SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 15, 1999
INDEPENDENT BANK CORPORATION
(Exact name of Registrant as specified in its charter)
Michigan 0-7818 38-2032782
(State or other Jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
230 West Main Street, Ionia, Michigan 48846
(Address of Principal Executive Offices) (Zip Code)
(616) 527-9450
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
1
<PAGE>
Item 2. Acquisition or Disposition of Assets.
Effective September 15, 1999, the Registrant, through its wholly owned
subsidiary Independent Bank MSB, acquired Mutual Savings Bank, f.s.b., a federal
savings bank. Mutual Savings Bank, f.s.b. was headquartered in Bay City,
Michigan, with branches in Michigan. The assets of Mutual Savings Bank, f.s.b.
include real property, loans and other assets which the Registrant intends to
continue to use for the business of banking.
The acquisition was effected pursuant to an Agreement and Plan of
Reorganization dated as of March 24, 1999, by and between Independent Bank
Corporation and Mutual Savings Bank, f.s.b., and the related Consolidation
Agreement dated April 20, 1999, by and among Independent Bank Corporation,
Mutual Savings Bank, f.s.b and Independent Bank MSB. Pursuant to the Agreement
and Plan of Reorganization and the Consolidation Agreement, Mutual Savings Bank,
f.s.b. was consolidated with and into Independent Bank MSB (the "Merger"). The
effective date of the Merger was September 15, 1999.
Pursuant to the Agreement and Plan of Reorganization and the Consolidation
Agreement, each of the issued and outstanding shares of Mutual Savings Bank,
f.s.b. common stock that were outstanding immediately prior to the effective
time of the Merger were converted into the right to receive 0.8 shares of common
stock of Independent Bank Corporation, with cash in lieu of fractional shares.
Funding for the cash in lieu of fractional shares was provided from the general
funds of Independent Bank Corporation.
The terms of the Merger and the establishment of the purchase price were
arrived at as a result of arm's length negotiations between the management of
the Registrant and the management of Mutual Savings Bank, f.s.b. Prior to the
consummation of the Merger, there were no material relationships between the
Registrant and Mutual Savings Bank, f.s.b., or any of their respective
affiliates, directors, officers or associates of any such directors or officers.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired. The following financial
statements of Mutual Savings Bank, f.s.b. are filed as part of this report:
(i) The Audited Consolidated Financial Statements of Mutual Savings
Bank, f.s.b. were filed as Exhibit 99.1 to Registrant's current report on
Form 8-K dated May 25, 1999, and are incorporated herein by reference,
which Consolidated Financial Statements include:
(A) Independent Auditor's Report of KPMG LLP, dated February 2,
1999;
2
<PAGE>
(B) Consolidated Statements of Financial Condition at December
31, 1998 and December 31, 1997;
(C) Consolidated Statements of Operations for the Years ended
December 31, 1998, 1997, and 1996;
(D) Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 1998, 1997 and 1996.
(E) Consolidated Statements of changes in Stockholders' Equity
for the Years ended December 31, 1998, 1997, and 1996;
(F) Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996; and
(G) Notes to Consolidated Financial Statements.
(ii) Interim unaudited financial statements for Mutual Savings Bank,
f.s.b. as of June 30, 1999, as follows are filed as Exhibit 99.1 hereto.
(A) Interim Consolidated Statements of Financial Condition at
June 30, 1999 (unaudited);
(B) Interim Consolidated Statements of Operations for the three
and six month periods ended June 30, 1999 and 1998 (unaudited);
(C) Interim Consolidated Statements of Comprehensive Income for
the three and six months ended June 30, 1999 and 1998 (unaudited);
(D) Interim Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1999 and 1998 (unaudited).
(E) Interim Consolidated Statement of Changes in Stockholders'
Equity for the six-month period ended June 30, 1999 (unaudited); and
(F) Notes to Unaudited Consolidated Financial Statements.
(b) Pro Forma Financial Information.
(i) Pro Forma Combined Financial Statements of Independent Bank
Corporation as follows were filed as pages F-2, F-5, F-6, F-7 and F-8 of
Independent Bank Corporation's Registration Statement on Form S-4, as
amended (Registration No. 333-79679) filed with the Commission on May 28,
1999, with respect to the Merger:
3
<PAGE>
(A) Introduction to Unaudited Pro Forma Combined Financial
Statements;
(B) Unaudited Pro Forma Combined Statements of Operations for the
years ended December 31, 1998, 1997 and 1996;
(C) Note (d) and (e) to the Unaudited Pro Forma Combined
Financial Statements;
(ii) Interim Unaudited Pro Forma financial statements of Independent
Bank Corporation as follows are filed as part of this report.
