SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Northwest Equity Corp.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $1.00 par value
per share
(2) Aggregate number of securities to which transaction applies:
825,301
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$24.00 per share, to be paid in cash.*
(4) Proposed maximum aggregate value of transaction:
$19,807,224
(5) Total fee paid: $3,961.45
*The Merger Per Share Consideration is subject to increase or decrease in
an amount equal to Registrant's earnings less dividends paid after September 1,
1999, through the date of the Determination Date Financial Statements to be
prepared prior to closing, based on the Merger Agreement, as amended.
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$3,961.45
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes: Registrant anticipates first distribution of Proxy Statement to
shareholders commencing February 2, 2000.
<PAGE>
NORTHWEST EQUITY CORP.
February 2, 2000
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "Special Meeting") of Northwest Equity Corp. ( "Northwest"), the holding
company for Northwest Savings Bank (the "Bank"), which will be held on February
29, 2000, at 2:00 p.m., Amery, Wisconsin time, at Centennial Hall, 608 Harriman
Avenue South, Amery, Wisconsin 54001.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve an Agreement and Plan of Merger dated February 16, 1999 (the
"Merger Agreement"), as amended, by and among Northwest, Bremer Financial
Corporation, a Minnesota corporation ("Bremer"), and Bremer Acquisition
Corporation, a Wisconsin corporation and wholly owned subsidiary of Bremer
("Merger Sub"), providing for the merger of Northwest with and into Merger Sub
(the "Merger").
Northwest's Board of Directors has unanimously approved the terms of
the Merger Agreement, believes the Merger Agreement is in the best interests of
Northwest shareholders, and recommends that shareholders of Northwest vote for
the proposal to approve and adopt the Merger Agreement.
The attached Notice of Special Meeting of Shareholders and Proxy
Statement describe the formal business to be conducted at the Special Meeting.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of common stock of Northwest will be required to approve the
Merger. An abstention or failure to vote will have the same effect as a vote
against the Merger. Accordingly, please complete, date, sign and promptly return
your proxy card in the enclosed envelope. Returning your proxy card will not
prevent you from voting in person at the Special Meeting, but will assure that
your vote is counted if you are unable to attend.
You should not send in certificates for your shares of Northwest common
stock with your proxy card. Please carefully read and follow the instructions
set forth in the election form and letter of transmittal delivered to you under
separate cover regarding the making of your election and the surrender of your
Northwest stock certificates.
The investment banking firm ABN AMRO Incorporated has issued its
written opinion, dated as of the date of the Merger Agreement and confirmed as
of the date of this Proxy Statement, to your Board of Directors regarding the
fairness from a financial point of view of the consideration to be received by
Northwest's shareholders pursuant to the Merger Agreement. A copy of the opinion
is attached as Appendix E to the Proxy Statement.
The vote of every shareholder is important to us. Please sign and
return the enclosed appointment of proxy form ("Proxy") promptly in the
postage-paid envelope provided, regardless of whether you are able to attend the
Annual Meeting in person. If you attend the Annual Meeting, you may vote in
person even if you have already mailed your Proxy.
On behalf of the Board of Directors and all of the employees of
Northwest and the Bank, I wish to thank you for your continued support.
Sincerely yours,
_/s/_Brian L. Beadle
Brian L. Beadle
President and Chief Executive Officer
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NORTHWEST EQUITY CORP.
234 KELLER AVENUE SOUTH
AMERY, WISCONSIN 54001
(715) 268-7105
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 29, 2000
PROPOSED MERGER WITH BREMER FINANCIAL CORPORATION
- YOUR VOTE IS VERY IMPORTANT
TO THE HOLDERS OF COMMON STOCK OF NORTHWEST EQUITY CORP.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
Shareholders of Northwest Equity Corp. ("Northwest") will be held on February
29, 2000 at 2:00 p.m., Amery, Wisconsin time, at Centennial Hall, 608 Harriman
Avenue South, Amery, Wisconsin 54001.
The Special Meeting is for the purpose of considering and voting upon the
following matters, all of which are set forth more completely in the
accompanying Proxy Statement.
MATTERS TO BE VOTED ON AT THE SPECIAL MEETING:
1) Approval of the Agreement and Plan of Reorganization and Merger dated
February 16, 1999, as amended (the "Merger Agreement"), among Bremer
Financial Corporation ("Bremer"), Northwest, and Bremer Acquisition
Corporation ("Merger Sub") pursuant to which Northwest and the Merger
Sub will be merged (the "Merger").
2) To adjourn the Special Meeting to solicit additional votes in favor of
the Merger in the event the required vote for approval and adoption of
the Merger Agreement has not been obtained by the date of the Special
Meeting.
3) Any other matters that may be properly brought before the Special
Meeting or any adjournment or postponement thereof. The Board of
Directors is not aware of any other such business.
With respect to Matter 1, the Boards of Directors of Northwest and Bremer
approved the Merger Agreement pursuant to which Merger Sub will be merged with
and into Northwest and Northwest will become a wholly-owned subsidiary of
Bremer. In the Merger, each share of Northwest Common Stock will be converted
into the right to receive $24.00 in cash subject to an adjustment to increase or
decrease the cash consideration per share by an amount equal to Northwest's
earnings less dividends paid from September 1, 1999 through the date of the
Determination Date Financial Statements divided by the total number of
outstanding Northwest shares plus Northwest shares issuable upon exercise of
stock options. The Merger cannot be completed unless approved by Northwest
stockholders at the Special Meeting. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the Special Meeting, please take time to
vote by completing and mailing the enclosed proxy card.
This Proxy Statement provides detailed information about the Merger and the
other matters under consideration at the Special Meeting. We encourage you to
read it carefully.
BY ORDER OF THE BOARD OF DIRECTORS,
_/s/_James Moore
James Moore, Secretary
Amery, Wisconsin Northwest Equity Corp.
February 2, 2000
<PAGE>
NORTHWEST EQUITY CORP.
234 KELLER AVENUE SOUTH
AMERY, WISCONSIN 54001
(715) 268-7105
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 29, 2000
INTRODUCTION
This Proxy Statement is being furnished to the holders of the common
stock, $1.00 par value per share (the "Common Stock"), of Northwest Equity Corp.
("Northwest" or the "Company") in connection with the solicitation of proxies on
behalf of the Board of Directors of Northwest for use at a special meeting (the
"Special Meeting") of shareholders to be held on February 29, 2000 at 2:00 p.m.,
Amery, Wisconsin time, at Centennial Hall, 608 Harriman Avenue South, Amery,
Wisconsin 54001, for the purposes described herein and at any adjournment or
postponements thereof.
This Proxy Statement, Notice of Special Meeting of Shareholders and
form of proxy (the "Proxy"), are first being mailed to shareholders on or about
February 2, 2000. Northwest will reimburse its transfer agent for expenses
reasonably incurred in forwarding solicitation materials to beneficial owners of
shares.
