taxes. Both
activities have reduced state franchise taxes.
FN-47
<PAGE> 231
BUSINESS
OVERVIEW. First Northern Capital Corp. (the "Company" or "First Northern"), a
unitary savings and loan holding company, was incorporated in Wisconsin in 1995
for the purpose of owning all of the outstanding stock of First Northern Savings
Bank, S.A. (the "Savings Bank"), a Wisconsin chartered capital stock savings and
loan association, which reorganized into the holding company structure effective
December 20, 1995 (the "Reorganization"). At that date, each outstanding share
of the Savings Bank's common stock was converted into one share of the Company's
common stock. Consequently, the former holders of all the outstanding stock of
the Savings Bank acquired the same proportionate ownership interest in First
Northern as they had held in the Savings Bank. The consolidated capitalization,
assets, liabilities, income and other financial data of First Northern
immediately following the Reorganization were substantially the same as those of
the Savings Bank immediately prior to consummation of the Reorganization. The
Reorganization was effected to provide greater flexibility in meeting the
Company's future financial and competitive needs. All data presented in this
10-K for dates and periods prior to December 20, 1995 relate to the Savings
Bank. All references herein to First Northern or the Company for any date or
period prior to consummation of the Reorganization shall be deemed to refer to
the Savings Bank.
The Savings Bank is the only direct subsidiary of the Company and its
operations are the primary contributor to the Company's earnings and expenses.
The Savings Bank's business consists primarily of attracting deposits from the
general public and originating loans throughout its Northeastern Wisconsin
branch network. Great Northern Financial Services Corporation ("GNFSC"), a
wholly owned subsidiary of the Savings Bank, offers full brokerage services to
the public, including the sale of tax deferred annuities and mutual funds, and
sells credit life and disability insurance. Another wholly owned subsidiary,
First Northern Investments, Inc. ("FNII"), manages a majority of the Savings
Bank's investments and purchases automobile loans from Savings Financial
Corporation ("SFC" ) and mortgage loans from the Savings Bank. The Savings
Bank's 50% owned subsidiary, SFC, originates, services and sells automobile
loans to FNII, the Saving Bank and its other parent corporation.
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.
On August 18, 1997, First Northern effected a 2-for-1 stock split in the
form of a 100% stock dividend. Unless otherwise indicated, all shares and per
share information have been restated to reflect the stock split.
MERGER AGREEMENT WITH MUTUAL SAVINGS BANK. On February 22, 2000, First Northern,
and Mutual Savings Bank, a Wisconsin-chartered mutual savings bank ("Mutual"),
announced that they had entered into an Agreement and Plan of Merger, dated as
of February 21, 2000 ( the "Merger Agreement"), by and among Mutual, First
Northern and OV Corp., a Wisconsin corporation organized as a wholly owned
subsidiary of Mutual for the purpose of effecting the transactions contemplated
by the Merger Agreement ("Merger Corp."). The Merger Agreement provides for the
acquisition of First Northern by Mutual through a merger of First Northern with
and into Merger Corp. (the "Merger"), which will be the surviving corporation
("Survivor"). The Merger Agreement has been approved by the boards of directors
of Mutual and First Northern.
Subject to the terms and conditions of the Merger Agreement, at the time of
the Merger, each outstanding share of First Northern common stock, par value
$1.00 per share ("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 share, of Survivor ("Survivor Common Stock"), or a
combination of cash and shares of Survivor Common Stock (the "Merger
Consideration"). Prior to the closing date, Mutual will select the percentage of
the total Merger Consideration to be paid in the Survivor Common Stock, which
may not be less than 40% or more than 70%; the balance will be paid in cash.
Each First Northern stockholder will be entitled to elect to receive (a) cash,
(b) Survivor Common Stock or (c) as to First Northern stockholders holding not
less than 170 shares of First Northern Common Stock, a combination of cash and
Survivor Common Stock, with the percentage of such shares of their First
Northern Common Stock equal to the lesser of the Stock Percentage and 50%
converted into Survivor Common Stock and the balance converted into cash.
Elections will be subject to proration if the cash or stock elections exceed the
maximum amounts permitted under the Merger Agreement. Cash will be paid in lieu
of any fractional shares of the Survivor Common Stock which holders of First
Northern Common Stock would otherwise receive.
In connection with the Merger, Mutual and First Northern will engage in a
restructuring involving a number of steps (the "Restructuring"). As a part of
the Restructuring, Mutual will form a mutual holding company in which Mutual's
depositors will hold all the voting rights. The mutual holding company will own
a majority of the Survivor Common Stock; the balance of the shares of Survivor
Common Stock will be offered for sale to Mutual's depositors and issued to First
Northern stockholders in the
FN-48
<PAGE> 232
Merger. As a result of the Restructuring, Mutual Savings Bank and the Savings
Bank, will become wholly owned subsidiaries of Survivor. Thus, Survivor will be
a subsidiary mid-tier stock holding company.
Consummation of the Merger is subject to the satisfaction of certain closing
conditions set forth in the Merger Agreement, including approval by the
stockholders of First Northern and approval by the OTS, the FDIC and the
WDFI--Administrator. The depositors of Mutual must also approve Mutual's plan
for the 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 Survivor 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 by Survivor with the
Securities and Exchange Commission.
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 at
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.
CAUTIONARY FACTORS. This Form 10-K contains or incorporates by reference various
forward-looking statements concerning the Company's prospects that are based on
the current expectations and beliefs of management. Forward-looking statements
may also be made by the Company from time to time in other reports and documents
as well as oral presentations. When used in written documents or oral
statements, the words "anticipate," "believe," "estimate," "expect," "objective"
and similar expressions are intended to identify forward-looking statements. The
statements contained herein and such future statements involve or may involve
certain assumptions, risks and uncertainties, many of which are beyond the
Company's control, that could cause the Company's actual results and performance
to differ materially from what is expected. In addition to the assumptions and
other factors referenced specifically in connection with such statements, the
following factors could impact the business and financial prospects of the
Company: general economic conditions; legislative and regulatory initiatives;
increased competition and other effects of the deregulation and consolidation of
the financial services industry; monetary and fiscal policies of the federal
government; deposit flows; disintermediation; the cost of funds; general market
rates of interest; interest rates or investment returns on competing
investments; demand for loan products; demand for financial services; changes in
accounting policies or guidelines; unforeseen future costs and consequences of
the year 2000 problem; and changes in the quality or composition of the Savings
Banks loan and investment portfolios and the investment portfolio of FNII.
Further, First Northern's Merger Agreement with Mutual is subject to regulatory,
First Northern stockholder and Mutual depositor approvals and other closing
conditions.
THE THRIFT INDUSTRY. The operations of First Northern and the Savings Bank, as
well as other savings associations and other financial institutions, are
significantly influenced by general economic conditions, by the related
monetary, tax and fiscal policies of the federal government and by the policies
of regulatory authorities, including the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"), the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and in the case of
First Northern and the Savings Bank, the Wisconsin Department of Financial
Institutions---Division of Savings Institutions ("WDFI -- Administrator"). First
Northern's results of operations are also affected by accounting principles and
regulations adopted by the Financial Accounting Standards Board ("FASB") and
other organizations. Deposit flows and costs of funds are influenced by interest
rates on competing investments, general market rates of interest, the level of
personal savings and the public perception of the financial strength of the
industry. Lending activities are affected by the demand for mortgage financing
and other types of loans, which in turn is affected by the interest rates at
which such financing may be offered and market forces acting upon the supply of
housing and the availability of funds.
RECAPITALIZATION OF SAIF. The Savings Association Insurance Fund ("SAIF") of the
FDIC was recapitalized during 1996 by a one-time special assessment imposed on
all SAIF members. The $2,856,000 assessment paid by First Northern had a
significant impact on its 1996 financial results. However, the effect of the
recapitalization is a significant reduction in federal deposit insurance
premiums for SAIF-insured institutions on an ongoing basis.
MARKET AREA AND COMPETITION. First Northern's primary market area is an eight
county area in Northeastern Wisconsin, which surrounds Green Bay, the third
largest city in Wisconsin. First Northern operates 19 offices located in 14
cities in this area. These counties and cities are serviced by four Green Bay
area television stations and are included in the circulation of a Green Bay
newspaper.
FN-49
<PAGE> 233
Financial organizations, such as First Northern, experience intense
competition in both attracting and retaining deposits and in making real estate
and consumer loans. First Northern's management believes that its share of the
deposit market is approximately 10% and that its mortgage lending market share
in its primary market area is approximately 9%. Most direct competition for
deposits has come from commercial banks, credit unions, stock brokerage firms
and money market mutual funds. In addition to offering competitive types of
accounts and interest rates, the principal methods used by First Northern to
attract deposits include the offering of a variety of services, and convenient
business hours and branch locations, with inter-branch deposit and withdrawal
privileges at each location. Competition in originating real estate loans comes
primarily from commercial banks and mortgage bankers. The primary factors in
competing for loans are interest rates and interest rate adjustment provisions,
loan fees and the quality of service to borrowers.
The Wisconsin Statutes governing savings associations and their holding
companies provide for regional reciprocal interstate banking which permits
additional competitors to enter First Northern's primary market and may tend to
create further concentration in the financial services industry. Under Wisconsin
law, Wisconsin chartered savings institutions may open branches in Illinois,
Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio, provided that
reciprocal legislation is adopted in such states (the "Regional States").
Currently, all but Missouri have adopted reciprocal legislation. A Wisconsin
based savings and loan holding company is able to acquire a savings institution
or holding company in any of the Regional States and such a holding company
located in a Regional State is able to make similar acquisitions in Wisconsin.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, which allows bank holding companies that are adequately capitalized and
adequately managed to acquire banks anywhere in the nation regardless of whether
the acquisition is prohibited under state law, also created further competition
and concentration in the financial services industry.
See "--Regulation--Federal Regulation of Holding Companies --
Gramm-Leach-Bliley Act" below for a description of this significant new federal
legislation which could have a far reaching impact on the financial services
industry.
LENDING ACTIVITIES. First Northern has traditionally concentrated on
originations of adjustable and fixed interest rate one- to four-family mortgage
loans and consumer loans. First Northern also originates 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 loans are primarily
originated for sale in the secondary mortgage market. Fixed interest 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 interest rate adjustable as compared to
76% at December 31, 1998.
To aid in matching maturities of its assets and liabilities, First Northern
originates second mortgage loans, automobile, boat, recreational vehicle and
other types of consumer loans. These loans are generally of shorter maturities
than first mortgage loans and are originated at both adjustable or fixed
interest rates.
First Northern started a commercial banking division in 1999, which
originates commercial loans and commercial real estate loans. First Northern
hired an experienced commercial banking manager to guide the development of this
division. At December 31, 1999, the commercial banking 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 in
Northeastern Wisconsin. 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.
LOAN INTEREST RATES AND TERMS. Interest rates charged on First Northern's loans
are affected primarily by the demand for such loans and the supply and cost of
money available for lending purposes. These factors are in turn affected by
general economic conditions and such other forces as monetary policies of the
federal government, including the Federal Reserve Board, the general supply of
money, tax policies and governmental budgetary matters. Certain lending
activities of Wisconsin chartered savings associations are subject to Wisconsin
usury laws.
FN-50
<PAGE> 234
The maturities and average periods that loans actually remain outstanding,
together with the variability of loan interest provisions, in each case as
compared with the corresponding factors for loan funding sources, are the key
determinants of a lender's exposure to interest rate risk. Loan sales may also
be used as a means of reducing interest rate risk. First Northern's general
policy, which is subject to review by management as a result of changing market
and economic conditions, and other factors, is to retain all adjustable interest
rate mortgage loans in its portfolio and to keep up to approximately 25% of the
mortgage portfolio in fixed interest rate mortgage loans. The percentage of
fixed mortgage loans held in the loan portfolio was increased from 20% to 25% in
1998 as a result of First Northern's asset and liability position which allowed
for some additional interest rate risk and other investment opportunities in the
market. First Northern estimates that generally not more than 5% of the total
mortgage portfolio will be in 30 year fixed interest rate mortgage loans. This
policy is part of First Northern's asset/liability management strategy.
Mortgage loans made by First Northern generally are long-term loans,
amortized on a monthly basis with principal and interest due each month. First
Northern does not include a prepayment penalty on one- to four-family
owner-occupied mortgage loans. Although the original contractual loan payment
period for mortgage loans normally ranges from 15 to 30 years, First Northern's
experience has been that, because of prepayments in connection with refinancing
and sales of property, mortgage loans typically remain outstanding for a
substantially shorter period. First Northern estimates that the average range of
time mortgage loans are outstanding is approximately six to ten years.
Management of First Northern is committed to managing the maturities of
assets and liabilities. To aid in this , management's policy is to emphasize the
origination of consumer and commercial loans and other loans having short
maturities, such as three to six years, and mortgage loans which are interest
rate adjustable or are eligible for sale in the secondary market. At December
31, 1999, consumer loans (second mortgage, automobile and other consumer loans)
outstanding totaled $194.7 million. Consumer loan originations and purchases for
the year ended December 31, 1999 were $132.7 million, of which $29.4 million or
22.2% were interest rate adjustable. Consumer loan originations and purchases in
1998 were $99.6 million, of which $32.8 million or 32.9% were interest rate
adjustable, and in 1997 originations and purchases were $98.2 million, of which
$29.2 million or 29.7% were interest rate adjustable.
Since February 1985, First Northern has originated mortgage loans using
contracts which contain interest rate adjustment clauses allowing a lifetime
interest rate adjustment of between 5% to 8% over the original contract interest
rate on all residential mortgage loans and subject to annual interest rate
adjustment caps of up to 2%. First Northern's ability to successfully market
such loans depends on, among other things, prevailing interest rates, the
volatility of interest rates and the public's acceptance of adjustable interest
rate mortgage loans. First Northern has generally fixed the interest rate for
the first one, two, three or five years of the loan term. First Northern also
maintains a policy of including a "due on sale" clause in its mortgage loans.
This clause generally gives First Northern the right, subject to certain
restrictions, to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the real property
subject to the mortgage without first either obtaining First Northern's consent
or repaying the loan.
LOAN ORIGINATIONS. First Northern has general authority to lend anywhere in the
United States; however, it has chosen to concentrate its mortgage origination
activities in Northeastern Wisconsin with primary emphasis in the counties
served by its offices. As of December 31, 1999, First Northern had only 93 loans
secured by out-of-state properties, representing $4.3 million or 0.8% of the
total dollars in its mortgage loan portfolio. First Northern's mortgage lending
is subject to written, non-discriminatory underwriting guidelines and to loan
origination procedures approved annually by First Northern's Board of Directors.
