<PAGE> 1
EXHIBIT 99.1
MUTUAL SAVINGS BANK
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mutual Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Mutual Savings Bank (the Bank) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
equity and cash flows for the three years ended December 31, 1999. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Bank and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for three years ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Milwaukee, Wisconsin
March 7, 2000
F-1
<PAGE> 2
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ------------------------
2000 1999 1998
----------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.................................. $ 18,978 $ 21,367 $ 22,534
Federal funds sold....................................... -- 25,000 45,000
Interest-earning deposits................................ 12,839 132,592 262,714
---------- ---------- ----------
Cash and cash equivalents................................ 31,817 178,959 330,248
Securities available-for-sale, at fair value:
Investment securities.................................. 57,461 57,763 116,534
Mortgage-related securities............................ 461,377 374,100 270,897
Loans held for sale...................................... 1,632 541 27,723
Loans receivable, net.................................... 1,127,987 1,082,795 1,037,589
Real estate owned........................................ 4,912 4,953 5,440
Premises and equipment................................... 26,727 26,871 27,567
Federal Home Loan Bank stock, at cost.................... 14,585 13,537 13,537
Accrued interest receivable.............................. 9,602 8,620 8,035
Intangible assets........................................ 11,027 11,496 29,786
Other assets............................................. 12,043 9,871 5,506
---------- ---------- ----------
$1,759,170 $1,769,506 $1,872,862
========== ========== ==========
LIABILITIES AND EQUITY
Liabilities:
Deposits............................................... $1,300,613 $1,343,007 $1,398,858
Borrowings............................................. 264,667 242,699 270,822
Advance payments by borrowers for taxes and
insurance........................................... 13,012 1,661 1,710
Other liabilities...................................... 13,290 18,319 25,729
---------- ---------- ----------
1,591,582 1,605,686 1,697,119
Equity:
Retained earnings...................................... 176,260 169,746 174,229
Net unrealized gain (loss) on securities
available-for-sale.................................. (8,672) (5,926) 1,514
---------- ---------- ----------
167,588 163,820 175,743
Commitments and Contingencies (Notes 13 and 14)
---------- ---------- ----------
$1,759,170 $1,769,506 $1,872,862
========== ========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 3
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------ --------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees..................... $41,403 $39,737 $ 79,623 $ 90,092 $ 93,628
Investments............................... 3,219 10,413 20,200 19,714 12,115
Mortgage-related securities............... 15,860 8,503 18,479 15,664 10,250
------- ------- -------- -------- --------
Total interest income....................... 60,482 58,653 118,302 125,470 115,993
Interest expense:
Deposits.................................. 29,739 30,985 61,091 65,236 60,917
Borrowings................................ 7,232 7,045 13,933 14,437 10,897
Advance payments by borrowers for taxes
and insurance.......................... 90 98 313 344 380
------- ------- -------- -------- --------
Total interest expense...................... 37,061 38,128 75,337 80,017 72,194
------- ------- -------- -------- --------
Net interest income......................... 23,421 20,525 42,965 45,453 43,799
Provision for losses on loans............... 236 203 350 637 1,065
------- ------- -------- -------- --------
Net interest income after provision for
losses on loans........................... 23,185 20,322 42,615 44,816 42,734
Noninterest income:
Service charges on deposits............... 1,413 1,332 2,813 2,630 2,413
Brokerage commissions..................... 994 827 1,826 1,228 984
Servicing fees on loans sold.............. 205 229 447 577 588
Loan fees and service charges............. 497 549 1,014 1,662 773
Gain on sales of loans.................... 43 436 497 1,025 486
Gain (loss) on sales of securities........ -- (108) 158 -- (12)
Other..................................... 864 634 1,229 1,318 927
------- ------- -------- -------- --------
Total noninterest income.................... 4,016 3,899 7,984 8,440 6,159
Noninterest expenses:
Compensation, payroll taxes and other
employee benefits...................... 8,624 8,539 17,158 16,638 15,346
Occupancy................................. 2,595 2,846 5,550 5,580 5,288
Federal deposit insurance premiums........ 142 416 820 837 822
Marketing................................. 1,256 1,137 1,864 2,158 2,375
Data processing........................... 741 575 1,329 1,260 1,213
Amortization of intangibles............... 469 1,355 18,290 2,738 1,941
Other..................................... 2,859 3,077 6,268 6,310 5,101
------- ------- -------- -------- --------
Total noninterest expenses.................. 16,686 17,945 51,279 35,521 32,086
------- ------- -------- -------- --------
Income (loss) before income taxes........... 10,515 6,276 (680) 17,735 16,807
Income taxes................................ 4,001 2,386 3,803 6,584 6,622
------- ------- -------- -------- --------
Net income (loss)........................... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 4
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
SECURITIES
RETAINED AVAILABLE- TOTAL
EARNINGS FOR-SALE EQUITY
-------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at January 1, 1997................................ $152,893 $(1,599) $151,297
Comprehensive income:
Net income............................................ 10,185 -- 10,185
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
liability of $850................................ -- 1,573 1,573
-------- ------- --------
Total comprehensive income............................... 12,691
-------- ------- --------
Balances at December 31, 1997.............................. 163,078 (26) 163,052
Comprehensive income:
Net income............................................ 11,151 -- 11,151
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
liability of $832................................ -- 1,540 1,540
-------- ------- --------
Total comprehensive income............................... 12,691
-------- ------- --------
Balances at December 31, 1998.............................. 174,229 1,514 175,743
Comprehensive income:
Net loss.............................................. (4,483) (4,483)
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
benefit of $4,144................................ -- (7,440) (7,440)
-------- ------- --------
Total comprehensive loss................................. (11,923)
-------- ------- --------
Balances at December 31, 1999.............................. 169,746 (5,926) 163,820
Comprehensive income:
Net income (unaudited)................................ 6,514 -- 6,514
Other comprehensive income:
Change in net unrealized gain (loss) on securities
available-for-sale, net of deferred income tax
benefit of $1,774 (unaudited).................... -- (2,746) (2,746)
-------- ------- --------
Total comprehensive income (unaudited)................... -- -- 3,768
-------- ------- --------
Balances at June 30, 2000 (unaudited)...................... $176,260 $(8,672) $167,588
======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 5
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)..................... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Provision for losses on loans....... 236 203 350 637 1,065
Provision for depreciation.......... 790 953 1,840 2,033 1,816
Deferred income tax benefit......... 1,774 1,192 (3,886) (630) (710)
Amortization of intangibles......... 469 1,355 18,290 2,738 1,941
Net discount amortization on
securities....................... (175) (18) (80) (5,242) (318)
Loans originated for sale........... (6,031) (45,405) (47,427) (131,082) (52,006)
Proceeds from sales of loans
originated for sale.............. 4,983 47,116 57,358 117,770 43,478
Net gain on sales of loans.......... (43) (436) (497) (1,025) (486)
Net (gain) loss on sale of
available-for-sale securities.... -- -- (378) -- 12
Purchases of trading account
assets........................... -- (24,827) (39,215) (5,066) --
Proceeds from sales of trading
account assets................... -- 24,719 38,995 5,067 --
Net loss on sale of trading
account assets................... -- 108 220 1 --
Decrease in other liabilities....... (5,029) (13,060) (7,410) (1,573) (94)