(A) Introduction to Unaudited Pro Forma Combined Financial
Statements;
(B) Unaudited Pro Forma Combined Statement of Financial Condition
at June 30, 1999;
(C) Unaudited Pro Forma Combined Statement of Operations for the
six-month period ended June 30, 1999; and
(D) Notes to the Unaudited Pro Forma Combined Financial
Statements.
(c) Exhibits. The following exhibits are furnished with or incorporated by
reference into this Current Report:
2.1 Agreement and Plan of Reorganization dated as of March 24, 1999,
by and between Independent Bank Corporation and Mutual Savings Bank,
f.s.b., together with the exhibits thereto, incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, as
amended (File No. 333-79679) filed with the Securities Exchange Commission
on or about May 28, 1999.
99.1 Interim unaudited financial statements of Mutual Savings Bank,
f.s.b.
4
<PAGE>
Unaudited Pro forma Combined Financial Statements
The unaudited pro forma combined financial statements give effect to the merger
to be accounted for as a pooling of interests. The combined financial statements
on the following pages present (i) the historical consolidated statement of
financial condition and the pro forma combined statement of financial condition
of Independent Bank Corporation ("IBC") and Mutual Savings Bank, f.s.b. ("MSB")
at June 30, 1999,; and (ii) the historical consolidated statements of operations
and pro forma combined statements of operations of IBC and MSB for the six
months ended June 30, 1999. The pro forma combined statement of financial
condition gives effect to the merger as if it had occurred on the date presented
and the pro forma combined statements of operations give effect to the merger as
if it had been effected for the period presented.
The pro forma statement of financial condition gives effect to nonrecurring
charges related to the merger, estimated tax benefits associated with the
elimination of the valuation allowance on deferred tax assets previously
recorded by MSB and balance sheet restructuring through the sale of certain
securities. The pro forma statement of financial condition also assumes each of
the outstanding shares of MSB common stock is converted into 0.80 shares of IBC
Common Stock.
The pro forma combined financial statements exclude the estimated effect of
revenue enhancements and expense savings associated with the consolidation of
operations of IBC and MSB. Such combined statements do however give effect to
the elimination of the valuation allowance on deferred tax assets previously
recorded by MSB in the period presented.
The pro forma combined financial statements are intended for informational
purposes and may not be indicative of the combined financial position or results
of operations that actually would have occurred had the transaction been
consummated during the periods or as of the dates indicated, or which will be
attained in the future. The pro forma combined financial statements should be
read in conjunction with the 1998 Annual Reports on Form 10-K and the Quarterly
Reports on Form 10-Q for the period ended June 30, 1999, of IBC and MSB.
<PAGE>
Independent Bank Corporation
Unaudited Pro Forma Combined Statement of Financial
Condition
June 30, 1999
(in thousands)
<TABLE>
Independent Mutual Proforma
------------------------------
Bank Corporation Savings Bank Adjustments Combined
-------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 33,281 $ 11,527 $ 44,808
Interest bearing deposits - -
------------------------------------------------------------------
Total cash and cash equivalents 33,281 11,527 - 44,808
Securities available for sale 110,874 56,969 $ 65,000 (a)
(40,000) (a) 192,843
Securities held to maturity 14,076 121,629 (25,000) (a) 110,705
Federal Home Loan Bank stock, at cost 12,589 7,023 19,612
Loans held for sale 22,254 4,602 26,856
Loans
Commercial and agricultural 247,285 46,559 293,844
Real estate mortgage 441,727 295,180 - (a) 736,907
Installment 142,908 18,739 161,647
-------------------------------------------------------------------
Total Loans 831,920 360,478 - 1,192,398
Allowance for loan losses (10,183) (1,940) (12,123)
-------------------------------------------------------------------
Net Loans 821,737 358,538 - 1,180,275
Property and equipment, net 29,462 8,064 (950) (b) 36,576
Accrued income and other assets 33,055 5,822 2,250 (b)
10,815 (d) 51,942
-------------------------------------------------------------------
Total Assets $ 1,077,328 $ 574,174 $ 12,115 $ 1,663,617
-------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 106,408 $ 12,322 $ 118,730
Savings and NOW 378,138 156,923 535,061
Time 352,148 256,951 609,099
-------------------------------------------------------------------
Total Deposits 836,694 426,196 - 1,262,890
Federal funds purchased 31,550 31,550
Other borrowings 104,163 98,272 202,435
Guaranteed preferred beneficial interests in
Company's subordinated debentures 17,250 17,250
Accrued expenses and other liabilities 14,680 12,481 $ 7,025 (b) 34,186
-------------------------------------------------------------------
Total Liabilities 1,004,337 536,949 7,025 1,548,311
-------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock -
Common stock 7,475 43 3,389 (c) 10,907
Capital surplus 38,969 32,125 (3,389) (c) 67,705
Retained earnings 26,275 6,446 (5,725) (b)
10,609 (d) 37,605
Accumulated other comprehensive income (loss) 272 (590) 206 (d) (112)
Unearned employee stock ownership plan shares (799) (799)
-------------------------------------------------------------------