Only shareholders of record at the close of business on January 21,
2000 (the "Voting Record Date") will be entitled to vote at the Special Meeting
or any adjournments or postponements thereof. On the Voting Record Date, there
were 825,301 shares of Common Stock outstanding and the Company had no other
class of securities outstanding.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote is
necessary to constitute a quorum at the Special Meeting. As to Matter 1,
shareholder consideration of the Agreement and Plan of Merger, dated February
16, 1999, as amended (the "Merger Agreement"), by and among Northwest, Bremer
Financial Corporation ("Bremer") and Bremer Acquisition Corporation ("Merger
Sub"), the affirmative vote of the holders of a majority of the shares of Common
Stock outstanding and entitled to vote is required to approve the Merger
Agreement. As to Matter 2, the affirmative vote of a majority of the shares of
Common Stock represented in person or by proxy at the Special Meeting is
necessary, and to adjourn the Special Meeting in the event the required vote for
approval of the Merger Agreement has not been obtained.
Abstentions are included in the determination of shares present and
voting for purposes of whether a quorum exists, while broker non-votes are not.
Neither abstentions nor broker non-votes are counted in determining whether a
matter has been approved. In the event there are not sufficient votes for a
quorum or to approve or ratify any proposal at the time of the Special Meeting,
the Special Meeting may be adjourned or postponed in order to permit the further
solicitation of proxies.
As provided in the Company's Articles of Incorporation, record holders
of Common Stock who beneficially own in excess of 10% of the outstanding shares
of Common Stock (the "10% Limit") are not entitled to any vote with respect to
the shares held in excess of the 10% Limit. A person or entity is deemed to
beneficially own shares owned by an affiliate of, as well as such persons acting
in concert with, such person or entity. The Company's Articles of Incorporation
authorize the Board (i) to make all determinations necessary to implement and
apply the 10% Limit, including determining whatever persons or entities are
acting in concert, and (ii) to demand that any person who is reasonably believed
to beneficially own Common Stock in excess of the 10% Limit supply information
to the Company to enable the Board to implement and apply the 10% Limit.
Shareholders are requested to vote by completing the enclosed Proxy and
returning it signed and dated in the enclosed postage-paid envelope.
Shareholders are urged to indicate their votes in the spaces provided on the
Proxy. Proxies solicited by the Board of Directors of the Company will be voted
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at the Special Meeting or any adjournments or postponements thereof in
accordance with the directions given thereon. Where no instructions are
indicated, signed proxies will be voted FOR the Merger Agreement, , and FOR
adjournment of the Special Meeting under the terms specified herein. Returning
your completed Proxy will not prevent you from voting in person at the Special
Meeting should you be present and wish to do so.
At the Special Meeting, shareholders will be asked to consider and vote
on Matter 1, a proposal to approve and adopt the Merger Agreement pursuant to
which, among other things, Merger Sub will merge with and into the Company (the
"Merger"). The Company will survive the Merger as a wholly-owned subsidiary of
Bremer. At the effective time of the Merger, each share of the Company's Common
Stock outstanding will automatically be converted into the right to receive
$24.00 in cash, subject to an adjustment to increase or decrease the cash
consideration per share by an amount equal to Northwest's earnings less
dividends paid from September 1, 1999 through the date of the Determination Date
Financial Statements divided by the total of the number of Northwest shares
outstanding plus Northwest shares issuable upon exercise of stock options. For a
more complete understanding of the proposed Merger between Northwest and Bremer,
you should read the Proxy Statement and attached materials carefully, as well as
the additional documents referred to therein.
In this Proxy Statement, the terms "we", "our", "Northwest" and the
"Company" each refers to Northwest Equity Corp.; the term "Bremer" refers to
Bremer Financial Corporation; the terms "Northwest Savings" or the "Bank" each
refers to Northwest Savings Bank, the Company's wholly- owned savings bank
subsidiary; and the term "Merger Sub" refers to Bremer Acquisition Corporation,
a wholly-owned subsidiary of Bremer.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON. THIS PROXY STATEMENT DOES NOT CONSTITUTE A
SOLICITATION OF A PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS
PROXY STATEMENT OR THAT THE INFORMATION IS CORRECT AS OF ANY TIME SUBSEQUENT TO
SUCH DATE. ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO THE
COMPANY AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY THE COMPANY, AND INFORMATION
CONTAINED IN THIS PROXY STATEMENT RELATING TO BREMER AND ITS SUBSIDIARIES HAS
BEEN SUPPLIED BY BREMER AND ITS SUBSIDIARIES.
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHAT IS BREMER?
Bremer, a Minnesota corporation, is an employee-owned bank holding company
registered with the Federal Reserve System under the Bank Holding Company Act of
1956, as amended. Bremer owns all of the outstanding shares of Bremer Bank,
National Association, which has offices in Wisconsin. Bremer, through its
banking subsidiaries, including Bremer Bank, offers a complete line of banking,
investment, leasing, insurance, and trust services through 100 offices located
throughout Minnesota, Wisconsin and North Dakota.
WHAT ARE THE COMPANY'S REASONS FOR THE MERGER?
The financial services industry has changed significantly in recent years. These
changes include increasing consolidation of the banking industry through
mergers, deregulation of competition among banking, securities and insurance
services providers and a trend towards banks and other financial institutions
offering a broad range of financial services and products to customers. In the
future, many expect the extensive use of technology to transform the delivery of
banking services. For these reasons, the Company's Board of Directors raised
concerns about the Company's relatively small size and limited resources and its
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ability to continue to meet the challenges facing it and to effectively serve
its customer base. The Company's Board of Directors was also concerned about its
ability to meet shareholders' expectations, since increasing shareholder values
in future years would require significant increases in profitability and growth
which would be difficult for the Company to achieve given its size, current
market conditions and increasing consumer demand for sophisticated and
diversified financial services.
Additionally, the Board recognizes that the Bank's customers will benefit from
Bremer's ability to offer more sophisticated financial services, greater depth
of resources, and greater banking convenience.
WHAT DOES NORTHWEST'S BOARD OF DIRECTORS RECOMMEND?
Northwest's Board of Directors has unanimously approved the Merger Agreement and
recommends that Northwest shareholders vote FOR adoption of the Merger
Agreement.
WHAT WILL I RECEIVE FOR MY NORTHWEST COMMON STOCK?
At the effective date of the Merger, each share of your Northwest Common Stock
will be converted into a right to receive $24.00 in cash, subject to an
adjustment to increase or decrease in the amount of cash consideration per share
by an amount equal to Northwest's earnings less dividends paid from September 1,
1999 through the date of the Determination Date Financial Statements divided by
the total of the number of outstanding Northwest shares plus Northwest shares
issuable upon exercise of stock options.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the Merger is completed, you will receive written instructions
for the exchange of your Northwest
stock certificates for cash.
HOW WILL I BE TAXED ON THE MERGER?
For federal income tax purposes, it is expected that Northwest shareholders will
have gain or loss measured by the difference between their cost or other basis
in their Northwest shares and the amount of cash received for the shares.
However, shareholders are urged to consult their own tax advisors concerning
specific tax consequences of the Merger.
WHEN WILL THE MERGER BE COMPLETED?
Bremer and Northwest hope to complete the Merger on or before March 31, 2000.
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGER FROM BEING COMPLETED?
Either Bremer or Northwest can withdraw from the Merger Agreement if, despite
their best efforts:
. the Merger Agreement is not approved by Northwest's shareholders; or
. the Merger Agreement does not receive all required regulatory approvals.