(Increase) decrease in other
assets........................... (2,172) (30) 3,665 (2,355) 9,039
(Increase) decrease in accrued
interest receivable.............. (982) (293) (585) 1,425 (3,533)
Other............................... (220) 1,006 587 513 (882)
--------- -------- --------- --------- ---------
Net cash provided (used) by operating
activities.......................... 114 (3,527) 17,344 (5,638) 9,507
Investing Activities
Proceeds from maturities and sales of
investment securities............... 20,000 65,070 65,000 429,337 397,619
Purchases of investment securities.... (18,808) (20,000) (20,000) (380,489) (376,634)
Proceeds from sales of
mortgage-related securities......... -- -- 54,060 -- 3,822
Purchases of mortgage-related
securities.......................... (115,412) (34,123) (213,504) (119,548) (72,071)
Net (purchases) sales of investments
in mutual funds..................... (867) (728) (1,481) (1,410) 16,742
Principal payments on mortgage-related
securities.......................... 23,765 35,602 60,367 77,407 59,514
Net (increase) decrease in loans
receivable.......................... (47,101) (7,290) (29,581) 208,864 96,953
Proceeds from sale of foreclosed
properties.......................... 1,936 1,147 1,673 3,438 627
Proceeds from sale of (purchase of)
Federal Home Loan Bank stock........ (1,048) -- -- 6,700 277
</TABLE>
F-5
<PAGE> 6
MUTUAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- -----------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchases of office properties and
equipment........................... (646) (497) (1,173) (3,141) (1,854)
Sales of office properties and
equipment........................... -- -- 29 -- --
Business acquisition, net of cash and
cash equivalents acquired of
$8,328.............................. -- -- -- -- (118,164)
--------- -------- --------- --------- ---------
Net cash provided (used) by investing
activities.......................... (138,181) 39,181 (84,610) 221,158 6,831
Financing Activities
Net increase (decrease) in deposits... (42,394) (11,539) (55,851) 36,528 (8,653)
Net decrease (increase) in short-term
borrowings.......................... 26,000 -- -- -- (208,194)
Proceeds from long-term borrowings.... 33,000 -- -- -- 228,000
Repayments on long-term borrowings.... (37,032) (123) (28,123) (45) --
Net increase (decrease) in advance
payments by borrowers for taxes and
insurance........................... 11,351 11,407 (49) (819) 1,636
--------- -------- --------- --------- ---------
Net cash provided (used) by financing
activities.......................... (9,075) (255) (84,023) 35,664 12,789
--------- -------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents......................... (147,142) 35,399 (151,289) 251,184 29,127
Cash and cash equivalents at beginning
of period........................... 178,959 330,248 330,248 79,064 49,937
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of
period.............................. 31,817 365,647 $ 178,959 $ 330,248 $ 79,064
========= ======== ========= ========= =========
Supplemental information:
Interest paid on deposits........... $ 28,256 $ 29,166 $ 61,220 $ 65,315 $ 61,598
Income taxes paid................... 4,058 3,092 6,678 7,859 5,530
Loans transferred to other real
estate owned..................... 1,673 951 1,773 7,975 178
Loans transferred from loans held
for sale to portfolio............ -- 19,171 17,748 17 --
Mutual fund liquidation proceeds.... -- 14,047 14,047 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE> 7
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Mutual Savings Bank (the Bank) provides a full range of financial services
to customers through its branch locations in Wisconsin. The Bank is subject to
competition from other financial institutions and is also subject to the
regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Bank
and its wholly owned subsidiaries, Lake Financial and Insurance Services (Lake),
Mutual Investment Company (MIC) and MC Development Ltd. (MD). Lake provides
investment and insurance services, MIC owns and manages an investment portfolio
for the benefit of the Bank, and MD holds, for sale, title to certain parcels of
developed and undeveloped real estate. Significant intercompany accounts and
transactions have been eliminated in consolidation.
The unaudited consolidated financial statements as of June 30, 2000 and for
the six months then ended have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenues
and expenses for the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Bank considers federal funds sold and interest-bearing deposits that
have original maturities of three months or less to be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-RELATED SECURITIES
TRADING ACCOUNT ASSETS
Trading account assets are held for resale in anticipation of short-term
market movements. Trading account assets are stated at fair value. Gains and
losses are included in net gain or loss on sales of securities and are based on
the specific identification method. There were no trading account assets at
December 31, 1999 or 1998 or June 30, 2000.
SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities, equity securities and investments in
mutual funds not classified as trading are classified as
F-7
<PAGE> 8
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported in a separate component of
equity.
The amortized cost of securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity, or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income from investments.
Interest and dividends are included in interest income from investments.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gain (loss) on sales of securities and are
based on the specific identification method.
Stock of the Federal Home Loan Bank (FHLB) is carried at cost which is its
redeemable value.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale, which generally consist of current production of
certain fixed-rate first mortgage loans, are recorded at the lower of aggregate
cost or market value. Fees received from the borrower are deferred and recorded
as an adjustment of the carrying value. Loans held for sale may be transferred
to loans held for investment when the Bank has both the ability and intent to
hold the loans for the foreseeable future or until maturity. Upon transfer, any
difference between the carrying amount of the loan and its outstanding principal
balance is recognized as an adjustment to yield by the interest method.
INTEREST AND FEES ON LOANS
Allowances of $161 (unaudited), $228 and $172 are established for accrued
but uncollected interest on mortgage loans for which any payments were more than
90 days past due at June 30, 2000 and December 31, 1999 and 1998, respectively.
Interest previously accrued on these loans is removed from income at that time.
Payments received, if any, on these loans are recorded as principal reduction or
as interest based on management's judgment as to ultimate collectibility of all
contractual future principal and interest payments.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the related loans' yield.
The Bank amortizes these amounts using the level yield method over the estimated
life of the related loans.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is composed of general valuation
allowances. The Bank may establish a specific valuation allowance on loans it
considers impaired but in such event the loan is reduced by the amount of the
specific allowance and a corresponding amount is charged off to the allowance
for losses on loans. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will not be able to collect
all amounts due according to the contractual terms of the loan agreement. When
the carrying amount of the loan exceeds (1) the present value of the expected
cash flows, discounted at the loan's original effective interest rate, or (2)
the fair value of the underlying collateral, a specific valuation allowance is
recorded for such excess. The adjusted balance of the loan is adjusted
(decreased) to reflect significant changes in the estimated fair value of
collateral, the estimated amount and timing of an impaired loan's expected
future cash flows, or if actual cash flows that differ significantly from
expected future cash flows. General valuation allowances are based on an
evaluation of the various risk components that are inherent in the credit
portfolio. The risk components that are
F-8
<PAGE> 9
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
evaluated include past loan loss experience; the level of non-performing and
classified assets; current economic conditions; volume, growth and composition
of the loan portfolio; adverse situations that may affect borrowers' ability to
repay; the estimated value of any underlying collateral; peer group comparisons;
regulatory guidance; and other relevant factors.
The allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. The allowance reflects management's best
estimate of the amount necessary to provide for the credit risks of the Bank.
The allowance is based on a risk model developed and implemented by management
and approved by the Bank's Board of Directors.
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties acquired through, or in lieu of, loan foreclosure are
recorded at the lower of cost or fair value less estimated costs to sell. Costs
related to the development and improvement of property are capitalized, whereas
costs related to holding the property are expensed.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and furniture, equipment and automobiles are amortized
over their estimated useful lives (40 to 45 years and 3 to 10 years,
respectively) using the straight line method. Leasehold improvements are
amortized over the shorter of their useful lives or the lease terms (generally
10 years). The Bank reviews buildings, leasehold improvements and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment exists when the
estimated undiscounted cash flows for the property is less than its carrying
value. If identified, an impairment loss is recognized through a charge to
earnings based on the fair value of the property.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, results from acquisitions made by the Bank. The Bank's
goodwill is being amortized to operating expense using the straight-line method
over 15 years. Other intangible assets are amortized over their estimated useful
lives, generally 7-10 years. The carrying amount of goodwill and other
intangible assets are reviewed if facts and circumstances indicate that it may
be impaired. If this review indicates that it is not recoverable, as determined
based on the estimated undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying amount of the goodwill is reduced
for the estimated shortfall of the cash flows discounted at the average cost of
capital for thrift institutions as compared to the carrying value.
INCOME TAXES
The Bank files a consolidated federal income tax return and separate, or
combined, state income tax returns, depending on the state. Income taxes are
accounted for using the "asset and liability" method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
that will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Bank's income tax returns. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date of the change. A valuation allowance is provided for any deferred
tax asset for which it is more likely
F-9
<PAGE> 10
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
than not that the asset will not be realized. Changes in valuation allowances
are recorded as a component of income.
PENSION COSTS
The Bank's net periodic pension cost consists of the expected cost of
benefits earned by employees during the current period and an interest cost on
the projected benefit obligation, reduced by the expected earnings on assets
held by the retirement plan, amortization of transitional assets over a period
of 15 years (beginning in 1987), amortization of prior service cost and by
amortization of recognized actuarial gains and losses over the estimated future
service period of existing plan participants.
SEGMENT INFORMATION
The Bank has determined that it has one reportable segment -- community
banking. The Bank offers a range of financial products and services to external
customers, including: accepting deposits from the general public; originating
residential, consumer and limited types of commercial loans (primarily loans
secured by multi-family properties); and marketing annuities and other insurance
products. Revenues for each of these products are disclosed in the consolidated
statements of income.
PENDING ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of SFAS No. 133," which delays the implementation date of SFAS No. 133 for
one year, to fiscal years beginning after June 15, 2000, provide a comprehensive
and consistent standard for the recognition of derivatives and hedging
activities. SFAS 133 requires all derivatives to be recorded on the balance
sheet at fair value. However, special accounting is provided for certain
derivatives that meet the definition of hedges. Changes in the fair value of
derivatives that do not meet the definition of hedges are required to be
reported in earnings in the period of change. The Bank does not use derivative
financial instruments such as futures, swaps, caps, floors, options or interest
or principal only strips of similar instruments. Therefore, SFAS No. 133 is not
expected to have a significant impact on the Bank. The Bank will implement this
statement on January 1, 2001.
2. BUSINESS COMBINATIONS
On March 31, 1997, the Bank completed the acquisition of First Federal
Bancshares of Eau Claire, Inc. (First Federal) in a cash transaction for $125.1
million. The transaction has been accounted for as a purchase. First Federal was
the parent company of First Federal Bank of Eau Claire, F.S.B. First Federal had
total assets of $730.7 million as of March 31, 1997. This acquisition resulted
in the recording of identifiable intangibles (value of deposit base) of $10.4
million and goodwill (unidentifiable intangible asset) of $24.1 million. The
results of operations of the acquired company are included in the consolidated
financial statements from the date of acquisition.
Scheduled amortization of intangibles was $2,711, $2,738 and $1,941 for the
years ended December 31, 1999, 1998 and 1997, and $469 (unaudited) and $1,355
(unaudited) for the six-month periods ended June 30, 2000 and 1999 respectively.
In 1999, increased competition for deposits from alternate investment products,
increases in interest rates which negatively impacted the volume of new loan
originations and credit standards more stringent than those used by the acquiree
caused management to
F-10
<PAGE> 11
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS -- (CONTINUED)
revise cash flow estimates to be realized from the acquired business.
Accordingly, $15,579 of intangibles were written off for the estimated shortfall
of the cash flows discounted at the average cost of capital for thrift
institutions as compared to the carrying value. This write-off is included in
amortization of intangibles on the statement of income. The unamortized balance
of goodwill and intangible assets was $11,027 (unaudited), $11,496 and $29,786
at June 30, 2000, and December 31, 1999 and 1998, respectively.