Total Shareholders' Equity 72,991 37,225 5,090 115,306
-------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,077,328 $ 574,174 $ 12,115 $ 1,663,617
===================================================================
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
Independent Bank Corporation
Unaudited Pro forma Combined Statement of
Operations
For the Six Months Ended June 30, 1999
(dollars in thousands, except per share amounts)
<TABLE>
Independent Bank Mutual Savings Proforma
------------------------------
Corporation Bank Adjustments Combined (e)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 39,124 $ 13,085 $ 52,209
Securities available for sale 3,098 1,445 4,543
Securities
Taxable 45 3,631 3,676
Tax-exempt 468 468
Other investments 498 279 777
-----------------------------------------------------------------------
Total Interest Income 43,233 18,440 61,673
-----------------------------------------------------------------------
Interest Expense
Deposits 12,923 8,563 21,486
Other borrowings 4,458 3,001 7,459
-----------------------------------------------------------------------
Total Interest Expense 17,381 11,564 28,945
-----------------------------------------------------------------------
Net Interest Income 25,852 6,876 32,728
Provision for loan losses 1,030 291 1,321
-----------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 24,822 6,585 31,407
-----------------------------------------------------------------------
Non-interest Income
Service charges on deposit accounts 2,244 327 2,571
Net gains on asset sales
Real estate mortgage loans 2,256 533 2,789
Securities 14 14
Other income 2,996 1,077 4,073
-----------------------------------------------------------------------
Total Non-interest Income 7,510 1,937 9,447
-----------------------------------------------------------------------
Non-interest Expense
Salaries and employee benefits 13,803 3,353 17,156
Occupancy, net 1,741 495 2,236
Furniture and fixtures 1,521 441 1,962
Other expenses 7,413 2,442 9,855
-----------------------------------------------------------------------
Total Non-interest Expense 24,478 6,731 31,209
-----------------------------------------------------------------------
Income Before Federal Income Tax 7,854 1,791 9,645
Federal income tax expense 2,246 $ 627 (d) 2,873
-----------------------------------------------------------------------
Net Income $ 5,608 $ 1,791 (627) $ 6,772
=======================================================================
Net income per common share
Basic $ 0.72 $ 0.40 $ 0.60
=======================================================================
Diluted $ 0.71 $ 0.39 $ 0.59
=======================================================================
Average shares outstanding 7,803 4,506 11,407
ESOP shares not committed to be released (42) (34)
-----------------------------------------------------------------------
Shares outstanding - Basic 7,803 4,464 11,374
Effect of dilutive securities - stock options 50 103 132
-----------------------------------------------------------------------
Shares outstanding - Dilutive 7,853 4,566 11,506
=======================================================================
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
(a) Reflects the expected sale of certain mortgage-backed securities of MSB.
The proceeds from these sales will be deployed in securities available for
sale. Such sales are expected to generate a loss ranging from $0.1 to $1.0
million and is reflected in note (b).
(b) Reflects Management's estimate of nonrecurring charges resulting in an
after-tax adjustment to retained earnings of $5.7 million. The nonrecurring
charges will be recognized upon consummation of the merger or shortly
thereafter and are expected to consist of the following (shown pre-tax):
<TABLE>
<S> <C>
Litigation settlement $2,025
Data processing termination and conversion costs 1,800
Legal and professional 1,150
Severance 700
Write-down of fixed assets 950
Loss on sale of securities 550
Other 800
------
7,975
Tax effect 2,250
------
$5,725
======
</TABLE>
The write-down of fixed assets consists primarily of signage and
duplicative data processing hardware and software.
Loss on the sale of securities is expected to range between $0.1 and $1.0
million. The mid-point of this range is included in the table above.
These nonrecurring charges are preliminary estimates and are subject to
revision as economic conditions, including interest rates, change or as
more information is made available.
(c) Each outstanding share of MSB common stock, par value $0.01 will be
converted into 0.80 shares of IBC Common Stock, par value $1.00.
(d) Management believes that the tax benefits associated with MSB's deferred
tax assets will more likely than not be realized, and therefore, no
valuation allowance is considered necessary. As a result, the adjustment to
federal income tax expense reflects the estimated tax benefit or expense
that would have been recognized by MSB if no valuation allowance had been
recognized during the periods presented.
The pro forma combined statement of condition has been adjusted to include
the net deferred tax asset and the related impact on retained earnings and
accumulated other comprehensive income as if no valuation allowance had
been recognized.
<PAGE>
(e) The pro forma combined statements of operations do not give effect to
anticipated nonrecurring charges as described in note (b) or the estimated
benefit of revenue enhancements and expense savings associated with the
consolidation of the operations of IBC and MSB.