Northwest and Bremer can also withdraw from the Merger Agreement by mutual
consent, and either can withdraw from the Merger if:
. the other party materially breaches the Merger Agreement; or
. the Merger is not completed by March 31, 2000, which may be extended
under some circumstances to April 30, 2000.
WHEN AND WHERE IS THE NORTHWEST SPECIAL SHAREHOLDER MEETING?
The Special Meeting of Northwest's shareholders to vote on the Merger Agreement
and other matters will be held at 2:00 p.m. Amery, Wisconsin time, on February
29, 2000, at Centennial Hall, 608 Harriman Avenue South, Amery, Wisconsin 54001.
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WHO CAN VOTE ON THE MERGER? WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
The Board of Directors of Northwest has determined that holders of Northwest
Common Stock at the close of business on January 21, 2000, can vote at the
Special Meeting (the "Voting Record Date"). The Merger Agreement must be
approved by the holders of a majority of the outstanding shares of Northwest
Common Stock. As of January 21, 2000, there were 825,301 shares of Northwest's
Common Stock outstanding.
WHAT SHOULD I DO NOW TO VOTE ON THE MERGER AND THE OTHER PROPOSALS TO BE
PRESENTED AT THE SPECIAL MEETING?
Shareholders should execute and complete their Proxy and return it in the
enclosed return envelope as soon as possible to insure that your shares are
voted at the Special Meeting. If you sign and send in your Proxy but do not
indicate how you want to vote, your Proxy will be voted FOR the proposals
presented at the Special Meeting.
If you do not sign and return your Proxy, or you abstain, it will have the
effect of a vote against the Merger Agreement.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker cannot vote your shares with respect to the Merger Agreement without
your instructions. You should instruct your broker to vote your shares,
following the directions provided by your broker. Shares that are not voted
because you do not instruct your broker will, in effect, be a vote against the
Merger Agreement.
CAN I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes, you can change your vote at any time before your Proxy is voted at the
Special Meeting. There are three ways you can change your vote. First, you can
send the Company a written statement that you would like to revoke your Proxy.
Second, you can send the Company a new Proxy. In either such case you should
send your revocation or new Proxy card to the Company's Secretary at the address
on the cover page of this Proxy Statement. Third, you can attend the Special
Meeting and vote in person. However, your attendance at the Special Meeting will
not revoke your Proxy unless you decide to vote at the Special Meeting. If you
instructed a broker to vote your shares, you must follow your broker's
directions for changing those instructions.
DO NORTHWEST'S OFFICERS OR DIRECTORS HAVE ANY INTEREST IN THE MERGER?
Northwest's officers and directors may have interests in the Merger that differ
from the interests of Northwest's shareholders generally. For example, under the
Merger Agreement, if the Merger is approved, options to purchase Northwest
Common Stock held by Northwest's officers and directors will automatically vest
and the officers and directors will be paid by Northwest in exchange for
cancellation of the options an amount equal to the difference between the option
exercise price per share and $24.00 in cash multiplied by the number of shares
of Common Stock subject to the options. The $24.00 per share consideration is
subject to increase or decrease by an amount equal to the amount of Northwest's
earnings less dividends paid from September 1, 1999, through the date of the
Determination Date Financial Statements divided by the total number of
outstanding Northwest shares plus Northwest shares issuable upon exercise of
stock options. Under the Merger Agreement, Northwest officers, directors and
employees will receive extended indemnification coverage from Bremer. In
addition, two directors of Northwest will be identified by Bremer to serve as
directors of Bremer Bank. Finally, in connection with the Merger, certain
officers of Northwest will receive cash payments from Bremer as described in
this Proxy Statement in satisfaction of Employment Agreements such officers have
with Northwest.
DO THE COMPANY'S SHAREHOLDERS HAVE APPRAISAL RIGHTS?
Under Wisconsin law, the Company's stockholders do not have a right to an
appraisal of the value of their shares in connection with the Merger.
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WHAT REGULATORY APPROVALS ARE REQUIRED?
Bremer must receive the approval of the Board of Governors of the Federal
Reserve System for the merger of Northwest with the Merger Sub. Bremer must also
receive the approval of the Wisconsin Department of Financial Institutions for
the acquisition of Northwest. The parties must receive the approval of the
Administrator of Savings Institutions, Wisconsin Department of Financial
Institutions, for Northwest's merger with the Merger Sub.
Bremer and Northwest have filed all required applications with these regulatory
authorities and, as of the date of this Proxy Statement, await the required
approvals from the regulators.
DID THE COMPANY USE A FINANCIAL ADVISER?
In deciding to approve the Merger Agreement, Northwest's Board of Directors
considered the opinion of its financial adviser, ABN AMRO Incorporated ("ABN
AMRO"), as to the fairness from a financial point of view of the consideration
to be received pursuant to the Merger Agreement. In connection with delivering
its opinion, ABN AMRO performed a variety of analyses that are described in the
Proxy Statement. ABN AMRO's fairness opinion is attached as Appendix E to the
Proxy Statement.
CAN THE MERGER AGREEMENT BE AMENDED?
Yes, Bremer and Northwest may, by mutual consent, amend the Merger Agreement
before completion of the Merger. However, once Northwest's shareholders approve
the Merger Agreement, any amendment that would result in a change in the
consideration to be paid in the Merger must be approved by Northwest's
shareholders.