Property appraisals by independent appraisers, in accordance with First
Northern's appraisal policy, are required. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and employment and income confirmations. Loans are reviewed
and approved as directed by the underwriting guidelines established by the Board
of Directors.
At December 31, 1999, First Northern serviced for others $151.4 million of
whole loans and participation interests in mortgage loans. In addition, as of
December 31, 1999, First Northern had approximately $140.2 million of 15, 20 and
30 year fixed interest rate mortgages in its mortgage loan portfolio. See "Loan
Interest Rates and Terms" above. In 1999, 1998 and 1997, First Northern sold
$20.1, $63.2, and $18.7 million, respectively of fixed interest rate mortgage
loans to the secondary market in accordance with First Northern's asset and
liability management policy. First Northern also originates mortgage loans for
the Wisconsin Department of Veterans Affairs ("WDVA") and the Wisconsin Housing
and Economic Development Authority ("WHEDA"), which result in additional
origination fees and servicing income. First Northern does not currently
originate a significant amount of Federal Housing Administration ("FHA") insured
or Veterans Administration ("VA") partially guaranteed loans.
In addition to traditional mortgage lending activities, First Northern has
participated in various state and local special loan
FN-51
<PAGE> 235
programs. Many of these programs are designed specifically to make home
ownership more available to qualified low/moderate income families. Through the
Federal Home Loan Bank ("FHLB") of Chicago's Affordable Housing Program, First
Northern has obtained funding for down payment and closing cost assistance to
assist low income first-time home buyers.
During 1999, First Northern purchased $31.9 million of single-family home
loans, $1.5 million in multi-family loans and $3.5 million in commercial real
estate loans from others. In 1998, First Northern purchased $15.0 million of
single-family home loans, $1.7 million in multi-family loans, and $0.6 million
in commercial real estate loans. In 1997, First Northern purchased $7.8 million
of single-family loans, $3.7 million of multi-family loans, and $1.0 million of
commercial real estate loans.
First Northern requires borrowers to obtain title insurance or abstracts of
title, depending on the type of mortgage product, on first mortgage real estate
loans. Home equity loan borrowers are required to obtain a title search before
and after the loan is originated to assure First Northern that the loan has been
properly recorded and secured. Borrowers also must obtain hazard insurance prior
to closing and, when required by the Department of Housing and Urban
Development, flood insurance. Borrowers may be required to advance funds on a
monthly basis together with each payment of principal and interest to a mortgage
escrow account from which First Northern makes disbursements for items such as
real estate taxes and private mortgage insurance premiums as they become due.
First Northern is required by Wisconsin law to pay interest on mortgage escrow
accounts for loans originated after January 31, 1983 that are secured by one- to
four-family, owner-occupied residences. The interest rate is based on the annual
average of passbook interest rates paid by all Wisconsin financial institutions
(2.74% for 1999). Currently, approximately 84.2% of the escrow dollars are
interest bearing. The interest rate paid on escrow dollars is adjusted annually.
The interest rate to be paid on qualified mortgage escrow dollars in 2000 is
2.51%.
Regulations of the WDFI-Administrator also limit the amount, which First
Northern may lend up to specific percentages of the value of the real property
securing the loan (referred to as "loan-to-value" ratios), as determined by an
appraisal at the time the loan is originated. A loan secured by a first lien
mortgage may not exceed 90% of the appraised value of the real estate security
unless, among other things, the portion exceeding that percentage is insured or
guaranteed by a mortgage insurance company against losses resulting from
borrower default or the loan is guaranteed by a federal or state agency. First
Northern's policy is to not make first mortgage loans in excess of 80% of the
lower of the appraised value or the purchase price unless the excess is insured
by private mortgage insurance or the loan is guaranteed by a federal or state
agency. Real estate loans secured by other than a first lien must also conform
generally to First Northern's policy of limiting loans to 80% of value; however,
First Northern adjusted its policy in 1998 to allow loan amounts to equal 100%
of value. All mortgage loan applications are reviewed by First Northern's
corporate underwriting staff to ensure compliance with its uniform loan
underwriting guidelines.
The federal agencies regulating First Northern have also established real
estate lending standards, which, among other things, create loan-to-value ratios
for various real estate loan categories. First Northern's current underwriting
standards, as stated above, conform with these real estate lending standards.
First Northern has been expanding its consumer lending portfolio, which
generally consists of home equity, automobile, boat, recreational vehicles,
credit card and other loans, to obtain higher yields, to serve the needs of its
customers and to aid in the management of interest rate risk. In addition, First
Northern purchases automobile loans from its subsidiary, SFC, which originates
automobile loans on an indirect basis for its parent companies. First Northern
has historically experienced relatively low delinquencies and few losses on
consumer loans.
First Northern added commercial loans to its product line offering the
second quarter of 1999. An experienced commercial loan manager with over 20
years of commercial lending experience was hired to develop the commercial
banking area. In addition to the commercial and industrial loans originated,
First Northern has experienced an increase in commercial real estate lending,
which is reported in the mortgage loan originations as a result of the
commercial loan product line. First Northern anticipates it will continue to
emphasize commercial loan growth.
FN-52
<PAGE> 236
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
First Northern's loan portfolio (excluding loans held for sale) by type of
collateral at the dates indicated. The table does not reflect loans sold and
serviced for others. First Northern continues to service loans sold to others.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ------------------ ------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
residential $465,737 61.35% $416,974 64.36% $393,563 64.74% $376,189 66.72% $352,449 69.08%
Five or more family
residential 35,815 4.72 32,013 4.94 24,506 4.03 20,154 3.57 17,591 3.45
Commercial real estate 17,699 2.33 7,546 1.16 9,269 1.52 9,975 1.77 10,028 1.97
Construction-residential 29,758 3.92 25,467 3.93 19,192 3.16 16,306 2.89 10,782 2.11
Construction-commercial 6,910 .91 4,470 0.69 2,156 0.35 1,701 0.30 1,225 0.24
Other 3,769 .49 3,129 0.48 2,226 0.37 1,900 0.34 1,788 0.35
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 559,688 73.72 489,599 75.56 450,912 74.17 426,225 75.59 393,863 77.20
Consumer loans:
Consumer 20,153 2.66 18,416 2.84 18,200 2.99 18,179 3.22 20,307 3.98
Second mortgage 78,223 10.30 66,426 10.25 68,596 11.28 59,148 10.49 46,528 9.12
Automobile 96,356 12.69 73,502 11.35 70,276 11.56 60,339 10.70 49,504 9.70
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans 194,732 25.65 158,344 24.44 157,072 25.83 137,666 24.41 116,339 22.80
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial loans 4,771 .63
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross total loans 759,191 100.00% 647,943 100.00% 607,984 100.00% 563,891 100.00% 510,202 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan proceeds 17,852 11,750 10,290 5,942 6,071
Allowance for losses 3,910 3,531 3,177 2,937 2,608
Unearned loan fees 549 923 988 1,017 988
-------- -------- -------- -------- --------
Net loans receivable $736,880 $631,739 $593,529 $553,995 $500,535
======== ======== ======== ======== ========
</TABLE>
CONTRACTUAL MATURITIES OF LOANS. The following table presents information as of
December 31, 1999 regarding loan maturities and contractual principal repayments
by categories of loans during the periods indicated. Loans with adjustable
interest rates are shown as maturing in the year of their contractual maturity.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE IN YEAR(S) ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
2003- 2005- 2009- AFTER
2000 2001 2002 2004 2008 2013 2013 TOTAL
------ ------ ------ ----- ------ ------ ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Mortgage $ 3,077 $ 1,684 $ 8,512 $12,455 $37,216 $101,204 $358,872 $523,020
Mortgage construction (1) 5,538 1,070 4,735 6,400 18,925 36,668
Consumer loans 29,203 27,821 26,759 43,486 37,746 25,590 4,127 194,732
Commercial 3,654 5 485 627 4,771
------- ------- ------- ------- ------- -------- -------- --------
Total $41,472 $30,580 $35,756 $61,303 $74,962 $133,194 $381,924 $759,191
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
- - ----------------
(1) First Northern's mortgage construction loans are originated for either the
construction phase or the combined construction and full amortization term
of the loan.
Of the $717.7 million of loans contractually due after December 31,
2000, approximately $256.2 million have fixed interest rates and approximately
$461.5 million have adjustable interest rates.
Contractual maturities of loans do not reflect the actual life of the
loan portfolio. The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments. The average life of
mortgage loans tends to increase, however, when current mortgage market interest
rates exceed interest rates on existing mortgages and decrease when mortgage
interest rates decline. The average life of consumer loans is affected by the
general and local economy.
FN-53
<PAGE> 237
MORTGAGE AND CONSUMER LOANS. The following table sets forth activity for First
Northern's investment and held-for-sale loan portfolios for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- ------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans originated
and purchased:
Construction - Residential $ 46,226 $ 31,115 $ 25,709 $ 25,695 $ 17,265
Construction - Commercial 1,540 5,930 901 51
Loans on existing property 80,051 59,021 51,536 49,017 37,491
Refinancing (1) 62,432 153,614 42,166 35,497 15,130
Other loans 2,739 2,049 2,398 2,668 2,560
-------- --------- --------- --------- ----------
Total mortgage loans originated
and purchased 192,988 251,729 121,809 113,778 72,497
Consumer loans originated
and purchased:
Other consumer 10,831 9,912 8,670 7,615 8,773
Second mortgage 47,415 38,747 36,896 32,548 30,474
Automobile 72,264 48,661 50,059 45,722 26,109
Education 2,143 2,317 2,568 2,382 2,895
-------- --------- --------- ----------- -----------
Total consumer loans originated
and purchased 132,653 99,637 98,193 88,267 68,251
-------- --------- --------- ---------- ----------
Commercial loans originated 5,032
Mortgage loans sold (20,085) (63,180) (18,668) (11,065) (11,583)
Education loans sold (2,040) (2,391) (2,491) (3,187) (10,489)
Loan repayments and other credits (197,300) (245,836) (154,750) (134,104) (112,140)
-------- --------- --------- --------- ---------
Net increase in real estate
loans and other loans $111,248 $ 39,959 $ 44,093 $ 53,689 $ 6,536
======== ========= ========= ========= =========
</TABLE>
- - -------------
(1) Refinanced mortgage loans are stated as gross dollars. Net new refinanced
dollars for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
were $46.3 million, $95.0 million, $25.7 million, $24.9 million, and $10.8
million, respectively. Net new dollars are the additional dollars that were
disbursed above an existing loan balance for the same borrower and property.
First Northern is permitted to make secured and unsecured consumer loans
including automobile, recreational vehicle, marine and other consumer loans,
home equity, property improvement, manufactured housing, education and deposit
account loans. At December 31, 1999, consumer loans represented 25.7% of total
loans.
LOAN FEE INCOME. A borrower on a one- to four-family owner-occupied residence
may be charged a loan origination fee or a processing fee of up to 1% of the
loan amount, with the actual amount being dependent upon, among other things,
market conditions at the time of origination. These fees are in addition to
appraisal and other third party fees paid by the borrower to First Northern at
the time of application. Loan origination and commitment fees and certain direct
loan origination costs are being deferred and the net amounts amortized as an
adjustment to the related loan's yield. First Northern is amortizing these
amounts using the level-yield method, adjusted for prepayments, over the
contractual life of the related loans. Currently, there are no loan fees charged
on consumer loans.
USURY LIMITATION AND INTEREST RATE ADJUSTMENT PROVISIONS. Any loan secured by a
real estate mortgage and made, refinanced, renewed, extended or modified after
November 1, 1981, is not subject to a maximum interest rate. Consumer loans of
$25,000 or less are generally subject to the Wisconsin Consumer Act which
establishes disclosure requirements for interest rates and finance charges and,
for transactions entered into before November 1, 1984, limits the maximum
finance charges.
FN-54
<PAGE> 238
Mortgage lenders have historically had authority under Wisconsin law to
include interest adjustment clauses in loan contracts. Before June 12, 1976, the
only limit on interest adjustment increases was the general usury ceiling.
However, as of that date, Wisconsin law began to distinguish between two kinds
of interest adjustment clauses in connection with loans on owner-occupied one-
to four- family residential property: (1) those that tie interest adjustments to
fluctuations in an approved index ("indexed" interest adjustment provisions);
and (2) those that do not ("unindexed" interest adjustment provisions). Subject
to certain statutory restrictions, interest adjustments under an unindexed
interest adjustment provision are solely at the option of the lender.
Under Wisconsin law, unindexed adjustable rate provisions contained in first
lien mortgage loans made on one- to four-family owner-occupied dwellings may:
(1) permit rate increases to be made as often as once every 6 months, upon 30
days' written notice, and in increments of up to 1% each; and (2) enable a
lender that has waived a permitted interest rate increase to subsequently
increase the interest rate to the level that would have been in effect had the
opportunity for an increase not been waived.
Mortgages that are subject to indexed interest rate adjustment provisions
are treated in substantially the same way under Wisconsin law. However, instead
of increases or decreases occurring solely at the discretion of the lender,
interest rates may be increased, and must be decreased, in accordance with
changes in the approved index. Unlike its unindexed adjustable rate counterpart,
adjustments made under an indexed adjustable rate provision governed by the 1981
law may be made at intervals more frequent than 6 months.
Borrowers may prepay their loan without penalty during the 30 days following
notice of a rate increase, or at any time after 5 years from the date of the
loan.
First Northern has originated both unindexed and indexed adjustable interest
rate mortgages. With both types of adjustable rate forms, First Northern has
generally fixed the interest rate for the first one, two, three or five years of
the loan term. The unindexed adjustable interest rate loans also provide for a
maximum interest rate adjustment of 1% during each 12 month period thereafter.
The indexed adjustable rate loan provides for a maximum interest rate adjustment
of the lesser of the index or 1% to 2% depending on origination date of the
loan, during each 12 month period. Since February 1985, First Northern has
originated adjustable interest rate mortgage loans using contracts which contain
interest rate adjustment clauses allowing a lifetime interest rate adjustment of
between 5% and 8% over the original contract interest rate on all residential
mortgage loans.