Earnings per common share for IBC and MSB are based on the historical
average number of common shares outstanding for each company during the
period, adjusted for a 5% stock dividend in 1999. For purposes of the pro
forma earnings per share computation, the common shares of MSB have been
adjusted to the equivalent shares of IBC.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
INDEPENDENT BANK CORPORATION
By /s/ William R. Kohls
William R. Kohls
Executive Vice President,
Secretary and Treasurer
(Principal Financial Officer)
Date: September 15, 1999
::ODMA\PCDOCS\GRR\342089\3
5
<PAGE>
EXHIBIT INDEX
Exhibit 2.1 - Agreement and Plan of Reorganization dated as of March 24, 1999,
by and between Independent Bank Corporation and Mutual Savings
Bank, f.s.b., together with the exhibits thereto, incorporated by
reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 333-79679) filed with
the Securities Exchange Commission on or about May 28, 1999.
Exhibit 99.1 - Interim unaudited financial statements of Mutual Savings Bank,
f.s.b.
<PAGE>
EXHIBIT 99.1
Mutual Savings Bank, f.s.b. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
June 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash on hand and on deposit .................................................... $11,527,375 $ 11,097,267
Interest-bearing deposits ...................................................... 2,986,235 3,666,821
----------- ----------
Cash and cash equivalents .................................................... 14,513,610 14,764,088
Investment securities available-for-sale ....................................... 12,657,806 166,484
Investment securities held-to-maturity (fair value of $17,490,000 in 1999
and $13,888,000 in 1998) .................................................. 17,490,458 13,888,050
Mortgage-backed securities available-for-sale .................................. 41,324,754 52,275,259
Mortgage-backed securities held-to-maturity (fair value of
$103,259,000 in 1999 and $129,027,000 in 1998) ............................. 104,138,845 129,063,968
Loans held for sale ............................................................ 4,601,748 5,957,504
Loans, net of allowance for loan losses of $1,940,000 in 1999
and $1,843,000 in 1998 ..................................................... 358,537,936 327,692,406
Real estate owned and other repossessed assets ................................. 50,202 328,896
Federal Home Loan Bank stock, at cost .......................................... 7,022,900 7,022,900
Premises and equipment, net .................................................... 8,064,089 8,017,347
Accrued interest receivable .................................................... 2,650,187 2,542,370
Capitalized mortgage servicing rights .......................................... 1,923,151 1,880,194
Prepaid expenses and other assets .............................................. 1,198,221 834,648
------------- -------------
Total assets ...................................................................$ 574,173,907 $ 564,434,114
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .......................................................................$ 426,196,422 $ 420,817,972
Securities sold under agreements to repurchase ................................. 45,000,000 45,000,000
Federal Home Loan Bank advances ................................................ 53,272,257 53,285,899
Advance payments by borrowers for taxes and insurance ......................... 6,743,235 4,451,737
Accrued interest payable ....................................................... 1,850,399 2,018,723
Accrued expenses and other liabilities ......................................... 3,886,789 2,723,507
---------- -----------
Total liabilities ............................................................ 536,949,102 528,297,838
----------- -----------
Stockholders' equity:
Preferred stock ($.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding in 1999 and 1998) .......................... - -
Common stock ($.01 par value, 20,000,000 shares authorized,
4,293,914 shares issued and outstanding in 1999 and
4,290,414 shares issued and outstanding in 1998) ............................ 42,939 42,904
Additional paid-in capital ..................................................... 32,125,058 32,136,522
Retained earnings -- substantially restricted .................................. 6,445,695 4,655,084
Accumulated other comprehensive income (loss) .................................. (590,051) 100,602
Unearned Employee Stock Ownership Plan shares .................................. (798,836) (798,836)
------------- -----------
Total stockholders' equity ................................................... 37,224,805 36,136,276
------------- -----------
Total liabilities and stockholders' equity .....................................$ 574,173,907 $ 564,434,114
============= =============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Mutual Savings Bank, f.s.b. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- --------
(Unaudited)
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans .................................. $ 6,658,917 $ 6,225,931 $ 13,084,489 $ 12,514,644
Interest on mortgage-backed securities ...................... 2,088,559 3,535,271 4,389,566 7,417,975
Interest on investment securities ........................... 391,189 288,409 628,651 398,167
Other interest income ....................................... 169,242 281,672 336,886 479,681
----------- ---------- ----------- -----------
Total interest income ........................................ 9,307,907 10,331,283 18,439,592 20,810,467
----------- ---------- ----------- -----------
Interest expense:
Interest on deposits ........................................ 4,231,769 4,551,661 8,562,867 9,050,192
Interest on securities sold under agreements
to repurchase ............................................. 658,673 1,233,335 1,312,833 2,544,710
Interest on Federal Home Loan Bank advances ................. 849,410 1,588,926 1,688,432 3,343,280
