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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 2000
REGISTRATION NO. 333-
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BANK MUTUAL CORPORATION
(Exact name of Registrant as specified in its charter)
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WISCONSIN 6035 39-0491685*
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
4949 WEST BROWN DEER ROAD
BROWN DEER, WISCONSIN 53223
(414) 354-1500
(Address, including ZIP Code, and telephone number,
including area code, of Registrant's principal executive offices)
MICHAEL T. CROWLEY, JR.
MUTUAL SAVINGS BANK
4949 WEST BROWN DEER ROAD
BROWN DEER, WISCONSIN 53223
(414) 354-1500
(Name, address, including ZIP Code, and telephone
number, including area code, of agent for service)
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COPIES TO:
KENNETH V. HALLETT CHRISTOPHER J. ZINSKI
QUARLES & BRADY LLP SCHIFF HARDIN & WAITE
411 EAST WISCONSIN AVENUE 233 SOUTH WACKER DRIVE
MILWAUKEE, WISCONSIN 53202 6600 SEARS TOWER
(414) 277-5000 CHICAGO, ILLINOIS 60606
(312) 876-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this registration statement becomes
effective.
If any of the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [ ]
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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* FEIN of Mutual Savings Bank. Bank Mutual is a corporation in formation
in a restructuring of Mutual Savings Bank, and has not yet been
assigned an employer ID number.
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- - ------------------------------------------------------------------------------------------------------------------------
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COMMON STOCK, $.01 PAR VALUE 8,996,198 SHARES N/A $80,590,944 $21,276
========================================================================================================================
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(1) Based upon the maximum number of shares of First Northern Capital Corp.
common stock to be converted into shares of Bank Mutual common stock,
par value $.01 per share, using the maximum stock conversion amount
pursuant to the Agreement and Plan of Merger to which this registration
statement relates and the number of First Northern shares outstanding
at April 28, 2000 (8,567,808 shares).
(2) Estimated pursuant to Rules 457(F)(1) and 457(C) under the Securities
Act of 1933, solely for the purpose of calculating the registration
fee, based upon the $13.4375 average of the high and low sales prices
for shares of First Northern common stock as reported on the Nasdaq
Stock Market on June 19, 2000, multiplied by 70% - the maximum stock
conversion amount - and multiplied by the maximum number of shares of
First Northern common stock as provided in note (1) above.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 3
FIRST NORTHERN CAPITAL CORP.
201 N. Monroe Avenue
P.O. Box 23100
Green Bay WI 54305-3100
(920) 437-7101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ___________, 2000
To the Shareholders of First Northern Capital Corp.:
A special meeting of the shareholders of First Northern Capital Corp. will
be held at ________________, located at ______________, Green Bay, Wisconsin, on
________, _______, 2000, at _____ a.m., local time, to consider and act upon a
proposal to approve an Agreement and Plan of Merger dated as of February 21,
2000 among Mutual Savings Bank, a predecessor to Bank Mutual and First Northern.
Pursuant to that merger agreement (a) First Northern will be merged into Bank
Mutual, which will then be a majority-owned subsidiary of Mutual Savings
Bancorp, MHC, and (b) holders of First Northern common stock will receive cash,
shares of Bank Mutual common stock or a combination thereof, pursuant to an
election described in the accompanying proxy statement/prospectus.
The record date for the special meeting is the close of business on
________, 2000. Only First Northern shareholders of record at that time are
entitled to notice of and to vote at the special meeting or any adjournment or
postponement thereof. To approve the merger, the holders of a majority of the
outstanding shares of First Northern common stock must vote in favor of the
merger agreement. First Northern shareholders do not have dissenters' rights of
appraisal.
The accompanying proxy statement/prospectus contains more detailed
information regarding the merger and the Agreement and Plan of Merger. A copy of
the merger agreement is included as Appendix A to the proxy
statement/prospectus.
YOUR VOTE IS IMPORTANT. EVEN IF YOU EXPECT TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. IF NO INSTRUCTIONS ARE INDICATED ON YOUR PROXY,
YOUR SHARES WILL BE VOTED "FOR" THE MERGER AGREEMENT. IF YOU DO NOT RETURN YOUR
PROXY OR VOTE IN PERSON, THE EFFECT IS A VOTE AGAINST THE MERGER AGREEMENT. YOU
CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS EXERCISED BY GIVING WRITTEN
NOTICE TO THE SECRETARY OF FIRST NORTHERN, OR FILING ANOTHER PROXY, OR ATTENDING
THE SPECIAL MEETING AND VOTING IN PERSON. DO NOT SEND ANY STOCK CERTIFICATES
WITH THE PROXY CARD.
THE FIRST NORTHERN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE MERGER AGREEMENT.
BY ORDER OF THE BOARD OF DIRECTORS
Marla J. Carr
Vice President and Secretary
___________, 2000
Green Bay, Wisconsin
<PAGE> 4
PROXY STATEMENT PROSPECTUS
OF OF
FIRST NORTHERN CAPITAL CORP. BANK MUTUAL CORPORATION
This proxy statement/prospectus is being furnished to you as a
shareholder of First Northern Capital Corp. in connection with the proposed
acquisition of First Northern by Bank Mutual. The First Northern board of
directors is soliciting your proxy for a special meeting of shareholders of
First Northern on , 2000 to approve that transaction. The holders of
at least a majority of First Northern's outstanding shares must vote in favor of
the merger agreement for it to be approved.
In the merger, First Northern shareholders may elect to receive cash,
Bank Mutual common stock, or a combination thereof. First Northern Savings Bank
will become a wholly-owned subsidiary of Bank Mutual. Mutual Savings Bank will
also be a wholly-owned subsidiary of Bank Mutual. Bank Mutual will be a
majority-owned subsidiary of Mutual Savings Bancorp, MHC.
This proxy statement/prospectus also is the prospectus of Bank Mutual
filed as part of a registration statement with the Securities and Exchange
Commission, relating to the shares of Bank Mutual common stock. Bank Mutual
estimates that between 5,140,685 and 8,996,168 shares of Bank Mutual common
stock will be issued in the merger.
Bank Mutual has applied for quotation of its common stock under the
symbol "BKMU" on the Nasdaq Stock Market. First Northern common stock is quoted
under the symbol "FNGB" on the Nasdaq Stock Market. On February 18, 2000, the
last trading day before the execution of the merger agreement, Nasdaq reported
that the last sale prices of First Northern common stock was $9.00 per share. On
, 2000, the last trading day before the date of this proxy
statement/prospectus, the last sale price of First Northern common stock was
$ .
YOU SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION THAT YOU RECEIVE
IN THIS TRANSACTION. FOR SOME OF THE IMPORTANT FACTORS WHICH YOU SHOULD CONSIDER
IN EVALUATING BANK MUTUAL COMMON STOCK AND THE PROPOSED TRANSACTION, PLEASE SEE
"RISK FACTORS" BEGINNING ON PAGE .
This Prospectus is dated , 2000. It is first being mailed to
First Northern shareholders on or about , 2000.
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THE SHARES OF BANK MUTUAL COMMON STOCK ARE NOT DEPOSITS OR ACCOUNTS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY, ARE NOT GUARANTEED BY BANK MUTUAL, AND ARE
SUBJECT TO INVESTMENT AND MARKET RISK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES. THEY ALSO HAVE NOT
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
TABLE OF CONTENTS
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SUMMARY ......................................................................4
The Parties...........................................................4
Summary of the Merger.................................................5
First Northern Special Meeting.......................................12
Comparison of Shareholder Rights.....................................13
Risk Factors.........................................................13
Do You Have Questions?...............................................13
Mutual Savings' Selected Historical Financial Data...................14
First Northern Selected Historical Financial Data....................16
Comparative Per Share Data of Bank Mutual and First Northern.........18
Pro Forma Per Share Data.............................................18
First Northern Market Information....................................20
Bank Mutual Market Information.......................................20
RISK FACTORS..................................................................21
THE SPECIAL MEETING...........................................................25
THE MERGER AND THE MERGER AGREEMENT...........................................27
General..............................................................27
Elections to Receive Cash or Stock; Conversion of Shares
in the Merger......................................................27
Exchange of First Northern Certificates; No Fractional Shares........29
Background of the Merger.............................................31
First Northern's Reasons for the Merger..............................34
Mutual's Reasons for the Merger......................................35
Interests of Officers and Directors in the Merger....................35
Opinion of First Northern's Financial Advisor........................37
Employee Plans.......................................................43
Management and Operations of First Northern Savings After
the Merger.........................................................44
Conduct of Business Pending the Merger...............................44
Representations, Warranties and Covenants............................44
Conditions to the Merger.............................................45
Regulatory Approvals Required for the Merger.........................46
No Solicitation......................................................47
Stock Option Agreement...............................................47
Termination; Amendment; Waiver.......................................48
Fees and Expenses....................................................49
Federal Income Tax Consequences; Tax Opinion................ ........49
Resale of Bank Mutual Common Stock...................................54
Accounting Treatment.................................................54
No Dissenters' Rights of Appraisal...................................54
MUTUAL SAVINGS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................54
BUSINESS OF MUTUAL SAVINGS BANK...............................................70
MANAGEMENT....................................................................98
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THE BANK MUTUAL RESTRUCTURING................................................109
BUSINESS OF FIRST NORTHERN...................................................113
REGULATION...................................................................114
RESTRICTIONS ON ACQUISITION OF BANK MUTUAL...................................126
RIGHTS OF BANK MUTUAL SHAREHOLDERS; COMPARISON TO FIRST NORTHERN SHARES......128
PRO FORMA FINANCIAL INFORMATION..............................................134
REGULATORY CAPITAL COMPLIANCE................................................145
MARKET FOR BANK MUTUAL COMMON STOCK..........................................150
LEGAL OPINIONS...............................................................152
EXPERTS ....................................................................152
OTHER INFORMATION WHICH YOU CAN OBTAIN.......................................152
INDEX TO FINANCIAL STATEMENTS................................................154
AGREEMENT AND PLAN OF MERGER..........................................Appendix A
FAIRNESS OPINION OF KBW...............................................Appendix B
</TABLE>
NEITHER BANK MUTUAL NOR FIRST NORTHERN HAS AUTHORIZED ANYONE TO GIVE
YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS EXCEPT FOR THOSE IN THIS
PROXY STATEMENT/PROSPECTUS. THAT IS TRUE WHETHER THE STATEMENTS ARE IN
CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE OFFERING OF SECURITIES. YOU
SHOULD NOT RELY UPON ANY OTHER INFORMATION OR REPRESENTATIONS EVEN IF SOMEONE
PROVIDES YOU WITH THEM, BECAUSE THEY ARE NOT AUTHORIZED BY MUTUAL, FIRST
NORTHERN OR ANYONE ELSE. MUTUAL AND FIRST NORTHERN DO NOT IMPLY OR REPRESENT BY
DELIVERING THIS PROXY STATEMENT/PROSPECTUS THAT MUTUAL, FIRST NORTHERN OR THEIR
BUSINESSES ARE UNCHANGED AFTER ITS DATE OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME AFTER ITS DATE.
Mutual has provided all information contained in this proxy
statement/prospectus about Bank Mutual, Mutual Savings Bank and the MHC. First
Northern has provided all information in this proxy statement/prospectus about
First Northern.
3
<PAGE> 7
SUMMARY
This section is a summary of important information in this proxy
statement/prospectus, and includes summaries of information which we believe is
material. To understand the merger fully and for a more complete description of
the legal terms of the merger, you should read carefully this entire document
and the documents to which we have referred you. See "Other Information Which
You Can Obtain" on page __. We have included page references to direct you to a
more complete description of some of the topics presented in this summary.
THE PARTIES
MUTUAL
For convenient reference, when we use the term "Mutual" we refer
together to Mutual Savings, Bank Mutual and the MHC, and including First
Northern Savings after the First Northern merger.
Bank Mutual Corporation
Bank Mutual will become a holding company by owning all of the common
stock of Mutual Savings and of First Northern Savings after the restructuring.
Bank Mutual has not engaged in any business to date. The primary office of Bank
Mutual is located at 4949 West Brown Deer Road, Brown Deer, Wisconsin 53223.
After the restructuring, the stock offering and the First Northern
merger, we expect Bank Mutual to be the fifth largest financial institution
headquartered in the state of Wisconsin, based on pro forma total assets of $2.6
billion at March 31, 2000.
Mutual Savings Bank
Mutual Savings is a community-oriented savings bank which emphasizes
traditional financial services to individuals and businesses within its market
areas. Our principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, in residential mortgage loans, consumer loans, multi-family and
commercial real estate loans, and commercial business loans. We also invest in
various mortgage-related securities and investment securities.
Mutual Savings has 50 branches located in Wisconsin, primarily in the
southern and northwestern parts of the state, and one office in eastern
Minnesota. It serves over 80,000 households. At March 31, 2000, it had assets of
$1.7 billion, deposits of $1.3 billion and equity of $163.9 million. By asset
size, it is the largest mutual savings institution headquartered in Wisconsin,
and one of the largest mutual savings institutions in the country. Mutual
Savings has grown both through acquisitions and internal growth. Its most recent
acquisition was of the $730.7 million asset First Federal Bancshares of Eau
Claire in March 1997.
As part of this transaction, Mutual Savings is converting from a
Wisconsin-chartered mutual savings bank into a federal stock savings bank. When
we refer to Mutual Savings, we also include the federal savings bank after that
conversion.
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<PAGE> 8
Mutual Savings Bancorp, MHC
The MHC will own more than half of the outstanding common stock of Bank
Mutual after the restructuring. We do not expect that the MHC will engage in any
business activity other than owning a majority of the common stock of Bank
Mutual and managing dividends, if any, it receives from Bank Mutual. We expect
that the MHC initially will waive the receipt of dividends declared by Bank
Mutual.
For further information, you should see "Business of Mutual Savings
Bank" beginning on page __, "Bank Mutual's Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page __, and
"Index to Financial Statements" on page __.
FIRST NORTHERN
First Northern, a Wisconsin corporation founded in 1995, is a holding
company for First Northern Savings Bank, S.A. First Northern Savings is a
Wisconsin-chartered savings and loan association. First Northern Savings also
has wholly-owned subsidiaries which manage certain investments, including the
purchase of loans, for First Northern Savings, and which offer full-service
brokerage services, and a 50%-owned subsidiary which originates, services and
sells automobile loans.
At March 31, 2000, First Northern had assets of $866.1 million,
deposits of $567.7 million and shareholders' equity of $77.4 million. The
primary office of First Northern is located at 201 North Monroe Avenue, Green
Bay, Wisconsin 54305. In this document, we use "First Northern" to refer to
First Northern Capital Corp. and "First Northern Savings" to refer to First
Northern Savings Bank, S.A.
As part of this transaction, First Northern Savings will convert into a
federally-chartered savings bank; when we refer to First Northern Savings, we
also include the federal savings bank after that conversion. After the
transaction, First Northern Savings will be wholly-owned by Bank Mutual.
For further information, you should see "Business of First Northern" on
page ___ and the information about First Northern incorporated by reference in
this document. See "Other Information which you can Obtain" on page ___.
SUMMARY OF THE MERGER (page __)
THE MERGER AGREEMENT IS ATTACHED AT THE BACK OF THIS PROXY
STATEMENT/PROSPECTUS AS APPENDIX A. WE STRONGLY ENCOURAGE YOU TO READ THE MERGER
AGREEMENT, BECAUSE IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
In the proposed merger, First Northern will merge into Bank Mutual.
Bank Mutual will be a majority-owned subsidiary of the MHC. First Northern
Savings and Mutual Savings will be wholly-owned subsidiaries of Bank Mutual. You
may elect to receive cash, shares of Bank Mutual common stock or a combination
in exchange for your shares of First Northern common stock.
EFFECTIVE TIME OF THE MERGER
Bank Mutual and First Northern hope to complete the merger shortly
after the special meeting, if regulatory approvals and other required matters
are completed by that time.
5
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WHAT YOU WILL RECEIVE IN THE MERGER (page __)
First Northern shareholders will receive, either cash, Bank Mutual
common stock, or a combination of cash and stock. Each First Northern share
which is converted into cash will be converted into $15.00; each First Northern
share converted into stock will be converted into 1.5 shares of Bank Mutual
common stock.
Shortly before the merger, Bank Mutual will select a stock percentage
between 40% and 70% of the total merger consideration that it will pay in Bank
Mutual common stock, with the remainder to be paid in cash. Therefore, the exact
percentage of Mutual common stock will not be determined until shortly before
the merger.
First Northern shareholders may elect to receive:
- cash for all of their First Northern shares;
- shares of Bank Mutual common stock for all of their First
Northern shares; or
- if they own at least 170 shares of First Northern common
stock, cash for some of their First Northern shares and shares
of Bank Mutual common stock for the remainder. In this "mixed"
election, shareholders will receive Bank Mutual common stock
for the lesser of 50% of their shares or the stock percentage,
referred to above, as chosen by Bank Mutual for the total
consideration to be payable in stock; the balance of shares
will be converted into cash.
You will receive an election form about [45] days before we anticipate the
merger will occur. In some cases, there will be qualifications, adjustments or
pro rations made to these elections and payments.
These exceptions are the following:
- cash at the rate of $10 per full Bank Mutual share will be
paid instead of any fractional shares of Bank Mutual common
stock resulting from the merger;
- if total elections for Bank Mutual common stock exceed the
percentage to be paid in stock, the amount of the elections of
First Northern shareholders for Bank Mutual common stock will
be reduced pro rata so that the resulting amounts approximate
the Bank Mutual common stock to be issued in the merger, with
the balance of the merger consideration paid in cash;
- if total elections for cash, including the cash paid for
fractional shares, exceed the cash percentage, the amount of
the elections of First Northern shareholders for cash will be
reduced pro rata so that the resulting amounts approximate the
cash to be paid in the merger, with the balance of the merger
consideration paid in Bank Mutual common stock;
- if total elections for cash exceed the cash percentage, Bank
Mutual and First Northern also may agree that all First
Northern shareholders electing cash who otherwise would
receive fewer than 25 shares of Bank Mutual common stock will
receive all cash, and the
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amount of shares and cash to be received by other First
Northern shareholders electing cash will be adjusted
accordingly; and
- if you do not make a timely election for either cash or stock
or a mixed combination, we will honor the elections of the
other First Northern shareholders to the extent possible and
then divide the remaining merger consideration, whether cash,
shares of Bank Mutual common stock, or both, proportionately
among the non-electing First Northern shareholders.
For example, if a First Northern shareholder owns 1,000 shares of First
Northern common stock and elects to be paid in stock, this would be exchanged
for 1,500 shares of Bank Mutual common stock. If the same shareholder requests
and receives all cash, the shareholder would receive $15,000. If that
shareholder makes a mixed election and the stock percentage of the transaction
as a whole is 40%, the shareholder would receive 600 shares of Bank Mutual
common stock (1,000 x .40 x 1.5) and $9,000 in cash (1,000 x .60 x $15). If that
shareholder makes a mixed election and the stock percentage of the transaction
as a whole is 60%, the shareholder would receive 750 shares of Bank Mutual
common stock (1,000 x .50 x 1.5) and $7,500 in cash (1,000 x .50 x $15).
These examples illustrate only a few of the possibilities that may
occur. The actual allocation of stock and cash for any particular First Northern
shareholder could be anywhere from 100% stock to 100% cash. Please note that our
examples assume that neither the cash nor the stock election is oversubscribed
and that there is no pro ration.
TAX CONSEQUENCES (page __)
To the extent that Bank Mutual stock is issued in the merger, the
merger will be structured as a "tax-free reorganization" for federal income tax
purposes. This means that First Northern shareholders generally will not
recognize any gain or loss for federal income tax purposes to the extent they
exchange their First Northern common stock for Bank Mutual common stock in the
merger. First Northern shareholders will recognize gain or loss, however, in
connection with the receipt of any cash in the merger, including cash paid for
fractional shares of Bank Mutual stock. The companies themselves, as well as the
holders of Bank Mutual stock, will not recognize gain or loss as a result of the
merger. Bank Mutual's outside counsel, Quarles & Brady LLP, has given First
Northern a legal opinion that the merger will be treated as a tax-free
reorganization for federal income tax purposes. It is a condition to First
Northern's obligation to complete the merger that this legal opinion not be
withdrawn or materially modified.
The federal income tax consequences described above may not apply to
all holders of First Northern common stock. Your tax consequences will depend
upon your personal situation. You should consult your tax advisor regarding the
tax consequences of the merger to you.
THE TAX OPINION CONTAINS EXCEPTIONS AND QUALIFICATIONS BECAUSE TAX
MATTERS ARE COMPLICATED, AND YOUR TAX CONSEQUENCES FROM THE MERGER WILL DEPEND
ON THE FACTS OF YOUR OWN SITUATION. WE URGE YOU TO CONTACT YOUR OWN TAX ADVISOR
TO UNDERSTAND FULLY HOW THE MERGER WILL AFFECT YOU, INCLUDING HOW ANY STATE,
LOCAL OR FOREIGN TAX LAWS MAY APPLY TO YOU.
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<PAGE> 11
WHAT HAPPENS TO FIRST NORTHERN STOCK OPTIONS (page __)
Options granted under First Northern's stock option plans will not be
assumed by Bank Mutual. First Northern option holders may exercise vested
options prior to the merger's effective date. The First Northern shares
resulting from an exercise of stock options will be converted in the same way
that other First Northern shares of common stock are converted in the merger.
To the extent that options are not exercised before the merger, whether
or not they are vested, First Northern may "cash out" those options for a cash
amount equal to the difference between the exercise price per share and $15. In
addition, to recognize that option holders will not be able to have their
options converted into options to acquire Bank Mutual stock and the
consequential tax impact to the option holders, First Northern may under the
merger agreement pay option holders an additional amount up to 25% of the cash
difference. We expect First Northern to make these payments. However, the total
of these additional payments may not exceed $756,000 after taking First
Northern's tax deductions for those payments. We decided that First Northern
options would not be assumed by Bank Mutual to permit a greater amount of Bank
Mutual stock to be available to First Northern shareholders.
It is a condition to Bank Mutual's obligations under the merger
agreement that no First Northern stock options be outstanding at the effective
time of the merger.
NO DISSENTERS' RIGHTS
Under Wisconsin law, First Northern shareholders do not have
dissenters' rights of appraisal.
OLD AND NEW STOCK CERTIFICATES
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
After we complete the merger, if you have not already submitted stock
certificates with an election form, we will send you written instructions that
describe how to exchange your First Northern stock certificates for Bank Mutual
stock certificates and/or cash.
PERCENTAGE OWNERSHIP INTEREST BY FIRST NORTHERN SHAREHOLDERS AFTER THE
MERGER
Bank Mutual will pay between 40% and 70% of the total merger
consideration by issuing shares of its common stock to the First Northern
shareholders. This means that Bank Mutual will issue between approximately 5.1
million shares and 9.0 million shares of its common stock to First Northern
shareholders in the merger. Assuming the sale of approximately 5.9 million
shares of Bank Mutual common stock in the Mutual Stock offering, which is the
midpoint in its expected offering, and that 40% of the total merger
consideration is in Bank Mutual stock, the shares issued to First Northern
shareholders will represent approximately 23.2% of the total outstanding Bank
Mutual common stock after the merger, and approximately 46.5% of the shares held
by persons other than the MHC.
This information is based on the number of First Northern shares
outstanding on March 31, 2000, and it assumes that no outstanding First Northern
options are exercised before the merger. In any event, a majority of the
outstanding Bank Mutual shares will be held by the MHC. Federal regulations
require that the MHC continue to own a majority of Bank Mutual's shares as long
as the MHC remains as a mutual holding company.
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OPINION OF FIRST NORTHERN'S FINANCIAL ADVISOR (page __)
In deciding to approve the merger, the First Northern board considered
an opinion from its financial advisor, Keefe, Bruyette & Woods, Inc., that, as
of the date of such opinion, the consideration to be paid in the merger is fair,
from a financial point of view, to First Northern's shareholders. The full text
of the written opinion of KBW is attached as Appendix B to this proxy
statement/prospectus. We encourage you to read this opinion.
INTERESTS OF FIRST NORTHERN'S OFFICERS AND DIRECTORS IN THE MERGER
(page __)
When considering the recommendation by the First Northern board to vote
"FOR" the merger agreement, you should be aware that certain directors and
officers of First Northern have interests in the merger other than solely as
First Northern shareholders. These interests may conflict with the general
interests of shareholders of First Northern. The First Northern Board was aware
of these interests and considered them in approving the merger.
- Outstanding First Northern stock options, including options
held by directors and officers, will be vested as a result of
the merger. They may exercise their options, or they will be
repurchased for cash in the amount of the "spread" between the
exercise price and $15. Holders may receive an additional
payment of up to 25% of their cash spread value to reflect the
tax consequences to holders from their inability to convert
the options into options for Bank Mutual common stock.
- First Northern directors and officers will continue to be
indemnified after the merger.
- The employment agreement of the chief executive officer of
First Northern will be assumed by Bank Mutual. While he will
waive provisions of his employment agreement that might result
in an acceleration of benefits as a result of the merger, he
will not be asked to waive similar provisions under his
supplemental employee retirement plan. He also will become
president and chief operating officer of Bank Mutual, and a
director of Mutual Savings.
- Other First Northern executive officers with employment
agreements will be offered replacement employment agreements.
- Directors of First Northern will continue as directors of
First Northern Savings, and four directors of First Northern
will be elected to the MHC and the Bank Mutual boards.
MANAGEMENT AND OPERATIONS OF FIRST NORTHERN AFTER THE MERGER (page __)
In the merger, First Northern will merge into Bank Mutual, and First
Northern Savings will become a company which is wholly owned by Bank Mutual.
Michael T. Crowley, Jr., the President and Chief Executive Officer of Mutual
Savings, will be the Chairman and Chief Executive Officer of Bank Mutual.
Michael D. Meeuwsen, President and Chief Executive Officer of First Northern,
will be the President and Chief Operating Officer of Bank Mutual.
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<PAGE> 13
The Board of Directors of the MHC and Bank Mutual will consist of the
seven current directors of Mutual Savings, and four current directors of First
Northern to be chosen by Bank Mutual. Those individuals have not yet been
selected by Mutual although Mutual expects Mr. Meeuwsen to be one of four
designees. The current directors of First Northern will also continue, with the
addition of Mr. Crowley, as directors of First Northern Savings, and Mr.
Meeuwsen will become a director of Mutual Savings.
Bank Mutual currently intends that First Northern Savings will continue
as a separate entity. Initial management and employees of First Northern Savings
as a subsidiary of Bank Mutual will be the same as those before the merger.
REGULATORY APPROVALS (SEE PAGE ___)
In order to complete the merger, we must receive approvals from, or
make filings with, the appropriate federal governmental agencies. The Mutual
restructuring also requires regulatory approvals, and it is a condition to the
merger that the restructuring occur. Mutual will not proceed with the First
Northern merger if the restructuring does not simultaneously occur.
OTHER CONDITIONS TO THE MERGER (pages __ and __)
The merger will be completed only if various conditions are met. These
conditions include, among others, that:
- the First Northern shareholders approve the merger;
- the Mutual restructuring receives regulatory approval,
and which also requires Mutual Savings member approval;
- the parties perform their obligations under the merger
agreement;
- the representations and warranties of the parties continue to
be materially accurate; and
- the parties receive the tax opinion discussed above.
The parties may waive conditions unless they are legally prohibited
from doing so. First Northern shareholder approval may not be legally waived.
NO SOLICITATION BY FIRST NORTHERN OF COMPETING TRANSACTIONS; MUTUAL'S
STOCK OPTION (page __)
First Northern has agreed not to discuss, conduct or agree to any other
transaction or proposal that would compete with the merger agreement and the
merger, unless First Northern's board must do so to meet its fiduciary
obligations to the First Northern shareholders. Bank Mutual or First Northern
may terminate the merger agreement if First Northern enters into or agrees to
another transaction following a good faith determination that the action is
required by its board of directors' fiduciary duties.
First Northern entered into a stock option agreement with Mutual
Savings which granted Mutual Savings the option to purchase from First Northern
up to 1,708,675 shares of First Northern common stock at a price of $9.0375 per
share. The stock option agreement was an inducement to and condition of Mutual
Savings entering into the merger agreement. The option is intended to increase
the likelihood that the merger will be completed and, consequently, may
discourage third parties who might be interested in acquiring all of or a
significant interest in First Northern from considering or proposing such an
acquisition.
10
<PAGE> 14
Mutual Savings may exercise the option only if certain events described
in the stock option agreement occur. None of these events has occurred as of the
date of this proxy statement/prospectus. At the request of the holder of the
option, under certain circumstances, First Northern will repurchase, for a
specified price, the option and any shares of First Northern common stock
purchased upon its exercise.
These provisions are included in the merger agreement, and the stock
option agreement was signed, because Mutual would not agree to the merger
agreement without protection against competing proposals or transactions which
may upset the proposed merger.
THE MUTUAL RESTRUCTURING (page __)
The merger will not happen unless Mutual simultaneously undergoes the
restructuring transaction which is further described in this document. Our
discussions regarding Bank Mutual and the MHC assume completion of that
restructuring.
The restructuring includes a number of facets; it has the general
effect of creating holding companies for Mutual Savings and, assuming the
merger, First Northern Savings. The transactions also introduce a stock
ownership structure to Mutual which prior to the restructuring has been a
member- owned institution. Significant elements of the restructuring include:
- Formation of the MHC, which is a mutual holding company. As a
mutual holding company, all voting power in the MHC will be
held by depositors of Mutual Savings.
- The establishment of Bank Mutual as a "mid-tier holding
company" that will be majority-owned by the MHC. The balance
of the shares of Bank Mutual will be held by others, including
depositors of Mutual Savings and others who have purchased
shares in a conversion offering, former First Northern
shareholders, and Mutual employee plans.
- Mutual Savings will be a wholly-owned subsidiary of Bank
Mutual. Rather than being a mutual institution in which all of
the voting power is held by its members, Mutual Savings will
be a stock entity, with all of its shares held by Bank Mutual.
In connection with the establishment of Bank Mutual, Mutual Savings
depositors are being given the opportunity to purchase shares of Bank Mutual at
an appraised value in a stock offering. If all of the shares are not purchased
by Mutual depositors, they will be offered to other members of the public and/or
the shares used to increase the number of shares of the Bank Mutual which will
be issued in the First Northern merger.
The following chart shows our new structure, which is commonly referred
to as a mutual holding company structure with a mid-tier holding company, after
the restructuring, Bank Mutual's stock offering and the First Northern merger:
11
<PAGE> 15
The MHC Public Shareholders
50.1% 49.9%
Bank Mutual
Mutual Savings First Northern Savings
100% 100%
TERMINATION, AMENDMENT OR WAIVER OF THE MERGER AGREEMENT
Even if the First Northern shareholders approve the merger agreement,
Bank Mutual and First Northern can agree at any time to terminate the merger
agreement without completing the merger. The merger agreement can also be
terminated by either party under specified circumstances. Once shareholders
approve the merger agreement, however, no amendment may be made to the merger
agreement without further shareholder approval if the amendment would reduce the
merger consideration or otherwise materially adversely affect the rights of
First Northern shareholders.
ACCOUNTING TREATMENT (page __)
Bank Mutual expects to account for the merger as a purchase, which
means that First Northern's assets and operations will be reflected only from
the merger date.
BOARD RECOMMENDATION TO FIRST NORTHERN SHAREHOLDERS
The First Northern board of directors believes that the merger is in
the best interests of First Northern and its shareholders. THE FIRST NORTHERN
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AGREEMENT. Some
First Northern directors and officers have interests in this transaction other
than as First Northern shareholders. For a description, you should see "The
Merger and the Merger Agreement -- Interests of Officers and Directors in the
Merger."
FIRST NORTHERN SPECIAL MEETING (page __)
The special meeting will be held at _______________, located at
______________, Green Bay, Wisconsin, _____, on _______, ____________, 2000 at
_____ a.m. At the special meeting, First Northern shareholders such as you will
consider and vote on a proposal to approve the merger agreement.
RECORD DATE
You can vote at the special meeting only if you owned shares of First
Northern common stock at the close of business on __________, 2000, which was
the record date.
VOTE REQUIRED TO APPROVE THE MERGER
The merger agreement requires the approval of the holders of a majority
of the outstanding shares of First Northern common stock. If you do not return
your proxy or vote in person, it will have the effect of a vote against the
merger agreement. Brokers who hold your shares of First Northern common stock as
nominees cannot vote those shares unless you give them instructions to vote in
the manner that they require. Mutual Savings members do not need to vote to
approve the merger, but they need to approve the Restructuring.
12
<PAGE> 16
VOTING POWER, VOTING BY MANAGEMENT
On the record date, __________ shares of First Northern common stock
were outstanding. Of these, _______ shares, approximately ____% of the shares
entitled to vote, were beneficially owned by directors and executive officers of
First Northern. Those numbers exclude stock options.
REVOKING PROXIES
You can revoke a proxy previously given by you by giving written notice
to the Secretary of First Northern, by filing another proxy, or by attending the
special meeting and voting in person.
COMPARISON OF SHAREHOLDER RIGHTS (page __)
Bank Mutual is a federally-chartered corporation, while First Northern
is incorporated in Wisconsin and governed by Wisconsin law. Bank Mutual has
elected to be generally governed by Wisconsin corporate law where it is
consistent with federal law. However, there are some differences in the rights
of the shareholders under federal and Wisconsin law, and under the charters and
other corporate documents relating to Bank Mutual and First Northern.
RISK FACTORS (page __)
YOU SHOULD SEE "RISK FACTORS" FOR SOME FACTORS WHICH YOU SHOULD
CONSIDER IN DECIDING HOW TO VOTE ON THE MERGER AGREEMENT.
DO YOU HAVE QUESTIONS?
If you have any questions about the merger, please call First Northern
Capital Corp., attention: Michael D. Meeuwsen or Rick B. Colberg, at (920)
437-7101. The precise allocation of merger consideration will not be chosen by
Mutual until immediately prior to closing, so that information will not be
available before that time.
13
<PAGE> 17
MUTUAL SAVINGS' SELECTED HISTORICAL FINANCIAL DATA
In the following table, Mutual Savings provides selected financial data
for its past five fiscal years. Mutual Savings derived this information from its
audited financial statements, although the table itself is not audited. The
table also includes information at March 31, 2000 and for the three months ended
March 31, 2000 and 1999, derived from Mutual Savings' unaudited financial
statements. Operating results for the interim periods do not necessarily
indicate the results of Mutual Savings that you may expect for the entire year.
The following data should be read together with Mutual Savings' consolidated
financial statements and related notes and "Management's Discussion and
Analysis" which appear in this proxy statement/prospectus at pages F-1 and ____,
respectively.
We are presenting information for Mutual Savings rather than Bank
Mutual because Bank Mutual has not had any operations or material assets prior
to this time. In the restructuring, Bank Mutual will become the sole shareholder
of Mutual Savings immediately prior to the First Northern merger.
In 1999, non-interest expense includes a special write-off of
intangible assets of $15.6 million which Mutual deemed to be impaired. The
intangible assets resulted from the 1997 acquisition of First Federal. The
effect on results for the year was a decrease of $13.6 million. See footnote 2
to Mutual Savings' consolidated financial statements. Also, in 1996,
non-interest expense includes a one-time FDIC Savings Association Insurance Fund
("SAIF") assessment of $6.4 million. All SAIF insured savings associations were
specially assessed in this quarter. The effect on net income of the assessment
in 1996 was a decrease of $3.9 million.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
--------------------- --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
--------------------- -------------------------------------------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $1,742,184 $1,769,506 $1,872,862 $1,826,080 $1,169,271 $1,205,092
Loans 1,103,826 1,082,795 1,037,589 1,255,082 825,131 790,713
Investment securities available for 48,165 57,763 116,534 159,208 172,299 120,081
Mortgage-related securities available for sale 472,456 374,100 270,897 225,906 90,452 196,902
Total cash and cash equivalents 39,700 178,959 330,248 79,064 37,151 55,234
Federal Home Loan Bank stock 13,537 13,537 13,537 20,237 8,001 7,841
Intangible assets 11,261 11,496 29,786 32,589 -- --
Foreclosed real estate, net 2,729 3,018 3,505 159 716 572
Total deposits 1,319,188 1,343,007 1,398,858 1,362,330 994,283 1,004,559
Total borrowings 238,699 242,699 270,822 270,867 -- 25,000
Total shareholders' equity 163,909 163,820 175,743 163,052 151,294 147,031
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $ 29,842 $ 29,151 $118,302 $ 125,470 $ 115,993 $ 81,674 $ 81,793
Total interest expense 18,179 19,127 75,337 80,017 72,194 49,595 50,390
-------- -------- -------- --------- --------- -------- --------
Net interest income 11,663 10,024 42,965 45,453 43,799 32,079 31,403
Provision for loan losses 76 39 350 637 1,065 672 597
-------- -------- -------- --------- --------- -------- --------
Net interest income after provision fo 11,587 9,985 42,615 44,816 42,734 31,407 30,806
loan losses
-------- -------- -------- -------- --------- -------- -------
Non-interest income:
Fees and service charges 1,520 1,374 6,100 6,097 4,758 2,816 2,840
Gain on sale of loans, mortgage-related
securities and investment securities 8 270 655 1,025 474 333 563
Other non-interest income 302 282 1,229 1,318 927 520 406
-------- -------- -------- --------- -------- -------- -------
Total non-interest income 1,830 1,926 7,984 8,440 6,159 3,669 3,809
Non-interest expense:
Amortization of intangible assets 235 678 18,290 2,738 1,941 -- --
Other non-interest expense 8,281 8,281 32,989 32,783 30,145 29,904 22,790
-------- -------- -------- --------- -------- ------- --------
Income before income taxes 4,901 2,952 (680) 17,735 16,807 5,172 11,825
Income tax expense 1,855 1,111 3,803 6,584 6,622 1,671 4,181
-------- -------- -------- --------- -------- ------- -------
Net income (loss) $ 3,046 $ 1,841 $ (4,483) $ 11,151 $ 10,185 3,501 7,644
======== ======== ======== ========= ======== ======= =======
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
MARCH 31,
--------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets 0.70% 0.40% (0.24)% 0.60% 0.62% 0.29% 0.64%
Return on average assets excluding 0.75 0.52 0.63 0.73 0.72 0.29 0.64
amortization of intangible assets
Return on average equity 7.48 4.17 (2.55) 6.57 6.52 2.34 5.42
Return on average equity excluding 7.99 5.49 6.63 7.95 7.59 2.34 5.42
amortization of intangible assets
Net interest rate spread (a) 2.33 1.89 2.03 2.16 2.31 2.09 2.07
Net interest margin (b) 2.78 2.29 2.44 2.58 2.76 2.77 2.69
Non-interest income to average assets 0.42 0.42 0.43 0.46 0.37 0.31 0.32
Non-interest expense (excluding 1.89 1.79 1.79 1.77 1.82 1.97 1.90
amortization intangible assets)
as a percent of average assets
Efficiency ratio (c) 61.37 69.30 64.75 60.83 60.34 83.65 64.72
Average interest-earning assets to average 1.10x 1.09x 1.10x 1.09x 1.10x 1.16x 1.14x
interest-bearing liabilities
CAPITAL RATIOS:
Average equity to average assets 9.35% 9.52% 9.56% 9.17% 9.44% 12.54% 11.72%
Equity to assets 9.41 9.57 9.26 9.38 8.93 12.94 12.20
Leverage capital 9.25 8.00 8.66 7.78 7.40 12.69 12.26
Total risk-based capital 18.76 17.56 18.51 17.02 14.80 24.58 24.04
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.33% 0.28% 0.44% 0.65% 0.79% 0.24% 0.07%
Non-performing assets to total assets 0.37 0.46 0.44 0.55 0.55 0.19 0.07
Allowance for loan losses to 190.42 229.14 144.54 101.86 72.14 201.80 623.53
non-performing loans
Allowance for loan losses to 109.02 88.79 88.74 66.98 71.01 178.15 386.77
non-performing assets
Allowance for loan losses to total loans 0.63 0.64 0.64 0.66 0.57 0.48 0.43
OTHER DATA:
Offices 51 52 51 52 53 33 33
</TABLE>
- - --------------------
(a) "Net interest rate spread" means the difference between the average
yield on the average balance of interest-earning assets and the average
cost on the average balance of interest-bearing liabilities.
(b) "Net interest margin" means the average net interest income divided by
the average balance of interest-earning assets.
(c) Computed using net interest income plus non-interest income as the
denominator and non-interest expense (excluding amortization of
intangible assets) as the numerator.
15
<PAGE> 19
FIRST NORTHERN SELECTED HISTORICAL FINANCIAL DATA
In the following table, we provide selected financial data for First
Northern for its past five fiscal years. First Northern derived this information
from its audited financial statements, although the table itself is not audited.
The table also includes information at and for First Northern's three months
ended March 31, 2000 and 1999, derived from First Northern's unaudited financial
statements. Operating results for the interim periods do not necessarily
indicate the results of First Northern that you may expect for the entire year.
The following data should be read together with First Northern's consolidated
financial statements and related notes and First Northern "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
are incorporated by reference in this proxy statement/prospectus.
In 1996, non-interest expense includes a one-time SAIF assessment of
$2.9 million. The effect on net income of this assessment in 1996 was a decrease
of $1.7 million. Earnings per share in 1996 were decreased by $0.19.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
--------------------- --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
--------------------- -------------------------------------------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 866,068 $ 839,623 $ 719,713 $ 667,696 $ 615,503 $ 553,467
Loans 766,554 736,880 631,739 593,529 553,995 500,535
Loans held for sale 2,347 1,085 3,075 2,119 2,532 2,989
Securities held to maturity 36,541 36,263 35,263 31,906 25,908 23,388
Investment securities available for sale 9,018 8,444 9,205 6,799 5,635 2,978
Mortgage-related securities available for sale 5,375 5,554 996 932 1,837 2,103
Total cash and cash equivalents 4,712 12,372 7,211 964 3,563 1,274
Federal Home Loan Bank stock 10,750 9,250 5,250 5,250 3,773 3,768
Intangible assets -- -- - - - -
Foreclosed real estate and repossessed assets, 432 382 106 153 189 136
net
Total deposits 567,693 566,908 542,372 481,788 458,323 449,954
Total borrowings 211,484 185,899 91,977 103,277 77,272 21,000
Total shareholders' equity 77,428 76,795 76,093 73,817 70,224 72,579
Book value per share $ 9.03 $ 8.98 $ 8.68 $ 8.35 $ 8.01 $ 7.97
Shares outstanding, net of treasury shares 8,573 8,549 8,765 8,846 8,775 9,110
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------------------- -------------------------------------------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $ 14,596 $ 12,482 $ 52,770 $ 49,690 $ 46,596 $ 41,876 $ 39,205
Total interest expense 9,152 7,140 30,686 29,003 26,491 23,203 22,036
------------------ ------------------------------------------------- -------
Net interest income 5,444 5,342 22,084 20,687 20,105 18,673 16,989
Provision for loan losses 165 60 472 420 320 370 240
------------------ ------------------------------------------------- -------
Net interest income after 5,279 5,282 21,612 20,267 19,785 18,303 16,749
provision for loan losses
------------------ ------------------------------------------------- -------
Non-interest income:
Fees and service charges 503 405 1,829 1,735 1,791 1,548 1,403
Gain on sale of loans,
mortgage-related securities
and investment securities 11 168 380 1,051 359 259 970
Other non-interest income 494 347 1,645 1,453 1,126 879 837
------------------ -------------------------------------------------- -----------
Total non-interest income 1,008 920 3,854 4,239 3,276 2,686 3,210
Non-interest expense:
Amortization of intangible -- -- -- -- -- - -
assets
Other non-interest expense 3,836 3,488 14,564 14,071 13,374 15,939 12,651
------------------ -------------------------------------------------- -----------
Income before income taxes 2,451 2,714 10,902 10,435 9,687 5,050 7,308
Income tax expense 795 923 3,525 3,606 3,651 1,767 2,718
------------------ -------------------------------------------------- -----------
Net income $ 1,656 $ 1,791 $ 7,377 $ 6,829 $ 6,036 $ 3,283 $ 4,590
================== ================================================== ===========
Diluted net income per share $ 0.19 $ 0.20 $ 0.83 $ 0.75 $ 0.66 $ 0.36 $ 0.49
================== ================================================== ===========
Dividends per share $ 0.11 $ 0.10 $ 0.40 $ 0.36 $ 0.32 $ 0.30 $ 0.28
================== ================================================== ===========
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
MARCH 31,
--------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------------------- -------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets 0.78% 0.99% 0.96% 0.98% 0.94% 0.56% 0.83%
Return on average equity 8.58 9.37 9.60 9.08 8.38 4.61 6.43
Net interest rate spread 2.38 2.74 2.69 2.73 2.83 2.86 2.69
Net interest margin 2.67 3.08 3.00 3.11 3.26 3.31 3.17
Non-interest income to average assets 0.47 0.51 0.50 0.61 0.51 0.46 0.58
Non-interest expense to average assets 1.81 1.93 1.89 2.03 2.09 2.72 2.27
Efficiency ratio 59.45 55.70 56.15 56.45 57.20 74.62 62.63
Average interest-earning assets to 106.60 108.30 107.60 108.70 109.90 110.90 111.60
average interest-bearing liabilities
CAPITAL RATIOS:
Average equity to average assets 9.08% 10.55% 9.99% 10.83% 11.24% 12.14% 12.82%
Equity to assets 8.94 10.51 9.15 10.57 11.06 11.41 13.11
Leverage capital 8.10 9.57 8.60 9.60 10.20 10.50 12.90
Total risk-based capital 12.90 15.76 14.00 15.70 16.70 17.80 21.90
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.03% 0.18% 0.04% 0.05% 0.07% 0.13% 0.08%
Non-performing assets to total assets 0.08 0.18 0.08 0.06 0.09 0.15 0.10
Allowance for loan losses to 1,743.35 307.68 1,381.63 1,020.52 722.05 394.76 623.92
non-performing loans
Allowance for loan losses to 610.83 276.65 588.86 781.19 535.75 314.79 470.76
non-performing assets
Allowance for loan losses to total loans 0.53 0.56 0.53 0.56 0.53 0.53 0.52
OTHER DATA:
Offices 19 19 19 19 19 20 20
</TABLE>
17
<PAGE> 21
COMPARATIVE PER SHARE DATA OF BANK MUTUAL AND FIRST NORTHERN
The following table shows trading information for First Northern common
stock on February 18, 2000 and , 2000. February 18, 2000 was the last
trading date before the parties announced the merger. , 2000 is the
latest practical date before this proxy statement/prospectus was finalized. To
prepare this table, we have assumed that the average Bank Mutual stock price on
the dates presented was $10.00, its expected offering price; however, there has
been no historic market in Bank Mutual stock and there can be no assurance that
the market prices will not be lower. See "First Northern Market Information" for
historical information on First Northern common stock.
<TABLE>
<CAPTION>
Equivalent
First Northern value for each
Date common stock First Northern share
- - ---- ------------ --------------------
<S> <C> <C>
February 18, 2000 $9.00 $15.00
, 2000
</TABLE>
PRO FORMA PER SHARE DATA
We have summarized in the table on the next page selected per share
information about Bank Mutual and First Northern. We present the Bank Mutual per
share information on a pro forma basis to reflect the restructuring and stock
offering, and then on a pro forma adjusted basis to reflect the First Northern
merger. We present the First Northern per share information both historically,
and on a pro forma basis to reflect the merger. Book value per share will be
affected by the amount raised in Bank Mutual's restructuring and stock offering.
We have assumed that net proceeds of $56.0 million will be raised and assumed
that 5.9 million shares will be sold at $10 per share in Bank Mutual's stock
offering at the "midpoint" of that offering, although actual results could
differ. We have also assumed that 40% of the consideration in the First Northern
merger will be in shares of Bank Mutual common stock, and the balance in cash.
Given the effect of Mutual's special write-off of intangible assets in 1999, we
also present per share results before amortization and write-off of intangible
assets.
The data in the table should be read together with the financial
information and the financial statements of Mutual and First Northern included
or incorporated by reference elsewhere in this proxy statement/prospectus. We
provide the pro forma combined per common share data as an illustration only.
The data do not necessarily indicate the combined financial position per share
or combined results of operations per share that would have been reported if the
merger had occurred when indicated, nor are they a forecast of the combined
financial position or combined results of operations for any future period. No
pro forma adjustments have been included herein which reflect potential effects
of cost savings or synergies which may be obtained by combining Mutual and First
Northern operations or the costs of combining the companies and operations.
Pro forma information for Bank Mutual is given assuming that the Mutual
restructuring occurs, with the same assumptions used below under "Pro Forma
Financial Information." It further assumes a quarterly cash dividend of $0.07
per share, which Bank Mutual has indicated it intends to pay on a quarterly
basis beginning in the first full quarter after the merger, but not earlier than
the first quarter of 2000. Actual dividends, however, are subject to regulatory
and other requirements, and may be higher or lower.
18
<PAGE> 22
<TABLE>
<CAPTION>
Three months ended
March 31, Years ended December 31,
-------------------------- --------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Bank Mutual:
Pro forma.................................. 0.20 0.12 (0.26) 0.71 0.67
Pro forma combined......................... 0.17 0.13 (0.07) 0.67 0.57
First Northern:
Historical................................. 0.19 0.20 0.83 0.75 0.66
Equivalent pro forma combined.............. 0.26 0.20 (0.11) 1.01 0.86
BASIC EARNINGS PER SHARE BEFORE AMORTIZATION
AND WRITE-OFF OF INTANGIBLE ASSETS:
Bank Mutual:
Pro forma.................................. 0.22 0.16 0.77 0.86 0.77
Pro forma combined......................... 0.21 0.19 0.83 0.91 0.78
First Northern:
Historical................................. 0.19 0.20 0.83 0.75 0.66
Equivalent pro forma combined.............. 0.33 0.29 1.25 1.37 1.17
PERIOD END BOOK VALUE:
Bank Mutual:
Pro forma.................................. 12.15 12.14
Pro forma combined......................... 11.30 11.30
First Northern:
Historical................................. 9.03 8.98
Equivalent pro forma combined.............. 16.95 16.95
PER SHARE DIVIDENDS:
Bank Mutual:
Pro forma.................................. 0.07* -- 0.28* -- --
Pro forma combined......................... 0.07* -- 0.28* -- --
First Northern:
Historical................................. 0.11 0.10 0.40 0.36 0.32
Equivalent pro forma combined.............. 0.105* -- 0.42* -- --
</TABLE>
The unaudited pro forma earnings per share information in the table for all
periods presented give effect to the restructuring, stock issuance and merger as
if they had occurred at the beginning of each period presented. The pro forma
combined book value per share information assumes that the restructuring, stock
issuance and merger was completed on the dates for which information is given.
19
<PAGE> 23
*Based upon the $0.07 quarterly dividend that Bank Mutual has indicated it
intends to declare beginning in the first quarter of 2001. We only assume that
dividend on the dates shown. Actual dividends, if any, may be higher or lower.
FIRST NORTHERN MARKET INFORMATION
The following table has information on the high and low trading prices of
First Northern common stock for the stated periods, as well as cash dividends
paid. It trades on the Nasdaq Stock Market, and all quotes are actual sales
prices reported by Nasdaq. Bank Mutual common stock does not yet publicly trade,
but Bank Mutual has applied for stock quotation on Nasdaq.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
PERIOD HIGH LOW PAID
------ ---- --- ---------
<S> <C> <C> <C> <C>
1998 - 1st quarter $14.00 $12.25 $0.09
2d quarter $14.00 $13.00 $0.09
3d quarter $13.88 $ 9.75 $0.09
4th quarter $13.75 $ 9.50 $0.09
1999 - 1st quarter $13.00 $10.88 $0.10
2d quarter $12.00 $10.00 $0.10
3d quarter $14.00 $10.63 $0.10
4th quarter $12.13 $ 8.75 $0.10
2000 - 1st quarter $14.00 $ 8.25 $0.11
2d quarter $0.11
3d quarter
(through July )
</TABLE>
On , 2000, First Northern had shareholders of record.
BANK MUTUAL MARKET INFORMATION
Prior to the First Northern merger, the Bank Mutual stock offering and the
restructuring, there has not been any trading market for Bank Mutual common
stock. While we anticipate that Bank Mutual common stock will be sold in the
stock offering for $10.00 per share, Bank Mutual cannot assure that the stock
will trade at this price afterward.
Because Bank Mutual has not previously had shareholders, it has not
historically paid any dividends. However, the Mutual Savings board of directors
has indicated that it initially intends for Bank Mutual to declare and pay
quarterly cash dividends of $0.07 per share beginning in the first quarter after
the merger, but not earlier then the first quarter of 2001. These dividends
remain subject to future Bank Mutual board approval, and the amounts of actual
cash dividends, if any, may be higher or lower. In addition, the payment of
dividends by any financial institution or holding company, including both Bank
Mutual and First Northern, is subject to regulatory requirements which, among
other things, require that financial institutions and their holding companies
maintain adequate capital.
See "Market for Bank Mutual Common Stock."
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<PAGE> 24
RISK FACTORS
In considering whether to approve the merger agreement and receive Bank
Mutual common stock, you should consider, among other things, the following
matters:
RISKS ABOUT THE MERGER
THE CONSIDERATION WHICH YOU RECEIVE MAY BE PRORATED.
Even though First Northern shareholders may elect to receive cash or Bank
Mutual common stock in this transaction, more shareholders may choose one of
these alternatives than is available in the transaction. If more shareholders
wish to receive cash than is available in a transaction, you may receive some
Bank Mutual shares whether or not you elected to receive any. Similarly, if more
shareholders choose Bank Mutual common stock than is available, you may receive
some cash, and that receipt of cash would be taxable.
MUTUAL AND FIRST NORTHERN OPERATIONS MAY NOT INTEGRATE AS WE HOPE
We anticipate that Mutual Savings and First Northern Savings will initially
operate as separate entities. That will delay or reduce any expense reduction
which the combined companies might achieve from a combination. Similarly, any
problems, such as may occur in systems conversions, which could arise if we
decide to combine the two operations will be deferred until such time as the
integration occurs. Similarly, Mutual and First Northern may find after the
merger that their operations and management philosophies will not combine as
well as they had expected, which could lead to operating inefficiencies and
complications going forward.
SHAREHOLDERS WHO MAKE ELECTIONS WILL BE UNABLE TO SELL THEIR STOCK IN THE
MARKET PENDING THE MERGER.
First Northern shareholders may elect to receive cash or stock in the
transaction. Elections will be irrevocable, and will require that shareholders
making the election turn in their First Northern stock certificates. During the
time between when the election is made and the merger is completed, First
Northern shareholders will be unable to sell their First Northern stock. If the
merger is unexpectedly delayed, this period could extend for a significant
period of time. First Northern shareholders can reduce the period during which
they cannot sell their shares by delivering their election shortly before the
close of the election period, but elections received after the close of the
election period will not be accepted or honored.
MANY REGULATORY APPROVALS ARE REQUIRED FOR THE TRANSACTION.
Before we can complete the merger, the Office of the Thrift Supervision and
other bank regulators must approve the transaction. Also, the merger requires
that the Mutual Restructuring have received appropriate regulatory approvals.
While both parties will take the actions which they need to accomplish to
receive these approvals, we cannot assure that we will be able to receive
approvals. Even if we receive the approvals, there may be conditions attached to
the approvals which will adversely affect Bank Mutual in the future.
THE MUTUAL RESTRUCTURING IS A UNIQUE TRANSACTION.
Mutual's restructuring to a mutual holding company format with a mid-tier
holding company, and the simultaneous acquisition of First Northern Savings, is
an unusual transaction. We are not aware of any prior transactions in which this
type of combination has occurred simultaneously with this type of restructuring.
In addition to regulatory requirements, we do not know whether the unusual
nature of the transaction, or ownership structure after the transaction, will
have an adverse effect on our operations or on the market for Bank Mutual common
stock.
In particular, because many former First Northern shareholders may be
issued shares of Bank Mutual common stock in the First Northern merger, in order
to avoid a taxable transaction that would occur if they received
21
<PAGE> 25
cash, they may be more likely to hold their Bank Mutual common stock than other
types of shareholders. Holding shares, versus selling them, could reduce market
activity for Bank Mutual common stock. Conversely, if the exchange ratio in the
First Northern merger requires some First Northern shareholders who would prefer
to receive cash to receive Bank Mutual shares, those shareholders may want to
quickly sell their Bank Mutual shares, which could create negative market
pressures and cause a drop in our share price.
FIRST NORTHERN DIRECTORS AND OFFICERS HAVE INTERESTS IN THE MERGER BESIDES
THOSE OF A SHAREHOLDER.
First Northern directors and officers have various interests in the merger
and related transactions besides being First Northern shareholders. These
interests include:
- the continuation of, or new, employment agreements for First Northern
executive officers;
- First Northern will purchase outstanding unexercised stock options,
including options for up to 755,900 shares of First Northern stock
held by First Northern officers and directors, for cash at the
difference between their exercise price and $15, plus additional
payments of up to 25% of that spread to offset tax consequences;
- Bank Mutual' agreement to continue indemnification for First Northern
directors and officers;
- four First Northern directors will become Bank Mutual and MHC
directors, and will continue as First Northern Savings directors; and
- at least 40% of the executive officers of Bank Mutual initially will
be former First Northern executive officers, and First Northern's
chief executive officer will become a director of Mutual Savings.
See "The Merger and the Merger Agreement -- Interests of Officers and Directors
in the Merger."
RISKS ABOUT BANK MUTUAL
CHANGING INTEREST RATES MAY HURT OUR PROFITS
To be profitable, we have to earn more money in interest and fees than we
pay as interest and other expenses. Of our first mortgage loans maturing after
one year, a majority have interest rates that are fixed for the term of the
loan. While most of our deposit accounts consist of time deposit accounts with
remaining terms to maturity of less than one year, most of our loans have longer
remaining terms. If interest rates rise, which has been the case in recent
quarters, the amount of interest we pay on deposits is likely to increase more
quickly than the amount of interest we receive on our loans, mortgage-related
securities and investment securities. This would cause our profits to decrease.
Rising interest rates would likely reduce the value of our mortgage-related
securities and investment securities and may decrease demand for loans and make
it more difficult for borrowers to repay their loans. For additional information
on our exposure to interest rates, see "Mutual Savings' Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk."
INCREASES IN MARKET INTEREST RATES ARE LIKELY TO ADVERSELY AFFECT EQUITY
As of March 31, 2000, we owned $520.6 million of securities available for
sale. Generally accepted accounting principles require that we carry these
securities at fair value on our balance sheet. Unrealized gains or losses on
these securities, reflecting the difference between the fair market value and
the amortized cost, is carried as a component of equity. In recent quarters,
rates have been rising. When market rates of interest increase, the fair value
of our securities available for sale generally decreases and equity decreases.
When rates decrease, fair value generally increases. As of March 31, 2000,
Mutual Savings' available for sale portfolio had an unrealized loss, because
fair value was $520.6 million and amortized cost was $534.7 million. At March
31, 2000, First Northern Savings had an unrealized gain of $694,000 on
securities available for sale.
22
<PAGE> 26
LOW DEMAND FOR REAL ESTATE LOANS MAY LOWER OUR PROFITABILITY
Making loans secured by real estate is our primary business and primary
source of profits. If customer demand for real estate loans decreases, our
profits may decrease because our alternative investments, primarily securities,
earn less income for us than real estate loans. Customer demand for loans
secured by real estate could be reduced by a weaker economy, an increase in
unemployment, a decrease in real estate values or an increase in interest rates.
STRONG COMPETITION WITHIN OUR MARKET AREA MAY REDUCE OUR CUSTOMER BASE
We encounter strong competition both in attracting deposits and originating
real estate and other loans. We compete with commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms. Our
market area includes branches of several commercial banks that are substantially
larger than us in terms of deposits and loans. In addition, tax exempt credit
unions operate in most of our market area and aggressively price their products
and services to a large part of the population. Our profitability depends upon
our continued ability to successfully increase our market share.
AFTER THE FIRST NORTHERN MERGER, WE WILL HAVE SIGNIFICANT INTANGIBLE
ASSETS, WHICH WILL HURT OUR FUTURE RESULTS
In the First Northern merger, Bank Mutual will record approximately $50.9
million in intangible assets using March 31, 2000 information. Bank Mutual will
amortize these intangible assets over 20 years. As a result, earnings will be
reduced by approximately $2.5 million annually. Also, at some point in the
future, intangible assets may become impaired, and we would need to write them
off as a reduction to earnings. For example, in 1999 Mutual Savings wrote off
$15.6 million of "impaired" intangible assets from the 1997 acquisition of First
Federal. Even though this special write-off did not affect our cash position,
our 1999 results were hurt by this action.
WE MAY EXPAND OUR LENDING ACTIVITIES IN RISKIER AREAS
We have identified commercial real estate, commercial business and consumer
loans, including indirect auto loans, as areas for increased lending emphasis.
While increased lending diversification is expected to increase interest income,
non-residential loans carry greater risk of payment default than residential
real estate loans. As the volume of these loans increase, credit risk increases.
In the event of substantial borrower defaults, our provision for loan losses
would increase and therefore, earnings would be reduced.
First Northern's consumer loan portfolio includes $99.0 million of indirect
auto loans. Indirect auto lending is not a current business line for Mutual
Savings. Although First Northern has experienced minimal delinquencies in its
automobile loan portfolio, borrowers may be more likely to become delinquent on
an automobile loan than on a residential real estate loan. Moreover, unlike the
collateral for real estate loans, automobiles depreciate rapidly and, in the
event of default, principal loss as a percent of the loan balance depends upon
the mileage and condition of the vehicle at the time of repossession, over which
First Northern has no control.
IMPLEMENTING STOCK-BASED BENEFITS WILL INCREASE OUR FUTURE COMPENSATION
EXPENSE AND REDUCE OUR EARNINGS
We intend to adopt a stock option plan which will provide for the granting
of options to purchase common stock, to adopt a management recognition plan that
will provide for awards of common stock to our eligible officers, employees and
directors and to have an employee stock ownership plan which may purchase shares
in the restructuring. In addition, we may adopt a restoration plan that will
supplement the benefits to select executive officers under the employee stock
ownership plan. These plans will increase our future costs of compensating our
directors and employees, reducing net earnings. The cost of these plans will
vary based on our stock price at specific points in the future.
23
<PAGE> 27
THE MHC'S CONTROL OVER BANK MUTUAL MAY PREVENT TRANSACTIONS YOU WOULD LIKE
The MHC will be managed by generally the same directors and officers who
manage Bank Mutual. Because the MHC will own a majority of Bank Mutual's common
stock after the restructuring, the board of directors of the MHC will control
the outcome of most matters put to a vote of shareholders of Bank Mutual. We
cannot assure you that the votes cast by the MHC will be in your best interest
as a shareholder.
THE PRICE TO BOOK RATIO OF THE COMMON STOCK IS HIGHER THAN IN MOST
CONVERSION TRANSACTIONS
Mutual's offering price in its stock offering as a percentage of projected
post-restructuring tangible book value of the common stock sold as of March 31,
2000 ranges from 110.6% at the minimum of the offering range to 130.6% at the
adjusted maximum of the offering range. This price to pro forma tangible book
value substantially exceeds that of common stock sold both in:
- most mutual-to-stock conversions that do not involve the formation of
a mutual holding company, that is, "full conversions"; and
- most recent offerings by companies that are reorganizing into the
mutual holding company structure and are conducting a stock offering.
Prospective investors should be aware that the relatively high price to pro
forma tangible book value may have an unfavorable effect on the after-market
performance of the common stock during the period immediately following the
offering. See "Pro Forma Financial Information."
RECENTLY, THE STOCK MARKET HAS BEEN VOLATILE AND MUTUAL-TO-STOCK CONVERSION
OFFERINGS HAVE NOT PERFORMED WELL IN THE AFTERMARKET
Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of the issuer. In
several cases, common stock issued by recently converted financial institutions
has traded at a price that is below the price at which such shares were sold in
the initial offerings of those companies. The purchase price of Bank Mutual
common stock sold in the stock offering is based on the independent appraisal.
The appraisal is not intended, and should not be construed, as a recommendation
of any kind as to the advisability of purchasing shares of common stock. The
valuation is based on estimates and projections of a number of matters, all of
which are subject to change from time to time. After our shares begin trading,
the trading price of our common stock will be determined by the marketplace, and
may be influenced by many factors, including prevailing interest rates, investor
perceptions of Bank Mutual, and general market for financial institution stocks
and economic conditions. Due to possible continued market volatility, we cannot
assure you that, following the stock offering, the trading price of Bank Mutual
common stock will be at or above the $10.00 per share price in the stock
offering. You should consider investing in the common stock only if you have a
long-term investment horizon.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this proxy statement/prospectus, and in the documents
incorporated in it by reference, which are not historical statements contain
forward-looking statements that involve risks and uncertainties. Statements
which "are not historical statements" include those in the future tense or which
use terms such as "believe," "expect" and "anticipate". Bank Mutual's actual
future results could differ in important and material ways from those discussed.
Many factors could cause or contribute to such differences. These factors
include those we discuss above in "Risk Factors." You should also carefully read
other parts of this proxy statement/prospectus, and the documents which are
incorporated in it, for other factors which could affect Bank Mutual's or First
Northern's operations in the future. In particular, both parties' Management's
Discussion and Analysis of Financial Condition and Results of Operations include
discussions of factors affecting them.
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<PAGE> 28
THE SPECIAL MEETING
This proxy statement/prospectus is being furnished to the First Northern
shareholders in connection with the solicitation of proxies by the First
Northern board from the holders of First Northern common stock for use at the
special meeting.
Date, Time and Place. The special meeting will be held at 10:00 a.m., local
time, on , 2000, at , located at ,
Green Bay, Wisconsin .
Purpose. At the special meeting, First Northern shareholders will consider
and vote on a proposal to approve the merger agreement.
The First Northern board is not aware, as of the date of mailing of this
proxy statement/prospectus, of any other matters which may properly come before
the special meeting. If any other matters properly come before the special
meeting, or any adjournment or postponement thereof, it is the intention of the
persons named in the proxy to vote such proxies in accordance with their best
judgment on such matters. Under Wisconsin law, at the special meeting,
shareholders can only consider the matters included in the notice of the special
meeting.
Recommendation of First Northern's Board of Directors. The First Northern
board has determined that the merger is in the best interests of First Northern
and its shareholders and has approved the merger agreement. THE FIRST NORTHERN
BOARD UNANIMOUSLY RECOMMENDS THAT THE FIRST NORTHERN SHAREHOLDERS VOTE IN FAVOR
OF APPROVAL OF THE MERGER AGREEMENT AT THE SPECIAL MEETING. See "The Merger and
the Merger Agreement -- First Northern's Reasons for the Merger."
Record Date; Voting Rights. Only holders of record of First Northern common
stock at the close of business on the record date, , 2000, are
entitled to receive notice of and to vote at the special meeting. On that date,
there were [ ] shares of First Northern common stock outstanding and
entitled to vote. Each share entitles the registered holder to one vote.
Quorum. A majority of the outstanding shares of First Northern common stock
entitled to vote must be represented in person or by proxy at the special
meeting in order to constitute a quorum for the transaction of business. Shares
of First Northern common stock represented by proxies that are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum. If a quorum is not present at the special meeting, it is expected that
the meeting will be adjourned or postponed to solicit additional proxies.
Proxies; Revocation. A proxy card is enclosed for use by First Northern
shareholders. The board of directors of First Northern requests that
shareholders SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No
postage is required if mailed within the United States. IF YOU HAVE QUESTIONS OR
REQUESTS FOR ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS, PLEASE CONTACT
MICHAEL D. MEEUWSEN OR RICK B. COLBERG AT:
First Northern Savings Bank, S.A.
201 N. Monroe Avenue
P.O. Box 100
Green Bay, WI 54305-0100
All properly executed proxies that are not revoked will be voted at the
special meeting as instructed on those proxies. Proxies containing no
instructions will be voted in favor of the merger agreement. A shareholder who
executes and returns a proxy may revoke it at any time before it is voted, but
only by executing and returning a proxy bearing a later date, by giving written
notice of revocation to the corporate secretary of First Northern, or by
attending the special meeting and voting in person. Mere attendance at the
special meeting will not in and of itself
25
<PAGE> 29
have the effect of revoking the proxy. Abstentions will be treated as shares
present in determining whether First Northern has a quorum for the special
meeting, but abstentions will have the same effect as a vote against approval of
the merger agreement. If a broker or other record holder or nominee indicates on
a proxy that it does not have direction or authority to vote certain shares,
those shares will be considered present at the special meeting for purposes of
determining a quorum but will have the same effect as a vote against approval of
the merger agreement.
The persons designated in the enclosed proxy card will have discretion to
vote on any matters incident to the conduct of the special meeting. If First
Northern proposes to adjourn the special meeting, the persons named in the proxy
will vote all shares, other than those that have been voted against approval of
the merger agreement, in favor of adjournment. At any subsequent reconvening of
the special meeting, all proxies will be voted in the same manner as they would
have been voted at the initial convening, except for any proxies that have
effectively been revoked or withdrawn before the reconvened meeting.
Proxies will be received by First Northern's independent transfer agent,
Firstar Bank NA, and the vote will be certified by representatives of Firstar.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS. After the effective date of the merger, shareholders will receive
instructions and a letter of transmittal for the submission of their stock
certificates.
Solicitation of Proxies. In addition to soliciting proxies by mail, First
Northern's directors, officers, and employees may, if they do not receive extra
compensation for doing so, solicit proxies personally or by telephone, fax or
email. Such persons may be reimbursed for out-of-pocket expenses that they
incur. First Northern intends to reimburse brokerage houses and other
custodians, nominees, and fiduciaries for reasonable out-of-pocket expenses
incurred in forwarding copies of solicitation materials to beneficial owners of
First Northern common stock held of record by those persons.
Required Vote. Approval of the merger agreement will require the
affirmative vote of holders of a majority of the outstanding shares of First
Northern common stock entitled to vote thereon at the special meeting, or
[ ] shares.
Share Ownership of Management and Other Significant Holders. On the record
date, directors and executive officers of First Northern and their affiliates
were the beneficial owners of an aggregate of , or approximately [ %],
of the shares of First Northern common stock then outstanding and eligible to
vote. All of the directors and executive officers of First Northern have
indicated their intention to vote their shares for approval of the merger
agreement. The above information excludes option shares. See "Ownership of First
Northern Common Stock."
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<PAGE> 30
THE MERGER AND THE MERGER AGREEMENT
The description of the merger and the merger agreement contained in this
proxy statement/prospectus describes the material terms of the merger agreement;
however, it does not purport to be complete. It is qualified in its entirety by
reference to the merger agreement. We have attached a copy of the merger
agreement as Appendix A.
GENERAL
In the merger, and as described in the merger agreement, First Northern
will merge into Bank Mutual. Outstanding shares of First Northern common stock
will be converted into cash or shares of Bank Mutual common stock. Cash will be
paid in lieu of any fractional share of Bank Mutual common stock. See "Election
to Receive Cash or Stock; Conversion of Shares in the Merger" below. As a result
of the merger, the separate corporate existence of First Northern will cease and
Bank Mutual will succeed to all the rights and be responsible for all the
obligations of First Northern. Bank Mutual is a successor to the corporation
named "OV Corp." in the merger agreement.
After the merger, Bank Mutual will be majority owned by the MHC. The other
shares of Bank Mutual will be owned by a combination of former First Northern
shareholders, Mutual depositors who have purchased the shares as part of the
restructuring, other public investors and Mutual employee plans. In turn, Mutual
Savings and First Northern Savings will be wholly-owned subsidiaries of Bank
Mutual.
ELECTIONS TO RECEIVE CASH OR STOCK; CONVERSION OF SHARES IN THE MERGER
At the effective time of the merger, by virtue of the merger and without
any further action on the part of First Northern, Bank Mutual or holders of
their securities:
- any shares of First Northern common stock that are owned by First
Northern or any subsidiary will be canceled and retired and cease to
exist, and no Bank Mutual common stock or other consideration will be
issued or delivered in exchange for those shares; and
- each share of First Northern common stock issued and outstanding,
other than any shares to be canceled as described above, will be
converted into and become the right to receive the merger
consideration in the form of cash, Bank Mutual common stock, or a
combination of cash and Bank Mutual common stock, all as more fully
described below.
- each issued and outstanding share of common stock of Bank Mutual will
remain one share of common stock of Bank Mutual;
The amount of merger consideration to be received for each share of First
Northern common stock will be either $15 in cash, 1.5 shares of Bank Mutual
common stock or a combination thereof. No fractional shares will be issued;
fractional shares will be converted into cash at the rate of $10 per share of
Bank Mutual common stock:
Several factors will determine whether a First Northern shareholder will
receive cash, Bank Mutual common stock, or a combination of cash and Bank Mutual
common stock for the First Northern common stock surrendered in the merger. Bank
Mutual has discretion to select a portion of the aggregate merger consideration
between and including 40% and 70% to be paid in the form of Bank Mutual common
stock, excluding fractional share interests to be paid in cash, with the
remainder paid in cash. The plans governing Mutual's restructuring contemplate
that Bank Mutual would only issue shares representing in excess of 40% of the
merger consideration if they are not subscribed for in the subscription offering
conducted in conjunction with Mutual's restructuring. Bank Mutual must make this
election at least three business days prior to the closing date of the merger.
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<PAGE> 31
Approximately [45] days before the date that we anticipate the merger will
become effective, Bank Mutual and First Northern will send a letter of
transmittal and form of election to First Northern shareholders of record for
their use in electing whether they:
- wish to receive cash for all of their First Northern shares;
- wish to receive shares of Bank Mutual common stock for all of their
First Northern shares;
- if they hold at least 170 shares of First Northern common stock, wish
to receive a mixed consideration; in this mixed election, shareholders
will receive cash for some of their First Northern shares and shares
of Bank Mutual common stock for the remainder. In this "mixed"
election, shareholders will receive Bank Mutual common stock for the
lesser of 50% of their shares or the overall stock percentage, between
40% and 70%, as chosen by Bank Mutual for the total consideration to
be payable in stock. The balance of the First Northern shares will be
converted into cash; or
- have no preference.
Each holder (that is, each registered shareholder account) will generally
be required to make a single election for each of the accounts. Nominees,
trustees and others who hold shares of First Northern common stock in
representative capacities may submit multiple forms of election so long as each
election form covers all of the shares of First Northern common stock held for a
particular beneficial owner. If any First Northern shareholder does not provide
any specification by the close of business on the third business day prior to
the effective time of the merger, we will treat that shareholder as not having a
preference between receiving cash or stock. All elections will be irrevocable.
If the aggregate requests for cash are less than or equal to the portion of
the aggregate merger consideration to be paid in cash, including payments of
cash in lieu of fractional shares, we will satisfy all of the requests for cash
in full and First Northern shareholders who requested stock may be required to
take a portion of their merger consideration in cash. If the aggregate requests
for cash are greater than the portion of the aggregate merger consideration to
be paid in cash, we will divide the available cash (after adjustment for cash to
be paid in lieu of fractional shares) proportionately among the First Northern
shares for which cash was requested, with the balance of the merger
consideration for those shares paid in Bank Mutual common stock, and we will pay
the merger consideration entirely in Bank Mutual common stock for all of the
other First Northern shares. We may further adjust this amount by providing that
any First Northern shareholder who has elected to receive cash who would receive
fewer than 25 shares of Bank Mutual common stock in a pro ration will receive
all cash. In that event, a proportion of cash and stock to be received by other
First Northern shareholders electing to receive all cash would be adjusted with
the effect that they will receive proportionately somewhat less cash and
somewhat more Bank Mutual common stock.
If the aggregate requests for stock are less than or equal to the portion
of the aggregate merger consideration to be paid in stock, we will satisfy all
of the requests for stock in full and First Northern shareholders who requested
cash may be required to accept a portion of their merger consideration in stock,
as discussed above. If the aggregate requests for stock are greater than the
portion of the aggregate merger consideration to be paid in stock we will divide
the available stock proportionately among the shares for which stock was
requested, with the balance of the merger consideration for those shares paid in
cash, and we will pay the merger consideration entirely in cash for all of the
other First Northern shares.
In all cases, we will honor "mixed" elections without further adjustment.
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<PAGE> 32
We will pay cash in lieu of any fractional share of Bank Mutual common
stock, after aggregating all fractional share interests of any shareholder who
holds more than one certificate for First Northern common stock.
All shares of First Northern common stock converted as provided above will
no longer be outstanding and will automatically be canceled and retired and will
cease to exist. Each holder of a certificate representing, immediately prior to
the effective time of merger, any such shares of First Northern common stock
will cease to have any rights with respect to those shares, except the right to
receive the merger consideration as described above. See "--Exchange of First
Northern Certificates; No Fractional Shares."
For employees who hold shares of First Northern common stock through the
First Northern 401(k) retirement savings plan, they will be able to direct the
trustees in this manner making an election for their account.
EXCHANGE OF FIRST NORTHERN CERTIFICATES; NO FRACTIONAL SHARES
Bank Mutual has designated to act as exchange agent under the
merger agreement. As of the effective time of the merger, Bank Mutual will
deposit with the exchange agent for exchange through the exchange agent, cash
and certificates representing the shares of Bank Mutual common stock issuable
pursuant to the merger agreement in exchange for outstanding shares of First
Northern common stock. That cash and those certificates for shares of Bank
Mutual common stock, together with any dividends or distributions and together
with any cash to be paid for fractional share interests, will be held as an
exchange fund by the Exchange Agent until paid to the former First Northern
shareholders or otherwise transferred as described in this section.
Approximately [45] calendar days before the anticipated effective time of
the merger, Bank Mutual will cause the exchange agent to mail to each holder of
record of a stock certificate representing First Northern shares a form of
election and letter of transmittal and instructions for surrendering the First
Northern stock certificate in exchange for cash or shares of Bank Mutual common
stock or both. Nominees, trustees and others who hold shares of First Northern
common stock in representative capacities may submit multiple forms of election
so long as each election form covers all of the shares of First Northern common
stock held for a particular beneficial owner.
PLEASE NOTE THAT SHAREHOLDERS OF FIRST NORTHERN SHOULD NOT SUBMIT THEIR
FIRST NORTHERN STOCK CERTIFICATES FOR EXCHANGE UNTIL THE LETTER OF TRANSMITTAL
AND FORM OF ELECTION, WITH INSTRUCTIONS, ARE RECEIVED.
Upon surrender of a First Northern stock certificate for cancellation to
the exchange agent, together with a duly executed form of election and letter of
transmittal and any other documents the exchange agent may reasonably require,
the holder of a First Northern stock certificate will be entitled to receive in
exchange:
- a certificate representing that number of whole shares of Bank Mutual
common stock into which the First Northern shares formerly represented
by the stock certificate have been converted and cash in lieu of any
fractional share;
- cash into which the First Northern shares formerly represented by the
stock certificate have been converted; or
- a combination of cash and shares of Bank Mutual common stock;
and the surrendered First Northern stock certificate will be canceled, all as
more fully described below.
At the effective time of the merger, the stock transfer books of First
Northern will be closed and there will be no further registration of transfers
of shares of First Northern common stock thereafter on the records of First
Northern. After the effective time of the merger, the holders of First Northern
stock certificates outstanding immediately prior to the effective time of the
merger will cease to have any rights with respect to the shares of First
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<PAGE> 33
Northern common stock formerly represented by those certificates except as
otherwise provided in the merger agreement or by law.