First Northern has been able to exercise its escalation and de-escalation
rights under the interest rate adjustments clauses on its mortgage loan
portfolio. The use of the adjustment clause gives First Northern greater control
over its income and portfolio retention due to its ability to increase or
decrease interest yields on its mortgage portfolio. See "Loan Interest Rates and
Terms" above.
CLASSIFIED ASSETS AND DELINQUENCIES. When a borrower fails to make a required
payment on a loan, First Northern or SFC attempts to have the deficiency cured
by contacting the borrower. Contacts are made after a payment is more than 30
days past due and, in most cases, deficiencies are cured promptly. If the
delinquency exceeds 90 days and is not cured through First Northern's normal
collection procedures, First Northern will institute measures to remedy the
default, including commencing a foreclosure action or accepting a voluntary deed
of the secured property in lieu of foreclosure from the mortgagor or
repossessing other collateral. If a foreclosure action is instituted and the
loan is not reinstated, paid in full, or refinanced, the property is sold at a
judicial sale at which, in most instances, First Northern is the buyer.
Under Wisconsin law, a mortgagor is afforded a period of time, subsequent to
the entry of judgment and prior to judicial sale, within which to redeem the
equity in the property ("equity right of redemption"). The length of the equity
right of redemption varies depending on the form of foreclosure proceedings
selected by the lender, the type and condition of the real estate security and
other factors. The majority of First Northern's residential foreclosures follow
a form which provides a 6 month equity right of redemption and a waiver of any
deficiency judgment against the borrower. Use of this process takes
approximately 8-12 months from commencement of the action to judicial
confirmation of the sale.
The OTS has established a classification system for problem assets. Under
the OTS regulation, problem assets are classified as "substandard," "doubtful,"
or "loss." Assets classified as loss are required to be charged-off. Assets
classified as doubtful or substandard do not require a write-off of the amounts
so classified but may necessitate additions to the general allowance for loan
losses. An institution's determination as to the classification of its assets
and the amount of valuation allowances are subject to review by the District
Director of the OTS or the FDIC, who could order the establishment of additional
loan loss allowances.
FN-55
<PAGE> 239
The following table identifies the dollar amount of loans that are
classified as substandard, doubtful or loss as of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------------------
1999 1998 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Substandard $638 441 $578
Doubtful 13 6 16
Loss 18 14
----- ----- ----
Total Classified Assets $669 $461 $594
===== ===== ====
</TABLE>
The increase in the amount of total classified assets in 1999 was the result
of an increase in overall delinquencies and the fact that December 31, 1998,
total classified assets were very low.
ALLOWANCES FOR LOSSES. Allowances for losses on loans, real estate, and
repossessed assets are based on management's evaluation of various factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loss experience, estimated sales price of collateral,
regulatory environment and holding and selling costs.
While First Northern has a low level of non-performing assets and low
historical charge-off experience, the inherent credit risk within the portfolio
(primarily relating to the indirect automobile loan portfolio and commercial
loans) has increased. It is this increased credit risk which primarily resulted
in the increase in the loan loss allowance.
Management believes that the allowances for losses on loans, real estate,
and repossessed assets are adequate. While management uses available information
to recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions or
regulatory requirements.
FN-56
<PAGE> 240
All of First Northern's loans are domestic. A summary of the allowance
for loan losses is shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Balance, beginning of year $ 1,813 $ 1,624 $ 1,453 $ 1,578 $ 1,499
Provisions 295 186 170 10 79
Charge-offs:
One- to four-family residential (1)
Recoveries:
One- to four-family residential 4
Commercial real estate 1 1
-------- -------- -------- -------- -------
Net recoveries 3 1 1
-------- -------- -------- -------- -------
Transfer of loss reserve (136)
-------- -------- -------- -------- -------
Balance, end of year 2,108 1,813 1,624 1,453 1,578
Consumer loans:
Balance, beginning of year 1,718 1,553 1,484 1,030 901
Provisions 53 234 150 360 161
Charge-offs:
Consumer (79) (47) (44) (23) (30)
Automobile (43) (52) (57) (43) (41)
-------- -------- -------- -------- -------
Total charge-offs (122) (99) (101) (66) (71)
-------- -------- -------- -------- -------
Recoveries:
Consumer 9 7 8 11 21
Automobile 20 23 12 13 18
-------- -------- -------- -------- -------
Total recoveries 29 30 20 24 39
-------- -------- -------- -------- -------
Net charge-offs (93) (69) (81) (42) (32)
--------- -------- -------- -------- -------
Transfer of loss reserve 136
-------- -------- -------- -------- -------
Balance, end of year 1,678 1,718 1,553 1,484 1,030
-------- -------- -------- -------- -------
Commercial loans:
Balance, beginning of period
Provisions, charged to provision
for loan losses 124
Charge-offs
Recoveries
Net (charge-offs) or recoveries -------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Balance, end of year 124
-------- -------- -------- -------- -------
Total allowance for loan losses $ 3,910 $ 3,531 $ 3,177 $ 2,937 $ 2,608
======== ======== ======== ======== =======
Foreclosed properties & repossessed assets:
Balance, beginning of year $ 6 $ - $ - $ 1 $ 1
Provisions, charged to
non-interest expense 8 10 13
Charge-offs:
One- to four-family residential (14) (4) (14)
-------- -------- -------- -------- -------
Balance, end of year $ - $ 6 $ - $ - $ 1
======== ======== ======== ======== =======
Total charge-offs
to average loans outstanding 0.02% 0.02% 0.02% 0.01% 0.01%
======== ======== ======== ======== =======
Net charge-offs to average
loans outstanding 0.01% 0.01% 0.01% 0.01% 0.01%
======== ======== ======== ======== =========
</TABLE>
Interest income on loans is accrued and credited to operations based on the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, uncollected interest credited to income in
the current year is reversed and uncollected interest accrued in the prior year
is charged to the allowance for loan losses. Management may elect to continue
the accrual of interest when the loan is in the process of collection and the
value of collateral is sufficient to cover the principal balance and accrued
interest. Interest received on non-accrual loans generally is either applied
against principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
FN-57
<PAGE> 241
The following tables show the Company's total allowance for loan losses and
the allocation to the various categories of loans held for investment at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------------
% OF
LOANS IN
ALLOWANCE CATEGORY
AS A % OF TO TOTAL
LOANS IN OUTSTANDING
AMOUNT CATEGORY(1) LOANS(1)
------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,566 0.34% 61.35%
Five or more family residential 254 0.71 4.72
Commercial real estate 241 1.36 2.33
Construction 0.00 4.83
Other 30 0.80 0.49
Classified mortgage loans 17 3.00
--------- -------- -----------
Total mortgage loans 2,108 0.38 73.72
Consumer loans:
Consumer 239 1.18 2.66
Second mortgage 657 0.84 10.30
Automobile 765 0.79 12.69
Education 0.00
Classified consumer loans 17 2.00
--------- -------- -----------
Total consumer loans 1,678 0.86 25.65
Commercial loans(2) 124 2.60 0.63
-------- -------- -----------
Total allowance for loans $3,910 0.52% 100.00%
====== ==== ======
</TABLE>
- - --------------
(1) Percentages are calculated on gross loan balances.
(2) First Northern began originating commercial loans in the second quarter
of 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------
% OF
LOANS IN
ALLOWANCE CATEGORY
AS A % OF TO TOTAL
LOANS IN OUTSTANDING
AMOUNT CATEGORY(1) LOANS(1)
------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,475 0.35% 64.36%
Five or more family residential 150 0.47 4.94
Commercial real estate 141 1.87 1.16
Construction 4.62
Other 38 1.21 0.48
Classified mortgage loans 9 3.00
---------- ------ ----------
Total mortgage loans 1,813 0.37 75.56
Consumer loans:
Consumer 96 0.52 2.84
Second mortgage 269 0.41 10.25
Automobile 1,340 1.82 11.35
Education
Classified consumer loans 13 2.00
--------- ------ ----------
Total consumer loans 1,718 1.08 24.44
--------- ------ ----------
Total allowance for loans $3,531 0.54% 100.00%
====== ==== ======
</TABLE>
- - --------------
(1) Percentages are calculated on gross loan balances.
FN-58
<PAGE> 242
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------
% OF
LOANS IN
ALLOWANCE CATEGORY
AS A % OF TO TOTAL
LOANS IN OUTSTANDING
AMOUNT CATEGORY(1) LOANS(1)
------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,324 0.34% 64.74%
Five or more family residential 135 0.55 4.03
Commercial real estate 127 1.37 1.52
Construction 3.51
Other 24 1.08 0.37
Classified mortgage loans 14 3.00
--------- ------ -----------
Total mortgage loans 1,624 0.36 74.17
Consumer loans:
Consumer 85 0.47 2.99
Second mortgage 250 0.37 11.28
Automobile 1,212 1.73 11.56
Education
Classified consumer loans 5 2.00
---------- ------- -----------
Total consumer loans 1,553 0.99 25.83
---------- ------- -----------
Total allowance for loans $3,177 0.52% 100.00%
========== ======= ===========
</TABLE>
- - --------------
(1) Percentages are calculated on gross loan balances.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------
% OF
LOANS IN
ALLOWANCE CATEGORY
AS A % OF TO TOTAL
LOANS IN OUTSTANDING
AMOUNT CATEGORY(1) LOANS(1)
------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,180 0.31% 66.72%
Five or more family residential 121 0.60 3.57
Commercial real estate 114 1.14 1.77
Construction 3.19
Other 18 0.95 0.34
Classified mortgage loans 20 3.00
------ ----- ------
Total mortgage loans 1,453 0.34 75.59
Consumer loans:
Consumer 83 0.46 3.22
Second mortgage 211 0.36 10.49
Automobile 1,172 1.94 10.70
Education
Classified consumer loans 18 2.00
------ ----- ------
Total consumer loans 1,484 1.08 24.41
------ ----- ------
Total allowance for loans $2,937 0.52% 100.00%
====== ===== ======
</TABLE>
- - --------------
(1) Percentages are calculated on gross loan balances.
FN-59
<PAGE> 243
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------
% OF
LOANS IN
ALLOWANCE CATEGORY
AS A % OF TO TOTAL
LOANS IN OUTSTANDING
AMOUNT CATEGORY(1) LOANS(1)
------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Breakdown of allowance
Mortgage loans:
One- to four-family residential $1,359 0.39% 69.08%
Five or more family residential 98 0.56 3.45
Commercial real estate 97 0.97 1.97
Construction 2.35
Other 16 0.89 0.35
Classified mortgage loans 8 2.05
------ ----- ------
Total mortgage loans 1,578 0.40 77.20
Consumer loans:
Consumer 79 0.39 3.98
Second mortgage 137 0.29 9.12
Automobile 811 1.64 9.70
Education
Classified consumer loans 3 2.00
------ ----- ------
Total consumer loans 1,030 0.89 22.80
------ ----- ------
Total allowance for loans $2,608 0.51% 100.00%
====== ===== ======
</TABLE>
- - -------------------------------
(1) Percentages are calculated on gross loan balances.
FN-60
<PAGE> 244
The following table is a summary of non-performing loans and assets.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------ -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
(90 days or more past due) $243 $223 $333 $509 $266
Non-accrual consumer loans 40 123 107 235 152
----- ----- ----- ----- -----
Total non-performing loans 283 346 440 744 418
Foreclosed properties, properties
subject to foreclosure and
repossessed assets 381 106 153 189 136
----- ----- ----- ----- -----
Total non-performing assets $664 $452 $593 $933 $554
==== ==== ==== ==== ====
Non-performing loans as a
percentage of total loans .04% .05% .07% .13% .08%
=== === === === ===
Non-performing assets as a
percentage of total assets .08% .06% .09% .15% .10%
=== === === === ===
Loan loss allowances as
a percentage of non-
performing loans 1,381.63% 1,020.52% 722.05% 394.76% 623.92%
======== ======== ====== ====== ======
Loan loss allowances as
a percentage of non-
performing assets 588.86% 781.19% 535.75% 314.79% 470.76%
====== ====== ====== ====== ======
Interest income that would have
been recognized if non-accrual
loans had been current (1) $12 $9 $13 $25 $12
====== ======= ====== ======= ======
</TABLE>
- - -----------------------
(1) No accrued interest income was included in net income in any of the years
presented from loans classified as non-accrual.
In addition, management is not aware of any possible credit problems of
borrowers not otherwise reflected herein which causes management to have serious
doubts as to the ability of such borrowers to comply with their present loan
repayment terms.
INVESTMENT AND MORTGAGE-RELATED ACTIVITIES. First Northern is authorized to
invest in obligations issued or fully guaranteed by the United States, certain
federal agency obligations, certain time deposits, negotiable certificates of
deposit issued by commercial banks, mortgage-backed and mortgage-related
securities, investment grade corporate notes and other specified investments.
FN-61
<PAGE> 245
The following table sets forth the composition of First Northern's investment
and mortgage-related securities portfolio at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
INVESTMENT AND MORTGAGE-RELATED SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31
--------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ----------------------
PERCENT PERCENT PERCENT
CARRYING OF CARRYING OF CARRYING OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
------------ ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning deposits $ 4,329 7.93% $ 861 1.86% $ 324 0.81%
Securities available-for-sale:
U.S. government securities 3,192 5.85 3,303 7.13 3,290 8.24
Federal agency obligations 3,465 6.35 3,822 8.25 2,002 5.01
Mortgage-related securities 5,554 10.17 996 2.15 932 2.33
Asset Management Fund 546 1.00 534 1.15 500 1.25
FHLMC stock 1,130 2.07 1,546 3.34 1,007 2.52
Northwest Equities
Corporation stock 111 0.20
---------- ---------- -------- -------- --------- --------
Total securities available-for-sale 13,998 25.64 10,201 22.02 7,731 19.35
Securities held-to-maturity:
U.S. government securities 1,000 2.50
Federal agency obligations 25,216 46.19 23,741 51.25 20,231 50.63
Corporate issue obligations 999 1.83
Mortgage-related securities 10,048 18.41 11,522 24.87 10,675 26.71
-------- ------- -------- ------- -------- -------
Total securities held-to-maturity 36,263 66.43 35,263 76.12 31,906 79.84
-------- ------- -------- ------- -------- -------
Total $54,590 100.00% $46,325 100.00% $39,961 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing for interest-earning
deposits, securities
available-for-sale and held-to-
maturity (1) 22 months 23 months 18 months
</TABLE>
- - ------------------------------
(1) For purposes of calculating the remaining life or term, securities
available-for-sale are assumed to have a zero term.