----------- ---------- ----------- -----------
Total interest expense ....................................... 5,739,852 7,373,922 11,564,132 14,938,182
----------- ---------- ----------- -----------
Net interest income .......................................... 3,568,055 2,957,361 6,875,460 5,872,285
Provision for loan losses .................................... 150,000 120,000 291,000 230,000
----------- ---------- ----------- -----------
Net interest income after provision for loan losses .......... 3,418,055 2,837,361 6,584,460 5,642,285
----------- ---------- ----------- -----------
Other income:
Gains and fees on loans sold ................................ 242,629 475,008 525,544 1,078,581
Loan servicing fees ......................................... 151,524 180,809 282,510 348,185
Other fees .................................................. 426,168 426,555 871,798 815,964
Net gain on sale of premises and equipment,
real estate owned and other repossessed assets ............ 7,856 19,375 20,096 13,522
Securities and insurance commissions and fees ............... 154,506 206,065 324,228 336,561
Other, net .................................................. 25,201 9,710 41,128 19,517
----------- ---------- ----------- -----------
Total other income ........................................... 1,007,884 1,317,522 2,065,304 2,612,330
----------- ---------- ----------- -----------
General and administrative expenses:
Salaries and employee benefits .............................. 1,678,689 1,606,210 3,313,645 3,228,935
Occupancy, equipment and supplies ........................... 534,624 586,657 1,075,843 1,185,410
Data processing ............................................. 257,743 253,684 531,721 510,623
Federal deposit insurance premiums .......................... 335,161 328,084 669,449 652,552
Marketing and promotion ..................................... 140,000 196,062 280,000 347,984
Professional fees ........................................... 80,600 117,276 162,100 234,552
Other ....................................................... 386,240 475,800 826,395 960,439
----------- ---------- ----------- -----------
Total general and administrative expenses .................... 3,413,057 3,563,773 6,859,153 7,120,495
----------- ---------- ----------- -----------
Income before income tax expense ............................. 1,012,882 591,110 1,790,611 1,134,120
Income tax expense ........................................... - - - -
----------- ---------- ----------- -----------
Net income ................................................... $ 1,012,882 $ 591,110 $ 1,790,611 $ 1,134,120
=========== ========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic earnings per share..................................... $ 0.24 $ 0.14 $ 0.42 $ 0.27
====== ====== ====== ======
Diluted earnings per share................................... $ 0.23 $ 0.14 $ 0.41 $ 0.26
====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Mutual Savings Bank, f.s.b. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
<TABLE>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income ................................................................ $ 1,012,882 $ 591,110 $1,790,611 $ 1,134,120
Other comprehensive income (loss):
Changes in unrealized gain (loss) on available-for-sale securities....... (478,493) 203,286 (690,653) 159,618
------------ --------- ---------- -----------
Comprehensive income ...................................................... $ 534,389 $ 794,396 $1,099,958 $ 1,293,738
=========== ========= ========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mutual Savings Bank, f.s.b. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 1999
<TABLE>
Retained Accumulated
Additional Earnings - Other Unearned
Common Paid-in Substantially Comprehensive ESOP
Stock Capital Restricted Income (Loss) Shares Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .............. $ 42,904 $ 32,136,522 $4,655,084 $ 100,602 $ (798,836) $ 36,136,276
Stock issued upon exercise of
stock options (3,500 shares) ............ 35 24,496 - - - 24,531
Net income for the period ................. - - 1,790,611 - - 1,790,611
Changes in unrealized gain (loss)
on available-for-sale securities ........ - - - (690,653) - (690,653)
ESOP valuation adjustment ................. - (35,960) - - - (35,960)
-------- ------------ ----------- ---------- ---------- ------------
Balance at June 30, 1999 .................. $ 42,939 $ 32,125,058 $6,445,695 $ (590,051) $ (798,836) $ 37,224,805
======== ============ =========== =========== ========== ============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Mutual Savings Bank, f.s.b. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30,
-------------------------------
1999 1998
--------------- -----------
(Unaudited)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).......................................................... $ 1,790,611 $1,134,120
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on sale of investment securities available-for-sale................. - -
Loss on sale of mortgage-backed securities available-for-sale............ - -
Stock compensation amortized to expense.................................. 100,122 137,174
Depreciation............................................................. 475,661 572,895
Capitalized mortgage servicing rights, net............................... (42,957) (499,254)
Reversal of reserve on deferred tax asset................................ - -
Write-off of fixed assets related to the merger.......................... - -
(Gain) loss on sale of premises and equipment,
real estate owned and other repossessed assets........................ (20,096) (13,522)
Accretion of discounts, amortization of premiums,
and other deferred yield items, net................................... (347,070) (285,565)
Provision for loan losses ............................................... 291,000 230,000
Originations of loans held for sale...................................... (44,542,773) (108,546,660)