In the event of a transfer of ownership of shares of First Northern common
stock which is not registered in the transfer records of First Northern, a
certificate representing the proper number of shares of Bank Mutual common
stock, a check in the proper amount of cash that the holder is entitled to
receive in respect of the First Northern shares pursuant to the merger
agreement, and any cash in lieu of a fractional share, will be delivered to the
transferee if the First Northern stock certificate which represented the shares
of First Northern common stock is presented to the exchange agent, accompanied
by all documents required to make the transfer and by evidence that any
applicable stock transfer taxes have been paid.
Until surrendered as contemplated by the merger agreement after the merger,
each First Northern stock certificate will represent only the right to receive
the merger consideration in cash or shares of Bank Mutual common stock, or both,
as contemplated by the merger agreement.
Bank Mutual will not pay dividends or make other distributions to the
holder of any unsurrendered First Northern stock certificate with respect to any
shares of Bank Mutual common stock represented by the First Northern stock
certificate after the merger, and no cash payment will be paid to the holder,
until the holder sends in the First Northern stock certificate. Subject to the
effect of any applicable law, after we receive a First Northern stock
certificate, we will promptly pay to the holder of the certificate, without
interest:
- the amount of any cash payable with respect to the surrendered First
Northern stock certificate to which the holder is otherwise entitled;
and
- the amount of any such dividends or distributions to which the holder
is entitled.
Bank Mutual will not issue fractional shares of its common stock in the
merger. Instead, all fractional share interests of a holder of more than one
First Northern stock certificate will be combined to maximize the number of
whole shares of Bank Mutual common stock to be issued and minimize the
fractional interests to be paid in cash. If a fractional share interest results
after the combination, Bank Mutual will pay the holder of a fractional share
interest an amount in cash equal to $10 for each full share of Bank Mutual
common stock.
If any portion of the exchange fund has not been paid or delivered to the
First Northern shareholders 12 months after the effective time of merger, Bank
Mutual will be entitled to receive it upon demand. If that occurs, any First
Northern shareholders who have not yet delivered their First Northern stock
certificates to the Exchange Agent must instead look only to Bank Mutual for
payment of their claim for cash or shares of Bank Mutual common stock, or both,
and any dividends or distributions with respect to Bank Mutual common stock.
Neither the Exchange Agent nor any party to the merger agreement will be liable
to any First Northern shareholder for any property delivered to any public
official pursuant to any abandoned property, escheat or similar law.
Bank Mutual will be entitled to deduct and withhold from the consideration
otherwise payable pursuant to the merger agreement to any First Northern
shareholder any amount that Bank Mutual is required to deduct and withhold under
any provision of federal, state, local or foreign tax law. Any withheld amounts
will be treated for all purposes of the merger agreement as having been paid to
the First Northern shareholder in respect of which the deduction and withholding
was made by Bank Mutual.
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<PAGE> 34
BACKGROUND OF THE MERGER
The terms of the merger resulted from arms length negotiations between
representatives of First Northern and Mutual Savings. The following briefly
discusses the background of these negotiations and related matters.
Over the last several years, the financial services industry has become
increasingly competitive, with many financial institutions expanding their size
and market area through consolidation. This trend was accelerated in 1998, with
a number of multi-billion dollar mergers announced whose effects would continue
to increase competition in the banking and the financial services industry in
First Northern's marketplace. In 1999, Congress also passed the
Gramm-Leach-Bliley Act which broadens the scope of financial services banks can
offer to consumers and makes it easier for affiliations to take place
between banks, securities firms and insurance companies. As part of its effort
to remain competitive within this environment, First Northern's management and
board have continually analyzed various strategic options available to First
Northern including the following:
- remaining as an independent financial institution via operational
improvements, internal growth, stock repurchase and a continued
investment in technology;
- pursuing external growth through either selected strategic
acquisitions or potential merger of equals transactions; and
- entering into a business combination with a larger entity.
Since its initial public offering in 1983, First Northern has been able
to sustain reasonable internal growth and to grow through two acquisitions. With
limited exceptions, internal growth became more difficult to sustain in the
later part of the 1990's.
However, in late 1998, First Northern analyzed the implementation of
expanded commercial lending to diversify its loan portfolio and enhance its
profitability. It also considered the development of initiatives to enhance a
sales culture within the organization and the establishment of an expanded
operations center. In early 1999, the First Northern board decided to proceed
with these matters. It became clear that the incremental benefits of these
changes would be realized only over time. External growth through
acquisition also became more difficult as there were fewer opportunities in the
marketplace and because First Northern's stock price had become relatively flat.
Also, in early 1999, First Northern considered and decided against the
possibility of acquiring individual branches that were being offered by a large
bank holding company. First Northern also made an unsuccessful effort to acquire
a commercial bank with approximately sixty million dollars in assets. This
unsuccessful effort further illustrated that First Northern could have
difficulty acquiring other institutions in the future unless it could
increase the value of its stock. During this period, First Northern also had
discussions with a larger savings and loan holding company about the possibility
of being acquired. By February 1999, First Northern determined that the
parameters of a possible transaction with this larger holding company were not
favorable to First Northern shareholders and First Northern thus terminated
those discussions.
In February 1999, First Northern was also contacted by Mutual Savings
concerning the possibility of combining the two organizations. The CEOs of
Mutual Savings and First Northern have worked together on many banking industry
regulatory and trade activities and, as a result, were familiar with each
other's organizations and business philosophies. After a general discussion,
they decided to meet later when their schedules permitted to explore the matter
in more detail.
In May 1999, the CEOs of First Northern and Mutual Savings met for an
initial exploratory discussion about the possibility of combining the two
organizations. Mutual's concept involved Mutual's reorganization into a holding
company structure so that it could use stock, as well as cash, in a purchase of
First Northern. After this meeting, the First Northern board instructed
management to pursue discussions further with Mutual Savings and to develop more
information about using a mutual holding company structure to combine the two
organizations.
First Northern advised Mutual Savings of its continuing interest in
exploring a mutual holding company concept later in May. At that time, it was
determined that Mutual Savings would engage the services of a financial advisor
to prepare an initial economic/financial analysis of the proposed transaction.
In late May 1999, Mutual Savings engaged RP Financial LP, the financial advisor
and appraiser engaged in connection with the proposed transaction, to conduct an
economic/financial feasibility analysis of a proposed transaction to combine
Mutual Savings and First Northern. It was agreed that if, after receiving that
analysis, Mutual Savings wished to pursue further discussions with First
Northern, it would contact First Northern.
In July 1999, Mutual Savings contacted First Northern and asked for a
meeting to discuss RP Financial's initial analysis. A copy of that analysis was
provided to First Northern. On July 8, 1999, First Northern and Mutual Savings
management met and had lengthy discussions on the organizations' operating
philosophies, corporate structures, products and services and reviewed in detail
the RP Financial analysis. RP Financial's analysis reflected that the
transaction could be generally favorable to both organizations from a financial
point of view. The following day, First Northern management distributed the
initial RP Financial analysis and some supplemental data to the First Northern
board. On July 14, 1999, RP Financial delivered an updated analysis, reflecting
input from management of both institutions, to Mutual Savings and First
Northern. After a review of this information on July 15, 1999, the First
Northern board decided to continue to explore and determine the feasibility of a
possible transaction with Mutual from a financial, as well as a regulatory,
point of view.
On July 27, 1999, management of Mutual Savings and First Northern met
with RP Financial and legal counsel to review and discuss the financial,
accounting, tax and other legal issues that would need to be addressed in
connection with a proposed combination.
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<PAGE> 35
In August, First Northern, for the second time during 1999, reviewed
the possibility of purchasing a number of commercial bank branch offices from
another large Wisconsin-based bank holding company, but after analyzing the
locations involved and the likely financial ramifications, declined to pursue a
purchase. Also in August, management of First Northern had an initial meeting
with a smaller thrift holding company about a possible combination. That holding
company's market was geographically separated from First Northern's and offered
few, if any, synergies.
Also in early August, First Northern and Mutual Savings management met
again and considered a wide variety of issues including reasons for considering
a combination of the two organizations, accounting, taxation, good will,
regulatory and legal treatment of the transaction as well as market conditions.
Also in August 1999, Mutual Savings consented to First Northern management
having a private discussion with RP Financial to obtain a further understanding
of the mutual holding company concept and the financial modeling used to analyze
a potential transaction. In late August 1999, First Northern and Mutual Savings
management and RP Financial further discussed and considered an updated
financial analysis.
In late August and early September 1999, the parties and legal counsel
continued to analyze the regulatory and tax implications of a transaction and
continued to discuss the structure and how to provide favorable financial
results for First Northern shareholders. In September 1999, the boards of Mutual
Savings and First Northern considered the developing financial and tax analysis
and agreed to continue exploratory discussions.
In early October 1999, management of both institutions again met to
discuss the tax, corporate structure, legal, regulatory and financial issues of
a possible transaction and developed an initial blueprint setting forth the
major elements of a transaction. At its October, 1999 board meeting, the First
Northern directors reviewed and discussed a number of documents pertaining to
the transaction and met with representatives of RP Financial in order to review
and question the analysis RP had prepared on behalf of Mutual Savings. As a
result, the First Northern board agreed to continue discussions with Mutual
Savings, and the First Northern management team met with Mutual Savings' CEO
later that month.
On November 12, 1999, Mutual Savings' CEO met with the First Northern
board to discuss the transaction and to respond to questions from First
Northern's board about Mutual's structure, operations, and strategies. On
November 18, 1999, the First Northern board met again and had a lengthy
discussion on the strategic alternatives available to First Northern. In
particular, the board reviewed its inability earlier in the year to acquire a
small commercial bank that was offered for sale and the fact that several
significant branch purchase transactions it had considered did not make
financial sense. It also discussed the approach earlier in the year made by a
large thrift holding company and the acceptable parameters of such a
transaction. It also reviewed its more recent discussions with a smaller thrift
holding company and decided that a combination with that entity did not make
strategic sense or add a significant value for First Northern shareholders at
that time. The board also reviewed recent contacts by a large bank holding
company and a further contact from the large thrift holding company with which
it had discussions earlier in the year. The First Northern board agreed to
continue pursuing discussions with Mutual Savings on the possible formation of a
mutual holding company and the acquisition by that entity of First Northern
pending further information on identified regulatory, tax, legal and human
resource issues.
At about the same time, Mutual Savings, its legal counsel and RP
Financial visited with the Office of Thrift Supervision in Washington, D.C. to
discuss, without disclosing the identity of First Northern, the parameters of
the transaction under consideration. The proposed transaction is unique in the
sense that it combines a mutual holding company restructuring (which has been
accomplished numerous times by other institutions) with the simultaneous
acquisition of a public company (which had not been previously accomplished
simultaneously with a restructuring). After this meeting, Mutual Savings
received an informal response from OTS staff indicating that such a transaction
likely could be accomplished under existing law and regulation subject to normal
application and review processes and the preservation of rights of Mutual
Savings' eligible account holders going forward.
In early December 1999, management of the institutions continued to
meet and work on financial, structural and human resource issues. Also in early
December, Mutual Savings engaged an investment banking firm experienced in
mutual holding company structures, Ryan, Beck & Co., to assist in the sale of
stock to be offered to its members as part of the mutual holding company
reorganization.
At its meeting on December 16, 1999, the First Northern board
authorized management to engage special legal counsel and a financial advisor,
in connection with the transaction under discussion. On December 17, 1999, First
Northern engaged Schiff Hardin & Waite as special legal counsel.
On December 22, 1999, Mutual Savings and First Northern management met
jointly with their respective counsel and Ryan, Beck to review the structure and
financial issues of the proposed transaction. At this meeting, Ryan, Beck
provided background on its experience in connection with mutual holding company
formation, mutual holding company values and its overall transaction analysis.
Ryan, Beck presented a detailed written analysis of a possible transaction which
illustrated the potential of the transaction from a financial and market point
of view.
On December 28, 1999, First Northern engaged the investment banking
firm of Keefe Bruyette & Woods, Inc. as its financial advisor. On December 30,
1999, First Northern and Mutual Savings management met to discuss and work on a
business plan to analyze costs of the transaction, possible synergies and other
financial matters. They also had a conference call with RP Financial regarding
development of a business plan and worked on financial projections for a planned
joint board meeting.
In early January, management of the two institutions again met to
continue work on financial and business plans. On January 10, 2000, First
Northern and Mutual Savings held a joint board meeting and Ryan, Beck made a
detailed financial presentation on the proposed transaction. Ryan, Beck provided
a detailed analysis regarding marketability of the stock to be issued in the
proposed conversion. Following this joint presentation, the First Northern board
met privately with its legal counsel and KBW to discuss the terms of KBW's
engagement and its role. Legal counsel also reviewed the terms of a proposed
confidentiality agreement with Mutual Savings.
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<PAGE> 36
On January 11, 2000, Mutual Savings and First Northern entered into a
confidentiality agreement and began to exchange additional and more detailed
financial and business information. Throughout January, numerous discussions
took place to further refine financial and business plans. At its January 20,
2000 board meeting, First Northern received presentations from KBW and Schiff
Hardin & Waite regarding the fairness from a financial point of view to First
Northern's shareholders and the legal and regulatory aspects of the proposed
transaction. The First Northern board determined to proceed with further due
diligence of Mutual Savings and the negotiation of the terms of a definitive
agreement. In late January 2000, the parties continue to meet, conduct due
diligence and exchange information as well as to negotiate the details of a
written definitive agreement. In early February 2000, the parties continued to
work on the drafts of various documents and the parties performed on site due
diligence on each other. A significant documentation issue was the stock option
agreement or "lock-up" that Mutual Savings wished to include as protection for
the transaction.
The stock option agreement, as it was originally presented by Mutual
Savings, gave Mutual Savings the right to acquire a number of new shares of
First Northern, which would be issued only in the event of the exercise of the
option granted in the stock option agreement. This option would only be
exercisable in the event that a third party attempted to outbid Mutual Savings
for an acquisition or merger transaction with First Northern. If a third party
did submit a bid in an attempt to outbid Mutual Savings, then new shares, in an
amount equal to 19.9% of the common stock of First Northern outstanding at the
time of this new bid, would be issued and sold to Mutual Savings at the
pre-announcement market price. The purpose of this stock option agreement, or
"lock-up" is to provide compensation to Mutual Savings for the time and expense
it took in pursuing this transaction in the event a subsequent bid from a third
party exceeds Mutual Savings' bid, and the transaction goes forward with the
other entity.
The First Northern board of directors spent considerable time
discussing the pros and cons of this protection device, focusing particularly on
its fiduciary duty to its shareholders. Many negotiation sessions with Mutual
Savings focused extensively on First Northern's concerns about how this lock-up
could negatively impact its fiduciary duty to its shareholders, by deterring
subsequent bidders, and therefore potentially not allowing the best price
reasonably available to be offered to First Northern shareholders.
First Northern was also concerned that the stock option agreement had
no cap on the value that it represented. This means there was no dollar limit on
the spread between the exercise price at which Mutual Savings would be able to
buy shares of First Northern if the stock option agreement was triggered
($9.0375 per share) and the price any new bidder would have to pay (current fair
market value plus a premium which in total would exceed the per share price
being offered by Mutual Savings). Without a cap, the amount of money that a
subsequent bidder potentially would have to pay could be deemed excessive.
Negotiations led First Northern to realize that Mutual Savings would
withdraw its offer if the First Northern board did not agree to some type of a
lock-up mechanism. After conferring with KBW and Schiff Hardin & Waite, the
First Northern board determined that if Mutual Savings were to withdraw its
offer, another bidder might not be available for some time, if at all, and
probably not at a comparable price. After assessing the current market
conditions, the First Northern board decided that shareholders would be
negatively impacted if First Northern did not enter into the proposed business
combination. Weighing the benefits of the merger agreement against the costs of
the deterrent effect of the lock-up, First Northern determined that the
transaction was in the best interest of the shareholders, even with the lock-up
agreement. However, First Northern and Mutual Savings continued to negotiate the
terms of the lock-up, agreeing to a $12 million cap on the its value. On
February 11, 2000, revised draft documents were sent to the First Northern
directors for review at a February 17, 2000 meeting.
Concurrent with these negotiations, KBW prepared an in depth market
analysis of the transaction, addressing the question of whether or not, from a
financial point of view, the transaction was fair to First Northern
shareholders. This analysis, which concluded that the transaction was fair from
a financial point of view, was also presented to First Northern's board on
February 17, 2000. After engaging in a thorough review of the proposed
transaction documents and the KBW financial analysis and an extensive
questioning of both the financial and legal advisors to First Northern, the
board of directors decided to adjourn the meeting until February 20, 2000 in
order to allow each board member to further analyze and assess the proposed
transaction.
On February 20, 2000, the board reconvened and unanimously approved the
transaction. On February 21, 2000, First Northern and Mutual Savings each signed
the definitive merger agreement and on February 22, 2000 announced the execution
of the definitive merger agreement.
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FIRST NORTHERN'S REASONS FOR THE MERGER
THE FIRST NORTHERN BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF FIRST NORTHERN AND ITS SHAREHOLDERS. THE FIRST NORTHERN BOARD
UNANIMOUSLY RECOMMENDS THAT FIRST NORTHERN SHAREHOLDERS VOTE "FOR" THE MERGER
AGREEMENT.
The First Northern board of directors has approved the merger agreement and
the stock option agreement. In reaching the decision to approve these
agreements, the board of directors consulted with First Northern management, as
well as its financial and legal advisors, and considered many factors, including
the following:
- The formation of an attractive $2.6 billion Wisconsin financial
institution;
- The advantages of a combination with an in-state institution,
including the building of market share without undue market
concentration concerns, enhanced exposure to commercial and consumer
banking markets, and the opportunities for increased efficiencies
resulting in increased profitability of the combined entity over time;
- The increased economic value for First Northern shareholders, because
the merger terms provide a premium over the historical First Northern
market price;
- The belief that the merger agreement would result in First Northern
shareholders receiving stock in a high quality combined company that
should benefit shareholders through enhanced operating efficiencies
and better penetration of commercial and consumer banking markets;
- The fact that the merger agreement, subject to certain limitations,
permits each First Northern shareholder to elect the form of
consideration to be received;
- The opportunity for First Northern shareholders to continue their
investment in a regional bank holding company through a tax-free
exchange;
- The advice from KBW, First Northern's financial advisor, that the
merger terms are fair from a financial point of view;
- Conditions in the marketplace for financial institutions that might
affect First Northern's ability to obtain more attractive offers in
the future;
- The less attractive strategic alternatives available to First Northern
in light of the continuing trend of bank consolidations, such as share
repurchase, acquisition of another banking institution, or continued
independent growth;
- The current and prospective economic and overall market environments
facing First Northern characterized by intensifying competition;
- Information concerning the businesses, earnings, operations, financial
condition, prospects, capital levels and asset quality of First
Northern and Mutual Savings, both individually and as a combined
entity;
- The ability to combine First Northern's operations with an attractive
bank holding company which shares many of First Northern's goals of
providing exemplary regional banking services, but which also offers a
larger market area and larger asset base to allow for enhanced service
in the future;
- Availability for employees and customers of opportunities for
employment with and service from a larger bank holding company; and
- The terms of the merger and stock option agreements.
The First Northern board of directors also reviewed various issues in
connection with its approval of the merger agreement and the stock option
agreement. In particular, the First Northern board discussed the potential
effects of the stock option agreement, including a possible deterrent effect
that it might have on subsequent, better offers. Also, the board considered the
possibility that the merger might cause First Northern to lose its independence
going forward. First Northern's board of directors took into account these
potential disadvantages when considering
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<PAGE> 38
the merger. The First Northern board concluded that any such disadvantages were
outweighed by the factors described above, and the KBW opinion that the merger
agreement with Mutual was fair from a financial point of view for the
shareholders of First Northern.
This discussion of the various factors considered by the First Northern
board of directors is not, and is not intended to be, exhaustive. It is not
necessarily in the order of importance to the board of directors or any
particular director. The First Northern board of directors did not find it
practicable to, and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination due to the variety of
factors considered. In addition, the board of First Northern is composed of six
individual members, and each director may have given different weights to
different factors. For a discussion of the interests of certain members of First
Northern's management and First Northern's board in the merger, see "Interests
of Officers and Directors in the Merger."
MUTUAL'S REASONS FOR THE MERGER
In significant part, the restructuring is being undertaken to accommodate
the First Northern merger. The First Northern merger will not proceed if the
restructuring does not occur. Mutual Savings' board of directors believes that
the First Northern merger is attractive to Mutual for various reasons. From
Mutual's perspective, the First Northern merger would:
- combine two financial institutions of complementary business focuses.
- significantly expand Mutual's presence in northeastern Wisconsin,
allowing it to enter attractive new markets through an established and
attractive operation.
- permit Mutual to acquire this presence for fair consideration.
- allow elimination of certain duplicative costs and achievement of
potential economies of scale over time by increasing size.
- complement the restructuring by providing a productive use for some of
the offering's cash proceeds.
- obtain additional experienced and well-qualified employees.
The Mutual Savings board has unanimously approved the merger agreement.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the merger by the First Northern
board, the shareholders of First Northern should be aware that some directors
and executive officers of First Northern have certain interests in the
consummation of the merger other than solely as holders of First Northern common
stock that are described below.
Stock Options. Holders of outstanding First Northern stock options,
including directors and officers, will have their options vested as a result of
the merger. Under the merger agreement, these options will not be assumed by
Bank Mutual; this requirement is imposed to permit a greater number of shares of
Bank Mutual common stock to be available to First Northern shareholders. As a
consequence, options must be exercised prior to the merger or they will be
"cashed out" in an amount equal to the "spread" between the exercise price and
$15 per share. In addition, holders may receive an additional payment, of up to
25% of the "spread" amount, in recognition of the taxability of the cash receipt
to the option holder, who is not given a choice to have a tax-free exchange. The
total amount of these additional payments, after considering any tax benefit to
First Northern, may not exceed $756,000.
The following table shows, for each director and executive officer of First
Northern, the number of shares for which options are held, the aggregate
"spread" between the option exercise prices and $15, and the maximum potential
25% payment, prior to tax effect, in recognition of the forced taxable
transaction.
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<TABLE>
<CAPTION>
Maximum
Executive Number of Total Potential
Officer/Director Options Spread Amount 25% Payment
---------------- ------- ------------- -----------
<S> <C> <C> <C>
Richard Aicher 79,300 $ 518,842 $ 129,711
Marla Carr 75,100 468,169 117,042
Rick Colberg 79,300 518,842 129,711
Dale Darmody 67,800 384,874 96,219
Michael Meeuwsen 168,000 1,101,146 275,287
John Steinbrecker 64,500 350,125 87,531
Steve Wilmet 54,500 272,625 68,156
Howard Frankenthal 36,000 252,558 63,140
Thomas Lopina 28,800 172,800 43,200
Robert Olson 14,400 61,650 15,413
Richard Smits 10,800 37,350 9,338
J. Gus Swoboda 32,400 209,583 52,396
All executive officers and 710,900 4,348,564 1,087,143
directors as a group
Total outstanding options 755,900 4,582,189 1,145,547
(including the above)
</TABLE>
Indemnification. The merger agreement provides that Bank Mutual will
indemnify and hold harmless, to the fullest extent permitted under applicable
law, directors or officers of First Northern against any amounts incurred in
connection with any claim arising out of or relating to the transactions
described in the merger agreement or which arise out of or relate to those
persons having served as a committee member, director, officer, employee or
agent of First Northern. Bank Mutual and any successors will continue to honor
the obligations of First Northern under First Northern's articles of
incorporation and bylaws existing and in force as of the date of the merger
agreement.
Employment Agreements. The First Northern executive officers who currently
have employment agreements with First Northern or First Northern Savings will
have those agreements either continued after the merger or replaced by new
employment agreements. The employment agreement of Mr. Meeuwsen, First
Northern's Chief Executive Officer, will be assumed by Bank Mutual. Mutual is
offering new agreements to the other First Northern executive officers who
currently have employment agreements. It is a condition to Mutual's obligations
under the merger agreement that no more than two First Northern executive
officers fail to enter into such agreements.
Mr. Meeuwsen's current employment agreement provides for an initial term of
five years, which is automatically extended for an additional year on its
anniversary date unless contrary notice is given. Mr. Meeuwsen is entitled to an
annually-reviewed base salary and benefits. The employment agreement can be
terminated by either party at the expiration of the term, at any time for cause,
upon Mr. Meeuwsen's retirement, disability or death, or as required by law. The
agreement provides for certain benefits upon termination, which are generally
increased in case of a change in control. Under the merger agreement, it is a
condition to Mutual's obligations that Mr. Meeuwsen waive any provisions of his
employment agreement under which the merger, or related transactions, would
create severance or other accelerated benefits, and that he enter into a
noncompetition agreement with Bank
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<PAGE> 40
Mutual. Mr. Meeuwsen is not being asked to waive provisions of his supplemental
employment retirement agreement under which the merger would constitute a change
in control causing all of his benefits to vest.
The replacement employment agreements being offered to other First Northern
executive officers who have employment agreements are generally similar to their
current agreements, with certain exceptions. The current agreements each provide
for a three-year term which can be renewed annually to restore the initial
three-year term. The replacement agreements will have an initial term of three
years, but will not be subject to annual renewal. At the end of the initial
three-year term and on each anniversary thereafter, the employment term for the
replacement agreements can be extended by mutual agreement for additional
one-year periods.
The replacement agreements and the current agreements both provide for
certain benefits upon termination. In general, the termination benefits under
the replacement agreements are greater than those under the current agreements
assuming that the current agreements are not renewed annually, but not as great
as the benefits an executive officer would receive if the current agreements
were renewed annually. The replacement employment agreements, like the current
agreements, provide certain rights to the executive officers upon a change in
control, but the replacement employment agreements specifically state that the
merger will not be considered a change in control. In addition, the replacement
employment agreements include noncompetition provisions.
See "Employee Plans" below regarding certain other arrangements with
respect to other employee plans provided for by the merger agreement.
Board and Officer Positions. Under the agreement, the Board of Directors of
the MHC and Bank Mutual will consist of the current members of the board of
Mutual Savings plus four out of the six members of the First Northern Board of
Directors. The four members of the First Northern Board will be selected by
Mutual Savings; Mutual expects that Mr. Meeuwsen will be one of the four
designees but has not yet determined the other three.
In addition, additional officers of Bank Mutual will be elected so that at
least 40% of the initial executive officers of Bank Mutual will be current First
Northern executive officers. Mr. Meeuwsen is expected to be elected the
president and chief operating officer of Bank Mutual, and Rick Colberg, First
Northern's chief financial officer, will be its chief financial officer.
OPINION OF FIRST NORTHERN'S FINANCIAL ADVISOR
KBW'S OPINION IS DIRECTED TO FIRST NORTHERN'S BOARD OF DIRECTORS AND
ADDRESSES ONLY THE CONSIDERATION OFFERED IN THE MERGER. IT DOES NOT ADDRESS THE
UNDERLYING BUSINESS DECISION TO PROCEED WITH THE MERGER AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH
RESPECT TO THE MERGER OR ANY OTHER MATTER RELATED THERETO.
KBW has informed First Northern that in arriving at its opinion, KBW has,
among other things:
- reviewed First Northern's Annual Reports on Form 10-K and related
audited financial information for the three fiscal years ended
December 31, 1998 and First Northern's quarterly reports on Form 10-Q
and related unaudited financial information up to the period ended
September 30, 1999;
- reviewed Mutual Savings' Reports of Condition and Income ("Call
Reports") and related audited financial information for the three
fiscal years ended December 31, 1998 and Mutual's quarterly Call
Report and related unaudited financial information up to the period
ended September 30, 1999;
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<PAGE> 41
- reviewed certain limited financial information, including
projections of future financial performance, relating to the
respective businesses, earnings, assets and prospects of First
Northern and Mutual Savings furnished to KBW by senior
management of First Northern;
- conducted certain limited discussions with members of senior
management of First Northern and Mutual concerning the
respective businesses, financial condition, earnings, assets,
liabilities, operations, regulatory condition, financial
forecasts, contingencies, and prospects of First Northern and
Mutual and their respective views as to the future financial
performance of First Northern, Mutual Savings, and Bank
Mutual, as the case may be, following the merger;
- reviewed the historical market prices for First Northern's
common stock and compared with that of certain publicly traded
companies which KBW deemed to be relevant;
- compared the respective results of operations of First
Northern and Mutual Savings with those of certain companies
which KBW deemed to be relevant;
- reviewed the merger agreement; and
- reviewed such other financial studies and analyses and
performed such other investigations and took into account such
other matters as KBW deemed necessary.
In preparing its opinion, KBW, with First Northern's consent, assumed
and relied on the accuracy and completeness of all financial and other
information supplied or otherwise made available to it by First Northern and
Mutual Savings, including information contemplated in the items above, and KBW
has not assumed responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of the assets or liabilities,
contingent or otherwise, of First Northern, Mutual Savings or any of their
subsidiaries, nor has it been furnished any such evaluation or appraisal. KBW is
not an expert in the evaluation of allowances for loan losses, and First
Northern acknowledges, KBW has not made an independent evaluation of the
adequacy of the allowance for loan losses of First Northern or Mutual Savings,
nor for this purpose has it reviewed any individual credit files relating to
First Northern or Mutual Savings, and, with First Northern's consent, it assumed
that the respective aggregate allowances for loan losses for both First Northern
and Mutual Savings are adequate to cover such losses and will be adequate on a
pro forma basis for Bank Mutual. In addition, it has not conducted any physical
inspection of the properties or facilities of First Northern or Mutual Savings.
KBW's opinion is predicated on the merger receiving the tax and accounting
treatment contemplated in the merger. KBW's opinion was necessarily based on
economic, market and other conditions as of, and the information made available
to it as of, the date of its opinion.
KBW's opinion was rendered without regard to the necessity for, or
level of, any restrictions, obligations, undertakings or divestitures which may
be imposed or required in the course of obtaining regulatory approval for the
merger.
In connection with rendering its opinion, KBW performed a variety of
financial analyses, including those summarized below. The summary set forth
below does not purport to be a complete description of the analyses performed by
KBW in this regard. The preparation of a fairness opinion involves various
determinations and judgments as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such opinion is not readily susceptible to a
partial analysis or summary description. Accordingly, notwithstanding the
separate factors summarized below, KBW believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
considered by it, without considering all analyses and factors, or attempting to
ascribe relative weights to some or all such analyses and factors, could create
an incomplete view of the evaluation process underlying KBW's opinion.
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<PAGE> 42
In performing its analyses, KBW made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of First Northern, Mutual and KBW.
The analyses performed by KBW are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of KBW's analysis
of the fairness of the consideration to be paid in the merger to First
Northern's shareholders, and were provided to First Northern's board of
directors in connection with the delivery of KBW's opinion. KBW did not draw any
specific conclusions from, or with regard to, any one method of analysis. With
respect to the comparison of selected companies analysis and the analysis of
selected merger transactions summarized below, no company utilized as a
comparison is identical to First Northern or Mutual. Accordingly, an analysis of
comparable companies is not mathematical; rather it involves complex
considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values, as the case may be, of the companies concerned. The
analyses do not purport to be appraisals or to reflect the process at which
First Northern and Mutual might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, KBW's opinion is just a part of many factors taken
into consideration by First Northern's board of directors.
The projections of future financial performance furnished to KBW and
used by it in certain of its analyses were prepared by the senior management of
First Northern. First Northern does not publicly disclose internal management
projections of the type provided to KBW in connection with its review of the
merger, and as a result, such projections were not prepared with a view towards
public disclosure. These projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions, and accordingly,
actual results could vary significantly from those set forth in such
projections.
The following is a summary of analyses presented by KBW to First
Northern's board of directors on February 17, 2000 in connection with its
opinion.
Comparable Company Analysis. KBW compared the financial performance and
market performance of First Northern and the financial performance of Mutual
based on various financial measures of earnings performance, operating
efficiency, capital adequacy and asset quality and, for First Northern, various
measures of market performance, including, but not limited to, price to book
ratios, price to earnings ratios and dividend payout ratios to those of selected
bank holding companies. For purposes of such analysis, the financial information
used by KBW was as of and for the quarter ended September 30, 1999. Market price
information was as of February 14, 2000. KBW selected publicly traded thrift
institutions in the Midwestern United States with total assets ranging from $500
million to $5 billion.
The twenty-four (24) companies in the First Northern peer group were:
MAF Bancorp, Inc., Clarendon Hills, IL
Flagstar Bancorp, Inc., Bloomfield Hills, MI
Anchor BanCorp Wisconsin Inc., Madison, WI
St. Francis Capital Corporation, Brookfield, WI
Alliance Bancorp, Hinsdale, IL
First Federal Capital Corp., La Crosse, WI
First Indiana Corporation, Indianapolis, IN
Metropolitan Financial Corp., Mayfield Heights, OH
Jefferson Savings Bancorp, Inc., Ballwin, MO
CFS Bancorp, Inc., Munster, IN
United Community Financial Corp., Youngstown, OH
Ottawa Financial Corporation, Holland, MI
First Defiance Financial Corp., Defiance, OH
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<PAGE> 43
NASB Financial, Inc, Grandview, MO
First Place Financial Corp., Warren, OH
Camco Financial Corporation, Cambridge, OH
Home Federal Bancorp, Seymour, IN
HMN Financial, Inc., Spring Valley, MN
FFY Financial Corp., Youngstown, OH
HF Financial Corp., Sioux Falls, SD
Fidelity Bancorp, Inc., Chicago, IL
Hallmark Capital Corp., Glendale, WI
First Federal Bankshares, Inc., Sioux City, IA
First Midwest Financial, Inc., Storm Lake, IA
KBW's analysis showed the following concerning First Northern's
financial performance:
<TABLE>
<CAPTION>
First Peer
Northern's Peer Group Group
Performance Average Median
----------- ------- ------
<S> <C> <C> <C>
Return on average assets (%) 0.96 0.92 0.91
Return on average equity (%) 9.60 10.65 9.97
Net interest margin (%) 3.00 3.17 3.07
Efficiency ratio (%) 55.95 58.08 57.92
Ratio of total equity to total assets(%) 9.15 9.01 8.01
Ratio of tangible equity to tangible assets (%) 9.15 8.50 7.37
Ratio of non-performing assets to total loans plus
other real estate owned (%) 0.11 0.85 0.64
Ratio of loan loss reserve to total loans (%) 0.52 0.87 0.75
</TABLE>
KBW's analysis further showed the following concerning First Northern's
market performance:
- that First Northern's price to earnings per share multiple
based on 1999 projected earnings was 11.05 times, compared to
a peer group average of 9.77 times and median of 8.97 times;
- that its price to earnings per share multiple based on 2000
projected earnings was 10.30 times, compared to a peer group
average of 9.59 times and median of 9.51 times;
- that its price to book value per share multiple was 112%,
compared to a peer group average of 108% and median of 101%
and
- that its dividend payout ratio was 48.15% compared to a peer
group average of 35.55% and median of 28.57%.
The Mutual Savings peer group consisted of eleven (11) selected
mutually held thrift institutions with total assets ranging from $1 billion to
$4 billion and ratios of total equity to total assets ranging from seven percent
(7%) to eleven percent (11%). The members of the Mutual Savings peer group were:
- Columbia Savings Bank, SLA (MHC), FairLawn, NJ
- Middlesex Savings Banks, Natick, MA
- Financial FT & SB of Olympia Fields, Olympia Fields, IL
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- First Federal Lincoln Bank, Lincoln, NE
- Cambridge Financial Group, Inc., Cambridge, MA
- North Shore Bank, FSB, Brookfield, WI
- Salem Five Cents Savings Bank, Salem, MA
- Bangor Savings Bank, Bangor, ME
- Provident Savings Bank, Jersey City, NJ
- Connecticut Bankshares, MHC, Manchester, CT
- Beneficial Mutual Savings Bank, Philadelphia, Pa
KBW's analysis showed the following concerning Mutual Savings'
financial performance:
<TABLE>
<CAPTION>
Mutual's Peer Group Peer Group
Performance Average Median
----------- ------- ------
<S> <C> <C> <C>
Return on average assets (%) 0.45 0.70 0.78
Return on average equity (%) 4.76 7.99 8.19
Net interest margin (%) 2.39 3.28 3.13
Efficiency ratio (%) 71.74 68.42 69.28
Ratio of amortization of intangible assets to
operating revenue (%) 5.47 1.57 0.34
Ratio of total equity to total assets (%) 9.61 8.59 9.03
Ratio of tier 1 capital to average tangible
assets (%) 8.26 8.31 8.09
Ratio of non-performing assets to total loans
plus other real estate owned (%) 0.83 0.65 0.63
Ratio of loan loss reserve to total loans (%) 0.64 0.89 0.87
</TABLE>
Historical Stock Data Analysis. KBW reviewed historical stock price
data for First Northern common stock compared to a composite of the First
Northern peer group, the Russell 2000 Financial Index and the Standard and Poors
500 Index for the period from January 1, 1999 through February 14, 2000. This
analysis showed that on a relative performance basis, First Northern's stock
price depreciated 22%, compared with depreciation of 27.5% and 13% for the First
Northern peer group and Russell 2000 Financial Index, respectively and the 14%
appreciation of the Standard and Poors 500 Index.
Comparable Merger Analysis. KBW analyzed two groups of selected banking
merger transactions where the selling institution was a thrift in the United
States from 1998 to 1999. The first group consisted of those transactions where
the buyers utilized the pooling-of-interests accounting method (the "Pooling
Group"); and the second group consisted of those transactions where the buyers
utilized the purchase accounting method (the "Purchase Group") The selling
institutions for both groups had total assets ranging from $500 million to $2
billion. KBW then compared the relevant valuation multiples for the groups to
First Northern's valuation multiples resulting from the transaction value, and
additionally restating the same valuation statistics by adjusting First
Northern's capital level down to the median of the groups' selling institutions
("First Northern Adjusted").
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<PAGE> 45
The comparable merger analysis indicated, based on First Northern's
announced transaction value, the following:
<TABLE>
<CAPTION>
First Purchase Pooling
First Northern Group Group
Northern Adjusted Median Median
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Deal Price / Book Value (%) 167.04 184.74 194.31 240.96
Deal Price / Tangible Book Value (%) 167.04 184.74 206.57 245.90
Deal Price / LTM EPS (x) 18.07 18.83 21.70 24.59
Tangible Premium to Core Deposits (%) 11.50 11.50 15.53 23.56
</TABLE>
The Purchase Group included the following transactions:
Acquiring Institution / Selling Institution
Commercial Federal Corporation / AmerUs Bank
BB&T Corporation / Maryland Federal Bancorp Inc.
UCBH Holdings Inc. / USB Holding
Summit Bancorp / NSS Bancorp
Richmond County Financial Corp. / Bayonne Bancshares Inc.
Temple-Inland Inc. / HF Bancorp Inc.
Dime Bancorp Inc. / Lakeview Financial Corp.
Belvedere Capital Partners Inc. / Placer Savings Bank
Independence Community Bank Corp. / Statewide Financial Corporation
Webster Financial Corp. / MECH Financial Inc.
The Pooling Group included the following transactions:
Acquiring Institution / Selling Institution
Commercial Federal Corporation / First Colorado Bancorp, Inc.
Hudson United Bancorp / IBS Financial Corp.
Hudson United Bancorp / Dime Financial Corporation
FirstMerit Corporation / Security First Corporation
First Charter Corporation / HFNC Financial Corp
Republic Security Financial Corporation / First Palm Beach Bancorp, Inc.
First Source Bancorp, Inc. / Pulse Bancorp, Inc
Peoples Heritage Financial Group / SIS Bancorp, Inc
Centura Banks, Inc / First Coastal Bankshares, Inc
Republic Bancorp, Inc. / D & N Financial Corporation
Anchor BanCorp Wisconsin Inc. / FCB Financial Corp
Old Kent Financial Corp / CFSB Bancorp, Inc
Fifth Third Bancorp / Emerald Financial Corporation
Independent Bank Corp / Mutual Savings Bank FSB
BB&T Corporation / First Liberty Financial Corp
North Fork Bancorporation / JSB Financial Inc
Provident Financial Group, Inc. / Fidelity Financial of Ohio, Inc
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<PAGE> 46
Discounted Free Capital Analysis. Using financial projections for First
Northern provided by management of First Northern, KBW estimated the future
amount of distributable free capital available to holders of First Northern
shares of common stock assuming the maintenance of a leverage ratio (as defined
under regulatory guidelines) of 7.0% over a five year period. KBW then estimated
the terminal value for First Northern common stock at the end of the period by
applying terminal multiples ranging from 11 to 19 times First Northern's
projected 2004 adjusted earnings. The distributable free capital stream and
terminal values were then discounted to a present value using discount rates
(ranging from 12% to 14%) chosen to reflect different assumptions regarding the
required rate of return to holders or prospective buyers of shares of First
Northern common stock. KBW calculated present values of distributable free
capital for First Northern ranging from $9.25 per share to $14.58 per share.
In connection with its opinion dated as of the date of this proxy
statement/prospectus, KBW performed procedures to update, as necessary, certain
of the analyses described above and reviewed the assumptions on which such
analyses described above were based and the factors considered in connection
therewith.
KBW has been retained by First Northern's board as an independent
contractor to act as financial adviser to First Northern with respect to the
merger. KBW, as part of its investment banking business, is continually engaged
in the valuation of banking businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. As specialists in the
securities of banking companies, KBW has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, KBW may, from time to time, purchase securities from, and sell
securities to, First Northern and Mutual Savings and as a market maker in
securities KBW may from time to time have a long or short position in, and buy
or sell, debt or equity securities of First Northern and Mutual Savings for
KBW's own account and for the accounts of its customers.
First Northern and KBW have entered into an agreement dated January
12, 2000 relating to the services provided by KBW in connection with the merger.
Under this agreement First Northern agreed to pay KBW, for the services relating
to the merger, a cash non-refundable financial advisory fee of $50,000, paid
upon the execution of the agreement. In addition, First Northern agreed to pay
KBW a cash fee of $100,000 payable on delivery of KBW's fairness opinion at the
time of announcement of the Merger and an additional cash fee of $100,000 in
conjunction with KBW's delivery of an updated fairness opinion for incorporation
in any proxy statement or prospectus. Upon closing of the transaction, First
Northern will pay to KBW a cash fee contingent equal to $350,000. Pursuant to
KBW's engagement agreement, First Northern also agreed to reimburse KBW for
reasonable out-of-pocket expenses and disbursements incurred in connection with
its retention and to indemnify KBW against certain liabilities, including
liabilities under the federal securities laws.
EMPLOYEE PLANS
Mutual and First Northern have agreed that outstanding First Northern
stock options, including those held by officers and directors, will be "cashed
out" prior to the merger. These provisions include an additional payment to
option holders in recognition of the tax consequences of this transaction. In
addition, First Northern executive officers who currently have employment
agreements will have those agreements either continued by Mutual or replaced by
new employment agreements. See "Interests of Officers and Directors in the
Merger" above.
Mutual has agreed that First Northern's 401(k) retirement plan will
continue, except to the extent not consistent with law, after the merger for
First Northern Savings' employees until the plan is combined with, or replaced
by, a retirement or similar benefit plan covering employees of all affiliates of
Mutual. Previous service with First Northern will be counted to determine
eligibility to participate and vesting in any successor plan, except where
recognition of that prior service would result in a duplication of benefits.
Similarly, Mutual will continue, except to the extent not consistent with law,
First Northern Savings health and welfare benefit plans and programs until they
are replaced by programs or benefits common to all Mutual employees. None of
these plans will be
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<PAGE> 47
terminated until First Northern Savings employees become eligible to participate
in successor plans. Prior service will be recognized, except where it would
result in duplication of benefits, and waiting periods, pre-existing condition
limitations and other exclusions generally would not apply where First Northern
employees previously were covered under First Northern plans.
See "Interests of Officers and Directors in the Merger" above for a
discussion of employment agreements.
MANAGEMENT AND OPERATIONS OF FIRST NORTHERN SAVINGS AFTER THE MERGER
When the merger is effective, First Northern's separate existence will
cease, and First Northern Savings will become a wholly owned subsidiary of Bank
Mutual. The directors and officers of First Northern Savings immediately prior
to the merger will continue to be its directors and officers and Mr. Crowley,
Jr. will become an additional director. Because First Northern Savings will be a
corporation wholly owned by Bank Mutual, Bank Mutual will have the power to
elect to change directors, and select and change officers, as it believes
appropriate.
Bank Mutual intends, for the immediate future, to continue First
Northern Savings as a separate entity, although consideration may be given to
combining operations with Mutual Savings at some point in the future. First
Northern Savings will continue to employ substantially all of its present
employees. The employees will continue as employees at will who are subject to
the determination of First Northern Savings management, and boards of directors
of First Northern Savings and Bank Mutual.
The parties expect that the merger will become effective shortly after
the special meeting. The merger will be legally completed by the filing of
articles of merger with the Wisconsin Department of Financial Institutions. The
filing of the articles of merger will occur as soon as practicable following the
satisfaction or waiver of the conditions set forth in the merger agreement. See
"Conditions to the Merger" below.
CONDUCT OF BUSINESS PENDING THE MERGER
In the merger agreement, First Northern has agreed, pending
consummation of the merger, unless otherwise consented to in writing by Mutual
Savings, that it will, among other things:
- carry on its business in the regular course;
- not do any act or omit to do any act which will cause a
material breach of any identified contracts to which First
Northern is a party;
- not change compensation or benefits, except for ordinary
raises;
- not incur any indebtedness outside the ordinary course of
business;
- use reasonable best efforts to preserve its business
organization intact, to retain the services of its present
officers and key employees and to preserve the goodwill of
suppliers, customers, creditors and others having business
relationships with it; and
- not issue any additional shares of stock except under
outstanding options, or grant any options, or declare or pay
any dividend other than its regular quarterly dividend.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The merger agreement contains various customary representations and
warranties for a transaction of this kind by Mutual Savings, Bank Mutual and
First Northern. They include, among other things:
- the organization, existence, and corporate power and
authority, and capitalization of each of the companies;
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<PAGE> 48
- the absence of conflicts with and violations of law and
various documents, contracts and agreements;
- the absence of any development materially adverse to the
companies;
- the absence of adverse material litigation;
- accuracy of reports and financial statements filed by First
Northern with the Securities and Exchange Commission;
- the accuracy and completeness of the statements of fact made
in the merger agreement;
- First Northern's title to its assets;
- the existence, performance and legal effect of certain
contracts;
- no violations of law by either party;
- the filing of tax returns, payment of taxes and other tax
matters by either party;
- labor and employee benefit matters, with respect to First
Northern; and
- compliance with applicable environmental laws with respect to
both parties.
In addition to the covenants described under "Conduct of Business
Pending the Merger," the merger agreement contains various other customary
covenants, including, among other things, access to information, each party's
efforts to cause its representations and warranties to be true and correct on
the closing date; and each party's agreement to use its reasonable best efforts
to cause the merger to qualify as a tax-free reorganization.
All representations, warranties and covenants of the parties, other
than the covenants in specified sections which relate to continuing matters,
terminate upon the merger.
CONDITIONS TO THE MERGER
The respective obligations of Mutual and First Northern to complete the
merger are subject to various conditions prior to the merger. The conditions
include the following:
- regulatory approvals of the merger and the Mutual
restructuring
- the performance of and compliance by the parties with their
obligations under the merger agreement;
- the absence of any litigation in which the merger is
restrained or enjoined;
- the accuracy of the representations and warranties of the
parties made in the merger agreement;
- from the date of the merger agreement to the merger, there
shall not have occurred any material adverse change of Mutual
Savings, Bank Mutual or First Northern;
- the approval of the merger agreement by the shareholders of
First Northern;
- as a condition to First Northern's obligations, the receipt of
the tax opinion that has been delivered by counsel; and
- obtaining any appropriate third party consents.
The parties may waive conditions to their obligations unless they are
legally prohibited from doing so. First Northern shareholder approval and
regulatory approvals may not be legally waived. In addition, Mutual will not
proceed with the First Northern merger unless it is able to simultaneously
undergo the restructuring.
First Northern has agreed that it, its subsidiaries, its officers and
its directors will not take actions which could facilitate a competing
acquisition proposal. First Northern has agreed to:
- not initiate, solicit or encourage any inquiries or the making
of any acquisition proposal;
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<PAGE> 49
- not engage in any negotiations concerning, provide any
confidential information to, or have any discussions with, any
person relating to an acquisition proposal;
- cease any pre-existing activities with respect to any other
acquisition proposal; and
- notify Mutual Savings promptly if any such inquiries or
proposals are received by it.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
General. We have agreed to use our best efforts to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
entities which are necessary or advisable to consummate the merger and the
Mutual restructuring which is a condition to the merger. These include approvals
of the OTS and the FDIC. Mutual has completed the filing of all application
materials necessary to obtain these regulatory approvals. The merger cannot be
completed without these regulatory approvals. We cannot assure that we will
obtain the required regulatory approvals, or when they will be received, or
whether there will be conditions in the approvals or any litigation challenging
the approvals. We also cannot assure that the United States Department of
Justice or any state attorney general will not attempt to challenge the merger
on antitrust grounds, or what the outcome will be if such a challenge is made.
We are not aware of any material governmental approvals or actions that
are required prior to the merger other than those described below. We presently
contemplate that we will seek any additional governmental approvals or actions
that may be required; however, we cannot assure that we will successfully obtain
any such additional approvals or actions.
Office of Thrift Supervision. The merger is subject to approval by the
OTS, as is the Mutual restructuring. Mutual has filed the required applications
and notifications with the OTS for these approvals.
The OTS may not approve any transaction that would result in a monopoly
or otherwise substantially lessen competition or restrain of trade, unless it
finds that the anti-competitive effects of the transaction are clearly
outweighed in the public interest. In addition, the OTS considers the financial
and managerial resources of the companies and their subsidiary institutions and
the convenience and needs of the communities to be served. Under the Community
Reinvestment Act, the OTS must take into account the record of performance of
each company in meeting the credit needs of its entire communities, including
low and moderate income neighborhoods, served by each company. Mutual Savings
has a satisfactory CRA rating with the OTS; First Northern Savings has an
outstanding CRA rating.
Federal law requires publication of notice of, and the opportunity for
public comment on, the applications submitted by Mutual for approval of the
merger and the restructuring, and authorizes the OTS to hold a public hearing in
connection with the application if it determines that such a hearing would be
appropriate. Any such hearing or comments provided by third parties could
prolong the period during which the application is subject to review. In
addition, under federal law, a period of 30 days must expire following approval
by the OTS within which period the Department of Justice may file objections to
the merger under the federal antitrust laws. If the Department of Justice were
to commence an antitrust action, that action would stay the effectiveness of OTS
approval of the merger unless a court specifically orders otherwise. In
reviewing the merger, the Department of Justice could analyze the merger's
effect on competition differently than the OTS, and thus it is possible that the
Department of Justice could reach a different conclusion than the OTS regarding
the merger's competitive effects.
Mutual Saving's right to exercise the stock option agreement is also
subject to the prior approval of the OTS, to the extent that it were to acquire
stock under the stock option agreement. In considering whether to approve Mutual
Saving's right to exercise its option, the OTS would generally apply the same
statutory criteria it would apply to its consideration of approval of the merger
and would also consider the power of Mutual Savings to hold those shares.
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<PAGE> 50
Mutual Restructuring. In addition to the regulatory approvals which we
require for the First Northern merger, Mutual will need to obtain regulatory
approvals, primarily from the OTS, to undergo its restructuring. These approvals
include authorization for Mutual Savings to convert to a federally-chartered
institution, for Mutual Savings to form a mutual holding company with Bank
Mutual as a mid-tier holding company, and to offer shares of Bank Mutual to
Mutual Savings' depositors under the terms of Mutual's plan of restructuring. In
considering the restructuring, regulators will look at many of the same factors
discussed above as applying to the First Northern merger, but would also
consider the fairness of the restructuring to Mutual Savings' depositors.
NO SOLICITATION
The merger agreement required First Northern to immediately terminate
any discussions with any other parties with respect to any acquisition
transactions with other parties.
The merger agreement further restricts the circumstances under which
First Northern may provide information to other parties. First Northern has
agreed not to solicit other offers, and has agreed to only provide further
information in limited circumstances.
STOCK OPTION AGREEMENT
On February 21, 2000, First Northern and Mutual Savings executed a
stock option agreement. That agreement grants to Mutual Savings the option to
buy up to 1,708,675 shares of First Northern common stock at an exercise price
of $9.0375 per share, payable in cash; provided, however, that in no event will
the number of shares of First Northern common stock for which the option is
exercisable exceed 19.9% of the First Northern common stock issued and
outstanding without giving effect to the option. The $9.0375 amount was the
average closing price paid for First Northern common stock in the 10 days
preceding the execution of the stock option agreement. The number and type of
shares and the exercise price per share may be adjusted for stock dividends,
stock splits, recapitalizations and similar transactions. A copy of the stock
option agreement is included as Exhibit 2.2 to First Northern's Current Report
on Form 8-K dated February 21, 2000, which is incorporated herein by reference.
See "Where You Can Find More Information."
The option is intended to increase the likelihood that the merger will
be completed. It was a condition to Mutual agreeing to the merger agreement, to
protect Mutual in view of, among other things, the extended period between
signing the merger agreement and expected receipt of regulatory approvals.
Consequently, aspects of the stock option agreement may have the effect of
discouraging persons who might now or at any time be interested in acquiring all
of or a significant interest in First Northern or its assets before completion
of the merger.
Mutual Savings may exercise the option, in whole or in part, at any
time prior to the termination of the option and following the occurrence of a
"purchase event" such as:
- the acquisition by any person other than Mutual Savings of
beneficial ownership of 20% or more of the then outstanding
First Northern common stock;
- First Northern enters into an agreement to engage in another
acquisition transaction with any person other than Mutual
Savings, or First Northern's board of directors recommends
that the First Northern stockholders approve or accept another
acquisition transaction;
- any person other than Mutual Savings makes a proposal to First
Northern or its stockholders, that becomes publicly known, to
engage in an acquisition transaction, such an offer being
referred to as a "tender offer" or an "exchange offer"; or
- any person other than Mutual Savings, without Mutual Savings'
consent, files an application or notice with any governmental
authority for approval to engage in an acquisition transaction
with First Northern.
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If one of these purchase events occurs prior to an event which
terminates the option, First Northern will, at Mutual Savings' request, promptly
prepare, file and keep current a registration statement under the Securities Act
covering any shares issued and issuable pursuant to the option. These
registration rights are subject to certain limitations contained in the stock
option agreement.
The option terminates upon the earliest to occur of:
- the time immediately prior to the time at which the merger is
completed;
- a proper termination of the merger agreement prior to a
triggering event;
- 18 months after the first occurrence of an event that would
allow Mutual Savings to exercise the option, and 12 months
after the end of any continuing triggering event.
If a purchase event occurs prior to an event which terminates the option,
- at Mutual Savings' request, First Northern will repurchase the
option from Mutual Savings at a price equal to the amount by
which (1) the "market/offer price," as defined below, exceeds
(2) the option price, multiplied by the number of shares for
which the option may then be exercised, up to $12.0 million;
and/or
- at the request of the holder of option shares, First Northern
will repurchase the number of option shares designated by
their holder at a price equal to the market/offer price
multiplied by the number of option shares designated.
If prior to an event which terminates the option, First Northern enters
into a type of agreement which provides for the conversion of its securities
into another entities', the agreement governing the transaction must provide
that the option shall be converted into, or exchanged for, a substitute of the
acquiring corporation.
Neither First Northern nor Mutual Savings may assign any of its rights
or delegate any of its obligations under the stock option agreement to any other
person without the consent of the other party. However, Mutual Savings may
assign the stock option agreement to one of its subsidiaries and Mutual Savings
may assign its rights under the stock option agreement after the occurrence of a
purchase event by any person other than Mutual Savings of beneficial ownership
of 20% or more of the then outstanding First Northern common stock.
The rights and obligations of Mutual Savings and First Northern under
the stock option agreement are subject to receipt of certain regulatory
approvals and both parties have agreed to use their reasonable efforts to obtain
these approvals. These include making application, if necessary, for listing of
the shares of First Northern common stock issuable under the stock option
agreement on any exchange or quotation system and applying to the OTS and to
other regulatory authorities for approval to acquire the shares issuable under
the stock option agreement. Some of the termination periods provided in the
option are extended if regulatory approvals are pending.
TERMINATION; AMENDMENT; WAIVER
The merger agreement may be terminated prior to the closing, before or
after approval by First Northern's shareholders, as follows:
- by mutual written agreement of Mutual Savings and First
Northern
- by either Mutual Savings or First Northern if the merger has
not occurred on or before January 16, 2001.
- by Mutual Savings if:
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- First Northern materially breaches its representations and
warranties in the merger agreement, if not cured;
- First Northern fails to perform its agreements and covenants
in the merger agreement;
- First Northern shareholders do not approve the merger; or
- if there is a material adverse change in First Northern; and
- - - by First Northern if:
- Mutual Savings materially breaches its representations and
warranties in the merger agreement, if not cured;
- Mutual Savings fails to perform its agreements and covenants
in the merger agreement;
- if there is a material adverse change in Mutual Savings; or
- First Northern, following specified procedures, agrees to
another transaction.
Upon termination of the merger agreement by either party, there are no
further obligations of any party to the others except that:
- the obligations of Mutual under the provisions of the merger
agreement regarding expenses and rights on termination will
survive;
- the obligations of First Northern under the stock option
agreement and its obligations to comply with the provisions of
the merger agreement regarding expenses and rights on
termination will survive; and
- each party shall retain any and all remedies which it may have
for breach of contract provided by law based on another
party's willful failure to comply with the terms of the merger
agreement.
The merger agreement may be amended by the parties at any time before
or after approval of the merger agreement by the First Northern shareholders.
However, after such approval, no amendment may be made without their approval if
it reduces the exchange rate or materially adversely affects the rights of the
First Northern shareholders.
The parties may waive any of their conditions to closing, unless they
may not be waived under law.
FEES AND EXPENSES
Mutual and First Northern will each pay its own costs and expenses in
connection with the merger agreement and the transactions contemplated thereby.
However, the agreement provides that if Mutual terminates the agreement because
of a willful First Northern breach or because First Northern terminates the
agreement to pursue an offer for which its directors believe is superior, First
Northern will reimburse Mutual for its expenses in the transaction up to $1.4
million. Similarly, First Northern terminates the agreement because of a willful
Mutual breach, Mutual will reimburse First Northern for its expenses in
connection with the transaction, up to $500,000.
FEDERAL INCOME TAX CONSEQUENCES; TAX OPINION
The following is a discussion of material federal income tax
consequences of the merger to Bank Mutual, First Northern and the holders of
First Northern common stock who are citizens or residents of the United States
or that are domestic corporations. This discussion is for general information
only and does not address all tax consequences of the merger. The summary may
not apply to First Northern shareholders in special situations (such as dealers
in securities or currencies, traders in securities, financial institutions,
tax-exempt organizations, insurance companies, persons holding shares of First
Northern common stock as part of a hedging, "straddle," conversion or other
integrated transaction, non-United States persons, persons whose functional
currency is not the United States dollar or persons who acquired their shares of
First Northern common stock pursuant to the exercise of employee
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stock options or warrants, or otherwise as compensation). The discussion assumes
that the shares of First Northern common stock are held as capital assets. In
addition, no information is provided with respect to the tax consequences of the
merger under applicable foreign, state or local laws.
FIRST NORTHERN SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM.
The completion of the merger is conditioned upon the receipt by First
Northern of an opinion from Quarles & Brady LLP that the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. Quarles & Brady has provided its
opinion based upon certain customary assumptions and representations of fact,
including representations of fact contained in letters from Mutual Savings, on
behalf of itself, Bank Mutual and the MHC, and First Northern to Quarles &
Brady, all of which must be true, correct and complete in all material respects
as of the effective time of the merger. No ruling has been sought from the
Internal Revenue Service as to the U.S. federal income tax consequences of the
merger. Although the Internal Revenue Service ordinarily does not give rulings
on merger transactions, its ruling policy would require that at least 50% of the
consideration to be paid in the merger be in the form of Bank Mutual stock for
the merger to be a tax-free reorganization. However, the IRS's ruling policy is
not necessarily its interpretation of existing law, and there are court
decisions that have upheld tax-free reorganization treatment where less than 40%
of the consideration was in the form of stock. The opinion of Quarles & Brady is
not binding upon the Internal Revenue Service or any court. Accordingly, we
cannot assure you that the Internal Revenue Service will not contest the
conclusions expressed in Quarles & Brady's opinion or, if it does so, that a
court will not agree with the IRS's position.
Assuming the merger will qualify as a tax-free reorganization, no gain
or loss will be recognized by Bank Mutual or First Northern as a result of the
merger. The pre-merger holders of Bank Mutual stock, if any, will not recognize
gain or loss as a result of the merger.
The following discussion addresses certain federal income tax
consequences of the merger to a First Northern shareholder, assuming that the
merger will qualify as a tax-free reorganization.
ONLY SHARES OF BANK MUTUAL COMMON STOCK RECEIVED
Except as discussed below with respect to cash received in lieu of a
fractional share of Bank Mutual common stock, a First Northern shareholder that
receives only shares of Bank Mutual common stock in exchange for the holder's
shares of First Northern common stock will not recognize gain or loss. The tax
basis of the shares of Bank Mutual common stock received in the merger will be
the same as the tax basis of the shares of First Northern common stock exchanged
in the merger. The holding period of the shares of Bank Mutual common stock
received will include the holding period of shares of First Northern common
stock exchanged in the merger.
ONLY CASH RECEIVED
A First Northern shareholder that receives solely cash in the merger in
exchange for the shareholder's shares of First Northern common stock generally
will recognize capital gain or loss measured by the difference between the
amount of cash received with respect to each share of First Northern common
stock and the tax basis of each share of First Northern common stock exchanged
in the merger. If, however, any such shareholder actually or constructively owns
shares of Bank Mutual common stock after the merger, the cash received by the
shareholder may, in certain circumstances, be taxed as a dividend. This
treatment would apply whether the constructive ownership is the result of
constructive ownership of shares of First Northern common stock that are
exchanged for shares of Bank Mutual common stock in the merger, prior, actual or
constructive ownership of shares of Bank Mutual common stock, or otherwise. The
circumstances under which dividend treatment may apply and the resulting
consequences are similar to those discussed under "- Shares of Bank Mutual
Common Stock and Cash
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Received - Treatment of Gain Recognized," except that the amount treated as a
dividend would not be limited to the amount of the shareholder's gain recognized
in the transaction, and it is possible that there would be some variation in the
manner in which the tests under Section 302 of the Code would be applied. See
also "- Effect of Overlapping or Constructive Ownership," for a general
discussion of the effect of a shareholder's overlapping ownership on the
dividend/capital gain issue.
SHARES OF BANK MUTUAL COMMON STOCK AND CASH RECEIVED
General. Except as discussed below with respect to cash received in
lieu of a fractional share of Bank Mutual common stock, a First Northern
shareholder that receives both shares of Bank Mutual common stock and cash in
exchange for shares of First Northern common stock will not recognize loss in
the exchange. However, under Section 356(a)(1) of the Code, the shareholder will
recognize gain, if any, with respect to each share of First Northern common
stock exchanged, measured by the sum of the fair market value of the portion of
a share of Bank Mutual common stock received for the share of First Northern
common stock, plus the amount of any cash received for the share of First
Northern common stock, minus the tax basis of such share of First Northern
common stock. However, this gain will be recognized only to the extent of the
amount of any cash received in exchange for the share of First Northern common
stock.
A First Northern shareholder may receive both shares of Bank Mutual
common stock and cash as the result of (a) making an election to receive some
shares and some cash, (b) making an election to receive all shares and being
prorated, if the election to receive all shares is oversubscribed, (c) making an
election to receive all cash and being prorated, if the election to receive all
cash is oversubscribed or (d) failing to make any election and neither the
election to receive all cash or all shares is oversubscribed.
Treatment of Gain Recognized. Any gain recognized will be taxed as
either gain from the sale or exchange of stock (that is, capital gain) or as a
dividend (to the extent of the shareholder's ratable share of earnings and
profits) based upon whether, in the transaction described in the next sentence,
the shareholder's interest in Bank Mutual was reduced sufficiently so that the
cash received was not treated as a dividend under the tests of Section 302 of
the Code. For purposes of this determination, a First Northern shareholder will
be treated as if the shareholder had engaged in a hypothetical transaction in
which the shareholder and all other First Northern shareholders (a) received
solely shares of Bank Mutual common stock in exchange for all of their shares of
First Northern common stock, and (b) thereafter had a portion of the shares of
Bank Mutual common stock redeemed for the cash portion of the merger
consideration. A First Northern shareholder's hypothetical interest in Bank
Mutual after step (a) is compared to the shareholder's interest in Bank Mutual
subsequent to the deemed redemption in step (b). In each case, subject to
limited exceptions, shares of Bank Mutual common stock actually or
constructively owned, under the constructive ownership rules described in
"-Effect of Overlapping or Constructive Ownership" below, by the shareholder
will be considered owned for purposes of applying this test, even if the shares
of Bank Mutual common stock were not received or deemed received in the merger.
If a shareholder is subjected to dividend treatment, the entire cash portion of
the merger consideration received by the shareholder will be treated as a
dividend to the extent of the shareholder's ratable share of earnings and
profits.
Under Section 302(b) of the Code, a distribution in redemption of stock
will not be treated as a dividend if, insofar as is here pertinent, (1) the
shareholder's interest in Bank Mutual is completely terminated as a result of
the transaction, (2) the shareholder's percentage interest in Bank Mutual is
reduced more than 20% in the redemption described above and after considering
all similar redemptions of other shareholders, or (3) the shareholder's interest
was "meaningfully reduced" by virtue of such redemption (collectively, the
"Section 302 Tests"). While alternative (3) of the Section 302 Tests requires a
determination based on a shareholder's particular facts and circumstances, the
IRS has indicated in published rulings that a distribution that results in any
actual reduction in interest of an extremely small, minority shareholder in a
publicly held corporation will meaningfully reduce the shareholder's interest in
the corporation, if the shareholder exercises no control with respect to
corporate affairs.
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Application of the Section 302 Tests - General. The application of the
Section 302 Tests to a shareholder that receives a combination of cash and Bank
Mutual common stock will depend upon, in addition to the type of election made
by the shareholder, the extent to which: (1) the cash or stock portion of the
merger consideration is oversubscribed; (2) the shareholder actually or
constructively owns after the merger any shares of Bank Mutual common stock
which the shareholder did not receive, actually or constructively, in the merger
- - - for example, shares of Bank Mutual common stock issued in the stock offering
which the shareholder owns actually or constructively; and (3) the shareholder
constructively owns shares of First Northern common stock immediately prior to
the effective time of the merger.
Effect of Overlapping or Constructive Ownership. A First Northern
shareholder that (a) actually or constructively owns after the merger any shares
of Bank Mutual common stock which the shareholder did not receive, actually or
constructively, in the merger as described above, or (b) constructively owns
shares of First Northern common stock immediately prior to the effective time of
the merger or shares of Bank Mutual common stock immediately after the effective
time of the merger, will be required to take those shares into account for
purposes of applying the Section 302 Tests. Under the applicable constructive
ownership rules of Section 318 of the Code, a shareholder will, in general, be
treated as owning shares that are owned by certain family members and other
related entities, or that are subject to options owned or deemed owned by the
person. The actual or constructive ownership of shares of First Northern common
stock may, in some circumstances, have the effect of causing a First Northern
shareholder that would otherwise qualify for capital gain treatment under the
Section 302 Tests to fail to qualify and subject the shareholder to dividend
treatment on the entire cash portion of the merger consideration paid to the
shareholder, to the extent of the shareholder's ratable share of earnings and
profits, even if the shareholder receives solely cash in the merger. Therefore,
First Northern shareholders that (1) constructively own shares of First Northern
common stock or (2) actually or constructively own shares of Bank Mutual common
stock should consult their tax advisors as to the tax consequences of receiving
cash, whether the shareholder intends to make a cash election, a stock election
or a part cash and part stock election.
Treatment of Dividends to Corporate Shareholders. To the extent that
cash received in exchange for shares of First Northern common stock is treated
as a dividend to a corporate shareholder, the corporate shareholder will be (a)
eligible for a dividends received deduction, subject to applicable limitations
and (b) subject to the "extraordinary dividend" provisions of the Code. Any cash
which is treated as a dividend to a corporate shareholder will constitute an
extraordinary dividend, except as otherwise provided in Treasury regulations
which have yet to be adopted. Consequently, the non-taxed portion of any such
dividend would reduce a corporate shareholder's adjusted tax basis in the shares
of Bank Mutual common stock received in the merger, but not below zero, and
would thereafter be taxable as capital gain.
The Basis and Holding Period of Shares of Bank Mutual Common Stock
Received in the Merger. The tax basis of each share of Bank Mutual common stock
received in the merger will be the same as the tax basis of the shares of First
Northern common stock exchanged, increased by the amount of gain recognized on
the exchange with respect to those shares of First Northern common stock,
including any such gain that is treated as a dividend, decreased by any portion
of the shares of First Northern common stock which are converted into cash in
lieu of receipt of a fractional share of Bank Mutual common stock, and further
decreased by the amount of cash received with respect to the shares of First
Northern common stock other than cash received in lieu of a fractional share
interest. As discussed above, corporate shareholders are subject to special
adjustments with respect to the portion of any cash received in the merger which
is taxable as a dividend. See "- Treatment of Dividends to Corporate
Shareholders." The holding period of the shares of Bank Mutual common stock
received will include the holding period of the shares of First Northern common
stock exchanged in the merger.
FRACTIONAL SHARES
If a First Northern shareholder receives cash in lieu of a fractional
share of Bank Mutual common stock in the merger, the cash amount will be treated
as received in exchange for the fractional share of Bank Mutual
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common stock. Gain or loss recognized as a result of that exchange will be equal
to the cash amount received for the fractional share of Bank Mutual common stock
reduced by the proportion of the shareholder's tax basis in shares of First
Northern common stock exchanged and allocable to the fractional shares of Bank
Mutual common stock.
FIRST NORTHERN 401(K) PLAN
Under the First Northern 401(k) retirement plan, participant accounts
may be invested in First Northern common stock. The instruction by a plan
participant to the plan trustees to convert that stock into cash, into Bank
Mutual common stock, or partly into cash and partly into Bank Mutual stock
pursuant to the merger will not result in a taxable event for the plan
participant at the time of the merger. However, the decision may have a
long-term tax impact on the participant.
Under the terms of the plan, company stock may be distributed in kind
at the election of the plan participant. In the event that company stock is
distributed in kind as part of a benefit payment which qualifies as a "lump sum
distribution" and the participant so elects, only the plan's original cost or
basis of the company stock will be taxed at that time to the participant; any
unrealized appreciation will not be taxed until such time as the company stock
is disposed of in a subsequent taxable transaction. To the extent that gain
recognized from the disposition does not exceed the net unrealized appreciation
at the time of the distribution from the plan, the gain recognized will be taxed
as long-term capital gain. Any additional unrealized appreciation, such as
growth in value subsequent to the distribution, will also be taxed as a
long-term capital gain if the stock has been held for more than one year after
the distribution date.
The net unrealized appreciation rules provide an option for a plan
participant who receives company stock in a lump sum distribution. For any
participant interested in maximizing the portion of share value that is
attributed to "appreciation" as opposed to "basis" in the stock, the instruction
to the plan trustee concerning the election to convert the First Northern common
stock into cash or Bank Mutual stock will be important. A conversion into cash
and subsequent investment by the participant in Bank Mutual common stock will
result in a new, presumably higher, basis and lower future appreciation. A
conversion into Bank Mutual common stock will result in the transfer in basis by
the plan trustee from the participant's allocable interest in First Northern
common stock to the participant's allocable interest in Bank Mutual common
stock.
LIMITATIONS ON TAX OPINION AND DISCUSSION
As noted earlier, the tax opinion is subject to certain assumptions,
relating to, among other things, the truth and accuracy of certain
representations made by Mutual Savings, Bank Mutual, the MHC and First Northern,
and the consummation of the merger in accordance with the terms of the merger
agreement and applicable state law. Furthermore, the tax opinion will not bind
the IRS and, therefore, the IRS is not precluded from asserting a contrary
position. The tax opinion and this discussion are based on currently existing
provisions of the Code, existing and proposed Treasury regulations, and current
administrative rulings and court decisions. There can be no assurance that
future legislative, judicial, or administrative changes or interpretations will
not adversely affect the accuracy of the tax opinion or of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS THAT MAY BE IMPORTANT TO YOU. THUS, WE
URGE FIRST NORTHERN SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE MERGER, INCLUDING TAX
RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
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RESALE OF BANK MUTUAL COMMON STOCK
All shares of Bank Mutual common stock received by First Northern
shareholders in the merger will be freely transferable, except that shares of
Bank Mutual common stock received by persons who are deemed to be "affiliates,"
as the term is defined under the Securities Act, of Bank Mutual or First
Northern prior to the Merger may be resold by them only in transactions
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Bank Mutual or First Northern generally include certain officers and
directors of such party as well as principal shareholders of such party.
Affiliates of both parties have previously been notified of their status. It
is a condition to the obligation of Bank Mutual to complete the merger that
Bank Mutual shall have received an affiliate letter from each person who is an
affiliate of First Northern.
This proxy statement/prospectus does not cover resales of Bank Mutual
common stock received by any person who may be deemed to be an affiliate of
First Northern or Bank Mutual.
ACCOUNTING TREATMENT
In accordance with generally accepted accounting principles, the
restructuring will be accounted for using the pooling of interests method and
the merger will be accounted for using the purchase method. The result of this
is that the recorded assets and liabilities of Mutual Savings will be carried
forward at their recorded amounts, the historical operating results will be
unchanged for the prior periods being reported on and that the net proceeds
from the acquisition of First Northern will be adjusted to fair value at the
date of the merger. To the extent that the purchase price, consisting of cash
plus the number of shares of Bank Mutual to be issued to former First Northern
shareholders at fair value, exceeds the fair value of the net assets of First
Northern at the merger date, that amount will be reported as goodwill to be
amortized to the consolidated income of Bank Mutual in future periods. Fair
value of the Bank Mutual shares will reflect an approximate 15% discount to
reflect the size of the block of stock issued and the estimated issuance costs
and market discount ordinarily incurred with the issuance of a substantial and
similarly sized block of shares. Further, the purchase accounting method
results in the operating results of First Northern only being included in the
consolidated income of Bank Mutual beginning from the date of the merger.
NO DISSENTERS' RIGHTS OF APPRAISAL
Under Wisconsin law, First Northern shareholders do not have the right
to dissent from the merger and to receive payment in cash for the fair value of
their shares of First Northern common stock.
MUTUAL SAVINGS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Mutual Savings' consolidated
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Mutual
Savings' consolidated financial statements and accompanying notes to
consolidated financial statements beginning on page F-1 of this prospectus, and
the other statistical data provided elsewhere in this prospectus.
GENERAL
Mutual Savings' results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income on
interest-earning assets, which for Mutual Savings primarily are loans and
mortgage-related and investment securities, and interest expense on
interest-bearing liabilities, which for Mutual Savings primarily are deposits
and borrowings. Our results of operations are also affected by our provision for
loan losses, non-interest income, and non-interest expense. Non-interest income
consists mainly of service fees and charges, gains on sales of loans held for
sale and insurance, securities and annuity commissions. Non-interest expense
consists primarily of salaries and employee benefits, occupancy expenses and
other general and administrative expenses, and amortization of intangible
assets.
Our results of operations may also be affected significantly by general
and local economic and competitive conditions, particularly changes in market
interest rates, government policies, and actions of regulatory authorities.
Future changes in applicable law, regulations or government policies may
materially impact us. Additionally, our lending activity is concentrated in
loans secured by real estate located in Wisconsin and/or to Wisconsin borrowers.
Accordingly, our results of operations are affected by regional market and
economic conditions.
MANAGEMENT STRATEGY
Mutual Savings' operating strategy is to succeed as a well-capitalized,
profitable community bank. We seek to accomplish this goal by:
- maintaining a community orientation and providing quality
customer service;
- expanding our market area;
- continuing our commitment to residential lending, while
diversifying our portfolio;
- managing credit risk;
- promoting core deposit accounts;
- limiting exposure to interest rate risk; and
- controlling expenses.
First Northern's operating strategy is similar to Mutual Savings'
strategy. Although the two banks initially will operate separately after the
restructuring, their business philosophies will continue to be complementary.
MANAGEMENT OF INTEREST RATE RISK
Mutual Savings' ability to maintain net interest income depends upon
earning a higher yield on assets than the rates we pay on deposits and
borrowings. Fluctuations in interest rates will ultimately impact both our level
of income and expense recorded on a large portion of our assets and liabilities.
Fluctuations in interest rates will also affect the market value of all
interest-earning assets, other than those which possess a short term to
maturity.
We have attempted to reduce our interest rate risk by emphasizing the
origination of ARM loans and by selling a majority of our longer-than-15 year
fixed rate mortgage loan originations. During the past few years we have
retained
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15-year fixed rate mortgage loans in our portfolio. It is our opinion that the
enhanced yield and cash flows offered by this product offset the amount of
interest rate risk that is assumed. For the year ended December 31, 1999, we
originated $96.4 million of fixed rate one- to four-family first mortgage loans,
or 63.1% of total one-to-four family first mortgage originations, of which $57.4
million were sold with servicing retained. In managing our investment
securities, a relatively high proportion of the portfolio is retained in
securities, with concentration in fixed rate investments having a weighted
average remaining life of 83 months at March 31, 2000. We believe these
strategies have reduced income due to lower initial yields on these investments
in comparison to longer term fixed rate investments. However, we believe that
reducing our exposure to interest rate fluctuations will enhance long-term
profitability.
For the first quarter of 2000, we originated $4.1 million of fixed
rate, one-to-four family first mortgage loans, or 18.9% of total one-to-four
family first mortgage originations, of which we sold $1.1 million with servicing
retained. As interest rates have risen, more borrowers have selected adjustable
loans.
Interest rate sensitivity is a measure of the difference between
amounts of interest-earning assets and interest-bearing liabilities which either
reprice or mature during a given period of time. The difference, or the interest
rate sensitivity "gap," provides an indication of the extent to which our
interest rate spread will be affected by changes in interest rates. For further
information about interest rate repricing, see "Gap Analysis".
During 1998 and early 1999, we operated in a low interest rate
environment. In that environment we experienced both increased interest rate
competition related to loan originations and above-average prepayment rates
related to mortgage loans and mortgage-related securities, as borrowers
refinanced higher-rate loans. As a result we had to invest our excess liquidity
in short term low-yielding investments. This had an adverse impact on our
profitability. As interest rates began to rise later in 1999, we began to
re-deploy our excess liquidity into higher yielding investments.
Due to the nature of our operations, we are not directly subject to
foreign currency exchange or commodity price risk. Instead, our real estate loan
portfolio, concentrated in Wisconsin, is subject to risks associated with the
local economy. We did not engage in any hedging transactions that use derivative
instruments (such as interest rate swaps and caps) during 1999 and did not have
any such hedging transactions in place at March 31, 2000. In the future, we may,
with approval of our board of directors, engage in hedging transactions
utilizing derivative instruments.