See Notes 2 and 3 of the Notes to Consolidated Financial Statements.
FN-62
<PAGE> 246
The following table sets forth the maturity ranges for investment and
mortgage-related securities, with their respective weighted average yields and
the total market value.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
OVER ONE OVER FIVE
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS OVER TEN YEARS
------------------------ ----------------------- ---------------------- --------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED
COST YIELD COST YIELD COST YIELD COST
----------- ---------- ----------- ---------- ---------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Investment and
Mortgage-related Securities
U.S. government obligations $ 2,248 6.48% $ 994 4.69%
Federal agency obligations 500 5.70 2,995 6.25
Mortgage-related securities $ 938 5.54% $ 4,817
Asset Management Fund 563 5.28
FHLMC stock 33 43.78
Northwest Equities
Corporation stock 111 3.06
------- ----- ------- -------- ------- --------- -------
Total investment and
mortgage-related securities
available-for-sale $ 2,892 6.64% $ 4,552 5.79% $ 938 5.54% $ 4,817
======= ===== ======= ======== ======= ========= =======
HELD-TO-MATURITY:
Investment and
Mortgage-related Securities
Federal agency obligations $ 4,700 5.97% $17,900 5.76% $ 2,616 5.99%
Corporate issue obligations 999 6.82
Mortgage-related securities 831 5.98 2,986 5.92 $ 6,231
------- ----- ------- -------- ------- --------- -------
Total investment and
mortgage-related securities
held-to-maturity $ 4,700 5.97% $19,730 5.82% $ 5,602 5.95% $ 6,231
======= ===== ======= ======== ======= ========= =======
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------
INVESTMENT AND
MORTGAGE-RELATED
OVER TEN YEARS SECURITIES TOTAL
-------------- --------------------------------------
WEIGHTED APPROX. WEIGHTED
AVERAGE AMORTIZED MARKET AVERAGE
YIELD COST VALUE YIELD
-------------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Investment and Morgage-related
Securities
U.S. government obligations $ 3,242 $ 3,192 5.93%
Federal agency obligations 3,495 3,465 6.17
Mortgage-related securities 6.81% 5,755 5,554 6.61
Asset Management Fund 563 546 5.28
FHLMC stock 33 1,130 43.78
Northwest Equities
Corporation stock 111 111 3.06
---------- ---------- ------- -----
Total investment and
mortgage-related securities
available-for-sale 6.81% $ 13,199 $13,998 6.33%
========== ========== ======= =====
HELD-TO-MATURITY:
Investment and
Mortgage-related Securities
Federal agency obligations $25,216 $24,645 5.82%
Corporate issue obligations 999 999 6.82
Mortgage-related securities 6.21% 10,048 9,976 6.10
---------- ---------- ------- -----
Total investment and
mortgage-related securities
held-to-maturity 6.21% $ 36,263 $35,620 5.93%
========== ========== ======= =====
</TABLE>
FN-63
<PAGE> 247
The following table sets forth the composition of First Northern's
mortgage-related held-to-maturity securities portfolio at December 31, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
MORTGAGE-RELATED PORTFOLIO COMPOSITION
----------------------------------------------
AT DECEMBER 31
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 6,192 $ 7,347 $ 7,028
Federal National Mortgage Association 3,856 4,175 3,647
------- ------- -------
Total mortgage-related securities $10,048 $11,522 $10,675
======= ======= =======
Average remaining contractual life or term to
repricing for mortgage-related securities (1) 166 months 150 months 139 months
</TABLE>
(1) The expected maturities for mortgage-related securities will differ
from contractual maturities because borrowers may have the right to
call or prepay mortgage obligations with or without prepayment
penalties.
DEPOSIT ACTIVITIES. First Northern has a number of different programs
designed to attract both short-term and long-term deposits from the general
public. These programs include regular passbook accounts, NOW checking
accounts, money market deposit accounts, fixed rate and variable rate
certificate accounts and negotiated rate certificates, as well as certain
other accounts. Included among those programs are individual retirement
accounts ("IRAs") and self-employed pension plan ("SEPP") accounts.
The specific programs offered by First Northern have changed over
time as new types of accounts and minimum denomination requirements have
been authorized. Currently there are no statutory or regulatory required
minimum denominations or interest rate ceilings on any deposit accounts.
First Northern currently offers deposit accounts with minimum balance
requirements and interest rates as follows:
<TABLE>
<CAPTION>
MINIMUM INTEREST
TYPE OR TERM BALANCE RATE
------------ ------- ----
<S> <C> <C>
NOW Checking Accounts(1) Varies Rate Set Weekly
Regular Deposit Accounts(2) $100 Rate Set Weekly
Money Market Accounts $2,500 Rate Set Weekly
Daily Advantage Money Market Account $10,000 Rate Set Weekly
High Five Passbook $5,000 Rate Set Weekly
91 Day through 60 Month Certificate $500 Rate Set Weekly
18 month IRA and SEPP Variable Certificates $100 Rate Set Monthly
Jumbo Certificates $90,000 Rate Set Daily
</TABLE>
(1) Some of the NOW Checking Accounts offered by First Northern do not bear
interest.
(2) As a practical matter, although subject to First Northern's right to impose
a prior notice requirement, deposits may be invested in and withdrawn from
passbook accounts without restriction. Interest is computed daily from the
date of deposit to the date of withdrawal and credited quarterly at a rate
established by the Investment Committee of management within regulatory
limits.
FN-64
<PAGE> 248
The following tables set forth the distribution of the average balances of the
Company's deposit accounts and the weighted average effective interest rates on
each category of deposits presented for the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CORE DEPOSITS:
Non-interest bearing NOW checking $ 26,005 4.70%
Interest bearing NOW checking 38,348 6.93 1.11%
Money market 68,276 12.34 3.89
Passbook 70,425 12.72 1.97
---------- ------- ----
Total core deposits 203,054 36.69 2.20
Certificate of deposit accounts 350,423 63.31 5.45
--------- ------- ----
Total deposits $553,477 100.00% 4.26%
======== ====== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CORE DEPOSITS:
Non-interest bearing NOW checking $22,899 4.50%
Interest bearing NOW checking 37,232 7.31 1.06%
Money market 57,813 11.35 4.38
Passbook 63,643 12.50 2.14
---------- ------- -----
Total core deposits 181,587 35.66 2.04
Certificate of deposit accounts 327,674 64.34 5.79
--------- ------- -----
Total deposits $509,261 100.00% 4.57%
======== ====== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CORE DEPOSITS:
Non-interest bearing NOW checking $ 19,364 4.10%
Interest bearing NOW checking 35,036 7.42 1.06%
Money market 50,265 10.65 4.31
Passbook 60,057 12.72 2.20
---------- ------- ----
Total core deposits 164,722 34.89 2.25
Certificate of deposit accounts 307,423 65.11 5.72
-------- ------- ----
Total deposits $472,145 100.00% 4.54%
======== ====== ====
</TABLE>
FN-65
<PAGE> 249
The following table presents certificates of deposits in amounts of $100,000 or
more by maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------
1999 1998
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturity:
3 months or less $30,820 $17,619
Greater than 3 months - 6 months 10,186 7,350
Greater than 6 months - 12 months 9,843 10,499
Greater than 12 months 10,785 10,225
-------- --------
$61,634 $45,693
======= =======
</TABLE>
BORROWED FUNDS. First Northern has a line of credit with the FHLB of Chicago and
has borrowed from the FHLB on an overnight and fixed interest rate basis to
assist with funding loan originations.
From time to time, First Northern borrows funds under repurchase
agreements. First Northern accepts funds from municipalities and school
districts. When the amounts of such funds are in excess of FDIC insurance
limits, First Northern collateralizes its obligation to repay such parties
through repurchase agreements. Repurchase agreements are used to lock-in a
profit spread to First Northern. Furthermore, because the repurchase agreements
from municipalities and school districts are not considered deposits, First
Northern does not pay premiums to the FDIC on such amounts. At December 31, 1999
and 1998, First Northern had no borrowings under repurchase agreements as
compared to $0.9 million of borrowings under repurchase agreements at December
31, 1997. The weighted average interest rate of the repurchase agreements as of
December 31, 1997 was 5.79%. See Note 7 of the Notes to Consolidated Financial
Statements.
FN-66
<PAGE> 250
The following table sets forth certain information regarding borrowings
by First Northern at the end of and during the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------
1999 1998 1997
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance outstanding at end of year:
Securities sold under agreement
to repurchase $ 900
Fixed interest rate notes
payable to FHLB $113,804 $ 83,825 75,075
Overnight borrowings from FHLB 68,595 7,675 26,065
Other borrowings 3,500 477 1,237
Weighted average interest rate at
end of year:
Securities sold under agreements
to repurchase 5.79%
Fixed interest rate notes
payable to FHLB 5.80% 5.71% 5.85%
Overnight borrowings from FHLB 4.74% 5.13% 6.92%
Other borrowings 4.54% 4.12% 5.27%
Maximum amount outstanding during the year:
Securities sold under agreements
to repurchase $ 900 $ 1,500
Fixed interest rate notes
payable to FHLB $123,846 97,750 75,525
Overnight borrowings from FHLB 68,595 37,220 33,400
Other borrowings 3,500 3,500 1,312
Average amount outstanding during
the year:
Securities sold under agreements
to repurchase $ 650 $ 1,217
Fixed interest rate notes
payable to FHLB $ 95,338 84,339 65,830
Overnight borrowings from FHLB 27,798 9,982 15,264
Other borrowings 1,050 919 314
Weighted average interest rate
during the year:
Securities sold under agreements
to repurchase 5.79% 5.65%
Fixed interest rate notes
payable to FHLB 5.71% 5.83% 5.97%
Overnight borrowings from FHLB 5.45% 5.79% 5.80%
Other borrowings 4.74% 5.21% 5.49%
</TABLE>
Borrowings increased to $185.9 million at December 31, 1999, as
compared to $92.0 million at December 31, 1998, primarily as a result of the
loan portfolio growth, decreased loan sales and modest deposit growth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FN-67
<PAGE> 251
YIELDS EARNED AND RATES PAID. First Northern's net earnings depend primarily
upon the spread between the income it receives from its loan and investment
portfolios and its cost of money, consisting of interest paid on deposit
accounts and borrowings.
The following table sets forth First Northern's weighted average yields
earned on mortgage loans, consumer loans, and investment and mortgage-related
securities; the weighted average interest rates paid on deposits and borrowings;
and the spread between yields earned and rates paid at the dates indicated.
Since the majority of First Northern's deposit accounts are market rate
accounts, the cost of deposits will likely continue to be subject to interest
rate fluctuations.
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Weighted average yield earned:
Mortgage loans 6.93% 7.03% 7.34% 7.16% 7.06%
Consumer loans 7.93 8.32 8.56 8.56 8.66
Commercial loans 8.25
Mortgage, consumer and commercial loans 7.22 7.35 7.66 7.51 7.44
Investment securities 6.13 5.92 6.41 6.14 6.33
Mortgage-related securities 6.29 6.06 6.37 6.44 7.02
Total loan portfolio,
investment securities, and
mortgage-related securities 7.14 7.25 7.57 7.43 7.39
Weighted average rate paid:
Deposits 4.33 4.35 4.61 4.42 4.56
FHLB and other borrowings (1) 5.76 5.66 5.87 5.71 6.02
Total deposits and FHLB and
other borrowings 4.68 4.54 4.83 4.60 4.63
Interest rate spread at the end of the year 2.46 2.71 2.74 2.83 2.76
</TABLE>
(1) At December 31, 1999, 1998, 1997 and 1996, overnight borrowing interest
rates were unusually high or low and, for the purpose of this report, First
Northern used an average of the overnight borrowing interest rates from the
preceding week to more accurately reflect the cost at December 31 of the
respective years.
FN-68
<PAGE> 252
The following table shows average yields earned and rates paid using daily
averages during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average yield earned during the year:
Mortgage loans 7.03% 7.33% 7.37% 7.18% 6.99%
Consumer loans 7.87 8.26 8.43 8.50 8.44
Commercial loans 8.58
Investment securities (1) 5.97 6.10 6.31 6.23 6.47
Mortgage-related securities 6.12 6.22 6.36 6.50 7.06
All interest-earning assets 7.17 7.47 7.55 7.42 7.28
Average rate paid during the year:
Deposits 4.23 4.54 4.51 4.43 4.42
Borrowings 5.61 5.82 5.94 5.78 6.79
All interest-bearing liabilities 4.48 4.74 4.72 4.56 4.59
Average interest rate spread (2) 2.69 2.73 2.83 2.86 2.69
Net yield on average interest-
earning assets (3) 3.00 3.11 3.26 3.31 3.17
Net yield on total interest-
earning assets (4) 2.75 3.02 3.14 3.14 3.17
</TABLE>
- - -------------
(1) Includes interest-earning deposits.
(2) Average yield on all interest-earning assets during the period less
average rate paid on all interest-bearing liabilities.
(3) Net interest earned divided by average interest-earning assets for the
year.
(4) Net interest earned divided by total interest-earning assets for the year.
AVERAGE BALANCE SHEET AND RATE/YIELD ANALYSIS. "See Management's Discussion and
Analysis of Financial Condition and Results of Operations."
AVERAGE EQUITY TO AVERAGE ASSETS. The ratio of average equity to average assets
measures a financial institution's financial strength. At December 31, 1999,
savings and loan associations in Wisconsin were required to maintain an average
equity to average assets ratio of at least 6.00%. At December 31, 1999, 1998,
1997, 1996 and 1995 the Savings Bank's average equity to average assets ratio
was 9.99%, 10.83%, 11.24%, 12.14%, and 12.99%, respectively.
FN-69
<PAGE> 253
CASH DIVIDENDS. The following schedule sets forth the cash dividends paid per
year:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash Dividends Paid Per Share $0.40 $0.36 $0.32 $0.30 $0.28
===== ===== ===== ===== =====
Cash Dividends Payout Ratio 48.2% 46.8% 47.1% 81.1%(1) 54.9%
==== ==== ==== ==== ====
(dividends declared per share
divided by basic net income per share)
</TABLE>
- - ----------------
(1) The Cash Dividends Payout Ratio was significantly increased in 1996 as a
result of the SAIF special assessment, which significantly reduced net
income per share. Without the SAIF special assessment, the Cash Dividend
Payout Ratio would have been 55.0%.