Principal amount of loans sold .......................................... 45,898,529 99,152,240
(Increase) decrease in accrued interest receivable....................... (107,817) 224,332
(Increase) decrease in prepaid expenses and other assets................. (363,573) (2,706,496)
Increase (decrease) in accrued liability for settlement of
class action lawsuit .................................................. - 2,500,000
Increase (decrease) in accrued interest payable.......................... (168,324) (231,919)
Increase (decrease) in accrued expenses and other liabilities ........... 1,163,282 391,630
Increase (decrease) in other, net........................................ 204,466 (265,270)
-------------- -------------
Net cash provided by (used in) operating activities......................... 4,331,061 (8,206,295)
-------------- -------------
Cash flows provided by (used in) investing activities:
Proceeds from sales of:
Investment securities available-for-sale.................................. - -
Mortgage-backed securities available-for-sale............................. - -
Premises and equipment.................................................... 1,250 100
Real estate owned and other repossessed assets............................ 287,965 322,898
Purchases of:
Investment securities available-for-sale.................................. (12,911,423) -
Investment securities held-to-maturity.................................... (285,113,107) (627,359,414)
Premises and equipment.................................................... (524,417) (327,625)
(Increase) decrease in net loans receivable................................ (31,201,842) 5,773,694
Principal payments received on:
Investment securities..................................................... 282,172,733 627,562,056
Mortgage-backed securities................................................ 35,028,934 46,155,556
-------------- -------------
Net cash provided by (used in) investing activities........................ (12,259,907) 52,127,265
-------------- -------------
Cash flows provided by (used in) financing activities:
Proceeds from Federal Home Loan Bank advances............................. - 10,000,000
Repayments of Federal Home Loan Bank advances............................. (16,111) (16,014,919)
Increase (decrease) in securities sold under agreements to repurchase..... - (40,000,000)
Increase (decrease) in deposits........................................... 5,378,450 7,878,437
Increase (decrease) in advance payments by borrowers for taxes and
insurance............................................................... 2,291,498 3,217,648
Issuance of common stock.................................................. 24,531 40,500
-------------- -------------
Net cash provided by (used in) financing activities......................... 7,678,368 (34,878,334)
-------------- -------------
Net increase (decrease) in cash and cash equivalents........................ (250,478) 9,042,636
Cash and cash equivalents at beginning of period............................ 14,764,088 13,396,756
-------------- -------------
Cash and cash equivalents at end of period.................................. $ 14,513,610 $ 22,439,392
============== =============
Cash paid during the period for interest.................................... $ 11,732,456 $ 15,170,101
============== =============
Supplemental disclosure of cash flow information:
Transfer of loans, at fair value, to real estate owned and other
repossessed assets....................................................... $ 356,312 $ 215,668
============== =============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Mutual Savings Bank, f.s.b. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six months Ended June 30, 1999 and 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include all
adjustments (consisting of only normal recurring accruals) necessary, in the
opinion of Management, for a fair presentation. The results of operations for
the six months ended June 30, 1999 are not necessarily indicative of results
that may be expected for the year ending December 31, 1999.
The unaudited consolidated financial statements include the accounts of Mutual
Savings Bank, f.s.b., A Stock Company ("MSB"), and its wholly-owned subsidiaries
MSB Service Corporation and MSB Investment and Insurance Services, Inc.
("MSBi"). All significant inter-company transactions and balances have been
eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in MSB's
Annual Report on Form 10-K filed with the Office of Thrift Supervision ("OTS")
for its fiscal year ended December 31, 1998.
2. Accounting for Income Taxes
MSB maintained a valuation allowance at both June 30, 1999 and December 31, 1998
which reduced its net deferred tax asset to zero. The valuation allowance has
been established because, in the opinion of Management, realization of the
benefit of the deferred tax assets is not more likely than not. The valuation
allowance considered the Bank's historical operating results, the significant
contribution of gains and fees from loan sales to earnings for 1998 and for the
six months ended June 30, 1999 and the uncertainty related to the possible costs
of a remaining securities related lawsuit. At December 31, 1998 MSB had
approximately $34.749 million of NOL carryforwards, of which $7,688,000 will
expire if not utilized against taxable income in the year 2004, $164,000 in the
year 2007, $15.260 million in the year 2008, $81,000 in the year 2009,
$6,779,000 in the year 2010, $929,000 in the year 2011, $411,000 in the year
2012, and $3,437,000 in the year 2018. Future utilization of $7,776,000 of the
NOL's is limited to approximately $700,000 per year as a result of converting to
a federally chartered stock savings bank on July 16, 1992, which resulted in a
change of control as defined in Section 382 of the Internal Revenue Code.
3. Earnings Per Share
The following tables are reconciliations of the numerators and denominators of
the basic and diluted Earnings Per Share ("EPS") computations.