We seek to coordinate asset and liability decisions so that, under
changing interest rate scenarios, earnings will remain within an acceptable
range.
The primary objectives of our interest rate management strategy are to:
- maintain earnings and capital within self-imposed parameters
over a range of possible interest rate environments;
- coordinate interest rate risk policies and procedures with other
elements of our business plan, all within the context of the
current business environment and our capital and liquidity
requirements; and
- manage interest rate risk in a manner consistent with the
approved guidelines and policies set by our board of directors.
To achieve the objectives of managing interest rate risk, our
Asset/Liability committee meets periodically to discuss and monitor the market
interest rate environment and provides reports to the board of directors
monthly. This committee is chaired by the President and is comprised of members
of Mutual Savings' senior management.
Historically, our lending activities have emphasized one- to
four-family first and second mortgage loans. Our primary source of funds has
been deposits and borrowings, consisting primarily of time deposits and
borrowings which have substantially shorter terms to maturity than the loan
portfolio. We have employed certain strategies to manage the interest rate risk
inherent in the asset/liability mix, including:
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- emphasizing the origination of adjustable-rate and 15 year
fixed-rate real estate loans for portfolio, and selling 30-year
fixed rate loans;
- maintaining a significant level of investment securities and
mortgage-related securities with a weighted average life of less
than eight years or with interest rates that reprice in less
than five years; and
- managing deposits and borrowings to provide stable funding.
We believe that the frequent repricing of our adjustable-rate real
estate loans, the cash flows from our 15 year fixed-rate real estate loans, and
adjustable rate features and shorter durations of our investment securities,
reduce our exposure to interest rate fluctuations.
GAP ANALYSIS. Repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring a financial institution's interest
rate sensitivity "gap." An asset or liability is said to be "interest rate
sensitive" within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-bearing assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
At March 31, 2000, based on the assumptions below, our interest-bearing
liabilities maturing or repricing within one year exceeded our interest-earning
assets maturing or repricing within the same period by $97.5 million. This
represented a negative cumulative one-year interest rate sensitivity gap of
(5.6%), and a ratio of interest-earning assets maturing or repricing within one
year to interest-bearing liabilities maturing or repricing within one year of
85.4%. By maintaining a low gap percentage, we decrease the impact on earnings
due to fluctuations in market interest rates. For the time frame of the gap, our
assets and liabilities are generally repricing at the same time.
The following table presents the amounts of our interest-earning assets
and interest-bearing liabilities outstanding at March 31, 2000, which we
anticipate to reprice or mature in each of the future time periods shown. Except
as stated below, we determined the amounts of assets and liabilities shown which
reprice or mature during a particular period in accordance with the earlier of
the term to repricing or the contractual maturity of the asset or liability. The
information presented in the following table is also based on the following
assumptions:
1. We assumed the following repayment rates applied to
outstanding balances applied to the beginning of the period:
Mortgage loans: 15.5%
Consumer loans: 49.8%
Commercial loans: 39.6%
2. Anticipated cash flows for mortgage-related securities were
obtained from an independent outside source.
-56-
<PAGE> 60
3. We reported federal agency securities with call options, that
we believed would be called, at the earlier of the next call
date or contractual maturity date;
4. We reported savings, money market accounts and
interest-bearing demand accounts that had no stated maturity
using decay rates. The decay rates were calculated using an
average of the Mutual Savings' most recent 12 months
experience.
5. FHLB advances are reported at the earlier of call date or final
maturity.
However, changes in interest rates could affect the loan and investment
prepayment assumptions and deposit decay rates used in our analysis.
The repayment assumption used for mortgage loans in (1) above was
adjusted from recent history due to the current rise in interest rates. In a
rising rate environment, prepayments on mortgage loans slow down significantly
as mortgage loan customers retain their low interest rate loans. Deposit decay
rates, as reflected in items (4) above, are based on Mutual Savings' recent
history. Deposit decay rates, prepayment rates and anticipated call dates can
have a significant impact on the estimated interest rate sensitivity gap. While
we believe that our assumptions are reasonable, they may not be indicative of
actual future deposit decay activity, loan and mortgage-related securities
prepayments, and the actual timing of federal agency calls.
-57-
<PAGE> 61
<TABLE>
<CAPTION>
AT MARCH 31, 2000
--------------------------------------------------------------------------------------
THREE TO MORE THAN ONE MORE THAN
WITHIN THREE TWELVE YEAR TO THREE THREE YEARS TO OVER
MONTHS MONTHS YEARS FIVE YEARS FIVE YEARS TOTAL
------------ ------------ -------------- -------------- ------------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable
Mortgage loans:
Fixed $ 13,849 $ 46,288 $ 106,095 $ 83,268 $ 196,091 $ 445,591
Adjustable 51,198 154,170 94,575 99,472 29,866 429,281
Other loans 62,400 57,306 116,280 -- -- 235,986
Securities:
Interest earning deposits 21,457 21,457
Non-mortgage 39,448 -- -- 10,101 49,549
Mortgage-related fixed 13,077 37,501 97,752 92,036 183,579 423,945
Mortgage-related adjustable 61,234 -- -- -- -- 61,234
Other interest-earning assets 13,558 13,558
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 276,221 295,265 414,702 284,877 409,536 1,680,601
---------- ---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts 2,218 6,136 13,791 10,940 56,056 89,141
Savings accounts 8,129 21,841 43,244 27,764 49,923 150,901
Money market accounts 6,419 16,913 39,108 31,709 135,902 230,051
Time deposits 233,607 328,522 219,642 18,921 -- 800,692
Advance payments by borrowers for taxes -- 7,049 -- -- -- 7,049
and insurance
---------- ---------- ---------- ---------- ---------- ----------
Other borrowings 5,005 33,147 200,450 97 -- 238,699
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 255,378 $ 413,608 $ 516,235 $ 89,431 241,881 1,516,533
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 20,843 $ (118,343) $ (101,533) $ 195,446 $ 167,655 $ 164,068
==========
Cumulative interest rate sensitivity gap $ 20,843 $ (97,500) $ (199,033) $ (3,587) $ 164,068
Cumulative interest rate sensitivity gap
as a percentage total assets 1.20% (5.60)% (11.42)% (0.21)% (9.42)%
Cumulative interest-earning assets as a
percentage of interest bearing liabilities 108.16% 85.43% (83.21)% (99.72)% (110.82)%
</TABLE>
The methods used in the previous table have some shortcomings. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans, have features which limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates
increase.
Present Value of Equity. In addition to the gap analysis table, we also use
a simulation model to monitor interest rate risk. This model reports the present
value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the present value of expected cash flows of interest rate-sensitive assets and
liabilities. The changes in market value of assets and liabilities due to
changes in interest rates reflect the interest rate sensitivity of those assets
and liabilities as their values are derived from the characteristics of the
asset or liability (i.e., fixed rate, adjustable-rate, caps, floors) relative to
the current interest rate environment. For example, in a rising interest rate
environment the fair market value of a fixed rate asset will decline, whereas
the fair market
-58-
<PAGE> 62
value of an adjustable-rate asset, depending on its repricing characteristics,
may not decline. Increases in the market value of assets will increase the
present value of equity whereas decreases in market value of assets will
decrease the present value of equity. Conversely, increases in the market value
of liabilities will decrease the present value of equity whereas decreases in
the market value of liabilities will increase the present value of equity.
The following table presents the estimated present value of equity over a
range of interest rate change scenarios at March 31, 2000. The present value
ratio shown in the table is the present value of equity as a percent of the
present value of total assets in each of the different rate environments. For
purposes of this table, we have made assumptions such as prepayment rates and
decay rates similar to those used for the gap analysis table.
<TABLE>
<CAPTION>
PRESENT VALUE OF EQUITY AS
PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
---------------------------------------- -----------------------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE RATIO CHANGE
- - -------------- ------------- -------------- ----------- ---------------------- ------------------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+200 $ 185,792 $(33,888) (15.43) % 11.26 % (11.69) %
+100 205,089 (14,591) (6.64) 12.16 (4.63)
0 219,680 - 0.00 12.75 0.00
- - -100 215,838 (3,842) (1.75) 12.28 (3.69)
- - -200 193,045 (26,635) (12.12) 10.79 (15.37)
</TABLE>
As in the case of the gap analysis table, the methods we used in the
previous table have some shortcomings. This type of modeling requires that we
make assumptions which may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. For example, we make
assumptions regarding the acceleration rate of the prepayment speeds of higher
yielding mortgage loans. Prepayments will accelerate in a falling rate
environment and the reverse will occur in a rising rate environment. We also
assume that decay rates on core deposits will accelerate in a rising rate
environment and the reverse in a falling rate environment. The table assumes
that we will take no action in response to the changes in interest rates, when
in practice rate changes on certain products, such as savings deposits, may lag
market changes. In addition, prepayment estimates and other assumptions within
the model are subjective in nature, involve uncertainties, and therefore cannot
be determined with precision. Accordingly, although the present value of equity
model may provide an estimate of our interest rate risk at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in interest rates on our present value of
equity.
-59-
<PAGE> 63
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the interest income
we earn on our interest-earning assets, primarily loans, mortgage-related
securities and investment securities, and the expense we pay on interest-bearing
liabilities, primarily time deposits and borrowings. Net interest income depends
on our volume of interest-earning assets and interest-bearing liabilities and
the interest rates we earned or paid on them.
Average Balance Sheet. The following table presents certain information
regarding Mutual Savings' financial condition and net interest income for the
quarters ended March 31, 2000 and 1999, and the years 1999, 1998 and 1997. The
table presents the average yield on interest-earning assets and the average cost
of interest-bearing liabilities for the periods indicated. We derived the yields
and costs by dividing income or expense by the average balance of
interest-earnings assets or interest-bearing liabilities respectively, for the
periods shown. We derived average balances from daily balances over the periods
indicated. Interest income includes fees which we considered adjustments to
yields.
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
-------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
ACTUAL OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE BALANCE PAID RATE BALANCE PAID RATE
------- ------- ------- ------- ----------- -------- --------
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $1,105,947 $1,097,134 $ 20,341 7.42 % $1,056,052 19,811 7.50 %
Mortgage-related securities 472,456 455,873 7,699 6.76 % 265,834 4,199 6.32 %
Investment securities and interest- 69,622 110,101 1,566 5.69 % 417,194 4,932 4.73 %
earning deposits
Federal Home Loan Bank stock 13,537 13,537 236 6.97 % 13,637 209 6.18 %
--------- ---------- ---------- ----- ---------- ------ ----
Total interest-earning assets 1,661,562 1,676,645 29,842 7.12 % 1,752,617 29,151 6.65 %
Non-interest-earning assets 80,622 65,886 99,561
========= ========== ==========
Total assets 1,742,184 1,742,531 1,852,178
--------- --------- ----------
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 150,901 $ 150,667 900 2.39 % $ 165,208 $ 985 2.38 %
Money market accounts 230,051 229,413 2,802 4.89 % 169,056 1,989 4.71 %
Interest-bearing demand accounts 89,141 87,556 225 1.03 % 89,628 234 1.04 %
Time deposits 800,692 813,807 10,851 5.33 % 909,933 12,381 5.44 %
---------- ---------- ---------- ----- ---------- ------ ----
Total deposits 1,270,785 1,281,443 14,778 4.61 % 1,333,825 15,589 4.67 %
Escrows 7,049 4,334 26 2.40 % 4,259 27 2.54 %
Borrowings 238,699 231,748 3,375 5.83 % 270,820 3,511 5.19 %
---------- ---------- ---------- ----- ---------- ------ ----
Total interest-bearing liabilities 1,516,533 1,517,525 18,179 4.79 % 1,608,904 19,127 4.76 %
---------- ---------- ---------- ----- --------- ------ ----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 48,403 41,028 40,351
Other non-interest-bearing 13,339 21,075 26,536
liabilities ---------- ---------- ---------
Total non-interest-bearing 61,742 62,103 66,887
liabilities ---------- ---------- ---------
Total liabilities 1,578,275 1,579,628 1,675,791
Equity 163,909 162,903 176,387
---------- ---------- ---------
Total liabilities and equity 1,742,184 1,742,531 1,852,178
========== ========== =========
Net interest income/net interest rate
spread $ 11,663 2.33 % $ 10,024 1.89 %
========== ==========
Net interest-earning assets/net
interest margin $ 159,120 2.78 % $ 143,713 2.29 %
========== ======= ========== =====
Average interest-earnings assets to 1.10x 1.09x
average interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE
BALANCE EARNED/PAID COST BALANCE EARNED/PAID COST BALANCE
------- ----------- ------- ------- ----------- ------- -------
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $1,069,568 $ 79,623 7.44 % $1,159,786 $ 90,092 7.77 % $1,212,945
Mortgage-related securities 290,772 18,479 6.36 % 238,338 15,664 6.57 % 159,259
Investment securities and interest- 383,630 19,294 5.03 % 347,115 18,681 5.38 % 193,665
earning deposits
Federal Home Loan Bank stock 13,537 906 6.69 % 15,640 1,033 6.6 % 18,206
---------- ---------- ---------- --------- -----------
Total interest-earning assets 1,757,507 118,302 6.73 % 1,760,879 125,470 7.13 % 1,584,075
Non-interest-earning assets 80,369 89,137 70,376
========== ========== ===========
Total assets $1,837,876 $1,850,016 $ 1,654,451
---------- ---------- -----------
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 163,102 $ 3,885 2.38 % $ 168,965 $ 4,268 2.53 % $ 168,998
Money market accounts 203,924 9,796 4.80 % 141,860 6,571 4.63 % 119,283
-----
Interest-bearing demand accounts 89,139 940 1.05 % 90,211 1,070 1.19 % 83,127
Time deposits 872,824 46,470 5.32 % 927,241 53,327 5.75 % 863,534
---------- ---------- ----- ---------- ---------- ----- -----------
Total deposits 1,328,989 61,091 4.60 % 1,328,277 65,236 4.91 % 1,234,942
Escrows 12,227 313 2.56 % 13,143 344 2.62 % 15,674
Borrowings 263,400 13,933 5.29 % 270,838 14,437 5.33 % 191,346
---------- ---------- ------ ---------- ---------- ------ -----------
Total interest-bearing liabilities 1,604,616 75,337 4.7 % 1,612,258 80,017 4.96 % 1,441,962
---------- ---------- ------ ---------- ---------- ------ -----------
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 43,402 39,714 31,969
Other non-interest-bearing 14,098 28,307 24,260
liabilities
---------- ---------- -----------
Total non-interest-bearing 57,500 68,021 56,229
liabilities
---------- ---------- -----------
Total liabilities 1,662,116 1,680,279 1,498,191
Equity 175,760 169,737 156,260
---------- ---------- -----------
Total liabilities and equity $1,837,876 $1,850,016 $ 1,654,451
========== ========== ===========
Net interest income/net interest rate
spread $ 42,965 2.03 % $ 45,453 2.16 %
========== ===== =========
Net interest-earning assets/net
interest margin $ 152,891 2.44 % $ 148,621 2.58 % $ 142,113
========== ===== ========== ===========
Average interest-earnings assets to 1.10x 1.09x
average interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997
--------------------------------
AVERAGE
INTEREST YIELD/
EARMED/PAID COST
----------- -------
ASSETS:
INTEREST-EARNING ASSETS:
<S> <C> <C>
Loans receivable (1) $ 93,628 7.72 %
Mortgage-related securities 10,250 6.44 %
Investment securities and interest- 10,940 5.65 %
earning deposits
Federal Home Loan Bank stock 1,175 6.45 %
---------- -----
Total interest-earning assets 115,993 7.32 %
Non-interest-earning assets
Total assets
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 4,696 2.78 %
Money market accounts 5,458 4.58 %
Interest-bearing demand accounts 1,137 1.37 %
Time deposits 49,626 5.75 %
---------- -----
Total deposits 60,917 4.93 %
Escrows 380 2.42 %
Borrowings 10,897 5.69 %
---------- -----
Total interest-bearing liabilities 72,194 5.01 %
---------- -----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits
Other non-interest-bearing
liabilities
Total non-interest-bearing
liabilities
Total liabilities
Equity
Total liabilities and equity
Net interest income/net interest rate
spread $ 43,799 2.31 %
==========
Net interest-earning assets/net
interest margin 2.76 %
Average interest-earnings assets to 1.10x
average interest-bearing liabilities
</TABLE>
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<PAGE> 64
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
(1) changes attributable to changes in volume (change in volume multiplied
by prior rate);
(2) changes attributable to change in rate (changes in rate multiplied by
prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
2000 COMPARED TO 1999
------------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------------
VOLUME RATE NET
---------- ---------- ---------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C>
Loans receivable $ 764 $ (234) $ 530
Mortgage-related securities 3,191 309 3,500
Investment securities (4,649) 1,283 (3,366)
Federal Home Loan Bank Stock -- 27 27
------- ------- -------
Total (694) 1,385 691
------- ------- -------
INTEREST-BEARING LIABILITIES:
Savings deposits $ (87) $ 2 $ (85)
Money market accounts 734 79 813
Interest bearing demand accounts (5) (4) (9)
Time deposits (1,286) (244) (1,530)
Escrows 0 (1) (1)
Borrowings (621) 485 (136)
------- ------- --------
Total (1,265) 317 (948)
------- ------- --------
Net change in net interest income $ 571 $ 1,068 $ 1,639
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------------------------- --------------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------------------- --------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------ --------------- ----------- ------------ --------------- -----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable$ $ (6,818) $ (3,651) $ (10,469) $ (4,126) $ 590 $ (3,536)
Mortgage-related securities 3,347 (532) 2,815 5,192 222 5,414
Investment securities 1,885 (1,272) 613 8,280 (539) 7,741
Federal Home Loan Bank Stock (141) 14 (127) (169) 27 (142)
-------- --------- --------- -------- --------- --------
Total (1,727) (5,441) (7,168) 9,177 300 9,477
-------- --------- --------- -------- --------- --------
INTEREST-BEARING LIABILITIES:
Savings deposits (145) (238) (383) (1) (427) (428)
Money market accounts 2,973 252 3,225 1,045 68 1,113
Interest bearing demand accounts (13) (117) (130) 92 (159) (67)
Time deposits (3,028) (3,829) (6,857) 3,664 37 3,701
Escrows (23) (8) (31) (65) 29 (36)
Borrowings (394) (110) (504) 4,276 (736) 3,540
-------- --------- --------- --------- --------- --------
Total (630) (4,050) (4,680) 9,011 (1,188) 7,823
-------- --------- --------- --------- --------- --------
Net change in net interest income $ (1,097) $ (1,391) $ (2,488) $ 166 $ 1,488 $ 1,654
======== ========= ========= ========= ========= ========
</TABLE>
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<PAGE> 65
COMPARISONS OF FINANCIAL CONDITION
AT MARCH 31, 2000 AND DECEMBER 31, 1999
Mutual Savings' total assets decreased $27.3 million, or 1.5% at March 31,
2000 from $1.77 billion at December 31, 1999.
At March 31, 2000, loans increased $21.0 million, or 1.9%. Investment
securities available for sale decreased $9.6 million, or 16.6%. Mortgage-related
securities increased $98.4 million, or 26.3%, to $472.5 million at March 31,
2000 from $374.1 million at December 31, 1999. The change in loans reflects an
increase of $11.3 million in one- to four-family first mortgage loans and an
increase of $9.7 million in consumer loans and other loans. Loan originations
were supplemented by the purchase of mortgage-related securities. Cash and cash
equivalents decreased from $180.0 million to $39.7 million There was a shift of
funds from total cash and cash equivalents to higher- yielding loans and
securities. Cash was also used to manage the deposit outflow during the quarter
ended March 31, 2000.
The reduction in total assets was primarily the result of a reduction of
$23.8 million, or 1.8%, in total deposits to $1.32 billion at March 31, 2000
from $1.34 billion at December 31, 1999. Interest-bearing deposits decreased
$31.0 million or 2.4%, to $1.27 billion at March 31, 2000. Non-interest-bearing
deposits increased $5.8 million, or 14.1% during the same period.
Interest-bearing deposit changes reflect competition from the equity and bond
markets, as well as increased competition for funds from traditional financial
institutions. Non-interest-bearing deposit changes reflect normal fluctuations
in demand type accounts and an increase in retail customer demand deposits at
the end of the quarter.
Equity increased $100,000, or .5%, to $163.9 million at March 31, 2000,
from $163.8 million at December 31, 1999. The increase resulted from net income
of $3.0 million for the three months ended March 31, 2000, partially offset by a
$2.9 million unrealized loss on securities available for sale, primarily
resulting from increasing market interest rates.
AT DECEMBER 31, 1999 AND 1998
Mutual Savings' total assets decreased $103.4 million, or 5.5%, to $1.77
billion at December 31, 1999 from $1.87 billion at December 31, 1998.
At December 31, 1999, loans increased $45.2 million, or 4.3%, to $1.08
billion, while investment securities available for sale decreased $58.8 million,
or 50.4%, to $57.8 million. Mortgage-related securities available for sale
increased $103.2 million, or 38.1%, to $374.1 million at December 31, 1999 from
$270.9 million at December 31, 1998. The changes in the first two categories
reflect our strategy of diversifying our loan originations to increase our
portfolio of home equity, multi-family and commercial real estate and commercial
business loans, by utilizing funds generated by maturing investments. Our
strategy of reinvesting short term investments into higher yielding mortgage
related securities is reflected in the increase in mortgage-related securities
and the decrease in cash and cash equivalents by $151.3 million or 45.8%, to
$179.0 million. The special $15.6 million write-off of intangible assets also
contributed to the reduction in assets.
Total deposits decreased by $55.9 million, or 4.0% to $1.343 billion at
December 31, 1999, compared with $1.399 billion at December 31, 1998. Total time
deposits were $828.1 million at December 31, 1999, a decrease of 10.9% from
$929.4 million at December 31, 1998. This runoff is a reflection of our interest
rate risk strategy of replacing high cost deposits with lower cost sources of
funds when possible. This reduction in time deposits was partially offset by an
increase in money market deposits which increased by $71.8 million or 45.0% to
$231.2 million at December 31, 1999, compared with $159.4 million at December
31, 1998. Remaining deposits, comprised of savings, interest and
non-interest-bearing demand deposits decreased $26.4 million or 8.5% to 283.7
-62-
<PAGE> 66
million at December 31, 1999 from $310.1 million at December 31, 1998. Also,
borrowings decreased $28.2 million or 10.4% to $242.7 million at December 31,
1999 from $270.8 million at December 31, 1998. This reduction in borrowings
reflects our strategy of managing net interest margin.
Equity decreased $11.9 million, or 6.8%, to $163.8 million at December 31,
1999, from $175.7 million at December 31, 1998, primarily due to the $4.5
million net loss for 1999 and a $7.4 million unrealized loss on securities
available for sale.
COMPARISONS OF OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
General. Net income for the quarter ended March 31, 2000 was $3.0 million
compared with $1.8 million for the quarter ended March 31, 1999. The $1.2
million, or 66.7% increase is primarily attributable to a $1.6 million increase
in net interest income and a $443,000 decrease in the amortization of intangible
assets, which was offset in part by a $744,000 increase in income taxes.
Net Interest Income. Net interest income increased $1.6 million, or 16.4%,
to $11.6 million for the first quarter of 2000 compared with $10.0 million for
the first quarter of 1999 primarily due to decreased interest expense. On an
annualized basis, our net interest spread increased to 2.33% for the quarter
ended March 31, 2000 from 1.90% for the comparable quarter of 1999.
Additionally, our annualized net interest margin increased to 2.78% from 2.29%.
Interest Income. Total interest income increased $691,000, or 2.3% to $29.8
million for the quarter ended March 31, 2000 compared with $29.1 million for the
quarter ended March 31, 1999. Interest on first mortgage loans decreased
$368,000 or 2.3%, to $15.5 million interest on consumer loans increased $868,000
million, or 24.3%, to $4.6 million, interest on investments decreased $3.3
million, or 64.9%, to $1.6 million, and interest on mortgage-related securities
increased $3.5 million, or 83.3%, to $7.7 million for the three months ended
March 31, 2000 compared with the corresponding prior year quarter.
The average balance of total interest-earning assets decreased $76.0
million or 4.3% to $1.7 billion for the three months ended March 31, 2000
compared with $1.8 billion for the corresponding quarter of the prior year. This
decrease was primarily attributable to a $2.6 million, or 0.3%, increase in the
average balance of first mortgage loans, to $867.2 million, a $38.4 million, or
20.1% increase to $229.9 million in the average balance of consumer loans, a
$307.0 million, or 73.6% decrease to $110.1 million in the average balance of
investment securities, and a $190.0 million, or 71.5%, increase to $455.9
million in the average balance of mortgage-related investments. These changes
reflect our strategy of emphasizing consumer loans and re-deploying excess
liquidity into higher earning mortgage-related investments.
For the three months ended March 31, 2000, the impact on interest income
from the decrease in the average balance of total interest-earning assets was
offset by a 47 basis point increase in the annualized average yield on total
interest-earning assets to 7.12% compared with 6.65% for the corresponding
quarter in the prior year. The re-deployment of lower yielding investments into
higher earning mortgage-related investments and the increased production of
consumer loans resulted in the higher yield of our interest-earning assets for
the three months ended March 31, 2000.
Interest Expense. Interest expense on deposits decreased $812,000, or 5.2%,
to $14.8 million for the first quarter of 2000 from $15.6 million for the first
quarter of 1999. Interest on time deposits, which accounted for 73.4% of
interest on deposits for the quarter ended March 31, 2000, decreased $1.5
million, or 12.4%, to $10.9 million from the corresponding period of the prior
year.
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The average balance of total interest-bearing liabilities decreased $91.4
million, or 5.7%, to $1.52 billion for the three months ended March 31, 2000
compared with $1.61 billion for the corresponding quarter of the prior year. We
experienced a decrease of $52.4 million to $1.28 billion in the average balance
of deposits and a decrease of $39.0 million to $231.7 million in borrowings. The
impact on interest expense from the decrease in the average balance of total
interest-bearing liabilities was partially offset, however, by a 3 basis point
increase in the annualized average cost of total interest-bearing liabilities to
4.79% compared with 4.76% for the first quarter of 1999. The annualized average
cost of deposits decreased five basis points to 4.61% compared with 4.66% for
the first quarter of 1999, reflecting our decision to allow the highest yielding
deposits to run off. The annualized average cost of borrowings increased 64
basis points to 5.83% for the first quarter of 2000, compared with 5.19% for the
corresponding period of the prior year. The increased cost of borrowings
reflects the upward pricing of our borrowings as a result of the higher interest
rate environment.
Provision for Loan Losses. Our provision for losses was $76,000 for the
first quarter of 2000 and $39,000 for the corresponding period of the prior
year. The allowance for loan losses at March 31, 2000 was $7.0 million, or
190.4% of non-performing loans. Non-performing loans at March 31, 2000 were $3.7
million compared with $4.8 million at March 31, 1999. Future provisions for loan
losses will continue to be based upon our assessment of the overall loan
portfolio and the underlying collateral, trends in non-performing loans, current
economic conditions and other relevant factors in order to maintain the
allowance for loan losses at adequate levels to provide for estimated future
losses.
Non-Interest Income. Total non-interest income, consisting of service fees,
gain on sale of loans and other income, decreased 6.6%, or $96,000, to $1.83
million for the first quarter of 2000 from $1.93 million for the first quarter
of 1999. The decrease in non-interest income is primarily attributable to a
decrease in gain on the sale of loans as a result of decreased loan originations
of fixed-rate mortgage loans with maturities greater than 15 years. The
origination of longer-term fixed-rate mortgages decreased due to the higher
interest rate environment.
Non-Interest Expense. Total non-interest expense, consisting primarily of
salaries and employee benefits, occupancy expense and other operating expenses,
decreased $443,000, to $8.28 million, for the quarter ended March 31, 2000
compared with $8.33 million for the quarter ended March 31, 1999. This was
principally because amortization of intangible assets decreased $443,000 to
$235,000, for the quarter ended March 31, 2000 compared with $678,000 for the
comparable quarter of 1999.
Our efficiency ratio, excluding amortization of intangible assets, for the
first quarter of 2000 was 61.37% compared with 69.30% for the corresponding
period in 1999. Our non-interest expense to average assets ratio was 1.89% for
the three months ended March 31, 2000 and 1.79% for the three months ended March
31, 1999.
Income Taxes. Income tax expense increased $744,000, or 67.0%, to $1.9
million for the three months ended March 31, 2000 compared with $1.1 million for
the three months ended March 31, 1999, due to an increase in income before tax
expense. The effective tax rate was 37.85% and 37.64% for the three months ended
March 31, 2000 and 1999, respectively.
YEARS ENDED DECEMBER 31, 1999 AND 1998
General. Net loss was $4.5 million for 1999, a decrease of $15.7 million,
or 140.2%, compared with net income of $11.2 million for 1998. The decrease was
primarily attributable to a $2.5 million decrease in net interest income and a
$15.6 million increase in amortization of intangible assets, offset in part by a
$2.8 million decrease in income tax expense. The increase in amortization of
intangible assets was related to a valuation of the unidentifiable intangible
assets and deposit base intangible accounts resulting from the purchase of First
Federal Bancshares of Eau Claire in 1997. At that time, as a result of the
purchase method of accounting used in the transaction, intangible assets were
generated. It is the responsibility of management to re-evaluate the carrying
value of intangible assets on a periodic basis. This valuation process was
performed in the fourth quarter of 1999.
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Using a present value calculation of the anticipated net income flows of future
years for the assets acquired, it was determined that the assets were overvalued
by $15.6 million. Accordingly, a write down was booked at that time. The effect
was a $13.6 million reduction in net income. See footnote 2 to Mutual Savings'
consolidated financial statements.
Net Interest Income. Net interest income for 1999 decreased $2.5 million,
or 5.5%, to $43.0 million for 1999 compared with $45.5 million for 1998. Net
interest rate spread, the difference between the average yield on the average
balance of interest-earning assets and the average cost of the average balance
of interest-bearing liabilities, decreased 13 basis points to 2.03% for 1999
from 2.16% for the prior year. Net interest margin, represented by net interest
income divided by the average balance of interest-earning assets, decreased 14
basis points to 2.44% for 1999 compared with 2.58 % for 1998. These decreases
were primarily due to the investment of proceeds from the repayment and sale of
mortgage loans in short-term, lower-yielding investments as market rates
declined.
Interest Income. Total interest income decreased $7.2 million, or 5.7%, to
$118.3 million for 1999 compared with $125.5 million for 1998. Interest and fees
on loans accounted decreased from $90.1 million for 1998 to $79.6 million for
1999. Interest and dividends on investment securities available for sale
increased $486,000, or 2.5%, to $20.2 million for 1999 compared with $19.7
million for 1998. Interest on mortgage-related securities available for sale
increased $2.8 million, or 17.8%, to $18.5 million for 1999 compared with $15.7
million for 1998.
We experienced a $3.4 million, or 0.2%, decrease in the average balance of
total interest-earning assets. However, the mix of our earning assets changed
more significantly. The average balance of loans decreased $90.2 million, or
7.8%, to $1.07 billion for 1999 compared with $1.16 billion for 1998. This
decrease primarily reflects decreased origination and the large repayments of
adjustable rate loans refinanced with 30 year fixed rate loans which were
subsequently sold. The average balance of mortgage-related securities increased
$52.4 million, or 22.0%, to $290.8 million for 1999 compared with $238.3 million
for 1998. The average balance of investment securities increased $36.5 million,
or 10.5%, to $383.6 million for 1999 compared with $347.1 million for 1998.
These increases reflect our continued strategy of using our investments to
increase interest income while managing interest rate risk.
The primary reason for the decrease in interest income was a 40 basis point
decrease in the average yield on interest-earning assets to 6.73% for 1999 from
7.13% for 1998. The average yield on loans decreased 33 basis points to 7.44%
for 1999 compared with 7.77% for the prior year. The average yield on
mortgage-related securities decreased 21 basis points to 6.36% for 1999 compared
with 6.57% for 1998. The average yield on investment securities decreased 35
basis points. to 5.03% for 1999 compared with 5.38% for 1998. The lower interest
rate environment along with the relatively flat yield curve that prevailed
during 1999 and the end of 1998 resulted in the downward repricing of our
interest rate-sensitive assets. In addition, the average yield on our assets was
affected by the refinancing of many of our existing loans to fixed rate mortgage
loans which were subsequently sold. The proceeds of loan repayments and loan
sales were invested in lower-yielding investment securities and mortgage-related
securities.
Interest Expense. Interest expense on deposits decreased $4.1 million, or
6.3%, to $61.1 million for 1999 compared with $65.2 million for 1998. Interest
expense on time deposits decreased $6.9 million, or 12.9% to $46.5 million for
1999, down from $53.3 million for 1998. Interest expense on savings accounts
decreased $383,000 or 9.0% to $3.9 million for 1999 compared to $4.3 million for
1998. Interest expense on money market accounts increased $3.2 million or 48.5%
to $9.8 million for 1999 compared to $6.6 million for 1998. Interest expense on
borrowings decreased $504,000, or 3.5%, to $13.9 million compared to $14.4
million in 1998.
The 5.8% overall decrease in interest expense was primarily attributable to
a decrease of 26 basis points in the average cost of interest-bearing
liabilities This decrease reflects a lower interest rate environment and our
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strategy of funding assets through competitive pricing of our deposit products
and allowing higher costing time deposits to run off when adverse market
conditions exist.
Provision for Loan Losses. During 1999 we provided $350,000 for loan
losses, compared to $637,000 for 1998. Net loan charge-offs were approximately
$257,000 for 1999, compared to $977,000 in 1998. The allowance for loan losses,
which is established through a provision for loan losses charged against income
was $6.9 million at both December 31, 1999 and December 31, 1998.
Non-interest Income. Non-interest income, consisting of service fees,
brokerage commissions, gain on sale of loans and other income, decreased
$456,000, or 5.4%, to $8.0 million for 1999 compared with $8.4 million for 1998.
Various factors contributed to the change, primarily a $598,000 increase in
brokerage commissions, a $648,000 decrease in loan fees and service charges due
to decreased loan originations, and a $528,000 decrease in gains on sales of
loans due to decreased loan sales.
Non-interest Expense. Non-interest expense increased $15.8 million, or
44.5%, to $51.3 million during 1999 compared with $35.5 million for the prior
year. Amortization of intangible assets made up 98.7% of the increase in
non-interest expense. An increase in amortization of Intangible assets of $15.6
million, or 578%, to $18.3 million in 1999 compared to $2.7 million in 1998, was
a result of the special write-off of intangible assets from the 1997 First
Federal acquisition. The remaining increase was $206,000 or 0.6% to $33.0
million in 1999, compared to $32.8 million in 1998 for other non-interest
expense items, excluding amortization of intangible assets.
Our efficiency ratio was 64.8% for 1999 compared with 60.8% for 1998. The
increase in the efficiency ratio reflects lower interest income as a result of
our high volume of lower yielding short-term investment securities rather than
an increase in operating expenses. The ratio of non-interest expense, excluding
amortization of intangible assets, to average assets was 1.79% for 1999 and
1.77% for 1998.
Income Taxes. Income tax expense decreased $2.8 million or 42.4% to $3.8
million for 1999 compared to $6.6 million for 1998. Income tax expense in 1999
is significantly impacted by the non-deductibility of a substantial portion of
the amortization of intangible assets. Excluding this amortization, our
effective tax rate for 1999 was 38.9% compared to 37.1% in 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
General. Net income was $11.2 million for 1998, an increase of $1.0
million, or 9.8%, compared with net income of $10.2 million for 1997. The
increase was primarily attributable to a $1.7 million increase in net interest
income, a reduction in provision for loan losses of $428,000, and an increase of
$2.3 million in total non-interest income offset by an increase in total
non-interest expense of $3.4 million.
Net Interest Income. Net interest income for 1998 increased $1.7 million,
or 3.9%, to $45.5 million compared with $43.8 million for 1997. Net interest
income was increased by the full year of earning assets from the purchase of
First Federal. However, this increase was offset by a decrease in net interest
rate spread by 15 basis points to 2.16% for 1998 from 2.31% for the prior year.
Net interest margin decreased 18 basis points to 2.58% for 1998 compared with
2.76% for 1997. This reduction was caused by the investment of proceeds from
loan sales and repayments, including significant refinancings into
lower-yielding investments. Borrowed funds were utilized in 1998 to enhance net
interest income by using the proceeds to invest in mortgage-related securities
with a positive spread. This partially offset the negative effect from reduction
of the loan portfolio.
Interest Income. Total interest income increased $9.5 million, or 8.2%, to
$125.5 million for 1998 compared with $116.0 million for 1997. Interest on
mortgage-related securities increased 52.4% to $15.7 million for 1998 compared
with $10.3 million for 1997. Interest and fees on loans decreased $3.5 million,
or 3.7%, to $90.1
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million for 1998, compared with $93.6 million for the prior year. Additionally,
interest and dividends on investment securities available for sale increased
$7.6 million, or 62.8%, to $19.7 million for 1998 from $12.1 million for 1997.
The increase in total interest income was primarily due to a $176.8
million, or 11.2%, increase in the average balance of total interest-earning
assets to $1.76 billion for 1998 compared with $1.58 billion for 1997. This
growth reflects the impact of the purchase of First Federal which occurred in
April 1997 and which was accounted for as a purchase. We purchased $539.7
million of loans in the acquisition. Growth in assets was funded by deposit
growth and by an increase in Federal Home Loan Bank borrowings, both of which
were also the result of the purchase of First Federal. The average balance of
net loans, however, decreased $53.2 million, or 4.4%, to $1.16 billion for 1998
compared with $1.21 billion for 1997, while the average balance of
mortgage-related securities increased $79.1 million, or 49.7%, to $238.3 million
for 1998 compared with $159.3 million for 1997. In addition, the average balance
of investment securities increased by $153.5 million, or 79.2%, to $347.1
million in 1998 compared with $193.7 million in 1997. In 1998, we experienced a
run off in mortgage loans. This was the result of customer loan prepayments.
Some ARM loans were refinanced to 30-year fixed rate mortgages. As part of our
interest rate risk strategy, these loans were subsequently sold.
The average yield on interest-earning assets decreased to 7.13% for 1998
compared with 7.32% for 1997. The average yield on loans increased 5 basis
points, to 7.77% for 1998 from 7.72% for the prior year. The average yield on
mortgage-related securities increased 13 basis points to 6.57% for 1998 from
6.44% for 1997. The average yield on investment securities decreased 37 basis
points to 5.38% for 1998 from 5.65% for 1997.
Interest Expense. Total interest expense increased $7.8 million or 10.8% to
$80.0 million in 1998 compared to $72.2 million in 1997. Interest expense on
deposits increased $4.3 million, or 7.1%, to $65.2 million for 1998 compared
with $60.9 million for 1997. Interest expense on time deposits, which accounted
for 81.7% of interest expense on deposits, increased $3.7 million, or 7.5%, to
$53.3 million for 1998 from $49.6 million for 1997. Interest expense on savings,
money market accounts and interest-bearing demand accounts increased $618,000,
or 5.5% to $11.9 million for 1998 compared to $11.3 million for 1998. Interest
expense on borrowings increased $3.5 million or 32.1% to $14.4 million in 1998
compared to $10.9 million in 1997.
The overall increase in interest expense on deposits was primarily
attributable to an increase of $170.3 million, or 11.8%, in the average balance
of total interest-bearing liabilities to $1.6 billion for 1998 compared with
$1.4 billion for 1997. The increase reflects a full year of balances resulting
from the purchase of First Federal in April, 1997. The increase in
interest-bearing liabilities occurred in three major areas: money market
accounts increased $22.6 million, or 18.9%, to $141.9 million in 1998 compared
to $119.3 million in 1997; time deposits increased $63.7 million or 7.4% to
$927.2 million in 1998 compared with $863.5 million in 1997; and Federal Home
Loan Bank borrowings increased $79.5 million, or 41.5% to $270.8 in 1998
compared to $191.3 for 1997.
The average cost of total interest-bearing liabilities decreased to 4.96%
for 1998 compared with 5.01% for 1997.
Provision For Loan Losses. During 1998 and 1997, we provided $637,000 and
$1.1 million, respectively, for loan losses. Net loan charge-offs were $1.0
million for 1998 and $240,000 for 1997. This resulted in the allowance for loan
losses decreasing $340,000, or 4.7%, to $6.9 million at December 31, 1998, from
$7.2 million at December 31, 1997. The decrease in the provision reflects an
increase in charge-offs resulting from the additional losses recognized on loans
acquired in the purchase of First Federal. The reduction in total allowances was
more than offset by the reduction in the loan portfolio. Therefore, at December
31, 1998, the allowance for loan losses as a percentage of loans was 0.66%
compared with 0.57% at December 31, 1997. The allowance for loan losses was
101.9% of non-performing loans at December 31, 1998, compared with 72.1% at
December 31, 1997.
Non-Interest Income. Total non-interest income for 1998 was $8.4 million,
an increase of $2.2 million, or 35.5%, from $6.2 million for 1997. The overall
increase is partially due to 1998 including a full year of income
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resulting from the purchase of First Federal compared to 1997, which included 9
months of income from the purchase. We experienced a 9.0% increase in fees on
deposit accounts to $2.6 million in 1998 compared with $2.4 million in 1997.
Brokerage commissions increased $244,000, or 24.4%, increasing to $1.2 million
for 1998 compared to $1.0 million in 1997. Loan fees and service charges
increased $889,000, or 115.0% to $1.7 million in 1998 compared with $773,000 in
1997. Gain on sale of loans, due to increase volume in loan sales, increased
$539,000, or 1.11%, to $1.0 million in 1998 compared with $486,000 in 1997.
Other income increased $391,000 or 42.2% to $1.3 million in 1998 compared to
$927,000 in 1997.
Non-Interest Expense. Total non-interest expense increased $3.4 million, or
10.6%, to $35.5 million during 1998 compared with $32.1 million for the prior
year. The overall increase is partially due to 1998 including a full year of
expenses resulting from the purchase of First Federal Bancshares compared to
1997 which included 9 months of expense. Salaries and employee benefits
increased $1.3 million, or 8.5%, to $16.6 million for 1998 compared with $15.3
million for 1997. Net occupancy expense increased $292,000 or 5.5% to $5.6
million in 1998 compared with $5.3 million in 1997. Other operating expense
increased $1.2 million or 23.5% to $6.3 million in 1998 compared with $5.1
million in 1997. Amortization of intangible assets constituted 23.4% of the $3.4
million increase in non-interest expense. The amortization of intangible assets
related to the First Federal acquisition was recorded for nine months during
1997 and for the full year in 1998. Amortization amounted to $2.7 million in
1998 compared with $1.9 million in 1997.
The ratio of non-interest expense to average assets, excluding amortization
of intangible assets, was 1.77% for 1998 and 1.82% for 1997. Our efficiency
ratio, which excludes amortization of intangible assets, was 60.8% for 1998
compared with 60.3% for 1997.
Income Taxes. Income tax expense decreased $38,000, or 0.6%, to $6.58
million for 1998 compared with $6.62 million for 1997, resulting in effective
tax rates of 37.1% and 39.4% for 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-related securities,
maturities and calls of investment securities, borrowings from the Federal Home
Loan Bank (the "FHLB") of Chicago and funds provided by our operations.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-related securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination and purchase of one-
to four-family real estate loans, multi-family and commercial real estate loans,
home equity loans, other consumer loans, commercial business loans, the purchase
of mortgage-related securities, and to a lesser extent, the purchase of
investment securities. During 1999 we originated and purchased loans of
approximately $374.9 million and during 1998 we originated and purchased loans
of approximately $428.3 million. Purchases of mortgage-related securities were
$213.5 million for 1999 and $119.5 million for 1998, while purchases of
investment securities were $21.5 million for 1999 and $381.9 million for 1998.
In the first quarter of 2000, we originated and purchased loans of $74.4
million, and purchased $114 million in mortgage- related securities and $10
million in investment securities.
These investing activities were funded by principal payments on mortgage
loans and mortgage-related securities, calls and maturities on investment
securities, borrowings and funds provided by our operating activities. Principal
repayments on loans and mortgage-related securities totaled $350.7 million
during 1999, compared to
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$588.0 million during 1998. Maturities and calls of investment securities
totaled $65.0 million during 1999 and $378.9 million during 1998. Sales of
loans, mortgage-related securities and investment securities provided cash flows
of $111.1 million during 1999 and $116.8 million during 1998.
At March 31, 2000, Mutual Savings had outstanding loan commitments to
borrowers of approximately $24.0 million, unused commercial lines of credit of
approximately $1.5 million and available home equity and overdraft lines of
credit of approximately $65.0 million. There were no outstanding commitments to
purchase securities at March 31, 2000. Total deposits decreased $23.8 million in
the first quarter of 2000, decreased $55.9 million during 1999 and increased
$36.5 million during 1998. Deposit flows are affected by the level of interest
rates, the interest rates and products offered by competitors and other factors.
Time deposit accounts scheduled to mature within one year were $545.3 million at
March 31, 2000. We are committed to maintaining a strong liquidity position;
therefore, we monitor our liquidity position on a daily basis. We anticipate
that we will have sufficient funds to meet current funding commitments.
At March 31, 2000, we exceeded each of the applicable regulatory capital
requirements. Our leverage (tier 1) capital was $160.9 million, or 9.25%, at
March 31, 2000. In order to be classified as "well-capitalized" by the FDIC we
were required to have leverage (tier 1) capital of $87.0 million, or 5.00%. To
be classified as a well-capitalized bank by the FDIC, we must also have a
risk-based total capital ratio of 10.00%. At March 31, 2000, we had a risk-based
total capital ratio of 18.76%. See "Regulation -- Mutual Savings Federal
Regulation Prior to Restructuring -- Capital Requirements" for a discussion of
the regulatory capital requirements applicable to Mutual Savings and see
"Regulatory Capital Compliance" for information regarding the impact of the
offering on our capital position.
It is anticipated that the restructuring and First Northern merger
transactions will result in a decrease in the capital of both Mutual Savings and
First Northern: See "Capitalization." Following the transactions, however, the
banks are expected to satisfy the FDIC criteria to be categorized as
"well-capitalized."
We do not anticipate any material capital expenditures, nor do we have any
balloon or other payments due on any long-term obligations or any off-balance
sheet items other than the commitments and unused lines of credit noted above.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock- Based Compensation." Under SFAS No. 123, an entity
may elect to recognize stock-based compensation expense based on the fair value
of the awards, or they may elect to account for stock-based compensation under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity
elects to account for stock-based compensation under APB No. 25, it is not
required to recognize expense based on the fair value of the awards. However,
the entity must disclose in the financial statements the effects of SFAS No.
123, as if the recognition provisions of SFAS No. 123 were adopted.
Currently, Mutual Savings does not provide stock-based compensation to its
employees. Upon completion of the restructuring, subject to shareholder
approval, we will establish certain stock-based compensation plans. If
established, we have evaluated the alternatives available under the provisions
of SFAS No. 123 and currently expect that we will not adopt the recognition
provisions of the statement, but will provide the required footnote disclosures.
Therefore, we do not expect that the adoption of SFAS No. 123 will have a
material impact on our financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement established standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common
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stock or potential common stock. SFAS No. 128 simplifies the standards for
computing EPS previously found in APB Opinion No. 15, "Earnings Per Share," and
makes them more comparable with international EPS standards.
Mutual Savings, as a mutual savings bank, does not have common stock
authorized, issued or outstanding and we do not calculate or present EPS. Upon
completion of the restructuring, we will calculate and present EPS in accordance
with SFAS No. 128.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at, fair value.
SFAS No. 133, as amended, is effective for all quarters of those years
beginning after June 15, 2000. This statement may not be applied retroactively
to financial statements of prior periods. As Mutual Savings does not utilize
derivatives, we do not expect that our adoption of SFAS No. 133 will have a
material impact on our financial position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes of Mutual Savings have been
prepared in accordance with generally accepted accounting principles (GAAP).
GAAP generally requires the measurement of financial position and operating
results in terms of historical dollars without consideration for changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Unlike
industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact on
performance than do the effects of inflation.
BUSINESS OF MUTUAL SAVINGS BANK
GENERAL
Mutual Savings is a community oriented financial institution which
emphasizes traditional financial services to individuals and businesses within
its market areas. Our principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
other operations, in residential mortgage loans, consumer loans, commercial real
estate loans, and commercial business loans. We also invest in various
mortgage-related securities and investment securities. The principal lending is
on one-to four-family, owner-occupied homes, home equity loans and lines of
credit, consumer loans, multi-family and commercial real estate loans, and
commercial business loans.
Mutual Savings' revenues are derived principally from interest on our loans
and mortgage-related securities, interest and dividends on our investment
securities, and commissions on non-interest income (including loan servicing
fees, deposit servicing fees, gains on sales of loans held for sale and
insurance, securities and annuity sales). Our primary sources of funds are
deposits, borrowings, scheduled amortization and prepayments of loan principal
and mortgage-related securities, maturities and calls of investment securities
and funds provided by operations.
MARKET AREA
Mutual Savings conducts its operations from 50 banking offices located in
21 counties throughout most of the state of Wisconsin, and one office in
Minnesota. At June 30, 1999 Mutual Savings had a 1.73% share of all
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Wisconsin bank, savings bank and savings association deposits. The counties in
which Mutual Savings operates include 57% of the population of the state, which
provides us with access to a large base of potential customers. The markets in
which Mutual Savings operates vary, which provides diversity of opportunities
for Mutual Savings.
As a result of the First Northern merger, Mutual will significantly expand
its presence. Together, Mutual Savings and First Northern Savings will then have
69 banking offices located in 28 counties in Wisconsin, in addition to the
Minnesota office. At June 30, 1999, the combined enterprise would have had a
2.42% share of all Wisconsin bank, savings bank and savings association
deposits. Counties in which Bank Mutual subsidiaries will operate will include
66% of the population of the state. On a pro forma basis, at March 31, 2000,
Bank Mutual would have been the fifth largest financial institution
headquartered in the state of Wisconsin, based on asset size.
The largest concentration of Mutual Savings' offices is in the Milwaukee
metropolitan area which includes Milwaukee, Waukesha, Ozaukee and Washington
counties. There are 18 offices in this area. The Milwaukee metro area is the
largest population and commercial base in Wisconsin, representing approximately
28% of Wisconsin's population. The Milwaukee area has traditionally had an
extensive manufacturing economic base, which is diversifying into service and
technology based businesses. The Milwaukee metropolitan area grew at an average
annual rate of approximately 4.85% in population during the 1990s.
Mutual Savings has four offices in the Madison area. Madison is the state
capital of Wisconsin and is the second largest metropolitan area in Wisconsin
representing approximately 8% of the state's population. Mutual Saving's ten
other south central Wisconsin offices are located in smaller cities that have
economic concentrations ranging from manufacturing to agriculture.
The third largest concentration of Mutual Savings offices is in the
northwestern part of the state, largely resulting from the First Federal
acquisition in 1997. This part of the state has medium sized to smaller cities
and towns. Industry includes medium sized and small business, with a significant
agricultural component. The counties in which Mutual Savings' northwest region
offices are located hold 8% of the state's population. Mutual Savings' Minnesota
office is located near the Wisconsin state border on the eastern edge of the
Minneapolis-St. Paul metropolitan area.
Recently, Mutual targeted the northeastern part of Wisconsin for a larger
presence. Mutual believes it will be able to accomplish this growth through the
First Northern merger because First Northern Savings' operations are located in
this part of the state. First Northern operates 19 offices in eight northeastern
counties that make up 12% of the state's population. Mutual Savings currently
has a relatively small presence in this area of the state.
COMPETITION
Mutual Savings faces significant competition both in making loans and
attracting deposits. Wisconsin has many banks, savings banks, and savings and
loan associations which offer the same types of banking products as Mutual
Savings. Wisconsin also has an extensive tax-exempt credit union industry, whose
expanded powers have resulted in increased competition to financial
institutions.
Many of Mutual Savings' competitors have greater resources than Mutual
does. Similarly, many competitors offer services that Mutual Savings does not
provide. For example, Mutual Savings does not provide trust or money management
services. However, Mutual does have an affiliate, Lake Financial and Insurance
Services, Inc. that offers securities, annuity and property and casualty
insurance services.
Most of Mutual Savings' competition for loans traditionally has come from
commercial banks, savings banks, savings and loan associations and credit
unions. Increasingly, other types of companies, such as mortgage banking firms,
finance companies, insurance companies and other providers of financial services
also compete for these products. For deposits, Mutual Savings has also competed
with traditional financial institutions. However,
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competition for deposits now also includes mutual funds, particularly short-term
money market funds, and brokerage firms and insurance companies. The recent
increase in electronic commerce now also increases competition from institutions
and other entities outside of Wisconsin.
LENDING ACTIVITIES
Loan Portfolio Composition. Mutual Savings' loan portfolio primarily
consists of one-to four-family residential first mortgage loans. To a lesser
degree, the loan portfolio includes consumer and other loans, including home
equity credit lines and fixed-rate second mortgage loans, multi-family loans,
commercial real estate loans, and commercial business loans.
At March 31, 2000, our loan portfolio totaled $1.1 billion, of which $889.1
million, or 79.0%, were first mortgage loans. Included in that total were $888.1
million of loans due after one year, of which 49.6% were adjustable rate
mortgage or ARM loans and 50.4% were fixed-rate loans with a weighted average
remaining maturity of 150 months. The remainder of our loans at March 31, 2000,
amounting to $236.0 million, or 21.0% of total loans, consisted of consumer
loans ($198.9 million or 17.7%) and commercial business loans ($37.0 million or
3.3%).
We originate primarily ARM loans and up to 15 year fully amortizing fixed
rate loans for our own portfolio. We also offer longer term fixed rate
residential mortgages, most of which are immediately sold into the secondary
market.
The loans that we originate are subject to federal and state laws and
regulations. The interest rates we charge on loans are affected principally by
the demand for loans, the supply of money available for lending purposes and the
interest rates offered by our competitors. These factors are in turn affected
by, among other things, economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters.
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The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------------- ----------- ----------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One to four-family $ 752,259 66.86 % $ 743,993 67.37 % $ 742,231 70.56 %
Multi-family 53,853 4.79 53,777 4.87 53,521 5.09
Commercial 55,085 4.90 52,375 4.74 40,922 3.89
Construction and development 27,908 2.48 26,530 2.40 21,939 2.09
---------- ------ ---------- ------ ---------- ------
Total first mortgage real
estate loans $ 889,105 79.03 876,675 79.38 858,613 81.63
---------- ------ ---------- ------ ---------- ------
Consumer and other loans:
Consumer loans:
Fixed equity 97,820 8.69 89,315 8.09 67,629 6.42
Home equity lines of credit 51,982 4.62 50,618 4.58 45,827 4.36
Student 28,598 2.54 28,371 2.57 29,634 2.82
Home improvement 10,449 0.93 9,920 0.90 8,373 0.80
Other 10,099 0.90 10,028 0.91 12,970 1.23
---------- ------ ---------- ------ ---------- ------
Total consumer loans 198,948 17.68 188,252 17.05 164,433 15.63
---------- ------ ---------- ------ ---------- ------
Commercial business loans 37,038 3.28 39,488 3.57 28,839 2.74
---------- ------ ---------- ------ ---------- ------
Total consumer and other loans 235,986 20.97 227,740 20.62 193,272 18.37
Total loans receivable 1,125,091 100.00 % 1,104,415 100.00 % 1,051,885 100.00 %
Less:
Undisbursed loan proceeds 14,233 14,658 7,001
Deferred fees and discounts 72 14 440
Allowance for losses 6,960 6,948 6,855
Total loans receivable, net $1,103,826 $1,082,795 $1,037,589
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- -----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ----------- ---------- ------------- ---------
(DOLLARS IN THOUSANDS)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One to four-family $ 930,011 73.1 % $ 577,612 68.39 % $ 566,990 70.1 %
Multi-family 68,811 5.41 74,446 8.81 74,024 9.15
Commercial 51,739 4.07 49,624 5.88 48,390 5.98
Construction and development 24,774 1.95 22,082 2.61 23,496 2.91
---------- ------ --------- ------ --------- ------
Total first mortgage real
estate loans 1,075,335 84.53 723,764 85.69 712,900 88.14
---------- ------ --------- ------ --------- ------
Consumer and other loans:
Consumer loans:
Fixed equity 74,196 5.83 40,150 4.74 29,849 3.69
Home equity lines of credit 46,380 3.65 33,245 3.94 27,440 3.39
Student 29,425 2.31 9,428 1.12 9,757 1.21
Home improvement 8,128 0.64 6,411 0.76 6,039 0.75
Other 19,893 1.56 6,355 0.75 5,512 0.68
---------- ------ --------- ------ --------- -----
Total consumer loans 178,022 13.99 95,589 11.32 78,597 9.72
---------- ------ --------- ------ --------- -----
Commercial business loans 18,866 1.48 25,231 2.99 17,281 2.14
---------- ------ --------- ------ --------- -----
Total consumer and other loans 196,888 15.47 120,820 14.31 95,878 11.86
---------- ------ --------- ------ --------- -----
Total loans receivable 1,272,223 100.00 % 844,584 100.00 % 808,778 100.00 %
Less:
Undisbursed loan proceeds 8,788 14,563 13,271
Deferred fees and discounts 1,158 969 1,402
Allowance for losses 7,195 3,921 3,392
Total loans receivable, net $1,255,082 $ 825,131 $ 790,713
========== ========= =========
</TABLE>
At March 31, 2000, $757.1 million of our one-to-four family first mortgage
loans were pledged as collateral under a blanket pledge to the Federal Home Loan
Bank of Chicago.
Loan Maturity. The following table presents the contractual maturity of our
loans at Mach 31, 2000. The table does not include the effect of prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on first mortgage loans totaled $26.3 million for the first quarter
of 2000, $179.1 million for fiscal 1999, $390.1 million for fiscal 1998 and
236.2 million for fiscal 1997.
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<TABLE>
<CAPTION>
AT MARCH 31, 2000
-----------------------------------------------
FIRST MORTGAGE CONSUMER AND
LOANS OTHER LOANS TOTAL
---------------- ------------- -------------
(IN THOUSANDS)
AMOUNTS DUE:
<S> <C> <C> <C>
Within one year $ 973 $ 21,913 $ 22,886
---------- ---------- ----------
After one year --
One to two years 3,361 16,054 19,415
Two to three years 11,232 17,871 29,103
Three to five years 21,127 35,015 56,142
Five to ten years 143,626 94,262 237,888
Ten to twenty years 390,790 50,731 441,521
Over twenty years 317,996 140 318,136
---------- ---------- ----------
Total due after one year 888,132 214,073 1,102,205
---------- ---------- ----------
Total loans $ 889,105 $ 235,986 1,125,091
========== ==========
LESS
Undisbursed loan proceeds 14,233
Deferred loan fees 72
Allowance for loan losses 6,960
----------
Net loans $1,103,826
==========
</TABLE>
The following table presents, as of March 31, 2000, the dollar amount of
all loans, due after March 31, 2001, and whether these loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 2001
-------------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loans $ 447,411 $ 440,702 $ 888,131
Consumer and other loans 107,972 106,102 214,074
---------- ---------- ----------
Total loans due after one year $ 555,383 $ 546,822 $1,102,205
========== ========== ==========
</TABLE>
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The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------------
2000 1999 1999 1998 1997
--------------- ------------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance outstanding at beginning of 1,104,956 $1,079,608 $1,079,608 $1,285,620 $ 848,941
--------------- ------------- ----------- ------------ ------------
ORIGINATIONS
First mortgage 26,605 54,352 171,071 309,606 170,268
Consumer and other loans 32,341 27,962 146,837 118,711 96,871
--------------- ------------- ----------- ------------ ------------
Total originations 58,946 82,314 317,908 428,317 267,139
--------------- ------------- ----------- ------------ ------------
PURCHASES
One-to four-family first mortgage 15,425 24,258 56,943 -- 1,034
Acquisition of First Federal -- -- -- -- 539,655
Total purchase 15,425 24,258 56,943 -- 540,689
--------------- ------------- ----------- ------------ ------------
LESS:
Principal payments:
First mortgage loans 26,338 58,853 179,103 389,179 237,113
Consumer and other loan 24,143 29,298 111,196 120,460 90,856
--------------- ------------- ----------- ------------ ------------
Total principal payment 50,481 88,151 290,299 509,639 327,969
--------------- ------------- ----------- ------------ ------------
Transfers to foreclosed real estate 496 268 1,773 7,887 391
--------------- ------------- ----------- ------------ ------------
Loan sales--first mortgage 1,138 30,218 57,431 116,803 42,789
--------------- ------------- ----------- ------------ ------------
Balance outstanding at end of period $ 1,127,212 $1,067,543 $1,104,956 $1,079,608 $1,285,620
=============== ============= =========== ============ ============
</TABLE>
Residential Mortgage Lending. Our primary lending activity has been the
origination of first mortgage loans secured by one- to four-family properties,
within our primary lending area, that are owner-occupied. At March 31, 2000,
$752.3 million or 66.9% of our gross loan portfolio consisted of loans secured
by one- to four-family residential properties. In addition to our loan
originations, we have purchased one- to four-family first mortgage loans of
$15.4 million in the first quarter of 2000 and $56.9 million in the year 1999.
Mutual reviews these loans for compliance with its underwriting standards, and
generally only invests in loans in the midwestern United States.
We offer conventional fixed rate mortgage loans and ARM loans with
maturity dates which typically range from 15 to 30 years. Residential mortgage
loans generally are underwritten to Federal National Mortgage Association
Standards (FNMA) and other agency guidelines. All ARM loans and fixed rate loans
with maturities of up to 15 years are held in our portfolio. Fixed rate loans
greater than 15 years typically are sold without recourse, servicing retained,
into the secondary market. During the past few years we have generally not
charged loan origination fees. The interest rates charged on mortgage loan
originations at any given date will vary, depending upon conditions in the local
and secondary markets.
We also originate "jumbo loans" in excess of the FNMA maximum loan
amount, which currently is $252,700. Fixed rate jumbo loans generally are sold
servicing released without recourse to secondary market purchasers of such
loans. ARM jumbo loans are underwritten in accordance with our underwriting
guidelines and are retained in our loan portfolio.
Mortgage loan originations are solicited from real estate brokers,
builders, existing customers, community groups and residents of the local
communities located in our primary market area through our loan origination
staff. We also advertise our mortgage loan products through local newspapers,
periodicals and internal customer communications.
We currently offer loans that conform to underwriting standards that
are based on standards specified by FNMA ("conforming loans") and also originate
a limited amount of non-conforming loans for our own portfolio or
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for sale. Loans may be fixed-rate one- to four-family mortgage loans or
adjustable-rate one- to four-family mortgage loans with maturities of up to 30
years. The average size of our one- to four-family mortgage loans originated in
1999 was approximately $94,000, and in the first quarter of 2000 was $110,000.
The overall average size of our one- to four- family first mortgage loans was
approximately $60,000 at March 31, 2000. We are an approved seller/servicer for
FNMA and an approved servicer for the Federal Home Loan Mortgage Corporation
(FHLMC).
The focus of our loan portfolio is the origination of 30-year ARM loans
with interest rates adjustable in one, two, three, or five years. ARM loans
typically are adjusted by a maximum of 200 points per adjustment period with a
lifetime cap of 12.9% Monthly payments of principal and interest are adjusted
when the interest rate adjusts. We do not offer ARM loans which provide for
negative amortization. The initial rates offered on ARM loans fluctuates with
general interest rate changes and are determined by secondary market pricing,
competitive conditions and our yield requirements. We currently utilize the
monthly average yield on United States treasury securities, adjusted to a
constant maturity of one year ("constant treasury maturity index") as the index
to determine the interest rate payable upon the adjustment date of our ARM
loans. Some of the ARM loans are granted with conversion options which provide
terms under which the borrower may convert the mortgage loan to a fixed rate
mortgage loan for a limited period early in the term of the ARM loan. The terms
at which the ARM loan may be converted to a fixed rate loan are established at
the date of loan origination and are set at a level allowing us to sell the ARM
loan into the secondary market upon conversion.
ARM loans may pose credit risks different from the risks inherent in
fixed rate loans, primarily because as interest rates rise, the underlying
payments from the borrowers rise, thereby increasing the potential for payment
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In order to minimize the risk
associated with ARM loans, borrowers under the one year ARM programs generally
are qualified at no less than the maximum adjusted rate at the first adjustment.
The volume and types of ARM loans we originate have been affected by
the level of market interest rates, competition, consumer preferences and the
availability of funds. During the past three years, we experienced a decreased
demand for ARM loans, versus fixed rate loans, due to the continued low interest
rate environment. Although we will continue to offer ARM loans, we cannot
guarantee that we will be able to originate a sufficient volume of ARM loans to
increase or maintain the proportion that these loans bear to our total loans.
In addition to conventional fixed rate and ARM loans, we are authorized
to originate mortgages utilizing various government programs, including programs
offered by the Federal Housing Administration, the Federal Veterans
Administration, and Guaranteed Rural Housing. We also participate in two
state-sponsored mortgage programs operated by Wisconsin Housing and Economic
Development Authority (WHEDA) and Wisconsin Department of Veterans Affairs
(WDVA). We originate these state-sponsored loans as an agent and assign them to
the agency immediately after closing. Servicing is retained by Mutual on both
the WHEDA and WDVA loans.
Upon receipt of a completed mortgage loan application from a
prospective borrower, a credit report is ordered, income and other information
is verified, and if necessary, additional financial information is requested. An
appraisal of the real estate to secure the loan is required which must be
performed by an independent, certified appraiser approved by the Board of
Directors. A title insurance policy is required on all real estate first
mortgage loans. Evidence of adequate hazard insurance and flood insurance, if
applicable, is required prior to closing. Borrowers are required to make e
monthly payments to fund principal and interest as well as private mortgage
insurance and flood insurance, if applicable. e With some exceptions for lower
loan-to-value ratio loans, borrowers also generally are required to escrow in
advance for real estate taxes and hazard insurance. We make disbursements for
these items from the escrow account as the obligations become due.
In addition to our full documentation loan program, we process some
loans as reduced documentation loans. These loans are processed under the FNMA
alternative documentation program. We require applicants for
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reduced documentation loans to complete a FNMA loan application and request
income, assets and debt information from the borrower. In addition to obtaining
outside vendor credit reports on all borrowers, we also look at other
information to ascertain the credit worthiness of the borrower. In most
instances, we utilize the FNMA "Desktop Underwriter" automated underwriting
process to further reduce the necessary documentation. For example, a simplified
appraisal may be used to verify the value of the property. All loans that are
process with reduced documentation conform to secondary market standards and are
generally salable.
Our Underwriting Department reviews all pertinent information prior to
making a credit decision to approve or deny an application. All recommendations
to deny are reviewed by a designated officer of Mutual prior to the final
disposition of the loan application. Our lending policies generally limit the
maximum loan-to-value ratio on one- to four-family mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property. Loans above 80% loan-to-value ratios are subject
to the availability of private mortgage insurance. Coverage is required to
reduce our exposure to less than 80% of value.
Our originations of first mortgage loans amounted to $152.7 million in
1999, $288.5 million in 1998 and $163.5 million in 1997, and $22.0 million in
the first quarter of 2000. A significant number of our first mortgage loan
originations have been the result of refinancing of our existing loans due to
the relatively low interest rate levels over the past three years. Total
refinancings of our existing first mortgage loans were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
FIRST
MORTGAGE LOAN
AMOUNT ORIGINATIONS
------ ------------
PERIOD (DOLLARS IN MILLIONS)
------
<S> <C> <C>
Quarter ended March 31, 2000 $ 2.9 11.0%
Year ended December 31, 1999 49.4 28.9
Year ended December 31, 1998 178.4 57.6
Year ended December 31, 1997 57.3 33.6
</TABLE>
In addition to our standard mortgage and consumer credit products, we
have developed mortgage programs designed to specifically address the credit
needs of low- to moderate-income home mortgage applicants and first-time home
buyers. Among the features of the low- to moderate-income home mortgage and
first-time home buyer's programs are reduced rates, lower down payments, reduced
fees and closing costs, and generally less restrictive requirements for
qualification compared with our traditional one- to four-family mortgage loans.
For instance, certain of these programs currently provide for loans with up to
97% loan-to-value ratios and rates which are lower than our traditional mortgage
loans.
Consumer Loans. We have been expanding our consumer loan portfolio
because higher yields can be obtained, there is strong consumer demand for such
products, and we have experienced relatively low delinquency and few losses on
such products. In addition, we believe that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities. At March 31, 2000, $198.9 million, or 17.7%, of our gross loan
portfolio was in consumer loans. Consumer loan products offered within our
market areas include home equity loans, home equity lines of credit, and to a
lesser extent, automobile loans, recreational vehicle loans, marine loans,
deposit account loans, overdraft protection lines of credit, unsecured consumer
loans through the Mastercard and Visa credit card programs (offered through Elan
Financial Services) and federally guaranteed student loans.
Our focus in consumer lending has been the origination of home equity
loans, home equity lines of credit and home improvement loans. At March 31,
2000, we had $160.2 million or 80.5% of the consumer loan portfolio in such
loans. Underwriting procedures for these loans include a comprehensive review of
the loan application, and require an acceptable credit rating and verification
of the value of the equity in the home and income of the
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borrower. The loan-to-value ratio and debt ratios to income are determining
factors in the underwriting process. Home equity loan and home improvement loan
originations are developed through the use of direct mail, cross-sales to
existing customers, and advertisements in local newspapers.
We originate both fixed rate and variable rate home equity loans and
home improvement loans with combined loan-to-value ratios to 100%. Loans above
80% combined loan to value ratios are subject to the availability of private
mortgage insurance. Pricing on fixed rate home equity and home improvement loans
is reviewed by senior management, and generally terms are in the three to
fifteen year range in order to minimize interest rate risk. During the quarter
ended March 31, 2000 we originated approximately $14 million of fixed rate
loans. These loans carry a weighted average written term of 8 years and a fixed
rate ranging from 6.95% to 12.25%. We also offer variable rate home equity and
home improvement loans. At March 31, 2000, $29.8 million or 27.5% of the home
equity and home improvement loan portfolio carried a variable rate. The variable
rate loans have a fixed rate for three years then adjust annually, with terms of
up to twenty years. Our home equity and home improvement loans are originated in
amounts which, together with the amount of the first mortgage, do not exceed
100% of the value of the property securing the loan.
Our home equity credit line loans, which totaled $52.0 million, or
26.1% of total consumer loans at March 31, 2000, are adjustable-rate loans
secured by a first or second mortgage on owner-occupied one to four-family
residences located in the state of Wisconsin. Current interest rates on home
equity credit lines are tied to the prime rate, adjust monthly and range from
100 to 150 basis points over the prime rate, depending on the loan-to-value
ratio. Home equity line of credit loans are made for terms up to 10 years and
require a minimum monthly payment of the greater of $100 or 1 1/2% of the month
end balance. An annual fee is charged on home equity lines of credit.
At March 31, 2000, student loans amounted to $28.6 million, or 14.4% of
our consumer loan portfolio. These loans are serviced by Great Lakes Higher
Education Servicing Corporation.
Consumer loans may entail greater credit risk than residential mortgage
loans. At March 31, 2000, $1.3 million or approximately 0.55% of the consumer
loan portfolio was 90 days or more delinquent. Although the level of
delinquencies in our consumer loan portfolio generally has been low, there can
be no assurance that delinquencies will not increase in the future.
Multi-family and Commercial Real Estate Loans. At March 31, 2000 our
multi-family and commercial real estate loan portfolio consisted of 160 loans
totaling $108.9 million or 9.7% of our gross loan portfolio. The multi-family
and commercial real estate loan portfolio consist of fixed rate, ARM and balloon
loans originated at prevailing market rates. This portfolio generally consists
of mortgages secured by apartment buildings, office buildings, warehouses,
industrial buildings and retail centers. ARM loans of this type are currently
being originated at 175 to 250 basis points above the rate on U.S. Treasury
securities for comparable maturities. These loans typically do not exceed 80% of
the lesser of the purchase price or an appraisal by an appraiser designated by
us. Balloon loans generally are amortized on a 15 to 25 year basis with a
typical loan term of three to ten years.
Loans secured by multi-family and commercial real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments relating to the outstanding debt. In most
cases, we obtain joint and several personal guarantees from the principals
involved. We generally require an assignment of rents or leases in order to be
assured that the cash flow from the project will be used to repay the debt.
Appraisals on properties securing multi-family and commercial real estate loans
are performed by independent state certified fee appraisers approved by the
board of directors. Title and hazard insurance are required as well as flood
insurance, if applicable. Environmental assessments are performed on all
multi-family and commercial real estate loans in excess of $500,000.
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At March 31, 2000, the largest outstanding loan on a multi-family
property was $7.1 million on a 240 unit apartment project located in Milwaukee,
Wisconsin. At the same date, the largest outstanding loan on a commercial real
estate property was $6.9 million on two office buildings located in Milwaukee,
Wisconsin. At March 31, 2000, these loans were current and performing in
accordance with their terms.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project decreases, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
Commercial Business Loans At March 31, 2000, our commercial business
loan portfolio consisted of loans totaling $37.0 million or 3.3% of our gross
loan portfolio. The commercial loan portfolio consists of loans to businesses
for equipment purchases, working capital lines of credit, debt refinancing, SBA
loans and domestic stand-by letters of credit. Typically, these loans are
secured by business assets and personal guarantees. We offer both variable and
fixed rate loans. Approximately 11.5% of the commercial business loans have an
interest rate adjusted monthly based on the prevailing prime rate. Term loans
are generally amortized over a three to seven year period. Fixed rates are
priced at a margin over the yield on US Treasury issues with maturities that
correspond to the maturities of the notes. All lines of credit and term loans
with balances over $500 thousand are reviewed annually. The largest commercial
business loan at March 31, 2000 had an outstanding balance of $13.5 million and
was secured by equipment and chattel paper. All payments under commercial
business loans were current as of March 31, 2000.
Loan Approval Authority. For one- to four- family residential loans
sold into the secondary market, our underwriters are authorized by the board of
directors to approve loans processed through the FNMA "Desktop Underwriter"
automated underwriting system up to $252,700. For one-to four-family residential
loans held in portfolio, our underwriters are authorized by the board of
directors to approve loans processed through the FNMA "Desktop Underwriter"
automated underwriting system up to $150,000, provided the loan-to-value ratio
is 75% of less and the loan meets other specific underwriting criteria. All
other loans in excess of $80,000 must be approved by a senior officer.
Consumer loan underwriters have individual loan approval authorities
ranging from $15,000 to $50,000. Loan applications exceeding $50,000 must be
approved by a senior officer. All home equity loans where the loan-to-value
ratio exceeds 80% and/or where the normal underwriting standards are not met
must be approved by a senior officer.
The executive committee of the board of directors reviews on a monthly
basis all loans made, and the board ratifies actions taken by the committee.
Multi-family and commercial loan proposals and multi-family and
commercial construction loan proposals are subject to approval of the executive
committee of the board. All loan decisions are subject to ratification by the
board at their monthly meetings.
Any commercial business loan less than $50,000 may be approved by the
department head or a senior officer, and any two of those individuals may
approve loans in the amount of $50,000 to $100,000. All commercial business
loans in the amount of $100,000 or more are approved by the executive committee
of the board of directors and ratified by the board at their next meeting.
Asset Quality
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<PAGE> 83
One of our key operating objectives has been and continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of owned properties, we have been proactive in addressing problem and
non-performing assets. These strategies, as well as our emphasis on quality
mortgage underwriting, our maintenance of sound credit standards for new loan
originations and relatively favorable economic and real estate market conditions
have resulted in historically low delinquency ratios and, in recent years, a
reduction in non-performing assets. These factors have helped strengthen our
financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to a current status. In the case of
one-to-four family mortgage loans, our mortgage servicing department is
responsible for collection procedures from the 15th day of delinquency through
the completion of foreclosure. Specific procedures include a late charge notice
being sent at the time a payment is over 15 days past due with a second notice
(in the form of a billing coupon) being sent before the payment becomes 30 days
past due. Once the account is 30 days past due, we attempt telephone contact
with the borrower. Letters are sent if contact has not been established by the
45th day of delinquency. On the 60th day of delinquency, attempts at telephone
contact continue and stronger letters, including foreclosure notices, are sent.
If telephone contact cannot be made, we send our property inspector to the
property.
When contact is made with the borrower, we attempt to obtain full
payment or work out a repayment schedule to avoid foreclosure. All properties
are inspected prior to foreclosure approval. Most borrowers pay before the
deadline given and it is not necessary to start foreclosure action. If it is,
action starts when the loan is between the 90th and 120th day of delinquency. We
normally seek the shortest redemption period possible. If we obtain the property
at the foreclosure sale, we hold the properties as real estate owned. They are
marketed after an outside appraisal is obtained and any PMI claims are filed.
The collection procedures and guidelines as outlined by Federal National
Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Federal Housing Administration (FHA), Veterans Administration (VA), Department
of Veterans Affairs (DVA), Wisconsin Housing and Economic Development Authority
(WHEDA) and Farmers Home Administration (FmHA) are followed.
The collection procedures for consumer loans, excluding student loans,
include our sending periodic late notices to a borrower once a loan is 15 days
past due. We attempt to make direct contact with a borrower once a loan becomes
30 days past due. Supervisory personnel in our Consumer Loan Collection
Department review loans 60 days or more delinquent on a regular basis. If
collection activity is unsuccessful after 90 days, we may charge-off a loan or
refer the matter to our legal counsel for further collection effort. Loans we
deem to be uncollectible are proposed for charge-off by our Collection
Department. Charge-offs of consumer loans require the approval of our Consumer
Loan Manager and a senior officer. All student loans are serviced by Great Lakes
Higher Education Servicing Corporation which guarantees their servicing to
comply with all Department of Education Guidelines. Our student loan portfolio
is guaranteed by the Great Lakes Higher Education Guaranty Corporation, which is
reinsured by the U.S. Department of Education.
The collection procedures for multi-family, commercial real estate and
commercial business loans include sending periodic late notices to a borrower
once a loan is past due. We attempt to make direct contact with a borrower once
a loan becomes 15 days past due. The manager of multi-family and commercial real
estate reviews loans 15 days or more delinquent on a regular basis. The
commercial banking manager reviews loans 10 days or more delinquent on a regular
basis. If collection activity is unsuccessful, we may refer the matter to our
legal counsel for further collection effort. After 90 days or sooner, loans we
deem to be uncollectible are proposed for repossession or foreclosure and
charge-off. This action requires the approval of our board of directors.