SUBSIDIARIES. GNFSC, a wholly owned subsidiary of the Savings Bank, engages in
the sale of credit life and disability insurance, and offers brokerage services
to the public, including the sale of tax deferred annuities and mutual funds.
First Northern's investment in GNFSC as of December 31, 1999 was $391,000.
FNII, a wholly owned Savings Bank subsidiary, was established September
2, 1994 for the purpose of managing a majority of First Northern's investment
portfolio. In April 1998, FNII began to purchase loans originated by SFC and the
Savings Bank moved its indirect auto loan portfolio to FNII. In March 1999, the
Savings Bank sold a $56.1 million mortgage loan participation to FNII. FNII
managed approximately $32.4 million of investments, $51.3 million of mortgage
loans and $75.3 million of indirect auto loans at December 31, 1999. First
Northern's investment in FNII as of December 31, 1999 was $161,858,000.
In March 1992, the Savings Bank acquired a 50% stock interest in SFC
from another financial institution. SFC originates, sells, and services indirect
automobile loans. As a result of this acquisition, SFC will on a regular basis,
sell such loans to First Northern or FNII but retain the servicing of the loans.
In April 1998, SFC began selling such loans to FNII but retains the servicing of
the loans. First Northern's investment in SFC as of December 31, 1999 was
$40,000.
Keystone Financial Services, Inc. ("Keystone"), a wholly owned
subsidiary of the Savings Bank, also engaged in the sale of credit life and
disability insurance and tax deferred annuities and offered discount brokerage
services for Prime Federal prior to the merger with and into First Northern.
After the merger, First Northern transferred such business to GNFSC. Keystone is
inactive, but will continue to be a wholly owned subsidiary of the Savings Bank
for possible future use in a related or other area. First Northern's investment
in Keystone as of December 31, 1999 was $100.
Another wholly owned subsidiary of the Savings Bank, First Northern
Financial Services, Inc., operated as a consumer lending subsidiary through
1981. As a result of legislative changes, First Northern now directly engages in
consumer lending activities. First Northern Financial Services, Inc. is
inactive, but it continues in existence for possible future use in a related or
other area. First Northern's book value investment in First Northern Financial
Services, Inc. as of December 31, 1999 was $100.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") imposes restrictions on savings associations' powers. It essentially
creates parallel regulation for state and federally chartered savings
associations and prevents state associations, such as the Savings Bank, from
exercising powers not authorized to federal associations or which the FDIC deems
to constitute a serious risk to the safety, soundness or stability of an insured
institution and/or the SAIF or to be inconsistent with sound banking principles.
The FDIC has informed First Northern that the certain activities that GNFSC is
performing are permissible for a federally chartered savings association but not
a national bank. Therefore, First Northern is required to deduct its investment
and loans to GNFSC when calculating its core, tangible and risked-based capital
ratios.
FN-70
<PAGE> 254
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash $ 4,340 $ 8,043
Interest-earning deposits 372 4,329
-------- --------
CASH AND CASH EQUIVALENTS 4,712 12,372
Securities available-for-sale, at fair value
Investment securities 9,018 8,444
Mortgage-related securities 5,375 5,554
Securities held-to-maturity
Investment securities
(estimated fair value of $25,747 - 2000; $25,644 - 1999) 26,231 26,215
Mortgage-related securities
(estimated fair value of $10,234 - 2000; $9,976 - 1999) 10,310 10,048
Loans held for sale 2,347 1,085
Loans receivable 766,554 736,880
Accrued interest receivable 4,518 4,229
Foreclosed properties and repossessed assets 432 382
Office properties and equipment 7,752 7,463
Federal Home Loan Bank stock 10,750 9,250
Life insurance policies 13,831 13,548
Prepaid expense and other assets 4,238 4,153
-------- --------
$866,068 $839,623
======== ========
LIABILITIES
Deposits $567,693 $566,908
Borrowings 211,484 185,899
Advance payments by borrowers for taxes and insurance 3,472 3,887
Other liabilities 5,991 6,134
-------- --------
TOTAL LIABILITIES 788,640 762,828
STOCKHOLDERS' EQUITY
Cumulative preferred stock, $1 par value; 10,000,000
shares authorized; none outstanding
Common stock, $1 par value; 30,000,000 shares authorized;
shares issued: 9,134,735 - 2000 and 1999
shares outstanding: 8,572,808 - 2000; 8,548,658 - 1999 9,135 9,135
Additional paid-in capital 8,528 8,780
Retained earnings 65,180 64,468
Accumulated other comprehensive income 415 479
Treasury stock at cost (561,927 shares - 2000; 586,077 shares - 1999) (5,830) (6,067)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 77,428 76,795
-------- --------
$866,068 $839,623
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
FN-71
<PAGE> 255
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
(In Thousands,
Except Per Share Amounts)
<S> <C> <C>
Interest and dividend income:
Loans $13,645 $11,734
Investment securities 678 545
Interest-earning deposits 19 18
Mortgage-related securities 254 185
------- -------
TOTAL INTEREST AND DIVIDEND INCOME 14,596 12,482
Interest expense:
Deposits 6,159 5,730
Borrowings 2,981 1,398
Advance payments by borrowers for taxes and insurance 12 12
------- -------
TOTAL INTEREST EXPENSE 9,152 7,140
------- -------
NET INTEREST INCOME 5,444 5,342
Provision for loan losses 165 60
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,279 5,282
Non-interest income:
Fees on serviced loans 55 36
Loan fees and service charges 58 53
Deposit account service charges 390 316
Insurance commissions 111 60
Gains on sales of loans 11 168
Other 383 287
------- -------
TOTAL NON-INTEREST INCOME 1,008 920
Non-interest expense:
Compensation, payroll taxes and other employee benefits 2,113 1,854
Federal insurance premiums 30 81
Occupancy 300 241
Data processing 403 391
Furniture and equipment 112 103
Telephone and postage 118 121
Marketing 105 115
Other 655 582
------- -------
TOTAL NON-INTEREST EXPENSE 3,836 3,488
INCOME BEFORE INCOME TAXES 2,451 2,714
Income taxes 795 923
------- -------
NET INCOME $ 1,656 $ 1,791
======= =======
BASIC NET INCOME PER SHARE $0.19 $0.20
======= =======
DILUTED NET INCOME PER SHARE $0.19 $0.20
======= =======
CASH DIVIDENDS PAID PER SHARE $0.11 $0.10
======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
FN-72
<PAGE> 256
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
----- ------- -------- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended March 31, 2000
- - -----------------------------------------
Balance at January 1, 2000 $9,135 $8,780 $64,468 $(6,067) $479 $76,795
Comprehensive income:
Net income 1,656 1,656
Other comprehensive losses (64)
(64)
Total comprehensive income 1,592
Cash dividends ($.11 per share) (944) (944)
Purchase of treasury stock (168) (168)
Exercise of stock options - (252) 405 153
------ ------ ------- -------- ---- -------
Balance at March 31, 2000 $9,135 $8,528 $65,180 $(5,830) $415 $77,428
====== ====== ======= ======== ==== =======
For the Three Months Ended March 31, 1999
- - -----------------------------------------
Balance at January 1, 1999 $9,135 $9,126 $60,582 $(3,710) $960 $76,093
Comprehensive income:
Net income 1,791 1,791
Other comprehensive losses (141)
(141)
--------
Total comprehensive income 1,650
Cash dividends ($.10 per share) (880) (880)
Purchase of treasury stock (632) (632)
Exercise of stock options - (291) 495 - 204
------ ------ ------- -------- ---- -------
Balance at March 31, 1999 $9,135 $ 8,835 $61,493 $(3,847) $819 $76,435
====== ====== ======= ======== ==== =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
FN-73
<PAGE> 257
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,656 $ 1,791
Adjustments to reconcile net income to cash provided
by operating activities:
Provision for losses on loans 165 60
Provision for depreciation and amortization 212 214
Gains on sales of loans (11) (168)
Loans originated for sale (1,731) (10,795)
Proceeds from loan sales 480 9,808
Increase in interest receivable (289) (118)
Increase (decrease) in interest payable 5 (3)
Increase in other assets (275) (659)
Decrease in other liabilities (182) (367)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 30 (237)
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investment securities 500 1,000
Proceeds from maturities of held-to-maturity investment securities 1,472 3,000
Purchases of available-for-sale investment securities (1,163) (495)
Purchases of held-to-maturity investment securities (1,477) (4,788)
Principal repayments on available-for-sale mortgage-related securities 77 4
Principal repayments on held-to-maturity mortgage-related securities 830 559
Purchases of held-to-maturity mortgage-related securities (991) -
Net increase in loans receivable (29,903) (5,716)
Purchases of office properties and equipment (501) (101)
Purchase of Federal Home Loan Bank stock (1,500) (500)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (32,656) (7,037)
Cash flows from financing activities:
Net increase in deposits 780 3,753
Net increase in short-term borrowings 1,686 7,135
Proceeds from long-term borrowings 39,965 2,025
Repayments of long-term borrowings (16,066) (5,000)
Cash dividend paid (944) (880)
Purchase of treasury stock (168) (632)
Proceeds from exercise of stock options 128 150
Net decrease in advance payments by borrowers for taxes and insurance (415) (375)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,966 6,176
DECREASE IN CASH AND CASH EQUIVALENTS (7,660) (1,098)
Cash and cash equivalents at beginning of period 12,372 7,211
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,712 $ 6,113
======== ========
Supplemental Information to the Statement of Cash Flows:
Interest on deposits $6,153 $5,733
Interest on borrowings 2,729 1,361
Income taxes - 165
Loans transferred to foreclosed properties and repossessed assets 84 82
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
FN-74
<PAGE> 258
FIRST NORTHERN CAPITAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. The consolidated financial statements include the accounts of First
Northern Capital Corp. ("First Northern" or the "Company") and its
wholly-owned subsidiary First Northern Savings Bank, S.A. and its
subsidiaries (collectively, the "Savings Bank"): Great Northern Financial
Services Corporation ("GNFSC"), First Northern Investments Incorporated
("FNII"), Keystone Financial Services, Incorporated ("Keystone") and First
Northern Financial Services, Incorporated. All significant intercompany
balances and transactions have been eliminated according to generally
accepted accounting principles. The Savings Bank's ownership of Savings
Financial Corporation ("SFC"), a 50% owned subsidiary, is accounted for by
the equity method.
2. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information, Rule 10-01 of Regulation S-X and the instructions to
Form 10-Q. The financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial information. In the opinion of First Northern, the
accompanying Unaudited Consolidated Statements of Financial Condition,
Unaudited Consolidated Statements of Income, Unaudited Consolidated
Statement of Stockholders' Equity and Unaudited Consolidated Statements of
Cash Flows contain all adjustments, which are of a normal recurring nature,
necessary to present fairly the consolidated financial position of the
Company and subsidiaries at March 31, 2000 and December 31, 1999, the
results of their income for the three months ended March 31, 2000 and 1999,
the changes in stockholders' equity for the three months ended March 31,
2000 and 1999, and their cash flows for the three months ended March 31,
2000 and 1999. The accompanying Unaudited Consolidated Financial Statements
and related notes should be read in conjunction with First Northern's 1999
Annual Report on Form 10-K. Operating results for the three months ended
March 31, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
FN-75
<PAGE> 259
3. Securities Available-for-Sale The amortized cost and estimated fair values
of securities available-for-sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
At March 31, 2000:
U.S. government and agency securities $ 7,401 $ 1 $(118) $ 7,284
Asset Management Funds 571 (19) 552
Federal Home Loan Mortgage
Corporation stock 33 1,028 1,061
Northwest Equities Corporation stock 111 10 - 121
------- ------ ------ -------
8,116 1,039 (137) 9,018
------- ------ ------ -------
Mortgage-related securities
Federal Home Loan Mortgage Corporation 1,879 97 1,782
Federal National Mortgage Association 1,766 1,766
Government National Mortgage Association 1,938 111 1,827
------- ------ ------ ------
5,583 - 208 5,375
------- ------ ------ -------
$13,699 $1,039 $(345) $14,393
======= ====== ====== =======
At December 31, 1999:
U.S. government and agency securities $ 6,737 $ 6 $ (86) $ 6,657
Asset Management Funds 563 (17) 546
Federal Home Loan Mortgage
Corporation stock 33 1,097 1,130
Northwest Equities Corporation stock 111 - - 111
------- ------ ------ -------
7,444 1,103 (103) 8,444
------- ------ ------ -------
Mortgage-related securities
Federal Home Loan Mortgage Corporation 1,938 (92) 1,846
Federal National Mortgage Association 1,862 1,862
Government National Mortgage Association 1,955 - (109) 1,846
------- ------ ------ -------
5,755 - (201) 5,554
------- ------ ------ -------
$13,199 $1,103 $(304) $13,998
======= ====== ====== =======
</TABLE>
At March 31, 2000, the U.S. government and agency securities available-for-sale
have the following maturities:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
(In Thousands)
<S> <C> <C>
Due in one year or less $2,249 $2,249
Due after one year through 5 years 5,152 5,035
------ ------
$7,401 $7,284
====== ======
</TABLE>
FN-76
<PAGE> 260
Expected maturities from mortgage-related securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties
4. Securities Held-to-Maturity
The amortized cost and estimated fair values of mortgage-related securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
At March 31, 2000:
Investment Securities:
U.S. government and agency securities $25,231 $(484) $24,747
Corporate Bonds 1,000 - - 1,000
------- --- ----- -------
Total investment securities 26,231 - (484) 25,747
------- --- ----- -------
Mortgage-related securities:
Federal Home Loan
Mortgage Corporation 6,782 $12 (64) 6,730
Federal National
Mortgage Association 3,528 - (24) 3,504
------- --- ----- -------
Total mortgage-related securities 10,310 12 (88) 10,234
------- --- ----- -------
Total investment securities and
mortgage-related securities $36,541 $12 $(572) $35,981
======= === ===== =======
At December 31, 1999:
Investment Securities:
U.S. government and agency securities $25,216 $(571) $24,645
Corporate bond 999 - - 999
------- --- ----- -------
Total investment securities 26,215 - (571) 25,644
------- --- ----- -------
Mortgage-related securities
Federal Home Loan
Mortgage Corporation 6,192 $15 (60) 6,147
Federal National
Mortgage Association 3,856 1 (28) 3,829
------- --- ----- -------
Total mortgage-related securities 10,048 16 (88) 9,976
------- --- ----- -------
Total investment securities and
mortgage-related securities $36,263 $16 $(659) $35,620
======= === ===== =======
</TABLE>
FN-77
<PAGE> 261
At March 31, 2000, the investment securities have the following maturities:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
(In Thousands)
<S> <C> <C>
Due in one year or less $ 5,245 $ 5,222
Due after one year through 5 years 18,392 17,986
Due after 5 years through 10 years 2,594 2,539
-------- --------
$ 26,231 $ 25,747
======== ========
</TABLE>
5. Loans Receivable The composition of loans follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
First mortgage loans:
One to four family residential $478,359 $465,737
Five or more family residential 37,361 35,815
Commercial real estate 19,717 17,699
Construction-residential 30,454 29,758
Construction-commercial 6,473 6,910
Other 4,169 3,769
-------- --------
576,533 559,688
Consumer loans:
Consumer 20,693 20,153
Second mortgage 82,132 78,223
Automobile 98,973 96,356
-------- --------
201,798 194,732
Commercial loans 9,724 4,771
-------- --------
788,055 759,191
Less:
Undisbursed loan proceeds 16,961 17,852
Allowance for losses 4,062 3,910
Unearned loan fees 478 549
-------- --------
21,501 22,311
-------- --------
$766,554 $736,880
======== ========
</TABLE>
FN-78
<PAGE> 262
6. The weighted average number of shares outstanding, including common stock
equivalents, for the three months ended March 31, 2000 and 1999 were
8,714,677 and 8,986,029, respectively.
7. Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentations.
8. On February 21, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Mutual Savings Bank ("Mutual"), a
Wisconsin-chartered mutual savings bank and OV Corp. (the "Merger Corp."),
a wholly owned subsidiary of Mutual organized for the purpose of effecting
the transactions contemplated by the Merger Agreement. The Merger Corp.
will be the surviving corporation. The Merger Agreement provides for the
acquisition of the Company by Mutual through a merger of the Company with
and into the Merger Corp.
Subject to the terms and conditions of the Merger Agreement, at the time of
the merger, each outstanding share of the Company's common stock will be
converted into the right to receive cash in the amount of $15.00 or 1.5
shares of common stock of the Merger Corp. or a combination of cash and
shares of the Merger Corp.
In connection with the Merger, the Company and Mutual will engage in a
restructuring. As part of the restructuring, Mutual will form a mutual
holding company. The mutual holding company will own a majority of the
Merger Corp.'s common stock. The balance of the shares of the Merger Corp.
will be offered for sale to Mutual's depositors and issued to First
Northern stockholders in the Merger. As a result of the restructuring, the
Savings Bank and Mutual will become wholly owned subsidiaries of the Merger
Corp.
The Merger and subsequent restructuring are subject to approval by the
stockholders of the Company, depositors of Mutual, and various regulatory
agencies.
Concurrent with the execution of the Merger Agreement, the parties entered
into a Stock Option Agreement by which the Company granted Mutual an
irrevocable option to purchase up to 1,708,675 share of the Company's stock
equal to 19.9% of the number of shares of the Company's stock outstanding
on February 21, 2000, at an exercise price of $9.0375 per share. The option
would become exercisable under certain circumstances if the Company becomes
the subject of a third party proposal for a competing transaction.
FN-79
<PAGE> 263
FIRST NORTHERN MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY FACTORS
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Company from time to time in
other reports and documents as well as oral presentations. When used in written
documents or oral statements, the words "anticipate," "believe," "estimate,"
"expect," "objective" and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Company's control, that could cause the Company's
actual results and performance to differ materially from what is expected. In
addition to the assumptions and other factors referenced specifically in
connection with such statements, the following factors could impact the business
and financial prospects of the Company: general economic conditions; legislative
and regulatory initiatives; monetary and fiscal policies of the federal
government; deposit flows; disintermediation; the cost of funds; general market
rates of interest; interest rates or investment returns on competing
investments; demand for loan products; demand for financial services; changes in
accounting policies or guidelines; changes in the quality or composition of the
Savings Bank's and FNII's loan and investment portfolios; the status of our
proposed merger with Mutual Savings Bank; and other factors referred to in the
reports filed with the Securities and Exchange Commission.
RECENT DEVELOPMENTS
MERGER AGREEMENT WITH MUTUAL SAVINGS BANK. On February 22, 2000, First Northern,
and Mutual Savings Bank, a Wisconsin-chartered mutual savings bank ("Mutual"),
announced that they had entered into an Agreement and Plan of Merger, dated as
of February 21, 2000 ( the "Merger Agreement"), by and among Mutual, First
Northern and OV Corp., a Wisconsin corporation organized as a wholly owned
subsidiary of Mutual for the purpose of effecting the transactions contemplated
by the Merger Agreement ("Merger Corp."). The Merger Agreement provides for the
acquisition of First Northern by Mutual through a merger of First Northern with
and into Merger Corp. (the "Merger"), which will be the surviving corporation
("Survivor"). The Merger Agreement has been approved by the boards of directors
of Mutual and First Northern.
Subject to the terms and conditions of the Merger Agreement, at the time of the
Merger, each outstanding share of First Northern common stock, par value $1.00
per share ("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 share, of Survivor ("Survivor Common Stock"), or a combination of cash
and shares of Survivor Common Stock (the "Merger Consideration"). Prior to the
closing date, Mutual will select the percentage of the total Merger
Consideration to be paid in the Survivor Common Stock, which may not be less
than 40% or more than 70%; the balance will be paid in cash. Each First Northern
stockholder will be entitled to elect to receive (a) cash, (b) Survivor Common
Stock or (c) as to First Northern stockholders holding not less than 170 shares
of First Northern Common Stock, a combination of cash and Survivor Common Stock,
with the percentage of such shares of their First Northern Common Stock equal to
the lesser of
FN-80
<PAGE> 264
the Stock Percentage and 50% converted into Survivor Common Stock and the
balance converted into cash. Elections will be subject to proration if the cash
or stock elections exceed the maximum amounts permitted under the Merger
Agreement. Cash will be paid in lieu of any fractional shares of the Survivor
Common Stock which holders of First Northern Common Stock would otherwise
receive.
In connection with the Merger, Mutual and First Northern will engage in a
restructuring involving a number of steps (the "Restructuring"). As a part of
the Restructuring, Mutual will form a mutual holding company in which Mutual's
depositors will hold all the voting rights. The mutual holding company will own
a majority of the Survivor Common Stock; the balance of the shares of Survivor
Common Stock will be offered for sale to Mutual's depositors and issued to First
Northern stockholders in the Merger. As a result of the Restructuring, Mutual
Savings Bank and the Savings Bank will become wholly owned subsidiaries of
Survivor. Thus, Survivor will be a subsidiary mid-tier stock holding company.
Consummation of the Merger is subject to the satisfaction of certain closing
conditions set forth in the Merger Agreement, including approval by the
stockholders of First Northern and approval by the OTS, the FDIC and the
WDFI--Administrator. The depositors of Mutual must also approve Mutual's plan
for the 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 Survivor 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 by Survivor with the
Securities and Exchange Commission.
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 at
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.
FINANCIAL CONDITION
BALANCE SHEET
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $7.7 million at
March 31, 2000, as compared to December 31, 1999, primarily because the Savings
Bank maintained additional cash at December 31, 1999, as a precaution against
possible events associated with Year 2000 concerns. Shortly after December 31,
1999, the cash was redeployed by paying down short-term borrowings.
SECURITIES AVAILABLE-FOR-SALE. Investment securities available-for-sale
increased $0.6 million as of March 31, 2000, as compared to December 31, 1999,
primarily as a result of the reinvestment
FN-81
<PAGE> 265
of maturing securities and the interest earnings on securities being reinvested,
partially offset by decreased market value. (See Notes to Unaudited Consolidated
Financial Statements--3. Securities Available-for-Sale)
Mortgage-related securities available-for-sale decreased $0.2 million at March
31, 2000, as compared to December 31, 1999, as a result of prepayments and
repayments of the underlying security.
SECURITIES HELD-TO-MATURITY. Investment securities held-to-maturity were almost
unchanged from March 31, 2000 as compared to December 31, 1999.
Mortgage-related securities held-to-maturity increased $0.3 million as a result
of the purchase of additional mortgage-related securities.
LOANS HELD FOR SALE. At March 31, 2000, First Northern had $2.3 million of fixed
interest rate mortgage and education loans classified as held for sale as
compared to $1.1 million at December 31, 1999. The increase in loans held for
sale is primarily the result of education loans originated during the first
quarter of 2000, all of which are contractually assigned to be sold.
FN-82
<PAGE> 266
LOANS RECEIVABLE. Loans receivable increased $29.7 million at March 31, 2000, as
compared to December 31, 1999, as a result of: (i) mortgage loan originations
and purchases; (ii) reduced prepayments or refinancing of mortgage loans; (iii)
increased automobile and second mortgage loan originations; and (iv) the
initiation of a commercial lending program in the second quarter of 1999. Loan
originations and purchases are as follows:
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Mortgage loans originated and purchased:
Construction $15,313 $ 8,821
Loans on existing property 17,247 8,707
Refinancing 5,186 29,202
Other loans 573 241
------- -------
Total mortgage loans originated
and purchased 38,319 46,971
Consumer loans originated and purchased:
Consumer 2,411 1,753
Second mortgage 10,986 9,129
Automobile 15,274 11,857
Education 1,178 950
------- -------
Total consumer loans originated 29,849 23,689
and purchased
Commercial loans 5,308
-
------- -------
Total loans originated and purchased $73,476 $70,660
======= =======
</TABLE>
Mortgage loan originations and purchases decreased $7.7 million for the first
quarter of 2000, as compared to the same period in 1999, primarily as the result
of decreased refinancing of existing First Northern mortgage loans. Construction
and purchase mortgage loan originations increased in the first quarter of 2000
primarily as a result of increased construction and purchase activity within
First Northern's market. Although total mortgage loan originations decreased for
the first quarter of 2000, the mortgage loan portfolio outstanding increased
$16.8 million (before deductions for undisbursed loan proceeds, allowance for
loan losses and unearned loan fees) for the first quarter of 2000. The increased
mortgage loan portfolio was primarily the result of: (i) increased adjustable
interest rate mortgage loan originations; (ii) reduced prepayments of principal
on outstanding loans; and (iii) reduced refinancing of existing mortgage loans,
all of which, we believe, is attributable to the increase in interest rates on
fixed interest rate mortgage loans.
FN-83
<PAGE> 267
First Northern added commercial banking services to its existing product lines
in the second quarter of 1999. To manage the commercial banking department,
First Northern hired a commercial loan manager with 20 years of commercial
banking experience. At March 31, 2000, First Northern's commercial loan
portfolio outstanding was at $9.7 million and management anticipates that this
segment of its loan portfolio will continue to increase. Management believes
commercial banking will enable First Northern to enhance its interest earning
assets and its interest rate spread management.
Consumer loan originations and purchases increased $6.2 million in the first
quarter of 2000 as compared to the same period in 1999, primarily as the result
of the increase in second mortgage loan originations and indirect automobile
originations from SFC. Second mortgage originations have increased as a result
of: (i) management's emphasis; (ii) increased marketing; and (iii) the use of an
introductory interest rate for a line-of-credit product secured by a second
mortgage. SFC increased its automobile originations by continued personalized
service and competitive interest rates.
<TABLE>
<CAPTION>
LOAN SALES
THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Mortgage Loans $303 $9,639
Education Loans 166 1
---- ------
Total Loans Sold $469 $9,640
==== ======
</TABLE>
Loans sold in the first quarter of 2000, as compared to the first quarter of
1999, decreased as a result of the reduction in 30 year fixed interest rate
mortgage loan originations. First Northern retains all adjustable interest rate
mortgage loan originations in its portfolio; retains the majority of 15 and 20
year fixed interest rate mortgage loans; and sells most 30 year fixed interest
rate mortgage loans in the secondary market. First Northern is contractually
committed to sell its current education loan portfolio as well as, future
originations.
OFFICE PROPERTIES AND EQUIPMENT. First Northern entered into an operating lease
for approximately 14,000 square feet of office space in the third quarter of
1999. This office space centralized the loan servicing, origination processing,
information systems, marketing and customer support services departments of the
Savings Bank. The additional leased space is needed to accommodate growth in
these areas. Total annual cost of this office space and its associated equipment
is approximately $152,000 (after-tax).
FN-84
<PAGE> 268
FEDERAL HOME LOAN BANK STOCK. Stock in the Federal Home Loan Bank ("FHLB")
increased $1.5 million to $10.8 million at March 31, 2000, as compared to $9.3
million at December 31, 1999. This increase in FHLB stock is the result of
increased borrowings outstanding from the FHLB of Chicago. The FHLB requires
member institutions to purchase one share of FHLB stock for every $20,000 of
FHLB borrowings. The FHLB borrowings are secured by First Northern's 1-4 family
residential mortgage loans.
LIFE INSURANCE POLICIES. Life insurance policies or bank owned life insurance
("BOLI") increased $0.3 million in the first three months of 2000 as a result of
the increased value of the policies. BOLI is long-term life insurance on the
lives of certain current and past Savings Bank employees where the insurance
policy benefits and ownership are retained by the Savings Bank. The cash value
accumulation on BOLI is permanently tax deferred if the policy is held to the
participant's death. Management believes this an effective method to help offset
a portion of future employee benefit costs.
DEPOSITS. Deposits increased $0.8 million for the first three months of 2000 as
a result of offering competitive interest rates and the acquisition of "jumbo"
(certificates of deposit in excess of $100,000) deposits. Jumbo deposits consist
of wholesale, negotiated retail and municipal deposits which at times, are a
cheaper source of funds than retail deposits or borrowing. First Northern's
total jumbo deposits were $55.5 million at March 31, 2000.
BORROWINGS. FHLB borrowings increased $25.6 million in the first three months of
2000, primarily to fund purchases of investment securities and the growth of the
loan portfolio. First Northern will borrow monies if borrowing is a less costly
form of funding for loans and investments than the cost of acquiring deposits.
First Northern anticipates that it will continue to utilize borrowings in 2000
if borrowings incrementally add to the overall profitability of the Company.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments by
borrowers for taxes and insurance ("escrow") decreased $0.4 million at March 31,
2000, as compared to December 31, 1999. The decrease in escrow dollars was the
result of year-end disbursement of real estate taxes from escrow accounts.