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TABLE OF CONTENTS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.....................................1
MATTERS TO BE VOTED ON AT THE SPECIAL MEETING.............................1
PROXY STATEMENT...............................................................2
INTRODUCTION...............................................................2
QUESTIONS AND ANSWERS ABOUT THE MERGER.....................................3
TABLE OF CONTENTS.............................................................7
THE SPECIAL MEETING...........................................................10
SUMMARY...................................................................10
THE SPECIAL MEETING....................................................10
Date, Time, Place and Purpose of Special Meeting....................10
Record Date; Shares Entitled to Vote................................10
Required Shareholder Approval; Voting Agreements....................10
THE MERGER.............................................................10
Parties to the Merger Agreement.....................................10
Northwest Equity Corp............................................10
Bremer Financial Corporation.....................................11
Bremer Acquisition Corporation...................................11
Effective Time of Merger............................................11
Form of the Merger and Purchase Price...............................11
Reasons for the Merger; Recommendation of the Northwest
Board of Directors...............................................11
Opinion of ABN-AMRO.................................................12
Interests of Management and Directors in the Merger.................12
Conditions to the Merger............................................12
Regulatory Approvals................................................12
Procedures for Exchange of Certificates.............................12
Federal Income Tax Consequences.....................................12
No Solicitation of Alternative Transaction..........................13
Termination of the Merger Agreement.................................13
Rights of Dissenting Shareholders...................................13
Market Prices of Common Stock.......................................13
THE SPECIAL MEETING.......................................................14
GENERAL................................................................14
REVOCABILITY OF PROXY..................................................14
SOLICITATION...........................................................14
VOTING AT THE SPECIAL MEETING..........................................14
VOTING RECORD DATE.....................................................14
VOTE REQUIRED FOR APPROVAL.............................................15
AVAILABLE INFORMATION.....................................................15
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS...........................16
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...................17
MATTER 1 -- APPROVAL OF THE MERGER AGREEMENT..................................18
DESCRIPTION OF PROPOSED MERGER............................................18
BOARD RECOMMENDATION......................................................18
PURCHASE PRICE............................................................18
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EXCHANGE OF THE COMMON STOCK FOR CASH.....................................19
BACKGROUND AND REASONS FOR THE PROPOSED MERGER............................19
Background Of The Merger...............................................19
Subsequent Merger Events...............................................21
Reasons For The Merger.................................................21
OPINION OF NORTHWEST'S FINANCIAL ADVISOR..................................22
CONDITIONS TO CONSUMMATION OF THE MERGER..................................26
NO SOLICITATION OF ALTERNATIVE TRANSACTION................................28
TERMINATION OF THE MERGER AGREEMENT.......................................29
EXPENSES; TERMINATION FEE.................................................30
REPRESENTATIONS AND WARRANTIES............................................31
AMENDMENT OF THE MERGER AGREEMENT.........................................31
CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME.............32
REGULATORY CONSIDERATIONS.................................................33
CLOSING AND EFFECTIVE TIME................................................34
TAX CONSEQUENCES OF THE MERGER............................................34
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND EFFECT
OF THE MERGER ON EMPLOYEES AND BENEFIT PLANS...........................35
Stock Owned By Officers And Directors..................................35
Stock Option Plan......................................................35
Employee Stock Ownership Plan..........................................36
Employee Agreements....................................................36
Employees And Benefit Plans............................................36
Indemnification; Directors' And Officers' Insurance....................37
Board Positions .....................................................37
Employees--General.....................................................37
ACCOUNTING TREATMENT......................................................37
EXPENSES OF THE MERGER....................................................38
EFFECT OF THE MERGER THE RIGHTS OF THE COMPANY'S SHAREHOLDERS.............38
APPRAISAL RIGHTS..........................................................38
INFORMATION ABOUT THE COMPANY AND THE BANK....................................38
PRIMARY MARKET AREA.......................................................39
SUBSIDIARY ACTIVITIES.....................................................39
EMPLOYEES.................................................................39
PROPERTIES................................................................39
LEGAL PROCEEDINGS.........................................................40
LENDING ACTIVITIES........................................................41
DELINQUENCIES, NONPERFORMING ASSETS AND CLASSIFIED ASSETS.................50
ALLOWANCE FOR LOAN LOSSES.................................................52
INVESTMENT ACTIVITIES.....................................................55
SOURCES OF FUNDS..........................................................58
REGULATION................................................................62
Wisconsin Savings Bank Regulation......................................62
Restrictions on Loans to and Transaction with Insiders and Affiliates..64
Insurance of Deposits..................................................64
Certain Federal Regulations............................................65
Capital Maintenance....................................................67
Community Reinvestment Act.............................................68
Federal Reserve System.................................................68
Federal Home Loan Bank System..........................................68
Holding Company Regulation.............................................68
Acquisition of the Company.............................................69
Federal Securities Laws................................................69
Regulatory Legislation Affecting Deposit Insurance.....................70
MARKET AND DIVIDEND INFORMATION...........................................71
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MARKET PRICES OF COMMON STOCK.............................................71
SELECTED PER SHARE DATA OF THE COMPANY....................................71
SELECTED CONSOLIDATED FINANCIAL AND OTHER
DATA OF NORTHWEST EQUITY CORP..........................................72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OEPRATION OF
NORTHWEST EQUITY CORP..................................................74
General .....................................................74
Management Strategy....................................................75
Comparison of Operating Results for the Six Months Ended
September 30, 1998 and September 30, 1999...........................76
Comparison of Operating Results for the Fiscal Years Ended
March 31, 1999 and March 31, 1998...................................78
Comparison of Operating Results for the Fiscal Years Ended
March 31, 1998 and March 31, 1997...................................80
Liquidity, Capital Resources and Regulatory Capital....................83
Impact of Inflation and Changing Prices................................84
Current Accounting Developments........................................84
Forward-Looking Statements ............................................84
Disclosure Involving Year 2000 Issues..................................84
Asset/Liability Management.............................................85
Average Balance Sheet..................................................88
Rate/Volume Analysis...................................................90
INFORMATION ABOUT BREMER......................................................90
MATTER 2--PROPOSAL TO ADJOURN THE SPECIAL MEETING.............................91
SHAREHOLDER PROPOSALS FOR THE 2000 SPECIAL MEETING............................92
Deadline For Submission Of Shareholder Proposals
For Inclusion In 2000 Proxy Materials...............................92
Advance Notice Requirement For Any Proposal Or
Nomination To Be Raised By A Shareholder............................92
DISCRETIONARY VOTING OF 2000 PROXIES..........................................93
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE
SPECIAL MEETING........................................................93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................94
APPENDICES
CONSOLIDATED FINANCIAL STATEMENTS..............................................F
AGREEMENT AND PLAN OF MERGER dated February 16, 1999.......................... A
FIRST AMENDMENT TO MERGER AGREEMENT.................................... B
SECOND AMENDMENT TO MERGER AGREEMENT....................................C
THIRD AMENDMENT TO MERGER AGREEMENT.....................................D
FAIRNESS OPINION OF ABN AMRO INCORPORATED..............................E
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THE SPECIAL MEETING
SUMMARY
The following is a summary of information contained elsewhere in this
Proxy Statement and has been prepared to assist shareholders in their review of
this Proxy Statement. This Summary is not intended to be a complete statement of
all material facts and is qualified in its entirety by the more detailed
information contained in this Proxy Statement and the Appendices hereto, all of
which shareholders are urged to read carefully.
THE SPECIAL MEETING
Date, Time, Place and Purpose of Special Meeting
The Special Meeting will be held on February 29, 2000, at 2:00 P.M.,
Amery, Wisconsin time at the Centennial Hall, 608 Harriman Avenue South, Amery,
Wisconsin. At the Special Meeting, shareholders will be asked to consider and
act on (1) the approval and adoption of the Merger Agreement; (2) the
adjournment of the Special Meeting to solicit votes in favor of the Merger
Agreement in the event the required vote for approval has not been obtained; and
(3) any other matters that may properly come before the Special Meeting.
Record Date; Shares Entitled to Vote
Holders of record of Common Stock at the close of business on January
21, 2000 (the "Voting Record Date") are entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof. On that date,
there were 825,301 shares of Common Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon or which may properly come
before the Special Meeting and any adjournments or postponements thereof. See
"THE SPECIAL MEETING -Voting at the Special Meeting; Voting Record Date."
Required Shareholder Approval; Voting Agreements
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote at the Special Meeting. Approval of the Merger Agreement by the requisite
vote of the Company's stockholders is a condition to consummation of the Merger.
See "THE SPECIAL MEETING--Voting at the Special Meeting; Voting Record Date."
As of the Voting Record Date, directors and executive officers of the
Company, and their affiliates, may be deemed to be the beneficial owners of
145,099 shares or 16.8% of the outstanding shares of Common Stock (excluding
shares of Common Stock which are issuable upon exercise of stock options and
which are not outstanding and entitled to vote as of the Record Date). As of the
Voting Record Date, neither Bremer nor its subsidiaries owned, directly or
indirectly, any shares of Common Stock.
THE MERGER
Parties to the Merger Agreement
Northwest Equity Corp.