-80-
<PAGE> 84
Our policies require that management continuously monitor the status of the
loan portfolio and report to the board of directors on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate. The
following table presents information regarding loans delinquent for 60 days or
longer:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
------------------------------------------ ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- ------------------- ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
-------- ---------- -------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family first mortgages 21 $ 880 24 $ 2,090 27 $ 1,739 43 $ 3,182
Other first mortgages 1 376 5 416 1 223 2 354
Consumer and other loans 92 650 263 1,280 111 457 238 1,163
-------- ---------- -------- ---------- ------- ---------- ------- ----------
Total delinquent loans (60 days and
over) 114 $ 1,906 292 $ 3,786 139 $ 2,419 283 $ 4,699
======== ========== ======== ========== ======= ========== ======= ==========
Delinquent loans (60 days and over) to
total loans 0.17 % 0.34 % 0.23 % 0.44%
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
90 DAYS 90 DAYS 90 DAYS
or More 60-89 DAYS
60-89 DAYS OR MORE 60-89 DAYS OR MORE
--------------- ------------- ------------- -------------- -------------- --------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE NO.OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family first mortgages 19 $ 691 42 $ 3,629 37 $ 1,589 96 $5,986 31 $ 1,427 70 $ 5,388
Other first mortgages - - 6 793 - - 1 73 - - 2 4,412
Consumer and other loans 112 495 215 979 121 660 221 913 146 707 297 1,469
----- ------ ----- ------- ----- ------- ----- -------- ----- ------- ----- --------
Total delinquent loans (60 days
and over) 131 $1,186 263 $ 5,401 158 $ 2,249 318 $6,972 177 $ 2,134 369 $ 11,269
===== ====== ===== ======= ===== ======= ===== ======== ===== ======= ===== ========
Delinquent loans (60 days and over)
to total loans 0.11% 0.49% 0.21% 0.65% 0.17% 0.88%
</TABLE>
Our $3.8 million in loans delinquent 90 days or more at March 31, 2000 were
comprised primarily of 24 one- to four-family first mortgage loans (including
FHA/VA first mortgage loans) with an average principal balance of approximately
$87,000. The largest non-performing asset at March 31, 2000 was a high-rise
condominium in Bloomington, Minnesota. The property is carried as foreclosed
real estate in the amount of $1.6 million, net of a specific loss allowance.
First Federal originally made a construction and development loan on the
building which contains forty-nine residential units and three commercial units.
Mutual Savings obtained title to the property in 1998. As of March 31, 2000,
nineteen residential units remained to be sold, including four residential units
that were under contract of sale. Mutual Savings does not anticipate further
loss.
-81-
<PAGE> 85
Non-performing assets totaled $6.4 million at March 31, 2000, and $7.8
million at December 31, 1999, compared with $10.2 million at December 31, 1998.
The following table presents information regarding non-accrual mortgage and
consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated.
<TABLE>
<CAPTION>
AT MARCH AT DECEMBER 31,
31,
---------- -------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans $ 2,483 $ 3,572 $ 2,937 $ 9,003 $ 1,764 $ 416
Non-accrual consumer and other loans 119 83 176 158 21
Accruing loans delinquent 90 days or more 1,053 1,152 3,617 813 158 128
-------- -------- -------- -------- -------- --------
Total non-performing loans 3,655 4,807 6,730 9,974 1,943 544
Foreclosed real estate, net 2,729 3,018 3,505 159 258 333
-------- -------- -------- -------- -------- --------
Total non-performing assets $ 6,384 $ 7,825 $ 10,235 $ 10,133 $ 2,201 $ 877
======== ======== ======== ======== ======== ========
Non-performing loans to total loans 0.33% 0.44% 0.65% 0.79% 0.24% 0.07%
Non-performing assets to total assets 0.37 0.44 0.55 0.55 0.19 0.07
</TABLE>
The large increase in non-performing assets in 1997 is primarily a result of the
acquisition of First Federal in that year.
With the exception of first mortgage loans insured or guaranteed by the
FHA, VA or Guaranteed Rural Housing (formerly FmHA), we stop accruing income on
loans when interest or principal payments are greater than 90 days in arrears or
earlier when the timely collectibility of such interest or principal is
doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited to income.
We may recognize income in the period that we collect it when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist.
All commercial real estate loans which are greater than 90 days past
due are considered to be impaired. Impaired loans are individually assessed to
determine whether a loan's carrying value is in excess of the fair value of the
collateral or the present value of the loan's cash flows discounted at the
loan's effective interest rate.
At March 31, 2000 and December 31, 1999 and 1998, we had no loans
classified as impaired as defined in SFAS No. 114.
Foreclosed real estate consists of property we acquired through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties
are initially recorded at the lower of the recorded investment in the loan or
fair value. Thereafter, we carry foreclosed real estate at fair value less
estimated selling costs. Foreclosed real estate is inspected periodically.
Additional outside appraisals are obtained if we consider that appropriate.
Additional write-downs may occur if the property value deteriorates. These
additional write-downs are charged directly to current operations.
-82-
<PAGE> 86
Allowance for Loan Losses. The following table presents the activity in
our allowance for loan losses at or for the periods indicated.
<TABLE>
<CAPTION>
AT, OR FOR
THE
QUARTER
ENDED, AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------- --------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- ----------- ----------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 6,948 $ 6,855 $ 7,195 $ 3,921 $ 3,392 $ 2,942
----------- ----------- ----------- -------- --------- ---------
Provision for loan losses 76 350 637 1,065 672 597
Other additions: purchase of First
Federal - - 2,449
----------- ----------- ----------- -------- --------- ---------
Charge-offs:
First mortgage loans 36 152 997 624 80 109
Consumer and other loans 35 189 223 127 77 51
----------- ----------- ----------- -------- --------- ---------
Total charge-offs 71 341 1,220 751 157 160
Recoveries:
First mortgage loans 0 (40) (206) (479) - -
Consumer and other loans (7) (44) (37) (32) (14) (13)
----------- ----------- ----------- -------- --------- ---------
Total recoveries (7) (84) (243) (511) (14) (13)
----------- ----------- ----------- -------- --------- ---------
Net charge-offs 64 257 977 240 143 147
----------- ----------- ----------- -------- --------- ---------
Balance at end of period $ 6,960 $ 6,948 $ 6,855 $ 7,195 $ 3,921 $ 3,392
=========== =========== =========== ======== ========= =========
Net charge-offs to average loans 0.01 % 0.03 % 0.08 0.02 % 0.02 % 0.02%
Allowance for loan losses to total loans 0.63 0.64 0.66 0.57 0.48 0.43
Allowance for loan losses to 190.42 144.54 101.86 72.14 201.8 623.53
non-performing loans
</TABLE>
The allowance for loan losses has been determined in accordance with
generally accepted accounting principles, under which we are required to
maintain adequate allowances for loan losses. We are responsible for the timely
and periodic determination of the amount of the allowance required. We believe
that our allowance for loan losses is adequate to cover specifically
identifiable loan losses, as well as estimated losses inherent in our portfolio
for which certain losses are probable but not specifically identifiable.
Loan loss allowances are reviewed monthly. General allowances are
maintained by the following categories for performing loans to provide for
unidentified inherent losses in the portfolios:
- One-to-four family
- Consumer
- Multi-family and commercial real estate
- Commercial business
Allowance goals have been established by an internal risk evaluation by
loan category. Various factors are taken into consideration, including:
historical loss experience, economic factors and other factors, that, in
management's judgment would affect the collectibility of the portfolio as of the
evaluation date. Shortfalls in loan loss allowance are charged against
operations as provision for loan losses, to maintain reserves at the desired
levels.
The appropriateness of the allowance is reviewed by senior management
on a monthly basis based upon its evaluation of then-existing economic and
business conditions affecting the key lending areas of Mutual Savings. Other
outside factors such as credit quality trends, collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments and
recent loss experience in particular segments of the portfolio that existed as
of the balance sheet date and the impact that such conditions were believed to
have had on the collectibility of the loan are also considered. Our board of
directors also reviews the loan loss allowances compared to the relative size of
the portfolio on a monthly basis.
-83-
<PAGE> 87
Delinquent and Non-performing loans. One-to-four family loans
delinquent more than 90 days, multi-family and commercial real estate loans more
than 60 days, consumer loans more than 90 days and commercial business loans
more than 60 days are reviewed and analyzed by senior officers on an individual
basis. Any potential loss is charged against reserves by establishing a
corresponding specific reserve for that loan from the general reserve.
By following careful underwriting guidelines, Mutual Savings has
historically maintained low levels of non-performing loans to total loans. Our
ratio of non-performing loans to total loans at December 31, 1995 was 0.10%. It
increased after the of acquisition of First Federal to a level of 0.97% at
December 31, 1998. However, at December 31, 1999 the level dropped to 0.44%, and
further dropped to 0.37% at March 31, 2000, reflecting the resolution of the
majority of the problem loans acquired.
We believe the primary risks inherent in our portfolio are possible
increases in interest rates, a possible decline in the economy, generally, and a
possible decline in real estate market values. Any one or a combination of these
events may adversely affect our loan portfolio resulting in increased
delinquencies and loan losses. Accordingly, and because of the increased
concentration of consumer loans, we have taken steps to increase our level of
loan loss allowances over the last 5 years. At March 31, 2000, the allowance for
loan losses as a percentage of total loans was 0.63% compared with 0.43% at
December 31, 1995. Furthermore, the increase in the allowance for loan losses
each year from 1995 to 1999 reflects our strategy of resolving non-performing
loans while providing adequate allowances for inherent losses in the portfolio
and identifying potential losses in a timely manner, as well as providing an
adequate allowance to reflect changes in the components of the portfolio during
that period.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, future additions may be necessary
if economic and other conditions in the future differ substantially from the
current operating environment. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. One or more of these agencies,
specifically the FDIC or the OTS, may require us to increase the allowance for
loan losses or the valuation allowance for foreclosed real estate based on their
judgments of information available to them at the time of their examination,
thereby adversely affecting our results of operations.
-84-
<PAGE> 88
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Comparison of Operating Results for the quarter ended
March 31, 2000, and the Years Ended December 31, 1999 and 1998 -Provision for
Loan Losses." The following tables represent our allocation of allowance for
loan losses by loan category on the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 2000
-----------------------
PERCENTAGE
OF
LOANS
IN
CATEGORY
TO TOTAL
LOAN CATEGORY AMOUNT LOANS
- - ------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans
One-to four-family $ 4,697 66.86%
Other 819 12.17%
---------- -----------
Total first mortgage loans 5,516 79.03%
Commercial 495 3.29%
Home equity lines 263 4.62%
Consumer & other 686 13.06%
Unallocated 0 0.00%
---------- -----------
Total allowance for loan losses $ 6,960 100.00%
========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------ ------------------- ----------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- - ------------- ---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans
One-to four-family $ 4,736 67.37% $ 5,189 70.56% $ 4,978 73.11% $ 2,644 68.39% $ 2,346 70.10%
Other 822 12.01% 596 11.07% 1,198 11.42% 595 17.30% 530 18.04%
---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
Total first mortgage
loans 5,558 79.38% 5,785 81.63% 6,176 84.53% 3,239 85.69% 2,876 88.14%
Commercial 520 3.57% 402 2.74% 283 1.48% 252 2.99% 173 2.14%
Home equity lines 253 4.58% 229 4.36% 231 3.65% 166 3.94% 137 3.39%
Consumer & other 617 12.47% 439 11.27% 505 10.34% 264 7.38% 206 6.33%
Unallocated 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
---------- -------- -------- --------- --------- --------- --------- -------- --------- ---------
Total allowance for $ 6,948 100.00% $ 6,855 100.00% $ 7,195 100.00% $ 3,921 100.00% $ 3,392 100.00%
loan losses ========== ======== ======== ========= ========= ========= ========= ======== ========= =========
</TABLE>
INVESTMENT ACTIVITIES
Investment Securities. The board of directors reviews and approves our
investment policy on an annual basis. Senior officers, as authorized by the
board of directors, implement this policy. The board of directors reviews our
investment activity on a monthly basis.
Our investment objectives are to meet legal liquidity requirements,
generate a favorable return on investments without undue compromise to our other
objectives as stated in the business plan and establish acceptable levels of
interest rate risk, credit risk and investment portfolio concentrations.
Wisconsin chartered savings banks have authority to invest in various types of
assets, including U.S. Treasury obligations, securities of various federal
agencies, State and Municipal obligations, mortgage-related securities, mortgage
derivative securities, certain time deposits of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements, loans of
federal funds, and, subject to certain limits, corporate debt and equity
securities, commercial paper and mutual funds.
-85-
<PAGE> 89
Our investment policy allows participation in hedging strategies or the
use of financial futures, options or forward commitments or interest rate swaps
but only with prior approval of the board of directors and the State of
Wisconsin, Department of Financial Institutions. We did not have any such
hedging transactions in place at March 31, 2000. Our investment policy prohibits
the purchase of non-investment grade bonds. Our investment policy also provides
that we will not engage in any practice that the Federal Financial Institutions
Examination Council considers to be an unsuitable investment practice. In
addition, the policy provides that we shall attempt to maintain primary
liquidity consisting of investments in cash, cash in banks, federal funds
purchased and securities with remaining maturities of less than six months in an
amount equal to 4.0% of average daily deposits. At March 31, 2000, our primary
liquidity ratio was 4.0%. For information regarding the carrying values, yields
and maturities of our investment securities and mortgage-related securities, see
"-- Carrying Values, Yields and Maturities."
We classify securities as trading, held to maturity, or available for
sale at the date of purchase. We currently do not have any held to maturity
securities, but if we did, they would be reported at cost, adjusted for
amortization of premium and accretion of discount. Available for sale securities
are reported at fair market value. We currently have no securities classified as
trading.
Mortgage-related Securities. Most of our mortgage-related securities
are directly or indirectly insured or guaranteed by GNMA, FHLMC or FNMA. The
rest of the securities are private collateralized mortgage obligations (CMO's).
We classify our entire mortgage-related securities portfolio as available for
sale.
At March 31, 2000, mortgage-related securities available for sale
totaled $472.5 million, or 27.1% of total assets. At March 31, 2000, the
mortgage-related securities portfolio had a weighted average yield of 6.77%. Of
the mortgage-related securities we held at March 31, 2000, $409.3 million, or
86.6%, had fixed rates and $63.1 million, or 13.4%, had adjustable-rates.
Mortgage-related securities at March 31, 2000 included real estate mortgage
investment conduits (REMICs), which are securities derived by reallocating cash
flows from mortgage pass-through securities or from pools of mortgage loans held
by a trust. REMICS are a form of, and are often referred to as CMO's.
Our REMICs have fixed and variable coupon rates ranging from 5.47% to
8.00% and a weighted average yield of 6.68% at March 31, 2000. At March 31,
2000, REMICs totaled $139.1 million, which constituted 29.4% of the
mortgage-related securities portfolio, or 8.0% of total assets. Our REMICs had
an expected average life of 8.3 years at March 31, 2000. For a further
discussion of our investment policies, including those for mortgage-related
securities, see "- Investment Securities." Purchases of mortgage-related
securities may decline in the future to offset any significant increase in
demand for one- to four-family mortgage loans and other loans.
Mortgage-related securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-related securities are
more liquid than individual mortgage loans. In general, mortgage-related
securities issued or guaranteed by GNMA, FHLMC and FNMA are weighted at no more
than 20% for risk-based capital purposes, compared to the 50% risk weighting
assigned to most non-securitized residential mortgage loans.
While mortgage-related securities carry a reduced credit risk as
compared to whole loans, they remain subject to the risk of a fluctuating
interest rate environment. Along with other factors, such as the geographic
distribution of the underlying mortgage loans, changes in interest rates may
alter the prepayment rate of those mortgage loans and affect both the prepayment
rates and value of mortgage-related securities.
-86-
<PAGE> 90
The following table presents our investment securities and
mortgage-related securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
-------------------------- --------------------------------------
2000 1999 1999 1998 1997
------------ ------------- ----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Carrying value at beginning of period $ 57,763 $ 116,534 $ 116,534 $ 159,208 $ 159,513
------------ ------------- ----------- ------------ -------------
Purchases 10,000 20,000 21,481 381,899 376,634
Acquisition of First Federal - - - 36,457
Calls - (5,000) (50,393) (5,015)
Transfer from mutual funds to CMO - - (14,047) - -
Maturities (20,000) (60,000) (65,000) (378,944) (409,346)
Sales - - - - -
Premium amortization and discount accretion, net 364 378 (182) 4,639 246
Decrease (increase) in unrealized gains 38 (213) (1,023) 135 719
------------ ------------- ----------- ------------ -------------
Net increase in investment securities (9,598) (44,835) (58,771) (42,674) (305)
------------ ------------- ----------- ------------ -------------
Carrying value at end of period $ 48,165 $ 71,699 $ 57,763 $ $116,534 $ 159,208
============ ============= =========== ============ =============
MORTGAGE-RELATED SECURITIES AVAILABLE FOR SALE:
Carrying value at beginning of period $ 374,100 $ 270,897 $ 270,897 $ $225,906 $ 90,452
------------ ------------- ----------- ------------ -------------
Purchases 114,420 20,234 213,504 119,548 72,071
Transfer from mutual funds to CMO - - 14,047 - -
Acquisition of First Federal - - - - 124,940
Sales - - (53,682) - (3,820)
Principal payments (11,359) (20,127) (60,367) (77,407) (59,514)
Premium amortization and discount accretion, net 120 41 262 613 72
Decrease (increase) in unrealized gains (4,825) (1,064) (10,561) 2,237 1,705
------------ ------------- ----------- ------------ -------------
Net increase in mortgage-related securities 98,356 (916) 103,203 44,991 135,454
------------ ------------- ----------- ------------ -------------
Carrying value at end of period $ 472,456 $ 269,981 $ 374,100 $ 270,897 $ 225,906
============ ============= =========== ============ =============
</TABLE>
-87-
<PAGE> 91
The following table presents the composition of our money market investments,
investment securities and mortgage-related securities portfolios in dollar
amount and in percentage of each investment type at the dates indicated. It also
presents the coupon type for the mortgage-related securities portfolio. For all
securities and for all periods presented, the carrying value is equal to fair
value.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, -------------------------------------------
2000 1999 1998 1997
-------------- -------------------------------------------
(Dollars in thousands)
Carrying/ Carrying/ Carrying/ Carrying/
Fair Value Fair Value Fair Value Fair Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS
Interest-earning deposits $ 21,457 $ 132,592 $ 262,714 $ 41,305
Federal funds sold - 25,000 45,000 15,000
============== ============ ============ ==============
Total money market investments $ 21,457 $ 157,592 $ 307,714 $ 56,305
============== ============ ============ ==============
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Mutual funds $ 28,928 $ 28,537 $ 40,885 $ 39,888
United States government and agencies 19,237 29,175 75,421 118,598
Asset-backed securities - 51 228 722
============== ============ ============ ==============
Total investment securities available for sale $ 48,165 $ 57,763 $ 116,534 $159,208
============== ============ ============ ==============
MORTGAGE-RELATED SECURITIES AVAILABLE FOR SALE
BY ISSUER:
Federal Home Loan Mortgage Corporation $ 67,697 $ 70,216 $ 43,717 $ 29,073
Federal National Mortgage Association 387,194 285,384 194,353 136,510
Private placement CMO's 17,032 17,927 31,994 59,118
Government National Mortgage Association 533 573 833 1,205
============== ============ ============ ==============
Total mortgage-related securities $ 472,456 $ 374,100 $ 270,897 $225,906
============== ============ ============ ==============
BY COUPON TYPE:
Adjustable-rate 63,133 $ 59,506 $ 51,877 $ 51,704
Fixed-rate 409,323 314,594 219,020 174,202
============== ============ ============ ==============
Total mortgage-related securities $ 472,456 $ 374,100 $ 270,897 $225,906
============== ============ ============ ==============
TOTAL INVESTMENT PORTFOLIO $ 542,078 $ 589,455 $ 695,145 $441,419
============== ============ ============ ==============
</TABLE>
-88-
<PAGE> 92
Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of our investment securities and mortgage-related
securities at March 31, 2000. Mortgage-related securities are presented by
issuer and by coupon type.
<TABLE>
<CAPTION>
AT MARCH 31, 2000
--------------------------------------------------------------------------------------------
More than Five
More than One Year Years to More than
One Year or Less to Five Years Ten Years Ten Years Total
------------------ ------------------ ---------------- --------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------------------ ------------------ ---------------- --------------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE
FOR SALE:
Mutual funds 28,928 5.83 % - - - % - - % 28,928 5.83 %
United States government and
agencies - - 19,237 5.66 % 19,237 5.66
------- -------- --------
Total investment securities $28,928 5.83 $ 19,237 5.66 $ - $ - $ 48,165 5.76
======= ======== ======= ======== ========
MORTGAGE-RELATED SECURITIES AVAILABLE
FOR SALE:
BY ISSUER:
GNMA pass-through certificates 3 7.89 177 7.81 413 8.21 - - 533 8.12
FNMA pass-through certificates - - 104 7.61 6,879 5.87 313,617 6.86 320,600 6.84
Private CMOs - - - - 1,615 6.50 15,417 6.91 17,032 6.87
FHLMC pass-through certificates 1 9.09 141 8.05 28 9.16 12,092 6.30 12,262 6.33
FHLMC, FNMA and GNMA-REMICs - - - - 5,326 6.22 116,703 6.65 122,029 6.63
------- -------- ------- -------- --------
Total mortgage-related
securities $ 4 8.19 $ 362 7.85 $14,261 6.15 $457,829 6.79 $472,456 6.77
======= ======== ======= ======== ========
BY COUPON TYPE:
Adjustable-rate 0 - - - 4,807 6.31 58,326 6.83 63,133 6.79
Fixed-rate 4 8.19 362 7.85 9,454 6.07 399,503 6.79 409,323 6.76
------- -------- ------- -------- --------
Total mortgage-related
securities $ 4 8.19 $ 362 7.85 $14,261 6.15 $457,829 6.79 $472,456 6.77
======= ======== ======= ======== ========
TOTAL INVESTMENT AND
MORTGAGE-RELATED SECURITIES
PORTFOLIO $28,932 5.83 % $ 19,599 5.70 % $14,261 6.15% $457,829 6.79% $520,621 6.68 %
======= ======== ======= ======== ========
</TABLE>
SOURCES OF FUNDS
General. Deposits, scheduled amortization and prepayments of loan
principal and mortgage-related securities, maturities and calls of investments
securities, Federal Home Loan Bank borrowings and funds provided by operations
are our primary sources of funds for use in lending, investing and for other
general purposes. We currently do not use reverse repurchase agreements as
sources of funds. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources."
Deposits. We offer a variety of deposit accounts having a range of
interest rates and terms. We currently offer regular savings deposits
(consisting of passbook and statement savings accounts), interest-bearing demand
accounts, non-interest-bearing demand accounts, money market accounts and time
deposits. We also offer IRA and Keogh time deposit accounts.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of deposits
and competition. Our deposits are primarily obtained from areas surrounding our
offices and we rely primarily on paying competitive rates, service and
long-standing relationships with customers to attract and retain these deposits.
We do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition,
U.S. Treasury securities offerings and the rates charged on other sources of
funds. Core deposits (defined as regular savings deposits, money market accounts
and demand accounts) represented 39.3% of total deposits on March 31, 2000. At
March 31, 2000, time deposits with remaining terms to maturity of less than one
year amounted to $545.3 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Analysis of Net Interest Income"
for
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<PAGE> 93
information relating to the average balances and costs of our deposit accounts
for the quarters ended March 31, 2000 and 1999, and the years ended December 31,
1999, 1998 and 1997.
The following table presents our deposit activity for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED MARCH 31,
-----------------------------------------------
2000 1999
---------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total deposits at beginning of period $1,343,007 $1,398,858
Net deposits (withdrawals) (37,593) (33,757)
Acquisition of First Federal - -
Interest credited, net of penalties 13,774 14,263
---------------------- -------------------
Total deposits at end of period $1,319,188 $1,379,364
====================== ===================
Net increase (decrease) $ (23,819) $ (19,494)
====================== ===================
Percentage increase (decrease) (1.77) % (1.39) %
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
---------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at beginning of period $ 1,398,858 $ 1,362,330 $ 994,283
Net deposits (withdrawals) (110,285) (20,851) (62,748)
Acquisition of First Federal - - 376,700
Interest credited, net of penalties 54,434 57,379 54,095
---------------------- ------------------- -------------------
Total deposits at end of period $ 1,343,007 $ 1,398,858 $ 1,362,330
====================== =================== ===================
Net increase (decrease) $ (55,851) $ 36,528 $ 368,047
====================== =================== ===================
Percentage increase (decrease) (3.99) % 2.68 % 37.02 %
</TABLE>
At March 31, 2000, we had $60.9 million in time deposits with balances of
$100,000 and over maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
----------------------------
(IN THOUSANDS)
<S> <C>
Three months or less $ 16,834
Over three months through six months 9,226
Over six months through 12 months 15,362
Over 12 months through 24 months 15,277
Over 24 months through 36 months 3,176
Over 36 months 986
----------------------------
Total $ 60,861
============================
</TABLE>
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<PAGE> 94
The following table presents the distribution of our deposit accounts
at the dates indicated by dollar amount and percent of portfolio, and the
weighted average nominal interest rate on each category of deposits.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------------------------ ----------------------------------------
2000 1999
------------------------------------------ ----------------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------------ --------- --------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings $ 150,901 11.44% 2.41% $ 151,447 11.28% 2.41%
Interest-bearing demand 89,141 6.76% 1.05% 89,685 6.68% 1.05%
Money market 230,051 17.44% 4.91% 231,174 17.21% 4.90%
Non-interest bearing 48,403 .67% 0.00% 42,596 3.17% 0.00%
---------- -------- -------- -------- ---------- -------
Total 518,496 39.30% 3.06% 514,902 38.34% 3.09%
---------- -------- -------- ----------
Certificates:
Time deposits with original
maturities of:
Three months or less 72,565 5.50% 5.06% 80,781 6.01% 5.07%
Over three months to
twelve months 168,333 12.77% 4.99% 198,154 14.76% 4.90%
Over twelve months to
twenty-four months 373,917 28.35% 5.47% 401,053 29.87% 5.37%
Over twenty-four
months to thirty-six 116,313 8.82% 6.06% 73,729 5.49% 5.62%
months
Over thirty-six months
to forty-eight months 5,392 0.41% 5.74% 5,819 0.43% 5.73%
Over forty-eight months
to sixty months 61,765 4.68% 5.89% 66,124 4.92% 5.94%
Over sixty months 2,407 0.18% 6.37% 2,445 0.18% 6.35%
----------- ---------- --------- ---------- --------- --------
Total time deposits 800,692 60.70% 5.46% 828,105 61.66% 5.31%
----------- ---------- ---------- ---------
Total deposits $1,319,188 100.00% 4.52% $1,343,007 100.00% 4.46%
=========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------------ --------- --------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings $ 166,316 11.89% 2.41% $ 169,530 12.44% 2.85%
Interest-bearing demand 100,753 7.20% 1.05% 95,310 7.00% 1.41%
Money market 159,361 11.39% 4.61% 134,451 9.87% 4.64%
Non-interest bearing 43,031 3.08% 0.00% 35,868 2.63% 0.00%
------------ --------- --------- ---------- ----------- -------
Total 469,461 33.56% 2.64% 435,159 31.94% 2.85%
------------ --------- ---------- -----------
Certificates:
Time deposits with original
maturities of:
Three months or less 82,097 5.87% 5.00% 59,205 4.35% 5.29%
Over three months to
twelve months 160,681 11.49% 5.17% 204,864 15.04% 5.52%
Over twelve months to
twenty-four months 517,495 36.99% 5.83% 433,152 31.79% 6.01%
Over twenty-four
months to thirty-six
months 82,755 5.92% 5.46% 113,969 8.37% 5.77%
Over thirty-six months
to forty-eight months 3,973 0.28% 5.73% 4,813 0.35% 5.84%
Over forty-eight months
to sixty months 79,861 5.71% 5.98% 107,885 7.92% 5.93%
Over sixty months 2,535 0.18% 6.34% 3,283 0.24% 6.21%
---------- -------- ------- ---------- --------- ------
Total time deposits 929,397 66.44% 5.63% 927,171 68.06% 5.82%
---------- -------- ---------- ---------
Total deposits $1,398,858 100.00% 4.62% $1,362,330 100.00% 4.87%
========== ======== ========== =========
</TABLE>
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<PAGE> 95
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at March 31, 2000 and December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------ ---------------------------------------------------------------
2000 1999 1998 1997
------------------ ---------------- -------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Time deposit accounts:
3.99% or less $ 120 $ 232 $ 113 $ 366
4.00% - 4.99% 188,407 231,747 79,861 3,909
5.00% - 5.99% 459,334 530,748 590,164 541,854
6.00% - 6.99% 151,548 63,808 257,491 378,791
7.00% or greater 1,283 1,570 1,768 2,251
------------------ ---------------- -------------------- ----------------------
Total $ 800,692 $ 828,105 $ 929,397 $ 927,171
================== ================ ==================== ======================
</TABLE>
The following table presents, by rate category, the remaining period to
maturity of time deposit accounts outstanding as of March 31, 2000.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 2000
--------------------------------------------------------------------------------------------------
OVER OVER OVER
WITHIN OVER THREE TO SIX MONTHS ONE TO TWO TWO TO THREE OVER THREE
THREE MONTHS SIX MONTHS TO ONE YEAR YEARS YEARS YEARS TOTAL
--------------------------------- ------------- ------------ -------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Time deposit accounts:
3.99% or less $ 95 $ 25 $ 120
4.00% - 4.99% 79,112 54,607 39,038 14,312 1,112 227 188,408
5.00% - 5.99% 115,795 75,948 125,374 112,212 14,554 15,451 459,334
6.00% - 6.99% 6,388 6,031 42,592 69,064 24,996 2,477 151,548
7.00% or greater 316 - - - 168 798 1,282
----------------- --------------- ------------- ------------ -------------- ---------- -----------
Total $ 201,706 $ 136,586 $ 207,004 $ 195,613 $ 40,830 $ 18,953 $ 800,692
================= =============== ============= ============ ============== ========== ===========
</TABLE>
Borrowings. We borrow funds to finance our lending and investing
activities. Substantially all of our borrowings take the form of advances from
the Federal Home Loan Bank of Chicago. At March 31, 2000 we had no borrowings of
less than one year. We have pledged certain loans receivable as blanket
collateral for these advances and future advances. The Federal Home Loan Bank
offers a variety of borrowing options with fixed or variable rates, flexible
repayment options and fixed or callable terms. We choose the rate, repayment
option and term to fit the purpose of the borrowing
OTHER FINANCIAL SERVICES
Mutual Savings, though its wholly-owned subsidiary Lake Financial and
Insurance Services, Inc., provides investment and insurance services to both
Mutual customers and the general public. Investment services include tax
deferred and tax free investments, mutual funds, and government securities.
Personal insurance, business insurance, life and disability insurance and
mortgage protection products are also offered by Lake Financial.
SUBSIDIARY ACTIVITIES
In addition to Lake Financial and Insurance Services, Inc., described
above, we have two active wholly-owned subsidiaries: Mutual Investment
Corporation and M C Development Ltd. Mutual Investment Corporation
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<PAGE> 96
owns and manages much of our investment portfolio. Mutual has funded this
separate subsidiary to enhance the return on the portfolio. M C Development Ltd.
is involved in land development and sales. It owns two parcels of undeveloped
land consisting of 15 acres in Brown Deer, WI and 318 acres in Oconomowoc, WI.
See "Properties".
PROPERTIES
Mutual Savings conducts its business through its executive office and 51
banking offices, which had an aggregate net book value of $24.2 million as of
December 31, 1999. The following table shows the location of Mutual Savings'
offices, whether they are owned or leased, and the expiration date of the leases
for the leased offices.
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- --------- ----------
<S> <C> <C> <C>
EXECUTIVE OFFICE:
4949 West Brown Deer Road 1991 Owned
Brown Deer, WI 53223
MILWAUKEE METRO AREA:
Bayshore Mall 1971 Leased 2009
5900 N. Port Washington Road
Glendale, WI 53217
Brookfield 1973* Owned
17100 W. Capitol Drive
Brookfield, WI 53005
Brookfield Square 1975 Leased 2006
400 N. Moorland Road
Brookfield, WI 53005
Brown Deer 1979 Owned
4801 W. Brown Deer Road
Brown Deer, WI 53223
Capitol Drive 1976 Owned
8050 W. Capitol Drive
Milwaukee, WI 53222
Cedarburg 1978* Leased 2006
W62 N248 Washington Avenue
Cedarburg, WI 53012
Downtown 1955 Owned
510 E. Wisconsin Avenue
Milwaukee, WI 53202
Grafton 1978 Owned
2030 Wisconsin Avenue
Grafton, WI 53024
</TABLE>
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<PAGE> 97
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- ------------- ---------- ------------
<S> <C> <C> <C>
Howell Avenue 1977 Owned
3847 S. Howell Avenue
Milwaukee, WI 53207
Mayfair Mall 1959* Leased 2001
2500 N. Mayfair Road
Wauwatosa, WI 53226
Mequon 1970* Owned
11249 N. Port Washington Road
Mequon, WI 53092
Oak Creek 1972 Owned
8780 S. Howell Avenue
Oak Creek, WI 53154
Oklahoma Avenue 1982 Owned
6801 W. Oklahoma Avenue
Milwaukee, WI 53219
Sherman Park 1950* Owned
4812 W. Burleigh Street
Milwaukee, WI 53210
Southgate 1967 Owned
3340 S. 27th Street
Milwaukee, WI 53215
Southridge Mall 1978 Leased 2002
5300 S. 76th Street
Greendale, WI 53219
Thiensville 1960* Owned
208 N. Main Street
Thiensville, WI 53092
West Allis 1976 Owned
10296 W. National Avenue
West Allis, WI 53227
MADISON AREA:
Downtown 1980 Leased 2003
23 S. Pinckney Street
Madison, WI 53703
West 1982 Leased 2011
5521 Odana Road
Madison, WI 53719
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
Middleton 1978 Owned
6209 Century Avenue
Middleton, WI 53562
Monona 1981 Owned
5320 Monona Drive
Monona, WI 53716
FOX VALLEY AREA:
Appleton 1985 Leased 2004
4323 W. Wisconsin Avenue
Fox River Mall
Appleton, WI 54915
Neenah 1974 Owned
101 W. Wisconsin Avenue
Neenah, WI 54956
JANESVILLE: 1973 Owned
2111 Holiday Drive
Janesville, WI 53545
SHEBOYGAN AREA:
Sheboygan 1973 Owned
801 N. 8th Street
Sheboygan, WI 53081
Sheboygan Motor Bank 1984 Owned
730 N. 9th Street
Sheboygan, WI 53081
BEAVER DAM: 1975 Owned
130 W. Maple Avenue
Beaver Dam, WI 53916
BELOIT: 1971 Leased 2012
3 Beloit Mall Shopping Center
Beloit, WI 53511
BERLIN: 1973 Owned
103 E. Huron Street
Berlin, WI 54923
FOND DU LAC: 1973 Leased 2001
Forest Mall Shopping Center
Fond du Lac, WI 54935
</TABLE>
-95-
<PAGE> 99
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
PORTAGE: 1976 Owned
145 E. Cook Street
Portage, WI 53901
EAU CLAIRE:
Downtown 1968* Owned
319 E. Grand Avenue
Eau Claire, WI 54701
Mall 1972* Owned
2812 Mall Drive
Eau Claire, WI 54701
Cub Foods 1996* Leased 2005
2717 Birch Street
Eau Claire, WI 54703
Pinehurst 1986* Owned
2722 Eddy Lane
Eau Claire, WI 54703
CHIPPEWA FALLS AREA:
Downtown 1975* Owned
35 W. Columbia
Chippewa Falls, WI 54729
Falls Pick'N Save 1995* Leased 2005
303 Prairie View Road
Chippewa Falls, WI 54729
MENOMONIE AREA:
Downtown 1967* Owned
717 Main Street
Menomonie, WI 54751
North 1978* Owned
2409 Hils Ct. N.E
Menomonie, WI 54751
RICE LAKE: 1979* Owned
2850 Pioneer Avenue
Rice Lake, WI 54868
BARRON: 1995* Owned
1512 E. Division Ave. (Hwy. 8)
Barron, WI 54812
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION ACQUIRED OWNED EXPIRATION
- - -------- -------- ----- ----------
<S> <C> <C> <C>
BLOOMER: 1995* Owned
1203 17th Avenue
Bloomer, WI 54724
CORNELL: 1980* Leased month to month
422 Main Street
Cornell, WI 54732
ELLSWORTH: 1975* Owned
385 W. Main Street
Ellsworth, WI 54011
HAYWARD: 1984* Owned
10562 Kansas Avenue
Hayward, WI 54843
HUDSON: 1979* Owned
2000 Crestview Drive
Hudson, WI 54016
SPOONER: 1995* Owned
500 Front Street
Spooner, WI 54801
ST. CROIX FALLS: 1980* Owned
144 Washington Street N
St. Croix Falls, WI 54024
STANLEY: 1978* Owned
118 N. Broadway
Stanley, WI 54768
WOODBURY, MINNESOTA: 1995* Owned
8420 City Centre Drive
Woodbury, MN 55125
</TABLE>
- - ------------------
* - Date originally opened by an acquired institution
In addition, Mutual Savings owns two parcels of undeveloped land
through its MC Development subsidiary. The 15 acre Brown Deer parcel is
comprised of four lots consisting of 2.9 to 4.3 acres and was part of a larger
property that was acquired in 1988 to accommodate the construction of a new
corporate headquarters building. Each of the lots is available for sale and is
designed to accommodate 60,000 to 75,000 square foot office buildings. The net
book value of the four lots is $1,590,000. The 318 acre Oconomowoc parcel was
held by an acquired institution that obtained it through a foreclosure. It is
located in an area of the City of Oconomowoc that has seen considerable
residential development. All of the necessary utilities are available to the
property and it will be marketed for residential development in a manner that
will attempt to maximize its potential value. The parcel has a net book value of
$345,000.
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<PAGE> 101
LEGAL PROCEEDINGS
Mutual is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. We
believe that these routine legal proceedings, in the aggregate, are immaterial
to our financial condition and results of operations.
PERSONNEL
As of March 31, 2000, Mutual had 488 full-time employees and 107
part-time employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be good.
MANAGEMENT
MANAGEMENT STRUCTURE
Bank Mutual's directors and executive officers initially will be
persons who are now directors or executive officers of Mutual Savings or First
Northern Savings. We expect that Bank Mutual will continue to have directors and
executive officers who have similar positions with Mutual Savings or First
Northern Savings unless and until there is a business reason to establish
separate management structures.
Under Mutual Savings' current form of organization, it is governed by a
board of directors which is chosen by the depositors of Mutual. After the
restructuring, Mutual Savings will be governed by a board of directors elected
by Bank Mutual as its sole shareholder. In turn, the board of directors of Bank
Mutual will be chosen by its shareholders. Because the MHC will then own a
majority of the shares of Bank Mutual and because cumulative voting for
directors will not be permitted, the MHC will be in a position to elect all of
the directors of Bank Mutual. The directors of the MHC will be chosen by the
deposits of Mutual Savings. Initially, the board of directors of the MHC will be
the same as the board of directors of Bank Mutual.
COMPOSITION OF BOARDS OF DIRECTORS
Upon the restructuring, Bank Mutual will have a board of directors
consisting of not less than five nor more than 15 directors. Each will belong to
one of three classes which was staggered three-year term of office. The classes
will be as nearly as equal as possible. At each of Bank Mutual's annual meetings
of shareholders, shareholders will elect directors to fill the seats of the
directors whose terms expire in that year and any other vacant seats.
The seven current directors of Mutual Savings will be initial directors
of the MHC and Bank Mutual. Under the First Northern merger agreement, Mutual
has committed that four of the six directors of First Northern will be elected
to Bank Mutual and the MHC Board of Directors. Mutual intends to elect Michael
D. Meeuwsen, the CEO of First Northern, as one of these directors; the other
three have not yet been chosen but will be designated by Mutual prior to the
First Northern merger.
MUTUAL'S CURRENT DIRECTORS
The following table presents the following information: the names of
Mutual Savings' directors, all of whom will be initial directors of Bank Mutual
and the MHC; their ages on August 15, 2000; their position(s) with Mutual; the
years when they began serving as directors of Mutual Savings; and when their
terms of office as directors of Bank Mutual and the MHC will expire. All of
these persons will have begun service as Bank Mutual directors in 2000.
-98-
<PAGE> 102
<TABLE>
<CAPTION>
MUTUAL MUTUAL
SAVINGS FIRST
DIRECTOR TERM TO
NAME AGE POSITION(S) WITH MUTUAL SAVINGS SINCE EXPIRE
- - ---- --- ------------------------------- ----- ------
<S> <C> <C> <C> <C>
Michael T. Crowley, Sr. (1) 87 Chairman and Director 1960 2001
Michael T. Crowley, Jr. (1) 57 President, CEO and Director 1970 2002
Thomas H. Buestrin 64 Director 1995 2001
Raymond W. Dwyer, Jr. 77 Director 1957 2003
Herbert W. Isermann 83 Director 1982 2003
William J. Mielke 53 Director 1988 2002
David J. Rolfs 78 Director 1984 2002
</TABLE>
- - ------------------
(1) Mr. Crowley, Sr. is the father of Mr. Crowley, Jr.
Mutual expects that Michael D. Meeuwsen, First Northern's CEO, will be one
of the four First Northern director designees; his term will expire in 200_.
Mutual has not yet determined the other three designees.
OUR DIRECTORS' BACKGROUNDS
The business experience of each of Mutual Savings' directors is as follows:
MICHAEL T. CROWLEY, JR. is the president and chief executive officer of
Mutual Savings. He has served in those capacities since 1983 and 1985,
respectively. He also serves as a director of various Mutual Savings'
subsidiaries. Mr. Crowley, Jr. also is chairman and director of TYME
Corporation, an ATM network of which Mutual Savings is a member.
MICHAEL T. CROWLEY, SR. is chairman of the board and director of Mutual
Savings.
THOMAS H. BUESTRIN is a real estate investor, property manager and real
estate developer with the firm of Buestrin, Allen & Associates Ltd. Mr. Buestrin
is president of that firm.
RAYMOND W. DWYER, JR. is retired. Prior to his retirement, he was a
practicing architect with R.W. Dwyer Architects.
WILLIAM J. MIELKE is a civil engineer with the firm Ruekert & Mielke Inc.
Mr. Mielke is president and CEO of that firm.
HERBERT W. ISERMANN is retired. Prior to his retirement, he served as a
vice president of Winding Roofing Company, a roofing contracting firm.
DAVID J. ROLFS is retired. Prior to his retirement, he was employed as
president of ABCO Dealers Inc., in the health care industry.
-99-
<PAGE> 103
MICHAEL D. MEEUWSEN, age 46, is the president and chief executive
officer of First Northern and of First Northern Savings. Under the First
Northern merger agreement, Mr. Meeuwsen also will be elected as an additional
director of Mutual Savings upon the First Northern merger.
Unless we give prior experience, each of these individuals has held the
identified current position for at least five years.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Mutual Savings' board of directors currently meets on a monthly basis
and may hold additional special meetings. During 1999, Mutual Savings board held
12 regular meetings. Going forward, Bank Mutual expects that its, and the MHC's,
board will meet four times a year, with special meetings as needed.
The board of directors of Bank Mutual will maintain Executive, Audit
and Compensation Committees. The Executive Committee will exercise the powers of
the board between its meetings. The Audit Committee will review the annual audit
prepared by the independent accountants, recommend the appointment of
accountants and receive reports from the internal audit department. It will
consist solely of independent directors. The Compensation Committee will provide
advice and recommendations to the Board of Directors in the areas of employee
salaries and benefit programs. It also will consist of independent directors.
Committee membership has not yet been determined.
The Bank Mutual bylaws provide that the board of directors as a whole
will act as the Nominating Committee. As such, the board will consider
appropriate nominees for any vacancy on the Bank Mutual board of directors, and
shareholders should forward any nominations to the board.
DIRECTOR COMPENSATION
Meeting Fees. Mutual Savings pays an annual retainer fee to each of its
non-management directors. Each of the directors receives a fee for attendance at
each board meeting. Each non-management director receives a fee for attendance
at each meeting of a committee of which the director is a member. Under an
arrangement pre-dating the establishment of the current payment structure, Mr.
Dwyer receives a fee for directors' and Executive Committee meetings for each
month regardless of attendance.
The following table sets forth the retainer and meeting fees in effect for
both 2000 and 1999:
<TABLE>
<S> <C>
Annual Retainer: $10,000
Meeting Fees:
Board $1,000
Executive Committee $700
Audit Committee none
Advertising Committee $150
Finance Committee $150
</TABLE>
Deferred Compensation. Mutual Savings also maintains a deferred
compensation plan for each of its non-management directors. Directors who have
provided at least five years of service to Mutual Savings will be paid $1,000
per month for 10 years after their retirement from the Mutual Savings' board.
All of the existing directors' benefits have vested. In the event a director
dies prior to completion of these payments, payments will go to the director's
heirs. Mutual Savings has funded these arrangements through "rabbi trust"
arrangements, and based on actuarial analyses believes these obligations are
adequately funded.
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Bank Mutual. Going forward, the MHC and Bank Mutual will establish new
compensation packages for their directors. It is expected that the boards of
both entities will meet on the same day; there will not be duplicate payments
for board meetings held on the same day.
EXECUTIVE OFFICERS
The following table gives information about each of the executive
officers of Mutual Savings and the anticipated executive officers of Bank Mutual
and the MHC.
<TABLE>
<CAPTION>
AGE
AT POSITION WITH POSITION WITH POSITION WITH
NAME 8/15/00 MUTUAL SAVINGS BANK MUTUAL THE MHC
---- ------- -------------- ----------- -------
<S> <C> <C> <C> <C>
Michael T. Crowley, Jr. 57 President and Chief Executive Chairman and Chief President and
Officer Executive Officer Chief Executive
Officer
Michael D. Meeuwsen 46 -- President and Chief Executive Vice
Operating Officer President and
Chief Operating
Officer
Michael T. Crowley, Sr. 87 Chairman of the Board -- Chairman
Eugene H. Maurer, Jr. 54 Senior Vice President, Senior Vice Senior Vice
Secretary-Treasurer, and President and President,
Chief Financial Officer Secretary Secretary and
CFO
P. Terry Anderegg 50 Senior Vice President-Retail -- --
Banking
Christopher Callen 57 Senior Vice President- -- --
Lending
Rick B. Colberg 48 -- Chief Financial --
Officer
Marlene M. Scholz 55 Senior Vice President- Senior Vice Senior Vice
Controller President President
</TABLE>
The business experience of each of these executive officers is as follows.
Unless we give prior experience, each of these individuals has held the
identified current position for at least five years.
MICHAEL T. CROWLEY, JR. is the president and chief executive officer of
Mutual Savings. He has served in those capacities since 1983 and 1985,
respectively. He also serves as a director of various Mutual Savings'
subsidiaries. Mr. Crowley, Jr. also is chairman and director of TYME
Corporation, an ATM network of which Mutual Savings is a member.
MICHAEL D. MEEUWSEN is the president and chief executive officer of First
Northern and of First Northern Savings.
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<PAGE> 105
MICHAEL T. CROWLEY, SR. is chairman of the board and director of Mutual
Savings.
EUGENE H. MAURER, JR. is the Senior Vice President and Secretary-Treasurer
of Mutual Savings. In that capacity, he is the principal financial officer of
Mutual Savings. Mr. Maurer also services as an officer of several Mutual
Savings' subsidiaries.
P. TERRY ANDEREGG is the Senior Vice President-Retail Banking of Mutual
Savings.
CHRISTOPHER J. CALLEN is the Senior Vice President-Lending of Mutual
Savings. Prior to assuming that position in 1998, Mr. Callen was a banking
executive for Firstar Corporation for many years, and a self-employed consultant
of the banking industry from 1996 to 1998.
RICK B. COLBERG is the Chief Financial Officer of First Northern and First
Northern Savings.
MARLENE M. SCHOLZ is the Senior Vice President-Controller of Mutual
Savings. In that capacity, she is Mutual Savings' principal accounting officer.
Ms. Scholz also serves as an officer of several Mutual Savings' subsidiaries.
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table provides information about
the compensation paid for 1999 to Mutual Savings' chief executive officer and to
the four other most highly compensated executive officers whose total annual
salary and bonus for 1999 was at least $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
------------------------
ALL OTHER
NAME AND SALARY BONUS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3)
- - ------------------- ------ ------- ------- -------
<S> <C> <C> <C>
Michael T. Crowley, Jr. 1999 573,556 - 1,600
President and Chief Executive Officer 1998 573,556 16,485 1,600
1997 547,060 40,408 1,613
Michael T. Crowley, Sr. 1999 238,052 - 1,280
Chairman 1998 238,052 6,780 1,447
1997 227,052 6,192 1,978
Donald T. Tietz (4) 1999 198,040 - -
Senior Executive Vice President- 1998 207,040 - 25,206
Northwest Region 1997 195,616 - 38,841
Eugene H. Maurer, Jr. 1999 139,465 - 1,435
Senior Vice President, Secretary/ 1998 133,965 4,018 1,382
Treasurer and Chief Financial Officer 1997 128,765 6,235 1,327
P. Terry Anderegg 1999 139,265 - 1,433
Senior Vice President- Retail Banking 1998 133,765 4,012 1,362
1997 128,565 7,468 1,346
</TABLE>
- - ------------------
(1) Mutual Savings Bank provides its executive officers with certain
non-cash benefits and perquisites. Management of Mutual Savings
believes that the aggregate value of these benefits for 1999 did not,
in the case of any executive officer, exceed $50,000 or 10% of the
aggregate salary and annual bonus reported for him in the Summary
Compensation Table.
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<PAGE> 106
(2) Reflects payments earned during the year, and paid during the
subsequent year, under Mutual Savings' Management Incentive Plan, a
non-qualified performance based compensation plan.
(3) Includes the following components for 1999: employer contributions to
the Mutual Savings Bank Savings and Investment Plan, a qualified
retirement plan under section 401(k) of the IRS regulations, - Mr.
Crowley, Jr. $1,600; Mr. Crowley, Sr. $1,280; Mr. Maurer $1,435; and
Mr. Anderegg $1,433. Mr. Tietz' prior year's amounts represented
employer contributions to the First Federal Bank of Eau Claire, F.S.B.
Deferred Compensation Plan, a non-qualified deferred compensation plan.
(4) Mr. Tietz retired on March 31, 2000.
DEFINED BENEFIT RETIREMENT PLANS
Mutual Savings maintains a qualified defined benefit pension plan that
covers substantially all employees who are age 21 or over and who have at least
one year of service. Pension benefits are based on the participant's average
annual compensation (salary and bonus) and years of credited service. Years of
credited service in the qualified defined benefit pension plan begin at date of
participation in the plan. Benefits are determined in the form of a ten year
certain and life annuity.
Designated officers of Mutual Savings also participate in a
nonqualified defined benefit pension plan. This nonqualified plan provides
monthly supplemental benefits to participants which will be paid out of
unsecured corporate assets, or the rabbi trust established for this plan. The
amount of the nonqualified plan benefit in the form of a ten year certain and
life annuity is determined below:
- an amount calculated under Mutual Savings' qualified defined
benefit pension plan without regard to the limitations imposed by
the Internal Revenue Code on benefit or compensation amounts and
without regard to certain limitations on years of service; minus
- the pension benefit accrued in the qualified defined benefit
pension plan.
The following table shows the estimated annual benefits payable in ten
year certain and life annuity form for participants retiring on their normal
retirement date at age 65 with various combinations of years of service and
average annual compensation under the qualified defined benefit plan plus, for
those officers eligible to participate, the nonqualified plan. At March 31,
2000, accrued years of service for officers named in the summary compensation
table were: Mr. Crowley, Sr. - 66 years; Mr. Crowley, Jr. - 32 years; Mr. Maurer
- - - 18 years; and Mr. Anderegg - 6 years. Mr. Tietz had been covered by the prior
retirement plan of First Federal; accrued benefits under the Mutual Savings plan
were minimal.
<TABLE>
<CAPTION>
Final Years of Service(1)
Average ---------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 28,300 $ 37,700 $ 49,700 $ 61,600 $ 73,500 $ 83,600
150,000 44,000 58,600 77,000 95,400 113,800 128,900
200,000 59,600 79,500 104,400 129,300 154,200 174,300
250,000 75,300 100,400 131,800 163,100 194,500 219,600
300,000 91,000 121,300 159,200 197,000 234,800 265,000
350,000 106,700 142,200 186,500 230,800 275,100 310,300
400,000 122,300 163,100 213,900 264,700 315,500 355,700
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
Final Years of Service(1)
Average ---------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
450,000 138,000 184,000 241,300 298,500 355,800 401,000
500,000 153,700 204,900 268,700 332,400 396,100 446,400
550,000 169,400 225,800 296,000 366,200 436,400 491,700
600,000 185,000 246,700 323,400 400,100 476,800 537,100
650,000 200,700 267,600 350,800 433,900 517,100 582,400
700,000 216,400 288,500 378,200 467,800 557,400 627,800
750,000 232,100 309,400 405,500 501,600 597,700 673,100
</TABLE>
- - -----------------------------
(1) Years of service in the nonqualified defined benefit pension plan begin
at date of hire. As of December 31, 1999, Mr. Crowley, Sr. has more
than 66 years of service with Mutual Savings. The amount of his total
annual accrued benefit as of December 31, 1999 was approximately
$308,000.
EMPLOYMENT AGREEMENTS
Mutual Savings has employment agreements with Messrs. Crowley Sr. and
Jr. and intends to enter into employment agreements with its other executive
officers. The initial terms of the employment agreements will be three years.
For Messrs. Crowley, each year the agreement may be extended so that the
agreement remains for three years upon agreement of Mr. Crowley and by
affirmative action of Mutual Savings' board of directors. For the other
executives, the end of the initial three year term and on each anniversary date
thereafter, the employment term may be extended for an additional year upon
agreement of the executive and by affirmative action taken by Mutual Saving's
Board of Directors. Under the employment agreements, each executive officer will
be entitled to a base salary which is reviewed annually based upon individual
performance and Mutual Saving's financial results, as well as benefits and
perquisites, in accordance with Mutual Saving's policies.
The employment agreements can be terminated at the election of the
executive officer or Mutual Savings at the expiration of the term, at any time
for cause, upon the occurrence of certain events specified by federal statute or
regulation, or as a result of the executive officer's retirement, disability or
death. Each employment agreement can also be voluntarily terminated without
cause by the executive officer or Mutual Savings. Each executive officer may
also terminate his employment agreement under certain circumstances following a
change in control.
Upon termination of an executive's employment at their election at the
expiration of the term of the employment agreements, the executive is entitled
to receive unpaid compensation for the period of employment plus accrued but
unused vacation time. Upon termination of employment at the election of Mutual
Savings at the expiration of the terms, the executives are entitled to receive
the same compensation as if they had voluntarily terminated at the end of the
term as well as an amount equal to 100% of their annual base salary at the date
of termination and certain benefits for a period of twelve months thereafter.
Upon each executive's death or retirement at age 65, the executive or
the executive's personal representative will receive his earned but unpaid base
salary and incentive compensation prorated to the end of the calendar month in
which such termination occurs and compensation for accrued but unused vacation
time. If the executive officer terminates employment voluntarily or is
terminated by Mutual Savings for cause, the executive shall not be entitled to
any compensation or benefits for any period after the date of termination.
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<PAGE> 108
If during the term Mutual Savings terminates an executive officer
without cause or the employment agreement is terminated by the executive officer
for cause, the executive would be entitled to receive 100% of base salary at the
time of termination through the end of a severance period. If the termination
occurs within the initial three year term of employment, the severance period
will be through the end of the initial three year term of employment, but not
less than one year, and if the termination shall occur after the expiration of
the initial three year term, the severance period will be one year. In the case
of Messrs. Crowley, the period is extended to 12 months beyond the current term
of employment, but not more than 36 months. Also, the executive officer would
continue to receive certain insurance and other benefits until twelve months
after the end of the term of employment. Mutual Savings must also pay to each
executive officer an additional lump sum cash payment in an amount equal to the
product of Mutual Saving's annual aggregate contributions for the benefit of the
executive officer to all qualified retirement plans in the year preceding
termination and the number of years in the severance period.
Under each employment agreement, the executive officer may also
terminate employment following a change in control of Mutual Savings, as defined
in the employment agreements under certain circumstances, including a reduction
in compensation or responsibilities. Upon any such termination as a result of a
change in control, each executive officer has a right to receive payments and
benefits as if a termination by Mutual Savings without cause had occurred.
However, under no circumstances may the aggregate amount of all severance
payments and termination benefits, computed on a present value basis, exceed an
amount which would cause the payments to be characterized as parachute payments
within the meaning of Section 280G(b)(2) of the Internal Revenue Code. That
section generally defines parachute payments to include any severance payments
and termination benefits which, on a present value basis, equal or exceed three
times the executive officer's average annual total compensation over a five-year
period immediately preceding the change in control.
OTHER COMPENSATION AGREEMENTS
Crowley Sr. Deferred Compensation Agreement. Mutual Savings has had a
deferred compensation arrangement with Mr. Crowley, Sr. for over 20 years under
which Mutual Savings agreed to defer a portion of Mr. Crowley's compensation in
exchange for compensation payments at the later date. The exact provisions have
been modified from time to time, most recently in a 1998 agreement. To fund this
obligation, Mutual Savings purchased a life insurance policy on the life of Mr.
Crowley, Sr. The policy is now fully paid.
Upon Mr. Crowley, Sr.'s retirement, he will receive a life income in
monthly installments, with a minimum of 240 monthly installments. The monthly
installments will be equal to the amount that would be payable to Mutual Savings
under the life insurance policy if Mutual Savings were to exercise a settlement
option under the policy for monthly life income, with a 240 month period
certain, with payments commencing as of the date of Mr. Crowley's retirement. If
Mr. Crowley were to die before retirement or receipt of 240 certain monthly
payments, the amounts otherwise payable to him will be paid in equal shares to
his two children (including Mr. Crowley, Jr.) or to their survivors.
Under certain circumstances, Mutual Savings may elect to make a lump
sum or other type of payment to Mr. Crowley or his heirs. Those payments would
be based upon other forms of payment which may be available under the life
insurance policy.
BENEFIT PLANS
Employee Stock Ownership Plan. This plan is a tax-qualified plan that
covers substantially all salaried employees who have at least one year of
service and have attained age 21 and will take effect at the completion of the
restructuring.
Bank Mutual intends to lend this plan enough money to purchase 8% of
the Bank Mutual shares issued to persons other than the MHC. The plan may
purchase all or part of these shares from Bank Mutual to the extent that
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<PAGE> 109
shares are available after filling the subscriptions of eligible account
holders. Alternatively, the plan may purchase all or part of these shares in
private transactions or on the open market after completion of the restructuring
to the extent that shares are available for purchase on reasonable terms. We
have not determined whether that purchase would be made directly from Bank
Mutual in the offering, or after completion of the restructuring. We expect to
make that determination immediately before the expiration date for submitting
orders in the offering. For this reason, we cannot assure you that the employee
stock ownership plan will purchase shares in the offering after the
restructuring, or that such purchases will occur during any particular time
period or at any particular price.
Although contributions to this plan will be discretionary, Mutual
intends to contribute enough money each year to make the required principal and
interest payments on the loan from Bank Mutual. It is expected that this loan
will be for a term of ten years and will call for level annual payments of
principal. It is anticipated that payments will be made quarterly and will
include interest at the prime rate. The plan will initially pledge the shares it
purchases as collateral for the loan and hold them in a suspense account.
The plan will not distribute the pledged shares immediately. Instead,
it will release a portion of the pledged shares annually. Assuming we complete
the restructuring before September 30, 2000, if the plan repays its loan as
scheduled over a 10-year term, we expect that 5% of the shares will be released
in 2000, 10% of the shares will be released annually in 2001 through 2009, and
the remaining 5% of the shares will be released in 2010. The plan will allocate
the shares released each year among the accounts of participants in proportion
to their base salary for the year. For example, if a participant's base salary
for a year represents 1% of the total base salaries of all participants for the
year, the plan would allocate to that participant 1% of the shares released for
the year.
Participants will direct the voting of shares allocated to their
individual accounts. Shares in the suspense account will usually be voted in a
way that mirrors the votes which participants cast for shares in their
individual accounts.
This plan may purchase additional shares in the future, and may do so
using borrowed funds, cash dividends, periodic employer contributions or other
cash flow.
Restoration Plan. Mutual is also implementing a "restoration plan" to
compensate selected executive officers for any benefits under the ESOP and the
Mutual Savings Bank Savings and Investment Plan which they are unable to receive
because of limitations under the Internal Revenue Code (the "Code") on
contributions and benefits. The Code limits the salary deferrals that an
employee may contribute to the Savings Plan and also restricts the amount of
tax-qualified plan benefits that can be received by plan participants.
The restoration plan will permit eligible officers to defer
compensation which they are unable to contribute to the Savings Plan because of
the Internal Revenue Code limits. In addition, the restoration plan will provide
benefits for eligible officers based upon the allocations they would have
received in the ESOP and Savings Plan in the absence of the Code limitations.
Under the Code, only the first $170,000 of compensation may be considered in
determining benefits under tax-qualified plans (subject to annual cost-of-living
adjustments).
For example, under the ESOP, only the first $170,000 of earnings are
considered in determining ESOP benefits. Under the restoration plan, an
executive officer would receive an amount equal to the benefit that the officer
would have received under the ESOP in the absence of the compensation limit.
Therefore, if an executive officer had total compensation of $250,000, the
officer would receive an award equal to the average allocation percentage under
the ESOP for the $80,000 of compensation in excess of the Code limit.
Payments under the restoration plan would be made in cash. The are tax
deductible by the employer, but are included in the taxable compensation of the
officer receiving such a payment. The restoration plan would initially cover
Messrs. Crowley Sr. and Jr.
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<PAGE> 110
FUTURE STOCK BENEFIT PLANS
Stock Option Plan. Bank Mutual intends to implement a stock option plan
for Mutual's directors, officers and employees after the restructuring.
Applicable regulations prohibit us from implementing this plan until six months
after the restructuring. If we implement this plan within one year after the
restructuring, applicable regulations require that we first obtain the approval
of the holders of a majority of the outstanding shares of Bank Mutual that are
not owned by the MHC. We have not decided whether we will implement this plan
before or after the one-year anniversary of the restructuring.
We expect to adopt a stock option plan that will authorize the
Compensation Committee to grant options to purchase up to 10% of the shares
issued in the restructuring and the First Northern merger, over a period of 10
years. The Committee will decide which eligible participants will receive
options and what the terms of those options will be. However, no stock option
will permit its recipient to purchase shares at a price that is less than the
fair market value of a share on the date the option is granted, and no option
will have a term that is longer than 10 years.
If we implement a stock option plan before the first anniversary of the
restructuring, applicable regulations will require that we observe the following
restrictions:
- We must limit the total number of shares that are optioned to
outside directors to 30% of the shares authorized for the plan.
- We must also limit the number of options granted to any one
outside director to 5% of the shares authorized for the plan and
the number of shares that are optioned to any executive officer
to 25% of the shares that are authorized for the plan.
- We must not permit the options to become vested at a more rapid
rate than 20% per year beginning on the first anniversary of
shareholder approval of the plan.
- We must not permit accelerated vesting for any reason other than
death or disability.
After the first anniversary of the restructuring, we may amend the plan
to change or remove these restrictions. If we adopt a stock option plan within
one year after the restructuring, we expect to later amend the plan, subject to
shareholder approval, to remove these restrictions and to provide for
accelerated vesting in cases of retirement and change of control. We expect that
any other amendment to this plan, whether adopted before or after the first
anniversary of the plan's initial effective date will be subject to shareholder
approval if it would change the class of people eligible to receive benefits,
change the price they must pay for stock which they acquire under the plan, or
increase the number of shares available under the plan or increase the maximum
amount of stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases. Because we cannot issue new shares that
would reduce the MHC's ownership position to less than a majority of Bank
Mutual's outstanding shares, we expect to obtain most or all of the shares for
this plan through stock repurchases, in which case there would not be dilution
to then-existing shareholders.
We expect the stock option plan will permit the Committee to grant
either incentive stock options that qualify for special federal income tax
treatment or non-qualified stock options that do not qualify for special
treatment. Incentive stock options may be granted only to employees and will not
create federal income tax consequences when they are granted. If they are
exercised during employment or within three months after termination of
employment, the exercise will not create federal income tax consequences either.
When the shares acquired on exercise of an incentive stock option are resold,
the seller must pay federal income taxes on the amount by which the sales price
exceeds the purchase price. This amount will be taxed at capital gains rates if
the sale occurs at least two years after the option was granted and at least one
year after the option was exercised. Otherwise, it is taxed as ordinary income.
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<PAGE> 111
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock options.
Non-qualified stock options will not create federal income tax consequences when
they are granted. When they are exercised, federal income taxes must be paid on
the amount by which the fair market value of the shares acquired by exercising
the option exceeds the exercise price. When the shares acquired on exercise of
anon-qualified stock option are resold, the seller must pay federal income taxes
on the amount by which the sales price exceeds the purchase price plus the
amount included in ordinary income when the option was exercised. This amount
will be taxed at capital gains rates, which will vary depending upon the time
that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, Mutual may be allowed a
federal income tax deduction for the same amount that the option holder includes
in his or her ordinary income. When an incentive stock option is exercised,
there is no tax deduction unless the shares acquired are resold sooner than two
years after the option was granted or one year after the option was exercised.
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers after the restructuring.
Applicable regulations prohibit us from implementing this plan until six months
after the restructuring. If we implement this plan within one year after the
restructuring, the regulations require that we first obtain the approval of the
holders of a majority of the outstanding shares of Bank Mutual that are not held
by the MHC. We have not decided whether we will implement this plan before or
after the one-year anniversary of the restructuring. We expect to adopt a
management recognition plan that will authorize the Compensation Committee to
make restricted stock awards of up to 4% of the shares issued to investors other
than the MHC. The Compensation Committee will decide which directors and
officers will receive restricted stock and what the terms of those awards will
be. If we implement a management recognition plan before the first anniversary
of the restructuring, applicable regulations will require that we observe the
following restrictions:
- We must limit the total number of shares that are awarded to
outside directors to 30% of the shares authorized for the plan.
- We must also limit the number of shares that are awarded to any
one outside director to 5% of the shares authorized for the plan
and the number of shares that are awarded to any executive
officer to 25% of the shares that are authorized for the plan.
- We must not permit the awards to become vested at a more rapid
rate than 20% per year beginning on the first anniversary of
shareholder approval of the plan.
- We must not permit accelerated vesting for any reason other than
death or disability.
After the first anniversary of the restructuring, we may amend the plan
to change or remove these restrictions. If we adopt a management recognition
plan within one year after the restructuring, we expect to amend the plan later,
subject to shareholder approval, to remove these restrictions and to provide for
accelerated vesting in cases of retirement and change of control. We expect that
any other amendment to this plan, whether adopted before or after the first
anniversary of the plan's initial effective date, will be subject to shareholder
approval if it would change the class of people eligible to receive benefits,
change the price they must pay for stock which they acquire under the plan, or
increase the number of shares available under the plan or increase the maximum
amount of stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases. Because we cannot issue new shares that
would reduce the MHC's ownership position to less than a majority of Bank
Mutual's outstanding shares, we expect to obtain most or all of the shares for
this plan through stock repurchases, to minimize dilution. Restricted stock
awards under this plan may feature employment restrictions that
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<PAGE> 112
require continued employment for a period of time for the award to be vested.
They may feature restrictions that require the achievement of specified
corporate or individual performance goals for the award to be vested. Or, they
may feature a combination of employment and performance restrictions. Awards are
not vested unless the specified employment restrictions and performance goals
are met. However, pending vesting, the award recipient may have voting and
dividend rights. When an award becomes vested, the recipient must include the
current fair market value of the vested shares in his income for federal income
tax purposes. Bank Mutual and Mutual Savings may be allowed a federal income tax
deduction in the same amount. Depending on the nature of the restrictions
attached to the restricted stock award, Bank Mutual and Mutual Savings may have
to recognize a compensation expense for accounting purposes ratably over the
vesting period or in a single charge when the performance conditions are
satisfied.
LIMITATIONS ON FEDERAL TAX DEDUCTIONS FOR EXECUTIVE OFFICER COMPENSATION
As a private entity, Mutual Savings has been subject to federal tax
rules which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the restructuring, federal tax laws may limit this deduction
to $1 million each tax year for each executive officer named in the summary
compensation table in Bank Mutual's proxy statement for that year. This limit
will not apply to non-taxable compensation under various broad-based retirement
and fringe benefit plans, to compensation that is "qualified performance-based
compensation" under applicable law or to compensation that is paid in
satisfaction of commitments that arose before the restructuring. Bank Mutual and
Mutual Savings expect that the Compensation Committee will take this deduction
limitation into account with other relevant factors in establishing the
compensation levels of their executive officers and in setting the terms of
compensation programs. However, there is no assurance that all compensation paid
to our executive officers will be deductible for federal income tax purposes. To
the extent that compensation paid to any executive officer is not deductible,
the net after-tax cost of providing the compensation will be higher and the net
after-tax earnings of Bank Mutual and Mutual Savings will be reduced.
CERTAIN TRANSACTIONS WITH MEMBERS OF OUR BOARD OF DIRECTORS AND EXECUTIVE
OFFICERS
Mutual Savings has had, and expects to continue to have, regular
business dealings with its officers and directors, as well as their associates
in firms which they serve in various capacities. Consistent with applicable law,
Mutual's policy is that transactions with its directors and executive officers
be on terms that are no more beneficial to the director or executive officer
than Mutual Savings would provide to unaffiliated third parties. Directors and
executive officers, and their associates, regularly deposit funds with Mutual
Savings; the deposits are on terms and conditions offered to other depositors.
To help prevent any inadvertent violations of its policy, Mutual
Savings discourages lending transactions between Mutual Savings and its
insiders, but loans are occasionally made. Certain of the directors and
executive officers have been indebted to Mutual Savings for loans made in the
ordinary course of business. All such loans have been on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. These loans do not involve more
than the normal risk of collectability or present other unfavorable futures.
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<PAGE> 113
<PAGE> 114
THE BANK MUTUAL RESTRUCTURING
GENERAL
Mutual Savings' board of directors initially approved Mutual Savings'
plan of restructuring on February 21, 2000. The board adopted the plan
unanimously. The plan of restructuring subsequently has been amended, also with
unanimous board approval, and when we refer to the plan of restructuring, it
includes amendments. Under the plan, Mutual Savings will reorganize from a
Wisconsin-chartered mutual savings bank into a holding company structure in
which Mutual Savings' depositors will hold all of the voting and liquidation
rights in the MHC, which in turn will own a majority interest in Bank Mutual, a
mid-tier holding company. The remaining interest in Bank Mutual will be held by
public shareholders. Bank Mutual will wholly-own Mutual Savings, which will
convert from mutual form into a federally-chartered stock savings bank.
The plan of restructuring and the plan of stock issuance remain subject
to regulatory approval by the Office of Thrift Supervision. The plan of
restructuring also requires approval of the members of Mutual Savings. After we
receive all the required regulatory approvals and member approval, we will
complete the restructuring which we describe in this prospectus.
We anticipate that the offering will be completed contemporaneously
with or immediately following the restructuring. We also intend to complete the
First Northern merger contemporaneously with or immediately following the
restructuring. Mutual Savings does not anticipate that it will complete the
restructuring if the offering and the First Northern merger cannot be completed.
For purposes of this discussion, we use "Stock Bank" to refer to Mutual
Savings in the post-restructuring stock form. References to Mutual Savings
include Mutual Savings in its current mutual form or in its post-restructuring
stock form, as indicated by the context.
DESCRIPTION OF THE RESTRUCTURING
Following receipt of all required regulatory approvals and approval of
the plan of restructuring by the members, the restructuring will be effected in
a manner approved by the OTS that is consistent with the purposes of the plan of
restructuring and applicable law.
Immediately prior to these transactions, Mutual Savings will have
converted to a federally-chartered mutual savings bank. Thereafter, a
newly-formed, federally-chartered, stock savings bank will merge with and into
Mutual Savings. The resulting Stock Bank will be a continuation of Mutual
Savings. All of Mutual Savings' right, title and interest in and to all property
will, by operation of law, immediately vest in the stock bank, without the
necessity of any conveyance or transfer and without any further act. The Stock
Bank will have, hold, and enjoy the same in its right and fully and to the same
extent as the same was possessed, held, and enjoyed by Mutual Savings, although
in the merger all stock of the MHC held by Mutual Savings will be cancelled. The
Stock Bank will continue to have, succeed to, and be responsible for all the
rights, liabilities, and obligations of Mutual Savings and will maintain its
headquarters operations at Mutual Savings's present location.
The MHC and Bank Mutual will not retain any assets of Mutual Savings
that are required by the Stock Bank in order to satisfy capital and reserve
requirements of federal law. All assets, rights, obligations and liabilities of
whatever nature of Mutual Savings that are not expressly retained by the MHC or
Bank Mutual shall be deemed transferred to the Stock Bank. Mutual Savings will
apply to the OTS to allocate up to $100,000 in capital at the MHC level in
connection with the restructuring. In addition, Mutual Savings will contribute
approximately $40.0 million to the initial capital of Bank Mutual, assuming the
midpoint of the offering range. This contributed capital, together with a
substantial part of the proceeds of the offering and funds from First Northern,
will be used to pay a portion of the consideration to First Northern
shareholders in the First Northern merger. Bank Mutual may distribute additional
capital to the MHC following the restructuring, subject to OTS regulations
governing capital distributions. Mutual Savings and First Northern Savings are
expected to pay dividends to Bank Mutual following the restructuring, in
accordance with the OTS regulations.
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EFFECTS OF THE RESTRUCTURING
GENERAL. The Stock Bank will be authorized to exercise any and all
powers, rights and privileges of, and shall be subject to all limitations
applicable to, stock savings banks chartered under federal law. The initial
board of directors of the Stock Bank will be comprised of the existing directors
of Mutual Savings, plus Michael Meeuwsen, the chief executive officer of First
Northern. Thereafter, Bank Mutual, as the holder of shares of the Stock Bank's
voting stock will elect the Stock Bank's board of directors. It is expected that
present management of Mutual Savings will continue as the management of the
Stock Bank following the restructuring.
The restructuring will not affect Mutual Savings's present business of
accepting deposits and investing its funds in loans and other investments
permitted by law, except that all those functions will be assumed by the Stock
Bank. The restructuring will not result in any change in the existing services
provided to depositors and borrowers, or in its existing offices, management and
staff. The Stock Bank will be subject to regulation, supervision and examination
by the OTS and the FDIC.
DEPOSITS AND LOANS. The Stock Bank will be owned by Bank Mutual.
However, upon the effective date of the restructuring, the voting, ownership and
liquidation rights of members of Mutual Savings will become the rights of
members of the MHC, subject to the conditions specified below. Members of Mutual
Savings at the effective date will automatically become the members of the MHC.
Each deposit account in Mutual Savings at the effective date will become a
deposit account in the Stock Bank in the same amount and upon the same terms and
conditions, except that the holder of each such deposit account will have
ownership and membership rights with respect to the MHC rather than the Stock
Bank for so long as such holder maintains a deposit account with the Stock Bank.
All insured deposit accounts of Mutual Savings that are transferred to the Stock
Bank will continue to be federally insured up to the legal maximum by the FDIC
in the same manner as deposit accounts existing in Mutual Savings immediately
prior to the restructuring. Any new deposit accounts established with the Stock
Bank after the restructuring will create membership and liquidation rights in
the MHC and will be federally insured up to the legal maximum by the FDIC. First
Northern depositors will not be members of the MHC.
All loans and other borrowings from Mutual Savings shall retain the
same status with the Stock Bank after the restructuring as they had with Mutual
Savings immediately prior to the restructuring. Borrowers are not members of
Mutual Savings and, accordingly, will not have membership rights in the MHC.
VOTING RIGHTS. As a Wisconsin-chartered mutual savings bank, Mutual
Savings has no authority to issue capital stock and, thus, no shareholders.
Control of Mutual Savings in its mutual form is vested in the board of
directors. After the restructuring, the members of the board of directors of
Mutual Savings, together with four First Northern directors, will become the
directors of MHC and Bank Mutual. They will be elected in three-year staggered
terms. The affairs of the Stock Bank will be directed by its board of directors,
and all voting rights as to the Stock Bank will be vested exclusively in Bank
Mutual, the holder of its outstanding voting stock.
Following the restructuring, Bank Mutual will have the power to issue
shares of common stock to persons other than the MHC. But so long as the MHC is
in existence, the MHC will be required to own at least a majority of the voting
stock of Bank Mutual. By virtue of its majority ownership interest in Bank
Mutual, and Bank Mutual's ownership of the Stock Bank, the MHC generally will be
able to elect all directors of Bank Mutual and generally will be able to control
the outcome of most matters presented to the shareholders of Mutual Savings and
Bank Mutual for resolution by vote, excluding certain matters related to stock
compensation plans and certain votes regarding a conversion to stock form by the
MHC. The Stock Bank and Bank Mutual may issue any amount of non-voting stock to
persons other than the MHC.
As a federally chartered mutual holding company, the MHC will have no
authorized capital stock and, thus, no shareholders. The MHC will be controlled
by members (that is, the depositors) of Stock Bank, and most members have
granted proxies in favor of Mutual's management. According to regulations of the
OTS, the
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revocable proxies that members of Mutual Savings have granted to the board of
directors of Mutual Savings, which confer on the board of directors of Mutual
Savings general authority to cast a member's vote on any and all matters
presented to the members, shall be deemed to cover the member's votes as a
member of the MHC, and such authority shall be conferred on the board of
directors of the MHC. The plan of restructuring also provides for the transfer
of proxy rights to the board of directors of the MHC. Accordingly, the board of
the MHC will, in effect, be able to govern the operations of the MHC, and hence
Mutual Savings, notwithstanding objections raised by members of the MHC, so long
as the board of directors has been appointed proxy for a majority of the
outstanding votes of members of the MHC, and such proxies have not been revoked.
In addition, all persons who become depositors of the Stock Bank following the
restructuring will have membership rights with respect to the MHC. Borrowers are
not members of Mutual Savings and, thus, will not receive membership rights in
the MHC.
LIQUIDATION RIGHTS. In the event of a voluntary liquidation of Mutual
Savings prior to the restructuring, holders of deposit accounts in Mutual
Savings would be entitled to distribution of any assets of Mutual Savings
remaining after the claims of such depositors, to the extent of their deposit
balances, and all other creditors are satisfied. Following the restructuring,
the holders of the common stock, including the MHC, would be entitled to any
assets remaining upon a liquidation, dissolution or winding-up of Mutual Savings
and, except through their liquidation interests in the MHC, discussed below,
holders of deposit accounts in Mutual Savings would have no interest in any such
assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up of the MHC following consummation of the restructuring, holders of
deposit accounts in Mutual Savings would be entitled, pro rata to the value of
their accounts, to distribution of any assets of the MHC remaining after the
claims of all creditors of the MHC are satisfied. Shareholders of Bank Mutual
will have no liquidation or other rights with respect to the MHC in their
capacities as such.
There currently are no plans to liquidate the Stock Bank or the MHC in
the future. Federal law and regulations require that any mutual savings bank
which converts to a stock savings bank set aside a "liquidation account"
representing its net worth as of the time of conversion. While former members of
the mutual savings bank would have a right under some circumstances to
participate in a distribution of this account upon a liquidation of the savings
bank, the possibility of such a liquidation ever occurring is extremely remote.
SUBSCRIPTION AND PREEMPTIVE RIGHTS. Under OTS regulations, depositors
of Mutual Savings are entitled to priority subscription rights to purchase
shares of capital stock of the MHC in the event that the MHC converts from
mutual to stock form subsequent to the restructuring. Holders of the capital
stock of Bank Mutual shall not be entitled to preemptive rights with respect to
any shares of Bank Mutual that may be issued.