STOCKHOLDERS' EQUITY. First Northern paid a cash dividend of $0.11 per share on
February 9, 2000, to stockholders of record on January 31, 2000. The increase of
$0.01 per share represents an 10.0% increase over the fourth quarter of 1999
cash dividend of $0.10 per share.
On March 20, 2000, First Northern approved a fourth stock repurchase program to
repurchase up to 429,315 shares (5% of total shares then outstanding) in the
open market. At March 31, 2000, 18,500 shares had been purchased or committed to
be purchased at an average price of $12.4375 per share.
FN-85
<PAGE> 269
ASSET QUALITY
First Northern currently classifies any loan on which a payment is greater than
90 days past due as non-performing. The following table summarizes
non-performing loans and assets:
<TABLE>
<CAPTION>
NON-PERFORMING LOANS AND ASSETS
AT MARCH 31 AT DECEMBER 31
2000 1999
---- ----
(Dollars in Thousands)
<S> <C> <C>
Non-accrual mortgage loans $186 $243
Non-accrual consumer loans 47 40
---- ----
Total non-performing loans 233 283
Properties subject to foreclosure 339 318
Foreclosed properties and
repossessed assets 93 63
---- ----
Total non-performing assets $665 $664
==== ====
Non-performing loans as a percent
of total loans 0.03% 0.04%
==== ====
Non-performing assets as a percent
of total assets 0.08% 0.08%
==== ====
</TABLE>
Total non-performing loans decreased as of March 31, 2000, as compared to
December 31, 1999, primarily as a result of a decrease in non-performing
mortgage loans. Management believes non-performing loans and assets, expressed
as a percentage of total loans and assets, are far below state and national
averages for financial institutions. There are no material accruing loans which,
at March 31, 2000, management has reason to believe will become non-performing
or result in potential losses.
In addition, management believes that First Northern's allowance for loan losses
are adequate. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowances may be necessary
based on changes in economic conditions. Furthermore, various regulatory
agencies, as an integral part of their examination process, periodically review
First Northern's allowances for losses on loans and real estate owned. Such
agencies may require First Northern to recognize additions to the allowances
based on the agencies' judgement of information available to them at the time of
their examination.
All of First Northern's loans are domestic, meaning the loans are secured by
real estate or other collateral located in the continental United States.
FN-86
<PAGE> 270
A summary of the allowance for losses is shown below.
<TABLE>
<CAPTION>
LOAN LOSS ALLOWANCE
AT AND FOR THE AT AND FOR THE
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage Loans:
Balance at the beginning of the period $2,108 $1,813
Provisions for the period 150 295
Charge-offs:
One-to-four family residential -- --
Recoveries:
One to four family residential 3 -
------ ------
Net recoveries 3 -
------ ------
Balance at the end of the period 2,261 2,108
Consumer Loans:
Balance at the beginning of the period 1,678 1,718
Provisions for the period 15 53
Charge-offs:
Consumer (14) (79)
Automobile (7) (43)
------ ------
Total charge-offs (21) (122)
Recoveries:
Consumer 3 9
Automobile 2 20
------ ------
Total recoveries 5 29
------ ------
Net charge-offs (16) (93)
------ ------
Balance at the end of the period 1,677 1,678
------ ------
Commercial Loans
Balance at the beginning of the period 124
Provisions for the period - 124
------ ------
Balance at the end of the period 124 124
------ ------
Total loan loss allowances at the end of the period $4,062 $3,910
====== ======
Allowance as a percent of total loans 0.53% 0.53%
====== ======
Allowance as a percent of non-performing loans 1,743.35% 1,381.63%
======== ========
Allowance as a percent of total assets 0.47% 0.47%
====== ======
Allowance as a percent of non-performing assets 610.83% 588.86%
====== ======
</TABLE>
FN-87
<PAGE> 271
RESULTS OF OPERATIONS
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets, the resultant yields,
and the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates. No tax equivalent adjustments were made since First
Northern's investment portfolio does not contain tax-exempt securities. Average
balances are derived from average daily balances. The yields and rates are
established by dividing income or expense dollars by the average balance of the
asset or liability. The yields and rates for the three months ended March 31,
2000 and 1999, have been annualized.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
2000 1999
---------------------------------------------------------------------
INTEREST INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans $547,607 $9,652 7.05% $482,918 $ 8,557 7.09%
Consumer loans 199,453 3,859 7.74% 159,373 3,177 7.97%
Commercial loans 6,198 134 8.65% - - -
Investment securities (2) 43,607 678 6.22% 36,828 545 5.92%
Interest-earning deposits 1,755 19 4.33% 1,677 18 4.29%
Mortgage-related securities (2) 16,113 254 6.31% 12,287 185 6.02%
-------- ------ ---- -------- ------- ----
TOTAL 814,733 14,596 7.17%. 693,083 12,482 7.20%
Interest-bearing liabilities:
Passbook accounts 69,448 331 1.91% 66,110 327 1.98%
NOW and variable rate insured
money market accounts 134,440 859 2.56% 127,945 739 2.31%
Time deposits 355,446 4,969 5.59% 342,364 4,664 5.45%
Advance payments by borrowers
for taxes and insurance 2,208 12 2.17% 1,862 12 2.58%
Borrowings 202,680 2,981 5.88% 101,626 1,398 5.50%
-------- ------ ---- -------- ------- ----
TOTAL 764,222 9,152 4.79% 639,907 7,140 4.46%
-------- ------ ---- -------- ------- ----
Net interest-earning assets balance
and interest rate spread $ 50,511 2.38% $ 53,176 2.74%
======== ==== ======== ====
Average interest-earning assets, net
interest income and net yield on
average interest-earning assets $814,733 $5,444 2.67% $693,083 $ 5,342 3.08%
======== ====== ==== ======== ======= ====
Average interest-earning assets to
interest-bearing liabilities 106.6% 108.3%
===== =====
</TABLE>
- - ----------------------------
(1) For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-sale investment
securities and mortgage-related securities are presented and yields
calculated based upon the historical cost basis.
FN-88
<PAGE> 272
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999
---------------------------------------------------------
INTEREST
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans $500,111 $35,164 7.03%
Consumer loans 175,577 13,816 7.87%
Commercial loans 5,454 468 8.58%
Investment securities (2) 38,789 2,336 6.02%
Interest-earning deposits 1,702 82 4.82%
Mortgage-related securities (2) 14,765 904 6.12%
-------- ------- ----
TOTAL 736,398 52,770 7.17%
Interest-bearing liabilities:
Passbook accounts 70,425 1,385 1.97%
NOW and variable rate insured
money market accounts 132,629 3,085 2.33%
Time deposits 350,423 19,090 5.45%
Advance payments by borrowers
for taxes and insurance 7,002 162 2.31%
Borrowings 124,186 6,964 5.61%
-------- ------- ----
TOTAL 684,665 30,686 4.48%
-------- ------- ----
Net interest-earning assets balance
and interest rate spread $ 51,733 2.69%
======== ====
Average interest-earning assets, net
interest income and net yield on
average interest-earning assets $736,398 $22,084 3.00%
======== ======= ====
Average interest-earning assets to
interest-bearing liabilities 107.6%
=====
</TABLE>
- - ----------------------------
(1) For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding.
(2) For the purpose of these computations, the available-for-sale investment
securities and mortgage-related securities are presented and yields
calculated based upon the historical cost basis.
FN-89
<PAGE> 273
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The interaction of changes in volume and rates earned or paid with regard to
interest-earning assets and interest-bearing liabilities has a significant
impact on net income between periods. The volume of interest-earning dollars in
loans and investments compared to the volume of interest-bearing dollars in
deposits and borrowings combined with the interest rate spread produces the
changes in net interest income between periods.
The following table sets forth the relative contribution of changes in volume
and effective interest rates on changes in net interest income for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTH ENDED MARCH 31
--------------------------
2000 VS 1999
------------
INCREASE (DECREASE) DUE TO:
---------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ (48) $1,149 $ (6) $1,095
Consumer loans (92) 797 (23) 682
Commercial loans - - 134 134
Investments securities 28 100 5 133
Interest-earning deposits - 1 - 1
Mortgage-related securities 9 57 3 69
----- ------ ---- ------
TOTAL $(103) $2,104 $113 2,114
===== ====== ==== ======
Interest-bearing liabilities:
Passbook accounts $ (12) $ 17 $ (1) 4
NOW and variable rate
insured money market accounts 80 36 4 120
Time deposits 120 180 5 305
Advance payments by borrowers
for taxes and insurance (2) 2 - -
Borrowings 98 1,389 96 1,583
----- ------ ---- ------
TOTAL $ 284 $1,624 $104 2,012
===== ====== ==== ======
Net change in net interest income $ 102
======
</TABLE>
FN-90
<PAGE> 274
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 VS 1998
------------
INCREASE (DECREASE) DUE TO:
---------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $(1,371) $3,154 $(129) $1,654
Consumer loans (627) 1,228 (58) 543
Commercial loans - - 468 468
Investments securities (42) 245 (5) 198
Interest-earning deposits (20) (52) 7 (65)
Mortgage-related securities (10) 297 (5) 282
------- ------ ----- ------
TOTAL $(2,070) $4,872 $ 278 3,080
======= ====== ===== ======
Interest-bearing liabilities:
Passbook accounts $ (108) $ 141 $ (12) 21
NOW and variable rate
insured money market accounts (177) 357 (22) 158
Time deposits (1,114) 1,302 (77) 111
Advance payments by borrowers
for taxes and insurance (1) 8 - 7
Borrowings (201) 1,646 (59) 1,386
------- ------ ----- ------
TOTAL $(1,601) $3,454 $(170) 1,683
======= ====== ===== ======
Net change in net interest income $1,397
======
</TABLE>
STATEMENTS OF INCOME
GENERAL. Net income decreased 7.5% for the first quarter of 2000 as compared to
the first quarter of 1999. This decrease was primarily the result of a reduction
of the net interest margin and increased operating expenses.
INTEREST AND DIVIDEND INCOME. Interest income on loans increased $1,911,000 in
the first quarter of 2000 as a result of the increased dollar amount of
mortgage, consumer and commercial loans outstanding. The average mortgage loans
outstanding increased $64.7 million or 13.4% in the first quarter of 2000 as
compared to the same period in 1999 and average consumer loans outstanding
increased $40.1 million. Commercial loans, which were introduced to First
Northern customers in the second quarter of 1999, had a balance outstanding at
March 31, 2000 of $9.7 million. The yield on the mortgage loan portfolio
decreased in the first quarter of 2000 as compared to the first quarter of 1999
as a result of interest rates on mortgage loan originations during the first
nine months of 1999 being less than the yield on the existing portfolio. Since
September of 1999, the interest rates on mortgage loan originations have
exceeded the yield on the existing mortgage portfolio. See Financial Condition -
Balance Sheet - Loans Receivable. Consumer loan yields also decreased during the
first quarter of 2000 as compared to the same
FN-91
<PAGE> 275
period in 1999 as a result of interest rates on originations and purchases being
below the portfolio average yield.
Interest income on investment securities increased $133,000 for the three months
ended March 31, 2000, as a result of an increase in the dollar amount of
investment securities outstanding and an increase in the yield earned on
investment securities.
Interest income on interest-earning deposits increased slightly primarily as a
result of additional interest-earning deposits outstanding.
Interest income on mortgage-related securities increased $69,000 as a result of
the increased average mortgage-related securities outstanding and the increase
in the average interest rate earned.
INTEREST EXPENSE. Interest expense on deposits increased $429,000 primarily as
the result of increased cost of deposits and increased deposits outstanding. The
average cost of deposits increased as a result of rising general market
interests and competition's deposit interest rates offered. Since June 1999, the
Federal Open Market Committee ("FOMC") has increased interest rates five times
for a total of 1.25%. The rise in FOMC interest rates raises the interest rate
expectations of consumers and hence the need to increase interest rates on new
or renewing deposits.
First Northern has utilized various time deposit terms and "special" interest
rates on various time deposit terms to attract new deposits. In addition, the
Savings Bank has acquired jumbo deposits to aid in its deposit growth.
See Financial Condition - Balance Sheet - Deposits.
Interest expense on borrowings increased $1,583,000 in the first quarter of 2000
as compared to the first quarter of 1999 as a result of increased dollars
outstanding and increased average interest paid on those borrowings. First
Northern's growth in interest earning assets outpaced the growth in deposits
thereby necessitating an increase in borrowings. First Northern anticipates it
will continue to emphasize growth in interest earning assets and will fund a
portion of that growth with borrowings. First Northern primarily borrows from
the Federal Home Loan Bank of Chicago and staggers the borrowing maturities from
overnight to 9 years in term.
PROVISION FOR LOAN LOSSES. First Northern increased its general loan loss
allowance in the first quarter of 2000 as a result of the growth in the loan
portfolio and the type of loans originated. The loan loss allowance as of March
31, 2000, was $4,062,000 or .53% of total loans and 610.8% of non-performing
assets.
Management believes that the current loan loss allowance is adequate; however,
the adequacy of the loan loss allowance is reviewed as historical loan loss
changes, changes in the size and composition of the loan portfolio, changes in
the general economy and as may otherwise be deemed necessary.
NON-INTEREST INCOME. Fees on serviced loans increased $19,000 in the first
quarter of 2000 as a result of decreased repayments or prepayments on loans sold
(with servicing retained). As the principal of a mortgage loan which was sold,
repays or prepays, the mortgage servicing asset is reduced and netted from fees
on serviced loans, thereby reducing the income on the serviced loans. When the
repayments or prepayments decrease, such as in the first quarter of 2000, the
FN-92
<PAGE> 276
amortization from the mortgage servicing assets also decreases and hence, the
income on serviced loans increases. First Northern's mortgage loan servicing
asset at March 31, 2000 was $562,700.
Loan fees and service charges increased slightly primarily as the result of late
charges collected on loans and fees collected from the Savings Bank's
line-of-credit home equity loans.
Income from deposit account service charges increased $74,000 as a result of
debit card fee income and fees from customers who overdraw their checking
account. Each time First Northern's debit card is used, a fee which varies with
each merchant, is paid to the Savings Bank by the debit card company. The
Savings Bank promotes the use of its debit card by direct mail.