<PAGE>
<TABLE>
For the Three Months Ended June 30,
-----------------------------------------------------------------------------------
1999 1998
------------------------------------------ -------------------------------------
Average Per Average Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders $ 1,012,882 4,292,414 $ 591,110 4,289,914
Employee Stock Ownership
Plan ("ESOP") shares not
committed to be released -- (38,555) -- (52,345)
------------ ---------- ---------- ---------
1,012,882 4,253,859 $0.24 591,110 4,237,569 $0.14
===== =====
Effect of dilutive securities:
Options -- 107,531 -- 100,638
------------ --------- ---------- ---------
Diluted EPS:
Income available to common
stockholders and assumed
conversions $ 1,012,882 4,361,390 $0.23 $ 591,110 4,338,207 $0.14
============ ========= ===== ========== ========= =====
For the Six Months Ended June 30,
-----------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
Average Per Average Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income available to common
stockholders $ 1,790,611 4,291,414 $1,134,120 4,288,136
ESOP shares not committed
to be released -- (40,069) -- (54,279)
------------ --------- ---------- ---------
1,790,611 4,251,345 $0.42 1,134,120 4,233,857 $0.27
===== =====
Effect of dilutive securities:
Options -- 98,248 -- 102,548
------------ --------- ---------- ---------
Diluted EPS:
Income available to common
stockholders and assumed
conversions $ 1,790,611 4,349,593 $0.41 $1,134,120 4,336,405 $0.26
============ ========= ===== ========== ========== =====
</TABLE>
The following table summarizes granted options to purchase shares of common
stock that were outstanding at June 30, 1999 and 1998, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
<PAGE>
<TABLE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------ ------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Weighted-average price of common
stock $ 12.54 $ 12.12 $ 11.32 $ 12.50
Weighted-average exercise price of
options 17.94 17.94 17.94 17.94
Range of exercise prices $ 13.25 - $19.25 $ 13.25 - $19.25 $ 13.25 - $19.25 $ 13.25 - $19.25
Number of shares 119,188 119,188 119,188 119,188
Weighted-average remaining
contractual life (in years) 4.25 5.25 4.25 5.25
</TABLE>
4. Commitments and Contingencies
MSB is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. These financial instruments
include commitments to sell mortgage loans, commitments to extend credit, and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Statements of Financial Condition. MSB's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. MSB uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer based on
compliance with contractual conditions. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The total commitment amounts do not necessarily represent future cash
requirements since some of the commitments may expire without being drawn upon.
MSB evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of credit, is
based on Management's credit evaluation of the counter party.
At June 30, 1999 MSB had outstanding commitments to originate mortgage loans of
$5,028,000. These outstanding commitments have interest rates ranging from
6.625% to 8.50%. At that same date, MSB had commitments to sell mortgage loans
of $7,176,000 to the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association, and of the loans committed to be sold,
commitments had not been issued to borrowers with respect to $1,018,000 of these
loans. Any fees associated with these commitments have not been recognized in
income. MSB has committed $11.233 million for construction loans on one- to
four-family dwellings of which $5,710,000 has not been funded at June 30, 1999.
Also at June 30, 1999, MSB had no outstanding commitments to purchase or sell
investment or mortgage-backed securities. At June 30, 1999 MSB had a commitment
for a $720,000 Federal Home Loan Bank ("FHLB") advance. MSB had commitments to
borrowers on undrawn home equity lines of credit of $12.275 million and
originated commercial loan commitments of $8,487,000. Standby letters of credit
are conditional commitments issued by MSB to guarantee the performance of a
customer to a third party. Those guarantees are issued to
<PAGE>
support private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers. At June 30, 1999 unused lines of credit were
$3,757,000 and standby letters of credit were $350,000. MSB anticipates that it
will have sufficient funds available to meet its current commitments. Management
believes that the market risk associated with the commercial loan commitments,
construction loan commitments and commitments on undrawn home equity lines of
credit is not significant.
For a discussion of pending legal proceedings, refer to "Part II -- Other
Information, Item 1 -- Legal Proceedings" of this document.
5. Regulatory Matters
MSB is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on MSB's
financial statements. Regulations of the OTS set forth minimum capital standards
applicable to all savings institutions. These standards include a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. Savings institutions must meet or exceed all three requirements at
all times to be considered in capital compliance. The following table presents
MSB's capital position with respect to the three requirements at June 30, 1999:
<TABLE>
Excess
As a % of Required As a % of Excess Capital
Amount Assets (1) Capital Assets (1) Capital %
------ ---------- ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity $ 37,224,805
Unrealized loss on available-
for-sale securities 590,051
Total tangible capital $ 37,814,856 6.58% $ 8,621,459 1.50% $ 29,193,397 5.08%
=============
Total core capital $ 37,814,856 6.58% $ 22,990,558 4.00% $ 14,824,298 2.58%
General valuation allowances 1,892,412
-------------
Total risk-based capital $ 39,707,268 13.02% $ 24,395,680 8.00% $ 15,311,588 5.02%
=============
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
As indicated in the table, MSB exceeded all three of these regulatory capital
requirements at June 30, 1999.