F-11
<PAGE> 12
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At June 30, 2000 (Unaudited):
U.S. government and federal agency obligation..... $ 28,909 $ 26 $ (773) $ 28,162
Asset-backed securities........................... -- -- -- --
Mutual funds...................................... 29,894 -- (595) 29,299
-------- ---- -------- --------
Total investment securities.................... 58,803 26 (1,368) 57,461
-------- ---- -------- --------
Federal Home Loan Mortgage Corporation............ 67,880 28 (2,904) 65,004
Federal National Mortgage Association............. 388,707 798 (10,102) 379,403
Private Placement CMOs............................ 16,798 1 (327) 16,472
Government National Mortgage Association.......... 492 7 (1) 498
-------- ---- -------- --------
Total mortgage-related securities.............. 473,877 834 (13,334) 461,377
-------- ---- -------- --------
Total.......................................... $532,680 $860 $(14,702) $518,838
======== ==== ======== ========
At December 31, 1999:
U.S. government and federal agency obligations.... $ 30,107 $ -- $ (932) $ 29,175
Asset-backed securities........................... 51 -- -- 51
Mutual funds...................................... 29,027 -- (490) 28,537
-------- ---- -------- --------
Total investment securities.................... 59,185 -- (1,422) 57,763
-------- ---- -------- --------
Federal Home Loan Mortgage Corporation............ 72,763 94 (2,641) 70,216
Federal National Mortgage Association............. 290,785 745 (6,146) 285,384
Private Placement CMOs............................ 17,884 65 (22) 17,927
Government National Mortgage Association.......... 566 8 (1) 573
-------- ---- -------- --------
Total mortgage-related securities.............. 381,998 912 (8,810) 374,100
-------- ---- -------- --------
Total.......................................... $441,183 $912 $(10,232) $431,863
======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At December 31, 1998:
U.S. government and federal agency obligations.... $ 75,113 $ 308 $ -- $ 75,421
Asset-backed securities........................... 228 -- -- 228
Mutual funds...................................... 41,592 -- (707) 40,885
-------- ------ ----- --------
Total investment securities.................... 116,933 308 (707) 116,534
-------- ------ ----- --------
Federal Home Loan Mortgage Corporation............ 43,607 168 (58) 43,717
Federal National Mortgage Association............. 192,200 2,250 (97) 194,353
Private Placement CMOs............................ 31,630 370 (6) 31,994
Government National Mortgage Association.......... 797 36 -- 833
-------- ------ ----- --------
Total mortgage-related securities.............. 268,234 2,824 (161) 270,897
-------- ------ ----- --------
Total.......................................... $385,167 $3,132 $(868) $387,431
======== ====== ===== ========
</TABLE>
F-12
<PAGE> 13
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
The amortized cost and fair values of securities by contractual maturity
are shown below. Actual maturities may differ from contractual maturities
because issuers have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30 2000
-----------------------
AMORTIZED
COST FAIR VALUE
--------- ----------
(UNAUDITED)
<S> <C> <C>
Due in one year or less..................................... $ 3,543 $ 3,543
Due after one year through five years....................... 25,366 24,619
Mutual funds................................................ 29,894 29,299
Mortgage-related securities................................. 473,877 461,377
-------- --------
$532,680 $518,838
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------
AMORTIZED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 10,000 $ 9,925
Due after one year through five years....................... 20,158 19,301
Mutual funds................................................ 29,027 28,537
Mortgage-related securities................................. 381,998 374,100
-------- --------
$441,183 $431,863
======== ========
</TABLE>
F-13
<PAGE> 14
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
A reconciliation of the gross change in the unrealized gain or loss on
available-for-sale securities to the change in unrealized gain or loss on
available-for-sale securities reported as a component of comprehensive income
follows:
<TABLE>
<CAPTION>
JUNE 30 2000
-------------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Change in unrealized losses on available-for-sale
securities................................................ $(13,842) $(5,170) $(8,672)
Less: reclassification adjustment for gains realized in net
income.................................................... -- -- --
-------- ------- -------
Change in net unrealized losses recognized in other
comprehensive
income.................................................... $(13,842) $(5,170) $(8,672)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized losses on available-for-sale
securities................................................ $(11,962) $(4,276) $(7,686)
Less: reclassification adjustment for gains realized in net
income.................................................... (378) (132) (246)
-------- ------- -------
Change in net unrealized losses recognized in other
comprehensive
income.................................................... $(11,584) $(4,144) $(7,440)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1998
-------------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized gains on available-for-sale
securities................................................ $2,372 $832 $1,540
Less: reclassification adjustment for gains (losses)
realized in net
income.................................................... -- -- --
------ ---- ------
Change in net unrealized gains recognized in other
comprehensive income...................................... $2,372 $832 $1,540
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1997
---------------------------------
BEFORE TAX
TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
<S> <C> <C> <C>
Change in unrealized gains on available-for-sale
securities................................................ $2,435 $855 $1,580
Less: reclassification adjustment for losses realized in net
income.................................................... 12 5 7
------ ---- ------
Change in net unrealized gains recognized in other
comprehensive
income.................................................... $2,423 $850 $1,573
====== ==== ======
</TABLE>
F-14
<PAGE> 15
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
3. SECURITIES -- (CONTINUED)
Total proceeds and gross realized gains and losses from sale of
available-for-sale securities were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED
----------------- -------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds............................................... $-- $ $54,060 $-- $3,825
Gross gains............................................ -- -- 378 -- 3
Gross losses........................................... -- -- -- -- 15
</TABLE>
Net losses of $0 (unaudited), $108 (unaudited) and $220 were recognized in
income from sales of securities classified as trading for the six months ended
June 30, 2000 and 1999 and the year ended December 31, 1999. There were no
realized net gains or losses on trading securities in 1998 or 1997 and no
unrealized gains or losses recognized in income related to trading securities
for any period presented.
Investment securities with a fair value of approximately $10 million at
June 30, 2000 (unaudited) and December 31, 1999 and 1998, were pledged to secure
public funds.
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
First mortgage loans:
One to four-family..................................... $ 733,958 $ 743,993 $ 742,231
Multi-family........................................... 65,105 53,777 53,521
Commercial............................................. 65,267 52,375 40,922
Construction and development........................... 30,840 26,530 21,939
---------- ---------- ----------
Total first mortgage real estate loans................. 895,170 876,675 858,613
---------- ---------- ----------
Consumer and other loans:
Consumer loans:
Fixed equity........................................ 108,811 89,315 67,629
Home equity lines of credit......................... 55,371 50,618 45,827
Student............................................. 27,698 28,371 29,634
Home improvement.................................... 12,134 9,920 8,373
Other............................................... 9,436 10,028 12,970
Total consumer loans.............................. 213,450 188,252 164,433
---------- ---------- ----------
Commercial business loans.............................. 42,815 39,488 28,839
---------- ---------- ----------
Total consumer and other loans...................... 256,265 227,740 193,272
Total loans receivable.............................. 1,151,435 1,104,415 1,051,885
</TABLE>
F-15
<PAGE> 16
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
4. LOANS RECEIVABLE -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Less:
Undisbursed loan proceeds.............................. 16,368 14,658 7,001
Allowance for losses on loans.......................... 7,085 6,948 6,855
Unearned loan fees and discounts....................... (5) 14 440
---------- ---------- ----------
23,448 21,620 14,296
---------- ---------- ----------
$1,127,987 $1,082,795 $1,037,589
========== ========== ==========
</TABLE>
The Bank's first mortgage loans, fixed equity, home equity lines of credit
and home improvement loans are primarily secured by properties housing one to
four families which are generally located in the Bank's local lending areas in
Wisconsin.
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30 DECEMBER 31
---------------- -------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................. $6,948 $6,855 $6,855 $7,195 $3,921
Provisions.................................... 236 247 350 637 1,065
Allowance of acquired business................ -- -- -- -- 2,449
Charge-offs................................... (114) (127) (341) (1,220) (751)
Recoveries.................................... 15 18 84 243 511
------ ------ ------ ------ ------
Balance at end of year........................ $7,085 $6,949 $6,948 $6,855 $7,195
====== ====== ====== ====== ======
</TABLE>
There are no loans which are considered to be impaired at June 30, 2000,
December 31, 1999 or December 31, 1998.