If, at some point in the future, the MHC converted to stock ownership,
Mutual Savings' depositors will continue to have specified rights to purchase
shares of the resulting entity. The plan of restructuring provides that
outstanding shares of Bank Mutual would be converted into shares of a surviving
entity in manner which would reflect the proportionate interest of the public
shareholders in Bank Mutual as compared to MHC's interest. Mutual Savings'
depositors on the January 31, 1999 eligibility record date with the same account
number and account title at a future eligibility date would have first priority
in any full conversion subscription offering to Mutual Savings' depositors, with
other depositors on a specified future eligibility date having the next
priority. Any future full conversion would be subject to government rules and
regulations as then in effect, and we cannot assure that full conversion would
occur.
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POSSIBLE CONVERSION OF THE MHC TO STOCK FORM
It is possible that at some point in the future, Mutual would make a
"full conversion" from the mutual to the stock form of organization. The plan of
restructuring pursuant to which Mutual Savings is effecting the current
restructuring includes provisions which would govern treatment of various
constituencies' interest in such a full conversion.
The plan of restructuring includes provisions intended to protect Bank
Mutual shareholders. In general, the provisions provide that Bank Mutual
shareholders would generally receive, in any subsequent full conversion, the
percentage of ownership in a successor entity as they would hold in Bank Mutual
just prior to that conversion.
Under current OTS regulations, in the event of a full conversion,
depositors would have a first right to purchase any shares offered for sale by a
successor entity. The process for the offer and sale of any such shares would be
similar to the offering contemplated by the plan of restructuring, although
eligibility dates and purchase amounts, among other things, could differ. In
addition, the plan of restructuring provides that, in a full conversion, a first
priority for eligible account holders on January 31, 1999 with the same account
number and account title at the future eligibility date will be granted. These
account holders would have a right, before that of other depositors, to purchase
shares of any successor entity.
Bank Mutual cannot assure that there will be any subsequent full
conversion or when one might occur. Also, any full conversion will be subject to
OTS or other governmental regulations as then in effect. Those regulations may
affect the treatment of Mutual Savings' depositors and Bank Mutual shareholders
in any full conversion. We also expect that such a conversion would require the
approval of the MHC's members.
BUSINESS OF FIRST NORTHERN
First Northern Capital Corp. is a unitary savings and loan holding
company that was incorporated in Wisconsin in 1995 for the purpose of owning all
the outstanding stock of First Northern Savings Bank, S.A., a Wisconsin
chartered capital stock savings and loan association, which reorganized into the
holding company structure effective December 20, 1995. First Northern is based
in Green Bay, Wisconsin and conducts its business from 19 offices located in a
contiguous, eight-county (Brown, Marinette, Manitowoc, Door, Shawano, Outagamie,
Waupaca, and Calumet) area in northeastern Wisconsin.
First Northern Savings is the only direct subsidiary of First Northern
and is operations are the primary contributor to First Northern's earnings and
expenses. First Northern Savings' business consists primarily of attracting
deposits from the general public and originating loans throughout its
Northeastern Wisconsin branch network. Traditionally, First Northern Savings has
concentrated on originations of adjusted and fixed rate one-to-four family
mortgage loans and consumer loans, as well as five or more family residential,
commercial real estate, and short-term construction mortgage loans. Adjustable
interest rate mortgage loans are originated for First Northern's portfolio,
while 30 year fixed interest rate mortgage loans and primarily originated for
sale in the secondary mortgage markets. Fixed rate mortgage loans with terms of
15 and 20 years are retained in First Northern's mortgage loan portfolio. At
December 31, 1999, approximately 75% of First Northern's mortgage loan portfolio
was comprised of adjustable rate loans.
First Northern began a commercial banking division in 1999, which
originates commercial loans and commercial real estate loans. As of December 31,
1999, this division had originated commercial loans of $5.0 million and
commercial real estate loans of $14.4 million, which are reported in mortgage
loan originations.
First Northern lends primarily in its eight county market area. At
December 31, 1999, approximately 99.2% of the total dollar amount of First
Northern's mortgage loans outstanding were on properties located in
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Wisconsin with the other 0.8% representing properties located primarily in other
midwestern states. First Northern's loan portfolio of $759.2 million before
deductions at December 31, 1999 was 90.4% by dollar volume of its total assets.
As of that date, approximately 63.4% by dollar volume of the loan portfolio
consisted of conventional first mortgage loans secured by one-to-four family
residences, with an additional 25.7% by dollar volume in consumer loans, 6.6% by
dollar volume in multi-family (more than four) residential properties, 3.2% by
dollar volume in commercial real estate properties, 0.6% by dollar volume in
commercial loans, and 0.5% by dollar volume in other properties.
First Northern Savings also has two active wholly owned subsidiaries
and one 50% owned subsidiary, as well as two inactive wholly owned subsidiaries.
Great Northern Financial Services Corporation, a wholly owned active subsidiary
of First Northern Savings, offers full brokerage services to the public,
including sales of tax deferred annuities and mutual funds, and sells credit
life and disability insurance. Another wholly owned active subsidiary, First
Northern Investments, Inc., manages a majority of First Northern Savings'
investments and purchases automobile loans from Savings Financial Corporation
and mortgage loans from First Northern Savings. SFC, the 50% owned subsidiary of
the Savings Bank originates, services, and sells automobile loans to First
Northern Investments, Inc., First Northern Savings, and its other parent
corporation.
This proxy statement/prospectus incorporates information about First
Northern by reference. This means that that information is considered to be
included in this document even though it is not actually included. The First
Northern information which is incorporated by reference in this proxy
statement/prospectus includes First Northern's historical financial information,
management's discussion and analysis, and other important information. For
further information about information which is incorporated by reference, and
how you can obtain copies, see "Other Information Which you Can Obtain."
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REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of Mutual Savings, before and after the
restructuring, and Bank Mutual, the MHC and First Northern Savings thereafter.
The description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
GENERAL
Mutual Savings is a Wisconsin chartered mutual savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation under the Savings Association Insurance Fund. Mutual
Savings currently is subject to extensive regulation, examination and
supervision by the Division of Savings Institutions of the Wisconsin Department
of Financial Institutions (the "Division") as its chartering agency, and by the
FDIC as the deposit insurer. Mutual Savings must file reports with the Division
and the FDIC concerning its activities and financial condition, and it must
obtain regulatory approval prior to entering into certain transactions, such as
mergers with, or acquisitions of, other depository institutions and opening or
acquiring branch offices.
The Division and the FDIC currently conduct periodic examinations to
assess Mutual Savings' compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of
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activities in which a savings bank can engage and is intended primarily for the
protection of the deposit insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Following the restructuring, in which Mutual Savings and First Northern
Savings will convert to federally-chartered stock savings banks, and the Office
of Thrift Supervision (OTS) will become the primary regulator of both banks. The
FDIC will remain responsible for supervisory and enforcement activities and
examination policies with respect to the deposit insurance fund. Following the
restructuring, the Division will no longer be responsible for regulation or
supervision of Mutual Savings or First Northern Savings.
Upon completion of the restructuring, the MHC will become a federal
mutual holding company within the meaning of Section 10(o) of the Home Owners'
Loan Act. As such, the MHC will be required to register with and be subject to
OTS examination and supervision as well as certain reporting requirements.
Following the restructuring, Bank Mutual, as a federal stock corporation in a
mutual holding company structure, will be deemed a federal stock holding company
within the meaning of Section 10(o) of the Home Owners' Loan Act. Bank Mutual
will be required to register and file reports with the OTS and will be subject
to regulation and examination by the OTS. Bank Mutual will be required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the OTS, the FDIC,
the SEC, or through legislation, could have a material adverse impact on Mutual
Savings, Bank Mutual, and the MHC and their operations and shareholders.
Certain of the laws and regulations applicable to Mutual Savings, Bank
Mutual, the MHC and First Northern Savings are summarized below or elsewhere in
this prospectus. These summaries do not purport to be complete and are qualified
in their entirety by reference to such laws and regulations.
MUTUAL SAVINGS
STATE REGULATION PRIOR TO RESTRUCTURING
Activity Powers. Mutual Savings derives its lending, investment and
other activity powers primarily from the applicable provisions of Chapter 214 of
the Wisconsin Statutes and its related regulations. Under these laws and
regulations, savings banks, including Mutual Savings, generally may invest in:
- real estate mortgages;
- consumer and commercial loans;
- specific types of debt securities, including certain corporate
debt securities and obligations of federal, state and local
governments and agencies;
- certain types of corporate equity securities; and
- certain other assets.
A savings bank may also exercise trust powers upon approval of the Division.
Wisconsin savings banks may also exercise any power or offer any financially
related product or service that any other provider of financial products or
services may undertake in Wisconsin, unless the Division determines otherwise.
The exercise of these lending, investment and activity powers are limited by
federal law and the related regulations. See " - Federal Regulation Prior to
Restructuring - Activity Restrictions on State-chartered Banks" below.
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Loans-to-One-Borrower Limitations. With certain specified exceptions, a
Wisconsin chartered savings bank may not make loans or extend credit to a single
borrower and to entities related to the borrower in an aggregate amount that
would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of Wisconsin laws and regulations. Mutual Savings currently
complies with applicable loans-to-one borrower limitations.
Minimum Capital Requirements. Under regulations of the Division,
Wisconsin savings banks must at all times maintain a net worth ratio in an
amount not less than 6.0%. For purposes of the regulation, the term "net worth
ratio" means the ratio, expressed as a percentage, the numerator of which is the
result of subtracting the savings bank's liabilities from its assets and adding
to that number unallocated, general loan loss reserves, but not loss reserves
for specific, identified losses, and the denominator of which is the savings
bank's assets. As of March 31, 2000, Mutual Savings' net worth ratio was 9.81%.
Examination and Enforcement. The Division may examine Mutual Savings
whenever it deems an examination advisable. The Division examines Mutual Savings
at least every 18 months. The Division may remove from a savings bank any
employee, agent or person affiliated with the savings bank if the Division finds
that the person has directly or indirectly violated any state or federal law,
regulation, rule or order regarding the operations of the savings bank or has
breached fiduciary or professional responsibilities to the savings bank.
MUTUAL SAVINGS
FEDERAL REGULATION PRIOR TO RESTRUCTURING
Capital Requirements. FDIC regulations require savings banks, such as
Mutual Savings, to maintain minimum levels of capital. The FDIC regulations
define two tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common shareholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock, any
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets (other than qualifying servicing rights), and any net
unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a rating of
1 (the highest examination rating of the FDIC for savings banks) under the
Uniform Financial Institutions Rating System, and that are not experiencing or
anticipating significant growth, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other savings banks, the minimum leverage
capital requirement is 4.0%, unless a higher leverage capital ratio is warranted
by the particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk- weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
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The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the o overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies have also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion of
the critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
On March 31, 2000 Mutual Savings exceeded the minimum capital adequacy
requirements; see "Capitalization."
Activity Restrictions on State-chartered Banks. Section 24 of the
Federal Deposit Insurance Act, as amended (FDIA), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits
the activities and investments of state-chartered FDIC insured banks and their
subsidiaries to those permissible for federally chartered national banks and
their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Regulations promulgated by the FDIC under Section 24 allow
state-chartered savings banks to engage in certain activities upon notice to the
FDIC, if such activities are conducted in a majority-owned subsidiary and meet
certain other regulatory conditions. Pursuant to these regulations, Mutual
Savings currently owns, through a subsidiary, four lots adjacent to its
headquarters in Brown Deer, Wisconsin and 318 acres of undeveloped land in
Oconomowoc, Wisconsin.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
state savings banks, including Mutual Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state savings bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
- insolvency, whereby the assets of the bank are less than its
liabilities to depositors and others;
- substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- likelihood that the bank will be unable to meet the demands of
its depositors or to pay its obligations in the normal course of
business; and
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- insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital
without federal assistance.
Deposit Insurance. The deposit accounts held by Mutual Savings are
insured by the SAIF to a maximum of $100,000 as permitted by law. Insurance on
deposits may be terminated by the FDIC if it finds the Mutual Savings has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the OTS as Mutual Savings' primary
regulator.
Pursuant to FDICIA, the FDIC established a system for setting deposit
insurance premiums based upon the risks a particular bank or savings association
posed to its deposit insurance funds. Under the risk-based deposit insurance
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending six months before the assessment period. The three capital
categories are (i) well capitalized, (ii) adequately capitalized and (iii)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Mutual Savings.
Under the FDIA, the FDIC may terminate the insurance of an
institution's deposits upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of Mutual Savings does not know of
any practice, condition, or violation that might lead to termination of its
deposit insurance.
Transactions with Affiliates. Transactions between an insured state
savings bank, such as Mutual Savings, and any of its affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution is not treated as an affiliate of the bank for the purposes of
Sections 23A and 23B; however, the Federal Reserve Board has proposed treating
any subsidiary of a bank that is engaged in activities not permissible for bank
holding companies under the Bank Holding Company Act of 1956 ("BHCA"), as an
affiliate for purposes of Section 23A and 23B. Sections 23A and 23B limit the
extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital stock and surplus, and limit all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus. The statutory
sections also require that all such transactions be on terms that are consistent
with safe and sound banking practices. The term "covered transaction" includes
the making of loans, purchase of assets, issuance of guarantees and other
similar types of transactions. Further, most loans by a bank to any of its
affiliates must be secured by collateral in amounts ranging from 100 to 130
percent of the loan amounts.
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In addition, any covered transaction by a bank with an affiliate and any
purchase of assets or services by a bank from an affiliate must be on terms that
are substantially the same, or at least as favorable, to the bank as those that
would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
- for loans secured by raw land, the supervisory loan-to-value
limit is 65% of the value of the collateral;
- for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of
structures), the supervisory limit is 75%;
- for loans for the construction of commercial, multi-family or
other non-residential property, the supervisory limit is 80%;
- for loans for the construction of one- to four-family properties,
the supervisory limit is 85%; and
- for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing
property, including non-owner occupied, one- to four-family
property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the Community Reinvestment Act (CRA),
any insured depository institution, including Mutual Savings, has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the FDIC, in
connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in
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its evaluation of certain applications by such institution, including
applications for additional branches and acquisitions.
Among other things, current CRA regulations replace the prior
process-based assessment factors with a new evaluation system that would rate an
institution based on its actual performance in meeting community needs. In
particular, the new evaluation system focuses on three tests:
- a lending test, to evaluate the institution's record of making
loans in its service areas;
- an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing,
and programs benefitting low or moderate income individuals and
businesses; and
- a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Mutual Savings
received a "satisfactory" overall rating in its most recent CRA examination.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder.
In addition, the FDIC adopted regulations to require a bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the FDIC. If, after being so
notified, a bank fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDICIA. If a bank fails to comply with such an
order, the FDIC may seek to enforce such an order in judicial proceedings and to
impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
define the five capital categories as follows: Generally, an institution will be
treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a
well-capitalized institution. An institution that has total risk-based capital
of less than 8%, Tier 1 risk-based-capital of less than 4% or a leverage ratio
that is less than 4% (or less than 3% if the institution is
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rated a composite "1" under the Uniform Financial Institutions Rating System)
would be considered to be "undercapitalized." An institution that has total
risk-based capital of less than 6%, Tier 1 capital of less than 3% or a leverage
ratio that is less than 3% would be considered to be "significantly
undercapitalized," and an institution that has a tangible capital to assets
ratio equal to or less than 2% would be deemed to be "critically
undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
- an amount equal to five percent of the bank's total assets at the
time it became "undercapitalized"; and
- the amount that is necessary (or would have been necessary) to
bring the bank into compliance with all capital standards
applicable with respect to such bank as of the time it fails to
comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
FDICIA, the FDIC is required to appoint a receiver or a conservator for a
critically undercapitalized bank within 90 days after the bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first became critically undercapitalized, a
receiver must be appointed, unless the FDIC makes certain findings that the bank
is viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an insider) and any of
certain entities affiliated with any such person (an insider's related interest)
are subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and
the insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to Mutual Savings' loans. See "-- Loans-to-One Borrower
Limitations." All loans by a bank to all insiders and insiders' related
interests in the aggregate may not exceed the bank's unimpaired capital and
unimpaired surplus. With certain exceptions, loans to an executive officer,
other than loans for the education of the officer's children and certain loans
secured by the officer's residence, may not exceed the lesser of $100,000 or the
greater of $25,000 or 2.5% of the bank's capital and unimpaired surplus.
Regulation O also requires that any proposed loan to an insider or a related
interest of that insider be approved in advance by a majority of the board of
directors of the bank, with any interested director not participating in the
voting, if such loan, when aggregated with any existing loans to that insider
and the insider's related interests, would exceed either $500,000 or the greater
of $25,000 or 5% of the bank's unimpaired capital and surplus. Generally, such
loans must be made on substantially the same terms as, and follow credit
underwriting procedures that are not less stringent than, those that are
prevailing at the time for comparable transactions with other persons.
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An exception is made for extensions of credit made pursuant to a
benefit or compensation plan of a bank that is widely available to employees of
the bank and that does not give any preference to insiders of the bank over
other employees of the bank.
MUTUAL SAVINGS AND FIRST NORTHERN SAVINGS
FEDERAL REGULATION FOLLOWING RESTRUCTURING
General. As federally chartered, SAIF-insured savings banks, Mutual
Savings and First Northern Savings (together, the "Banks") will be subject to
extensive regulation by the OTS and the FDIC. Lending activities and other
investments must comply with federal statutory and regulatory requirements. This
federal regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the SAIF of the FDIC and depositors. This regulatory structure
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves.
The OTS will regularly examine the Banks and prepare a report on its
examination findings to their boards of directors. The Banks' relationship with
its depositors and borrowers will also be regulated by federal law, especially
in such matters as the ownership of savings accounts and the form and content of
the Banks' mortgage documents.
The Banks will have to file reports with the OTS and the FDIC
concerning its activities and financial condition, and will have to obtain
regulatory approvals prior to entering into transactions such as mergers with or
acquisitions of other financial institutions. Any change in such regulations,
whether by the OTS, the FDIC or the United States Congress, could have a
material adverse impact on the Banks and their operations.
Regulation of the Banks following the restructuring will be comparable
in many respects to the regulation of Mutual Savings prior to the restructuring
described above with several key differences. Because of their conversion to a
federal savings bank charter, the Banks will no longer be subject to the
regulation or supervision of the Division. In addition, because of this charter
conversion, the OTS will become their primary federal regulator. Set forth below
are several material differences in the federal regulation and supervision of
the Banks after the restructuring as compared to its regulation before the
restructuring as described above.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards. The standards are tangible
capital equal to 1.5% of adjusted total assets, core capital equal to at least
3% of total adjusted assets, and risk-based capital equal to 8% of total
risk-weighted assets. Mutual Savings' pro forma capital ratios are set forth
under "Regulatory Capital Compliance."
Tangible capital is defined as core capital less all intangible assets
and mortgage servicing rights. Core capital is defined as common shareholders'
equity, noncumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, nonwithdrawable accounts and
pledged deposits of mutual savings associations and qualifying supervisory
goodwill, less nonqualifying intangible assets and mortgage servicing rights.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includible in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall,
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supplementary capital is limited to 100% of core capital. A savings association
must calculate its risk-weighted assets by multiplying each asset and
off-balance sheet item by various risk factors as determined by the OTS, which
range from 0% for cash to 100% for delinquent loans, property acquired through
foreclosure, commercial loans, and other assets.
OTS rules require a deduction from capital for institutions which have
unacceptable levels of interest rate risk. The OTS calculates the sensitivity of
an institution's net portfolio value based on data submitted by the institution
in a schedule to its quarterly Thrift Financial Report and using the interest
rate risk measurement model adopted by the OTS. The amount of the interest rate
risk component, if any, is deducted from an institution's total capital in order
to determine if it meets its risk-based capital requirement. Federal savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are exempt from filing the interest rate risk schedule. However,
the OTS may require any exempt institution to file such schedule on a quarterly
basis and may be subject to an additional capital requirement based on its level
of interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including dividend payments.
The OTS rules regarding capital distributions, which were substantially
updated effective April 1, 1999, define the term "capital distribution" as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. The definition specifically excludes dividends
consisting only of a savings association's shares or rights to purchase shares,
and payments that a mutual savings association is required to make under the
terms of a deposit instrument.
Under the revised OTS rules, capital distributions also include a
savings association's payment to repurchase, redeem, retire, or otherwise
acquire any of its shares or other ownership interests, any payment to
repurchase, redeem or otherwise acquire debt instruments included in its total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. Additionally, a capital distribution includes any
direct or indirect payment of cash or other property to owners or affiliates
made in connection with a corporate restructuring. The revised rule also defines
as a capital distribution any transaction the OTS or the FDIC determines, by
order or regulation, to be in substance a distribution of capital.
A final category of capital distribution under the revised OTS rules is
any other distribution charged against a savings association's capital accounts
if the savings association would not be well capitalized following the
distribution. As such, the revised capital distribution rules of the OTS do not
apply to capital distributions by wholly-owned operating subsidiaries of savings
associations. This is true because generally, for reporting purposes, the
accounts of a wholly-owned subsidiary are consolidated with those of the parent
savings association and any distributions by such subsidiary would not affect
the capital levels of the parent savings association.
For regulatory capital purposes, where the consolidated subsidiary is
not wholly owned, the balance sheet account "minority interests in the equity
accounts of subsidiaries that are fully consolidated" may be included in Tier 1
capital and total capital if certain conditions are met. Distributions by such
consolidated subsidiaries to shareholders other than the savings association
reduce the cited balance sheet account and, therefore, reduce capital.
Consequently, distributions by subsidiaries that are not wholly owned by the
savings association are subject to the revised OTS capital distribution rules if
the savings association will not be well capitalized following the distribution.
The revised OTS rule requires all savings associations to file a notice
or an application for approval before making a capital distribution. A savings
association must file an application if the association is not eligible for
expedited treatment under the application processing rules of the OTS or the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the
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savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years.
A savings association must file only a notice whenever an application
is not required under the above standards and any of the following criteria are
satisfied:
- the savings association will not be at least adequately
capitalized following the capital distribution;
- the capital distribution would reduce the amount of, or retire
any part of the savings association's common or preferred stock,
or retire any part of debt instruments such as notes or
debentures included in the savings association's capital;
- the proposed distribution would violate a prohibition contained
in any applicable statute, regulation, or agreement between the
savings association and the OTS, or the FDIC, or a condition
imposed on the savings association in an OTS-approved application
or notice; or
- the savings association is a subsidiary of a savings and loan
holding company.
If neither the savings association nor the proposed capital
distribution meet any of the criteria listed in the previous paragraph, the
savings association is not required to file a notice or an application before
making a capital distribution.
Under the revised rule, the OTS will review a savings association's
notice or application and may disapprove a notice or deny an application if the
OTS makes any of the following determinations:
- The savings association will be undercapitalized, significantly
undercapitalized, or critically undercapitalized under the prompt
corrective action regulations of the OTS following the capital
distribution;
- The proposed capital distribution raises safety and soundness
concerns; or
- The proposed capital distribution violates a prohibition
contained in any statute, regulation, agreement between the
savings association and the OTS (or the FDIC), or a condition
imposed on the savings association in an OTS-approved application
or notice.
Qualified Thrift Lender Test. Federal savings associations must meet a
qualified thrift lender test or they become subject to operating restrictions.
Until recently, the chief restriction was the elimination of borrowing rights
from the Federal Home Loan Bank. However, with passage of the Gramm-Leach-Bliley
Financial Modernization Act of 1999 by Congress, the failure to maintain
qualified thrift lender status will not affect borrowing rights with the Federal
Home Loan Bank. Notwithstanding these changes, Mutual Savings anticipates that
it will maintain an appropriate level of investments consisting primarily of
residential mortgages, mortgage-backed securities and other mortgage-related
investment, and otherwise qualify as a qualified thrift lender. The required
percentage of these mortgage-related investments is 65% of portfolio assets.
Portfolio assets are all assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 10% of total
assets. Compliance with the qualified thrift lender test is determined on a
monthly basis in nine out of every twelve months.
Transactions With Affiliates. Generally, federal banking law requires
that transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, some transactions can
be restricted to an aggregate percentage of the savings institution's capital.
Collateral in specified amounts must usually be provided by affiliates in order
to
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receive loans from the savings institution. In addition, a savings institution
may not extend credit to any affiliate engaged in activities not permissible for
a bank holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings
institution as affiliates on a case-by-case basis. For a more complete
discussion of these restrictions, see "Mutual Savings--Federal Regulation Prior
to Restructuring--Transactions with Affiliates" above.
Liquidity Requirements. All federal savings institutions are required
to maintain an average daily balance of liquid assets equal to a percentage of
the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. Depending on economic conditions and
savings flows of all savings institutions, the OTS can vary the liquidity
requirement from time to time between 4% and 10%. Monetary penalties may be
imposed on institutions for liquidity requirement violations.
Federal Home Loan Bank System. Following the restructuring, the Banks
will remain members of the Federal Home Loan Bank of Chicago, which is one of 12
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by financial institutions and proceeds derived
from the sale of consolidated obligations of the Federal Home Loan Bank System.
It makes loans to members pursuant to policies and procedures established by the
board of directors of the Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Chicago in an amount equal to at least 1% of our
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 20% of our outstanding advances,
whichever is larger. Mutual Savings and First Northern Savings currently are in
compliance with this requirement and will be in compliance following the
restructuring. The Federal Home Loan Bank imposes various limitations on
advances such as limiting the amount of real estate related collateral to 30% of
a member's capital and limiting total advances to a member.
Under the recently enacted Gramm-Leach-Bliley Financial Modernization
Act of 1999, Mutual Savings and First Northern Savings are voluntary members of
the Federal Home Loan Bank of Chicago. The banks could withdraw or significantly
reduce their stock ownership in the Federal Home Loan Bank of Chicago, although
they have no current intention to do so. In the past, the Federal Home Loan
Banks provided funds for programs to resolve the problems created by troubled
savings institutions and also contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of Federal Home Loan Bank dividends paid and could
continue to do so in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain noninterest bearing reserves at specified
levels against their checking, NOW, and Super NOW checking accounts and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve System may be used to satisfy the
OTS liquidity requirements. Savings institutions have authority to borrow from
the Federal Reserve System "discount window," but Federal Reserve System policy
generally requires savings institutions to exhaust all other sources before
borrowing from the Federal Reserve System.
MHC REGULATION
General. Upon completion of the restructuring, MHC will become a
federal mutual holding company within the meaning of Section 10(o) of the Home
Owners' Loan Act. As such, MHC will be required to register with and be subject
to OTS examination and supervision as well as reporting requirements. In
addition, the OTS will have enforcement authority over the MHC and its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
bank.
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Permitted Activities. A mutual holding company is permitted to, among
other things:
- invest in the stock of a savings institution;
- acquire a mutual institution through the merger of such
institution into a savings institution subsidiary of such mutual
holding company or an interim savings institution of such mutual
holding company;
- merge with or acquire another mutual holding company, one of
whose subsidiaries is a savings institution;
- acquire non-controlling amounts of the stock of savings
institutions and savings institution holding companies, subject
to various restrictions;
- invest in a corporation the capital stock of which is available
for purchase by a savings institution under federal law or under
the law of any state where the subsidiary savings institution or
institutions have their home offices;
- furnish or perform management services for a savings institution
subsidiary;
- hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary;
- hold or manage properties used or occupied by a savings
institution subsidiary; and
- act as a trustee under deed or trust.
As a result of the Gramm-Leach-Bliley Financial Modernization Act of
1999, the activities of a newly formed mutual holding company are restricted to
those of a financial nature permitting securities and insurance activities as
well as affiliations with financial companies such as insurance and securities
firms.
Waiver of Dividends. It has been the policy of a number of mutual
holding companies to waive the receipt of dividends declared by their savings
institution subsidiaries or mid-tier stock holding companies. Under OTS
regulations, the MHC may waive dividends from Bank Mutual only if the MHC
provides the OTS with written notice of its intent to waive its rights to
receive dividends 30 days prior to the proposed date of payment of the dividend
and the OTS does not object to such waiver. The OTS will not object to the
waiver if the following two determinations are made:
- the waiver would not be detrimental to the safe and sound
operation of the savings association; and
- the board of directors of the MHC expressly determines that
waiver of the dividend by the MHC is consistent with the
directors' fiduciary duties to the mutual members of the MHC.
Initially following the restructuring, the MHC expects to waive
dividends declared by Bank Mutual. The proposed management of the MHC believes
this is consistent with fiduciary duties owed to members of the MHC; among other
reasons, certain adverse tax consequences that would result from payment of the
dividend to the MHC. In addition, management believes that capital held in Bank
Mutual will be as productive, if not more productive, than capital held at the
MHC level.
If the MHC waives any dividend from Bank Mutual, then Bank Mutual would
pay such dividend only to its public shareholders. The MHC's decision as to
whether to waive a particular dividend will depend on a number of factors,
including its capital needs, the investment alternatives available to the MHC as
compared to those available to Bank Mutual, and the possibility of regulatory
approvals.
BANK MUTUAL REGULATION
After the restructuring, Bank Mutual, as a federal stock corporation in
a mutual holding company structure, will be deemed a federal mutual holding
company within the meaning of Section 10(o) of the Home Owners' Loan Act. Bank
Mutual will be required to register and file reports with the OTS and will be
subject to regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over Bank Mutual and any
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nonsavings institution subsidiary. The OTS can restrict or prohibit activities
that it determines to be a serious risk to Bank Mutual. This OTS regulation is
intended primarily for the protection of Mutual Savings' depositors and not for
the benefit of you, as BankS Mutual's shareholders.
Bank Mutual will also be subject to the regulation and supervision of
the SEC and will be required to file certain reports with, and otherwise comply
with, the rules and regulations of the SEC. Certain of the SEC's rules and
regulations are designed to protect you, as Bank Mutual's shareholders.
ACQUISITION OF BANK MUTUAL
Under federal law, no person may acquire control of Bank Mutual, Mutual
Savings, or First Northern Savings without first obtaining, as summarized below,
the approval of such acquisition of control by the OTS (or another federal
banking regulator).
Under the federal Change in Bank Control Act and the Savings and Loan
Holding Company Act, any person, including a company, or group acting in
concert, seeking to acquire 10% or more of the outstanding shares of Bank Mutual
must file a notice with the OTS. In addition, any person or group acting in
concert seeking to acquire more than 25% of the outstanding shares of Bank
Mutual's common stock will be required to obtain the prior approval of the OTS.
Under regulations, the OTS generally has 60 days within which to act on such
applications, taking into consideration certain factors, including the financial
and managerial resources of the acquiror, the convenience and needs of the
communities served by Bank Mutual, Mutual Savings and First Northern Savings,
and the antitrust effects of the acquisition.
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RESTRICTIONS ON ACQUISITION OF BANK MUTUAL
GENERAL
The plan of restructuring provides for the conversion of Mutual Savings
from the mutual to the stock form of organization and the formation of a stock
holding company and a mutual holding company. See "The Restructuring --
General." Certain provisions in Bank Mutual's charter and bylaws and in its
benefit plans and agreements entered into in connection with the restructuring,
together with provisions of federal law and certain governing regulatory
restrictions, may have anti-takeover effects.
MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure will restrict the ability of our
shareholders to effect a change of control of management because, as long as the
MHC remains in existence as a mutual savings bank holding company, it will
control a majority of Bank Mutual's voting stock. Moreover, the directors of the
MHC initially will be the directors of Bank Mutual. The MHC will be able to
elect all of the members of the Board of Directors of Bank Mutual, and as a
general matter, will be able to control the outcome of all matters presented to
the shareholders of Bank Mutual for a vote. See "The Restructuring -- Possible
Conversion of the MHC to Stock Form."
CHANGE IN BANK CONTROL
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
federal savings bank unless the OTS has been given 60 days prior written notice.
Federal law provides that no company may acquire control of a bank holding
company without the prior approval of the OTS. Any company that acquires control
becomes a "thrift holding company" subject to registration, examination and
regulation by the OTS.
Pursuant to federal regulations, control is conclusively deemed to have
occurred when an entity, among other things, has acquired more than 25 percent
of any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have occurred, subject to rebuttal, upon the acquisition of more
than 10 percent of any class of voting stock, or of more than 25 percent of any
class of stock, of a federal savings bank, where certain enumerated control
factors are also present in the acquisition.
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The OTS may prohibit an acquisition of control if:
(1) it would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of
control by such person.
These restrictions do not apply to the acquisition of stock by one or more
tax-qualified employee stock benefits plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
BANK MUTUAL'S CHARTER AND BYLAWS
General. Bank Mutual's charter and bylaws are available at Mutual's
administrative office or by writing or calling us, 4949 West Brown Deer Road,
Milwaukee, Wisconsin 53223, telephone number (414) 354-1500.
Classified Board of Directors and Related Provisions. Bank Mutual's
board of directors is divided into three classes which are as nearly equal in
number as possible. Directors serve for terms of three years. As a result, each
year, only one-third of the directors are eligible to be elected and it would
take at least two years to elect a majority of our directors.
Restrictions on Voting of Securities. The charter provides that for
five years after the restructuring any shares of common stock beneficially owned
directly or indirectly in excess of 10% by any person, other than the MHC, will
not be counted as shares entitled to vote, shall not be voted by any person or
counted as voting shares in connection with any matter submitted to shareholders
for a vote, and shall not be counted as outstanding for purposes of determining
a quorum or the affirmative vote necessary to approve any matter submitted to
the Shareholders for a vote. It is possible for such a person to have voting
authority for less than 10% of our shares, depending on how the shares are
registered.
Prohibition Against Cumulative Voting. Bank Mutual's charter does not
permit cumulative voting by shareholders in the election of directors. Therefor,
the holders of a majority of the shares voted at a meeting, thus precluding a
majority shareholder from obtaining representation on the board of directors
unless the minority shareholder is able to obtain the support of a majority. In
accordance with the law governing mutual holding companies, the MHC must remain
the majority holder of Bank Mutual's voting stock.
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our charter and bylaws having an anti-takeover
effect. For example, the charter authorizes the issuance of up to two million
shares of preferred stock, which conceivably would represent an additional class
of stock required to approve any proposed acquisition. This preferred stock,
none of which has been issued, together with authorized but unissued shares of
the common stock could represent additional capital required to be purchased by
the acquiror. Bank Mutual's charter authorizes the issuance of up to 100 million
shares of the common stock.
In addition to discouraging a takeover attempt which a majority of our
shareholders might determine to be in their best interest or in which our
shareholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult. It is possible that incumbent officers and directors might be
able to retain their positions (at least until their term of office expires)
even though a majority of our shareholders, other than the mutual holding
company, desires a change.
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<PAGE> 135
The provisions described above are intended to reduce Bank Mutual's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its board of directors. The
provisions of the employment agreements, the change of control agreements, the
management recognition plan and the stock option plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by Bank
Mutual and its subsidiaries in the event of a takeover. See "Management --
Employment Agreements," and "-- Future Stock Benefit Plans -- Stock Option
Plan."
Bank Mutual's board of directors believes that the provisions of the
charter, bylaws and benefit plans to be established are in the best interests of
Bank Mutual and its shareholders. An unsolicited non-negotiated proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the board of directors believes it is in the best
interests of Bank Mutual and its shareholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts. It is also
the board of directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of Mutual and that otherwise is in the best interests of all shareholders.
RIGHTS OF BANK MUTUAL SHAREHOLDERS; COMPARISON TO FIRST NORTHERN SHARES
Upon consummation of the merger, the shareholders of First Northern
will become shareholders of Bank Mutual. The rights of the Bank Mutual
shareholders are governed by federal law and Bank Mutual's charter and bylaws.
Among other things, Bank Mutual's charter and bylaws provide that, if consistent
with federal law, Bank Mutual will be governed by corporate law provisions of
Wisconsin law, as if it were a Wisconsin corporation. Mutual has made an
exception to that requirement for various antitakeover laws under Wisconsin law;
see "Antitakeover Laws" below.
Bank Mutual is authorized to issue 100 million shares of common stock,
par value $0.01 per share, and 10 million shares of preferred stock, $0.01 par
value. The common stock represents nonwithdrawable capital, will not be in an
account of insurable type and will not be insured by the FDIC or any other
governmental agency.
The rights of the First Northern shareholders presently are governed by
Wisconsin law and the First Northern restated articles of incorporation and
bylaws. These rights differ in certain respects and the material differences are
summarized below.
NO PREEMPTIVE RIGHTS
Neither the holders of Bank Mutual common stock nor First Northern
common stock have any preemptive rights with respect to any shares issued by the
companies. Any subsequent stock issuance by Bank Mutual, however, may only be
effected through a stock issuance plan approved by the OTS which would grant
subscription priorities to the MHC's members unless Bank Mutual demonstrates
that a non-conforming stock issuance would be more beneficial to it.
LIQUIDATION RIGHTS; REDEMPTION
In the event of any liquidation, dissolution or winding up of Bank
Mutual, the holders of its common stock generally would be entitled to receive,
after payment of all liabilities and any preferred stock preferences, all assets
of Bank Mutual available for distribution. Common stock is not subject to any
redemption provisions. Similar provisions apply for First Northern.
Federal regulations require that, so long as the MHC remains in place,
it must hold a majority of the outstanding shares of Bank Mutual common stock.
That, in general, will give the MHC the right to control
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<PAGE> 136
significant decisions and transactions involving Bank Mutual. First Northern
does not have a similar controlling person.
TREATMENT UPON FULL CONVERSION
In the event that Mutual would make a full conversion of the MHC to the
stock form of organization, the plan of restructuring includes provisions
intended to protect Bank Mutual shareholders. In general, they provide that Bank
Mutual shareholders would receive, in any subsequent full conversion, the same
percentage of ownership of a successor entity as they would hold in Bank Mutual
prior to that conversion. See "The Restructuring - Possible Conversion of the
MHC to Stock Form."
Bank Mutual cannot assure that there will be a subsequent full
conversion. Also, any such full conversion will be subject to OTS, or other
governmental regulations as then in effect. Those regulations may affect the
treatment of Bank Mutual shareholders in any full conversion, and could have the
effect of disadvantaging Bank Mutual shareholders.
VOTING RIGHTS
Holders of Bank Mutual common stock will have one vote for each share
held by them on all matters which are representative to shareholder's vote.
There is an exception to this rule during the first five years of Bank Mutual's
existence for persons or entities, other than the MHC, which come to acquire
more than 10% of Bank Mutual's common stock. In that case, shares in excess of
10% of Bank Mutual's outstanding common stock will not have any voting rights.
Shares of First Northern common stock have one share per vote on each
matter as considered by shareholders except in the case of restrictions on
certain 20% or greater shareholders imposed by Wisconsin law. See "Anti-takeover
Laws--Control Share Voting Restrictions" below.
Neither Bank Mutual's nor First Northern's shareholders have cumulative
rights in the election of directors. Because the MHC will always own more than
50% of the shares of Bank Mutual, it will control the election of directors.
STATUTORY SHAREHOLDER LIABILITY
Under Wisconsin law, shareholders of corporations which are either
organized or qualified to do business in the state of Wisconsin may be
personally liable for unpaid compensation claims by employees, for up to six
month services in any one case. As a Wisconsin corporation, shares of First
Northern common stock have been subject to this employee wage statute.
Non-Wisconsin corporations which are qualified to do business in Wisconsin have
been judicially determined to be subject to this law. However, it has not been
judicially determined whether federally-chartered entities, such as Bank Mutual,
may be made subject to the Wisconsin statute.
BOARD OF DIRECTORS
The Bank Mutual bylaws provide that its board of directors shall
consist of not less than 5 no more than 15 directors, and determined from time
to time by the board of directors. The directors are classified into three
classes, which are to be as nearly equal in size as possible. Each class is
elected for a three-year term, and one of the classes of the board of directors
is subject to election at each annual meeting of Bank Mutual shareholders. The
First Northern articles and bylaws provide for a size to be determined by the
board of directors; First Northern directors are also elected by class for
three-year terms.
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<PAGE> 137
The Bank Mutual bylaws also provide that a director may be removed only
for cause by a vote of the holders of majority of shares entitled to vote.
Vacancies on the Bank Mutual board of directors, whether by resignation
of a director or by the establishment of an increase in the number of directors,
may be filled by action of the remaining directors of Bank Mutual. However, the
directors so elected only serve until the next meeting of shareholders. In First
Northern's case, under Wisconsin law, directors elected by the Board may serve
the remaining term of the class.
Directors of Bank Mutual must own not less than 100 shares of Bank
Mutual common stock. First Northern does not have an equivalent share ownership
requirement.
SPECIAL MEETINGS OF SHAREHOLDERS
Under Bank Mutual's charter, until five years after the Mutual
restructuring, special meetings of shareholders of Bank Mutual may only be
called upon the direction of the board of directors. Thereafter, special
meetings may be called by the Chairman of the Board, the president and majority
of the directors, or upon the written request of holders of not less than 1/10th
of all the outstanding shares of capital stock. Wisconsin law provides rights to
First Northern shareholders similar to those which will apply to Bank Mutual
after 2005.
The Bank Mutual board of directors will act as a nominating committee
for the selecting of management nominees for election of directors. With certain
exceptions in the case of vacancies, nominating committee must deliver written
nominations to the secretary at least 20 days prior to the date of the annual
meeting. No nominations for directors except for those made by the nominating
committee will be voted upon at the annual meeting unless other nominations by
shareholders are made in writing and delivered to Bank Mutual at least five days
prior to the date of the annual meeting. First Northern's nominating committee
is also its entire board of directors.
PREFERRED STOCK
The Bank Mutual charter authorizes the issuance of preferred stock, in
one or more classes with the rights and preferences of shareholders of those
classes to be determined by the Board of Directors. First Northern's articles of
incorporation similarly authorize preferred stock. In both cases, if the
companies were to issue shares of preferred stock, their holders would have
dividend and liquidation rights prior to those holders of common stock, and
would have such voting rights as were determined by the Board of Directors.
APPROVAL OF FUNDAMENTAL TRANSACTIONS
Corporate combination transactions such as mergers, sales of
substantially all assets, or dissolution of the corporation, would require the
approval of the holders of a majority of the outstanding shares of Bank Mutual
common stock. Because the MHC would own a majority, it would control the
decisions on these matters. Majority vote would also be required for similar
transactions for First Northern, except in the case where Wisconsin law would
require a higher percentage in the case of certain combinations with affiliates.
See "Anti-takeover Laws" below.
Similarly, the approval of the majority of outstanding shares is
required for an amendment to the Bank Mutual charter. A similar vote is required
for amendment to First Northern's Articles of Incorporation. In the event either
company had issued shares of preferred stock, preferred shareholders may have
rights to vote as a class on certain types of amendments.
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<PAGE> 138
DISSENTERS' RIGHTS
Because its securities trade on the Nasdaq Stock Market, Wisconsin law
does not generally give First Northern shareholders dissenters' rights in most
transactions. Because Bank Mutual has provided that it will be subject to
Wisconsin corporate law provisions, so long as Bank Mutual has a class of
securities traded on the Nasdaq Stock Market or an exchange, its shareholders
also will not have dissenters' rights in most corporate transactions.
ANTI-TAKEOVER LAWS
As discussed above, there are certain provisions of Bank Mutual charter
and bylaws which could impede a takeover. For example, as discussed above, Bank
Mutual will have a classified board of directors and directors may not be
removed by shareholders without cause. Further, the control by the MHC will, in
and of itself, have the effect of restricting a takeover of Bank Mutual.
Additionally, for five years, Bank Mutual articles and bylaws restrict the
voting power of any party other than the MHC which would own more than 10% of
Bank Mutual common stock and restrict the calling of special meetings by
shareholders. While First Northern also has a classified board of directors, the
other provisions intended to inhibit a takeover do not apply to First Northern.
Although Bank Mutual has provided in its charter and bylaws that it
will be subject to Wisconsin corporate law provisions, its charter provides that
it is not subject to various provisions of the Wisconsin Business Corporation
Law which may impede takeovers. First Northern has been subject to those laws.
Therefore, the followings laws will be no longer applicable.
Business Combination Statute. Sections 180.1140 to 180.1144 of the
Wisconsin Business Corporation Law regulate a broad range of business
combinations between a resident domestic corporation and an interested
stockholder. A business combination is defined to include any of the following
transactions:
- merger or share exchange;
- sale, lease, exchange, mortgage, pledge, transfer, or other
disposition of assets equal to 5% or more of the market value
of the stock or assets of the company or 10% of its earning
power or income;
- issuance of stock or rights to purchase stock with a market
value equal to 5% or more of the outstanding stock; and
- adoption of a plan of liquidation or dissolution.
A resident domestic corporation is defined to mean a Wisconsin
corporation that has a class of voting stock that is registered or traded on a
national securities exchange or that is registered under Section 12(g) of the
Exchange Act and that, as of the relevant date, satisfies any of the following:
- its principal offices are located in Wisconsin;
- it has significant business operations located in Wisconsin;
- more than 10% of the holders of record of its shares are
residents of Wisconsin; or
- more than 10% of its shares are held of record by residents of
Wisconsin.
First Northern is a resident domestic corporation for purposes of the Wisconsin
anti-takeover laws.
An interested stockholder is defined to mean a person who beneficially
owns, directly or indirectly, 10% of the voting power of the outstanding voting
stock of a corporation or who is an affiliate or associate of the corporation
and beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years.
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<PAGE> 139
Under this law, First Northern cannot engage in a business combination
with an interested stockholder for a period of three years following the date
such person becomes an interested stockholder, unless the board of directors
approved the business combination or the acquisition of the stock that resulted
in the person becoming an interested stockholder before such acquisition. First
Northern may engage in a business combination with an interested stockholder
after the three-year period with respect to that stockholder expires only if one
or more of the following conditions is satisfied:
- the board of directors approved the acquisition of the stock
prior to such stockholder's acquisition date;
- the business combination is approved by a majority of the
outstanding voting stock not beneficially owned by the
interested stockholder; or
- the consideration to be received by shareholders meets certain
fair price requirements of the statute with respect to form
and amount.
Fair Price Statute. The Wisconsin Business Corporation Law also
provides, in Sections 180.1130 to 180.1133, that certain mergers, share
exchanges or sales, leases, exchanges or other dispositions of assets in a
transaction involving a significant shareholder and a resident domestic
corporation require a supermajority vote of shareholders in addition to any
approval otherwise required, unless shareholders receive a fair price for their
shares that satisfies a statutory formula. A significant shareholder for this
purpose is defined as a person or group who beneficially owns, directly or
indirectly, 10% or more of the voting stock of the corporation, or is an
affiliate of the corporation and beneficially owned, directly or indirectly, 10%
or more of the voting stock of the corporation within the last two years. Any
such business combination must be approved by 80% of the voting power of the
corporation's stock and at least two-thirds of the voting power of the
corporation's stock not beneficially held by the significant shareholder who is
party to the relevant transaction or any of its affiliates or associates, in
each case voting together as a single group, unless the following fair price
standards have been met:
- the aggregate value of the per share consideration is equal to
the higher of:
- the highest price paid for any common shares of the
corporation by the significant shareholder in the
transaction in which it became a significant
shareholder or within two years before the date of
the business combination;
- the market value of the corporation's shares on the
date of commencement of any tender offer by the
significant shareholder, the date on which the person
became a significant shareholder or the date of the
first public announcement of the proposed business
combination, whichever is higher; or
- the highest preferential liquidation or dissolution
distribution to which holders of the shares would be
entitled; and
- either cash, or the form of consideration used by the
significant shareholder to acquire the largest number of
shares, is offered.
Control Share Voting Restrictions. Under Section 180.1150 of the
Wisconsin Business Corporation Law, unless otherwise provided in the articles of
incorporation, the voting power of shares, of a resident domestic corporation,
held by any person or group of persons acting together in excess of 20% of the
voting power in the election of directors is limited (in voting on any matter)
to 10% of the full voting power of those shares. This restriction does not apply
to shares acquired directly from the resident domestic corporation, in certain
specified transactions, or in a transaction in which the corporation's
shareholders have approved restoration of the full voting power of the otherwise
restricted shares. Because of the 10% threshold contained in Wisconsin's
business combination statute discussed above, this control share threshold of
20% may not be triggered unless the board of directors first approves a
transaction that permits the shareholder to exceed the 10% ownership level.
135
<PAGE> 140
Defensive Action Restrictions. Section 180.1134 of the Wisconsin
Business Corporation Law provides that, in addition to the vote otherwise
required by law or the articles of incorporation of a resident domestic
corporation, the approval of the holders of a majority of the shares entitled to
vote is required before such corporation can take certain action while a
takeover offer is being made or after a takeover offer has been publicly
announced and before it is concluded. This statute requires shareholder approval
for the corporation to do either of the following:
- acquire more than 5% of its outstanding voting shares at a
price above the market price from any individual or
organization that owns more than 3% of the outstanding voting
shares and has held such shares for less than two years,
unless a similar offer is made to acquire all voting shares
and all securities which may be converted into voting shares;
or
- sell or option assets of the corporation which amount to 10%
or more of the market value of the corporation, unless the
corporation has at least three independent directors
(directors who are not officers or employees) and a majority
of the independent directors vote not to have this provision
apply to the corporation.
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<PAGE> 141
PRO FORMA FINANCIAL INFORMATION
PRO FORMA DATA REFLECTING THE FIRST NORTHERN MERGER
In the following tables, we provide unaudited pro forma condensed
combined financial data of Bank Mutual and subsidiaries which includes the
historical data for Mutual Savings and First Northern plus adjustments to give
effect to the First Northern merger. The data are based on an assumption that
Bank Mutual common shares are issued for 40% of First Northern shares
outstanding on March 31, 2000 and cash is paid for 60% of First Northern shares
outstanding on March 31, 2000. Additional assumptions are discussed in the notes
that follow the table. Operating results data assumes that this transaction
occurred on the first day of each period shown, whereas financial condition data
assumes that this transaction occurred at the date indicated. The per share
information is calculated assuming the number of shares outstanding is unchanged
throughout each respective time period.
In accordance with generally accepted accounting principles the First
Northern merger will be accounted for using the purchase method. Accordingly,
the recorded assets and liabilities of Mutual Savings will be carried forward at
their recorded amounts and the historical operating results of Mutual Savings
will be unchanged for the prior periods being reported on. However, the assets
and liabilities of First Northern will be adjusted to fair value at the date of
the merger. To the extent that the purchase price, consisting of the number of
shares of Bank Mutual to be issued to former First Northern shareholders at fair
value plus cash to be paid to former First Northern shareholders, exceeds the
fair value of the net assets of First Northern at the merger date, that excess
will be reported as an intangible asset to be amortized to the consolidated
income of Bank Mutual in future periods. Further, the purchase accounting method
results in the operating results of First Northern only being included in the
consolidated income of Bank Mutual beginning from the date of the merger.
We present this pro forma data as an illustration only. It does not
necessarily indicate the financial position or financial results that would have
actually been reported if the restructuring and merger had occurred as of, or
at, the beginning of the periods presented, nor do they necessarily indicate
future financial position or results of operations. The pro forma results of
operations neither assume nor incorporate any benefits from cost savings or
synergies of operations of the combined companies. The effects of the stock
offering are reflected in "Pro forma Data Reflecting the Stock Offering" below
and the following tables should be read in conjunction with that information.
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<PAGE> 142
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
Fair Value
Historic Historic Pre-Stock and Pre-Stock
Mutual First Offering Merger Offering
Savings Northern Combined Adjustments Merged
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (In thousands)
Cash and cash equivalents $ 39,700 $ 4,712 $ 44,412 $ (85,472) a, b $ (41,060)
Investments 520,621 50,934 571,555 (560) c 570,995
Loans, net 1,105,947 768,901 1,874,848 (6,625) c 1,868,223
Office properties and equipment 26,509 7,752 34,261 3,340 c 37,601
Intangible assets 11,261 - 11,261 50,883 c 62,144
Other assets 38,146 33,769 71,915 3,927 b,c 75,842
--------------------------------------------------------------------------------------------
Total assets $ 1,742,184 $ 866,068 $ 2,608,252 $ (34,607) $ 2,573,645
============================================================================================
LIABILITIES AND EQUITY
Liabilities:
Deposits $ 1,319,188 $ 567,693 $ 1,886,881 $ 575 c $ 1,877,456
Borrowings 238,699 211,484 450,183 (1,375) c 448,808
Other liabilities 20,388 9,463 29,851 - 29,851
--------------------------------------------------------------------------------------------
Total liabilities 1,578,275 788,640 2,366,915 (800) 2,366,115
Shareholders' equity 163,909 77,428 241,337 (33,907)a, b, c 207,530
--------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,742,184 $ 866,068 $ 2,608,252 $ (34,607) $ 2,573,645
============================================================================================
</TABLE>
138
<PAGE> 143
BANK MUTUAL BANCORP
PRO FORMA BALANCE SHEET FOOTNOTES
MARCH 31, 2000
a. Assumes that First Northern shares are exchanged for 60% cash and 40%
Bank Mutual shares based on a value of $15 per share for each First
Northern share outstanding. Adjusted outstanding First Northern shares
used to calculate book value per common share is 8,572,808, resulting
in the issuance of 5,143,685 shares of Bank Mutual and the payment of
$77.2 million of cash to former First Northern shareholders. Also
reflected is the $100,000 capital contribution to form the MHC.
b. Adjustment to record the effects of estimated non-recurring
merger-related charges of $8.3 million, $6.2 million net of tax effect,
which will be charged to earnings concurrent with the First Northern
merger and which consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Merger related professional fees* $ 925
Costs of acquisition* 500
Buy-back of outstanding options 5,642
Restructuring charges 500
Benefit plan accruals 750
------------
8,317
Tax benefit 2,109
------------
Total estimated non-recurring charges $ 6,208
============
</TABLE>
* Amount not tax effected as it is not deductible for federal
and state income tax purposes.
c. Under purchase accounting, First Northern's assets and liabilities are
to be adjusted to their estimated fair values. The estimated fair value
adjustments have been determined by Mutual based upon available
information. The following sets forth the purchase accounting
adjustments made to reflect First Northern's assets and liabilities to
fair values at March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Historical net assets $ 77,428
Investments (560)
Loans receivable (6,625)
Office properties and repossessed assets 3,340
Other assets - loan servicing rights 907
Other assets - income tax benefit 911
Deposits (575)
Borrowings 1,375
----------
76,201
Purchase price - cash $ 77,155
Purchase price - stock* 43,721
Acquisition costs 6,208
---------
(127,084)
Cost in excess of net assets of business acquired $ 50,883
==========
</TABLE>
* The shares to be issued to First Northern shareholders have
been recorded at fair value, to reflect an approximate 15%
discount to reflect the size of the block of stock issued and
the estimated issuance costs and market discount ordinarily
incurred with the issuance of a substantial and similarly
sized block of shares.
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<PAGE> 144
UNAUDITED PRO FORMA CONDENSED
COMBINED PRE-STOCK OFFERING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Restructuring
Historic Historic Pre-Stock Fair Value Pre-Stock
Mutual First Offering and Merger Offering
Savings Northern Combined Adjustments Merged (a)
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 29,842 $ 14,956 $ 44,438 $ (980)b, c $ 43,458
Interest expense 18,179 9,152 27,331 - 27,331
-----------------------------------------------------------------------------------
Net interest income 11,633 5,444 17,107 (980) 16,127
Provision for losses on loans 77 165 242 - 242
-----------------------------------------------------------------------------------
Net interest income after provision for 11,586 5,279 16,865 (980) 15,885
losses on loans
Total noninterest income 1,830 1,008 2,838 - 2,838
Total noninterest expenses 8,515 3,835 12,350 636d 12,986
-----------------------------------------------------------------------------------
Income before income taxes 4,901 2,452 7,353 (1,616) 5,737
Income taxes 1,855 796 2,651 (392)e 2,259
-----------------------------------------------------------------------------------
Net income $ 3,046 $ 1,656 $ 4,702 $(1,224) $ 3,478
===================================================================================
</TABLE>
a Reflects the historical combined earnings of Mutual Savings and First
Northern prior to the stock offering of Bank Mutual.
b Reflects the loss of interest revenue on $85.6 million of cash outflows
related to the First Northern merger at 6.26%, which represents the yield
on the one year U.S. treasury note as of March 31, 2000.
c Reflects amortization of intangible assets from the First Northern merger
over a 20 year life using the straight-line method.
d Reflects the amortization of the fair market value adjustment on
significant purchase accounting adjustments related to loans receivable of
$6.625 million amortization straight-line over 5 years.
e The following tables sets forth the tax effects of the pro forma
adjustments. (No tax benefit is attributable to amortization of intangible
assets.) All adjustments assume a 40.0% marginal tax rate.
<TABLE>
<S> <C>
Tax benefit on foregone interest revenue $ 536
Tax accrual on investment discount accretion (144)
-------
$ 392
=======
</TABLE>
140
<PAGE> 145
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Restructuring
Historic Historic Pre-Stock Fair Value Pre-Stock
Mutual First Offering and Merger Offering
Savings Northern Combined Adjustments Merged (a)
--------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $118,302 $52,770 $171,072 $(3,637)b, c $167,425
Interest expense 75,337 30,686 106,023 - 106,023
--------------------------------------------------------------------------------------
Net interest income 42,965 22,084 65,049 (3,637) 61,412
Provision for losses on loans 350 472 822 - 822
--------------------------------------------------------------------------------------
Net interest income after provision 42,615 21,612 64,227 (3,637) 60,590
for losses on loans
Total noninterest income 7,984 3,854 11,838 - 11,838
Total noninterest expenses 51,279d 14,564 65,843 e 2,576e 68,419
--------------------------------------------------------------------------------------
Income before income taxes (680) 10,902 10,222 (6,213) 4,009
Income taxes 3,803 3,525 7,328 (1,455)f 5,873
--------------------------------------------------------------------------------------
Net income $ 4,483) $ 7,377 $ 2,894 $(4,758) $(1,864)
======================================================================================
</TABLE>
a Reflects the historical combined earnings of Mutual Savings and First
Northern prior to the stock offering of Bank Mutual.
b Reflects the loss of interest revenue on $85.6 million of cash outflows
related to the First Northern merger at 5.93%, which represents the yield
on the one year U.S. treasury note as of December 31, 1999.
c Reflects the amortization of the fair market value adjustment on
significant purchase accounting adjustments related to loans receivable of
$6.6 million amortization straight-line over 5 years.
d In 1999, non-interest expense includes a special write off of intangible
assets of $15.6 million which Mutual deemed to be impared. The intangible
assets resulted from the 1997 acquisition of First Federal. The
net-of-income-tax effect on net income of the write-off in 1999 was a
decrease of $13.6 million.
e Reflects amortization of intangible assets of $51.5 million from the First
Northern merger over a 20 year life using the straight-line method.
f The following table sets forth the tax effects of the pro forma
adjustments. (No tax benefit is attributable to amortization of intangible
assets.) All adjustments assume a 40.0% marginal tax rate.
<TABLE>
<S> <C>
Tax benefit on foregone interest revenue $ 2,030
Tax accrual on investment discount accretion (575)
----------
$ 1,455
==========
</TABLE>
141
<PAGE> 146
PRO FORMA DATA REFLECTING THE STOCK OFFERING
In the following tables, we provide unaudited pro forma condensed
combined financial data of, and assumptions relating to, Bank Mutual reflecting
the stock offering. The data assumes that the First Northern merger has also
occurred; detailed effects of the First Northern merger are reflected in the pro
forma data on the preceding pages.
In accordance with generally accepted accounting principles, the
restructuring will be accounted for at historical cost in a manner similar to
pooling of interest accounting in accordance with generally accepted accounting
principles. Accordingly, the carrying value of Mutual Savings' assets,
liabilities and equity will not be affected by the restructuring and will be
reflected in the successor stock savings bank's financial statements based upon
their historical amounts.
We present this pro forma data as an illustration only. It does not
necessarily indicate the financial position or financial results that would have
actually been reported if the restructuring and merger had occurred as of, or
at, the beginning of the periods presented, nor do they necessarily indicate
future financial position or results of operations. The pro forma results of
operations neither assume nor incorporate any benefits from cost savings or
synergies of operations of the combined companies.
142
<PAGE> 147
BANK MUTUAL CORPORATION
STOCK OFFERING
MARCH 31, 2000
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
-----------------------------------------------------------------
4,633,564 5,906,014 7,178,464 8,641,781
shares at shares at shares at shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share (a)
-----------------------------------------------------------------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Gross proceeds $ 46,336 $ 59,060 $ 71,785 $ 86,418
Less marketing fees and other issuance expenses (2,923) (3,098) (3,274) (3,476)
-----------------------------------------------------------------
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (3,911) (4,420) (4,929) (5,514)
-----------------------------------------------------------------
Estimated adjusted net proceeds (b) $ 31,680 $ 42,702 $ 53,724 $ 66,399
=================================================================
Combined net income:
Historical combined (c) $ 3,478 $ 3,478 $ 3,478 $ 3,478
Interest income (d) 297 401 504 623
ESOP (e) (117) (133) (148) (165)
MRP (f) (117) (133) (148) (165)
-----------------------------------------------------------------
Pro forma income 3,541 3,614 3,687 3,771
Amortization of intangible assets 845 845 845 845
-----------------------------------------------------------------
Pro forma net income before amortization of intangible assets $ 4,386 $ 4,459 $ 4,532 $ 4,616
=================================================================
Earnings per share:
Historical combined (c) $ 0.19 $ 0.17 $ 0.15 $ 0.13
Interest income (d) 0.02 0.02 0.02 0.02
ESOP (e) (0.01) (0.01) (0.01) -
MRP (f) (0.01) (0.01) - -
-----------------------------------------------------------------
Pro forma basic and diluted earnings per share 0.19 0.17 0.16 0.15
Amortization of intangible assets 0.05 0.04 0.04 0.03
-----------------------------------------------------------------
Pro forma basic and diluted earnings per share before
amortization of intangible assets $ 0.24 $ 0.21 $ 0.20 $ 0.18
=================================================================
Pro forma basic P/E ratio (g) 13.0x 14.4x 15.8x 17.2x
=================================================================
Pro forma basic P/E ratio
before amortization of intangible assets (g) 10.5x 11.7x 12.8x 14.1x
=================================================================
Number of shares used in calculating net income per share (h) 18,439,970 20,839,821 23,239,672 25,999,500
=================================================================
Shareholders' equity:
Historical combined (c) $ 207,530 $ 207,530 $ 207,530 $ 207,530
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (e) (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (f) (3,911) (4,420) (4,929) (5,514)
-----------------------------------------------------------------
Proforma shareholder's equity (i) 239,210 250,232 261,254 273,929
Unamortized intangible assets (62,144) (62,144) (62,144) (62,144)
-----------------------------------------------------------------
Proforma tangible shareholder's equity (i) $ 177,066 $ 188,088 $ 199,110 $ 211,785
=================================================================
Shareholders' equity per share:
Historical combined $ 10.59 $ 9.37 $ 8.40 $ 7.51
Estimated net proceeds 2.22 2.53 2.77 3.00
Less: Common stock acquired by ESOP (e) (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by MRP (f) (0.20) (0.20) (0.19) (0.19)
-----------------------------------------------------------------
Pro forma shareholders' equity per share (h)(i) 12.21 11.30 10.58 9.92
Unamortized intangible assets 3.17 2.81 2.52 2.25
-----------------------------------------------------------------
Pro forma tangible shareholders' equity per share (h)(i) $ 9.04 $ 8.49 $ 8.06 $ 7.67
=================================================================
Pro forma price to book value ratio 81.90% 88.50% 94.61% 100.91%
=================================================================
Pro forma price to tangible book value ratio 110.62% 117.79% 124.22% 130.55%
=================================================================
Number of shares used in equity per share calculations (h) 19,593,685 22,143,685 24,693,685 27,626,185
=================================================================
</TABLE>
143
<PAGE> 148
BANK MUTUAL CORPORATION
PRO FORMA FOR STOCK OFFERING
DECEMBER 31, 1999
(a) Assumes an increase in the number of shares due to a 15% increase in the
maximum of the offering range to reflect changes in market and financial
conditions before the conversion and stock offering is completed or to
fill the order of the employee stock ownership plan.
(b) Estimated adjusted proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by Mutual
Savings' employee stock ownership plan and (ii) the value of the shares to
be purchased by Mutual Savings' recognition plan after the conversion and
stock offering, subject to shareholder approval, at an assumed purchase
price of $10.00 per share. Marketing fees and other issuance expenses
consist of legal, accounting, printing and other fixed costs totaling
$2,345,000 plus variable marketing fees based on 1.50% of gross proceeds
less shares to be acquired by the ESOP.
(c) Reflects the combined historical net earnings and shareholders' equity of
Mutual Savings and First Northern for the three months ended March 31,
2000, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of Bank Mutual at 6.26%, which represents the one year U. S.
treasury note rate at March 31, 2000.
(e) Bank Mutual assumes that 8% of the shares of common stock issued in the
restructuring, stock offering and merger will be purchased by the ESOP
(782,180, 883,976, 985,772, and 1,102,837 shares at the minimum, midpoint,
maximum and adjusted maximum, respectively). Bank Mutual also assumes that
the funds used to acquire such shares will be borrowed by the ESOP from
Bank Mutual. Mutual Savings intends to make quarterly contributions to the
ESOP over a ten-year period in an amount at least equal to the principle
and interest requirements of the debt. The pro forma earnings assumes (i)
that the loan to the ESOP is payable over ten years in equal installments
of principle with the ESOP shares having an average fair value of $10.00
per share; ii) that the loan to the ESOP bears interest at the Mutual
Savings' prime interest rate; (iii) that the ESOP expense for the period is
equivalent to the principal payment for the period and are made throughout
the period (the interest expense paid by the Mutual Savings and the
interest income recognized by the Bank Mutual on the ESOP debt are
eliminated in consolidation); (iv) that 19,555, 22,099, 24,644 and 27,571
shares are committed to be released with respect to the quarter ended March
31, 2000, at the minimum, midpoint, maximum and adjusted maximum,
respectively; (v) only the ESOP shares committed to be released during the
period are considered outstanding for the purposes of the earnings per
share calculations based on the average shares to be released during the
year; and (f) the effective tax rate is 40.0% for the period.
(f) Bank Mutual assumes that 4% of the shares of common stock issued in the
conversion, stock offering and merger will be purchased by the recognition
plan (391,090, 441,988, 492,886, and 551,419 shares at the minimum,
midpoint, maximum and adjusted maximum respectively), assuming that: (a)
shareholder approval of the recognition plan is received; (b) the shares
were acquired by the recognition plan at the beginning of the period
presented in open market purchases at $10.00 per share; (c) the amortized
expense for the quarter ended March 31, 2000 is 5% (based on a five year
amortization using the straight line method) of the amount contributed
which is equal to the vested portion of the shares based on the average
shares to be vested during the year; and (d) the effective tax rate
applicable to such employee compensation expense is 40.0%. Unvested shares
under the recognition plan are excluded from the basic earnings per share
calculation and included in the diluted earnings per share calculation only
if they are dilutive under the treasury stock method. Bank Mutual assumes
that 20% of the recognition plan shares vest annually and that 19,555,
22,099, 24,644 and 27,571 shares vest for the period ended March 31, 2000
at the minimum, midpoint, maximum and adjusted maximum, respectively.
(g) Assuming Bank Mutual were to fully convert, resulting in additional
estimated adjusted net proceeds at the minimum, midpoint, maximum and
adjusted maximum of $91.1 million, $102.2 million, $113.3 million and
$126.0 million, respectively, which were invested at 5.93%, which
represents the one year U. S. treasury note rate as of December 31, 1999,
less tax effects, and all other assumptions noted above remained unchanged,
the following ratios and amounts would result:
144
<PAGE> 149
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
---------------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma shareholders' equity per share $ 16.86 $ 15.92 $ 15.17 $ 14.48
Pro forma tangible shareholders' equity per share $ 13.69 $13.11 $ 12.65 $ 12.23
Pro forma price to book value ratio 59.31% 62.83% 65.93% 69.08%
Pro forma price to tangible book value ratio 73.05% 76.28% 79.05% 81.79%
Pro forma basic earnings per share $ .24 $ .22 $ .20 $ .19
Pro forma basic earnings per share before amortization of
intangible assets $ .29 $ .26 $ .24 $ .22
Pro forma basic P/E ratio 10.4x 11.4x 12.2x 13.2x
Pro forma basic P/E ratio before amortization of intangible
assets 8.7x 9.5x 10.3x 11.1x
</TABLE>
(h) Basic earnings per share calculations are determined by (i) starting
with the number of shares assumed to be sold in the conversion and
stock offering excluding shares to be acquired by the ESOP and
recognition plan, (ii) adding the number of shares to be issued to
shareholders of First Northern, (iii) adding the number of shares to be
issued to MHC, (iv) adding the average ESOP shares that have been
committed for release during the period, and (v) adding the average
recognition plan shares assumed vested during the period. The unvested
recognition plan shares are deemed to be for future services and not
dilutive under the treasury stock method. Book value per share
calculations are determined by (i) starting with the number of shares
assumed to be sold in the stock offering (ii) adding the number of
shares to be issued to First Northern shareholders and (iii) adding the
number of shares to be issued to MHC. Set forth below is a
reconciliation of the number of shares used in making the earnings per
share and book value per share calculations:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
<S> <C> <C> <C> <C>
Shares issued in stock offering 4,633,564 5,906,014 7,178,464 8,641,781
Shares issued to First Northern shareholders 5,143,685 5,143,685 5,143,685 5,143,685
Shares issued to MHC 9,816,436 11,093,986 12,371,536 13,840,719
---------- ---------- ---------- ----------
Total shares outstanding and used in calculating 19,593,685 22,143,685 24,693,685 27,626,185
book value per share
Less shares sold to ESOP (782,180) (883,976) (985,772) (1,102,837)
Less recognition plan shares (391,090) (441,988) (492,886) (551,419)
Plus ESOP shares assumed committed to be 9,777 11,050 12,322 13,785
released
Plus recognition plan shares assumed vested 9,777 11,050 12,322 13,785
------------------------------------------------------------
Number of shares used in calculating basic and
diluted earnings per share 18,439,969 20,839,821 23,239,671 25,999,499
============================================================
</TABLE>
(i) The retained earnings of Mutual Savings will be substantially
restricted after the restructuring. See "The Restructuring - Effects of
the Restructuring - Liquidation Rights." Pro forma shareholders' equity
and pro forma shareholders' equity per share do not give effect to the
liquidation account or the bad debt reserves established by Mutual
Savings or First Northern Savings for federal income tax purposes in
the event of a liquidation.
145
<PAGE> 150
BANK MUTUAL CORPORATION
STOCK OFFERING
DECEMBER 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
----------------------------------------------------------------
4,633,564 5,906,014 7,178,464 8,641,781
shares at shares at shares at shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share (a)
----------------------------------------------------------------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Gross proceeds $ 46,336 $ 59,060 $ 71,785 $ 86,418
Less marketing fees and other issuance expenses (2,923) (3,098) (3,274) (3,476)
----------------------------------------------------------------
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (3,911) (4,420) (4,929) (5,514)
----------------------------------------------------------------
Estimated adjusted net proceeds (b) $ 31,680 $ 42,702 $ 53,724 $ 66,399
================================================================
Combined net income (loss):
Historical combined (c) $ (1,864) $ (1,864) $ (1,864) $ (1,864)
Interest income (d) 1,127 1,519 1,912 2,362
ESOP (e) (469) (530) (591) (662)
MRP (f) (469) (530) (591) (662)
----------------------------------------------------------------
Pro forma income (loss) (1,675) (1,405) (1,135) (825)
Amortization and write-off of intangible assets, net of tax 18,713 18,713 18,713 18,713
----------------------------------------------------------------
Pro forma net income before amortization and write-
off of intangible assets $ 17,038 $ 17,308 $ 17,578 $ 17,888
================================================================
Earnings (loss) per share:
Historical combined (c) $ (0.10) $ (0.09) $ (0.08) $ (0.07)
Interest income (d) 0.06 0.07 0.08 0.09
ESOP (e) (0.03) (0.03) (0.03) (0.03)
MRP (f) (0.02) (0.02) (0.02) (0.02)
----------------------------------------------------------------
Pro forma basic earnings (loss) per share (0.09) (0.07) (0.05) (0.03)
Amortization and write-off of intangible assets 1.01 0.90 0.80 0.72
----------------------------------------------------------------
Pro forma basic earnings per share before amortization and write-
off of intangible $ 0.92 $ 0.83 $ 0.75 $ 0.69
================================================================
Pro forma basic P/E ratio (g) NM NM NM NM
================================================================
Pro forma basic P/E ratio
before amortization of intangible assets (g) 10.9x 12.1x 13.3x 14.6x
================================================================
Number of shares used in calculating net income per share (i) 18,498,633 20,906,119 23,313,604 26,082,213
================================================================
Shareholder's equity:
Historical combined (h) $ 207,441 $ 207,441 $ 207,441 $ 207,441
Estimated net proceeds 43,413 55,962 68,511 82,942
Less: Common stock acquired by ESOP (e) (7,822) (8,840) (9,858) (11,028)
Less: Common stock to be acquired by MRP (f) (3,911) (4,420) (4,929) (5,514)
----------------------------------------------------------------
Proforma shareholder's equity (j) 239,121 250,143 261,165 273,840
Unamortized intangible assets (63,012) (63,012) (63,012) (63,012)
----------------------------------------------------------------
Proforma tangible shareholder's equity (j) $ 176,109 $ 187,131 $ 198,153 $ 210,828
================================================================
Shareholder's equity per share:
Historical combined (i) $ 10.59 $ 9.37 $ 8.40 $ 7.51
Estimated net proceeds 2.21 2.53 2.78 3.00
Less: Common stock acquired by ESOP (e) (0.40) (0.40) (0.40) (0.40)
Less: Common stock to be acquired by MRP (f) (0.20) (0.20) (0.20) (0.20)
----------------------------------------------------------------
Pro forma shareholder's equity per share (i)(j) 12.20 11.30 10.58 9.91
Unamortized intangible assets 3.22 2.85 2.56 2.28
----------------------------------------------------------------
Pro forma tangible shareholder's equity per share (i)(j) $ 8.99 $ 8.45 $ 8.02 $ 7.63
================================================================
Pro forma price to book value ratio 81.90% 88.50% 94.61% 100.91%
================================================================
Pro forma price to tangible book value ratio 111.23% 118.34% 124.69% 131.06%
================================================================
Number of shares used in equity per share calculations (i) 19,593,685 22,143,685 24,693,685 27,626,185
================================================================
</TABLE>
146
<PAGE> 151
BANK MUTUAL CORPORATION
PRO FORMA FOR STOCK OFFERING
MARCH 31, 2000
(a) Assumes an increase in the number of shares due to a 15% increase in
the maximum of the offering range to reflect changes in market and
financial conditions before the conversion and stock offering is
completed or to fill the order of the employee stock ownership plan.
(b) Estimated adjusted proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by Mutual
Savings' employee stock ownership plan and (ii) the value of the shares
to be purchased by Mutual Savings' recognition plan after the
conversion and stock offering, subject to shareholder approval, at an
assumed purchase price of $10.00 per share. Marketing fees and other
issuance expenses consist of legal, accounting, printing and other
fixed costs totaling $2,345,000 plus variable marketing fees based on
1.50% of gross proceeds less shares to be acquired by the ESOP.
(c) Reflects the combined historical net earnings and shareholders' equity
of Mutual Savings and First Northern for the three months ended March
31, 2000, adjusted for the merger.
(d) Consists of interest earned on net proceeds from the sale of minority
ownership of Bank Mutual at 6.26%, which represents the one year U. S.
treasury note rate at March 31, 2000.
(e) Bank Mutual assumes that 8% of the shares of common stock issued in the
restructuring, stock offering and merger will be purchased by the ESOP
(782,180, 883,976, 985,772, and 1,102,837 shares at the minimum,
midpoint, maximum and adjusted maximum, respectively). Bank Mutual also
assumes that the funds used to acquire such shares will be borrowed by
the ESOP from Bank Mutual. Mutual Savings intends to make quarterly
contributions to the ESOP over a ten-year period in an amount at least
equal to the principle and interest requirements of the debt. The pro
forma earnings assumes (i) that the loan to the ESOP is payable over
ten years in equal installments of principle with the ESOP shares
having an average fair value of $10.00 per share; ii) that the loan to
the ESOP bears interest at the Mutual Savings' prime interest rate;
(iii) that the ESOP expense for the period is equivalent to the
principal payment for the period and are made throughout the period
(the interest expense paid by the Mutual Savings and the interest
income recognized by the Bank Mutual on the ESOP debt are eliminated in
consolidation); (iv) that 19,555, 22,099, 24,644 and 27,571 shares are
committed to be released with respect to the quarter ended March 31,
2000, at the minimum, midpoint, maximum and adjusted maximum,
respectively; (v) only the ESOP shares committed to be released during
the period are considered outstanding for the purposes of the earnings
per share calculations based on the average shares to be released
during the year; and (f) the effective tax rate is 40.0% for the
period.
(f) Bank Mutual assumes that 4% of the shares of common stock issued in the
conversion, stock offering and merger will be purchased by the
recognition plan (391,090, 441,988, 492,886, and 551,419 shares at the
minimum, midpoint, maximum and adjusted maximum respectively), assuming
that: (a) shareholder approval of the recognition plan is received; (b)
the shares were acquired by the recognition plan at the beginning of
the period presented in open market purchases at $10.00 per share; (c)
the amortized expense for the quarter ended March 31, 2000 is 5% (based
on a five year amortization using the straight line method) of the
amount contributed which is equal to the vested portion of the shares
based on the average shares to be vested during the year; and (d) the
effective tax rate applicable to such employee compensation expense is
40.0%. Unvested shares under the recognition plan are excluded from the
basic earnings per share calculation and included in the diluted
earnings per share calculation only if they are dilutive under the
treasury stock method. Bank Mutual assumes that 20% of the recognition
plan shares vest annually and that 19,555, 22,099, 24,644 and 27,571
shares vest for the period ended March 31, 2000 at the minimum,
midpoint, maximum and adjusted maximum, respectively.
(g) Assuming Bank Mutual were to fully convert, resulting in additional
estimated adjusted net proceeds at the minimum, midpoint, maximum and
adjusted maximum of $91.1 million, $102.2 million, $113.3 million and
$126.0 million, respectively, which were invested at 5.93%, which
represents the one year U. S. treasury note rate as of December 31,
1999, less tax effects, and all other assumptions noted above remained
unchanged, the following ratios and amounts would result:
147
<PAGE> 152
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma shareholders' equity per share $ 16.86 $ 15.91 $ 15.16 $ 14.47
Pro forma tangible shareholders' equity per share $ 13.64 $ 13.07 $ 12.61 $ 12.19
Pro forma price to book value ratio 59.33% 62.85% 65.95% 69.09%
Pro forma price to tangible book value ratio 73.32% 76.53% 79.29% 82.02%
Pro forma basic earnings per share $ .06 $ .08 $ .10 $ .11
Pro forma basic earnings per share before
amortization of intangible assets $ 1.22 $ 1.11 $ 1.03 $ .94
Pro forma basic P/E ratio NM NM NM NM
Pro forma basic P/E ratio before amortization of
intangible assets 8.2x 9.0x 9.8x 10.6x
</TABLE>
(h) Consists of equity of Mutual Savings at December 31, 1999 plus capital
of $43,721,000 issued to former shareholders' assuming 40% of the
shares are exchanged less $100,000 of initial capitalization of MHC.