In addition, under capital adequacy guidelines and the regulatory framework for
prompt corrective action, MSB must meet specific capital guidelines that involve
quantitative measures of MSB's liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. MSB's capital amounts and
classification are also subject to qualitative
<PAGE>
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require MSB to maintain minimum amounts and ratios (set forth in the following
table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to assets
(as defined). Management believes, as of June 30, 1999, that MSB meets all
capital adequacy requirements to which it is subject. To be categorized as
well-capitalized, MSB must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following table.
MSB's actual capital amounts and ratios are also presented in the following
table:
<TABLE>
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 June 30, 1999:
Total capital (to risk-weighted assets) $39,707,268 13.02% $24,395,680 8.00% $30,494,600 10.00%
Tier 1 capital (to risk-weighted assets) $37,814,856 12.40% $12,197,840 4.00% $18,296,760 6.00%
Tier 1 capital (to total assets) $37,814,856 6.58% $22,990,558 4.00% $28,738,198 5.00%
As of December 31, 1998:
Total capital (to risk-weighted assets) $37,795,223 13.17% $22,964,880 8.00% $28,706,100 10.00%
Tier 1 capital (to risk-weighted assets) $36,035,674 12.55% $11,482,440 4.00% $17,223,660 6.00%
Tier 1 capital (to total assets) $36,035,674 6.39% $22,573,340 4.00% $28,216,676 5.00%
</TABLE>
As of June 30, 1999, the most recent notification of the OTS categorized MSB as
well capitalized under the regulatory framework for prompt corrective action.
6. Consolidated Disclosure of Fair Value
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by MSB using available market information and
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop th estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts MSB
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following table presents the disclosure of estimated fair values as of June
30, 1999 and December 31, 1998:
<PAGE>
<TABLE>
June 30, 1999 December 31, 1998
----------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Assets
Cash on hand and on deposit $ 11,528 $ 11,528 $ 11,097 $ 11,097
Interest-bearing deposits 2,986 2,986 3,667 3,667
----- ----- ----- -----
Cash and cash equivalents 14,514 14,514 14,764 14,764
Investment securities 30,148 30,148 14,055 14,055
Mortgage-backed securities 145,464 144,584 181,339 181,302
Loans receivable, net 363,140 362,652 333,650 336,728
FHLB stock, at cost 7,023 7,023 7,023 7,023
Accrued interest receivable 2,650 2,650 2,542 2,542
Liabilities
Deposits 426,196 426,683 420,818 423,108
Repurchase Agreements 45,000 45,141 45,000 46,069
FHLB advances 53,272 53,291 53,286 55,169
Advance payments by borrowers for taxes and insurance 6,743 6,743 4,452 4,452
Accrued interest payable 1,850 1,850 2,019 2,019
</TABLE>
Cash and Cash Equivalents
For cash and cash equivalents, the carrying value approximates the fair value.
Investment Securities
For investment securities (other than mortgage-backed securities) and marketable
equity securities, fair values are based on quoted market prices or dealer
quotes, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. The estimated fair
value of the collateralized mortgage obligation ("CMO") residual included in
investment securities is based on future expected cash flows.
Mortgage-Backed Securities
Estimated fair value for mortgage-backed securities is based on quoted market
prices.
Loans Receivable
For certain homogeneous categories of loans, such as certain residential
mortgages and consumer loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for similar remaining
maturities. The carrying value and fair value of commitments to originate and
sell loans is not significant.
Federal Home Loan Bank Stock
The carrying value of the FHLB stock approximates the fair value.
<PAGE>
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates the fair value.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair value of
fixed-maturity certificates of deposit ("CD's") is estimated using the rates
currently offered for CD's of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
generally provided by retail deposits compared to the cost of alternative
borrowing sources.
Securities Sold under Agreements to Repurchase
Rates currently available to MSB for securities sold under agreements to
repurchase ("Repurchase Agreements") with similar terms and remaining maturities
are used to estimate the fair value of the existing Repurchase Agreements.
Federal Home Loan Bank Advances
Rates currently available to MSB for FHLB advances with similar terms and
remaining maturities are used to estimate the fair value of the existing
advances.
Advance Payments by Borrowers for Taxes and Insurance
The carrying value of advance payments by borrowers for taxes and insurance
approximates the fair value.
Accrued Interest Payable
The carrying value of accrued interest payable approximates the fair value.
7. Reclassifications
Certain reclassifications were made to prior period financial statements to
conform to the 1999 presentation.