The unpaid principal balance of loans serviced for others were $278,057
(unaudited), $287,789, $279,759 and $250,496 at June 30, 2000 and December 31,
1999, 1998 and 1997, respectively. These loans are not reflected in the
consolidated financial statements.
5. REAL ESTATE OWNED
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Acquired by foreclosure or in lieu of foreclosure........... $2,977 $3,018 $3,505
Acquired for development or resale.......................... 1,935 1,935 1,935
------ ------ ------
$4,912 $4,953 $5,440
====== ====== ======
</TABLE>
F-16
<PAGE> 17
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
6. ACCRUED INTEREST
Accrued interest on loans and investments are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Mortgage-related securities................................. $2,484 $1,787 $1,174
Investment securities....................................... 553 814 821
Loans receivable............................................ 6,565 6,019 6,040
------ ------ ------
$9,602 $8,620 $8,035
====== ====== ======
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Land........................................................ $ 6,969 $ 6,969 $ 6,889
Office buildings............................................ 25,840 25,292 25,177
Furniture, equipment and automobiles........................ 12,015 12,060 11,759
Leasehold improvements...................................... 1,203 1,203 1,442
------- ------- -------
46,027 45,524 45,267
Less allowances for depreciation and amortization........... 19,300 18,653 17,700
------- ------- -------
$26,727 $26,871 $27,567
======= ======= =======
</TABLE>
Depreciation expense for the six months ended June 30, 2000 and 1999 and
the years ended 1999, 1998 and 1997, was $790 (unaudited), $935 (unaudited),
$1,840, $2,033 and $1,816, respectively.
The Bank leases various branch offices, office facilities and equipment
under noncancellable operating leases which expire on various dates through
2012. Future minimum payments under noncancelable operating leases with initial
or remaining terms of one year or more for the years indicated are as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- -----------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
2000........................................................ $ 435 $ 870
2001........................................................ 660 660
2002........................................................ 446 446
2003........................................................ 417 417
2004........................................................ 390 390
Thereafter.................................................. 1,364 1,364
------ ------
Total..................................................... $3,712 $4,147
====== ======
</TABLE>
Total rental expenses totaled $273 (unaudited), $302 (unaudited), $609,
$639 and $682 for the six months ended June 30, 2000 and 1999 and the years
ended 1999, 1998 and 1997, respectively.
F-17
<PAGE> 18
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Checking accounts:
Non-interest-bearing................................... $ 49,002 $ 42,596 $ 43,031
Interest-bearing....................................... 86,133 89,685 100,753
---------- ---------- ----------
135,135 132,281 143,784
Money market accounts.................................... 220,721 231,174 159,361
Savings accounts......................................... 148,406 151,447 166,316
Certificate accounts:
Due within one year.................................... 539,156 593,512 638,596
After one but within two years......................... 190,143 178,431 237,113
After two but within three years....................... 46,057 34,716 30,129
After three but within four years...................... 10,593 11,535 10,479
After four but within five years....................... 10,397 9,868 11,583
After five years....................................... 5 43 1,497
---------- ---------- ----------
796,351 828,105 929,397
---------- ---------- ----------
$1,300,613 $1,343,007 $1,398,858
========== ========== ==========
</TABLE>
The aggregate amount of certificate accounts with balances of one hundred
thousand dollars or more is approximately $63,787 (unaudited), $62,223 and
$70,513 at June 30, 2000 and December 31, 1999 and 1998, respectively.
Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
------------------ -----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest-bearing checking accounts............. $ 452 $ 472 $ 940 $ 1,070 $ 1,137
Money market accounts.......................... 5,656 4,315 9,796 6,571 5,458
Savings accounts............................... 1,786 1,981 3,885 4,268 4,696
Certificate accounts........................... 21,845 24,217 46,470 53,327 49,626
------- ------- ------- ------- -------
$29,739 $30,985 $61,091 $65,236 $60,917
======= ======= ======= ======= =======
</TABLE>
The deposit accounts are insured by the FDIC to a maximum of one hundred
thousand dollars for each insured depositor in accordance with applicable law
and regulation.
F-18
<PAGE> 19
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
9. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
--------------------- ----------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- --------- ------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank advances
maturing:
2000....................... $ 31,147 7.07% $ 42,152 6.53% $ 42,170 5.77%
2001....................... 33,000 6.59 -- -- -- --
2002....................... -- -- -- -- 203,000 5.20
2003....................... 520 4.30 547 5.11 569 4.65
2004....................... 200,000 5.70 200,000 5.70 -- --
Thereafter................. -- -- 25,000 4.98
Other borrowings................ -- -- 83 10.25
-------- -------- --------
$264,667 $242,699 $270,822
======== ======== ========
</TABLE>
Advances that mature in the year 2004 consist of borrowings that are
redeemable at the option of the FHLB beginning at various times in 2001.
The Bank is required to maintain unencumbered mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHLB as collateral. The Bank's borrowings at the FHLB are limited to the
lesser of 35% of total assets or 60% of the book value of certain mortgage
loans. In addition, these notes are collateralized by FHLB stock of $14,585 at
June 30, 2000 (unaudited) and December 31, 1999.
10. EQUITY
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary, actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
As a state-chartered savings bank, the Bank is required to meet minimum
capital levels established by the State of Wisconsin in addition to federal
regulations.