The Company, a Wisconsin corporation, is a bank holding company whose
principal subsidiary is Northwest Savings Bank, a Wisconsin-chartered savings
bank, headquartered in Amery, Wisconsin. The Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") fund of the Federal Deposit
Insurance Corporation ("FDIC"). The Company was organized at the direction of
the Bank in connection with the Bank's conversion from the mutual to stock form
of organization. The conversion was completed on October 7, 1994. The primary
activity of the Company is its ownership of all the outstanding capital stock of
the Bank. The Bank is a stock savings bank, whose predecessor institution was
originally organized in 1936, and it is headquartered in Amery, Wisconsin. The
Bank conducts its business through three offices located in Amery, New Richmond
and Siren, Wisconsin. At September 30, 1999, the Company had consolidated total
assets of $97.6 million, deposits of $62.0 million and shareholder equity of
$12.4 million.
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The Bank is principally engaged in the business of attracting retail
deposits from the general public and investing those funds, together with funds
generated from operations and principal payments, primarily in one- to
four-family residential mortgage loans, mortgage backed securities and, to a
lesser extent, consumer and other loans and investments securities.
The principal executive offices of the Company are located at 234
Keller Avenue South, Amery, Wisconsin 54001, and its telephone number is (715)
268-7105.
Bremer Financial Corporation
Bremer is an employee-owned regional financial services company
headquartered in St. Paul, Minnesota. It was incorporated under Minnesota law on
December 7, 1943. As of September 30, 1999, Bremer owned at least 95% of the
total outstanding capital stock of each of its 14 subsidiary banks. The
subsidiary banks are located in Minnesota, Wisconsin and North Dakota and have a
total of 100 offices throughout these states. Bremer's subsidiary banks range in
size from $68 million to $488 million in total assets and from $62 million to
$330 million in total deposits as of September 30, 1999. As of September 30,
1999, Bremer and its subsidiaries (including its subsidiary banks) had
consolidated assets of $3.8 billion and consolidated deposits of $2.8 billion.
Bremer Acquisition Corporation
The Merger Sub was incorporated by Bremer in January 1999, as a general
business corporation under the laws of the State of Wisconsin for the purpose of
effectuating the Merger Agreement. The Merger Sub conducts no active business
and was created to effectuate the Merger based upon regulatory and tax
considerations. Upon completion of the Merger, Northwest will be the Surviving
Corporation and the Merger Sub will cease to exist.
Effective Time of Merger
Subject to the terms and conditions of the Merger Agreement, the
Effective Time of the Merger will occur on the date and time specified in the
Articles of Merger as filed with the Wisconsin Department of Financial
Institutions ("WDFI"). See "MATTER I --APPROVAL OF THE MERGER AGREEMENT
- --Conditions to Consummation of the Merger." It is expected that a period of
time will elapse between the Special Meeting and the Effective Time. See "MATTER
I --APPROVAL OF THE MERGER AGREEMENT--Regulatory Considerations." The Merger
Agreement may be terminated by either party if, among other reasons, the Merger
has not been consummated on or before March 31, 2000, provided that if the
Merger has not been consummated because requisite regulatory approvals have not
been obtained, either party may extend the date to April 30, 2000. See "MATTER I
- --APPROVAL OF THE MERGER AGREEMENT --Termination of the Merger Agreement."
Form of the Merger and Purchase Price
Under the terms of the Merger Agreement, at the Effective Time, the
Merger Sub will merge with and into the Company, with the Company surviving the
Merger as a wholly-owned subsidiary of Bremer. At the Effective Time of the
Merger, each outstanding share of Northwest Common Stock will be converted into
the right to receive $24.00 in cash, subject to an adjustment to increase or
decrease the amount of the cash consideration per share to an amount to equal
Northwest's earnings less dividends paid from September 1, 1999 through the date
of the Determination Date Financial Statements divided by the total of the
number of Northwest shares outstanding plus Northwest shares issuable upon
exercise of stock options (the "Merger Per Share Consideration"). Immediately
before the Effective Time, Northwest will acquire all allocated stock options
(totaling 100,980 options) to purchase shares of Northwest Common Stock for the
difference between the Merger Per Share Consideration and the exercise price per
share. At January 31, 2000, the average exercise price per option share was
$10.44.
Reasons for the Merger; Recommendation of the Northwest Board of Directors
The Board of Directors of the Company believes that the Merger is in
the best interests of the shareholders of the Company and has unanimously
approved the Merger Agreement. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS OF NORTHWEST VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
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AGREEMENT. In making this determination, the Board of Directors considered a
number of factors. See "MATTER I --APPROVAL OF THE MERGER AGREEMENT--Background
of and Reasons for the Proposed Merger" and "Board Recommendation."
Opinion of ABN AMRO
ABN AMRO Incorporated ("ABN AMRO") has rendered an opinion to the
Northwest Board dated as of the date of the Agreement that, based upon the
matters set forth in such opinion and such other matters as it deemed relevant,
as of the date of the opinion, the consideration is fair to the holders of
Northwest Common Stock from a financial point of view. ABN AMRO's opinion is
included as Appendix E to this Proxy Statement. Northwest stockholders are urged
to read the ABN AMRO opinion in its entirety for a description of the procedures
followed, matters considered, and limitations on the reviews undertaken in
connection therewith. ABN AMRO confirmed its opinion as of the date of this
Proxy Statement. See "MATTER I--APPROVAL OF THE MERGER AGREEMENT-Opinion of
Northwest's Financial Advisor."
Interests of Management and Directors in the Merger
Some members of the Company's and the Bank's management and of the
Company's Board of Directors have interests in the Merger in addition to their
interests as shareholders of the Company generally. These interests include,
among other things, provisions in the Merger Agreement relating to
indemnification, the appointment of certain outside directors of the Company as
directors of Bremer Bank, the continuation of directors' and officers'
indemnification coverage by Bremer, cash payments for unexercised stock options,
accelerated vesting of stock benefits, severance and certain other employee
benefits. The aggregate value of all cash payments to be made to the executive
officers and directors of the Company in connection with stock options, employee
severance and director fees, and the revised compensation plans of Messrs.
Beadle and Moore is estimated to be $1.7 million. The amounts to be received by
the various executive officers and directors of the Company pursuant to the
foregoing arrangements are described in this Proxy Statement. See "MATTER I
- --APPROVAL OF THE MERGER AGREEMENT -- Interests of Certain Persons in the Merger
and the Effect of the Merger on Employees and Benefit Plans."
Conditions to the Merger
The Merger Agreement sets forth a number of conditions which must be
satisfied or, where permissible, waived before the Merger may be consummated,
including (1) the approval of the Merger Agreement by the requisite vote of the
shareholders of the Company, and (2) the receipt of all necessary regulatory
approvals for the Merger. See "MATTER I--APPROVAL OF THE MERGER AGREEMENT
- --Conditions to Consummation of the Merger" and "--Regulatory Considerations."
Regulatory Approvals
The Merger is subject to prior approval by the Federal Reserve Board
("FRB") and the Wisconsin Department of Financial Institutions ("WDFI"). As of
the date of this Proxy Statement, all required regulatory applications have been
filed and the parties were awaiting required regulatory approvals.