Insurance commissions increased $51,000 as a result of First Northern receiving
an insurance bonus. If First Northern obtains a predetermined threshold of
insurance sales and insurance losses are below another threshold, insurance
bonuses are earned. First Northern received $49,000 in insurance bonuses in the
first quarter of 2000.
Gains on the sale of loans decreased $157,000 as a result of decreased loan
sales. First Northern sold $469,000 of loans in the first quarter of 2000 as
compared to $9,640,000 in the first quarter of 1999. Loan sales decreased
substantially in the first quarter of 2000 as a result of decreased thirty year
fixed interest rate mortgage loan originations, which are sold to the secondary
market.
Other income increased $96,000 for the three months ended March 31, 2000, as
compared to the same period last year as a result of: (i) ATM surcharges; (ii)
interest income on Bank Owned Life Insurance; and (iii) interest from officers'
life insurance.
NON-INTEREST EXPENSE. Compensation expense increased $259,000 as a result of
increased: (i) number of employees; (ii) compensation to existing employees;
(iii) education and training costs; (iv) reduced expense deferrals associated
with loan originations; and (v) 2000 being a leap year which added one
additional day of compensation for hourly paid employees.
Federal insurance premiums decreased $51,000 as a result of a decrease in
federal deposit premiums charged First Northern and other Savings Association
Insurance Fund ("SAIF") insured institutions. Beginning in the year 2000, the
Financing Income Corporation Obligations ("FICO") bonds interest cost was spread
out to all insured financial institutions rather than just the SAIF insured
institutions.
Occupancy expense increased 24.5% in the first quarter of 2000 as a result of
the Savings Bank's rental of approximately 14,000 square feet of office space in
downtown Green Bay. This rental space consolidated various operational
departments in one location that were in three separate Savings Bank offices.
Data processing expense increased $12,000 in the three months ended March 31,
2000, as a result of an increase in service bureau expense and service contracts
on data processing equipment. Service bureau expense increased as a result of
increased contract cost, additional transactions processed and additional
products offered.
FN-93
<PAGE> 277
Furniture and equipment expense increased $9,000 in the first quarter of 2000 as
a result of increased cost of service contracts on equipment and increased
depreciation on furniture and equipment at the remodeled Kiel Office.
Marketing expense decreased $10,000 in the first quarter of 2000 primarily as a
result of timing of the marketing expense. It is anticipated marketing expenses
will increase in the second quarter of 2000 as compared to the first quarter of
2000.
Other expenses increased $73,000 in the three months ended March 31, 2000, as a
result of: (i) debit card expenses; (ii) costs associated with the operation of
SFC and (iii) employees expense.
INCOME TAXES. The effective income tax rate for the first quarter of 2000 was
32.4% as compared to 34.0% for the first quarter of 1999. The decrease in the
effective income tax rate was the result of the purchase of BOLI and an increase
in the earnings of FNII, which is not subject to state income taxes. Since First
Northern intends to hold the life insurance policies until the participants'
death, BOLI interest income is not taxable. In addition, First Northern moved
its indirect automobile loan portfolio to FNII at the beginning of the second
quarter of 1999, which has reduced state income taxes. In March 1999, First
Northern moved approximately $56.3 million in mortgage loan participations to
FNII and further reduced its state income tax.
LEGISLATION. The Gramm-Leach-Bliley Act ("Act") passed by Congress could
significantly alter the environment in which First Northern and the Savings Bank
operate. This Act tore down the former artificial statutory barriers between
financial institutions, insurance companies, and investment firms and may lead
to increased competition among such entities. In addition, the Act will prevent
the sale of unitary thrift holding companies, such as First Northern, to
commercial companies. Finally, the Act placed additional obligations on First
Northern and the Savings Bank in the areas of customer privacy, CRA-related
agreements, and the operation of ATMs.
FN-94
<PAGE> 278
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Historically, federal regulations have required the Savings Bank to maintain a
minimum percentage of liquid assets to net withdrawable accounts plus short-term
borrowings. The required percentage (liquidity ratio) has varied from time to
time based upon economic conditions and deposit flows. The liquidity ratio is
set by the Office of Thrift Supervision ("OTS") and it is currently 4% of
average of net withdrawable accounts plus short-term borrowings payable on
demand or in one year or less during the current calendar quarter. In general,
liquid assets, for the purposes of calculating the liquidity ratio, include
cash, certain time deposits, and U.S. government and agency obligations. The
Savings Bank has historically maintained a liquidity ratio that exceeds the OTS
requirement. The Savings Bank's quarterly average liquidity ratio at March 31,
2000, was 5.20%. At December 31, 1999, its monthly average liquidity ratio was
5.45%. The slight decrease in the liquidity ratio at March 31, 2000, is mainly
attributable to the growth in the loan portfolio. The Savings Bank believes that
its maintenance of excess liquidity, above the 4% federally required liquidity
ratio, is an appropriate strategy to aid in proper asset/liability management.
Liquidity management is both a daily and long-term responsibility of management.
The Savings Bank adjusts its investments in liquid assets based upon
management's assessment of: (i) expected loan demand; (ii) expected deposit
flows; (iii) yields available on interest-earning deposits; and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-earning overnight deposits and other short-term
government and agency obligations. When the Savings Bank requires funds beyond
its ability to generate them internally, it can borrow funds from the FHLB of
Chicago or other sources. The FHLB of Chicago limits advances to member
institutions to an aggregate amount not to exceed 35% of the member
institution's total assets. Wisconsin law permits First Northern, without the
prior written approval of the Wisconsin Department of Financial Institutions ---
Division of Savings Institutions, to borrow an aggregate amount not to exceed
50% of its total assets.
CAPITAL RESOURCES AND REGULATORY INFORMATION
First Northern's net worth to total assets ratio at March 31, 2000, for State of
Wisconsin regulatory requirements was 8.6%, or 2.6% over the Wisconsin minimum
legal requirement of 6.00% of total assets established by the Division of
Savings Institutions of the Department of Financial Institutions, which
regulates First Northern.
As of March 31, 2000, the most recent notification from the OTS categorized the
Savings Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Savings Bank must
maintain minimum tangible, core and risk based ratios as set forth in the
following table. As a state-chartered savings institution, the Savings Bank is
also subject to a minimum capital requirement of the State of Wisconsin.
Management believes that, at March 31, 2000, the Savings Bank exceeded all
capital adequacy requirements to which it is subject. There are no conditions or
events since that notification that management believes have changed the Savings
Bank's categorization as well capitalized.
FN-95
<PAGE> 279
The Savings Bank's required and actual capital amounts and ratios are presented
in the following table.
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Risk-based capital $73,904 12.90% >=$45,746 >=8.00% >=$57,183 >=10.00%
(to risk-weighted assets)
Tier 1 (core) capital $69,842 12.20% >=$22,873 >=4.00% >=$34,310 >=6.00%
(to risk-weighted assets)
Tier 1 (core) capital $69,842 8.10% >=$34,599 >=4.00% >=$43,248 >=5.00%
(to adjusted assets)
Tangible equity $69,842 8.10% >=$34,599 >=4.00% >=$43,248 >=5.00%
(to tangible assets)
State of Wisconsin capital $74,792 8.60% >=$51,976 >=6.00% N/A N/A
(to total assets)
As of December 31, 1999:
Risk-based capital $76,326 14.00% >=$43,770 >=8.00% >=$54,713 >=10.00%
(to risk-weighted assets)
Tier 1 (core) capital $72,416 13.20% >=$21,885 >=4.00% >=$32,828 >=6.00%
(to risk-weighted assets)
Tier 1 (core) capital $72,416 8.60% >=$33,546 >=4.00% >=$41,783 >=5.00%
(to adjusted assets)
Tangible equity $72,416 8.60% >=$33,546 >=4.00% >=$41,783 >=5.00%
(to tangible assets)
State of Wisconsin capital $77,197 9.20% >=$50,377 >=6.00% N/A N/A
(to total assets)
</TABLE>
FN-96
<PAGE> 280
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. THE AFFAIRS OF MUTUAL SAVINGS OR BANK MUTUAL MAY CHANGE AFTER
THE DATE OF THIS PROSPECTUS. DELIVERY OF THIS DOCUMENT AND THE SALES OF SHARES
MADE HEREUNDER DOES NOT MEAN OTHERWISE.
Page
[TABLE OF CONTENTS TO GO HERE]
UNTIL THE LATER OF , 2000 OR 25 DAYS AFTER COMMENCEMENT OF THE
OFFERING, ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
Up to 8,641,781
Shares of
Common Stock
[BANK MUTUAL LOGO]
Proposed Holding Company for
Mutual Savings Bank
----------------
PROSPECTUS
----------------
Ryan, Beck & Co.
, 2000
-143-
<PAGE> 281
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Legal Fees and Expenses............................................... $ 750,000
Financial Advisor..................................................... 200,000
Accounting Fees and Expenses.......................................... 225,000
Appraisal/Business Plan Fees.......................................... 120,000
Conversion Agent...................................................... 80,000
Printing Fees and Expenses............................................ 225,000
Postage and Mailing Expenses.......................................... 275,000
Stock Certificate Expenses............................................ 8,000
Transfer Agent Fees................................................... 50,000
Marketing Agent Fees and Expenses..................................... 930,000
Filing Fees:
OTS........................................................... 10,000
Nasdaq (including entry and listing fees)..................... 95,000
SEC........................................................... 23,000
NASD.......................................................... 9,000
IRS Ruling Request............................................ 5,000
Other. . ............................................................. 95,000
----------
*Total.............................................. $3,100,000
</TABLE>
- - -----------------
* All amounts are estimated. Expenses relate to a combination of the
restructuring, the stock issuance and the First Northern merger because the
transactions are in many respects intermingled. Represents Mutual's expenses,
but does not include First Northern's.
ITEM 24. 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.
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<PAGE> 282
(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 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 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 26. 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.
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
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<PAGE> 283
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 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.
(5) 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 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.
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<PAGE> 284
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Village of Brown
Deer, State of Wisconsin, on June 14, 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
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael T. Crowley, Jr. and Eugene H.
Maurer, Jr., and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and any other regulatory
authority, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.*
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/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
/s/ Thomas H. Buestrin Director
- - -------------------------------------------
Thomas H. Buestrin
/s/ Michael T. Crowley, Sr. Director
- - -------------------------------------------
Michael T. Crowley, Sr.
/s/ R.W. Dwyer, Jr. Director
- - -------------------------------------------
R.W. Dwyer, Jr.
/s/ Herbert W. Isermann Director
- - -------------------------------------------
Herbert W. Isermann
/s/ William J. Mielke Director
- - -------------------------------------------
William J. Mielke
/s/ David J. Rolfs Director
- - -------------------------------------------
David J. Rolfs
</TABLE>
*Each of the above signatures is affixed as of June 14, 2000. Capacities
indicated are with Mutual Savings Bank, which is forming Bank Mutual Corporation
pursuant to the Plan of Reorganization.
S-1
<PAGE> 285
BANK MUTUAL
("BANK MUTUAL" OR THE "REGISTRANT")
EXHIBIT INDEX
TO
FORM S-1 REGISTRATION STATEMENT
The following exhibits are filed with or incorporated by reference in
this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED HEREIN FILED
BY REFERENCE TO HEREWITH
<S> <C> <C> <C>
1.1 Agency Agreement between Mutual (to be filed by
Savings Bank and Ryan Beck amendment)
1.2(a) Agreement between Mutual Savings Bank X
and Ryan, Beck & Co. executed February
3, 2000
1.2(b) Amendment thereto dated June __, 2000 (will be filed by
amendment)
2.1 Plan of Restructuring from Mutual Savings X
Bank to Mutual Holding Company of
Mutual Savings Bank, as amended and
restated May 15, 2000*
2.2 Agreement and Plan of Merger, dated as of X
February 21, 2000, by and among Mutual
Savings Bank, OV Corp. and First Northern
Capital Corporation*
3(i) Charter of Bank Mutual X
3(ii) Bylaws of Bank Mutual X
4.1 Charter of Bank Mutual Exhibit 3(i) above
4.2 Stock Issuance Plan of Mutual Savings, as X
amended and restated May 15, 2000
4.3 Plan of Restructuring Exhibit 2.1 above
5.1 Opinion of Quarles & Brady LLP as to the X [Form of]
legality of the securities being registered
8.1 Opinion of Quarles & Brady LLP as to the X [Form of]
tax consequences of the transaction
10.1 Mutual Savings Restoration Plan (to be filed by
amendment)
10.2 Mutual Savings' Outside Directors' X
Retirement Plan
</TABLE>
EI-1
<PAGE> 286
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED HEREIN FILED
BY REFERENCE TO HEREWITH
<S> <C> <C> <C>
10.3 Mutual Savings Executive Excess Benefit X
Plan
10.4 Agreement regarding deferred X
compensation Agreement dated May 16,
1988 between Mutual Savings and Michael
T. Crowley, Sr.
10.5(a) Employment Agreement between Mutual X
Savings and Michael T. Crowley Jr.
10.5(b) Amendment thereto dated February 17, X
1998
10.6(a) Employment Agreement between Mutual X
Savings and Michael T. Crowley, Sr. dated
December 31, 1993
10.6(b) Amendment thereto dated February 17, X
1998
10.7 Form of Employment Agreements of other X
Mutual Savings executive officers
23.1 Consent of Ernst & Young LLP, Mutual X
Savings' independent accountants
23.2 Consent of Wipfli Ullrich Bertelson LLP, X
First Northern's independent accountants
23.3 Consents of Quarles & Brady LLP Contained in Exhibits 5.1
and 8.1
23.4 Consent of RP Financial, appraiser X
23.5 Consent of Michael Meeuwsen, named as a X
prospective director
23.6 Consent of Ernst & Young LLP, First Contained in Exhibit 23.1
Northern's former independent accountants
24.1 Powers of Attorney On Signatures page
27.1 Financial Data Schedule-March 31, 2000 X
27.2 Financial Data Schedule-March 31, 1999 X
27.3 Financial Data Schedule-December 31, 1999 X
27.4 Financial Data Schedule-December 31, 1998 X
27.5 Financial Data Schedule-December 31, 1997 X
99.1 RP Financial Appraisal (to be filed by amendment)
99.2 Stock Order Form X
99.3 Marketing Materials (to be filed by
amendment)
</TABLE>
- - ------------------
* Without exhibits or schedules, which will be furnished to the
Commission upon request.
EI-2