(i) Basic earnings per share calculations are determined by (i) starting
with the number of shares assumed to be sold in the conversion and
stock offering, excluding shares to be acquired by the ESOP and
recognition plan, (ii) adding the number of shares to be issued to
shareholders of First Northern, (iii) adding the number of shares to be
issued to MHC, (iv) adding the average ESOP shares that have been
committed for release during the period, and (v) adding the average
recognition plan shares assumed vested during the period. . The
unvested recognition plan shares were deemed to be for future services
and not dilutive under the treasury stock method. Book value per share
calculations are determined by (i) starting with the number of shares
assumed to be sold in the stock offering, (ii) adding the number of
shares to be issued to First Northern shareholders and (iii) adding the
number of shares to be issued to MHC. Set forth below is a
reconciliation of the number of shares used in making the per share
calculations:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
<S> <C> <C> <C> <C>
Shares issued in conversion 4,633,564 5,906,014 7,178,464 8,641,781
Shares issued to First Northern shareholders 5,143,685 5,143,685 5,143,685 5,143,685
Shares issued to MHC 9,816,436 11,093,986 12,371,536 13,840,719
---------- ---------- ---------- ----------
Total shares outstanding and used in calculating 19,593,685 22,143,685 24,693,685 27,626,185
book value per share
Less shares sold to ESOP (782,180) (883,976) (985,772) (1,102,837)
Less recognition plan shares (391,090) (441,988) (492,886) (551,419)
Plus ESOP shares assumed committed to be 39,109 44,199 49,289 55,142
released
Plus recognition plan shares assumed vested 39,109 44,199 49,289 55,142
--------------------------------------------------------------------
Number of shares used in calculating basic and
diluted earnings per share 18,498,633 20,906,119 23,313,605 26,082,214
====================================================================
</TABLE>
(j) The retained earnings of Mutual Savings will be substantially
restricted after the restructuring. See "The Restructuring - Effects of
the Restructuring - Liquidation Rights." Pro forma shareholders' equity
and pro forma shareholders' equity per share do not give effect to the
liquidation account or the bad debt reserves established by Mutual
Savings or First Northern Savings for federal income tax purposes in
the event of a liquidation.
148
<PAGE> 153
REGULATORY CAPITAL COMPLIANCE
At March 31, 2000, Mutual Savings and First Northern Savings exceeded all
regulatory capital requirements. Set forth below is a summary of the capital
computed under generally accepted accounting principles and the compliance
with regulatory capital standards at March 31, 2000, on a historical and pro
forma basis. We have assumed that the indicated number of shares were sold as of
March 31, 2000 and shares were issued to First Northern shareholders in
conjunction with the merger agreement. We assumed that Mutual Savings received
none of the proceeds from the offering. We further assume that in conjunction
with the initial capitalization of Bank Mutual, that capital will be
transferred to Bank Mutual in the amounts of $44.0 million, $40.0 million, $36.3
million and $32.0 million from Mutual Savings and $10.5 million, $8.4 million,
$6.8 million and $4.5 million from First Northern Savings at the minimum,
midpoint, maximum and adjusted maximum, respectively, and that MHC is initially
capitalized by a transfer from Mutual Savings of $100,000 in all pro forma
cases. Finally, we assume that First Northern Savings' capital will be reduced
by $4.8 million of non-recurring merger-related expenses.
After the restructuring, the stock offering and the First Northern merger, we
believe that Mutual Savings and First Northern Savings will continue to exceed
all applicable regulatory capital requirements. For a discussion of the capital
requirements applicable to Mutual Savings, see "Regulation - Mutual Savings and
First Northern Savings Federal Regulation Following Restructuring".
<TABLE>
<CAPTION>
Mutual Savings
---------------------------------------------------------------------------------------------------
Proforma
-----------------------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
--------- ---------- --------- ---------
4,633,564 5,906,014 7,178,464 8,641,781
Historical Shares Sold Shares Sold Shares Sold Shares Sold
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a)
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
===================================================================================================
GAAP Capital (b) $163,909 9.41% $119,809 7.06% $123,809 7.27% $127,509 7.48% $131,809 7.71%
===================================================================================================
Tier I Leverage Capital:
Capital level $160,879 9.25% $116,779 6.89% $120,799 7.11% $124,479 7.45% $128,779 7.54%
Requirement (c) 69,575 4.00 67,811 4.00 67,971 4.00 68,119 4.00 68,291 4.00
---------------------------------------------------------------------------------------------------
Excess $ 91,304 5.25% $ 48,968 2.89% $ 85,312 3.11% $ 56,360 3.45% $ 60,488 3.54%
===================================================================================================
Tier I Risk-based Capital:
Capital level $160,879 17.98% $116,779 13.18% $120,779 13.62% $124,479 14.03% $128,779 14.50%
Requirement 35,788 4.00 35,435 4.00 35,467 4.00 35,497 4.00 35,531 4.00
---------------------------------------------------------------------------------------------------
Excess $ 84,847 13.98% $ 81,344 9.18% $ 85,312 9.62% $ 88,982 10.03% $ 93,248 10.50%
===================================================================================================
Total Risk based Capital:
Capital level $167,839 18.76% $123,727 13.97% $127,727 14.41% $131,427 14.81% $135,727 15.28%
Requirement 71,576 8.00 70,870 8.00 70,934 8.00 70,993 8.00 71,062 8.00
---------------------------------------------------------------------------------------------------
Excess $ 96,263 10.76% $ 52,857 5.97% $ 56,793 6.41% $ 60,434 6.81% $ 64,665 7.28%
===================================================================================================
</TABLE>
149
<PAGE> 154
<TABLE>
<CAPTION>
First Northern Savings
---------------------------------------------------------------------------------------------------
Proforma
-----------------------------------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
--------- ---------- --------- ---------
4,633,564 5,906,014 7,178,464 8,641,781
Historical Shares Sold Shares Sold Shares Sold Shares Sold
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a) Amount Assets(a)
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital (b)
$70,730 8.23% $105,103 11.67% $107,203 11.88% $108,803 12.03% $111,103 12.26%
===================================================================================================
Tier I Leverage Capital:
Capital level $69,842 8.07% $ 53,333 6.29% $ 55,433 6.52% $ 57,033 6.69% $ 59,333 6.94%
Requirement (c) 34,599 4.00 33,938 4.00 34,022 4.00 34,086 4.00 34,178 4.00
Excess ---------------------------------------------------------------------------------------------------
$35,243 4.07% $ 19,395 2.29% $ 21,411 2.52% $ 22,947 2.69% $ 25,155 2.94%
===================================================================================================
Tier I Risk-based Capital:
Capital level $69,842 12.21% $ 53,333 8.61% $ 55,433 8.94% $ 57,033 9.20% $ 59,333 9.56%
Requirement 22,873 4.00 24,775 4.00 24,792 4.00 24,805 4.00 24,823 4.00
Excess ---------------------------------------------------------------------------------------------------
$46,969 8.21% $ 28,558 4.61% $ 30,641 4.94% $ 32,228 5.20% $ 34,510 5.56%
===================================================================================================
Total Risk based Capital:
Capital level $73,904 12.92% $ 60,281 9.73% $ 62,381 10.06% $ 63,981 10.32% $ 66,281 10.68%
Requirement 45,746 8.00 49,551 8.00 49,584 8.00 49,610 8.00 49,647 8.00
Excess ---------------------------------------------------------------------------------------------------
$28,158 4.92% $ 10,730 1.73% $ 12,797 2.06% $ 14,371 2.32% $ 16,634 2.68%
===================================================================================================
</TABLE>
(a) Leverage capital levels are shown as a percentage of "average assets" and
"risk-based capital" levels are calculated on the basis of a percentage of
"risk-weighted assets", as each is defined in bank regulations.
(b) GAAP is defined as generally accepted accounting principles.
(c) The current leverage capital requirement for savings banks is 4%-5% of total
adjusted assets. For savings banks that receive the highest supervisory
ratings for safety and soundness and that are not experiencing or
anticipating significant growth, the leverage capital requirement is 3%.
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<PAGE> 155
CERTAIN EFFECTS OF THE FIRST NORTHERN MERGER ON MUTUAL
On a pro forma basis at March 31, 2000, assuming completion of the
First Northern merger, the restructuring and the stock offering, Bank Mutual
would have had total assets of $2.6 billion, total deposits of $1.9 billion, net
loans of $1.9 billion, total shareholders' equity of $250.2 million. For further
pro forma information, see "Pro Forma Data."
Management of Mutual Savings believes that the First Northern merger
will be advantageous to Mutual's competitive posture, joining two banks with
contiguous market areas and compatible business philosophies and product mix.
The merger will permit Mutual to expand into growing northeastern Wisconsin
markets at a fair consideration and in a more efficient manner than establishing
new branches. Initially, the two banks will continue to operate separately.
Mutual considers the experienced, forward-looking management of First
Northern to be a benefit of the merger. First Northern's CEO and three other
board members will join the board of Bank Mutual. It is anticipated that the
merger will allow the banks to eliminate certain duplicative costs and to
achieve potential economies of scale over time through the increased size and
efficiencies of the combined entity. Similarly, the increased size and
geographical market area should, over time, allow Mutual to expand products and
services and take advantage of greater cross-selling opportunities.
GEOGRAPHIC EXPANSION
Mutual Savings and First Northern Savings currently operate in markets
that are, for the most part, contiguous and complementary to each other. Most of
Mutual Savings' offices are located in the southeastern, south central and
western part of Wisconsin. While Mutual has a relatively small presence in
northeastern Wisconsin, all of First Northern Savings' offices are located in
that area of the state. In particular, First Northern has a substantial presence
in the Fox River Valley region, and also includes surrounding rural and vacation
areas. The Fox River Valley region is anchored by the cities of Green Bay, where
First Northern has its headquarters and a substantial presence, and Appleton,
where Mutual Savings has its offices in the area. See "Business of Mutual
Savings Bank - Market Area." The First Northern acquisition would substantially
increase Mutual's presence in the northeastern part of the state, while Mutual
Savings expects that it would also retain its current offices in the region
after the First Northern merger.
Mutual Savings believes that the northeastern part of Wisconsin is an
attractive area for growth. It is the third largest population concentration in
the state, and includes a variety of commercial, industrial, service and
recreational businesses.
IMPACT ON DEPOSITS
Mutual Savings and First Northern Savings have relatively similar
deposit mixes and interest rates paid on those deposits.
151
<PAGE> 156
The following table presents the distribution of Mutual Savings' and First
Northern Savings' deposit accounts at March 31, 2000 by dollar amount and
percent of portfolio, and the weighted average interest rate on each category of
deposits.
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------
MUTUAL SAVINGS FIRST NORTHERN SAVINGS
-------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------------- ---------- ------------ ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings $ 150,901 11.44% 2.41% $72,307 12.80% 2.40%
Interest-bearing demand 89,141 6.76% 1.05% 39,569 7.01% 1.12%
Money market 230,051 17.44% 4.91% 68,253 12.08% 4.55%
Demand 48,403 3.67% 0.00% 30,362 5.38% 0.00%
------------ --------- ----------- ---------- ---------- ------------
Total 518,496 39.30% 3.06% 210,491 37.27% 2.51%
------------- --------- ---------- ----------
Certificates:
Time deposits with original
maturities of:
Three months or less 72,565 5.50% 5.06% 22,585 4.00% 5.61%
Over three months to
twelve months 168,333 12.77% 4.99% 86,197 15.26% 5.59%
Over twelve months to
twenty-four months 373,917 28.35% 5.47% 162,620 28.78% 5.60%
Over twenty-four
months to thirty-six months 116,313 8.82% 6.06% 44,587 7.89% 5.66%
Over thirty-six months
to forty-eight months 5,392 0.41% 5.74% 30,759 5.45% 6.00%
Over forty-eight months
to sixty months 61,765 4.68% 5.89% 7,626 1.35% 5.52%
Over sixty months 2,407 0.18% 6.37% -- --
------------- --------- ----------- ----------- ----------- ------------
Total time deposits 800,692 60.70% 5.46% 354,374 62.73% 5.64%
------------- --------- ----------- ----------- ---------- ------------
Total deposits $ 1,319,188 100.00% 4.52% $ 567,693 100.00% 4.47%
============= ========= =========== ==========
</TABLE>
In addition to having a similar deposit mix, Mutual Savings and First
Northern Savings offer similar, although not identical, deposit products. Even
though Mutual Savings and First Northern Savings are expected to initially
operate as separate financial institutions, Mutual expects that certain deposit
products which currently are offered by only one of the savings banks may now be
offered by both. Thus, both Mutual Savings and First Northern Savings will have
the benefit of the other's experience.
Mutual expects that customer retention will be maximized because both
the institutions anticipate keeping open all branch offices after the merger,
under the existing names. Because the two companies have relatively similar
deposit and pricing strategies, Mutual does not expect that changes, if any,
which may be made by First Northern Savings will cause a significant deposit run
off.
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<PAGE> 157
IMPACT ON LOAN PORTFOLIO
Mutual Savings' and First Northern Savings' loan products and lending
operations are relatively similar, although Mutual Savings has a higher
percentage of first mortgage loans than First Northern Savings, and First
Northern Savings has a higher percentage of consumer loans. The following table
presents the composition of Mutual Savings' and First Northern Savings' loan
portfolios in dollar amounts and in percentages of the total portfolio at March
31, 2000. We have used several specific categories in this table than we have in
other tables in this prospectus to help illustrate the comparison between the
two institutions.
<TABLE>
<CAPTION>
----------------------------------------
FIRST NORTHERN
MUTUAL SAVINGS SAVINGS
------------------------------------------ ----------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE
AMOUNT TOTAL RATE AMOUNT TOTAL RATE
------------ ---------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to-four family $752,259 66.86 % $478,359 60.%0
Multi-family 53,853 4.79 37,361 4.74
Commercial real estate 55,085 4.9 19,717 2.50
Construction and development 27,908 2.48 41,096 5.21
------------ --------- ---------- ---------
Total first mortgage real
estate loans $889,105 79.03 % 7.28 % $576,533 73.15 % 7.01 %
------------ --------- ---------- ---------
Consumer and other loans:
Consumer loans:
Fixed equity $ 97,820 8.69 % 8.12 % $ 63,324 8.04 % 8.19 %
Home equity lines of credit 51,982 4.62 8.28 18,803 2.39 9.82
Student 28,598 2.54 8.35 * -- --
Automobile 5,492 0.49 8.70 98,973 12.56 7.30
Home improvement 10,449 0.93 8.17 ** -- --
Other 4,607 0.41 8.67 20,693 2.63 9.19
------------ --------- -------- ---------- --------- ---------
Total consumer loans 198,948 17.68 8.23 201,798 25.62 8.01
------------ --------- -------- ---------- --------- ---------
Commercial business loans 37,038 3.28 7.81 9,724 1.23 8.53
------------ --------- -------- ---------- --------- ---------
Total consumer and other loans 235,986 20.97 8.61 211,522 26.85 8.03
------------ --------- -------- ---------- --------- ---------
Total loans receivable $1,125,091 100 % 7.46 % $ 788,055 100.00 % 7.29 %
============ ==========
Less:
Undisbursed loan proceeds 14,233 16,961
Deferred fees and discounts 72 478
Allowance for losses 6960 4062
------------ ----------
Total loans receivable, net $1,105,947 $768,901
============ ==========
Non-performing loans as a percent 0.33 % 0.03 %
of total loans
Non-performing assets as a percent 0.37 % 0.07 %
of total assets
</TABLE>
* First Northern Savings generally makes student loans for resale rather
than retaining them in its portfolio.
** First Northern Savings does not separately categorize home improvement
loans. However, these loans are included in "fixed equity" and "home
equity lines of credit."
153
<PAGE> 158
First Northern Savings has a higher level of consumer loans than Mutual
Savings, particularly of automobile loans. Most of these are indirect automobile
loans originated by First Northern through a joint venture with another
financial institution. First Northern Savings has experienced minimal
delinquencies under this program; Mutual expects to continue the program after
the First Northern merger. First Northern Savings' "other" consumer loans
include loans secured by boats, recreational vehicles and snowmobiles as a
consequence of the vacation and recreational regions which are served by First
Northern.
The weighted average interest rates on Mutual Savings' and First
Northern Savings' loans is generally consistent by loan type, with several
exceptions. The average rate on First Northern Savings' home equity lines of
credit is higher than Mutual Savings', primarily as a result of the lower
average credit line. Conversely, the weighted average rate on First Northern's
automobile loans is lower than Mutual Savings'. That difference results both
because First Northern's joint venture company absorbs losses on this portfolio,
which are then reflected at First Northern in the net yield rather than as
written off assets, and as a result of the more aggressive automobile loan
pricing by that joint venture.
Both First Northern's and Mutual Savings' non-performing loan and asset
ratios reflect strong asset quality.
Mutual believes that, over time, the First Northern merger will provide
additional lending opportunities to the combined enterprise. Mutual intends to
augment its consumer lending with programs currently offered by First Northern
Savings. Similarly, Mutual believes that the expanded customer and geographical
base will provide further opportunities for commercial real estate and
commercial business lending in which Mutual Savings and First Northern Savings
intend to expand. Mutual also expects to minimize customer disruption to First
Northern Savings' customers by retaining First Northern Savings as a separate
entity, whose local loan officers will retain authority to make most credit
decisions in its market area. Also, a larger institution will be better able to
diversify its portfolio since it has a larger customer base, can more readily
hire experienced staff, and leverage greater resources.
MARKET FOR BANK MUTUAL COMMON STOCK
Mutual has not previously issued common stock, so there is no market
for the common stock. We have received conditional approval to have our common
stock quoted on the Nasdaq National Market under the symbol "BKMU" after the
restructuring. Ryan, Beck has advised us that it intends to make a market in the
common stock following the restructuring, but is under no obligation to do so.
We will encourage and assist additional market makers to make a market in our
common stock.
Making a market involves maintaining bid and asked quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices. Various securities laws and other regulatory requirements apply
to these activities. Additionally, the development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is
not within our control, or that of any market maker. The number of active buyers
and sellers of the common stock at any particular time may be limited. Under
such circumstances, you could have difficulty selling your shares on short
notice and you should not view the common stock as a short-term investment. We
cannot assure you that an active and liquid trading market for the common stock
will develop or that, if it develops, it will continue, nor can we assure you
that if you purchase shares you will be able to sell them at or above $10.00 per
share.
HOW MUTUAL DETERMINED ITS OFFERING RANGE AND $10.00 PRICE PER SHARE IN ITS STOCK
OFFERING
The Bank Mutual offering range in the stock offering which it is
conducting in conjunction with its restructuring is based on an independent
appraisal of Mutual's pro forma market value prepared by an appraisal firm
experienced in appraisals of savings institutions.
154
<PAGE> 159
The appraiser has estimated that in its opinion as of June 12, 2000,
the estimated pro forma market value of Mutual, assuming completion of the stock
offering and the First Northern merger, was between $144.5 million and $195.5
million, with a midpoint of $170.0 million.
The board of directors of Mutual Savings has determined to sell shares
in the stock offering at $10.00 share. Based on that price, assuming the
issuance of 5,143,685 shares to former shareholder of First Northern, the pro
forma market value of Mutual Savings ranged between $195.9 million and $246.9
million, with a midpoint pro forma market value of $221.4 million. This is the
"estimated valuation range." The stock issuance plan provides that total
outstanding shares must reflect the estimated valuation range and that public
ownership will equal 49.9 percent of outstanding shares, while the MHC's
ownership will equal 50.1 percent. Given the 5,143,685 shares to be issued to
the former shareholders of First Northern, this results in an offering range of
between 4,633,564 and 7,178,464 shares, with a midpoint of 5,906,014 shares.
Following the stock offering and First Northern merger, shares outstanding to
the public will therefore range between 9,777,249 and 12,322,149, with a
midpoint of 11,049,699 shares. Total outstanding shares, held by the MHC and
public owners, will range between 19,593,685 and 24,693,685.
The appraisal was based in part upon Mutual Savings' financial
condition and operations, the financial condition and operations of First
Northern, the effect of the First Northern merger and the effect of the
additional capital Bank Mutual will raise from the sale of common stock. The
independent appraisal will be updated before Mutual completes its restructuring.
The $10.00 price per share was chosen by Mutual Savings' board of
directors because it is the price per share most commonly used in stock
offerings involving conversions and reorganizations of savings institutions.
MUTUAL'S POLICY REGARDING DIVIDENDS
Bank Mutual currently plans to pay shareholders a cash dividend at an
annual rate of $0.28 per share. The dividend would be declared and payable
quarterly at a rate of $0.07 per share, starting for the first full quarter we
are a public company, but not earlier than the first quarter of 2001. The
payment of dividends will be subject to the determination of our board of
directors, which will take into account, among other factors, our financial
condition, results of operations, tax considerations, industry standards,
economic conditions and regulatory restrictions that affect the payment of
dividends by Mutual Savings and First Northern Savings to Bank Mutual. Bank
Mutual must also comply with regulations that govern the level of dividends
which may pay as well as the regulatory capital requirements of Bank Mutual as a
savings bank holding company. We cannot guarantee that we will pay dividends or
that, if paid, that we will not reduce or eliminate dividends in the future.
If Bank Mutual pays dividends to its shareholders, it will be required
to pay dividends to the MHC unless the MHC elects to waive dividends. We
currently anticipate that initially the MHC will waive dividends paid by Bank
Mutual. Any decision to waive dividends will be subject to regulatory approval.
If the OTS does not permit the dividend waiver, it is possible that Bank Mutual
would need to lower the amount of dividends in order to retain sufficient
capital at Bank Mutual. See "Regulation - MHC Regulation - Waiver of Dividends."
As the principal assets of Bank Mutual, Mutual Savings and First
Northern Savings will provide the principal sources of funds for the payment of
dividends by Bank Mutual. Federal law provides that dividends may be paid by
Mutual Savings and First Northern Savings, as federal institutions, only out of
net income and unrestricted capital surplus. However, these subsidiaries will
not be permitted to pay dividends on their capital stock if, among other things,
their capital would be reduced below the amount required for the liquidation
account. See "The Restructuring -- Effects of the Restructuring -- Liquidation
Rights."
Any payment of dividends by Mutual Savings or First Northern to Bank
Mutual which would be deemed to be drawn out of their bad debt reserves would
require a payment of taxes at the then-current tax rate by them on the amount
155
<PAGE> 160
of earnings deemed to be removed from bad debt reserves for such distribution.
Mutual Savings and First Northern do not intend to make any distribution to Bank
Mutual that would create this type of a tax liability.
Bank Mutual and Mutual Savings have also committed to the OTS in
connection with the reorganization, that during the one-year period following
the completion of the restructuring, Bank Mutual will not declare an
extraordinary dividend to shareholders which would be treated by recipient
shareholders as a tax-free return of capital for federal income tax purposes
without prior approval of the OTS.
LEGAL OPINIONS
The legality of the Bank Mutual common stock to be issued in the
merger, and certain federal income tax consequences of the merger, will be
passed upon on behalf of Bank Mutual by Quarles & Brady LLP, Milwaukee,
Wisconsin.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Mutual Savings'
consolidated financial statements at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, as set forth in their
report. We have included Mutual Savings' financial statements in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
Wipfli Ullrich Bertelsen LLP, independent auditors, have audited First
Northern's consolidated financial statements at December 31, 1999 and for the
year then ended, as set forth in their report. We have incorporated by reference
First Northern's financial statements for that period in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Wipfli Ullrich Bertelsen LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of First Northern as of December 31, 1998 and for each of
the two years in the period ended December 31, 1998 included in their Annual
Report on Form 10-K for the year ended December 31, 1999, as set forth in their
report. That report is incorporated by reference in this proxy
statement/prospectus and elsewhere in the registration statement. First
Northern's financial statements for the periods indicated are incorporated by
reference in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
OTHER INFORMATION WHICH YOU CAN OBTAIN
First Northern is a public company, and must provide information to the
public under the Securities Exchange Act of 1934. Therefore, First Northern
files reports, proxy statements and other information with the Securities and
Exchange Commission. You may inspect and copy these materials at the
Commission's public reference facilities, which are located at:
- Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
- 7 World Trade Center, New York, New York 10048, and
- Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
You may also obtain copies of these documents by writing to the Commission's
Public Reference Section, Washington, D.C. 20549; in that case, you will be
charged for the copies at the rates which the Commission sets. You may also
obtain
156
<PAGE> 161
copies from the Commission's Web site (http://www.sec.gov). Because First
Northern common stock is traded on the Nasdaq Stock Market, you can inspect
material filed by it at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street N.W., Washington, D.C. 20006.
This proxy statement/prospectus "incorporates by reference" the filings
named below. That means that the contents of those documents are considered to
be part of this proxy statement/prospectus even though they are not actually
included with it. Bank Mutual or First Northern will provide you with a copy of
any of those documents without charge if you are a First Northern record
shareholder, or if you are a beneficial owner of securities which are held in
street name. They will not necessarily provide exhibits unless those exhibits
are specifically incorporated by reference in the document. You can obtain
copies of the documents by writing to First Northern, 201 North Monroe Avenue,
P.O. Box 23100, Green Bay, Wisconsin 54305-3100, Attn: Marla J. Carr, or by
calling Ms. Carr, First Northern's corporate secretary, at (920) 437-7101. You
should request the information by , 2000 to help assure that you receive
it before the special meeting.
This proxy statement/prospectus incorporates by reference the following
documents. Each of them has been filed by First Northern with the Commission as
required by the Exchange Act:
- Form 10-K for the year ended December 31, 1999;
- Forms 10-Q for the quarter ended March 31, 2000; and
- First Northern's current report on Form 8-K dated February 21, 2000.
This proxy statement/prospectus also incorporates all reports and definitive
proxy or information statements filed by First Northern under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this proxy
statement/prospectus. They will be incorporated by reference into this proxy
statement/prospectus from the date on which First Northern files such documents.
Bank Mutual has filed a registration statement on Form S-4 under the
Securities Act with the Commission which covers the shares of common stock
described in this proxy statement/prospectus. The registration statement has
information in addition to the information in this proxy statement/prospectus.
You may obtain that additional information at the addresses above. This proxy
statement/prospectus, and the documents which this proxy statement/prospectus
incorporates by reference, describe certain contracts or other documents. These
descriptions are only summaries, and are not necessarily complete. If you wish
further information rather than this summary, you should review a copy of the
document if Bank Mutual has filed it as an exhibit to the registration
statement. When Bank Mutual has filed a document as an exhibit, a complete
reading of the document will provide you more information than a summary. Bank
Mutual is not responsible if you fail to read the full document.
157
<PAGE> 162
INDEX TO FINANCIAL STATEMENTS
BANK MUTUAL AND MUTUAL
For pro forma financial information about Bank Mutual giving effect to
the merger with First Northern, see "Pro Forma Financial Information."
The following financial statements of Mutual Savings are included in
this Proxy Statement/Prospectus. Mutual Savings may be considered a predecessor
to Bank Mutual. Because Bank Mutual has not conducted operations, separate
financial statements for it are not included.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
MUTUAL SAVINGS BANK
Independent Auditors' Report.............................................................. F-1
Consolidated Statements of Financial Condition at March 31, 2000 (unaudited) and
December 31, 1999 and 1998............................................................ F-2
Consolidated Statements of Income for the three months ended March 31, 2000 and 1999
and for each of the Three Years Ended December 31, 1999, 1998 and 1997................ F-3
Consolidated Statements of Changes in Equity for the three months ended March 31, 2000
and 1999 and for each of the three years ended December 31, 1999, 1998 and 1997....... F-4
Consolidated Statements for Cash Flows for the three months ended March 31, 2000
and 1999 and for each of the three years ended December 31, 1999, 1998 and 1997....... F-5
Notes to Consolidated Financial Statements................................................ F-8
</TABLE>
FIRST NORTHERN
First Northern's historical financial statements and other financial
information are incorporated by reference in this proxy statement/prospectus
from First Northern's filings with the Securities and Exchange Commission. See
"Other Information Which You Can Obtain."
158
<PAGE> 163
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> 164
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Financial Condition
(In Thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
ASSETS (Unaudited)
Cash and due from banks $ 18,243 $ 21,367 $ 22,534
Federal funds sold -- 25,000 45,000
Interest-earning deposits 21,457 132,592 262,714
-----------------------------------------
Cash and cash equivalents 39,700 178,959 330,248
Securities available-for-sale, at fair value:
Investment securities 48,165 57,763 116,534
Mortgage-related securities 472,456 374,100 270,897
Loans held for sale 2,121 541 27,723
Loans receivable, net 1,103,826 1,082,795 1,037,589
Real estate owned 4,664 4,953 5,440
Premises and equipment 26,509 26,871 27,567
Federal Home Loan Bank stock, at cost 13,537 13,537 13,537
Accrued interest receivable 9,095 8,620 8,035
Intangible assets 11,261 11,496 29,786
Other assets 10,850 9,871 5,506
-----------------------------------------
$ 1,742,184 $ 1,769,506 $ 1,872,862
=========================================
LIABILITIES AND EQUITY
Liabilities:
Deposits $ 1,319,188 $ 1,343,007 $ 1,398,858
Borrowings 238,699 242,699 270,822
Advance payments by borrowers for taxes
and insurance 7,049 1,661 1,710
Other liabilities 13,339 18,319 25,729
-----------------------------------------
1,578,275 1,605,686 1,697,119
Equity:
Retained earnings 172,792 169,746 174,229
Net unrealized gain (loss) on securities
available-for-sale (8,883) (5,926) 1,514
-----------------------------------------
163,909 163,820 175,743
Contingencies (Notes 13 and 14)
-----------------------------------------
$ 1,742,184 $ 1,769,506 $ 1,872,862
=========================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 165
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income: (Unaudited)
Loans, including fees $ 20,341 $ 19,811 $ 79,623 $ 90,092 $ 93,628
Investments 1,802 5,141 20,200 19,714 12,115
Mortgage-related securities 7,699 4,199 18,479 15,664 10,250
-------------------------------------------------------------
Total interest income 29,842 29,151 118,302 125,470 115,993
Interest expense:
Deposits 14,778 15,589 61,091 65,236 60,917
Borrowings 3,375 3,511 13,933 14,437 10,897
Advance payments by borrowers
for taxes and insurance 26 27 313 344 380
-------------------------------------------------------------
Total interest expense 18,179 19,127 75,337 80,017 72,194
-------------------------------------------------------------
Net interest income 11,663 10,024 42,965 45,453 43,799
Provision for losses on loans 76 39 350 637 1,065
-------------------------------------------------------------
Net interest income after provision
for losses on loans 11,587 9,985 42,615 44,816 42,734
Noninterest income:
Service charges on deposits 661 642 2,813 2,630 2,413
Brokerage commissions 492 337 1,826 1,228 984
Servicing fees on loans sold 101 115 447 577 588
Loan fees and service charges 266 280 1,014 1,662 773
Gain on sales of loans 8 305 497 1,025 486
Gain (loss) on sales of securities -- (35) 158 -- (12)
Other 302 282 1,229 1,318 927
-------------------------------------------------------------
Total noninterest income 1,830 1,926 7,984 8,440 6,159
Noninterest expenses:
Compensation, payroll taxes and
other employee benefits 4,417 4,292 17,158 16,638 15,346
Occupancy 1,365 1,428 5,550 5,580 5,288
Federal deposit insurance
premiums 73 211 820 837 822
Marketing 615 498 1,864 2,158 2,375
Data processing 373 227 1,329 1,260 1,213
Amortization of intangibles 235 678 18,290 2,738 1,941
Other 1,438 1,625 6,268 6,310 5,101
-------------------------------------------------------------
Total noninterest expenses 8,516 8,959 51,279 35,521 32,086
-------------------------------------------------------------
Income (loss) before income taxes 4,901 2,952 (680) 17,735 16,807
Income taxes 1,855 1,111 3,803 6,584 6,622
-------------------------------------------------------------
Net income (loss) $ 3,046 $ 1,841 $ (4,483) $ 11,151 $ 10,185
=============================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 166
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Changes in Equity
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Retained Available- Total
Earnings For-Sale Equity
-------------------------------------------------------
<S> <C> <C> <C>
Balances at January 1, 1997 $152,893 $(1,599) $151,297
Comprehensive income:
Net income 10,185 - 10,185
Change in net unrealized gain (loss)
on securities available-for-sale,
net of deferred income tax liability
of $850 - 1,573 1,573
------------------
Total comprehensive income 12,691
-------------------------------------------------------
Balances at December 31, 1997 163,078 (26) 163,052
Comprehensive income:
Net income 11,151 - 11,151
Other comprehensive income:
Change in net unrealized gain (loss)
on securities available-for-sale,
net of deferred income tax liability
of $832 - 1,540 1,540
------------------
Total comprehensive income 12,691
-------------------------------------------------------
Balances at December 31, 1998 174,229 1,514 175,743
Comprehensive income:
Net loss (4,483) (4,483)
Other comprehensive income:
Change in net unrealized gain (loss)
on securities available-for-sale,
net of deferred income tax benefit
of $4,144 - (7,440) (7,440)
------------------
Total comprehensive loss (11,923)
-------------------------------------------------------
Balances at December 31, 1999 169,746 (5,926) 163,820
Comprehensive income:
Net income (unaudited) 3,046 - 3,046
Other comprehensive income:
Change in net unrealized gain (loss)
on securities available-for-sale,
net of deferred income tax benefit
of $1,830 (unaudited) - (2,957) (2,957)
------------------
Total comprehensive income (unaudited) - - 89
-------------------------------------------------------
Balances at March 31, 2000 (unaudited) $172,792 $(8,883) $163,909
=======================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 167
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $3,046 $1,841 $ (4,483) $ 11,151 $10,185
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Provision for losses on loans 76 39 350 637 1,065
Provision for depreciation 478 439 1,840 2,033 1,816
Deferred income tax benefit 3,356 842 (3,886) (630) (710)
Amortization of intangibles 235 678 18,290 2,738 1,941
Net discount amortization on securities (484) (419) (80) (5,242) (318)
Loans originated for sale (2,715) (28,354) (47,427) (131,082) (52,006)
Proceeds from sales of loans originated
for sale 1,138 30,523 57,358 117,770 43,478
Net gain on sales of loans (3) (305) (497) (1,025) (486)
Net (gain) loss on sale of
available-for-sale securities - 35 (378) - 12
Purchases of trading account assets - - (39,215) (5,066) -
Proceeds from sales of trading account
assets - - 38,995 5,067 -
Net loss on sale of trading account assets
- - 220 1 -
Decrease in other liabilities (4,980) (11,692) (7,410) (1,573) (94)
(Increase) decrease in other assets (979) 1,646 3,665 (2,355) 9,039
(Increase) decrease in accrued interest
receivable (475) 287 (585) 1,425 (3,533)
Other (1,580) (1,962) 587 513 (882)
------------------------------------------------------------------------
Net cash provided (used) by operating
activities (2,887) (6,402) 17,344 (5,638) 9,507
INVESTING ACTIVITIES
Proceeds from maturities and sales of
investment securities 20,000 65,000 65,000 429,337 397,619
Purchases of investment securities (10,000) (20,000) (20,000) (380,489) (376,634)
Proceeds from maturities and sales of
mortgage-related securities - - 54,060 - 3,822
Purchases of mortgage-related securities (114,420) (20,234) (213,504) (119,548) (72,071)
</TABLE>
See accompanying notes.
F-5
<PAGE> 168
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net (purchases) sales of investments in mutual
funds (421) (363) (1,481) (1,410) 16,742
Principal repayments on mortgage-related
securities 11,359 20,127 60,367 77,407 59,514
Net (increase) decrease in loans receivable (21,107) 10,307 (29,581) 208,864 96,953
Proceeds from sale of foreclosed properties 764 307 1,673 3,438 627
Proceeds from sale of Federal Home Loan
Bank stock - - - 6,700 277
Purchases of office properties and equipment (116) (191) (1,173) (3,141) (1,854)
Sales of office properties and equipment - - 29 - -
Business acquisition, net of cash and cash
equivalents acquired of $8,328 - - - - (118,164)
------------------------------------------------------------------------
Net cash provided (used) by investing
activities (113,941) 54,953 (84,610) 221,158 6,831
FINANCING ACTIVITIES
Net increase (decrease) in deposits (23,819) (19,494) (55,851) 36,528 (8,653)
Net decrease in short-term borrowings - - - - (208,194)
Proceeds from long-term borrowings 11,000 - - - 228,000
Repayments on long-term borrowings (15,000) (2) (28,123) (45) -
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 5,388 5,392 (49) (819) 1,636
------------------------------------------------------------------------
Net cash provided (used) by financing
activities (22,431) (14,104) (84,023) 35,664 12,789
------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (139,259) 34,447 (151,289) 251,184 29,127
Cash and cash equivalents at beginning of
period 178,959 330,248 330,248 79,064 49,937
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39,700 $364,695 $ 178,959 $330,248 $ 79,064
========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 169
Mutual Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental information:
Interest paid on deposits $14,249 $14,778 $ 61,220 $ 65,315 $61,598
Income taxes paid 18 818 6,678 7,859 5,530
Loans transferred to other real estate
owned 540 284 1,773 7,975 178
Loans transferred from loans held for sale
to portfolio - - 17,748 17 -
Mutual fund liquidation proceeds - - 14,047 - -
</TABLE>
See accompanying notes.
F-7
<PAGE> 170
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
December 31, 1999
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Mutual Savings Bank (the Bank) provides a full range of financial services to
customers through its branch locations in Wisconsin. The Bank is subject to
competition from other financial institutions and is also subject to the
regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Bank
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenues
and expenses for the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Bank considers federal funds sold and interest-bearing deposits that have
original maturities of three months or less to be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-RELATED SECURITIES
Trading Account Assets
Trading account assets are held for resale in anticipation of short-term market
movements. Trading account assets are stated at fair value. Gains and losses are
included in net gain or loss on sales of securities and are based on the
specific identification method. There were no trading account assets at December
31, 1999 or 1998.
F-8
<PAGE> 171
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities Available-for-Sale
Management determines the appropriate classification of debt securities at the
time of purchase. Debt securities, equity securities and investments in mutual
funds not classified as trading are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of equity.
The amortized cost of securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-backed securities, over the estimated life of the security.
Such amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other-than-temporary are included in
gain (loss) on sales of securities and are based on the specific identification
method.
Stock of the Federal Home Loan Bank (FHLB) is carried at cost which is its
redeemable value.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale, which generally consist of current production of certain
fixed-rate first mortgage loans, are recorded at the lower of aggregate cost or
market value. Fees received from the borrower are deferred and recorded as an
adjustment of the carrying value.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are recorded as an asset when loans are sold with
servicing rights retained. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on a
current market interest rate.
F-9
<PAGE> 172
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST AND FEES ON LOANS
Allowances of $214 (unaudited), $228 and $172 are established for accrued but
uncollected interest on mortgage loans for which any payments were more than 90
days past due at March 31, 2000 and December 31, 1999 and 1998, respectively.
Interest previously accrued on these loans is removed from income at that time.
Payments received, if any, on these loans are recorded as principal reduction or
as interest based on management's judgment as to ultimate collectibility of all
contractual future principal and interest payments.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the related loans' yield. The
Bank amortizes these amounts using the level yield method over the estimated
life of the related loans.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is composed of specific and general valuation
allowances. The Bank establishes specific valuation allowances on loans it
considers to be impaired. A loan is considered impaired when the carrying amount
of the loan exceeds the present value of the expected future cash flows,
discounted at the loan's original effective interest rate, or the fair value of
the underlying collateral. A specific valuation allowance is established for an
amount equal to the impairment. General valuation allowances are based on an
evaluation of the various risk components that are inherent in the credit
portfolio. The risk components that are evaluated include past loan loss
experience; the level of non-performing and classified assets; current economic
conditions; volume, growth and composition of the loan portfolio; adverse
situations that may affect borrowers' ability to repay; the estimated value of
any underlying collateral; peer group comparisons; regulatory guidance; and
other relevant factors.
The allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. Management may transfer amounts between specific
and general valuation allowances as considered necessary. The allowance reflects
management's best estimate of the amount necessary to provide for the impairment
of loans, as well as other credit risks of the Bank. The allowance is based on a
risk model developed and implemented by management and approved by the Bank's
Board of Directors.
F-10
<PAGE> 173
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties acquired through, or in lieu of, loan foreclosure are
recorded at the lower of cost or fair value less estimated costs to sell. Costs
related to the development and improvement of property are capitalized, whereas
costs related to holding the property are expensed. Gains on sales are
recognized based on the carrying value when the earnings process is
substantially complete. Losses on sales not previously provided for are
recognized upon closing of the sale.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at amortized
cost. Buildings and equipment are depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over the
shorter of their useful lives or lease terms. The Bank reviews buildings,
leasehold improvements and equipment for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment exists when the estimated undiscounted cash flows for
the property is less than its carrying value. If identified, an impairment loss
is recognized through a charge to earnings based on the fair value of the
property.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, results from acquisitions made by the Bank. The Bank's goodwill
is being amortized to operating expense using the straight-line method over 15
years. Other intangible assets are amortized over their estimated useful lives,
generally 7 - 10 years. The carrying amount of goodwill and other intangible
assets are reviewed if facts and circumstances indicate that it may be impaired.
If this review indicates that it is not recoverable, as determined based on the
estimated undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying amount of the goodwill is reduced for the
estimated shortfall of the cash flows discounted at the average cost of capital
for thrift institutions as compared to the carrying value.
F-11
<PAGE> 174
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Bank files a consolidated federal income tax return and separate, or
combined, state income tax returns, depending on the state. Income taxes are
accounted for using the "asset and liability" method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
that will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Bank's income tax returns. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date of the change. A valuation allowance is provided for any deferred
tax asset for which it is more likely than not that the asset will not be
realized. Changes in valuation allowances are recorded as a component of income.
PENSION COSTS
The Bank's net periodic pension cost consists of the expected cost of benefits
earned by employees during the current period and an interest cost on the
projected benefit obligation, reduced by the expected earnings on assets held by
the retirement plan, amortization of transitional assets over a period of 15
years (beginning in 1987), amortization of prior service cost and by
amortization of recognized actuarial gains and losses over the estimated future
service period of existing plan participants.
SEGMENT INFORMATION
The Bank has determined that it has one reportable segment - community banking.
The Bank offers a range of financial products and services to external
customers, including: accepting deposits from the general public; originating
residential, consumer and limited types of commercial loans (primarily loans
secured by multi-family properties); and marketing annuities and other insurance
products. Revenues for each of these products are disclosed in the consolidated
statements of income.
F-12
<PAGE> 175
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of SFAS No. 133," which delays the implementation date of SFAS No. 133 for
one year, to fiscal years beginning after June 15, 2000, provide a comprehensive
and consistent standard for the recognition of derivatives and hedging
activities. SFAS 133 requires all derivatives to be recorded on the balance
sheet at fair value. However, special accounting is provided for certain
derivatives that meet the definition of hedges. Changes in the fair value of
derivatives that do not meet the definition of hedges are required to be
reported in earnings in the period of change. The Bank does not use derivative
financial instruments such as futures, swaps, caps, floors, options or interest
or principal only strips of similar instruments. Therefore, SFAS No. 133 is not
expected to have a significant impact on the Bank. The Bank will implement this
statement on January 1, 2001.
2. BUSINESS COMBINATIONS
On March 31, 1997, the Bank completed the acquisition of First Federal
Bancshares of Eau Claire, Inc. (First Federal) in a cash transaction for $125.1
million. The transaction has been accounted for as a purchase. First Federal was
the parent company of First Federal Bank of Eau Claire, F.S.B. First Federal had
total assets of $730.7 million as of March 31, 1997. This acquisition resulted
in the recording of identifiable intangibles (value of deposit base) of $10.4
million and goodwill (unidentifiable intangible asset) of $24.1 million. The
results of operations of the acquired company are included in the consolidated
financial statements from the date of acquisition.
Scheduled amortization of intangibles was $2,711, $2,738 and $1,941 for the
years ended December 31, 1999, 1998 and 1997, and $235 (unaudited) and $678
(unaudited) for the three-month periods ended March 31, 2000 and 1999
respectively. In 1999, increased competition for deposits from alternate
investment products, increases in interest rates which negatively impacted the
volume of new loan originations and credit standards more stringent than those
used by the acquiree caused management to revise cash flow estimates to be
realized from the acquired business. Accordingly, $15,579 of intangibles were
written off for the estimated shortfall of the cash flows discounted at the
average
F-13
<PAGE> 176
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
2. BUSINESS COMBINATIONS (CONTINUED)
cost of capital for thrift institutions as compared to the carrying value. This
write-off is included in amortization of intangibles on the statement of income.
The unamortized balance of goodwill and intangible assets was $11,261,
(unaudited) $11,496 and $29,786 at March 31, 2000, and December 31, 1999 and
1998, respectively.
3. SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At March 31, 2000 (Unaudited):
U.S. government and federal agency obligation $ 20,101 $ - $ (864) $ 19,237
Asset-backed securities - - - -
Mutual funds 29,448 - (520) 28,928
- - -----------------------------------------------------------------------------------------------------------
Total investment securities 49,549 - (1,384) 48,165
- - -----------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation 70,366 9 (2,678) 67,697
Federal National Mortgage Association 397,021 484 (10,311) 387,194
Private Placement CMOs 17,266 1 (235) 17,032
Government National Mortgage Association 526 8 (1) 533
- - -----------------------------------------------------------------------------------------------------------
Total mortgage-related securities 485,179 502 (13,225) 472,456
- - -----------------------------------------------------------------------------------------------------------
Total $534,728 $502 $(14,609) $520,621
===========================================================================================================
At December 31, 1999:
U.S. government and federal agency obligations $ 30,107 $ - $ (932) $ 29,175
Asset-backed securities 51 - - 51
Mutual funds 29,027 - (490) 28,537
- - -----------------------------------------------------------------------------------------------------------
Total investment securities 59,185 - (1,422) 57,763
- - -----------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation 72,763 94 (2,641) 70,216
Federal National Mortgage Association 290,785 745 (6,146) 285,384
Private Placement CMOs 17,884 65 (22) 17,927
Government National Mortgage Association 566 8 (1) 573
- - -----------------------------------------------------------------------------------------------------------
Total mortgage-related securities 381,998 912 (8,810) 374,100
- - -----------------------------------------------------------------------------------------------------------
Total $441,183 $ 912 $(10,232) $431,863
===========================================================================================================
</TABLE>
F-14
<PAGE> 177
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
U.S. government and federal agency obligations $ 75,113 $ 308 $ - $ 75,421
Asset-backed securities 228 - - 228
Mutual funds 41,592 - (707) 40,885
- - -----------------------------------------------------------------------------------------------------------
Total investment securities 116,933 308 (707) 116,534
- - -----------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation 43,607 168 (58) 43,717
Federal National Mortgage Association 192,200 2,250 (97) 194,353
Private Placement CMOs 31,630 370 (6) 31,994
Government National Mortgage Association 797 36 - 833
- - -----------------------------------------------------------------------------------------------------------
Total mortgage-related securities 268,234 2,824 (161) 270,897
- - -----------------------------------------------------------------------------------------------------------
Total $385,167 $ 3,132 $ (868) $387,431
===========================================================================================================
</TABLE>
The amortized cost and fair values of securities by contractual maturity are
shown below. Actual maturities may differ from contractual maturities because
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
MARCH 31 2000
------------------------------------
Amortized
Cost Fair Value
------------------------------------
(Unaudited)
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 20,101 19,237
Mutual funds 29,448 28,928
Mortgage-related securities 485,179 472,456
------------------------------------
$534,728 $520,621
====================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
------------------------------------
Amortized
Cost Fair Value
------------------------------------
<S> <C> <C>
Due in one year or less $ 10,000 $ 9,925
Due after one year through five years 20,158 19,301
Mutual funds 29,027 28,537
Mortgage-related securities 381,998 374,100
------------------------------------
$441,183 $431,863
====================================
</TABLE>
F-15
<PAGE> 178
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
3. SECURITIES (CONTINUED)
A reconciliation of the gross change in the unrealized gain or loss on
available-for-sale securities to the change in unrealized gain or loss on
available-for-sale securities reported as a component of comprehensive income
follows:
<TABLE>
<CAPTION>
MARCH 31 2000
-----------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense amount
-----------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Change in unrealized losses on available-for-
sale securities $(4,787) $(1,830) $(2,957)
Less: reclassification adjustment for gains
realized in net income - - -
-----------------------------------------------------
Change in net unrealized losses recognized in
other comprehensive income $(4,787) $(1,830) $(2,957)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1999
-----------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense amount
-----------------------------------------------------
<S> <C> <C> <C>
Change in unrealized losses on available-for-
sale securities $(11,962) $(4,276) $(7,686)
Less: reclassification adjustment for gains
realized in net income (378) (132) (246)
-----------------------------------------------------
Change in net unrealized losses recognized in
other comprehensive income $(11,584) $(4,144) $(7,440)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1998
-----------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense amount
-----------------------------------------------------
<S> <C> <C> <C>
Change in unrealized gains on available-for-
sale securities $2,372 $832 $1,540
Less: reclassification adjustment for gains
(losses) realized in net income - - -
-----------------------------------------------------
Change in net unrealized gains recognized in
other comprehensive income $2,372 $832 $1,540
=====================================================
</TABLE>
F-16
<PAGE> 179
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 1997
-------------------------------------------------
Before Tax Net-of-
Tax (Benefit) Tax
Amount Expense Amount
-------------------------------------------------
<S> <C> <C> <C>
Change in unrealized gains on available-for-sale
securities $2,435 $855 $1,580
Less: reclassification adjustment for losses
realized in net income 12 5 7
-------------------------------------------------
Change in net unrealized gains recognized in other
comprehensive income $2,423 $850 $1,573
=================================================
</TABLE>
Total proceeds and gross realized gains and losses from sale of
available-for-sale securities were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED
2000 1999 1999 1998 1997
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds $ - $ $54,060 $ - $3,825
Gross gains - - 378 - 3
Gross losses - 35 - - 15
</TABLE>
Net losses of $0 (unaudited), $0 (unaudited) and $220 were recognized in income
from sales of securities classified as trading for the three months ended March
31, 2000 and 1999 and the year ended December 31, 1999. There were no realized
net gains or losses on trading securities in 1998 or 1997 and no unrealized
gains or losses recognized in income related to trading securities for any
period presented.
Investment securities with a fair value of approximately $10 million at March
31, 2000 (unaudited) and December 31, 1999 and 1998, were pledged to secure
public funds.
F-17
<PAGE> 180
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
First mortgage loans $ 861,197 $ 850,145 $ 836,674
Fixed equity 105,371 96,824 78,244
Home equity line of credit loans 51,982 50,618 45,827
Education loans 28,598 28,371 29,634
Commercial loans 37,038 39,488 28,839
Construction loans 27,908 26,530 21,939
Home improvement loans 10,449 9,920 8,373
Other loans 2,548 2,519 2,355
------------------------------------------------------
1,125,091 1,104,415 1,051,885
Less:
Undisbursed loan proceeds 14,233 14,658 7,001
Allowance for losses on loans 6,960 6,948 6,855
Unearned loan fees and discounts 72 14 440
-------------------------------------------------------
21,265 21,620 14,296
-------------------------------------------------------
$ 1,103,826 $ 1,082,795 $ 1,037,589
=======================================================
</TABLE>
The Bank's first mortgage loans, fixed equity, home equity lines of credit and
home improvement loans are primarily secured by properties housing one to four
families which are generally located in the Bank's local lending areas in
Wisconsin.
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31 DECEMBER 31
2000 1999 1999 1998 1997
---------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $6,948 $6,855 $6,855 $7,195 $3,921
Provisions 76 39 350 637 1,065
Allowance of acquired business - - - - 2,449
Charge-offs, net of recoveries (64) (52) (257) (977) (240)
---------------------------------------------------------------------
Balance at end of year $6,960 $6,842 $6,948 $6,855 $7,195
=====================================================================
</TABLE>
F-18
<PAGE> 181
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
4. LOANS RECEIVABLE (CONTINUED)
The unpaid principal balance of loans serviced for others were $282,771
(unaudited), $287,789, $279,759 and $250,496 at March 31, 2000 and December 31,
1999, 1998 and 1997, respectively. These loans are not reflected in the
consolidated financial statements.
5. REAL ESTATE OWNED
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Acquired by foreclosure or in lieu of foreclosure $2,729 $3,018 $3,505
Acquired for development or resale 1,935 1,935 1,935
-----------------------------------------------
$4,664 $4,953 $5,440
===============================================
</TABLE>
6. ACCRUED INTEREST
Accrued interest on loans and investments are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Mortgage-related securities $2,406 $1,787 $1,174
Investment securities 300 814 821
Loans receivable 6,389 6,019 6,040
-----------------------------------------------
$9,095 $8,620 $8,035
===============================================
</TABLE>
F-19
<PAGE> 182
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continuted)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land and land improvements $ 6,969 $ 6,969 $ 6,889
Office buildings 25,305 25,292 25,177
Furniture, equipment and automobiles 12,094 12,060 11,759
Leasehold and parking lot improvements 1,203 1,203 1,442
-------------------------------------------------
45,571 45,524 45,267
Less allowances for depreciation and amortization 19,062 18,653 17,700
-------------------------------------------------
$26,509 $26,871 $27,567
=================================================
</TABLE>
Depreciation expense for the three months ended March 31, 2000 and 1999 and the
years ended 1999, 1998 and 1997, was $478 (unaudited), $439 (unaudited), $1,840,
$2,033 and $1,816, respectively.
The Bank leases various branch offices, office facilities and equipment under
noncancellable operating leases which expire on various dates through 2012.
Future minimum payments under noncancelable operating leases with initial or
remaining terms of one year or more for the years indicated are as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
------------------------------------
(Unaudited)
<S> <C> <C>
2000 $ 649 $ 870
2001 660 660
2002 446 446
2003 417 417
2004 390 390
Thereafter 1,364 1,364
------------------------------------
Total $3,926 $4,147
====================================
</TABLE>
F-20
<PAGE> 183
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
7. PREMISES AND EQUIPMENT (CONTINUED)
Total rental expenses totaled $136 (unaudited), $149 (unaudited), $609, $639 and
$682 for the three months ended March 31, 2000 and 1999 and the years ended
1999, 1998 and 1997, respectively.
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Checking accounts:
Non-interest-bearing $ 48,403 $ 42,596 $ 43,031
Interest-bearing 89,141 89,685 100,753
------------------------------------------------------
137,544 132,281 143,784
Money market accounts 230,051 231,174 159,361
Savings accounts 150,901 151,447 166,316
Certificate accounts:
Due within one year 545,295 593,512 638,596
After one but within two years 195,614 178,431 237,113
After two but within three years 40,830 34,716 30,129
After three but within four years 10,453 11,535 10,479
After four but within five years 8,500 9,868 11,583
After five years - 43 1,497
------------------------------------------------------
800,692 828,105 929,397
------------------------------------------------------
$1,319,188 $1,343,007 $1,398,858
======================================================
</TABLE>
The aggregate amount of certificate accounts with balances of one hundred
thousand dollars or more is approximately $60,861 (unaudited), $62,223 and
$70,513 at March 31, 2000 and December 31, 1999 and 1998, respectively.
F-21
<PAGE> 184
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
8. DEPOSITS (CONTINUED)
Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest-bearing
checking accounts $ 225 $ 234 $ 940 $ 1,070 $ 1,137
Money market accounts 2,802 1,989 9,796 6,571 5,458
Savings accounts 900 985 3,885 4,268 4,696
Certificate accounts 10,851 12,381 46,470 53,327 49,626
------------------------------------------------------------------------------
$14,778 $15,589 $61,091 $65,236 $60,917
==============================================================================
</TABLE>
9. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
------------------------- -------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- ------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Bank advances
maturing:
2000 $ 5,152 6.35% $ 42,152 6.53% $ 42,170 5.77%
2001 33,000 6.07 - - - -
2002 - - - 203,000 5.20
2003 547 4.39 547 5.11 569 4.65
2004 200,000 5.70 200,000 5.70 - -
Thereafter - - - - 25,000 4.98
Other borrowings - - - - 83 10.25
------------ ------------ -----------
$238,699 $242,699 $270,822
============ ============ ===========
</TABLE>
Advances that mature in the year 2004 consist of borrowings that are redeemable
at the option of the FHLB beginning at various times in 2001.
F-22
<PAGE> 185
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
9. BORROWINGS (CONTINUED)
The Bank is required to maintain unencumbered mortgage loans in its portfolio
aggregating at least 167% of the amount of outstanding advances from the FHLB as
collateral. The Bank's borrowings at the FHLB are limited to the lesser of 35%
of total assets or 60% of the book value of certain mortgage loans. In addition,
these notes are collateralized by FHLB stock of $13,537 at March 31, 2000
(unaudited) and December 31, 1999.
10. EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possible additional discretionary, actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
As a state-chartered savings bank, the Bank is required to meet minimum capital
levels established by the State of Wisconsin in addition to federal regulations.
Quantitative measures established by federal regulation to ensure adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as these terms are defined in regulations)
to risk-weighted assets (as these terms are defined in regulations), and of Tier
I capital (as these terms are defined in regulations) to average assets (as
these terms are defined in regulations). For the state of Wisconsin, total
capital (as these terms are defined in regulations) as a ratio of total assets
must meet a minimum standard. Management believes, as of March 31, 2000 and
December 31, 1999, that the Bank meets all capital adequacy requirements to
which it is subject.
F-23
<PAGE> 186
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
As of March 31, 2000 and December 31, 1999 and 1998, the most recent
notification from the State of Wisconsin categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. The
Bank is not aware of any conditions or events which would change their status as
well capitalized. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000 (unaudited):
Total capital
(to risk-weighted assets) $167,839 18.76% $ 71,576 8.00% $89,470 10.00%
Tier 1 capital
(to risk-weighted assets) 160,879 17.98% 35,788 4.00% 53,682 6.00%
Tier 1 capital
(to average assets) 160,879 9.25% 69,580 4.00% 86,975 5.00%
State of Wisconsin capital
(to total assets) 167,839 9.60% 104,941 6.00% N/A N/A
As of December 31, 1999:
Total capital
(to risk-weighted assets) $164,565 18.51% $ 71,143 8.00% $88,928 10.00%
Tier 1 capital
(to risk-weighted assets) 157,617 17.72% 35,571 4.00% 53,357 6.00%
Tier 1 capital
(to average assets) 157,617 8.66% 72,770 4.00% 90,962 5.00%
State of Wisconsin capital
(to total assets) 164,565 9.26% 106,587 6.00% N/A N/A
</TABLE>
F-24
<PAGE> 187
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital
(to risk-weighted assets) $150,439 17.02% $ 70,728 8.00% $88,409 10.00%
Tier 1 capital
(to risk-weighted assets) 143,584 16.24% 35,364 4.00% 53,046 6.00%
Tier 1 capital
(to average assets) 143,584 7.78% 73,798 4.00% 92,248 5.00%
State of Wisconsin capital
(to total assets) 150,439 8.00% 112,783 6.00% N/A N/A
</TABLE>
Following are reconciliations of the Bank's equity under generally accepted
accounting principles to capital as determined by regulators:
<TABLE>
<CAPTION>
Risk- Tier I State of
Based (Core) Wisconsin
Capital Capital Capital
-------------------------------------------------------------
<S> <C> <C> <C>
As of March 31, 2000 (Unaudited):
Equity per financial statements $163,909 $163,909 $163,909
Unrealized losses on investments
(excluding unrealized loss on mutual
funds) 8,363 8,363 8,363
Intangibles (11,261) (11,261) (11,261)
Mortgage servicing rights (132) (132) (132)
Allowance for loan losses 6,960 - 6,960
-------------------------------------------------------------
Regulatory capital $167,839 $160,879 $167,839
=============================================================
</TABLE>
F-25
<PAGE> 188
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
10. EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Risk- Tier I State of
Based (Core) Wisconsin
Capital Capital Capital
-------------------------------------------------------------
<S> <C> <C> <C>
As of December 31, 1999:
Equity per financial statements $163,820 $163,820 $163,820
Unrealized losses on investments
(excluding unrealized loss on mutual
funds) 5,436 5,436 5,436
Intangibles (11,496) (11,496) (11,496)
Mortgage servicing rights (143) (143) (143)
Allowance for loan losses 6,948 - 6,948
-------------------------------------------------------------
Regulatory capital $164,565 $157,617 $164,565
=============================================================
As of December 31, 1998:
Equity per financial statements $175,743 $175,743 $175,743
Unrealized losses on investments
(excluding unrealized loss on mutual
funds) (2,221) (2,221) (2,221)
Intangibles (29,786) (29,786) (29,786)
Mortgage servicing rights (152) (152) (152)
Allowance for loan losses 6,855 - 6,855
-------------------------------------------------------------
Regulatory capital $150,439 $143,584 $150,439
=============================================================
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank has a discretionary, defined-contribution savings plan (the Plan). The
Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and
provides employees meeting certain minimum age and service requirements the
ability to make contributions to the Plan on a pretax basis. The Bank may then
match a percentage of the employee's contributions. Matching contributions made
by the Bank were $21 (unaudited) and $19 (unaudited) in the three months ended
March 31, 2000 and 1999, and $68 in 1999 and $56 in 1998.
F-26
<PAGE> 189
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Bank also has a defined-benefit pension plan covering employees meeting
certain minimum age and service requirements and a supplemental pension plan for
certain qualifying employees. The benefits are generally based on years of
service and the employee's compensation during the last five years of
employment. The Bank's funding policy is to contribute annually the amount
necessary to satisfy the requirements of the Employee Retirement Income Security
Act of 1974.
Plan assets which consist primarily of immediate participation guarantee
contracts with an insurance company are actively managed by investment
professionals.
F-27
<PAGE> 190
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables set forth the Plan's funded status and net periodic benefit
cost for 1999 and 1998. No such information is available relative to interim
periods.
<TABLE>
<CAPTION>
1999 1998
---------------------------------
(Dollars In Thousands)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $13,916 $10,878
Service cost 659 632
Interest cost 934 798
Plan amendments - 1,118
Actuarial (gain) loss (1,629) 704
Benefits paid (328) (214)
---------------------------------
Benefit obligation at end of year $13,552 $13,916
=================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $13,218 $11,057
Actual return on plan assets 333 963
Employer contributions 996 1,412
Benefits paid (328) (214)
---------------------------------
Fair value of plan assets at end of year $14,219 $13,218
=================================
FUNDED STATUS
Funded (underfunded) status at end of year $ 668 $ (698)
Unrecognized net actuarial gain (loss) (239) 791
Unrecognized prior service cost 1,028 1,230
Unrecognized net transition asset (101) (151)
---------------------------------
Prepaid benefit cost $ 1,356 $ 1,172
=================================
Weighted average assumptions used in cost calculations:
Discount rate 6.75% 7.00%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on plan assets 7.50% 7.50%
=================================
</TABLE>
F-28
<PAGE> 191
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 659 $ 632 $ 503
Interest cost 934 797 690
Expected return on plan assets (986) (824) (715)
Amortization of transition asset (50) (50) (50)
Amortization of prior service cost 202 144 76
Recognized actuarial loss 54 24 29
---------------------------------------------------
Total net periodic benefit cost $ 813 $ 723 $ 533
===================================================
</TABLE>
The supplemental pension plan had a projected benefit obligation of $3,110 and
$3,247 and assets aggregating $2,777 and $2,521 at December 31, 1999 and 1998,
respectively.
Total net periodic pension expense was $264 (unaudited) and $266 (unaudited) in
the three months ended March 31, 2000 and 1999, respectively.
The Bank acquired an ESOP with the acquisition of First Federal which covered
substantially all former employees of First Federal with two or more years of
employment and who were at least 21 years of age. The cash proceeds received by
the ESOP in connection with the merger were used to prepay the unpaid principal
and interest outstanding under the ESOP. The remaining cash balance has been
invested in a mutual fund. An allocation was made to the participants' accounts
as of December 31, 1998 and the final allocation was made as of December 31,
1999. The Bank is in the process of applying for a determination letter to
terminate the Plan and anticipates that all assets will be available for
distribution in a lump sum during 2000.
F-29
<PAGE> 192
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
12. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEARS ENDED DECEMBER 31
2000 1999 1999 1998 1997
------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $1,789 $1,173 $ 6,896 $7,010 $ 7,041
State 79 (56) 793 204 291
------------------------------------------------------------------------------
1,868 1,117 7,689 7,214 7,332
Deferred expense (benefit):
Federal (10) (5) (3,120) (786) (1,007)
State (3) (1) (766) 156 297
------------------------------------------------------------------------------
(13) (6) (3,886) (630) (710)
------------------------------------------------------------------------------
$1,855 $1,111 $ 3,803 $6,584 $ 6,622
==============================================================================
</TABLE>
For state income tax purposes, the subsidiaries of the Bank have net business
loss carryovers of $487 available to offset against future income which expire
through 2013.
The income tax provision differs from the provision computed at the federal
statutory corporate rate for three months ended March 31, 2000 and 1999 and the
years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
2000 1999 1999 1998 1997
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for
income taxes $4,901 $ 2,952 $ (680) $17,735 $16,807
====================================================================
Tax expense at federal statutory rate
$1,715 $ 1,034 $ (238) $ 6,207 $ 5,882
Increase (decrease) in taxes
resulting from:
State income taxes - Net of
federal tax benefit 50 (37) 21 382 382
Nondeductible intangible
amortization 82 108 3,487 490 351
Other 8 6 533 (495) 7
</TABLE>
F-30
<PAGE> 193
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
<TABLE>
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for income taxes $1,855 $ 1,111 $ 3,803 $ 6,584 $ 6,622
====================================================================
</TABLE>
F-31
<PAGE> 194
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Bank's deferred tax assets and liabilities as of March 31,
2000 and December 31, are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
State net operating losses $ 26 $ 26 $ 26 $ 238
Loan loss reserves 2,068 2,103 1,673 1,274
Deferred loan fees 51 225 155 370
Pension 1,241 1,151 1,147 1,165
Unrealized loss on investment securities 5,224 3,394 - 78
Other 1,322 1,252 297 402
------------------------------------------------------
Total deferred tax assets 9,932 8,151 3,298 3,527
------------------------------------------------------
Deferred tax liabilities:
Property and equipment depreciation 1,057 1,057 1,196 1,200
FHLB stock dividends 546 555 544 820
Purchase accounting adjustments 1,558 1,611 3,910 4,407
Unrealized gain on investment securities - - 750 -
------------------------------------------------------
Total deferred tax liabilities 3,161 3,223 6,400 6,427
------------------------------------------------------
Net deferred tax asset (liability) $6,771 $4,928 $(3,102) $(2,900)
======================================================
</TABLE>
The Bank qualified under provisions of the Internal Revenue Code that permitted
it to deduct from taxable income an allowance for bad debts that differed from
the provision for such losses charged to income for financial reporting
purposes. Accordingly, no provision for federal income taxes has been made for
approximately $48,592 of retained income as of March 31, 2000 (unaudited) and
December 31, 1999. If, in the future, the Bank no longer qualifies as a bank for
tax purposes, income taxes of approximately $19,500 would be imposed.
F-32
<PAGE> 195
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
13. CONTINGENT LIABILITY
The Bank has entered into an agreement whereby, for an initial fee and annual
fee, certain of its United States Treasury notes are pledged as collateral for
an Industrial Development Revenue Bond which was issued by a local municipality
to finance commercial real estate owned by a third party, unrelated to the Bank.
Under the terms of the agreement, the Bank must maintain with a trustee
collateral with a fair market value, as defined, aggregating 128%, 135% and 135%
or more of the sum of the outstanding principal balance of the bonds plus
accrued interest on the outstanding principal at March 31, 2000 and December 31,
1999 and 1998, respectively. The Bank continues to receive interest payments on
the collateral.
At March 31, 2000 (unaudited) and December 31, 1999 and 1998, United States
Treasury notes with outstanding principal balances aggregating approximately
$10,000 were held by the trustee as collateral for these bonds which had an
outstanding principal balance of $5,165 (unaudited), $5,165 and $5,410 for March
31, 2000 and December 31, 1999 and 1998, respectively. The third-party borrower
is not in default on any scheduled payments due under the bond issue which has a
scheduled maturity of on December 15, 2009.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist of commitments to extend credit and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract amounts reflect the extent of involvement the Bank has in particular
classes of financial instruments and also represents the Bank's maximum exposure
to credit loss.
F-33
<PAGE> 196
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Unused consumer lines of credit $64,914 $63,461 $59,406
Unused commercial lines of credit 1,494 1,003 946
Commitments to extend credit:
Fixed rate 11,824 7,418 19,445
Adjustable rate 12,184 7,595 4,003
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. As some commitments expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates the collateral needed and creditworthiness of
each customer on a case by case basis. The Bank generally extends credit only on
a secured basis. Collateral obtained varies, but consists principally of one- to
four-family residences.
Forward commitments to sell mortgage loans of $147 (unaudited), $0 and $17,030
at March 31, 2000 and December 31, 1999 and 1998, respectively, represent
commitments obtained by the Bank from a secondary market agency to purchase
mortgages from the Bank and place them in a mortgage-backed security pool with a
defined yield. Commitments to sell loans expose the Bank to interest rate risk
if market rates of interest decrease during the commitment period. Commitments
to sell loans are made to mitigate interest rate risk on commitments to
originate loans and loans held for sale.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about certain financial instruments,
whether or not recognized in the consolidated financial statements, for which it
is practicable to estimate the value, is summarized below. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques.
F-34
<PAGE> 197
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from this disclosure. Accordingly, the aggregate fair
value of amounts presented does not represent the underlying value of the Bank
and is not particularly relevant to predicting the Bank's future earnings or
cash flows.
The following methods and assumptions are used by the Bank in estimating its
fair value disclosures of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the statements of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment and Mortgage-Related Securities: Fair values for these securities are
based on quoted market prices or such prices of comparable instruments.
Loans Receivable and Loans Held-for-Sale: The fair value of one- to four-family
fixed rate mortgage loans was determined based on the current market price for
securities collateralized by similar loans. For variable rate oneto four-family
mortgage, consumer and other loans that re-price frequently and with no
significant change in credit risk, carrying values approximate fair values. The
fair value for fixed rate commercial real estate, rental property mortgage,
consumer and other loans was estimated by projecting cash flows at market
interest rates.
Federal Home Loan Bank Stock: Federal Home Loan Bank stock is carried at cost,
which is its redeemable (fair) value, since the market for this stock is
restricted.
Accrued Interest Receivable: The carrying value of accrued interest receivable
approximates fair value.
F-35
<PAGE> 198
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits and Advance Payments by Borrowers for Taxes and Insurance: The fair
values disclosed for variable rate investment accounts, NOW accounts, passbook
accounts, money market certificates, accrued interest and advance payments by
borrowers for taxes and insurance are equal to the carrying amounts at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Borrowings: The fair value of long-term borrowings is estimated using discounted
cash flow calculations with the discount rates equal to interest rates currently
being offered for borrowings with similar terms and maturities.
Commitments to Extend Credit and Forward Commitments to Sell Loans: The fair
value of these commitments is considered to approximate the carrying values due
to the short-term nature of these commitments.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 DECEMBER 31
2000 1999 1998
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 39,700 $ 39,700 $ 178,959 $ 178,959 $ 330,248 $ 330,248
Investment and
mortgage-related 520,621 520,621 431,863 431,863 387,431 387,431
securities
Loans receivable, net 1,103,826 1,083,747 1,082,795 1,067,333 1,045,046 1,056,232
Loans held for sale 2,121 2,121 541 541 27,723 27,723
Federal Home Loan Bank stock
13,537 13,537 13,537 13,537 13,537 13,537
Accrued interest
receivable 9,095 9,095 8,620 8,620 8,035 8,035
Deposits and accrued
interest 1,319,188 1,248,942 1,343,007 1,298,038 1,398,858 1,381,119
Advance payments by
borrowers 7,049 7,049 1,661 1,661 1,710 1,710
Borrowings 238,699 236,366 242,699 194,443 270,822 230,233
</TABLE>
F-36
<PAGE> 199
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The preceding table does not include any amount for the value of any
off-balance-sheet items (see Note 14) since the fair value of these items is not
significant.
16. MERGER AND CONVERSION
On February 21, 2000, Mutual and First Northern Capital Corp. (First Northern),
entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger
Agreement has been approved by the boards of directors of Mutual and First
Northern.
To accomplish the transaction Mutual also adopted a plan of restructuring in
which it will reorganize into a mutual holding company (MHC) in which Mutual's
depositors will hold all of the voting rights. The MHC in turn will form and own
the majority interest in a subsidiary, a mid-tier stock holding company
(Mid-Tier HC). The balance of the shares of Common Stock will be offered for
sale to Mutual's depositors and issued to First Northern shareholders in the
Merger. As a result of the reorganization and merger, First Northern Capital
Corp will merge with and into Mid-Tier HC and, Mutual Savings Bank and First
Northern Savings Bank, S.A., will become wholly owned subsidiaries of Mid-Tier
HC.
Subject to the terms and conditions of the Merger Agreement, at the time of the
Merger, each outstanding share of First Northern common stock (First Northern
Common Stock), will be converted into the right to receive cash in the amount of
$15.00, or 1.5 shares of common stock, par value $.01 per share, of Mid-Tier HC
Common Stock or a combination of cash and shares of Mid-Tier HC Common Stock
(Merger Consideration). Prior to the closing date, Mutual will select the
percentage of the total Merger Consideration to be paid in Common Stock, which
may not be less than 40% or more than 70%; the balance will be paid in cash. The
remaining shares of the Mid-Tier HC will be offered for sale to Mutual's
depositors, pursuant to the terms of a Plan of Restructuring. The Restructuring
will be accounted for as a pooling of interests, whereas the merger will be
accounted for as a purchase.
Consummation of the Merger is subject to the satisfaction of certain closing
conditions set forth in the Merger Agreement, including approval by the
shareholders of First Northern and approval by the Office of Thrift Supervision,
the Federal Deposit Insurance Corporation and the Administrator of the Division
of Savings Institutions of the
F-37
<PAGE> 200
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
16. MERGER AND CONVERSION (CONTINUED)
Wisconsin Department of Financial Institutions as to both the Restructuring and
the Merger. The depositors of Mutual must also approve Mutual's Plan of
Restructuring. The Merger is also subject to receipt of an opinion of counsel to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and the receipt of an opinion of
counsel or a private letter ruling from the Internal Revenue Service as to the
federal income tax treatment of certain transactions contemplated by the Merger
Agreement. In addition, the Merger is conditioned upon the approval for listing
on the NASDAQ National Market of the shares of Common Stock to be issued in the
Merger, which shares will be registered under the Securities Act of 1933 by a
registration statement to be filed with the Securities and Exchange Commission.
The amount and pricing of the proposed stock offering will be based upon an
independent appraisal of the Bank. In connection with the conversion, the costs
of issuing the common stock will be deducted from the sale proceeds. At March
31, 2000 (unaudited) and December 31, 1999, no costs related to the conversion
have been capitalized. In the event that the consummation of the conversion or
merger do not occur, any recorded costs will be expensed.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its net worth as of the date of the latest consolidated
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders, if any, who continue to
maintain their deposit accounts at the Bank after the conversion.
The liquidation account will be reduced annually to the extent that eligible
account holders and supplemental eligible account holders, if any, have reduced
their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's or a supplemental eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder and supplemental eligible account
holder, if any, will be entitled to receive balances for accounts then held.
F-38
<PAGE> 201
Mutual Savings Bank and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information with respect to March 31, 2000 and the
three-month periods ended March 31, 2000 and 1999 is unaudited)
16. MERGER AND CONVERSION (CONTINUED)
Concurrently with the execution of the Merger Agreement, in order to induce
Mutual to enter into the Merger Agreement, the parties entered into a Stock
Option Agreement by which First Northern granted to Mutual an irrevocable option
to purchase up to 1,708,675 shares of First Northern Common Stock, which equals
19.9% of the number of shares of First Northern Common Stock outstanding on
February 21, 2000, at an exercise price of $9.0375 per share. The option would
become exercisable under certain circumstances if First Northern becomes the
subject of a third-party proposal for a competing transaction.
F-39
<PAGE> 202
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MUTUAL SAVINGS BANK,
OV CORP.
AND
FIRST NORTHERN CAPITAL CORP.
DATED AS OF FEBRUARY 21, 2000
Note to readers:
Bank Mutual Corporation will assume the rights and obligations of "OV
Corp." in this agreement when the merger becomes effective. Therefore, Bank
Mutual Corporation is the "Merger Corp." and will be the "Survivor" under this
agreement.