Procedures for Exchange of Certificates
If the Merger is consummated, Northwest shareholders will be notified
promptly of the consummation of the Merger and will be advised of the procedure
for surrender of their stock certificates in exchange for the Consideration.
STOCKHOLDERS SHOULD NOT SEND IN STOCK CERTIFICATES AT THIS TIME. See "MATTER
I--APPROVAL OF THE MERGER AGREEMENT--Exchange of the Common Stock for Cash."
Federal Income Tax Consequences
The receipt of cash by a Northwest shareholder in exchange for shares of
Common Stock pursuant to the Merger will be a taxable transaction to such
stockholder for federal income tax purposes and may also be a taxable
transaction under applicable state, local, foreign and other tax laws. In
general, a shareholder will recognize gain or loss equal to the difference, if
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any, between the amount of cash received in exchange for his or her shares of
Common Stock and the shareholder's tax basis in such shares. See "MATTER
I--APPROVAL OF THE MERGER AGREEMENT--Tax Consequences of the Merger."
Shareholders are urged to consult their own tax advisors as to the
specific consequences to them of the Merger under federal, state, local, foreign
and any other applicable tax laws.
No Solicitation of Alternative Transactions
The Merger Agreement provides that Northwest will not initiate, solicit or
encourage any inquiries, proposals or offers with respect to a merger,
consolidation or certain similar transactions involving Northwest or any of its
subsidiaries; provided, however, that Northwest may engage in negotiations and
discussions and provide information to a person relating to such a transaction
if Northwest's Board of Directors, after consultation with its outside counsel,
determines that the failure to do so would constitute a breach of fiduciary
duty. See "MATTER I--APPROVAL OF THE MERGER AGREEMENT--No Solicitation of
Alternative Transactions." Termination of the Merger Agreement
The Merger Agreement may be terminated either by Bremer or Northwest,
acting alone under specified circumstances, or by mutual consent. See "MATTER
I--APPROVAL OF THE MERGER AGREEMENT--Termination of the Merger Agreement;
Expenses; Termination Fee."
Rights of Dissenting Shareholders
There are no dissenting shareholders' rights applicable to the Merger.
Market Prices of Common Stock
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the symbol "NWEQ".
The last reported sales price of Northwest Common Stock on February 16,
1999, the last trading day immediately prior to public announcement of the
execution of the Merger Agreement, was $18.75 per share. On January 12, 2000
(the last practicable date prior to the mailing of this Proxy Statement), the
last reported sales price of Northwest Common Stock was $22.25 per share.
Shareholders are advised to obtain current market quotations for their shares.
On October 12, 1999, Northwest declared a cash dividend, which was payable on
November 5, 1999, to shareholders of record on October 29, 1999, in the amount
of $.17 per share for the calendar quarter ended September 30, 1999.
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THE SPECIAL MEETING
GENERAL
These proxy materials are delivered in connection with the solicitation by
Northwest's Board of Directors of proxies to be voted at the Special Meeting of
Shareholders and at any adjournment or postponement thereof. You are invited to
attend the Meeting on February 29, 2000, at 2:00 P.M., Amery, Wisconsin time, at
Centennial Hall, 608 Harriman Avenue South, Amery, Wisconsin 54001. This Proxy
Statement, accompanying Notice of Special Meeting of Shareholders and form of
Proxy are being mailed commencing on or about February 2, 2000. The Company's
telephone number is (715) 268-7105.
REVOCABILITY OF PROXY
A proxy may be revoked at any time before its exercise by (1) written
notice to the Secretary of the Company, (2) timely delivery of a valid later
dated proxy or (3) voting by ballot at the Special Meeting. However, if you are
a beneficial owner of shares of the Company's outstanding Common Stock that are
not registered in your own name, you will need appropriate documentation from
the holder of record of your shares to vote personally at the Special Meeting.
SOLICITATION
The Company will pay the expenses of soliciting proxies. Proxies may be
solicited on behalf of the Company by the Company's and the Bank's directors,
officers and regular employees in person or by telephone, facsimile transmission
or by telegram. The Company has requested brokerage houses and nominees to
forward these proxy materials to the beneficial owners of shares held of record
and, upon request, the Company will reimburse them for their reasonable
out-of-pocket expenses. In addition, the Company has retained the services of
Regan & Associates, Inc. to assist in the solicitation of proxies.
VOTING AT THE SPECIAL MEETING
Regardless of how many shares of Common Stock you own, your vote is
important. Since many Company shareholders cannot attend the Special Meeting, it
is necessary that a large number be represented by proxy. Accordingly, the Board
of Directors has designated proxies to represent those shareholders who cannot
be present in person.
You are requested to vote by mail by completing, signing, dating and
returning the enclosed Proxy in the postage-paid envelope provided by the
Company. You may vote for, against, or withhold authority to vote on any matter
to come before the Special Meeting. The designated proxies will vote your shares
in accordance with your instructions. If you sign and return a Proxy without
giving specific voting instructions, your shares will be voted FOR approval of
the Merger Agreement and FOR any motion to adjourn the Special Meeting to
solicit additional votes in favor of the Merger.
If matters not described in this Proxy Statement are presented at the Special
Meeting, the proxies will use their own judgment to determine how to vote your
shares. The Company is not currently aware of any other matters to be presented
except those described in this Proxy Statement. If the Special Meeting is
adjourned, your shares may be voted by the proxies on the new meeting date as
well, unless you have at that time revoked your proxy instructions.
VOTING RECORD DATE
You are entitled to vote your Common Stock if our records showed that you
held your shares as of January 21, 2000 (the "Voting Record Date"). At the close
of business on January 21, 2000 , a total of 825,301 shares of Common Stock were
outstanding and entitled to vote. Each share of Common Stock has one vote on
each matter calling for a vote of shareholders at the Special Meeting.
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The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the stockholders entitled to vote at the Special
Meeting is necessary to constitute a quorum. The Special Meeting may be
adjourned in order to permit the further solicitation of proxies if there is an
insufficient number of shareholders present to constitute a quorum. Abstentions
and broker "non-votes" are counted as present and entitled to vote for purposes
of determining a quorum. A broker "non-vote" occurs when a nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power for that particular item and
has not received voting instructions from the beneficial owner on that item.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the shares of Common Stock entitled
to vote is required to approve the Merger Agreement. Abstentions and broker
"non-votes" are not counted for purposes of approval of the Merger Agreement.
The affirmative vote of a majority of the shares represented in person or
by proxy is necessary for adjournment of the Special Meeting under certain
circumstances.
As of the Voting Record Date, directors and executive officers of the
Company, and their affiliates, may be deemed to be the beneficial owners of
145,099 shares, or 16.8% of the outstanding shares of Common Stock (excluding
shares of Common Stock which are issuable upon exercise of stock options and
which are not outstanding and entitled to vote as of the Voting Record Date). As
of the Voting Record Date, neither Bremer nor its subsidiaries owned, directly
or indirectly, any shares of Common Stock.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located in Chicago
(Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511) and in New York (7 World Trade Center, 13th Floor, New
York, New York 10048). Copies of such material can be obtained by mail from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. The address is (http://www.sec.gov.).