Quantitative measures established by federal regulation to ensure adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as these terms are defined in regulations)
to risk-weighted assets (as these terms are defined in regulations), and of Tier
I capital (as these terms are defined in regulations) to average assets (as
these terms are defined in regulations). For the state of Wisconsin, total
capital (as these terms are defined in regulations) as a ratio
F-19
<PAGE> 20
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
10. EQUITY -- (CONTINUED)
of total assets must meet a minimum standard. Management believes, as of June
30, 2000 and December 31, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 2000 and December 31, 1999 and 1998, the most recent
notification from the State of Wisconsin categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. The
Bank is not aware of any conditions or events which would change their status as
well capitalized. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000 (unaudited):
Total capital (to risk-weighted assets)... $171,598 18.69% $73,453 8.00% $91,817 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 164,513 17.92% 36,727 4.00% 55,090 6.00%
Tier 1 capital (to average assets)........ 164,513 9.37% 70,244 4.00% 87,458 5.00%
State of Wisconsin capital (to total
assets)................................ 171,598 9.72% 105,918 6.00% N/A N/A
As of December 31, 1999:
Total capital (to risk-weighted assets)... $164,565 18.51% $71,143 8.00% $88,928 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 157,617 17.72% 35,571 4.00% 53,357 6.00%
Tier 1 capital (to average assets)........ 157,617 8.66% 72,770 4.00% 90,962 5.00%
State of Wisconsin capital (to total
assets)................................ 164,565 9.26% 106,587 6.00% N/A N/A
As of December 31, 1998:
Total capital (to risk-weighted assets)... $150,439 17.02% $70,728 8.00% $88,409 10.00%
Tier 1 capital (to risk-weighted
assets)................................ 143,584 16.24% 35,364 4.00% 53,046 6.00%
Tier 1 capital (to average assets)........ 143,584 7.78% 73,798 4.00% 92,248 5.00%
State of Wisconsin capital (to total
assets)................................ 150,439 8.00% 112,783 6.00% N/A N/A
</TABLE>
F-20
<PAGE> 21
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
10. EQUITY -- (CONTINUED)
Following are reconciliations of the Bank's equity under generally accepted
accounting principles to capital as determined by regulators:
<TABLE>
<CAPTION>
RISK- TIER I STATE OF
BASED (CORE) WISCONSIN
CAPITAL CAPITAL CAPITAL
------- ------- ---------
<S> <C> <C> <C>
As of June 30, 2000 (Unaudited):
Equity per financial statements........................... $167,588 $167,588 $167,588
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. 8,077 8,077 8,077
Intangibles............................................... (11,027) (11,027) (11,027)
Mortgage servicing rights................................. (125) (125) (125)
Allowance for loan losses................................. 7,085 -- 7,085
-------- -------- --------
Regulatory capital.......................................... $171,598 $164,513 $171,598
======== ======== ========
As of December 31, 1999:
Equity per financial statements........................... $163,820 $163,820 $163,820
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. 5,436 5,436 5,436
Intangibles............................................... (11,496) (11,496) (11,496)
Mortgage servicing rights................................. (143) (143) (143)
Allowance for loan losses................................. 6,948 -- 6,948
-------- -------- --------
Regulatory capital.......................................... $164,565 $157,617 $164,565
======== ======== ========
As of December 31, 1998:
Equity per financial statements........................... $175,743 $175,743 $175,743
Unrealized losses on investments (excluding unrealized
loss on mutual funds).................................. (2,221) (2,221) (2,221)
Intangibles............................................... (29,786) (29,786) (29,786)
Mortgage servicing rights................................. (152) (152) (152)
Allowance for loan losses................................. 6,855 -- 6,855
-------- -------- --------
Regulatory capital.......................................... $150,439 $143,584 $150,439
======== ======== ========
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank has a discretionary, defined-contribution savings plan (the Plan).
The Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code
and provides employees meeting certain minimum age and service requirements the
ability to make contributions to the Plan on a pretax basis. The Bank may then
match a percentage of the employee's contributions. Matching contributions made
by the Bank were $39 (unaudited) and $36 (unaudited) in the six months ended
June 30, 2000 and 1999, $68 in 1999, $56 in 1998 and $52 in 1997.
The Bank also has a defined-benefit pension plan covering employees meeting
certain minimum age and service requirements and a supplemental pension plan for
certain qualifying employees. The benefits are generally based on years of
service and the employee's compensation during the last five years of
F-21
<PAGE> 22
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
employment. The Bank's funding policy is to contribute annually the amount
necessary to satisfy the requirements of the Employee Retirement Income Security
Act of 1974.
Plan assets which consist primarily of immediate participation guarantee
contracts with an insurance company are actively managed by investment
professionals.
The following tables set forth the Plan's funded status and net periodic
benefit cost for 1999 and 1998. No such information is available relative to
interim periods.
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year..................... $13,916 $10,878
Service cost................................................ 659 632
Interest cost............................................... 934 798
Plan amendments............................................. -- 1,118
Actuarial (gain) loss....................................... (1,629) 704
Benefits paid............................................... (328) (214)
------- -------
Benefit obligation at end of year........................... $13,552 $13,916
======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year.............. $13,218 $11,057
Actual return on plan assets................................ 333 963
Employer contributions...................................... 996 1,412
Benefits paid............................................... (328) (214)
------- -------
Fair value of plan assets at end of year.................... $14,219 $13,218
======= =======
Funded Status
Funded (underfunded) status at end of year.................. $ 668 $ (698)
Unrecognized net actuarial gain (loss)...................... (239) 791
Unrecognized prior service cost............................. 1,028 1,230
Unrecognized net transition asset........................... (101) (151)
------- -------
Prepaid benefit cost........................................ $ 1,356 $ 1,172
======= =======
Weighted average assumptions used in cost calculations:
Discount rate............................................. 6.75% 7.00%
Rate of increase in compensation levels................... 5.50% 5.50%
Expected long-term rate of return on plan assets.......... 7.50% 7.50%
======= =======
</TABLE>
F-22
<PAGE> 23
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost................................................ $ 659 $ 632 $ 503
Interest cost............................................... 934 797 690
Expected return on plan assets.............................. (986) (824) (715)
Amortization of transition asset............................ (50) (50) (50)
Amortization of prior service cost.......................... 202 144 76
Recognized actuarial loss................................... 54 24 29
----- ----- -----
Total net periodic benefit cost............................. $ 813 $ 723 $ 533
===== ===== =====
</TABLE>
The supplemental pension plan had a projected benefit obligation of $3,110
and $3,247 and assets aggregating $2,777 and $2,521 at December 31, 1999 and
1998, respectively.
Total net periodic pension expense was $513 (unaudited) and $438
(unaudited) in the six months ended June 30, 2000 and 1999, respectively.
The Bank acquired an ESOP with the acquisition of First Federal which
covered substantially all former employees of First Federal with two or more
years of employment and who were at least 21 years of age. The cash proceeds
received by the ESOP in connection with the merger were used to prepay the
unpaid principal and interest outstanding under the ESOP. The remaining cash
balance has been invested in a mutual fund. An allocation was made to the
participants' accounts as of December 31, 1998 and the final allocation was made
as of December 31, 1999. The Bank is in the process of applying for a
determination letter to terminate the Plan and anticipates that all assets will
be available for distribution in a lump sum during 2000.
12. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31
---------------- ----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal......................................... $3,706 $2,456 $ 6,896 $7,010 $ 7,041
State........................................... 187 (76) 793 204 291
------ ------ ------- ------ -------
3,893 2,380 7,689 7,214 7,332
Deferred expense (benefit):
Federal......................................... 87 5 (3,120) (786) (1,007)
State........................................... 21 1 (766) 156 297
------ ------ ------- ------ -------
108 6 (3,886) (630) (710)
------ ------ ------- ------ -------
$4,001 $2,386 $ 3,803 $6,584 $ 6,622
====== ====== ======= ====== =======
</TABLE>
For state income tax purposes, the subsidiaries of the Bank have net
business loss carryovers of $487 available to offset against future income which
expire through 2013.