<PAGE> 203
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
RECITALS 1
ARTICLE I
DEFINITIONS 1
1.1 Acquisition 2
1.2 Acquisition Proposal 2
1.3 Affiliate 2
1.4 Affiliate Letter 3
1.5 Agreement 3
1.6 Announcement 3
1.7 Bank 3
1.8 Buildings 3
1.9 CERCLA 3
1.10 Closing 3
1.11 Closing Date 3
1.12 Code 3
1.13 Confidentiality Agreement 3
1.14 Contracts 3
1.15 Control 3
1.16 Disclosure Schedules 4
1.17 Employee Benefit Plans 4
1.18 Environmental Claim 4
1.19 Environmental Laws 4
1.20 Environmental Permits 4
1.21 Equipment 4
1.22 ERISA 5
1.23 Exchange Act 5
1.24 FDIC 5
1.25 FHLB of Chicago 5
1.26 First Northern 5
1.27 First Northern Closing Certificate 5
1.28 First Northern Common Stock 5
1.29 First Northern Counsel Opinion 5
1.30 First Northern Disclosure Schedule 5
1.31 First Northern Executives 5
1.32 First Northern Existing Contracts 5
1.33 First Northern Existing Employment Agreements 5
1.34 First Northern Existing Indebtedness 6
1.35 First Northern Existing Liens 6
</TABLE>
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<PAGE> 204
<TABLE>
<CAPTION>
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<S> <C>
1.36 First Northern Existing Litigation 6
1.37 First Northern Existing Plans 6
1.38 First Northern Meeting 6
1.39 First Northern Real Estate 6
1.40 First Northern Replacement Employment Agreement 6
1.41 First Northern Shareholders 6
1.42 First Northern Stock Option Plans 7
1.43 First Northern Stock Options 7
1.44 First Northern Subsidiaries 7
1.45 Fraction Payment 7
1.46 Hazardous Materials 7
1.47 HOLA 7
1.48 Indebtedness 7
1.49 Investment Securities 7
1.50 IRS 7
1.51 Knowledge 7
1.52 Law 8
1.53 Lien 8
1.54 Material Adverse Effect 8
1.55 Material Contract 8
1.56 Merger 9
1.57 Merger Corp 9
1.58 Mutual 9
1.59 Mutual Closing Certificate 9
1.60 Mutual Counsel Opinion 9
1.61 Mutual Disclosure Schedule 9
1.62 Mutual Existing Contracts 9
1.63 Mutual Existing Litigation 9
1.64 Mutual Real Estate 9
1.65 NASDAQ/NMS 10
1.66 OTS 10
1.67 Permits 10
1.68 Permitted Liens 10
1.69 Person 10
1.70 Proxy Statement 10
1.71 Registration Statement 10
1.72 Regulatory Approvals 10
1.73 Release 10
1.74 SAIF 10
1.75 SEC 10
1.76 Securities Act 10
1.77 Section 180.0622(2)(b) 11
</TABLE>
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<PAGE> 205
<TABLE>
<CAPTION>
Page
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<S> <C>
1.78 Stock Option Agreement 11
1.79 Subsidiary 11
1.80 Survivor 11
1.81 Survivor Common Stock 11
1.82 WBCL 11
1.83 Wisconsin Agency 11
1.84 Year 2000 Compliant 11
1.85 Other Defined Terms 12
ARTICLE II
THE MERGER 13
2.1 The Merger 13
2.2 Effect of the Merger 13
2.3 Effective Time 13
2.4 Articles and Bylaws of Survivor 14
2.5 Charter and Bylaws of the Bank; Offices of 14
the Bank
2.6 Directors and Officers of Survivor 14
2.7 Capital Stock of Merger Corp. 14
2.8 Conversion of First Northern Common Stock 15
2.9 Exchange of First Northern Certificates 19
2.10 Reorganization 22
2.11 No Dissenting Shares 23
2.12 Meeting of First Northern Shareholders 23
2.13 Liquidation Account and Sub-Accounts 23
2.14 Restructuring 24
2.15 Anti-Dilution Provisions 25
2.16 Alternative Structure 25
ARTICLE III
OTHER AGREEMENTS 25
3.1 Confidentiality; Access 25
3.2 Disclosure Schedules 26
3.3 Duties Concerning Representations 27
3.4 Deliveries of Information; Consultation 27
3.5 Directors' and Officers' Indemnification 28
and Insurance
3.6 Letters of Accountants 29
3.7 Legal Conditions to Merger 29
3.8 Stock Listings 30
3.9 Announcements 30
3.10 Best Efforts 30
3.11 Employee And Managerial Matters 30
3.12 Employee Benefit Matters 31
</TABLE>
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<PAGE> 206
<TABLE>
<CAPTION>
Page
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<S> <C>
3.13 Conformance to Reserve Policies 32
3.14 Conduct of Mutual's Business and Authorization,
Reservation and Listing of Common Stock 32
3.15 Affiliates 33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST NORTHERN 33
4.1 Organization and Qualification; Subsidiaries 33
4.2 Articles of Incorporation and Bylaws 34
4.3 Capitalization 34
4.4 Authorization: Enforceability 35
4.5 No Violation or Conflict 35
4.6 Title to Assets; Leases 35
4.7 Litigation 36
4.8 Securities and Banking Reports; Books and Records 36
4.9 Absence of Certain Changes 37
4.10 Buildings and Equipment 38
4.11 First Northern Existing Contracts 38
4.12 Investment Securities 38
4.13 Contingent and Undisclosed Liabilities 38
4.14 Insurance Policies 38
4.15 Employee Benefit Plans 39
4.16 No Violation of Law 40
4.17 Brokers 40
4.18 Taxes 41
4.19 Real Estate 41
4.20 Governmental Approvals 42
4.21 No Pending Acquisitions 42
4.22 Labor Matters 42
4.23 Indebtedness 43
4.24 Permits 43
4.25 Disclosure 43
4.26 Information Supplied 43
4.27 Vote Required 44
4.28 Opinion of Financial Advisor 44
4.29 Environmental Protection 44
4.30 Year 2000 Compliant 45
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MUTUAL AND MERGER CORP.
45
5.1 Organization and Capitalization; Business 45
</TABLE>
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<PAGE> 207
<TABLE>
<CAPTION>
Page
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<S> <C>
5.2 Authorization; Enforceability 46
5.3 No Violation or Conflict 46
5.4 Litigation 46
5.5 Brokers 47
5.6 Governmental Approvals 47
5.7 Disclosure 47
5.8 Information Supplied 47
5.9 Opinion of Financial Advisor 47
5.10 Cash Payment 47
5.11 Compliance with Laws 48
5.12 Consummation 48
5.13 Banking Reports; Books and Records 48
5.14 Absence of Certain Changes 48
5.15 Mutual Existing Contracts 49
5.16 Contingent and Undisclosed Liabilities 49
5.17 Taxes 49
5.18 Real Estate 50
5.19 No Pending Acquisitions 50
5.20 Environmental Protection 51
5.21 Year 2000 Compliant 51
ARTICLE VI
CONDUCT OF BUSINESS BY FIRST NORTHERN PENDING THE MERGER 52
6.1 Carry on in Regular Course 52
6.2 Use of Assets 52
6.3 No Default 52
6.4 Insurance Policies 52
6.5 Employment Matters 52
6.6 Contracts and Commitments 52
6.7 Indebtedness; Investments 53
6.8 Preservation of Relationships 53
6.9 Compliance with Laws 53
6.10 Taxes 53
6.11 Amendments 53
6.12 Issuance of Stock; Dividends; Redemptions 53
6.13 Policy Changes 53
6.14 Acquisition Transactions 53
ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER 54
7.1 Conditions to Each Parties Obligations to 54
Effect the Merger 55
7.2 Conditions to Obligation of Mutual
</TABLE>
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<PAGE> 208
<TABLE>
<CAPTION>
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<S> <C>
7.3 Conditions to Obligation of First Northern 57
ARTICLE VIII
TERMINATION; MISCELLANEOUS 59
8.1 Termination 59
8.2 Rights on Termination; Waiver 59
8.3 Survival of Representations, Warranties and
Covenants 60
8.4 Entire Agreement; Amendment 60
8.5 Expenses 60
8.6 Governing Law 61
8.7 Assignment 61
8.8 Notices 61
8.9 Counterparts; Headings 62
8.10 Interpretation 62
8.11 Severability 62
8.12 Specific Performance 62
8.13 No Reliance 62
8.14 Further Assurances 62
</TABLE>
<TABLE>
EXHIBITS
<S> <C>
Exhibit 1 - Form of Affiliate's Letters
Exhibit 2 - Form of First Northern Closing Certificate
Exhibit 3 - Form of First Northern Counsel Opinion
Exhibit 4 - Form of First Northern Replacement Employment Agreement
Exhibit 5 - Form of Mutual Closing Certificate
Exhibit 6 - Form of Mutual Counsel Opinion
</TABLE>
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<PAGE> 209
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of this 21st day of February,
2000 by and among MUTUAL SAVINGS BANK, OV CORP. and FIRST NORTHERN CAPITAL CORP.
RECITALS
WHEREAS, the respective Boards of Directors of Mutual, Merger Corp. and
First Northern have approved this Agreement by the requisite vote imposed by
Law, and deem it advisable and in the best interest of their respective
institutions and members or stockholders, as the case may be, to consummate the
reorganization provided for herein, pursuant to which First Northern will merge
with and into Merger Corp., the surviving institution, and in connection
therewith the stockholders of First Northern will receive Survivor Common Stock
and/or cash in exchange for their shares of First Northern Common Stock;
WHEREAS, concurrently with this Agreement and as a condition and an
inducement to the willingness of Mutual to enter into this Agreement, First
Northern and Mutual are entering into a Stock Option Agreement granting Mutual,
under the conditions set forth therein, the option to purchase shares of
newly-issued First Northern Common Stock;
WHEREAS, the Board of Directors of First Northern has directed that
this Agreement and the transactions described in this Agreement be submitted for
approval at the First Northern Meeting;
WHEREAS, the Merger will be conducted in connection with the
Restructuring; and
WHEREAS, the transactions provided herein are subject to various
regulatory approvals and other conditions specified herein;
NOW, THEREFORE, in consideration of the Recitals and of the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
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<PAGE> 210
1.1 Acquisition. "Acquisition" shall mean any of the following
involving First Northern or the Bank on the one hand, or Mutual on the other
hand, other than the Merger or the Restructuring:
(a) any merger, consolidation, share exchange, business combination or
other similar transaction;
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of assets in a single transaction or series of
related transactions, excluding from this calculation any such transactions
undertaken in the ordinary course of business and consistent with past practice;
(c) any sale of 10% or more of the outstanding shares of capital stock
(or securities convertible or exchangeable into or otherwise evidencing, or an
agreement or instrument evidencing, the right to acquire capital stock);
(d) any tender offer or exchange offer for 10% or more of the
outstanding shares of capital stock or the filing of a registration statement
under the Securities Act in connection therewith;
(e) In the case of First Northern, any solicitation of proxies in
opposition to approval by its shareholders of the Merger or the Stock Option
Agreement;
(f) The filing of an acquisition application (or the giving of
acquisition notice), whether in draft or final form, under HOLA with respect to
it;
(g) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act and the rules and regulations of
the SEC promulgated thereunder) shall have been formed which beneficially owns
or has the right to acquire beneficial ownership of, 10% or more of the then
outstanding shares of capital stock; or
(h) any public announcement of a proposal, plan or intention to do any
of the foregoing.
1.2 Acquisition Proposal. "Acquisition Proposal" shall mean the
making of any proposal by any Person concerning an Acquisition.
1.3 Affiliate. "Affiliate" shall mean, with respect to any Person, any
other Person who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the first Person,
including without limitation all directors and executive officers of the first
Person.
-2-
<PAGE> 211
1.4 Affiliate Letter. "Affiliate Letter" shall mean a letter from each
Affiliate of First Northern substantially in the form of Exhibit 1 attached to
this Agreement.
1.5 Agreement. "Agreement" shall mean this Agreement and Plan of Merger,
together with the Exhibits attached hereto and together with the Disclosure
Schedules, as the same may be amended or supplemented from time to time in
accordance with the terms hereof.
1.6 Announcement. "Announcement" shall mean any public notice, release,
statement or other communication to employees, suppliers, customers, members,
stockholders, the general public, the press or any securities exchange or
quotation system relating to the negotiation and preparation of this Agreement
or the transactions contemplated hereby.
1.7 Bank. "Bank" shall mean First Northern Savings Bank, S.A., a
Wisconsin-chartered savings and loan association which is a wholly-owned
subsidiary of First Northern.
1.8 Buildings. "Buildings" shall mean all buildings, fixtures, structures
and improvements (including without limitation stand-alone automated teller
machines or similar devices) used by a Person or an Affiliate and located on the
Person's Real Estate.
1.9 CERCLA. "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as the same may be in effect from time
to time.
1.10 Closing. "Closing" shall mean the conference to be held at 10:00 A.M.,
Central Time, on the Closing Date at the offices of Quarles & Brady LLP, 411
East Wisconsin Avenue, Milwaukee, Wisconsin 53202, or such other time and place
as the parties may mutually agree to in writing, at which the transactions
contemplated by this Agreement shall be consummated.
1.11 Closing Date. "Closing Date" shall mean the date of the Effective Time
or such other date as the parties may mutually agree to in writing.
1.12 Code. "Code" shall mean the Internal Revenue Code of 1986, as the same
may be in effect from time to time.
1.13 Confidentiality Agreement. "Confidentiality Agreement" shall mean the
letter agreement regarding confidentiality and related issues between Mutual and
First Northern dated January 11, 2000.
1.14 Contracts. "Contracts" shall mean all of the contracts, agreements,
leases, relationships and commitments, written or oral, to which the relevant
Person is a party or by which it is bound.
1.15 Control. "Control," as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and
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<PAGE> 212
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise. "Control," as used with respect to securities or other
property, shall mean the power to exercise or direct the exercise of any voting
rights associated therewith, or the power to dispose or direct the disposition
thereof, or both.
1.16 Disclosure Schedules. "Disclosure Schedules" shall mean the First
Northern Disclosure Schedule and the Mutual Disclosure Schedule.
1.17 Employee Benefit Plans. "Employee Benefit Plans" shall mean any
pension plan, profit sharing plan, bonus plan, incentive compensation plan,
deferred compensation plan, stock ownership plan, stock purchase plan, stock
option plan, stock appreciation plan, employee benefit plan, employee benefit
policy, retirement plan, fringe benefit program, insurance plan, severance plan,
disability plan, health care plan, sick leave plan, death benefit plan, or any
other plan or program to provide retirement income, fringe benefits or other
benefits to former or current employees of the relevant Person.
1.18 Environmental Claim. "Environmental Claim" shall mean any and all
administrative, regulatory or judicial actions, suits, demands, demand letters,
directives, claims, Liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any Person alleging potential
liability (including, without limitation, potential liability for enforcement,
investigatory costs, cleanup costs, governmental response costs, removal costs,
remedial costs, natural resources damages, property damages, personal injuries,
or penalties) arising out of, based on or resulting from: (A) the presence, or
release into the environment, of any Hazardous Materials at any location,
whether or not owned by a Person or any of its Subsidiaries; or (B)
circumstances forming the basis of any violation or alleged violation, of any
Environmental Law; or (C) any and all claims by any Person seeking damages,
contribution, indemnification, cost, recovery, compensation or injunctive relief
resulting from the presence or Release of any Hazardous Materials.
1.19 Environmental Laws. "Environmental Laws" shall mean all federal,
state, local or foreign statute, Law, rule, ordinance, code, policy, guideline,
rule of common law and regulations relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), including, without
limitation, Laws and regulations relating to Releases or threatened Releases of
Hazardous Materials, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials.
1.20 Environmental Permits. "Environmental Permits" shall mean
environmental, health and safety permits and governmental authorizations
necessary for their operations of a Person under Environmental Laws.
1.21 Equipment. "Equipment" shall mean all equipment, boilers, furniture,
fixtures, motor vehicles, furnishings, office equipment, computers and other
items of tangible personal
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property owned by the relevant Person which are either presently used, or are
used on the Closing Date, by the relevant Person in the conduct of its business.
1.22 ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as the same may be in effect from time to time.
1.23 Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as the same may be in effect from time to time.
1.24 FDIC. "FDIC" shall mean the Federal Deposit Insurance
Corporation.
1.25 FHLB of Chicago. "FHLB of Chicago" shall mean the Federal Home
Loan Bank of Chicago, Illinois.
1.26 First Northern. "First Northern" shall mean First Northern
Capital Corp., a Wisconsin corporation which is registered as a unitary
savings and loan holding company under HOLA and the rules and regulations
of the OTS promulgated thereunder.
1.27 First Northern Closing Certificate. "First Northern Closing
Certificate" shall mean the Closing Certificate of First Northern in
substantially the form of Exhibit 2 attached to this Agreement.
1.28 First Northern Common Stock. "First Northern Common Stock" shall
mean all of the authorized shares of common stock, $1.00 par value per
share, of First Northern.
1.29 First Northern Counsel Opinion. "First Northern Counsel Opinion"
shall mean an opinion of Schiff Hardin & Waite in substantially the form of
Exhibit 3 attached to this Agreement.
1.30 First Northern Disclosure Schedule. "First Northern Disclosure
Schedule" shall mean the disclosure schedule, dated the date of this
Agreement, delivered by First Northern to Mutual contemporaneously with the
execution and delivery of this Agreement and as the same may be amended
from time to time after the date of this Agreement and prior to the Closing
Date in accordance with the terms of this Agreement.
1.31 First Northern Executives. "First Northern Executives" shall mean
the individuals who serve as executive officers of First Northern or the
Bank.
1.32 First Northern Existing Contracts. "First Northern Existing
Contracts" shall mean those Contracts which are listed pursuant to Section
4.11 of this Agreement on the First Northern Disclosure Schedule.
1.33 First Northern Existing Employment Agreements. "First Northern
Existing Employment Agreements" shall mean the employment agreements by and
between the Bank or
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First Northern and any of the First Northern Executives, identified on the First
Northern Disclosure Schedule.
1.34 First Northern Existing Indebtedness. "First Northern Existing
Indebtedness" shall mean all Indebtedness of First Northern and the First
Northern Subsidiaries, all of which is listed on the First Northern
Disclosure Schedule.
1.35 First Northern Existing Liens. "First Northern Existing Liens"
shall mean all Liens affecting any of the assets and properties of First
Northern or any First Northern Subsidiary except for Liens for current
taxes not yet due and payable, pledges to secure deposits and such
imperfections of title, easements and other encumbrances, if any, as do not
materially detract from the value of or substantially interfere with the
present use of the property affected thereby, all of which are listed and
briefly described on the First Northern Disclosure Schedule.
1.36 First Northern Existing Litigation. "First Northern Existing
Litigation" shall mean all pending or, to the Knowledge of First Northern,
threatened claims, suits, audit inquiries, charges, workers compensation
claims, litigation, arbitrations, proceedings, governmental investigations,
citations and actions of any kind against First Northern or any First
Northern Subsidiary, or affecting any assets or the business of First
Northern or any First Northern Subsidiary, all of which are listed and
briefly described on the First Northern Disclosure Schedule.
1.37 First Northern Existing Plans. "First Northern Existing Plans"
shall mean all Employee Benefit Plans of First Northern and the First
Northern Subsidiaries and any Employee Benefit Plans of such entities that
have been terminated since January 1, 1997, all of which are listed on the
First Northern Disclosure Schedule.
1.38 First Northern Meeting. "First Northern Meeting" shall mean the
special or annual meeting of the First Northern Shareholders for the
purpose of approving the Merger, this Agreement and the transactions
contemplated by this Agreement, and for such other purposes as may be
necessary or desirable.
1.39 First Northern Real Estate. "First Northern Real Estate" shall
mean the parcels of real property identified in the legal descriptions set
forth in the First Northern Disclosure Schedule.
1.40 First Northern Replacement Employment Agreement. "First Northern
Replacement Employment Agreement" shall mean an employment agreement in
substantially the form of Exhibit 4 attached to this Agreement, to be
entered into at the Closing and to be effective as of the Effective Time,
by and between the Bank and any one or more of the First Northern
Executives, all as provided in Section 3.11 of this Agreement.
1.41 First Northern Shareholders. "First Northern Shareholders" shall
mean all Persons owning shares of First Northern Common Stock on the
relevant date of inquiry.
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1.42 First Northern Stock Option Plans. "First Northern Stock Option
Plans" shall mean the First Northern Capital Corp. 1999 Stock Plan, and the
following plans of the Bank, as assumed by First Northern: 1984 Stock
Option Plan, 1989 Executive Stock Option Plan, 1989 Directors' Stock Option
Plan, 1994 Executive Stock Plan, and 1994 Directors' Stock Option Plan.
1.43 First Northern Stock Options. "First Northern Stock Options"
shall mean all options to purchase shares of First Northern Common Stock
granted pursuant to the First Northern Stock Option Plans which are
outstanding as of the relevant time of inquiry, whether or not such options
are exercisable prior to the Effective Time.
1.44 First Northern Subsidiaries. "First Northern Subsidiaries" shall
mean those Subsidiaries of First Northern listed on the First Northern
Disclosure Schedule pursuant to Section 4.1(c) of this Agreement.
1.45 Fraction Payment. "Fraction Payment" shall mean any cash paid for
fractional share interests paid pursuant to Section 2.9(e) of this
Agreement.
1.46 Hazardous Materials. "Hazardous Materials" shall mean: (A) any
petroleum or petroleum products, radioactive materials, asbestos in any
form that is or could become friable, urea formaldehyde foam insulation,
and transformers or other equipment that contain dielectric fluid
containing regulated levels of polychlorinated biphenyls (PCBs) and radon
gas; and (B) any chemicals, materials or substances which are now defined
as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes, restricted
hazardous wastes," "toxic substances," "toxic pollutants," or words of
similar import, under any Environmental Law; and (C) any other chemical,
material, substance or waste, exposure to which is now prohibited, limited
or regulated by any governmental authority.
1.47 HOLA. "HOLA" shall mean the Home Owners' Loan Act of 1933, as the
same may be in effect from time to time, including the rules and
regulations of the OTS promulgated thereunder.
1.48 Indebtedness. "Indebtedness" shall mean all liabilities or
obligations (except deposit accounts) of the relevant Person, whether
primary or secondary, absolute or contingent: (a) for borrowed money; (b)
evidenced by notes, bonds, debentures or similar instruments; or (c)
secured by Liens on any assets of the relevant Person.
1.49 Investment Securities. "Investment Securities" shall mean all
investment securities of the relevant Person permitted to be held by the
relevant Person under Law.
1.50 IRS. "IRS" shall mean the United States Internal Revenue Service.
1.51 Knowledge. "Knowledge" of a Person shall mean, for purposes of
this Agreement, when any fact or matter is stated to be "to the Knowledge"
of that Person or words of
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similar import, the actual knowledge of the existence or nonexistence of such
fact or matter by the executive officers and the Person and its Subsidiaries.
1.52 Law. "Law" shall mean any federal, state, local or other law,
rule, regulation, policy or governmental requirement of any kind, and the rules,
regulations and orders promulgated thereunder by any regulatory agencies or
other Persons.
1.53 Lien. "Lien" shall mean, with respect to any asset: (a) any
mortgage, pledge, lien, charge, claim, restriction, reservation, condition,
easement, covenant, lease, encroachment, title defect, imposition, security
interest or other encumbrance of any kind; and (b) the interest of a vendor or
lessor under any conditional sale agreement, financing lease or other title
retention agreement relating to such asset.
1.54 Material Adverse Effect. "Material Adverse Effect" shall mean any
change or effect that is or is reasonably likely to be materially adverse to the
business, operations, properties (including intangible properties), condition
(financial or otherwise), assets, liabilities (including contingent liabilities)
or prospects of the relevant Person and its Subsidiaries, taken as a whole.
1.55 Material Contract. "Material Contract" shall mean any Contract of
a Person or any of its subsidiaries which constitutes:
(a) a lease of, or agreement to purchase or sell, any capital
assets involving in excess of $50,000 as to any asset or $100,000 in the
aggregate;
(b) any management, consulting, employment, personal service,
severance, agency or other contract or contracts providing for employment or
rendition of services and which: (i) are in writing, or (ii) create other than
an at will employment relationship; or (iii) provide for any commission, bonus,
profit sharing, incentive, retirement, consulting or additional compensation;
(c) any agreements or notes evidencing any Indebtedness;
(d) a power of attorney (whether revocable or irrevocable) given
to any other person by the Person that is in force;
(e) an agreement by the Person not to compete in any business or
in any geographical area;
(f) an agreement restricting the Person's right to use or
disclose any information in its possession;
(g) a partnership, joint venture or similar arrangement;
(h) a license involving payments in excess of $1,000;
(i)an agreement or arrangement with any Affiliate which is not a
Subsidiary;
(j) an agreement for data processing services;
(k) any assistance agreement, supervisory agreement, memorandum
of understanding, consent order, cease and desist order or other regulatory
order or decree with or by the SEC, OTS, FDIC, Wisconsin Agency or any other
regulatory authority; or
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(l) any other agreement or set of related agreements or series of
agreements which: (i) involve an amount in excess of $50,000 on an annual basis
or $100,000 in the aggregate; or (ii) is not in the ordinary course of business
of the Person or any Subsidiary of the Person.
1.56 Merger. "Merger" shall mean the merger of First Northern with and
into Merger Corp. pursuant to this Agreement.
1.57 Merger Corp. "Merger Corp." shall mean OV Corp., a Wisconsin
corporation organized as a wholly-owned subsidiary of Mutual for the purpose of
effecting the transactions contemplated by this Agreement. (Merger Corp. is the
same corporate entity as Survivor, but the term "Merger Corp." is intended to be
used primarily to designate the entity prior to the Merger.)
1.58 Mutual. "Mutual" shall mean Mutual Savings Bank, a mutual savings
bank chartered under Chapter 214 of the Wisconsin Statutes, and shall include
any successor savings bank pursuant to the Restructuring.
1.59 Mutual Closing Certificate. "Mutual Closing Certificate" shall
mean the Closing Certificate of Mutual and Merger Corp. in substantially the
form of Exhibit 5 attached to this Agreement.
1.60 Mutual Counsel Opinion. "Mutual Counsel Opinion" shall mean the
opinion of Quarles & Brady LLP in substantially the form of Exhibit 6 attached
to this Agreement.
1.61 Mutual Disclosure Schedule. "Mutual Disclosure Schedule" shall
mean the disclosure schedule, dated the date of this Agreement, delivered by
Mutual to First Northern contemporaneously with the execution and delivery of
this Agreement and as the same may be amended from time to time after the date
of this Agreement and prior to the Closing Date in accordance with the terms of
this Agreement.
1.62 Mutual Existing Contracts. "Mutual Existing Contracts" shall mean
those Contracts which are listed pursuant to Section 5.15 of this Agreement on
the Mutual Disclosure Schedule.
1.63 Mutual Existing Litigation. "Mutual Existing Litigation" shall
mean all pending or, to the Knowledge of Mutual, threatened claims, suits, audit
inquiries, charges, workers compensation claims, litigation, arbitrations,
proceedings, governmental investigations, citations and actions of any kind
against Mutual or any Mutual Subsidiary, or affecting any assets or the business
of Mutual or any Mutual Subsidiary, all of which are listed and briefly
described on the Mutual Disclosure Schedule.
1.64 Mutual Real Estate. "Mutual Real Estate" shall mean the parcels of
real property identified in the legal descriptions set forth in the First
Northern Disclosure Schedule.
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1.65 NASDAQ/NMS. "NASDAQ/NMS" shall mean the National Association of
Securities Dealers Automated Quotations National Market System.
1.66 OTS. "OTS" shall mean the Office of Thrift Supervision,
Department of the Treasury, or any successor agency.
1.67 Permits. "Permits" shall mean all licenses, permits, approvals,
franchises, qualifications, permissions, agreements, orders and governmental
authorizations required for the conduct of the business of the relevant Person.
1.68 Permitted Liens. "Permitted Liens" shall mean those First
Northern or Mutual Existing Liens which are expressly noted as Permitted Liens
on a Disclosure Schedule.
1.69 Person. "Person" shall mean a natural person, corporation, bank,
trust, partnership, association, governmental entity, agency or branch or
department thereof, or any other legal entity.
1.70 Proxy Statement. "Proxy Statement" shall mean the proxy statement
of First Northern to be filed with the SEC and to be distributed to the First
Northern Shareholders in connection with the First Northern Special Meeting and
the approval of the Merger by the First Northern Shareholders, which shall also
constitute the prospectus of Survivor filed as a part of the Registration
Statement.
1.71 Registration Statement. "Registration Statement" shall mean a
registration statement on Form S-4 (or other appropriate form) to be filed under
the Securities Act by Survivor in connection with the Merger for purposes of
registering any shares of Survivor Common Stock to be issued in the Merger
pursuant to this Agreement.
1.72 Regulatory Approvals. "Regulatory Approvals" shall mean all of
the approvals which are conditions precedent to consummating the Merger and the
Restructuring, as specified in Section 7.1(c) of this Agreement.
1.73 Release. "Release" shall mean any release, spill, emission,
leaking, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the atmosphere, soil, surface water, groundwater or property.
1.74 SAIF. "SAIF" shall mean the Savings Association Insurance Fund of
the FDIC.
1.75 SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
1.76 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as the same may be in effect from time to time.
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1.77 Section 180.0622(2)(b). "Section 180.0622(2)(b)" shall mean WBCL
Section 180.0622(2)(b), including judicial interpretations thereof and of former
WBCL Section 180.04(6), its predecessor statute.
1.78 Stock Option Agreement. "Stock Option Agreement" shall mean the
Stock Option Agreement, of even date herewith, being entered into by and between
First Northern and Mutual concurrently with their execution and delivery of this
Agreement.
1.79 Subsidiary. "Subsidiary" shall mean any corporation, financial
institution, joint venture, partnership, limited liability company, trust or
other business entity: (i) 25% or more of any outstanding class of whose voting
interests is directly or indirectly owned by the relevant Person, or is held by
it with power to vote; (ii) the election of a majority of whose directors,
trustees, general partners or comparable governing body is controlled in any
manner by the relevant Person; or (iii) with respect to the management or
policies of which the relevant Person has the power, directly or indirectly, to
exercise a controlling influence. Subsidiary shall include an indirect
Subsidiary of the relevant Person which is controlled in any manner specified
above through one or more corporations or financial institutions which are
themselves Subsidiaries.
1.80 Survivor. "Survivor" shall have the meaning specified in Section
2.1 of this Agreement. (Survivor is the same corporate entity as Merger Corp.,
but the term "Survivor" is intended to be used primarily to designate the entity
as the surviving corporation in the Merger.)
1.81 Survivor Common Stock. "Survivor Common Stock" shall mean the
Common Stock, $.01 par value, of Survivor after the Merger.
1.82 WBCL. "WBCL" shall mean the Wisconsin Business Corporation Law.
1.83 Wisconsin Agency. "Wisconsin Agency" shall mean the Administrator
of the Division of Savings Institutions of the Wisconsin Department of Financial
Institutions, or any successor agency.
1.84 Year 2000 Compliant. "Year 2000 Compliant" shall mean, with
respect to material hardware and software systems, that such hardware and
software is designed to be used prior to, during, and after the calendar Year
2000 A.D., recognize the "leap day" therein, and such hardware and software used
during each such time period will accurately receive, provide and process
date/time data from, into and between the years 1999 and 2000, and all
subsequent years, and will not malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other hardware and software, used in combination with the hardware and software
of the affected Person, properly exchanges date/time data with the hardware and
software of the affected Person.
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1.85 Other Defined Terms. The following additional terms are defined
in the specific Section to which they relate:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Cash Election 2.8(e)
Cash Election Shares 2.8(f)
Cash Fraction 2.8(f)(ii)(A)
Cash Percentage 2.8(a)(i)
Cash Value 2.8(a)(ii)
COBRA 3.12(e)
Conversion Notice 2.8(b)
Disclosure Schedule Change 3.2(d)
Effective Time 2.3
Election Deadline 2.8(l)
Exchange Agent 2.9(a)
Exchange Fund 2.9(a)
Exchange Ratio 2.8(a)(iii)
First Northern Approvals 4.1
First Northern Certificates 2.8(i)
First Northern Reports 4.8
Form of Election 2.8(e)
Indemnified Liabilities 3.5(a)
Indemnified Parties 3.5(a)
Initial Mailing Record Date 2.8(i)
Letter of Transmittal 2.9(b)(i)
Maximum Cash Number 2.8(a)(iv)
Maximum Stock Number 2.8(a)(v)
Merger Consideration 2.8(a)(vi)
MHC 2.14(c)
Mixed Election 2.8(e)
Mixed Election Shares 2.8(f)
Mutual Reports 5.13
Non-Election 2.8(e)
Non-Election Shares 2.8(f)(i)
Restructuring 2.14
Representative 2.8(e)
Stock Bank 2.14(d)
Stock Election 2.8(e)
Stock Election Shares 2.8(f)(i)
Stock Fraction 2.8(g)(ii)(A)
Stock Percentage 2.8(a)(vii)
Transitory 2.14(c)
</TABLE>
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ARTICLE II
THE MERGER
2.1 The Merger. This Agreement provides for the merger of First
Northern with and into Merger Corp., whereby the stock of First Northern and
Merger Corp. outstanding as of the Effective Time will be converted as described
herein. As of the Effective Time, First Northern will be merged with and into
Merger Corp. which, as the surviving corporation ("Survivor"), shall remain a
Wisconsin business corporation and become registered under HOLA as a savings and
loan holding company and, in such capacity, shall be governed by the laws of the
State of Wisconsin and federal laws applicable to registered savings and loan
holding companies and subsidiary holding companies of federal mutual holding
companies, including rules and regulations of regulatory authorities thereunder.
The separate existence of First Northern shall thereupon cease. The Merger shall
be effected pursuant to the provisions of federal Law and the WBCL, and shall
have the effects provided in the WBCL.
2.2 Effect of the Merger.
(a) At the Effective Time, the effect of the Merger shall be as
provided in the WBCL, including the effects described in Sections 2.2(b) and
2.2(c) of this Agreement.
(b) The corporate identity, existence, purposes, powers,
franchises, privileges, assets, properties and rights of both First Northern and
Merger Corp. shall be merged into and continued in Survivor, and Survivor shall
be fully vested therewith.
(c) At the Effective Time, Survivor shall succeed to or
continue, without other transfer, and shall possess and enjoy, all the rights,
privileges, assets, properties, powers and franchises both of a public and a
private nature, and shall be subject to all the restrictions, disabilities and
duties of First Northern and Merger Corp., and all the rights, privileges,
assets, properties, powers and franchises of First Northern or Merger Corp. and
all property, real, personal and mixed, tangible or intangible, and all debts
due to First Northern or Merger Corp. on whatever account, shall be vested in
Survivor; and all rights, privileges, assets, properties, powers and franchises,
and all and every other interest shall be thereafter as effectively the property
of Survivor as they were of First Northern or Merger Corp.; and the title to or
any interest in any real estate vested by deed or otherwise in First Northern or
Merger Corp. shall not revert or be in any way impaired by reason of the Merger;
provided, however, that all rights of creditors and Liens upon any property of
either First Northern or Merger Corp. shall be preserved unimpaired, and all
debts, liabilities and duties of First Northern or Merger Corp. shall
thenceforth attach to Survivor and may be enforced against Survivor to the same
extent as if said debts, liabilities and duties had been incurred or contracted
by Survivor.
2.3 Effective Time. The consummation of the Merger shall be effected
as promptly as practicable after the satisfaction or waiver of the conditions
set forth in Article VII of this Agreement. The Merger shall become effective on
the date and time specified in Articles of Merger to be filed with the Wisconsin
Department of Financial Institutions. The date and time
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on which the Merger shall become effective is referred to in this Agreement as
the "Effective Time."
2.4 Articles and Bylaws of Survivor.
(a) The Articles of Incorporation of Merger Corp. as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of Survivor until amended in accordance with Law. (The parties contemplate
amendment of Merger Corp.'s articles of incorporation prior to the Effective
Time to, among other things, change its name and authorize additional shares.)
(b) The Bylaws of Merger Corp. as in effect immediately prior to
the Effective Time shall be the Bylaws of Survivor until amended in accordance
with Law, except that the name of the corporation identified therein shall be
changed to as provided in Section 2.4(a) hereof.
2.5 Charter and Bylaws of the Bank; Offices of the Bank.
(a) The Charter and Bylaws of the Bank in force immediately
prior to the Effective Time initially shall be the Charter and Bylaws of the
Bank immediately following the Effective Time.
(b) The location of the main office of the Bank immediately
prior to the Effective Time initially shall continue as the main office of the
Bank immediately following the Effective Time, and the location of each of the
Bank's branch offices immediately prior to the Effective Time shall continue as
a branch location of the Bank immediately following the Effective Time.
2.6 Directors and Officers of Survivor. As of the Effective Time, the
directors of Survivor shall be: (a) the duly qualified and acting directors of
Merger Corp. immediately prior to the Effective Time (who will be the same as
the directors of Mutual at such date) plus (b) four additional directors who
shall have been directors of First Northern prior to the Effective Time and who
shall be designated in writing by Mutual to First Northern at least five
business days prior to the Effective Time. The officers of Merger Corp.
immediately prior to the Effective Time shall be the officers of Survivor, in
all cases to hold office as provided in the Bylaws of Survivor. The directors of
Survivor shall promptly thereafter take the actions described in Section 3.11(b)
hereof to elect additional officers.
2.7 Capital Stock of Merger Corp. At the Effective Time, each share of
common stock of Merger Corp. then issued and outstanding, without any action on
the part of the holder thereof, shall remain an issued and outstanding share of
Survivor Common Stock.
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2.8 Conversion of First Northern Common Stock.
(a) Definitions. As used in this Agreement:
(i) "Cash Percentage" shall mean that percentage equal to:
(A) 100%; minus (B) the Stock Percentage.
(ii) "Cash Value" shall mean $15.00.
(iii) "Exchange Ratio" shall mean 1.5.
(iv) "Maximum Cash Number" shall mean that number equal to:
(A) (1) the Cash Percentage; multiplied by (2) the
number of shares of First Northern Common Stock issued and outstanding
immediately prior to the Effective Time; minus
(B) the number of shares of First Northern Common
Stock to be exchanged for Fraction Payments.
(v) "Maximum Stock Number" shall mean that number equal
to: (A) the Stock Percentage; multiplied by (B) the number of shares of First
Northern Common Stock issued and outstanding immediately prior to the Effective
Time.
(vi) "Merger Consideration" shall mean the shares of
Survivor Common Stock issuable pursuant to this Section 2.8 of this Agreement
and cash payable pursuant to this Section 2.8 of this Agreement.
(vii) "Stock Percentage" shall mean that percentage selected
by Mutual in the Conversion Notice which shall be (at the option of Mutual) any
percentage between and including 40% and 70%.
(b) Conversion Notice. At least three business days prior to the
Closing Date, Mutual shall send a notice to First Northern (the "Conversion
Notice") which specifies Mutual's election as to the amounts of the Cash
Percentage and the Stock Percentage. The parties shall then proceed to close the
transactions described in this Agreement on the basis of such election
identified in the Conversion Notice.
(c) Conversion. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Corp., First Northern, Mutual or
the holders of First Northern Common Stock, each share of First Northern Common
Stock issued and outstanding at the Effective Time (except for treasury stock
which shall be canceled as described in Section 2.8(m) of this Agreement) shall
be converted into and become the right to receive:
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(i) cash in the amount of the Cash Value; or
(ii) that number of shares of Survivor Common Stock equal
to the Exchange Ratio; or
(iii) a combination of cash and shares of Survivor Common
Stock determined in accordance with the provisions of this Section 2.8 of this
Agreement.
(d) Maximum Numbers. The number of shares of First Northern
Common Stock to be converted into the right to receive Survivor Common Stock in
the Merger shall equal the Maximum Stock Number. The number of shares of First
Northern Common Stock to be converted into the right to receive cash in the
Merger shall equal the Maximum Cash Number. Notwithstanding any other provisions
of this Agreement, at least 40% of the number of shares of First Northern Common
Stock issued and outstanding immediately prior to the Effective Time shall be
converted into whole shares of Survivor Common Stock.
(e) Elections. Subject to the allocation and election procedures
set forth in this Section 2.8 of this Agreement, each record holder immediately
prior to the Effective Time of shares of First Northern Common Stock will be
entitled in respect to all of the shares of First Northern Common Stock owned by
such holder: (i) to elect to receive cash for such shares (a "Cash Election");
(ii) to elect to receive Survivor Common Stock for such shares (a "Stock
Election"); (iii) to indicate that such record holder has no preference as to
the receipt of cash or Survivor Common Stock for such shares (a "Non-Election");
or (iv) as to First Northern Shareholders holding not less than 170 shares of
First Northern Common Stock, to elect to receive a combination of cash and
Survivor Common Stock, with the percentage of such shares of First Northern
Common Stock equal to the lesser of (x) the Stock Percentage and (y) 50%
converted into Survivor Common Stock and the balance converted into cash (a
"Mixed Election"). All such elections shall be made on a form designed by
Mutual, which is reasonably satisfactory to First Northern, for that purpose (a
"Form of Election"). Holders of record of shares of First Northern Common Stock
who hold such shares as nominees, trustees or in other representative capacities
(a "Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the shares
of First Northern Common Stock held by each Representative for a particular
beneficial owner. Shareholders who are not Representatives must make a single
election for all shares of First Northern Common Stock held by them.
(f) Cash Elections in Excess of Maximum Cash Number. If the
aggregate number of shares covered by Cash Elections (the "Cash Election
Shares") together with the portion of shares to be converted into cash pursuant
to Mixed Elections exceeds the Maximum Cash Number:
(i) each share of First Northern Common Stock covered by a
Stock Election (the "Stock Election Shares") and each share of First Northern
Common Stock covered by a Non-Election (the "Non-Election Shares") shall be
converted into the right to receive a
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number of shares of Survivor Common Stock equal to the Exchange Ratio, and each
share of First Northern Common Stock covered by a Mixed Election (the "Mixed
Election Shares") shall be converted as provided in the Mixed Election; and
(ii) each Cash Election Share shall be converted into the
right to receive:
(A) an amount in cash, without interest, equal to: (1)
the Cash Value; multiplied by (2) a fraction (the "Cash Fraction"), the
numerator of which shall be the difference between (I) the Maximum Cash Number
and (II) the product of the number of Mixed Election Shares times the Cash
Percentage and the denominator of which shall be the total number of Cash
Election Shares; and
(B) a number of shares of Survivor Common Stock equal
to: (1) the Exchange Ratio; multiplied by (2) a fraction equal to one minus the
Cash Fraction.
(C) Notwithstanding the foregoing provisions, to avoid
the ongoing expense of very small shareholder accounts, prior to the Effective
Time, Mutual and First Northern may agree that, notwithstanding the foregoing
proration, the shares of First Northern Common Stock of any First Northern
Shareholder who has made a Cash Election and who as a result of the foregoing
proration would otherwise receive fewer than 25 (or such smaller number as may
be agreed upon by Mutual and First Northern) shares of Survivor Common Stock
shall have their First Northern Common Stock converted solely into cash. In that
event, the proportions of cash and Survivor Common Stock to be received by other
First Northern Shareholders who have made a Cash Election shall be appropriately
adjusted to reflect a pro rata allocation of remaining available cash and
Survivor Common Stock among such other First Northern Shareholders.
(g) Stock Elections in Excess of Maximum Stock Number. If the
aggregate number of Stock Election Shares, together with the portion of shares
to be converted into shares of Survivor Common Stock pursuant to Mixed Elections
exceeds the Maximum Stock Number:
(i) each Cash Election Share and each Non-Election Share
shall be converted into the right to receive cash in the amount of the Cash
Value, and each Mixed Election Share shall be converted as provided in the Mixed
Election; and
(ii) each Stock Election Share shall be converted into the
right to receive:
(A) a number of shares of Survivor Common Stock equal
to: (1) the Exchange Ratio; multiplied by (2) a fraction (the "Stock Fraction"),
the numerator of which shall be the difference between (I) the Maximum Stock
Number and (II) the product of the number of Mixed Election Shares times the
Stock Percentage and the denominator of which shall be the total number of Stock
Election Shares, and
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(B) an amount in cash, without interest, equal to: (1)
the Cash Value; multiplied by (2) a fraction equal to one minus the Stock
Fraction.
(h) Other. In the event that neither Section 2.8(f) or 2.8(g) of
this Agreement is applicable: (i) each Cash Election Share shall be converted
into the right to receive cash in the amount of the Cash Value; (ii) each Stock
Election Share shall be converted into the right to receive a number of shares
of Survivor Common Stock equal to the Exchange Ratio; and (iii) each
Non-Election Share shall be converted into the right to receive shares of
Survivor Common Stock and the right to receive cash on a proportionate basis so
that the total number of shares of First Northern Common Stock converted into
the right to receive shares of Survivor Common Stock and cash, respectively,
approximate the Maximum Stock Number and the Maximum Cash Number, respectively,
as closely as possible.
(i) Initial Mailing. Mutual and First Northern will mail a Form
of Election to all holders of record of shares of First Northern Common Stock as
of a date mutually agreed to by First Northern and Mutual (the "Initial Mailing
Record Date") which shall be approximately 45 calendar days prior to the
anticipated Effective Time. Elections shall be made by holders of First Northern
Common Stock by mailing to the Exchange Agent a Form of Election. To be
effective, a Form of Election must be properly completed, signed and submitted
to the Exchange Agent and accompanied by the certificates representing the
shares of First Northern Common Stock ("First Northern Certificates") as to
which the election is being made (or by an appropriate guarantee of delivery of
such certificates as set forth in such Form of Election from a member of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, provided such certificates are in fact
delivered by the time set forth in such guarantee of delivery). Mutual will have
the discretion, which it may delegate in whole or in part to the Exchange Agent,
to determine whether Forms of Election have been properly completed, signed and
submitted or revoked and to disregard immaterial defects in Forms of Election.
The decision of Mutual (or the Exchange Agent) in such matters shall be
conclusive and binding. Neither Mutual nor the Exchange Agent will be under any
obligation to notify any Person of any defect in a Form of Election submitted to
the Exchange Agent. The Exchange Agent shall also make all computations
contemplated by this Section 2.8 of this Agreement and all such computations
shall be conclusive and binding on the holders of First Northern Common Stock
absent manifest error in any such computation.
(j) Nonsubmittal. For the purposes hereof, a holder of First
Northern Common Stock who does not submit a Form of Election which is received
by the Exchange Agent prior to the Election Deadline shall be deemed to have
made a Non-Election. If Mutual or the Exchange Agent shall determine that any
purported Cash Election or Stock Election was not properly made, such purported
Cash Election or Stock Election shall be deemed to be of no force and effect and
the Person making such purported Cash Election or Stock Election shall, for all
purposes hereof, be deemed to have made a Non-Election.
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(k) Subsequent Mailings. Mutual and First Northern shall each
use its reasonable best efforts to promptly mail the Form of Election to all
Persons who become holders of First Northern Common Stock during the period
between the Initial Mailing Record Date and 10:00 a.m. New York time, on the
date ten calendar days prior to the anticipated Effective Time and to make the
Form of Election available to all Persons who become holders of First Northern
Common Stock subsequent to such day and no later than the close of business on
the third business day prior to the Effective Time.
(l) Election Deadline. A Form of Election must be received by
the Exchange Agent by the close of business on the third business day prior to
the Effective Time (the "Election Deadline") in order to be effective. All
elections will be irrevocable.
(m) Treasury Stock. Any shares of First Northern Common Stock
that are owned by First Northern or any First Northern Subsidiary, except in a
fiduciary capacity, at the Effective Time shall be canceled and retired and
cease to exist and no cash or shares of Survivor Common Stock shall be issued or
delivered in exchange therefor.
(n) Adjustment. In the event that, prior to the Effective Time,
there is a reclassification, stock split or stock dividend with respect to
outstanding Survivor Common Stock or outstanding First Northern Common Stock, an
appropriate and proportionate adjustment, if any, shall be made to any or one or
more of the Cash Value or the Exchange Ratio.
2.9 Exchange of First Northern Certificates.
(a) Exchange Agent. As of the Effective Time, Survivor shall
deposit, or shall cause to be deposited, with a bank or trust company designated
by Survivor and reasonably acceptable to First Northern (the "Exchange Agent"),
for the benefit of the holders of shares of First Northern Common Stock, for
exchange in accordance with this Article II of this Agreement through the
Exchange Agent: (i) certificates representing the aggregate number of shares of
Survivor Common Stock issuable pursuant to Section 2.8 of this Agreement; and
(ii) cash representing the aggregate amount of cash payable pursuant to Section
2.8 of this Agreement; (such certificates for shares of Survivor Common Stock,
together with any dividends or distributions with respect thereto, such cash and
any Fraction Payment, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures.
(i) At or promptly after the Effective Time, Survivor shall
cause the Exchange Agent to mail to each holder of record of a First Northern
Certificate which immediately prior to the Effective Time of Merger represented
outstanding shares of First Northern Common Stock and which was not submitted to
the Exchange Agent with a duly executed and completed Form of Election: (A) a
letter of transmittal ("Letter of Transmittal") which shall specify that
delivery shall be effected, and risk of loss and title to the First Northern
Certificates shall pass, only upon delivery of the First Northern Certificates
to the Exchange
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Agent and which shall be in such form and have such other customary provisions
as Survivor may reasonably specify and which are reasonably acceptable to First
Northern; and (B) instructions to effect the surrender of the First Northern
Certificates in exchange for cash or shares of Survivor Common Stock, or both,
as described in this Agreement.
(ii) Upon surrender of a First Northern Certificate for
cancellation to the Exchange Agent together with either a Form of Election or a
Letter of Transmittal, in each case duly executed, and with such other documents
as the Exchange Agent may reasonably require, the holder of such First Northern
Certificate shall be entitled to receive, and Survivor shall cause the Exchange
Agent to promptly deliver in exchange therefor after the Effective Time: (A) a
certificate representing that number of whole shares of Survivor Common Stock to
which such holder is entitled to receive in respect of such First Northern
Certificate pursuant to Section 2.8 of this Agreement; and (B) a check
representing the cash that such holder is entitled to receive in respect of such
First Northern Certificate pursuant to Section 2.8 of this Agreement; and (C) a
check for any Fraction Payment. The First Northern Certificate so surrendered
shall forthwith be canceled; provided, however, that fractional share interests
of any one holder shall be aggregated to maximize the number of whole shares of
Survivor Common Stock to be issued and minimize the Fraction Payments.
(iii) In the event of a transfer of ownership of shares of
First Northern Common Stock which is not registered in the transfer records of
First Northern, a certificate representing the proper number of shares of
Survivor Common Stock, a check for the proper amount of cash that such holder is
entitled to receive in respect of such First Northern Certificate pursuant to
Section 2.8 of this Agreement and any Fraction Payment, shall be delivered to
the transferee if the First Northern Certificate which represented such shares
of First Northern Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid.
(iv) No interest will be paid or accrued on the cash and
shares of Survivor Common Stock to be issued pursuant to this Agreement, the
cash in lieu of fractional shares, if any, and unpaid dividends and
distributions on the shares of Survivor Common Stock, if any, payable to First
Northern Shareholders.
(v) If any First Northern Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such First Northern Certificate to be lost, stolen or destroyed
and, if required by Survivor in its reasonable discretion, the posting by such
Person of a bond in such reasonable amount as Survivor may direct as indemnity
against any claim that may be made against it with respect to such First
Northern Certificate, the Exchange Agent will deliver in exchange for such lost,
stolen or destroyed First Northern Certificate, a certificate representing the
proper number of shares of Survivor Common Stock and a check for the cash, in
each case that such First Northern Shareholder has the right to receive pursuant
to Section 2.8 of this Agreement, and the Fraction Payment, if any, with respect
to the shares of First Northern Common Stock formerly represented
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thereby, and unpaid dividends and distributions on the shares of Survivor Common
Stock, if any, as provided in this Article II of this Agreement.
(vi) Until surrendered as contemplated by this Section 2.9
of this Agreement, each First Northern Certificate shall be deemed at all times
after the Effective Time to represent only the right to receive upon surrender
only the cash or shares of Survivor Common Stock, or both, and any Fraction
Payment.
(c) Distributions with Respect to Unexchanged Shares. If any
Survivor Common Stock is issued pursuant to the Merger, no dividends or other
distributions declared or made after the Effective Time with respect to Survivor
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered First Northern Certificate with respect to the
shares of Survivor Common Stock represented thereby, and no Fraction Payment
shall be paid to any such holder, until the holder of such First Northern
Certificate has surrendered such First Northern Certificate to the Exchange
Agent. Subject to the effect of any applicable Law, following the surrender of
any such First Northern Certificate, there shall be paid to the holder of the
surrendered First Northern Certificate, without interest: (i) promptly, any
Fraction Payment to which such holder is entitled and the amount of dividends or
other distributions with a record date after the Effective Time of Merger
theretofore paid with respect to such whole shares of Survivor Common Stock; and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date occurring after surrender payable with respect to such whole
shares of Survivor Common Stock.
(d) No Further Rights in First Northern Common Stock. All shares
of Survivor Common Stock issued and cash paid upon conversion of the First
Northern Common Stock in accordance with the terms of this Agreement shall be
deemed to have been issued and paid in full satisfaction of all rights
pertaining to the First Northern Common Stock.
(e) No Fractional Shares. No fractional shares of Survivor
Common Stock shall be issued in the Merger. All fractional share interests of a
holder of more than one First Northern Certificate at the Effective Time shall
be aggregated. If a fractional share interest results after such aggregation,
each holder of a fractional interest shall be paid an amount in cash equal to
the product obtained by multiplying such fractional interest by the Cash Value.
Promptly after the determination of the amount of cash to be paid to holders of
fractional interests, the Exchange Agent shall notify Survivor and Survivor
shall deliver such amounts to such holders subject to and in accordance with the
terms of Section 2.9(c) of this Agreement.
(f) Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund as directed by Survivor. Any interest and
other income resulting from such investments shall be paid to Survivor. In the
event the cash in the Exchange Fund shall be insufficient to fully satisfy all
of the payment obligations to be made by the Exchange Agent hereunder, then
Survivor shall promptly deposit cash into the Exchange Fund in an
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amount which is equal to the deficiency in the amount of cash required to fully
satisfy such payment obligations.
(g) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the First Northern Shareholders after twelve
(12) months after the Effective Time shall be delivered to Survivor, upon
demand, and any First Northern Shareholders who have not theretofore complied
with this Article II of this Agreement shall thereafter look only to Survivor
for payment of their claim for cash or shares of Survivor Common Stock, or both,
any cash in lieu of fractional share interests and any dividends or
distributions with respect thereto.
(h) No Liability. Neither the Exchange Agent nor any party to
this Agreement shall be liable to any First Northern Shareholder for any shares
of First Northern Common Stock or Survivor Common Stock (or dividends or
distributions with respect thereto) or cash delivered in accordance with
applicable Law to a public official pursuant to any abandoned property, escheat
or similar Law.
(i) Withholding Rights. Survivor shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any First Northern Shareholder such amounts as Survivor is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax Law. To the extent that amounts are so
withheld by Survivor, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the First Northern Shareholder in respect
of which such deduction and withholding was made by Survivor.
(j) Uncertificated Shares. Notwithstanding any other provision
of this Agreement, the Form of Election and the Letter of Transmittal may, at
the option of Survivor, provide for the ability of a holder of one or more First
Northern Certificates to elect that Survivor Common Stock to be received in
exchange for the First Northern Common Stock formerly represented by such
surrendered First Northern Certificates be issued in uncertificated form.
(k) Stock Transfer Books. At the Effective Time, the stock
transfer books of First Northern shall be closed and there shall be no further
registration of transfers of shares of First Northern Common Stock thereafter on
the records of First Northern. From and after the Effective Time, the holders of
First Northern Certificates outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such shares of First Northern
Common Stock except as otherwise provided in this Agreement or by Law.
2.10 Reorganization. The parties intend that this Agreement be a plan
of reorganization within the meaning of Section 368(a) of the Code and that the
Merger be a tax-free reorganization under Section 368(a) of the Code to the
extent that shares of First Northern Common Stock are exchanged for shares of
Survivor Common Stock as described in this Agreement. No party shall voluntarily
take or cause to be taken any action which would disqualify the Merger as a
tax-free reorganization under Section 368 of the Code.
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2.11 No Dissenting Shares. The parties acknowledge that under the WBCL,
the First Northern Shareholders are not entitled to dissent from the Merger and
are not entitled to require appraisal of their First Northern Common Stock.
2.12 Meeting of First Northern Shareholders.
(a) First Northern will promptly take all steps necessary to
cause the First Northern Meeting to be duly called, noticed, and held as soon as
practicable for the purpose of voting to approve this Agreement, the Stock
Option Agreement (if required), the Merger and all matters related thereto.
First Northern will use its best efforts to secure the required approval of its
Shareholders.
(b) Merger Corp. and First Northern will prepare and file with
the SEC the Registration Statement and the Proxy Statement, respectively, as
soon as reasonably practicable after the date of this Agreement. Merger Corp.,
Mutual and First Northern shall use reasonable best efforts to cause the Proxy
Statement to be cleared for mailing, and the Registration Statement to be
declared effective under the Securities Act as promptly as practicable after
such filing. First Northern will cause to be mailed to its Shareholders a notice
of the Meeting and the Proxy Statement as soon as practicable thereafter. Merger
Corp., Mutual and First Northern shall also take such action as may be
reasonably required to cause any shares of Survivor Common Stock issuable
pursuant to the Merger to be registered or to obtain an exemption from
registration or qualification under applicable state "blue sky" or securities
Laws; provided, however, that Merger Corp. shall not be required to qualify as a
foreign corporation or to file any general consent to service of process under
the Laws of any jurisdiction. Each party to this Agreement will furnish to the
other parties all information concerning itself as each such other party or its
counsel may reasonably request and which is required or customary for inclusion
in the Proxy Statement and the Registration Statement.
(c) The Proxy Statement shall include the recommendation of the
Board of Directors of First Northern in favor of the Merger; provided, however,
that if the Board of Directors of First Northern shall, in good faith and after
receiving the written opinion of its legal counsel, determine that to make such
a recommendation would be a violation of its fiduciary obligations under
applicable Law, then the Board of Directors of First Northern shall not be
obligated to make any such recommendation.
2.13 Liquidation Account and Sub-Accounts. The liquidation account and
sub-account balances of the Bank shall be continued for the benefit of certain
account holders of the Bank who maintain their accounts in the Bank in the event
of a complete liquidation of the Bank. The liquidation account balance shall be
subject to downward adjustment to the extent of any downward adjustment to any
sub-account balance in accordance with Section 563b.3(f) of the regulations of
the OTS. A distribution of each sub-account balance may be made only in the
event of a complete liquidation of the Bank and only out of funds available for
such purpose after payment of all creditors but before any payments to
stockholders.
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2.14 Restructuring. In connection with the Merger, Mutual and First
Northern will conduct a series of transactions, as set forth below (the
"Restructuring"):
(a) Mutual will convert from a state-chartered savings bank to a
federal savings bank.
(b) Bank will convert from a state-chartered savings and loan
association to a federal savings bank.
(c) Mutual will form a mutual holding company ("MHC"). MHC will
also form a transitory federal stock savings bank ("Transitory"). Mutual will
contribute the shares of Merger Corp. to MHC. MHC would thereupon own all of the
stock of both Merger Corp. and Transitory.
(d) Mutual will convert to a federal stock savings bank ("Stock
Bank"). Mutual's depositors would receive deposit accounts in Stock Bank with
the same terms and conditions as their deposit accounts in Mutual.
(e) Transitory would merge into Stock Bank in a transaction in
which MHC would receive all of the stock of Stock Bank.
(f) MHC would transfer the stock of Stock Bank to Merger Corp.
so that Merger Corp. would hold all of the stock of Stock Bank, and MHC would
initially own 100% of the shares of common stock of Merger Corp. The former
depositors of Mutual would hold all of the liquidation and voting interest in
MHC, for so long as, and to the extent, they continue to maintain their deposits
with Stock Bank.
(g) Simultaneously with the Merger, Survivor would issue shares
of its stock to the public and the Survivor Employee Benefit Plans for cash, at
the price to purchasers of $10.00 per share.
(h) As a result of the Merger, Survivor will be the sole
stockholder of Bank.
Therefore, as a result of the Restructuring and the Merger, Bank and
Stock Bank would become "sister" corporations owned by Survivor. MHC would own
at least 51% of the stock of Survivor, and the new public shareholders, the
former shareholders of First Northern and Survivor Employee Benefit Plans would
together own 49% or less of the stock of Survivor.
The amount of Survivor Common Stock to be offered to the public would be
determined so that the total of Survivor Common Stock issued to First Northern
Shareholders, new investors and reserved for options or the other compensation
programs for directors and employees of Survivor and its Subsidiaries would
constitute less than 50% of the total Survivor Common Stock, and the balance
would be owned by MHC.
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The Restructuring is subject to certain regulatory approvals. After the
Restructuring is effected, Mutual agrees that it will assume and timely
discharge any and all obligations, covenants and agreements of First Northern
under this Agreement which are to be performed or discharged after the Effective
Time, but which have not been fully performed or discharged as of the time the
Restructuring is effected. Mutual agrees, however, that it will not alter the
structure of the Restructuring as described herein if it would: (i) alter,
change or reduce the amount of the consideration to be paid to holders of First
Northern Common Stock or the manner or basis upon which such exchange is made;
(ii) have an adverse federal or state income tax consequence to First Northern,
or any of the shareholders of First Northern; (iii) have an adverse effect on
the shareholders of First Northern Common Stock; or (iv) would be likely to
delay or jeopardize receipt of the Regulatory Approvals or satisfaction of any
of the conditions to the Merger set forth in Article VII.
2.15 Anti-Dilution Provisions. In the event that between the date of
this Agreement and the Effective Time the issued and outstanding shares of First
Northern Common Stock shall have been changed into a different number of shares
as a result of a stock split, reverse stock split, stock dividend,
recapitalization, reclassification or other similar transaction, or in the event
the number of authorized and unissued shares of First Northern Common Stock
subject to issuance upon the exercise of outstanding First Northern Stock
Options shall have changed between the date of this Agreement and the Effective
Time as the result of the granting of additional First Northern Stock Options,
then the per share merger consideration shall be adjusted appropriately, so long
as the aggregate consideration remains the same.
2.16 Alternative Structure. Notwithstanding anything in this Agreement
to the contrary, Mutual may specify (subject to First Northern's approval, which
shall not be unreasonably withheld) that any of its or MHC's direct or indirect
subsidiaries, and First Northern and any of its direct or indirect subsidiaries
shall enter into transactions other than those described in this Article II, in
order to effect the purposes of this Agreement, and Mutual and First Northern
shall take all action necessary and appropriate to effect, or cause to be
affected, such transactions; provided, however, that (i) other than a change in
structure required by a regulatory agency having jurisdiction over the
transactions contemplated by this Agreement, no such specification shall
materially and adversely affect the timing of the consummation of the
transactions contemplated herein; or (ii) no such specifications shall
materially and adversely affect the tax effect or economic benefits of the
Merger to the holders of First Northern Common Stock or to Mutual's members or
the fundamental structure of the mid-tier holding company in the Restructuring.
Such alternative structure may include substitution of a federally chartered
holding company for Merger Corp., if required by relevant regulators.
ARTICLE III
OTHER AGREEMENTS
3.1 Confidentiality; Access. The Confidentiality Agreement shall remain
in full force and effect, except that numbered paragraph 4 thereof ("Other
Discussions") shall be superceded
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by this Agreement and of no further force and effect. Upon reasonable notice,
each of First Northern and Mutual shall afford to the other's officers,
employees, accountants, legal counsel and other representatives access, during
normal business hours, to all of its and its Subsidiaries' properties, books,
contracts, commitments and records; provided that First Northern and Mutual
shall have the right to redact any information from such materials which relates
to assessments, analyses or discussions of a possible Acquisition engaged in by
it prior to the date of this Agreement, or which, relates to matters or issues
concerning its evaluation of the Merger or its obligations under this Agreement,
or that would impair its Board of Directors' ability to discharge its fiduciary
duties.
3.2 Disclosure Schedules.
(a) Contemporaneously with the execution and delivery of this
Agreement, First Northern is delivering to Mutual the First Northern Disclosure
Schedule, which is accompanied by a certificate signed by the Chief Executive
Officer and Secretary of First Northern stating that the First Northern
Disclosure Schedule is being delivered pursuant to this Agreement and is the
First Northern Disclosure Schedule referred to in this Agreement. The First
Northern Disclosure Schedule is deemed to constitute an integral part of this
Agreement and to modify the representations, warranties, covenants or agreements
of First Northern contained in this Agreement to the extent that such
representations, warranties, covenants or agreements expressly refer to the
First Northern Disclosure Schedule.
(b) Contemporaneously with the execution and delivery of this
Agreement, Mutual is delivering to First Northern the Mutual Disclosure
Schedule, which is accompanied by a certificate signed by the Chief Executive
Officer and Secretary of Mutual stating that the Mutual Disclosure Schedule is
being delivered pursuant to this Agreement and is the Mutual Disclosure Schedule
referred to in this Agreement. The Mutual Disclosure Schedule is deemed to
constitute an integral part of this Agreement and to modify the representations,
warranties, covenants or agreements of Mutual contained in this Agreement to the
extent that such representations, warranties, covenants or agreements expressly
refer to the Mutual Disclosure Schedule.
(c) All capitalized terms used in the Disclosure Schedules shall
have the definitions specified in this Agreement. All descriptions or listings
of documents contained in the Disclosure Schedules are qualified in their
entirety by reference to the documents so described, true copies of which
heretofore have been delivered or made available to the other. Except as
expressly stated to the contrary in the Disclosure Schedules, disclosure of a
matter or document in a Disclosure Schedule shall not be deemed to be an
acknowledgment that such matter is material or outside the ordinary course of
business of the disclosing party. Disclosure of any matter or event in any of
the schedules included in Disclosure Schedule shall be deemed disclosure for
purposes of any and all other schedules included therein without the need of
specific cross reference or duplication, provided, however, that disclosure of
an agreement or other document in a listing of agreements or documents without
any summary or description of
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the substance thereof shall be deemed disclosure only for purposes of the
schedule in which such agreement or other document is listed.
(d) Updates. Prior to the Closing Date, each party shall, to the
extent a matter required to be reported occurs, update its Disclosure Schedule
on a monthly basis by written notice to the other to reflect any matters which
have occurred from and after the date of this Agreement which, if existing on
the date of this Agreement, would have been required to be described in the
Disclosure Schedule. If requested by the recipient within 14 calendar days after
receipt by it of an update to the other's Disclosure Schedule, the party
providing the update shall meet and discuss with the recipient any update to the
Disclosure Schedule which, in the reasonable judgment of the recipient, has or
may reasonably be expected to have a Material Adverse Effect on the disclosing
party or which may in any manner be materially adverse to the recipient (a
"Disclosure Schedule Change").
3.3 Duties Concerning Representations. Each party to this Agreement
shall: (a) to the extent within its control, use best efforts to cause all of
its representations and warranties contained in this Agreement to be true and
correct in all respects at the Effective Time with the same force and effect as
if such representations and warranties had been made on and as of the Effective
Time; and (b) use best efforts to cause all of the conditions precedent set
forth in Article VII of this Agreement to be satisfied. Neither party shall take
any action, nor agree to commit to take any action, which would or reasonably
can be expected to: (i) adversely affect the ability of either Mutual or First
Northern to obtain the Regulatory Approvals; (ii) adversely affect a party's
ability to perform its covenants or agreements under this Agreement; or (iii)
result in any of the conditions to the Merger set forth in Article VII not being
satisfied.
3.4 Deliveries of Information; Consultation. From time to time prior
to the Effective Time, and subject to the limitations on access rights under
Section 3.1 of this Agreement and to the Confidentiality Agreement:
(a) Deliveries. First Northern and Mutual shall furnish promptly
to the other: (i) a copy of each significant report, schedule and other document
filed by or received by it or its Subsidiaries pursuant to the requirements of
federal or state securities or financial institution Laws or any other
applicable Laws promptly after such documents are available; (ii) its
consolidated monthly financial statements (as prepared in accordance with its
normal accounting procedures) promptly after such financial statements are
available; (iii) a summary of any action taken by its, or its Subsidiaries',
Boards of Directors, or any committee thereof; and (iv) all other significant
information concerning its and its Subsidiaries' business, properties and
personnel as the other may reasonably request.
(b) Consultation. Representatives of First Northern and Mutual
shall confer and consult with one another on a regular and frequent basis to
report on operational matters and the general status of First Northern's and
Mutual's ongoing business operations.
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(c) Regulatory Matters. Representatives of First Northern and
Mutual shall discuss with one another any matters directly affecting them in
which any state or federal regulator of First Northern or Mutual or any of their
Subsidiaries, is involved.
(d) Litigation. Each party to this Agreement shall provide
prompt notice to the other party of any litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind which may be
commenced, threatened or proposed by any Person concerning the legality,
validity or propriety of the transactions contemplated by this Agreement. If any
such litigation is commenced against any party to this Agreement, the parties
shall cooperate in all respects in connection with such litigation.
3.5 Directors' and Officers' Indemnification and Insurance.
(a) Survivor's Indemnification. From and after the Effective
Time, Survivor shall indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer, director or employee of First Northern or any First
Northern Subsidiary (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement with the approval of Survivor (which approval shall not be
unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation which is based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director, officer
or employee of First Northern or any First Northern Subsidiary, whether
pertaining to any matter existing or occurring at or prior to the Effective
Time, but only if filed, initiated, asserted or claimed prior to, or at or
within five years after, the Effective Time ("Indemnified Liabilities"),
including all Indemnified Liabilities based in whole or in part, or arising in
whole or in part out of, or pertaining to, this Agreement or the transactions
contemplated hereby, in each case to the full extent First Northern would have
been permitted under the WBCL and First Northern's Articles of Incorporation and
Bylaws (as amended and in effect as of the date of this Agreement) to indemnify
such person, and Survivor shall pay expenses in advance of the final disposition
of any such action or proceeding to each Indemnified Party to the full extent
permitted by Law upon receipt of any affirmation and undertaking required by
Section 180.0853 of the WBCL. Without limiting the foregoing, in the event any
such claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether brought before or within five years after the
Effective Time): (x) any counsel retained by the Indemnified Parties for any
period after the Effective Time shall be reasonably satisfactory to Survivor;
(y) after the Effective Time, Survivor shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; and (z) after the Effective Time, Survivor will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that Survivor shall not be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 3.5, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify Survivor (but the failure so to notify
Survivor shall not relieve it from any liability which it may have under this
Section 3.5 except to the extent such failure materially prejudices such party),
and shall deliver to Survivor the affirmation and undertaking,
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if any, required by Section 180.0853 of the WBCL. The Indemnified Parties as a
group may retain only one law firm to represent them with respect to each such
matter unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties.
(b) Director and Officer Insurance. Survivor shall use
reasonable efforts to obtain, after the Effective Time, directors' and officers'
liability insurance coverage for the officers and directors of Survivor, for
itself or as part of an affiliated group with MHC, to the extent that the same
is economically practicable. Such insurance shall cover directors and officers
of the Bank to the same extent as it covers directors and officers of other
subsidiaries of Survivor or MHC.
(c) Parties Benefitted. The provisions of this Section 3.5 are
intended to be for the benefit of, and shall be enforceable by, each Indemnified
Party, his or her heirs and his or her representatives, and shall survive the
Effective Time and any merger, consolidation or reorganization of Survivor,
including the Restructuring.
3.6 Letters of Accountants. First Northern shall use its best efforts
to cause to be delivered to Mutual a letter of Wipfli Ullrich Bertelson LLP,
First Northern's independent auditors, dated a date within three business days
before the date on which the Registration Statement is declared effective, and
addressed to Mutual, in form and substance reasonably satisfactory to Mutual and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement and proxy statements similar to the Proxy Statement.
Mutual shall use its best efforts to cause to be delivered to First Northern a
letter of Ernst & Young LLP, Mutual's independent auditors, dated a date within
three business days before the date on which the Registration Statement is
declared effective, and addressed to Mutual and First Northern, in form and
substance reasonably satisfactory to Mutual and First Northern and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement
and proxy statements similar to the Proxy Statement.
3.7 Legal Conditions to Merger. Each party to this Agreement will: (a)
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger (including
making all filings and requests in connection with the Regulatory Approvals and
furnishing all information required in connection therewith); (b) promptly
cooperate with and furnish information to the other party in connection with any
such requirements imposed upon any of them in connection with the Merger; and
(c) take all reasonable actions necessary to obtain (and will cooperate with the
other party in obtaining) any consent, authorization, order or approval of, or
any exemption by, any governmental entity or other public or private Person,
required to be obtained by the parties to this Agreement in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
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3.8 Stock Listings. First Northern shall use its best efforts to
maintain the listing of First Northern Common Stock on the NASDAQ/NMS through
the Effective Time. It is the intention of the parties that by taking this
action First Northern Shareholders will not be entitled to any dissenters' or
appraisal rights under applicable Law as a result of the Merger and the
transactions contemplated by this Agreement.
3.9 Announcements. Subject to each party's disclosure obligations
imposed by Law, First Northern and Mutual will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement or any of the transactions
contemplated hereby and shall not issue any public Announcement or statement
with respect thereto prior to consultation with the other party.
3.10 Best Efforts. Subject to the terms and conditions of this
Agreement and subject to the fiduciary duties of the Board of Directors of each
party, each of the parties agrees to use its best efforts to take, or cause to
be taken, all action and to do, or cause to be done, all things necessary or
advisable to consummate the transactions contemplated by this Agreement.
3.11 Employee And Managerial Matters.
(a) Employees. The Bank will continue to employ substantially
all present employees who are employed without employment contracts as employees
at will, subject to the determinations of Bank management and the Bank's and
Survivor's boards of directors.
(b) Survivor Executive Officers. Promptly after the Effective
Time, the Survivor Board of Directors shall meet to elect additional executive
officers of Survivor so that at least 40% of the Survivor executive officers are
executive officers of First Northern prior to the Effective Time. Such
individuals shall be designated by Mutual prior to the time the Proxy Statement
is mailed to First Northern Shareholders.
(c) First Northern Replacement Employment Agreements. The Bank
shall, with respect to each of the First Northern Executives who is a party to a
First Northern Existing Employment Agreement, use its best efforts to cause them
to enter into a First Northern Replacement Employment Agreement; provided,
however, that the First Northern Existing Employment Agreement of the chief
executive officer of First Northern shall be retained subject to the provisions
of Section 7.2(h) hereof.
(d) Bank Officers and Directors. As of the Effective Time, the
directors and executive officers of the Bank shall continue to be those persons
serving in such capacities prior to the Effective Time. Promptly thereafter, the
chief executive officer of Mutual shall be elected as an additional director of
the Bank. In addition, promptly thereafter, the chief executive officer of First
Northern shall be elected as an additional director of the Stock Bank.
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3.12 Employee Benefit Matters.
(a) First Northern Stock Option Plans. Prior to the Effective
Time, First Northern shall take any and all actions necessary so that, effective
as of the Effective Time, the First Northern Stock Option Plans will be
terminated, there shall be no outstanding stock options of First Northern (other
than the Stock Option Agreement), and any and all shares reserved for issuance
in connection with the exercise of options granted under any such First Northern
Stock Option Plan (including those reserved for issuance upon the exercise of
First Northern Stock Options granted prior to, and outstanding as of, the
Effective Time) shall be free of all restrictions associated with such
reservation and shall constitute authorized and unissued shares of First
Northern Common Stock; provided, however, that any and all shares subject to
First Northern Stock Options that are exercised prior to the Effective Time
shall not be deemed to constitute authorized and unissued shares of First
Northern Common Stock.
(b) First Northern 401(k) Plan. The First Northern 401(k)
Retirement Plan shall continue, except to the extent inconsistent with Law,
after the Merger for employees of Bank until such time as it is combined with,
or replaced by, a retirement or similar benefit plan covering employees of all
Affiliates of MHC. For purposes of determining eligibility to participate and
vesting under the Survivor's 401(k) plan or a 401(k) plan covering employees of
all Affiliates of MHC, service with First Northern or an Affiliate of First
Northern shall be treated as service with MHC; provided, however, that such
service shall not be recognized to the extent that such recognition would result
in a duplication of benefits.
(c) Health and Welfare Benefits. After the Merger, Survivor
shall continue, except to the extent not consistent with Law, the Bank's health
and welfare benefit plans, programs, insurance and policies, until such time as
they are replaced by programs or benefits common to all employees of Affiliates
of MHC; provided, however, no coverage of any of the Bank's continuing employees
or their dependents shall terminate under any of the Bank's health and welfare
benefit plans, programs, insurance and policies prior to the time such employees
and dependents become eligible to participate in the programs and benefits
common to substantially all employees of Affiliates of MHC and their dependents.
(d) Replacement. With respect to each employee and health and
welfare benefit plan or program that replaces a First Northern Existing Plan,
for purposes of determining eligibility to participate and vesting, service with
First Northern or an Affiliate of First Northern shall be treated as service
with Survivor; provided, however, that such service shall not be recognized to
the extent that such recognition would result in a duplication of benefits. Such
service shall also apply for purposes of satisfying any waiting periods,
actively-at-work requirements, and evidence of insurability requirements. No
pre-existing condition limitations will apply to any of the Bank's employees or
their dependents who were participants in the First Northern Existing Plans
comparable to the plan in question at the Closing Date. Each of the Bank's
continuing employees and their dependents shall be given credit for amounts paid
under a corresponding benefit plan during the same period for purposes of
applying deductibles,
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co-payments and out-of-pocket maximums as though such amounts had been in
accordance with the terms and conditions of the corresponding First Northern
Existing Plan.
(e) COBRA. Until the Effective Time, First Northern shall be
liable for all obligations for continued health coverage pursuant to Section
4980B of the Code and Sections 601 through 609 of ERISA ("COBRA") with respect
to each First Northern qualifying beneficiary (as defined in COBRA) who incurs a
qualifying event (as defined in COBRA) before the Effective Time. Survivor shall
be liable for (i) all obligations for continued health coverage under COBRA with
respect to each First Northern qualified beneficiary (as defined in COBRA) who
incurs a qualifying event (as defined in COBRA) from and after the Effective
Time, and (ii) for continued health coverage under COBRA from and after the
Effective Time for each First Northern qualified beneficiary who incurs a
qualifying event before the Effective Time.
3.13 Conformance to Reserve Policies. First Northern shall cause the
Bank to establish such additional accruals and reserves as may be necessary, in
the reasonable judgment of Mutual, to conform the Bank's general valuation
allowances to Mutual's asset classification policy, as well as to reflect the
costs and expenses of First Northern with respect to the Merger and the other
transactions contemplated by this Agreement; provided, however, that First
Northern shall not be required to cause the Bank to take any such action until
the Regulatory Approvals have been received, shareholders have approved this
Agreement and the Merger at the meeting specified in Section 2.12 of this
Agreement and First Northern is reasonably satisfied that the Merger will be
consummated. First Northern's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose nor shall any condition set forth in Section 7.2 of this
Agreement be considered unsatisfied as a consequence of any modification or
changes undertaken by the Bank, after notice to and non-objection by Mutual, in
order for First Northern to comply with the requirements of this Section 3.13.
3.14 Conduct of Mutual's Business and Authorization, Reservation and
Listing of Common Stock. Mutual will maintain its corporate existence in good
standing and conduct its business so as to be able to consummate the
transactions contemplated by the Agreement. Mutual shall, in the event it
becomes aware of the impending or threatened occurrence of any event or
condition which would cause or constitute a breach (or would have caused or
constituted a breach had such event occurred or been known prior to the date
hereof) of any of its representations, warranties, covenants or agreements
contained or referred to herein or which would or would be reasonably likely to
cause Mutual not to be able to satisfy any condition set forth in Sections 7.1
or 7.3 of this Agreement, give prompt written notice thereof to First Northern
and use its best efforts to prevent or promptly remedy the same. By appropriate
resolution, the Board of Directors of Survivor shall, prior to the Effective
Time, authorize and reserve the required number of shares of Survivor Common
Stock to be issued pursuant to this Agreement. Survivor also shall use all
reasonable efforts to cause the shares of Survivor Common Stock to be issued
pursuant to this Agreement to be approved for listing on the NASDAQ/NMS subject
to official notice of issuance, prior to the Effective Time.
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3.15 Affiliates. Not later than 10 calendar days after the date of the
First Northern Meeting, First Northern shall deliver to Mutual a letter
identifying, to the best of First Northern's Knowledge, all Persons who were
Affiliates at the date of the First Northern Meeting. First Northern shall
furnish such information and documents as Mutual may reasonably request for the
purposes of reviewing such list. First Northern shall advise the Affiliates of
the resale restrictions imposed by applicable securities Laws and shall use
reasonable best efforts to obtain from the Affiliates an executed Affiliate
Letter for delivery to Mutual prior to or at the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST NORTHERN
First Northern hereby represents and warrants to Mutual and Merger
Corp. that:
4.1 Organization and Qualification; Subsidiaries.
(a) First Northern is a corporation duly organized, validly
existing and in active status under the Laws of the State of Wisconsin, and is a
registered savings and loan holding company under HOLA. The Bank is a Wisconsin
capital stock savings and loan association duly organized, validly existing and
in good standing under the Laws of the state of Wisconsin. The deposits of the
Bank are insured by the SAIF of the FDIC as permitted by federal Law, and the
Bank has paid all premiums and assessments required thereunder. The Bank is a
member in good standing of the FHLB of Chicago. Each of the other First Northern
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the state of its incorporation. Each of First Northern and the First
Northern Subsidiaries has the requisite corporate power and authority and is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates, approvals and orders ("First Northern
Approvals") necessary to own, lease and operate its properties and to carry on
its business as it is now being conducted, including appropriate authorizations
from the OTS, the FDIC and the Wisconsin Agency, except where a failure to be so
organized, existing and in good standing or to have such power, authority and
First Northern Approvals would not, individually or in the aggregate, have a
Material Adverse Effect on First Northern, and neither First Northern nor any
First Northern Subsidiary has received any notice of proceedings relating to the
revocation or modification of any First Northern Approvals.