AS FURTHER DESCRIBED BELOW, THIS PROXY STATEMENT INCORPORATES BY REFERENCE
DOCUMENTS RELATING TO THE COMPANY WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. COPIES OF THOSE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH
ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) WILL BE
PROVIDED WITHOUT CHARGE UPON REQUEST DIRECTED TO BRIAN L. BEADLE, PRESIDENT,
NORTHWEST EQUITY CORP., 234 KELLER AVENUE SOUTH, AMERY, WISCONSIN 54001. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS BEFORE THE SPECIAL MEETING, ANY
SUCH REQUEST SHOULD BE MADE ON OR BEFORE FEBRUARY 20, 2000.
BREMER PROVIDED THE INFORMATION CONTAINED IN THE PROXY STATEMENT CONCERNING
BREMER, THE MERGER SUB AND BREMER BANK.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC (SEC File No.
0-24606) are incorporated by reference into this Proxy Statement: (i) the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999,
(ii) the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1999; (iii) the Company's Current Reports on Form 8-K dated
February 17, 1999, April 1, 1999, and July 25, 1999; and (iv) the description of
the Company's Common Stock contained in its Registration Statement on Form S-1,
Registration No. 33-73264, dated December 22, 1993, as amended on February 2,
1994, February 9, 1994, March 22, 1994, June 10, 1994 and July 21, 1994.
In addition, all other documents filed by the Company pursuant to Section
13 (a), 13(c), 14 or 15(d) of the Exchange Act after the hereof and prior to the
date to which the Special Meeting has been finally adjourned shall be deemed to
be incorporated by reference herein from the date of filing of such documents.
Any statements contained in a document incorporated or deemed to be incorporated
by reference herein will be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part hereof.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of September 30, 1999, (except as noted otherwise below) by: (i)
each shareholder known to the Company to beneficially own more than 5% of the
shares of Common Stock outstanding, as disclosed in certain reports regarding
such ownership filed with the Company and with the Securities and Exchange
Commission ("SEC"), in accordance with Sections 13(d) or 13(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (ii) each director of the
Company, (iii) the Executive Officer of the Company, and (iv) all directors and
executive officers as a group. All members of the Board of Directors of the
Company also serve as directors of the Bank.
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Number of Shares
Beneficially
Name Owned (1) Percent of Class
Northwest Savings Bank
Employee Stock Ownership Trust(2)........ 21,437 2.6%
Heartland Advisors, Inc. (3).......... 80,000 9.7%
John Hancock Advisers, Inc. (4)....... 61,000 7.4%
Donald J. Ripp (5).................... 52,000 6.3%
Brian L. Beadle (6) (8)(9)........... 46,574 5.6%
Gerald J. Ahlin.................... 10,295 1.2%
Michael D. Jensen.................. 34,025 4.1%
Vern E. Albrecht................... 13,500 1.6%
Norman M. Osero.................... 14,275 1.7%
James Moore (7)............... 21,320 2.6%
All directors, director nominees and
executive officers as a group
(6 persons)(6) (8) 139,979 17.0%
- --------------------------
(1) Unless otherwise indicated, includes shares of Common Stock held
directly by the individuals as well as by members of such individuals'
immediate family who share the same household, shares held in trust and
other indirect forms of ownership over which shares the individuals
effectively exercise sole or shared voting and/or investment power.
(2) Emjay Corporation (the "Trustee") is the trustee for the Northwest
Savings Bank Employee Stock Ownership Trust. The Trustee's address is
4600 North Port Washington Road, Milwaukee, Wisconsin 53217.
(3) Based upon a Schedule 13G dated January 29, 1999, filed with the
Company under the Exchange Act by Heartland Advisors, Inc., 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202.
(4) Based upon a Schedule 13G dated January 29, 1997 filed with the Company
under the Exchange Act by John Hancock Advisers, Inc., John Hancock
Place, P.O. Box 111, Boston, MA 02199.
(5) Based upon a Schedule 13D dated December 14, 1994 filed with the
Company under the Exchange Act by Donald J. Ripp, 10575 W. Forest Home
Avenue, P.O. 301, Hales Corners, Wisconsin 53130-0301.
(6) Includes shares of Common Stock awarded to certain executive officers
under the Company's stock incentive plan that are subject to vesting
requirements. Recipients of restricted stock awards may direct voting
prior to vesting.
(7) Current executive officer and new director nominee.
(8) Includes shares of Common Stock allocated to certain executive officers
under the Northwest Savings Bank Employee Stock Ownership Plan, for
which such individuals possess shared voting power. Mr. Beadle was
allocated 11,924 shares and Mr. Moore was allocated 7,742 shares.
(9) Brian L. Beadle, President and Chief Executive Officer of Northwest
Equity Corp., 312 Johnson Street, Amery, WI 54001.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than 10% of the Company's Common Stock,
to file reports of ownership and changes in ownership with the SEC. Executive
officers, directors and greater than 10% beneficial owners are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during the fiscal year ended March 31,
1999, all of its executive officers and directors and greater than 10%
beneficial owners complied with all applicable Section 16(a) filing
requirements.
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MATTER 1
APPROVAL OF THE MERGER AGREEMENT
The following information describes certain aspects of the Merger Agreement
and the proposed Merger of Northwest with and into the Merger Sub as described
below. This description does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement, a copy of which is attached to
and incorporated in this Proxy Statement as Appendix A, and to the First, Second
and Third Amendments to the Merger Agreement, which are attached and
incorporated in this Proxy Statement as Appendices B-D, respectively. All
shareholders are urged to read the Merger Agreement and the Amendments in their
entirety.
DESCRIPTION OF PROPOSED MERGER
On February 16, 1999, the Company entered into the Merger Agreement with
Bremer. The Merger Agreement provides that the Merger will be effected by the
following transactions, which will occur virtually simultaneously, except for
the formation of the Merger Sub:
1. Bremer created the Merger Sub, a Wisconsin business corporation, as a
wholly-owned subsidiary in January 1999.
2. The Merger Sub will merge with and into the Company, with the Company
being the surviving entity, making the Company a wholly-owned subsidiary of
Bremer.
At some time subsequent to the above Merger, it is anticipated that
Northwest Savings Bank will merge with and into Bremer Bank, Bremer's
wholly-owned banking subsidiary. If such a merger occurs in the future,
Northwest Savings Bank's offices will then operate as branches of Bremer Bank.
BOARD RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
PURCHASE PRICE
Each share of the Common Stock issued and outstanding immediately prior
to the Effective Time shall be converted into and become the right to receive
cash in the amount of $24.00 per share, increased or decreased by an amount
equal to the sum of the earnings of Northwest from September 1, 1999, through
the date of the Determination Date Financial Statements, less the amount of any
dividends declared by Northwest from September 1, 1999, and prior to the
Closing, divided by the sum of the number of issued and outstanding shares of
the Common Stock immediately prior to the Effective Time plus the number of
shares of Common Stock issuable upon exercise of options granted under the
Northwest Equity Corp Stock Option Plan (the "Stock Option Plan") (the "Merger
Per Share Consideration"). As of September 30, 1999, the total of such
outstanding shares and the number of shares issuable upon exercise of options
was 926,281.