F-23
<PAGE> 24
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
12. INCOME TAXES -- (CONTINUED)
The income tax provision differs from the provision computed at the federal
statutory corporate rate for six months ended June 30, 2000 and 1999 and the
years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
----------------- ----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for income
taxes.......................................... $10,515 $6,276 $ (680) $17,735 $16,807
======= ====== ====== ======= =======
Tax expense at federal statutory rate............ $ 3,680 $2,197 $ (238) $ 6,207 $ 5,882
Increase (decrease) in taxes resulting from:
State income taxes -- Net of federal tax
benefit..................................... 135 (49) 21 382 382
Nondeductible intangible amortization.......... 164 216 3,487 490 351
Other.......................................... 22 24 533 (495) 7
------- ------ ------ ------- -------
Provision for income taxes....................... $ 4,001 $2,386 $3,803 $ 6,584 $ 6,622
======= ====== ====== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Bank's deferred tax assets and liabilities as of June 30, 2000
and December 31, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ----------------------------
2000 1999 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
State net operating losses........................... $ 26 $ 26 $ 26 $ 238
Loan loss reserves................................... 1,886 2,103 1,673 1,274
Deferred loan fees................................... 51 225 155 370
Pension.............................................. 1,241 1,151 1,147 1,165
Unrealized loss on investment securities............. 5,170 3,394 -- 78
Other................................................ 1,371 1,252 297 402
------ ------ ------- -------
Total deferred tax assets.............................. 9,745 8,151 3,298 3,527
------ ------ ------- -------
Deferred tax liabilities:
Property and equipment depreciation.................. 1,057 1,057 1,196 1,200
FHLB stock dividends................................. 556 555 544 820
Purchase accounting adjustments...................... 1,536 1,611 3,910 4,407
Unrealized gain on investment securities............. -- -- 750 --
------ ------ ------- -------
Total deferred tax liabilities......................... 3,149 3,223 6,400 6,427
------ ------ ------- -------
Net deferred tax asset (liability)..................... $6,596 $4,928 $(3,102) $(2,900)
====== ====== ======= =======
</TABLE>
The Bank qualified under provisions of the Internal Revenue Code that
permitted it to deduct from taxable income an allowance for bad debts that
differed from the provision for such losses charged to income for financial
reporting purposes. Accordingly, no provision for federal income taxes has been
made for approximately $48,592 of retained income as of June 30, 2000
(unaudited) and December 31, 1999. If,
F-24
<PAGE> 25
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
12. INCOME TAXES -- (CONTINUED)
in the future, the Bank no longer qualifies as a bank for tax purposes, income
taxes of approximately $19,500 would be imposed.
13. CONTINGENT LIABILITY
The Bank has entered into an agreement whereby, for an initial fee and
annual fee, certain of its United States Treasury notes are pledged as
collateral for an Industrial Development Revenue Bond which was issued by a
local municipality to finance commercial real estate owned by a third party,
unrelated to the Bank. Under the terms of the agreement, the Bank must maintain
with a trustee collateral with a fair market value, as defined, aggregating
128%, 135% and 135% or more of the sum of the outstanding principal balance of
the bonds plus accrued interest on the outstanding principal at June 30, 2000
and December 31, 1999 and 1998, respectively. The Bank continues to receive
interest payments on the collateral.
At June 30, 2000 (unaudited) and December 31, 1999 and 1998, United States
Treasury notes with outstanding principal balances aggregating approximately
$10,000 were held by the trustee as collateral for these bonds which had an
outstanding principal balance of $5,165 (unaudited), $5,165 and $5,410 for June
30, 2000 and December 31, 1999 and 1998, respectively. The third-party borrower
is not in default on any scheduled payments due under the bond issue which has a
scheduled maturity of on December 15, 2009.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract amounts reflect the extent of involvement the Bank has in particular
classes of financial instruments and also represents the Bank's maximum exposure
to credit loss.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------- ------------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Unused consumer lines of credit............................. $66,958 $63,461 $59,406
Unused commercial lines of credit........................... 1,480 1,003 946
Commitments to extend credit:
Fixed rate ((7.625-9.25) in 2000; 6.60%-8.25% in 1999 and
6.15%-7.25% in 1998)................................... 10,496 7,418 19,445
Adjustable rate........................................... 17,344 7,595 4,003
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. As some commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates the collateral needed and creditworthiness
of each customer on a case by case basis. The
F-25
<PAGE> 26
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (CONTINUED)
Bank generally extends credit only on a secured basis. Collateral obtained
varies, but consists principally of one-to four-family residences.
Forward commitments to sell mortgage loans of $2,274 (unaudited), $0 and
$17,030 at June 30, 2000 and December 31, 1999 and 1998, respectively, represent
commitments obtained by the Bank from a secondary market agency to purchase
mortgages from the Bank and place them in a mortgage-backed security pool with a
defined yield. Commitments to sell loans expose the Bank to interest rate risk
if market rates of interest decrease during the commitment period. Commitments
to sell loans are made to mitigate interest rate risk on commitments to
originate loans and loans held for sale.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about certain financial instruments,
whether or not recognized in the consolidated financial statements, for which it
is practicable to estimate the value, is summarized below. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from this disclosure. Accordingly, the aggregate fair
value of amounts presented does not represent the underlying value of the Bank
and is not particularly relevant to predicting the Bank's future earnings or
cash flows.
The following methods and assumptions are used by the Bank in estimating
its fair value disclosures of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the statements
of financial condition for cash and cash equivalents approximate those assets'
fair values.
Investment and Mortgage-Related Securities: Fair values for these
securities are based on quoted market prices or such prices of comparable
instruments.
Loans Receivable and Loans Held-for-Sale: The fair value of one- to
four-family fixed rate mortgage loans was determined based on the current market
price for securities collateralized by similar loans. For variable rate one to
four-family mortgage, consumer and other loans that re-price frequently and with
no significant change in credit risk, carrying values approximate fair values.
The fair value for fixed rate commercial real estate, rental property mortgage,
consumer and other loans was estimated by projecting cash flows at market
interest rates.
Federal Home Loan Bank Stock: Federal Home Loan Bank stock is carried at
cost, which is its redeemable (fair) value, since the market for this stock is
restricted.
Accrued Interest Receivable: The carrying value of accrued interest
receivable approximates fair value.
Deposits and Advance Payments by Borrowers for Taxes and Insurance: The
fair values disclosed for variable rate investment accounts, NOW accounts,
passbook accounts, money market certificates, accrued interest and advance
payments by borrowers for taxes and insurance are equal to the carrying amounts
at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash
F-26
<PAGE> 27
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
flow calculation that applies interest rates currently offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings: The fair value of long-term borrowings is estimated using
discounted cash flow calculations with the discount rates equal to interest
rates currently being offered for borrowings with similar terms and maturities.
Commitments to Extend Credit and Forward Commitments to Sell Loans: The
fair value of these commitments is considered to approximate the carrying values
due to the short-term nature of these commitments.