(b) First Northern and each First Northern Subsidiary is duly
qualified or licensed as a foreign corporation to conduct business, and is in
good standing (or the equivalent thereof) in each jurisdiction where the
character of the properties it owns, leases or operates or the nature of the
activities it conducts make such qualification or licensing necessary, except
for such failures to be so duly qualified and licensed and in good standing that
would not, either individually or in the aggregate, have a Material Adverse
Effect on First Northern.
(c) A true and complete list of all Subsidiaries of First
Northern (the "First Northern Subsidiaries"), together with (i) First Northern's
direct or indirect percentage ownership
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of each First Northern Subsidiary; (ii) the jurisdiction in which the First
Northern Subsidiaries are incorporated; and (iii) a description of the principal
business activities conducted by each First Northern Subsidiary, is set forth in
the First Northern Disclosure Schedule. Except as set forth in the First
Northern Disclosure Schedule, First Northern and/or one or more of the First
Northern Subsidiaries owns beneficially and of record all of the outstanding
shares of capital stock of each of the First Northern Subsidiaries. Except for
the Subsidiaries identified in the First Northern Disclosure Schedule, First
Northern does not directly or indirectly own any equity or similar interests in,
or any interests convertible into or exchangeable or exercisable for any equity
or similar interest in, any corporation, partnership, limited liability company,
joint venture or other business association or entity other than in the ordinary
course of business, and in no event in excess of 10% of the outstanding equity
or voting securities of such entity.
4.2 Articles of Incorporation and Bylaws. First Northern heretofore has
furnished to Mutual a complete and correct copy of the Articles of Incorporation
and Bylaws, as amended or restated, of First Northern and of each First Northern
Subsidiary. Such Articles of Incorporation and Bylaws are in full force and
effect. Neither First Northern nor any First Northern Subsidiary is in violation
of any of the provisions of its Articles of Incorporation or Bylaws.
4.3 Capitalization. The authorized capital stock of First Northern
consists of 30,000,000 shares of First Northern Common Stock and 10,000,000
shares of cumulative preferred stock, par value $1.00 per share. As of February
15, 2000, (a)8,586,308 shares of First Northern Common Stock are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
non-assessable, except as otherwise provided by Section 180.0622(2)(b), and not
issued in violation of any preemptive right of any First Northern Shareholder,
(b) 548,427 shares of First Northern Common Stock are held in the treasury of
First Northern, (c) 755,900 shares of First Northern Common Stock are subject to
issuance pursuant to outstanding First Northern Stock Options, and (d) 753,000
shares of First Northern Common Stock are reserved for future issuance pursuant
to the First Northern Stock Option Plans, and there has been no change in such
amounts thereafter except for changes resulting from the exercise or termination
after such date, if any, of First Northern Stock Options included in (c) above.
As of the date of this Agreement, no shares of First Northern's preferred stock
are issued and outstanding. Except as set forth in clauses (c) and (d) above, as
of the date of this Agreement First Northern has not granted any options,
warrants or other rights, agreements, arrangements or commitments of any
character, including without limitation voting agreements or arrangements,
relating to the issued or unissued capital stock of First Northern or any First
Northern Subsidiary or obligating First Northern or any First Northern
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, First Northern or any First Northern Subsidiary. All shares of
First Northern Common Stock subject to issuance as described in the foregoing,
upon issue on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable, except as otherwise provided in Section 180.0622(2)(b), and will
not be issued in violation of any preemptive right of any First Northern
Shareholder. Except as described in the First Northern Disclosure Schedule,
there are no obligations, contingent or otherwise, of First Northern or any
First Northern Subsidiary to repurchase, redeem or otherwise acquire any shares
of First Northern Common Stock or the
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capital stock of any First Northern Subsidiary or to provide funds to or make
any investment (in the form of a loan, capital contribution or otherwise) in any
First Northern Subsidiary or any other entity. Each of the outstanding shares of
capital stock of each First Northern Subsidiary is duly authorized, validly
issued, fully paid and nonassessable, except, where applicable, as provided in
Section 180.0622(2)(b), and such shares owned by First Northern or another First
Northern Subsidiary are owned free and clear of all security interests, liens,
claims, pledges, agreements, limitations of First Northern's voting rights,
charges or other encumbrances of any nature whatsoever.
4.4 Authorization: Enforceability. The entering into, execution,
delivery and performance of this Agreement and all of the documents and
instruments required by this Agreement to be executed and delivered by First
Northern are within the corporate power of First Northern, and: (a) have been
duly and validly authorized by the requisite vote of the Board of Directors of
First Northern; and (b) upon the approval of the First Northern Shareholders and
receipt of all Regulatory Approvals, shall be duly and validly authorized by all
necessary corporate action. This Agreement is, and the other documents and
instruments required by this Agreement to be executed and delivered by First
Northern or the Bank will be, when executed and delivered by First Northern and
the Bank, the valid and binding obligations of First Northern and the Bank,
enforceable against each of them in accordance with their respective terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Laws generally affecting the
rights of creditors and subject to general equity principles.
4.5 No Violation or Conflict. Subject to the receipt of the Regulatory
Approvals, the execution, delivery and performance of this Agreement and all of
the documents and instruments required by this Agreement to be executed and
delivered by First Northern do not and will not conflict with or result in a
breach of any Law, the Articles of Incorporation or Bylaws of First Northern, or
the Articles of Incorporation or Bylaws of the Bank or any other First Northern
Subsidiary, constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any First Northern
Existing Contract or any First Northern Permit, or the creation of any Lien upon
any of the properties or assets of First Northern or any First Northern
Subsidiary, in each case which would have a Material Adverse Effect on First
Northern.
4.6 Title to Assets; Leases. Except for the First Northern Existing
Liens, the Permitted Liens on the Closing Date, Liens for current taxes not yet
due and payable, pledges to secure deposits and such imperfections of title,
easements and other encumbrances, if any, as do not materially detract from the
value of or substantially interfere with the present use of the property
affected thereby, First Northern owns good and marketable title to the assets
and properties which it owns or purports to own, free and clear of any and all
Liens. There is not, under any leases pursuant to which First Northern or any of
the First Northern Subsidiaries leases from others real or personal property,
any default by First Northern, any First Northern Subsidiary or, to the best of
First Northern's Knowledge, any other party thereto, or any event
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which with notice or lapse of time or both would constitute such a default in
each case which would have a Material Adverse Effect on First Northern.
4.7 Litigation. Except for the First Northern Existing Litigation: (a)
neither First Northern nor any First Northern Subsidiary is subject to any
material continuing order of, or written agreement or memorandum of
understanding with, or, to the Knowledge of First Northern, any continuing
material investigation by, any federal or state savings and loan or insurance
authority or other governmental entity, or any judgment, order, writ,
injunction, decree or award of any governmental entity or arbitrator, including,
without limitation, cease and desist or other orders of any savings and loan
regulatory authority; (b) there is no claim, litigation, arbitration,
proceeding, governmental investigation, citation or action of any kind pending
or, to the Knowledge of First Northern, proposed or threatened, against or
relating to First Northern or any First Northern Subsidiary, nor to the
Knowledge of First Northern is there any basis known for any such material
action; (c) there are no actions, suits or proceedings pending or, to the
knowledge of First Northern, proposed or threatened, against First Northern by
any Person which question the legality, validity or propriety of the
transactions contemplated by this Agreement; and (d) there are no uncured
material violations or violations with respect to which material refunds or
restitutions may be required, cited in any compliance report to First Northern
or any First Northern Subsidiary as a result of an examination by any regulatory
authority.
4.8 Securities and Banking Reports; Books and Records.
(a) Since January 1, 1997, First Northern and the Bank have filed
all reports, registration statements, definitive proxy statements and
prospectuses, together with any amendments required to be made with respect
thereto, that were and are required to be filed under the Securities Act,
Exchange Act or any other Law with: (i) the SEC; (ii) the OTS; (iii) the FHLB of
Chicago; (iv) the FDIC; (v) the Wisconsin Agency; and (vi) any other applicable
state securities or savings and loan authorities (all such reports, statements
and prospectuses are collectively referred to herein as the "First Northern
Reports"). When filed, each of the First Northern Reports complied as to form
and substance in all material respects with the requirements of applicable Laws.
(b) Each of the consolidated audited financial statements and
consolidated unaudited interim financial statements (including, in each case,
any related notes thereto) of First Northern included in the First Northern
Reports filed with the SEC have been or will be, as the case may be, prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto and except
with respect to consolidated unaudited interim statements as permitted by SEC
Form 10-Q) and each fairly presents the consolidated financial condition of
First Northern as of the respective dates thereof and the consolidated income,
equity and cash flows for the periods then ended, subject, in the case of the
consolidated unaudited interim financial statements, to normal year-end and
audit adjustments and any other adjustments described therein.
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(c) The minute books of First Northern and the First Northern
Subsidiaries contain accurate and complete records of all meetings and actions
taken by written consent by their respective shareholders and Boards of
Directors (including all committees of such Boards), and all signatures
contained therein are the true signatures of the Persons whose signatures they
purport to be. The share transfer books of First Northern are correct, complete
and current in all respects. The accounting books and records of First Northern:
(i) are in all material respects correct and complete; (ii) are current in a
manner consistent with past practice; and (iii) have recorded therein all the
properties and assets and liabilities of First Northern.
4.9 Absence of Certain Changes. Except as set forth in the First
Northern Disclosure Schedule, since December 31, 1999 there has not been any:
(a) change in the financial condition, properties, business or
results of operations of First Northern or any First Northern Subsidiary having
a Material Adverse Effect on First Northern;
(b) damage, destruction or loss (whether or not covered by
insurance) with respect to any assets of First Northern or any First Northern
Subsidiary having a Material Adverse Effect on First Northern;
(c) transactions by First Northern or any First Northern
Subsidiary outside the ordinary course of their respective businesses or
inconsistent with past practices, except for the transactions contemplated by
this Agreement;
(d) except for regular quarterly cash dividends of $0.11 per
share on First Northern Common Stock with usual record and payment dates,
declaration or payment or setting aside the payment of any dividend or any
distribution in respect of the capital stock of First Northern or any direct or
indirect redemption, purchase or other acquisition of any such stock by First
Northern;
(e) allocations to the accounts of any directors, officers or
employees of First Northern or of any First Northern Subsidiary pursuant to any
of the First Northern Existing Plans other than in the normal course and in
accordance with the terms of the First Northern Existing Plans (none of which
have been amended or established subsequent to December 31, 1999);
(f) contribution to, increase in, or establishment of any
Employee Benefit Plan (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), or any other increase in the compensation payable or to become payable
to any officers, directors or key employees of First Northern or any First
Northern Subsidiary other than in the normal course and in accordance with the
terms of the First Northern Existing Plans (none of which have been amended or
established subsequent to December 31, 1999); or
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(g) change in the method of accounting or accounting practices of
First Northern or any First Northern Subsidiary.
4.10 Buildings and Equipment. Except as set forth in the First Northern
Disclosure Schedule: (a) the Buildings and the Equipment of First Northern and
the First Northern Subsidiaries are in good operating condition and repair,
reasonable wear and tear excepted; (b) are adequately insured for the nature of
First Northern's business with the self-insured retentions specified on the
First Northern Disclosure Schedule; (c) such assets and their use conform in all
material respects to applicable Laws; and (d) no notice of any violation of any
building, zoning or other Law relating to such assets or their use has been
received by First Northern or any First Northern Subsidiary.
4.11 First Northern Existing Contracts. The First Northern Disclosure
Schedule lists and briefly describes each Material Contract (the "First Northern
Existing Contracts") to which First Northern or a First Northern Subsidiary is a
party or by which its assets are bound. First Northern and each First Northern
Subsidiary has fully performed each term, covenant and condition of each First
Northern Existing Contract which is to be performed by it at or before the date
hereof, except where such non-performance would not have a Material Adverse
Effect on First Northern.
4.12 Investment Securities. Except as set forth on the First Northern
Disclosure Schedule, First Northern and the First Northern Subsidiaries do not
own, and does not have any right or obligation to acquire, any Investment
Securities.
4.13 Contingent and Undisclosed Liabilities. First Northern and the
First Northern Subsidiaries have no material liabilities of any nature
(contingent or otherwise) except for those which: (a) are disclosed in the First
Northern Reports or in the First Northern Disclosure Schedule or in this
Agreement; or (b) arise in the ordinary course of business since December 31,
1999 and are not required to be disclosed in the First Northern Reports or
pursuant to this Agreement or the First Northern Disclosure Schedule.
4.14 Insurance Policies. All real and personal property owned or leased
by First Northern or any First Northern Subsidiary has been and is being insured
against, and First Northern or the respective First Northern Subsidiary
maintains liability insurance against, such insurable risks and in such amounts
as set forth in the First Northern Disclosure Schedule. Such Insurance Policies
constitute all insurance coverage owned by First Northern or any First Northern
Subsidiary and are in full force and effect and First Northern or any First
Northern Subsidiary has not received notice of and is not otherwise aware of any
cancellation or threat of cancellation of such insurance. Except as described in
the First Northern Disclosure Schedule, no property damage, personal injury or
liability claims have been made, or are pending, against First Northern or any
First Northern Subsidiary that are not covered by insurance. Within the past two
(2) years, no insurance company has canceled any insurance (of any type)
maintained by First Northern or any First Northern Subsidiary. Neither First
Northern nor any First Northern Subsidiary has any liability for unpaid premiums
or premium adjustments for any
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insurance policy. To the Knowledge of First Northern, the cost of any insurance
currently maintained by First Northern or any First Northern Subsidiary will not
increase significantly upon renewal other than increases consistent with the
general upward trend in the cost of obtaining insurance.
4.15 Employee Benefit Plans.
(a) Except for the First Northern Existing Plans, First
Northern does not maintain, nor is it bound by, any Employee Benefit Plan. First
Northern has furnished Mutual with a complete and accurate copy of each First
Northern Existing Plan and a complete and accurate copy of each material
document prepared in connection with each such First Northern Existing Plan,
including, without limitation and where applicable, a copy of (i) each trust or
other funding arrangement, (ii) the most recent summary plan description and all
summaries of material modifications applicable thereto, (iii) the most recently
filed IRS Form 5500, (iv) the most recently received IRS determination letter,
and (v) the most recently prepared actuarial report and financial statement.
(b) Except as indicated on the First Northern Disclosure
Schedule, no member of First Northern's "controlled group," within the meaning
of Section 4001(a)(14) of ERISA, maintains or contributes to, or within the two
years preceding the Effective Time has maintained or contributed to, an employee
pension benefit plan subject to Title IV of ERISA. Except as indicated on the
First Northern Disclosure Schedule, none of the First Northern Existing Plans or
First Northern Existing Contracts obligates First Northern or any First Northern
Subsidiary to pay material separation, severance, termination or similar-type
benefits solely as a result of any transaction contemplated by this Agreement or
as a result of a "change in control," within the meaning of such term under
Section 280G of the Code. Except as indicated on the First Northern Disclosure
Schedule, none of the First Northern Existing Plans or First Northern Existing
Contracts provides for or promises retiree medical, disability or life insurance
benefits to any current or former employee, officer or director of First
Northern or any First Northern Subsidiary. Each of the First Northern Existing
Plans is subject only to the Laws of the United States or a political
subdivision thereof.
(c) Each First Northern Existing Plan has always been operated
in material compliance with the requirements of all applicable Law, and all
persons who participate in the operation of such First Northern Existing Plans
and all First Northern Existing Plan "fiduciaries" (within the meaning of
Section 3(21) of ERISA) have always acted in material compliance with the
provisions of all applicable Law. First Northern and all of the First Northern
Subsidiaries have performed in all material respects all obligations required to
be performed by any of them under, are not in any material respect in default
under or in violation of, and have no knowledge of any material default or
violation by any party to, any First Northern Existing Plan. No legal action,
suit or claim is pending or, to the knowledge of First Northern, threatened with
respect to any First Northern Existing Plan (other than claims for benefits in
the ordinary course) and no fact or event exists to the knowledge of First
Northern that could give rise to any such action, suit or claim.
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(d) Except as set forth on the First Northern Disclosure
Schedule, each First Northern Existing Plan that is intended to be qualified
under Section 401(a) of the Code or Section 401(k) of the Code has received a
favorable determination letter from the IRS that it is so qualified, and to the
Knowledge of First Northern no fact or event has occurred since the date of such
determination letter from the IRS to adversely affect the qualified status of
any such First Northern Existing Plan. No trust maintained or contributed to by
First Northern or any First Northern Subsidiary is intended to be qualified as a
voluntary employees' beneficiary association or is intended to be exempt from
federal income taxation under Section 501(c)(9) of the Code.
(e) There has been no non-exempt prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) with
respect to any First Northern Existing Plan. First Northern and each of the
First Northern Subsidiaries has not incurred any liability for any excise tax
arising under Section 4972 or 4980B of the Code and no fact or event exists that
could give rise to any such liability.
(f) All contributions, premiums or payments required to be
made with respect to any First Northern Existing Plan have been made on or
before their due dates. There is no accumulated funding deficiency, within the
meaning of ERISA or the Code, in connection with the First Northern Existing
Plans and no reportable event, as defined in ERISA, has occurred in connection
with the First Northern Existing Plans. First Northern and the First Northern
Subsidiaries are not contributing to, and have not contributed to any
multi-employer plan, as defined in ERISA.
(g) No representation and warranty set forth in this Section
4.15 shall be deemed to be breached unless such breach, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect on
First Northern.
4.16 No Violation of Law. Except as set forth in the First Northern
Disclosure Schedule, neither First Northern, any First Northern Subsidiary nor
any of the assets of First Northern or the First Northern Subsidiaries
materially violate or conflict with any Law, any First Northern Permits, or any
decree, judgment or order, or any zoning, building line restriction, planning,
use or other similar restriction, in each case which would have a Material
Adverse Effect on First Northern.
4.17 Brokers. Except for fees to Keefe, Bruyette & Woods, Inc.,
First Northern's financial advisor, neither First Northern nor any First
Northern Subsidiary has incurred any brokers', finders', financial advisor or
any similar fee in connection with the transactions contemplated by this
Agreement. The First Northern Disclosure Schedule contains a list of all fees to
be paid to such advisor in connection with the transactions contemplated by this
Agreement.
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4.18 Taxes.
(a) Except as disclosed in the First Northern Disclosure
Schedule and except as may arise as a result of the transactions contemplated by
this Agreement: First Northern and the First Northern Subsidiaries have timely
and properly filed all federal, state, local and foreign tax returns (including
but not limited to income, franchise, sales, payroll, employee withholding and
social security and unemployment) which were required to be filed except where
the failure to have filed timely or properly would not have a Material Adverse
Effect on First Northern; First Northern and the First Northern Subsidiaries
have paid or made adequate provision, in reserves reflected in its financial
statements included in the First Northern Reports in accordance with generally
accepted accounting principles, for the payment of all taxes (including interest
and penalties) and withholding amounts owed by them or assessable against them;
no tax deficiencies have been assessed or proposed against First Northern or any
First Northern Subsidiary and to the Knowledge of First Northern there is no
basis in fact for the assessment of any tax or penalty tax against First
Northern or any First Northern Subsidiary.
(b) As of the date of this Agreement, except as disclosed in
the First Northern Disclosure Schedule, there are no fiscal years of First
Northern currently under examination by the IRS or the Wisconsin Department of
Revenue, and none of the open years has been examined by the IRS or the
Wisconsin Department of Revenue. First Northern and the First Northern
Subsidiaries have not consented to any extension of the statute of limitation
with respect to any open tax returns.
(c) There are no tax Liens upon any property or assets of
First Northern or any First Northern Subsidiary except for Liens for current
taxes not yet due and payable.
(d) As soon as practicable after the date of this Agreement,
First Northern and the First Northern Subsidiaries will deliver to Mutual
correct and complete copies of all tax returns and reports of First Northern
filed for all periods not barred by the applicable statute of limitations. No
examination or audit of any tax return or report for any period not closed by
audit or not barred by the applicable statute of limitations has occurred, no
such examination is in progress and, to the Knowledge of First Northern, no such
examination or audit is planned.
(e) Except where the failure to withhold, pay or file would
not have a Material Adverse Effect on First Northern, First Northern and the
First Northern Subsidiaries have properly withheld and timely paid all
withholding and employment taxes which they were required to withhold and pay
relating to salaries, compensation and other amounts heretofore paid to their
employees or other Persons. All Forms W-2 and 1099 required to be filed with
respect thereto have been timely and properly filed.
4.19 Real Estate. The First Northern Real Estate: (a) constitutes
all real property and improvements (or interest therein, including without
limitation easements, licenses or similar arrangements authorizing First
Northern or a First Northern Subsidiary to place, maintain, operate and/or use
an automated teller machine or similar device on real property of a third-
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party) leased or owned by First Northern or any First Northern Subsidiary; (b)
other than with respect to First Northern or any First Northern Subsidiary as
lessee, is not subject to any leases or tenancies of any kind; (c) is not in the
possession of any adverse possessors; (d) has direct access to and from a public
road or street; (e) except for violations that would not have a Material Adverse
Effect on First Northern, is used in a manner which is consistent with
applicable Law; (f) is, and has been since the date of possession thereof by
First Northern or any First Northern Subsidiary, in the peaceful possession of
First Northern or any First Northern Subsidiary; (g) is served by all water,
sewer, electrical, telephone, drainage and other utilities required for the
normal operations of the Buildings of First Northern and the First Northern
Subsidiaries and the First Northern Real Estate; (h) except as disclosed in the
First Northern Disclosure Schedule, to the Knowledge of First Northern, is not
located in an area designated as a flood plain or wetland; (i) is not subject to
any outstanding special assessment; (j) is not subject to any zoning, ordinance,
decrees or other Laws which would materially restrict or prohibit Mutual from
continuing the operations presently conducted thereon by First Northern or any
First Northern Subsidiary; (k) is not subject to any interest of any Person
under an easement, contract, option or mineral rights or other agreements which
would have a Material Adverse Effect on First Northern; (l) is not subject to
any presently pending condemnation proceedings, nor to First Northern's
Knowledge, are such proceedings threatened against the First Northern Real
Estate.
4.20 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required in connection with the
execution, delivery and performance of this Agreement by First Northern or any
First Northern Subsidiary, except for the Regulatory Approvals and except for
consent the failure of which to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on First Northern.
4.21 No Pending Acquisitions. Except for this Agreement, First Northern
is not a party to or bound by any agreement, undertaking or commitment with
respect to an Acquisition on the date of this Agreement.
4.22 Labor Matters.
(a) Except as disclosed on the First Northern Disclosure Schedule
(or in an updated First Northern Disclosure Schedule with respect to vacations
in (iii) below), there is no present or former employee of First Northern or any
First Northern Subsidiary who has any claim against any of such entities
(whether under Law, under any employee agreement or otherwise) on account of or
for: (i) overtime pay, other than overtime pay for the current payroll period;
(ii) wages or salaries, other than wages or salaries for the current payroll
period; or (iii) vacations, sick leave, time off or pay in lieu of vacation,
sick leave or time off, other than vacation, sick leave or time off (or pay in
lieu thereof) earned in the twelve-month period immediately preceding the date
of this Agreement or incurred in the ordinary course of business and appearing
as a liability on the most recent financial statements included in the First
Northern Reports.
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(b) There are no pending and unresolved claims by any Person
against First Northern or any First Northern Subsidiary arising out of any Law
relating to discrimination against employees or employee practices or
occupational or safety and health standards. There is no pending or, to the
knowledge of First Northern, threatened, nor has First Northern or any First
Northern Subsidiary, since January 1, 1995, experienced any, labor dispute,
strike or work stoppage which affected, affects or may affect the business of
First Northern or any First Northern Subsidiary or which did, may or would
interfere with the continued operation of First Northern or any First Northern
Subsidiary.
(c) Neither First Northern nor any First Northern Subsidiary
is a party to any collective bargaining agreement. There is not now pending or,
to the Knowledge of First Northern, threatened, any charge or complaint against
First Northern or any First Northern Subsidiary by or before the National Labor
Relations Board or any representative thereof, or any comparable state agency or
authority. No union organizing activities are in process, or to First Northern's
Knowledge contemplated, and no petitions have been filed for union organization
or representation of employees of First Northern or any First Northern
Subsidiary, and First Northern and the First Northern Subsidiaries have not
committed any unfair labor practices which have not heretofore been corrected
and fully remedied.
4.23 Indebtedness. Except for the First Northern Existing
Indebtedness, First Northern has no Indebtedness.
4.24 Permits. The Permits described on the Disclosure Schedule
constitute all Permits which First Northern and the First Northern Subsidiaries
currently have and need for the conduct of their respective businesses as
currently conducted, except for such Permits the failure of which to have would
not have a Material Adverse Effect on First Northern.
4.25 Disclosure. No statement of fact by First Northern contained
in this Agreement, the First Northern Disclosure Schedule, or any other document
furnished or to be furnished by First Northern contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or therein contained, in
the light of the circumstances under which they were made, not misleading as of
the date to which it speaks.
4.26 Information Supplied. None of the information supplied or to
be supplied by First Northern for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement will, at the date the Registration
Statement becomes effective, the date(s) the Proxy Statement is mailed to the
First Northern Shareholders and at the time(s) of the First Northern Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations of the SEC
thereunder.
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4.27 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of First Northern Common Stock is the only
vote of the holders of any class or series of capital stock or other securities
of First Northern necessary to approve the Merger, this Agreement and the
transactions contemplated by this Agreement.
4.28 Opinion of Financial Advisor. First Northern has received the
opinion of Keefe, Bruyette & Woods, Inc. as of the date of this Agreement, to
the effect that the consideration to be received in the Merger by the First
Northern Shareholders is fair to the First Northern Shareholders from a
financial point of view.
4.29 Environmental Protection.
(a) Except as set forth in the First Northern Disclosure
Schedule, First Northern and the First Northern Subsidiaries: (i) are in
material compliance with all applicable Environmental Laws; and (ii) have not
received any communication (written or oral), from a governmental authority or
other Person, that alleges that First Northern is not in compliance with
applicable Environmental Laws.
(b) Except as set forth in the First Northern Disclosure
Schedule, First Northern and the First Northern Subsidiaries have obtained all
Environmental Permits, and all such Environmental Permits are in good standing
and First Northern and the First Northern Subsidiaries are in material
compliance with all terms and conditions of their Environmental Permits.
(c) Except as set forth in the First Northern Disclosure
Schedule, there is no Environmental Claim pending or, to the Knowledge of First
Northern, threatened against First Northern, any First Northern Subsidiary or
against any Person whose liability for any Environmental Claim First Northern or
any First Northern Subsidiary has or may have retained or assumed either
contractually or by operation of Law, or against any real or personal property
or operations which First Northern or any First Northern Subsidiary owns, leases
or manages.
(d) Except as set forth in the First Northern Disclosure
Schedule, there have been no Releases of any Hazardous Material by First
Northern or by any Person on real property owned (including REO properties of
the Bank), used, leased or operated by First Northern or any of the First
Northern Subsidiaries.
(e) No real property at any time owned (including REO
properties of the Bank), operated, used or controlled by First Northern or any
First Northern Subsidiary is currently listed on the National Priorities List or
the Comprehensive Environmental Response, Compensation and Liability Information
System, both promulgated under the CERCLA, or on any comparable state list, and,
except as described in the First Northern Disclosure Schedule, First Northern
has not received any written notice from any Person under or relating to CERCLA
or any comparable state or local Law relating to potential listing on such
lists.
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(f) Except as set forth in the First Northern Disclosure
Schedule, to the Knowledge of First Northern, no off-site location at which
First Northern or any First Northern Subsidiary has disposed or arranged for the
disposal of any waste is listed on the National Priorities List or on any
comparable state list and neither First Northern nor any First Northern
Subsidiary has received any written notice from any Person with respect to any
off-site location, of potential or actual liability or a written request for
information from any Person under or relating to CERCLA or any comparable state
or local Law.
4.30 Year 2000 Compliant. All of the material computer hardware and
software systems of, or used by, First Northern and the First Northern
Subsidiaries (including, without limitation, those related to their facilities,
equipment, quality control activities, accounting and bookkeeping records and
record keeping activities) are Year 2000 Compliant, except where the failure to
be Year 2000 Compliant would not have a Material Adverse Effect on First
Northern.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MUTUAL AND MERGER CORP.
Mutual and Merger Corp. hereby jointly and severally represent and
warrant to First Northern that:
5.1 Organization and Capitalization; Business.
(a) Mutual is a mutual savings bank duly organized, validly
existing and in good standing under Chapter 214 of the Wisconsin Statutes. The
deposits of Mutual are insured by the SAIF of the FDIC as permitted by federal
Law, and Mutual has paid all premiums and assessments required thereunder.
Mutual is a member in good standing of the FHLB of Chicago.
(b) Mutual has full corporate power and authority and those
Permits necessary to carry on its business as it is now conducted and to own,
lease and operate its assets and properties.
(c) Merger Corp. is a corporation duly organized, validly
existing and in active status under the Laws of the State of Wisconsin. Prior to
the date of this Agreement, Merger Corp. engaged in no business other than
matters necessary to the organization and incorporation of Merger Corp. and to
authorize Merger Corp. to enter into, execute and deliver this Agreement. The
authorized capital stock of Merger Corp. consists of 9,000 shares of common
stock, $.01 par value per share. As of the date of this Agreement, 100 shares of
Merger Corp.'s common stock are issued and outstanding, all of which are duly
authorized, validly issued, fully paid, and non-assessable, except as otherwise
provided by Section 180.0622(2)(b), and are owned by Mutual.
(d) Prior to Closing, the Articles of Incorporation of Merger
Corp. will be changed so that the authorized capital stock of Survivor may
include shares of preferred stock,
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$.01 par value, and will include at least a sufficient number of shares of
Survivor Common Stock to permit the Merger and the Restructuring. Upon
completion of the Restructuring, not less than 51% of shares of Survivor Common
Stock will be owned by MHC. All the outstanding shares of Survivor Common Stock,
and all shares of Survivor Common Stock to be issued in the Merger, will be duly
authorized, validly issued, fully paid and non-assessable, except as otherwise
provided by Section 180.0622(2)(b).
(e) Copies of the Articles of Incorporation and Bylaws of
Mutual and of Merger Corp. have been delivered to First Northern. Such copies
are complete and correct copies of such documents, and are in full force and
effect. Neither Mutual nor Merger Corp. are in violation of any of the
provisions of their Articles of Incorporation or Bylaws.
5.2 Authorization; Enforceability. The entering into, execution,
delivery and performance of this Agreement and all of the documents and
instruments required by this Agreement to be executed and delivered by Mutual or
Merger Corp. are within the corporate power of Mutual or Merger Corp., as the
case may be, and: (a) have been duly and validly authorized by the requisite
vote of the Board of Directors of Mutual and, where required, by the Board of
Directors and sole shareholder of Merger Corp.; and (b) upon receipt of all
Regulatory Approvals, shall be duly and validly authorized by all necessary
corporate action on the part of both Mutual and Merger Corp. This Agreement is,
and the other documents and instruments required by this Agreement to be
executed and delivered by Mutual or Merger Corp. will be, when executed and
delivered by Mutual or Merger Corp., as the case may be, the valid and binding
obligations of Mutual or Merger Corp., as the case may be, enforceable against
Mutual or Merger Corp., as the case may be, in accordance with their respective
terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar Laws generally
affecting the rights of creditors and subject to general equity principles.
5.3 No Violation or Conflict. Subject to the receipt of the
Regulatory Approvals, the execution, delivery and performance of this Agreement
and all of the documents and instruments required by this Agreement to be
executed and delivered by Mutual or Merger Corp. do not and will not conflict
with or result in a breach of any Law or the Articles of Incorporation or Bylaws
of Mutual or Merger Corp. or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any Contract
of Mutual or Merger Corp. or any Permit held by or the creation of any Lien upon
any of the properties or assets of Mutual or Merger Corp.
5.4 Litigation. Except for the Mutual Existing Litigation: (a)
neither Mutual nor any Mutual Subsidiary is subject to any continuing order of,
or written agreement or memorandum of understanding with, or, to the Knowledge
of Mutual, any continuing material investigation by, any federal or state
savings and loan or insurance authority or other governmental entity, or any
judgment, order, writ, injunction, decree or award of any governmental entity or
arbitrator, including, without limitation, cease and desist or other orders of
any savings and loan regulatory authority; (b) there is no claim, litigation,
arbitration, proceeding, governmental investigation,
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citation or action of any kind pending or, to the Knowledge of Mutual, proposed
or threatened, against or relating to Mutual or any Mutual Subsidiary, nor is to
the Knowledge of Mutual is there any basis for any such material action; (c)
there are no actions, suits or proceedings pending or, to the Knowledge of
Mutual, proposed or threatened, against Mutual by any Person which question the
legality, validity or propriety of the transactions contemplated by this
Agreement; and (d) there are no uncured material violations or violations with
respect to which material refunds or restitutions may be required, cited in any
compliance report to Mutual or any Mutual Subsidiary as a result of an
examination by any regulatory authority.
5.5 Brokers. Except for fees to Ryan, Beck & Co. and RP Financial,
L.L.C., Mutual's marketing and financial advisors, neither Mutual nor Merger
Corp. has incurred any brokers', finders', financial advisor or any similar fee
in connection with the transactions contemplated by this Agreement. The Mutual
Disclosure Schedule contains a list of all agreements with such advisors, copies
of which have been provided to First Northern.
5.6 Governmental Approvals. Other than the Regulatory Approvals, no
permission, approval, determination, consent or waiver by, or any declaration,
filing or registration with, any governmental or regulatory authority is
required in connection with the execution, delivery and performance of this
Agreement by Mutual or Merger Corp.
5.7 Disclosure. No statement of fact by Mutual contained in this
Agreement, the Omaha Disclosure Schedule or any other document furnished or to
be furnished by Mutual contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein contained, in the light of the
circumstances under which they were made, not misleading as of the date to which
it speaks.
5.8 Information Supplied. None of the information supplied or to be
supplied by Mutual for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement will, at the date the Registration
Statement becomes effective, the date(s) the Proxy Statement is mailed to the
First Northern Shareholders and at the time(s) of the First Northern Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
5.9 Opinion of Financial Advisor. Mutual has received the opinion of
RP Financial, L.L.C., as of the date of this Agreement, to the effect that the
consideration to be paid in the Merger by Mutual is fair to Mutual and its
members from a financial point of view.
5.10 Cash Payment. Mutual has sufficient funds or has financing
arranged as part of the Restructuring to pay the cash payment required under
Section 2.8 of this Agreement and such payment will not cause Mutual or Survivor
to fail to meet any regulatory capital requirements to which it is subject.
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5.11 Compliance with Laws. Mutual is in compliance in all material
respects with all applicable Laws.
5.12 Consummation. Mutual has no reason to believe that it will be
unable to obtain the Regulatory Approvals.
5.13 Banking Reports; Books and Records.
(a) Since January 1, 1997, Mutual has filed all reports,
together with any amendments required to be made with respect thereto, that were
and are required to be filed under any Law with: (i) the OTS; (ii) the FHLB of
Chicago; (iii) the FDIC; (iv) the Wisconsin Agency; and (v) any other applicable
state securities or savings bank authorities (all such reports and other
documents are collectively referred to herein as the "Mutual Reports"). When
filed, each of the Mutual Reports complied as to form and substance in all
material respects with the requirements of applicable Laws.
(b) Each of the consolidated audited financial statements and
consolidated unaudited interim financial statements (including, in each case,
any related notes thereto) of Mutual included in the Mutual Reports have been or
will be, as the case may be, prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto and except with respect to consolidated
unaudited interim statements) and each fairly presents the consolidated
financial condition of Mutual as of the respective dates thereof and the
consolidated income, equity and cash flows for the periods then ended, subject,
in the case of the consolidated unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein.
(c) The minute books of Mutual and the Mutual Subsidiaries
contain accurate and complete records of all meetings and actions taken by
written consent by their respective shareholders and Boards of Directors
(including all committees of such Boards), and all signatures contained therein
are the true signatures of the Persons whose signatures they purport to be. The
accounting books and records of Mutual: (i) are in all material respects correct
and complete; (ii) are current in a manner consistent with past practice; and
(iii) have recorded therein all the properties and assets and liabilities of
Mutual.
5.14 Absence of Certain Changes. Except as set forth in the Mutual
Disclosure Schedule, since December 31, 1998 there has not been any:
(a) change in the financial condition, properties, business or
results of operations of Mutual or any Mutual Subsidiary having a Material
Adverse Effect on Mutual;
(b) damage, destruction or loss (whether or not covered by
insurance) with respect to any assets of Mutual or any Mutual Subsidiary having
a Material Adverse Effect on Mutual;
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(c) transactions by Mutual or any Mutual Subsidiary outside
the ordinary course of their respective businesses or inconsistent with past
practices, except for the transactions contemplated by this Agreement; or
(d) change in the method of accounting or accounting practices
of Mutual or any Mutual Subsidiary.
5.15 Mutual Existing Contracts. The Mutual Disclosure Schedule
lists and briefly describes each Material Contract (the "Mutual Existing
Contracts") to which Mutual or a Mutual Subsidiary is a party or by which its
assets are bound. Mutual and each Mutual Subsidiary has fully performed each
term, covenant and condition of each Mutual Existing Contract which is to be
performed by it at or before the date hereof, except where such non-performance
would not have a Material Adverse Effect on Mutual.
5.16 Contingent and Undisclosed Liabilities. Mutual and the Mutual
Subsidiaries have no material liabilities of any nature (contingent or
otherwise) except for those which: (a) are disclosed in the Mutual Reports or in
the Mutual Disclosure Schedule or in this Agreement; or (b) arise in the
ordinary course of business since December 31, 1998 and are not required to be
disclosed in the Mutual Reports or pursuant to this Agreement or the Mutual
Disclosure Schedule.
5.17 Taxes.
(a) Except as disclosed in the Mutual Disclosure Schedule and
except as may arise as a result of the transactions contemplated by this
Agreement: Mutual and the Mutual Subsidiaries have timely and properly filed all
federal, state, local and foreign tax returns (including but not limited to
income, franchise, sales, payroll, employee withholding and social security and
unemployment) which were required to be filed except where the failure to have
filed timely or properly would not have a Material Adverse Effect on Mutual;
Mutual and the Mutual Subsidiaries have paid or made adequate provision, in
reserves reflected in its financial statements included in the Mutual Reports in
accordance with generally accepted accounting principles, for the payment of all
taxes (including interest and penalties) and withholding amounts owed by them or
assessable against them; no tax deficiencies have been assessed or proposed
against Mutual or any Mutual Subsidiary and to the Knowledge of Mutual there is
no basis in fact for the assessment of any tax or penalty tax against Mutual or
any Mutual Subsidiary.
(b) As of the date of this Agreement, except as disclosed in
the Mutual Disclosure Schedule, there are no fiscal years of Mutual currently
under examination by the IRS or the Wisconsin Department of Revenue, and none of
the open years has been examined by the IRS or the Wisconsin Department of
Revenue. Mutual and the Mutual Subsidiaries have not consented to any extension
of the statute of limitation with respect to any open tax returns.
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(c) There are no tax Liens upon any property or assets of
Mutual or any Mutual Subsidiary except for Liens for current taxes not yet due
and payable.
(d) As soon as practicable after the date of this Agreement,
Mutual and the Mutual Subsidiaries will deliver to First Northern correct and
complete copies of all tax returns and reports of Mutual filed for all periods
not barred by the applicable statute of limitations. No examination or audit of
any tax return or report for any period not closed by audit or not barred by the
applicable statute of limitations has occurred, no such examination is in
progress and, to the Knowledge of Mutual, no such examination or audit is
planned.
(e) Except where the failure to withhold, pay or file would
not have a Material Adverse Effect on Mutual, Mutual and the Mutual Subsidiaries
have properly withheld and timely paid all withholding and employment taxes
which they were required to withhold and pay relating to salaries, compensation
and other amounts heretofore paid to their employees or other Persons. All Forms
W-2 and 1099 required to be filed with respect thereto have been timely and
properly filed.
5.18 Real Estate. The Mutual Real Estate: (a) constitutes all real
property and improvements (or interest therein, including without limitation
easements, licenses or similar arrangements authorizing Mutual or a Mutual
Subsidiary to place, maintain, operate and/or use an automated teller machine or
similar device on real property of a third-party) leased or owned by Mutual or
any Mutual Subsidiary; (b) other than with respect to Mutual or any Mutual
Subsidiary as lessee, is not subject to any leases or tenancies of any kind; (c)
is not in the possession of any adverse possessors; (d) has direct access to and
from a public road or street; (e) is used in a manner which is consistent with
applicable Law; (f) is, and has been since the date of possession thereof by
Mutual or any Mutual Subsidiary, in the peaceful possession of Mutual or any
Mutual Subsidiary; (g) is served by all water, sewer, electrical, telephone,
drainage and other utilities required for the normal operations of the Buildings
of Mutual and the Mutual Subsidiaries and the Mutual Real Estate; (h) except as
disclosed in the Mutual Disclosure Schedule, to the Knowledge of Mutual, is not
located in an area designated as a flood plain or wetland; (i) is not subject to
any outstanding special assessment; (j) is not subject to any zoning, ordinance,
decrees or other Laws which would materially restrict or prohibit Mutual from
continuing the operations presently conducted thereon by Mutual or any Mutual
Subsidiary; (k) is not subject to any interest of any Person under an easement,
contract, option or mineral rights or other agreements which would have a
Material Adverse Effect on Mutual; (l) is not subject to any presently pending
condemnation proceedings, nor to Mutual's Knowledge, are such proceedings
threatened against the Mutual Real Estate.
5.19 No Pending Acquisitions. Except for this Agreement, Mutual is
not a party to or bound by any agreement, undertaking or commitment with respect
to an Acquisition on the date of this Agreement.
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5.20 Environmental Protection.
(a) Except as set forth in the Mutual Disclosure Schedule,
Mutual and the Mutual Subsidiaries: (i) are in material compliance with all
applicable Environmental Laws; and (ii) have not received any communication
(written or oral), from a governmental authority or other Person, that alleges
that Mutual is not in compliance with applicable Environmental Laws.
(b) Except as set forth in the Mutual Disclosure Schedule,
Mutual and the Mutual Subsidiaries have obtained all Environmental Permits and
all such Environmental Permits are in good standing and Mutual and the Mutual
Subsidiaries are in material compliance with all terms and conditions of their
Environmental Permits.
(c) Except as set forth in the Mutual Disclosure Schedule,
there is no Environmental Claim pending or, to the Knowledge of Mutual,
threatened against Mutual, any Mutual Subsidiary or against any Person whose
liability for any Environmental Claim Mutual or any Mutual Subsidiary has or may
have retained or assumed either contractually or by operation of Law, or against
any real or personal property or operations which Mutual or any Mutual
Subsidiary owns, leases or manages.
(d) Except as set forth in the Mutual Disclosure Schedule,
there have been no Releases of any Hazardous Material by Mutual or by any Person
on real property owned (including REO properties of Mutual), used, leased or
operated by Mutual or any of the Mutual Subsidiaries.
(e) No real property at any time owned (including REO
properties of Mutual), operated, used or controlled by Mutual or any Mutual
Subsidiary is currently listed on the National Priorities List or the
Comprehensive Environmental Response, Compensation and Liability Information
System, both promulgated under the CERCLA, or on any comparable state list, and,
except as described in the Mutual Disclosure Schedule, Mutual has not received
any written notice from any Person under or relating to CERCLA or any comparable
state or local Law relating to potential listing on such lists.
(f) Except as set forth in the Mutual Disclosure Schedule, to
the Knowledge of Mutual, no off-site location at which Mutual or any Mutual
Subsidiary has disposed or arranged for the disposal of any waste is listed on
the National Priorities List or on any comparable state list and neither Mutual
nor any Mutual Subsidiary has received any written notice from any Person with
respect to any off-site location, of potential or actual liability or a written
request for information from any Person under or relating to CERCLA or any
comparable state or local Law.
5.21 Year 2000 Compliant. All of the material computer hardware and
software systems of, or used by, Mutual and the Mutual Subsidiaries (including,
without limitation, those related to their facilities, equipment, quality
control activities, accounting and bookkeeping
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records and record keeping activities) are Year 2000 Compliant, except where the
failure to be Year 2000 Compliant would not have a Material Adverse Effect on
Mutual.
ARTICLE VI
CONDUCT OF BUSINESS BY FIRST NORTHERN PENDING THE MERGER
From and after the date of this Agreement and until the Effective Time,
except as required by this Agreement, or as required for the Merger or the
Restructuring, without the prior written consent of an executive officer of
Mutual, First Northern and the First Northern Subsidiaries shall:
6.1 Carry on in Regular Course. Diligently carry on their business in
the regular course and substantially in the same manner as heretofore conducted
and shall not make or institute any unusual or novel methods of lending,
investing, purchasing, selling, leasing, managing, accounting or operating.
6.2 Use of Assets. Use, manage, operate, maintain and repair all of
their assets and properties in a normal business manner.
6.3 No Default. Not do any act or omit to do any act, or permit any act
or omission to act, which will cause a breach of any of the First Northern
Existing Contracts, except where such breach would not have a Material Adverse
Effect on First Northern and the First Northern Subsidiaries taken as a whole.
6.4 Insurance Policies. Use reasonable efforts to maintain all of its
Insurance Policies in full force and effect, except as mutually agreed to by
First Northern and Mutual.
6.5 Employment Matters. Not: (a) except as described in the First
Northern Disclosure Schedule, grant any increase in the rate of pay of any of
their employees that exceeds $10,000 individually or $100,000 in the aggregate;
(b) institute or amend any Employee Benefit Plan, except as expressly
contemplated under this Agreement; (c) enter into or modify any written
employment arrangement with any Person except as described in Sections 3.11, 7.2
and 7.3; (d) make any discretionary contributions to any of the First Northern
Existing Plans; or (e) make any allocation to the account of any participant(s)
in any of the First Northern Existing Plans, other than in the normal course and
in accordance with the terms of the relevant First Northern Existing Plan or
except as expressly contemplated by this Agreement.
6.6 Contracts and Commitments. Not enter into any contract or
commitment or engage in any transaction not in the usual and ordinary course of
business and consistent with First Northern's normal business practices and not
purchase, lease, sell or dispose of any capital asset, except for such capital
asset transactions which individually do not involve a dollar amount in excess
of $50,000 and which together do not involve an aggregate dollar amount in
excess of $100,000.
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6.7 Indebtedness; Investments. Not create, incur, invest in or assume
any Indebtedness or Investment Securities not in the usual and ordinary course
of business; and not, without the prior written consent of Mutual, incur costs
and expenses in connection with the transactions contemplated by this Agreement
which materially exceed the estimate set forth in the First Northern Disclosure
Schedule pursuant to Section 8.5 of this Agreement.
6.8 Preservation of Relationships. Use their best efforts to preserve
their business organizations intact, to retain the services of their present
officers and key employees and to preserve the goodwill of depositors, borrowers
and other customers, suppliers, creditors and others having business
relationships with First Northern.
6.9 Compliance with Laws. Comply with all applicable Laws, except for
such noncompliances which would not individually or in the aggregate have a
Material Adverse Effect on First Northern and the First Northern Subsidiaries
taken as a whole.
6.10 Taxes. Timely and properly file all federal, state, local and
foreign tax returns which are required to be filed, and shall pay or make
provision for the payment of all taxes owed by it as reflected on such returns.
6.11 Amendments. Not amend First Northern's Articles of Incorporation
or Bylaws, or the Articles of Incorporation or Bylaws of the Bank or any other
First Northern Subsidiary, except as mutually agreed to by First Northern and
Mutual or as required by Law.
6.12 Issuance of Stock; Dividends; Redemptions. Not: (a) issue any
additional shares of stock of any class or grant any warrants, options
(including any options pursuant to any First Northern Stock Option Plan) or
rights to subscribe for or acquire any additional shares of stock of any class
other than the issuance of First Northern Common Stock issuable upon exercise of
First Northern Stock Options outstanding as of the date of this Agreement; (b)
except as provided below, declare or pay any dividend or make any capital or
surplus distributions of any nature, except for First Northern's regular
quarterly cash dividends not exceeding $0.11 per share for each outstanding
share of First Northern Common Stock; or (c) recapitalize or reclassify any of
their capital stock or liquidate in whole or in part.
6.13 Policy Changes. Not make a material change in any lending,
investment, liability, management or other material policies concerning their
business or operations, except as required by Law or as required by the Board of
Directors of First Northern in the exercise of its fiduciary duties.
6.14 Acquisition Transactions. Promptly following the execution of this
Agreement, First Northern shall take affirmative steps necessary to discontinue,
and thereafter not initiate, solicit or knowingly encourage (including by way of
furnishing any information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal, or negotiate with
any person in furtherance of such inquires or to obtain an Acquisition Proposal,
or agree to endorse, or endorse,
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any Acquisition Proposal, or authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by First Northern or any of the First Northern
Subsidiaries to take any such action, and First Northern shall promptly notify
Mutual orally, and confirm in writing, subject to disclosure being consistent
with the fiduciary duties of the Board of Directors of First Northern, all of
the relevant details relating to all inquiries and proposals which First
Northern or a First Northern Subsidiary may receive relating to any of such
matters; provided, however, that nothing contained in this Section 6.14 shall
prohibit the Board of Directors of First Northern from: (a) furnishing or
permitting any of its officers, directors, employees, investment bankers,
financial advisors, attorneys, accountants or other representatives to furnish
information to any party that requests information as to First Northern and/or
the Bank or take any other action if (i) the Board of Directors of First
Northern, upon the written opinion of its legal counsel, determines in good
faith that such action is required for the Board of Directors of First Northern
to comply with its fiduciary duties to shareholders imposed by applicable Laws,
(ii) prior to furnishing such information to such party, First Northern receives
from such party an executed confidentiality agreement in reasonably customary
form, and (iii) First Northern gives Mutual prior written notice that
information will be furnished; or (b) complying with Rules 14d-2 and 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER
7.1 Conditions to Each Parties Obligations to Effect the Merger. The
respective obligations of Mutual and First Northern to effect the transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing and as of the Effective Time of the following conditions
precedent:
(a) No Litigation. No suit, action or other proceeding shall
be pending or overtly threatened before any court in which the consummation of
the transactions contemplated by this Agreement is restrained or enjoined or in
which the relief requested is to restrain, enjoin or prohibit the consummation
of the transactions contemplated by this Agreement and, in either case, where in
the reasonable judgment of either Mutual or First Northern, such suit, action or
other proceeding, is likely to have a material adverse effect with respect to
such party's interest.
(b) Approval of First Northern Shareholders. This Agreement
and the Merger shall have received the requisite approval and authorization of
the First Northern Shareholders.
(c) Regulatory Approvals.
(i) The Merger, this Agreement, the transactions
contemplated hereby, shall have been approved by the OTS, the FDIC, the
Wisconsin Agency, and any other governmental entities whose approval is
necessary, all conditions required to be satisfied prior to the Effective Time
imposed by the terms of such approvals shall have been satisfied, and all
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waiting periods relating to such approvals shall have expired. The
Restructuring, except for the step set forth in Section 2.14(b) of this
Agreement which shall not be a condition precedent to completion of the Merger,
also shall have been approved by the OTS, the FDIC and the Wisconsin Agency, and
any other governmental entity whose approval is necessary in order for Mutual to
proceed with the Restructuring.
(ii) No permission, approval, determination, consent
or waiver received pursuant to Section 7.1(c)(i) of this Agreement shall contain
any condition applicable to Mutual which is, in the reasonable judgment of
Mutual, materially burdensome upon the conduct of Mutual's business or which
would so adversely impact the economic and business benefits of the Merger or
the Restructuring to Mutual so as to render it inadvisable to proceed with the
Merger or the Restructuring.
(d) Restructuring. The Restructuring shall have occurred,
except for any part thereof which can occur only simultaneously with or
subsequent to the Merger and the step set forth in Section 2.14(b) of the
Agreement which shall not be a condition precedent to completion of the Merger.
All such events which shall occur simultaneously with the Closing shall occur
simultaneously with Closing.
(e) Tax Matters. Mutual and First Northern shall have received
(a) an opinion of Quarles & Brady LLP, counsel to Mutual, or a private letter
ruling from the Internal Revenue Service, to the effect that (i) the transfer by
First Northern of its assets to Merger Corp. pursuant to the Merger and, as
described in the definition of the Restructuring, the transfer by MHC of the
stock of Stock Bank to Merger Corp. and the issuance of shares of stock of
Merger Corp. to the public for cash will be treated for federal income tax
purposes as a transaction within the provisions of ss. 351(a) of the Code and
(b) an opinion of Quarles & Brady LLP that the Merger will constitute a
reorganization within the meaning of ss. 368(a) of the Code.
(f) NASDAQ/NMS. Shares of Survivor Common Stock shall have
been approved for quotation on the NASDAQ/NMS.
7.2 Conditions to Obligation of Mutual. The obligation of Mutual to
effect the transactions contemplated by this Agreement shall be subject to the
fulfillment at or prior to the Closing and as of the Effective Time of the
following additional conditions precedent:
(a) Compliance with Agreement. First Northern shall have
performed and complied in all material respects with all of its covenants,
agreements and other obligations under this Agreement which are to be performed
or complied with by it prior to or on the Closing Date and as of the Effective
Time.
(b) Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to Mutual, and First Northern shall have made
available to Mutual for examination the originals or true and
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correct copies of all documents Mutual may reasonably request in connection with
the transactions contemplated by this Agreement.
(c) Representations and Warranties of First Northern. Each of
the representations and warranties of First Northern contained in Article IV of
this Agreement, after giving effect to any update to the First Northern
Disclosure Schedule Change, shall be true and correct, as of the Effective Time
with the same force and effect as though made on and as of the Effective Time,
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such date), and
except for those breaches which individually or in the aggregate do not or would
not be reasonably likely to have a Material Adverse Effect on First Northern.
(d) No Material Adverse Change. During the period from the
date of this Agreement to the Closing Date and as of the Effective Time there
shall not have occurred, and there shall not exist on the Closing Date and as of
the Effective Time, any condition(s) or fact(s) having individually or in the
aggregate a Material Adverse Effect (irrespective of whether any such condition
or fact was disclosed in a First Northern Disclosure Schedule Change) on First
Northern.
(e) Deliveries at Closing. First Northern shall have delivered
to Mutual the following documents, each properly executed and dated the Closing
Date: (i) the First Northern Closing Certificate; and (ii) the First Northern
Counsel Opinion.
(f) Other Documents. First Northern shall have delivered to
Mutual such certificates and documents of officers of First Northern and public
officials as shall be reasonably requested by Mutual to establish the existence
of First Northern and the due authorization of this Agreement and the
transactions contemplated by this Agreement by First Northern.
(g) Accountant Letters. Mutual shall have received a copy of
each of the following letters from Wipfli Ullrich Bertelson LLP, each of which
shall be in form and substance reasonably satisfactory to Mutual and shall
contain information concerning the financial condition of First Northern: (i)
the letter described in Section 3.6 of this Agreement; (ii) a similar letter
dated the Closing Date.
(h) First Northern Replacement Employment Agreements. Except
with respect to First Northern's chief executive officer and up to two
additional First Northern Executives, First Northern shall have delivered to
Mutual, with respect to each of the First Northern Executives who have First
Northern Existing Employment Agreements in effect on the Closing Date, a First
Northern Replacement Employment Agreement in each case dated as of the Closing
Date and executed on behalf of the Bank by a duly authorized officer and by the
appropriate First Northern Executive. The Chief Executive Officer of First
Northern shall have delivered to the Bank and Mutual a waiver, reasonably
acceptable in form and substance to Mutual, of the provisions of his First
Northern Existing Employment Agreement, which would create severance or other
accelerated benefits thereunder as a result of the Merger and the
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transactions relating thereto, and shall have entered into a non-competition
agreement with provisions substantially identical to those of Article III of the
First Northern Replacement Employment Agreement.
(i) Stock Listing. First Northern Common Stock shall continue
to have been listed on the NASDAQ/NMS.
(j) First Northern Stock Options. First Northern shall have,
prior to the Closing Date and with the written consent (if necessary) of the
First Northern Stock Option holder, cashed out each of such holder's First
Northern Stock Options without the exercise thereof at a price equal to the
difference between the Cash Value and the exercise price of such option. In the
event that a holder of a First Northern Stock Option fails to take any action,
the holder of such First Northern Stock Option shall be deemed to have agreed to
have his or her First Northern Stock Option cashed out in accordance with this
subsection 7.2(j). In recognition of the requirement that such options be
converted to cash without an ability to elect stock and not be carried forward
into the Survivor, to the extent that options are cashed out pursuant to this
section 7.2(j), First Northern may provide an additional payment equal to not
more than 25% of such difference between the Cash Value and the exercise price
of any such option; provided, however, that in no event shall the net total
amount of such additional payments, after the expected corporate tax deduction,
to all holders of First Northern Stock Options exceed $755,000. In any event, as
of the Closing Date there shall be no outstanding First Northern Stock Options
other than the Stock Option Agreement.
7.3 Conditions to Obligation of First Northern. The obligation of First
Northern to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing and as of the Effective
Time of the following additional conditions precedent:
(a) Compliance with Agreement. Mutual and Merger Corp. each
shall have performed and complied in all material respects with all of its
covenants, agreements and other obligations under this Agreement which are to be
performed or complied with by it prior to or on the Closing Date and as of the
Effective Time.
(b) Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to First Northern, and Mutual shall have made
available to First Northern for examination the originals or true and correct
copies of all documents which First Northern may reasonably request in
connection with the transactions contemplated by this Agreement.
(c) Representations and Warranties of Mutual and Merger Corp.
Each of the representations and warranties of Mutual and Merger Corp. contained
in Article V of this Agreement, after giving effect to any Mutual Disclosure
Schedule Change, shall be true and correct as of the Effective Time with the
same force and effect as though made on and as of the
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Effective Time, except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date), and except for those breaches which individually or in the aggregate
do not or would not be reasonably likely to have a Material Adverse Effect on
Mutual.
(d) No Material Adverse Change. During the period from the
date of this Agreement to the Closing Date and as of the Effective Time there
shall not have occurred, and there shall not exist on the Closing Date and as of
the Effective Time, any condition(s) or fact(s) having individually or in the
aggregate a Material Adverse Effect (irrespective of whether any such condition
or fact was disclosed in a Mutual Disclosure Schedule Change) on Mutual.
(e) Deliveries at Closing. Mutual shall have delivered to
First Northern the following documents, each properly executed and dated the
Closing Date: (i) the Mutual Closing Certificate; and (ii) the Mutual Counsel
Opinion.
(f) Other Documents. Mutual shall have delivered to First
Northern such certificates and documents of officers of Mutual and of public
officials as shall be reasonably requested by First Northern to establish the
existence of Mutual and the due authorization of this Agreement and the
transactions contemplated by this Agreement by Mutual.
(g) Opinion of Financial Advisor. First Northern shall have
received the opinion of Keefe, Bruyette & Woods, Inc. dated the date on which
the First Northern Proxy Statement is first mailed to First Northern
Shareholders, to the effect that the consideration to be received in the Merger
by the First Northern Shareholders is fair to the First Northern Shareholders
from a financial point of view and such option shall not have been withdrawn as
of the Closing Date.
(h) First Northern Replacement Employment Agreements. Pursuant
to Section 3.11 of this Agreement, the Bank shall have offered to each of the
First Northern Executives who have a First Northern Existing Employment
Agreement a First Northern Replacement Employment Agreement, in each case dated
as of the Closing Date, except as contemplated by Section 7.2(h).
(i) Accountant Letters. First Northern shall have received a
copy of each of the following letters from Ernst & Young LLP, each of which
shall be in form and substance reasonably satisfactory to First Northern and
shall contain information concerning the financial condition of Mutual: (i) the
letter described in Section 3.6 of this Agreement; (ii) a similar letter dated
the Closing Date.
(j) Non-Competition Agreement. The Chief Executive Officer of
Mutual shall have entered into a non-competition agreement with Mutual with
provisions substantively identical to those of Article III of the First Northern
Replacement Employment Agreement, but substituting "Milwaukee County" for "Brown
County."
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ARTICLE VIII
TERMINATION; MISCELLANEOUS
8.1 Termination. This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time prior to the Closing
(whether before or after approval of this Agreement by the First Northern
Shareholders), as follows:
(a) by mutual written agreement of Mutual and First Northern;
(b) by Mutual if any of the conditions set forth in Sections
7.1 or 7.2 of this Agreement shall not have been fulfilled by the Closing, or
within 30 days after receipt of a First Northern Disclosure Schedule Change
indicating a First Northern Material Adverse Effect which cannot be reasonably
expected to be cured;
(c) by First Northern if any of the conditions set forth in
Sections 7.1 or 7.3 of this Agreement shall not have been fulfilled by the
Closing, or within 30 days after receipt of a Mutual Disclosure Schedule Change
indicating a Mutual Material Adverse Effect which cannot be reasonably expected
to be cured;
(d) by either Mutual or First Northern if the Closing has not
occurred on or before 11:59 p.m. on January 16, 2001.
(e) by First Northern, upon five days' prior written notice to
Mutual, if, as a result of an Acquisition Proposal by a Person other than Mutual
or an Affiliate of Mutual, the Board of Directors of First Northern determines
in good faith and upon the written opinion of its legal counsel that its
fiduciary duties to shareholders require that such Acquisition Proposal be
accepted, but in such case subject to all of Mutual's rights hereunder and under
the Stock Option Agreement.
8.2 Rights on Termination; Waiver. The representations, warranties,
covenants, agreements and other obligations of the parties set forth in this
Agreement shall terminate upon the termination of this Agreement pursuant to
Section 8.1 hereof, except that the agreements set forth in Section 3.1, and
Article VIII of this Agreement shall survive any such termination indefinitely,
and each party to this Agreement shall retain any and all remedies which it may
have for breach of contract provided by Law based on another party's willful
failure to comply with the terms of this Agreement. If any of the conditions set
forth in Sections 7.1 and 7.2 of this Agreement have not been satisfied, Mutual
may nevertheless elect to proceed with the consummation of the transactions
contemplated by this Agreement and if any of the conditions set forth in
Sections 7.1 and 7.3 of this Agreement have not been satisfied, First Northern
may nevertheless elect to proceed with the consummation of the transactions
contemplated by this Agreement. Any such election to proceed shall be evidenced
by a certificate signed on behalf of the waiving party by an officer of that
party.
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8.3 Survival of Representations, Warranties and Covenants. The
representations, warranties, covenants, agreements and other obligations of the
parties set forth in this Agreement shall terminate at the Effective Time,
except the covenants, agreements, and other obligations of the parties which by
their terms or nature are contemplated to be performed after the Effective Time
shall survive the Effective Time indefinitely.
8.4 Entire Agreement; Amendment. This Agreement, the Stock Option
Agreement, the Confidentiality Agreement and the other documents referred to in
this Agreement and required to be delivered pursuant to this Agreement
constitute the entire agreement among the parties pertaining to the subject
matter of this Agreement, and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions of the parties, whether
oral or written, and there are no warranties, representations or other
agreements between the parties in connection with the subject matter of this
Agreement, except as specifically set forth in this Agreement. This Agreement
may be amended by the parties at any time before or after approval of this
Agreement by the First Northern Shareholders, except that after such approval no
amendment shall be made without the further approval of the First Northern
Shareholders if such amendment: (a) reduces the consideration to be received by
First Northern Shareholders; or (b) otherwise materially adversely affects the
rights of the First Northern Shareholders. No amendment, supplement,
modification, waiver or termination of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
8.5 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated by this Agreement shall be paid by
the party incurring such expenses. The First Northern Disclosure Schedule and
Mutual Disclosure Schedule includes an estimate by First Northern and Mutual,
respectively, of all costs and expenses incurred or to be incurred by each in
connection with the transactions contemplated by this Agreement. Notwithstanding
the foregoing, in the event Mutual terminates this Agreement pursuant to Section
8.1(b) on account of First Northern having willfully breached one or more of the
conditions set forth in Section 7.2(a) or 7.2(c) of this Agreement, or if First
Northern terminates this Agreement pursuant to Section 8.1(c) hereof on account
of Mutual having willfully breached one or more of the conditions set forth in
Section 7.3(a) or 7.3(c) of this Agreement, then, in addition to any other
rights or remedies such party (the "non-breaching party") shall have against the
other party (the "breaching party") under this Agreement or at law or in equity,
the non-breaching party shall have the right to recover from the breaching
party, up to $500,000 in the case of First Northern's expenses and up to $1.4
million in the case of, Mutual's expenses, all reasonable and necessary expenses
incurred by the non-breaching party exclusively for the purpose of entering into
this Agreement and consummating the transactions contemplated hereby. In
addition, Mutual shall be reimbursed for its expenses, as provided above, in
addition to its other remedies in the event that First Northern terminates this
Agreement pursuant to Section 8.1(e) hereof.
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8.6 Governing Law. This Agreement shall be construed and interpreted
according to the Laws of the State of Wisconsin.
8.7 Assignment. This Agreement and the Stock Option Agreement shall
not be assigned by operation of law or otherwise, except that each of Mutual and
Merger Corp. may assign all or any of its rights hereunder and thereunder to any
Affiliate in connection with the Restructuring or as provided in Section 2.16
hereof, provided that no such assignment shall relieve Mutual or Merger Corp. of
its obligations hereunder.
8.8 Notices. All communications or notices required or permitted by
this Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an officer of a party by personal
delivery or telephonic facsimile transmission (receipt electronically confirmed)
or two days after deposited in the United States mail, certified or registered
mail, postage prepaid, return receipt requested, and addressed as follows,
unless and until any of such parties notifies the others in accordance with this
Section of a change of address:
IF TO MUTUAL OR MERGER CORP.: Mutual Savings Bank
Attn: Michael T. Crowley, Jr.
President and Chief Executive Officer
4949 West Brown Deer Road
Milwaukee, WI 53223
Fax No: (414) 362-6195
with a copy to:
Quarles & Brady LLP
Attention: James D. Friedman
411 East Wisconsin Avenue
Milwaukee, WI 53202
Fax No: (414) 291-3552
IF TO FIRST NORTHERN: First Northern Capital Corp.
Attn: Michael D. Meeuwsen
President and Chief Executive Officer
201 N. Monroe Avenue
Green Bay, WI 54305
Fax No: (920) 437-1581
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<PAGE> 270
with a copy to:
Schiff Hardin & Waite
Attn: Christopher J. Zinski
6600 Sears Tower
Chicago, IL 60606
Fax No.: (312) 258-5600
8.9 Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Table of Contents
and Article and Section headings in this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
8.10 Interpretation. Unless the context requires otherwise, all words
used in this Agreement in the singular number shall extend to and include the
plural, all words in the plural number shall extend to and include the singular,
and all words in any gender shall extend to and include all genders.
8.11 Severability. If any provision, clause, or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement. If, however, any provision of this
Agreement is held invalid by a court of competent jurisdiction, then the parties
hereto shall in good faith amend this Agreement to include an alternative
provision that accomplishes a result which is not materially different.
8.12 Specific Performance. The parties agree that the assets and
business of First Northern as a going concern constitute unique property. There
is no adequate remedy at Law for the damage which any party might sustain for
failure of the other parties to consummate the Merger and the transactions
contemplated by this Agreement, and accordingly, each party shall be entitled,
at its option, to the remedy of specific performance to enforce the Merger
pursuant to this Agreement.
8.13 No Reliance. Except for the parties to this Agreement, any
Indemnified Parties under Section 3.5 of this Agreement and any assignees
permitted by Section 8.7 of this Agreement: (a) no Person is entitled to rely on
any of the representations, warranties and agreements of the parties contained
in this Agreement; and (b) the parties assume no liability to any Person because
of any reliance on the representations, warranties and agreements of the parties
contained in this Agreement.
8.14 Further Assurances. If, at any time after the Effective Time,
any further action is necessary or desirable to carry out the purposes of this
Agreement and to vest Survivor with full
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right, title and possession to all assets, properties, rights, privileges,
powers and franchises of either Merger Corp. or First Northern, the officers of
Survivor are fully authorized to take any such action in the name of Merger
Corp. or First Northern.
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IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Merger to be duly executed as of the day and year first above written.
MUTUAL SAVINGS BANK
By: /s/ Michael T. Crowley, Jr.
-------------------------------------
Michael T. Crowley, Jr.
President and Chief Executive Officer
Attest:
/s/ Eugene H. Maurer, Jr.
-----------------------------------------------
Eugene H. Maurer, Jr., Secretary
OV CORP.
By: /s/ Michael T. Crowley, Jr.
-------------------------------------
Michael T. Crowley, Jr.
President
Attest:
/s/ Eugene H. Maurer, Jr.
-----------------------------------------------
Eugene H. Maurer, Jr., Secretary
FIRST NORTHERN CAPITAL CORP.
By: /s/ Michael D. Meeuwsen
-------------------------------------
Michael D. Meeuwsen
President and Chief Executive Officer
Attest:
/s/ Marla J. Carr
-----------------------------------------------
Marla J. Carr, Secretary
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APPENDIX B
[KEEFE BRUYETTE & WOODS LETTERHEAD]
Proxy Date, 2000
The Board of Directors
First Northern Capital Corp.
201 N. Monroe Avenue
Green Bay, Wisconsin 54305
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the stockholders of First Northern
Capital Corp. ("First Northern") of the total consideration (the "Merger
Consideration") offered in the proposed merger (the "Merger"), whereby Mutual
Savings Bank ("Mutual") will acquire First Northern through a newly formed two
tier mutual holding company, Bank Mutual Corporation ("Bank Mutual"), pursuant
to the Agreement and Plan of Merger, dated as of February 21, 2000, between
First Northern, Mutual and a predecessor of Bank Mutual (the "Agreement").
Pursuant to the terms of the Agreement, each outstanding share of common stock,
par value $1.00 per share, of First Northern will be converted into the right to
receive a number of shares of common stock, par value $0.01 per share, of Bank
Mutual ("Bank Mutual Common Stock") and/or cash determined as set forth in the
Agreement. First Northern stockholders may elect to receive either Bank Mutual
Common Stock and/or cash, subject to certain procedures contained in the
Agreement, as to which procedures Keefe, Bruyette & Woods, Inc. ("KBW")
expresses no opinion.
KBW, as part of its investment banking business, is continually engaged
in the valuation of financial institutions and financial institution holding
companies and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for various other purposes. As
specialists in the securities of banking companies, we have experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
our business as a broker-dealer, we may, from time to time purchase securities
from, and sell securities to, First Northern, Mutual and Bank Mutual, and as a
market maker in securities, we may from time to time have a long or short
position in, and buy or sell, debt or equity securities of First Northern or
Bank Mutual for our own account and for the accounts of our customers. To the
extent we have any such position as of the date of this opinion it has been
disclosed to First Northern. We have acted exclusively for the Board of
Directors of First Northern in rendering this fairness opinion and will receive
a fee from First Northern for our services.
In connection with this opinion, we have reviewed, analyzed and relied
upon material bearing upon the financial and operating condition of First
Northern, Mutual and Bank Mutual and the Merger, including among other things,
the following: (i) the Agreement; (ii) the Annual Reports to Stockholders and
Annual Reports on Form 10-K for the three years ended December 31, 1999 of First
Northern; (iii) certain interim reports to stockholders and Quarterly Reports on
Form 10-Q of First Northern and certain other communications from First Northern
to their stockholders; (iv) First Northern and Mutual's annual and quarterly
financial reports submitted to various regulatory agencies; and (v) other
financial information concerning the businesses and operations of First
Northern, Mutual and Bank Mutual furnished to us by First Northern, Mutual and
Bank Mutual for purposes of our analysis. We have also held discussions with
senior management of First Northern, Mutual and Bank Mutual regarding the past
and current business operations, regulatory relations, financial condition and
future prospects of their respective companies and such other matters, as we
have deemed relevant to our inquiry. In addition, we have compared certain
financial and stock market information for First Northern with similar
information for certain other companies the securities of which are publicly
traded, reviewed the
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financial terms of certain recent business combinations in the banking industry
and performed such other studies and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we have relied
upon the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of First Northern, Mutual and
Bank Mutual as to the reasonableness and achievability of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgments of such managements and
that such forecasts and projections will be realized in the amounts and in the
time periods currently estimated by such managements. We are not experts in the
independent verification of the adequacy of allowances for loan and lease losses
and we have assumed, with your consent, that the aggregate allowances for loan
and lease losses for First Northern and Mutual are adequate to cover such
losses. In rendering our opinion, we have not made or obtained any evaluations
or appraisals of the property of First Northern or Mutual.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of First
Northern and Mutual; (ii) the assets and liabilities of First Northern and
Mutual; and (iii) the nature and terms of certain other merger transactions
involving banking companies. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and knowledge of
the banking industry generally. Our opinion is necessarily based upon conditions
as they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Merger Consideration offered in the Merger is fair, from a
financial point of view, to the stockholders of First Northern.
Very truly yours,
Keefe, Bruyette & Woods, Inc.
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<PAGE> 275
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Bank Mutual will be incorporated under federal law, and indemnification
of its directors will be governed by federal law, and OTS regulations
thereunder. Federal regulations define areas for indemnity coverage by federal
savings banks, such as Mutual Savings (the "Bank") as follows:
(a) Any person against who any action is brought or threatened because
that person is or was a director or officer of the Bank shall be indemnified by
the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred by such person in
defending or settling such action, or in enforcing his or her
rights to indemnification if the person attains a favorable
judgment in such enforcement action, which may be advanced in
certain instances.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this paragraph are met:
(i) The Bank shall make the indemnification provided by
subparagraph (a) in connection with any such action which results
in a final judgment on the merits in favor of such officer or
director.
(ii) The Bank shall make the indemnification provided by
subparagraph (a) in case of settlement of such action, final
judgment against such director or officer or final judgment in
favor of such director or officer other than on the merits, if a
majority of the disinterested directors of the Bank determines
that such a director or officer was acting in good faith within
the scope of his or her employment or authority as he or she
could reasonably have believed under the circumstances was in the
best interest of the Bank or its members.
(c) As used in this paragraph:
(i) "action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for review;
(ii) "final judgment" means a judgment, decree, or order
which is not appealable and as to which the period for appeal has
expired with no appeal taken:
(iii) "settlement" includes the entry of a judgment by
consent or by confession or a plea of guilty or nolo contendere.
Regulations promulgated by the OTS would subject Bank Mutual to the
same indemnification regulations applicable to the Bank as described above.
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<PAGE> 276
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such, and Bank Mutual and the MHC will
continue coverage, which is intended to be increased to reflect Bank Mutual's
status as a publicly-traded company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index following the Signatures page in this
Registration Statement, which Exhibit Index is incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
Bank Mutual hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
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(5) That every prospectus: (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referred to in Item 20 of
this Registration Statement, or otherwise, Bank Mutual has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Bank Mutual of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, Bank Mutual will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Village of Brown
Deer, State of Wisconsin, on June 21, 2000.
BANK MUTUAL CORPORATION
(Registrant)
By: /s/ Michael T. Crowley, Jr.
---------------------------
Michael T. Crowley, Jr.
Chairman and Chief Executive Officer of Mutual
Savings Bank, which is forming Bank Mutual
Corporation pursuant to the Plan of Reorganization
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael T. Crowley, Jr. and Eugene H.
Maurer, Jr., and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and any other regulatory
authority, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.*
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Michael T. Crowley, Jr. Chairman and Chief Executive Officer;
------------------------------
Michael T. Crowley, Jr. Director
/s/ Eugene H. Maurer, Jr. Senior Vice President and Chief Financial Officer
------------------------------
Eugene H. Maurer, Jr. (principal financial officer)
/s/ Marlene M. Scholz Controller (principal accounting officer)
------------------------------
Marlene M. Scholz
/s/ Thomas H. Buestrin Director
------------------------------
Thomas H. Buestrin
/s/ Michael T. Crowley, Sr. Director
------------------------------
Michael T. Crowley, Sr.
/s/ R.W. Dwyer, Jr. Director
------------------------------
R.W. Dwyer, Jr.
/s/ Herbert W. Isermann Director
------------------------------
Herbert W. Isermann
/s/ William J. Mielke Director
------------------------------
William J. Mielke
/s/ David J. Rolfs Director
------------------------------
David J. Rolfs
</TABLE>
*Each of the above signatures is affixed as of June 21, 2000. Capacities
indicated are with Mutual Savings Bank, which is forming Bank Mutual Corporation
pursuant to the Plan of Reorganization.
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<PAGE> 279
BANK MUTUAL
("BANK MUTUAL" OR THE "REGISTRANT")
EXHIBIT INDEX
TO
FORM S-4 REGISTRATION STATEMENT
The following exhibits are filed with or incorporated by reference in
this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED HEREIN FILED
BY REFERENCE TO HEREWITH
<S> <C> <C> <C>
2.1 Agreement and Plan of Merger, dated as of Appendix A to the Proxy
February 21, 2000, by and among Mutual Statement/Prospectus
Savings Bank, OV Corp. and First Northern contained in this
Capital Corporation Registration Statement
3(i) Articles of Incorporation of Bank Mutual Exhibit 3(i) to Bank
Mutual's Registration
Statement on Form S-1,
No. 333-39362, filed June
15, 2000 ("Bank Mutual
S-1")
3(ii) Bylaws of Bank Mutual Exhibit 3(ii) to Bank
Mutual
4.1 Articles of Incorporation of Bank Mutual Exhibit 3(i) above
4.2 Stock Issuance Plan of Mutual Savings, as Exhibit 4.2 to Bank
amended and restated May 15, 2000 Mutual S-1
4.3 Plan of Restructuring from Mutual Savings Exhibit 2.1 to Bank
Bank to Mutual Holding Company of Mutual Mutual S-1
Savings Bank, as amended and restated
May 15, 2000
5.1 Opinion of Quarles & Brady LLP as to the X [form of]
legality of the securities being registered
8.1 Opinion of Quarles & Brady LLP as to the X [form of]
tax consequences of the transaction
23.1 Consent of Ernst & Young LLP, Bank X
Mutual's independent accountants
23.2 Consent of Wipfli Ullrich Bertelson LLP, X
First Northern's independent accountants
23.3 Consents of Quarles & Brady LLP Contained in Exhibits 5.1
and 8.1
23.4 Consent of Keefe, Bruyette & Woods, Inc., X [ form of ]
financial advisor to First Northern
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED HEREIN FILED
BY REFERENCE TO HEREWITH
<S> <C> <C> <C>
23.5 Consent of Michael D. Meeuwsen (director X
designee)
23.6 Consent of Ernst & Young LLP, First Contained in Exhibit 23.1
Northern's former independent accountants
24.1 Powers of Attorney On Signatures page
99.1 Form of proxy to be used in connection with X
the Special Meeting of Shareholders of First
Northern
99.2 Opinion of Keefe, Bruyette & Woods, Inc. Appendix B to the Proxy
Statement/Prospectus
</TABLE>
EI-2