<TABLE>
<CAPTION>
JUNE 30 2000 DECEMBER 31 1999 DECEMBER 31 1998
------------------------ ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents... $ 31,817 $ 31,817 $ 178,959 $ 178,959 $ 330,248 $ 330,248
Investment and mortgage-
related securities........ 518,838 518,838 431,863 431,863 387,431 387,431
Loans receivable, net....... 1,127,987 1,106,015 1,082,795 1,067,333 1,045,046 1,056,232
Loans held for sale......... 1,632 1,632 541 541 27,723 27,723
Federal Home Loan
Bank stock................ 14,585 14,585 13,537 13,537 13,537 13,537
Accrued interest
receivable................ 9,602 9,602 8,620 8,620 8,035 8,035
Deposits and accrued
interest.................. 1,300,613 1,238,606 1,343,007 1,298,038 1,398,858 1,381,119
Advance payments by
borrowers................. 13,012 13,012 1,661 1,661 1,710 1,710
Borrowings.................. 264,667 262,843 242,699 194,443 270,822 230,233
</TABLE>
The preceding table does not include any amount for the value of any
off-balance-sheet items (see Note 14) since the fair value of these items is not
significant.
16. MERGER AND CONVERSION
On February 21, 2000, Mutual and First Northern Capital Corp. (First
Northern), entered into an Agreement and Plan of Merger (the Merger Agreement).
The Merger Agreement has been approved by the boards of directors of Mutual and
First Northern.
To accomplish the transaction Mutual also adopted a plan of restructuring
in which it will reorganize into a mutual holding company (MHC) in which
Mutual's depositors will hold all of the voting rights. The MHC in turn will
form and own the majority interest in a subsidiary, a mid-tier stock holding
company (Mid-Tier HC). The balance of the shares of Common Stock will be offered
for sale to Mutual's depositors and issued to First Northern shareholders in the
Merger. As a result of the reorganization and merger, First Northern Capital
Corp will merge with and into Mid-Tier HC and, Mutual Savings Bank and First
Northern Savings Bank, S.A., will become wholly owned subsidiaries of Mid-Tier
HC.
Subject to the terms and conditions of the Merger Agreement, at the time of
the Merger, each outstanding share of First Northern common stock (First
Northern Common Stock), will be converted into the right to receive cash in the
amount of $15.00, or 1.5 shares of common stock, par value $.01 per
F-27
<PAGE> 28
MUTUAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 2000 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)
16. MERGER AND CONVERSION -- (CONTINUED)
share, of Mid-Tier HC Common Stock or a combination of cash and shares of
Mid-Tier HC Common Stock (Merger Consideration). Prior to the closing date,
Mutual will select the percentage of the total Merger Consideration to be paid
in Common Stock, which may not be less than 40% or more than 70%; the balance
will be paid in cash. The remaining shares of the Mid-Tier HC will be offered
for sale to Mutual's depositors, pursuant to the terms of a Plan of
Restructuring. The Restructuring will be accounted for as a pooling of
interests, whereas the merger will be accounted for as a purchase.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions set forth in the Merger Agreement, including approval by the
shareholders of First Northern and approval by the Office of Thrift Supervision,
the Federal Deposit Insurance Corporation and the Administrator of the Division
of Savings Institutions of the Wisconsin Department of Financial Institutions as
to both the Restructuring and the Merger. The depositors of Mutual must also
approve Mutual's Plan of Restructuring. The Merger is also subject to receipt of
an opinion of counsel to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
and the receipt of an opinion of counsel or a private letter ruling from the
Internal Revenue Service as to the federal income tax treatment of certain
transactions contemplated by the Merger Agreement. In addition, the Merger is
conditioned upon the approval for listing on the NASDAQ National Market of the
shares of Common Stock to be issued in the Merger, which shares will be
registered under the Securities Act of 1933 by a registration statement to be
filed with the Securities and Exchange Commission.
The amount and pricing of the proposed stock offering will be based upon an
independent appraisal of the Bank. In connection with the conversion, the costs
of issuing the common stock will be deducted from the sale proceeds. At June 30,
2000 and December 31, 1999, $749,000 (unaudited) and $0 of costs related to the
conversion have been capitalized. In the event that the consummation of the
conversion or merger do not occur, any recorded costs will be expensed.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its net worth as of the date of the latest consolidated
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders, if any, who continue to
maintain their deposit accounts at the Bank after the conversion.
The liquidation account will be reduced annually to the extent that
eligible account holders and supplemental eligible account holders, if any, have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or a supplemental
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder and supplemental eligible
account holder, if any, will be entitled to receive balances for accounts then
held.
Concurrently with the execution of the Merger Agreement, in order to induce
Mutual to enter into the Merger Agreement, the parties entered into a Stock
Option Agreement by which First Northern granted to Mutual an irrevocable option
to purchase up to 1,708,675 shares of First Northern Common Stock, which equals
19.9% of the number of shares of First Northern Common Stock outstanding on
February 21, 2000, at an exercise price of $9.0375 per share. The option would
become exercisable under certain circumstances if First Northern becomes the
subject of a third-party proposal for a competing transaction.
F-28
<PAGE> 29
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.
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> 30
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
January 22, 1999
Milwaukee, Wisconsin
FN-2
<PAGE> 31
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
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
-------- --------
Commitments and Contingencies (see Note 14)
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-3
<PAGE> 32
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-4
<PAGE> 33
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-5
<PAGE> 34
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 payments on available-for-sale mortgage-related
securities............................................. 88 933 901
Principal payments 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 available-for-sale... -- 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-6
<PAGE> 35
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-7
<PAGE> 36
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-8
<PAGE> 37
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 would establish an
allowance where the carrying amount of the impaired loan is greater than the
value. 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
FN-9
<PAGE> 38
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
economic life of the improvements. Estimated useful lives include periods up to
40 years for properties and up to 12 years for furniture and equipment.
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-10
<PAGE> 39
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
FN-11
<PAGE> 40
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<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-12
<PAGE> 41
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
FN-13
<PAGE> 42
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-14
<PAGE> 43
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-15
<PAGE> 44
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) (2) (225) (2) (61) (1)
Other........................................... (12) -- 15 -- (4) --
------- --- ------- --- ------ ---
Provision for income taxes........................ $ 3,525 33 $ 3,606 35 $3,651 37
======= === ======= === ====== ===
</TABLE>
FN-16
<PAGE> 45
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (SARs), 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-17
<PAGE> 46
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-18
<PAGE> 47
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
CONTRACTUAL EXERCISE 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).
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
FN-19
<PAGE> 48
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY -- (CONTINUED)
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-20
<PAGE> 49
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-21
<PAGE> 50
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
NUMBER OF EARNINGS
NET INCOME SHARES PER 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>
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.
FN-22
<PAGE> 51
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. SEGMENT INFORMATION -- (CONTINUED)
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.
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
FN-23
<PAGE> 52
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. COMMITMENTS -- (CONTINUED)
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-24
<PAGE> 53
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-25
<PAGE> 54
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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-26
<PAGE> 55
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
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>
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 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-27
<PAGE> 56
FIRST NORTHERN CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 shares 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-28