Earnings shall mean the consolidated net earnings or losses after tax
for Northwest and its Subsidiaries as determined by generally accepted
accounting principles applied on a consistent basis. Earnings shall be
calculated and determined based upon the Determination Date Financial
Statements. For purposes of determining Northwest's earnings from September 1,
1999, through September 30, 1999, the earnings for Northwest from July 1, 1999,
through September 30, 1999, shall be determined (the "1999 Third Quarter
Earnings") and the earnings for the period from September 1, 1999, through
September 30, 1999, shall be deemed to equal 33.3% of the 1999 Third Quarter
Earnings. The Merger Per Share Consideration shall be rounded to the nearest
whole cent.
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Northwest has capitalized certain expenses in connection with the
Merger Agreement, including legal fees, investment banking fees, and the costs
of certain environmental work. These types of expenses associated with the
Merger Agreement will continue to be capitalized and will not be expensed prior
to the date of the Determination Date Financial Statements. If this method of
handling these expenses is treated as an exception to generally accepted
accounting principles, it will be deemed a permissible exception for purposes of
the Merger Agreement. For purposes of calculating any adjustment to the Merger
Per Share Consideration, Northwest's earnings after September 1, 1999, will not
be reduced by these expenses.
The parties have agreed that the Determination Date shall be the last
day of the calendar month prior to the Closing Date, unless the Closing Date
occurs on or before the 12th day of any month, in which case the Determination
Date will be the last day of the calendar month prior to the most recent
month-end prior to the Closing Date. For example, if the Closing Date occurs on
May 1, 1999, the Determination Date would be March 31, 1999. Northwest will
prepare and deliver consolidated financial statements as of the Determination
Date that have been reviewed by Northwest's regularly employed accountants in
accordance with requirements for review contained in the Statement of Standards
for Accounting and Review Services of the American Institute of Certified Public
Accountants and such statement shall constitute the Determination Date Financial
Statements.
EXCHANGE OF THE COMMON STOCK FOR CASH
At the Effective Time, shareholders of the Company who are the holders of
record of shares of the Common Stock on January 21, 2000, the Voting Record
Date, will receive the Merger Per Share Consideration for each share of the
Common Stock held at the Effective Time.
Before the Effective Time, stock options issued and outstanding under the
Stock Option Plan will become fully vested, and Northwest will cancel such
options (currently consisting of options to acquire a total of 100,980 shares of
Common Stock) in exchange for an amount equal to the difference between the
Merger Per Share Consideration and the exercise price for each outstanding
option. At $24.00 per share, the total consideration to be paid by Northwest for
such options will be approximately $1,369,000, representing $24.00 less the
$10.44 average exercise price per share of the options. Such amount will be
subject to increase or decrease based on final calculation of the Merger Per
Share Consideration reflecting adjustment for earnings and dividends paid from
September 1, 1999 to the date of the Determination Date Financial Statements
(See "Purchase Price").
Based on the 825,301 shares of the Common Stock outstanding on the Voting
Record Date, total consideration specified in the Merger Agreement will be
approximately $19,807,224, representing $24.00 in cash exchanged for each share
of Common Stock. Such amount will be subject to increase or decrease based on
final calculation of the Merger Per Share Consideration reflecting adjustment
for earnings and dividends paid from September 1, 1999 to the date of the
Determination Date Financial Statements. (See "Purchase Price"). Bremer has
committed credit facilities in place to fund the payment of the total
consideration in the Merger.
Bremer has engaged the services of Firstar Bank, N.A. to act at the
Exchange Agent for purposes of completing the exchange of shares for the total
consideration.
PROMPTLY AFTER CONSUMMATION OF THE MERGER, BREMER OR THE EXCHANGE AGENT
WILL NOTIFY COMPANY SHAREHOLDERS OF THE PROCEDURES FOR EXCHANGING THE COMMON
STOCK FOR CASH. COMPANY SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE TRANSMITTAL FORMS FROM THE EXCHANGE AGENT. THE TRANSMITTAL
FORMS WILL LIST PERSONS TO CONTACT FOR ASSISTANCE WITH THE EXCHANGE.
BACKGROUND AND REASONS FOR THE PROPOSED MERGER
Background of the Merger
Effective October 7, 1994, Northwest became the holding company for
Northwest Savings upon its conversion from mutual form to stock ownership. As
part of the mutual-to-stock conversion, Northwest completed an initial public
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offering of 1,032,517 shares of Northwest Common Stock at $8.00 per share.
Following the conversion, Northwest proceeded to improve stockholder
value through business and financial initiatives. In addition to its efforts to
continue Northwest Savings' traditional lending and deposit franchises, one of
these business initiatives was a leveraging strategy through which Northwest
Savings selectively originated and purchased loans and mortgage-backed
securities using borrowings from the Federal Home Loan Bank of Chicago, Illinois
("FHLB-Chicago") in order to earn additional net interest income. On May 30,
1997, Northwest formed an investment subsidiary incorporated and domiciled in
Nevada to hold certain of its interest-earning assets. This arrangement has
allowed Northwest to reduce substantially its Wisconsin state income taxes.
Northwest's financial initiatives centered upon cash distributions to
stockholders. In fiscal 1995, Northwest commenced paying cash dividends, which
it has since increased on ten occasions. In fiscal 1996, Northwest also began
repurchasing its Common Stock on a regular basis. Since then, Northwest has
repurchased 207,863 of its shares, representing 20.1% of the shares issued in
connection with the mutual-to-stock conversion.
In addition to the foregoing business and financial initiatives,
Northwest periodically evaluated strategic alternatives. From time to time,
Northwest received inquiries from potential strategic alliance partners and, on
occasion, held exploratory discussions with them. In April 1998, Northwest
engaged ABN AMRO as its financial adviser to conduct a formal process to
evaluate strategic alternatives and, potentially, to seek out a strategic
alliance partner.
On April 14, 1998, ABN AMRO provided the Northwest Board a strategic
overview of Northwest. Following the meeting, the Northwest Board authorized
Northwest management and ABN AMRO to explore potential strategic alliance
transaction opportunities.
Thereafter, ABN AMRO, in close consultation with Northwest management,
structured an organized process of identifying and eliciting interest from a
group of logical prospective strategic alliance partners who would be provided
an informational brochure describing Northwest and its business (the
"Confidential Descriptive Memorandum," or "Memorandum"), subject to the prior
execution of a confidentiality agreement. Through May and June 1998, ABN AMRO
prepared the Memorandum and assisted Northwest management in preparing a list of
prospective partners. On July 14, 1998, ABN AMRO completed the Memorandum and on
July 15, 1998, it began contacting prospective strategic alliance partners
authorized by Northwest management.
On August 25, 1998, ABN AMRO reviewed with Northwest management the
results of the formal solicitation process that ended August 12, 1998. During
this process, on Northwest's behalf, ABN AMRO contacted 26 prospective strategic
alliance partners, of which: 16 (including Bremer) entered into confidentiality
agreements and received the Memorandum; five submitted written, non-binding
expressions of interest in a transaction with Northwest at a price or within a
price range (four all-stock proposals and one cash proposal); and one expressed
orally to ABN AMRO a preliminary, non-binding indication of interest in a cash
transaction at a price.
Following this formal proposal process, the stock market, and financial
stocks in particular, declined markedly in response to a variety of foreign and
domestic economic and political concerns. During the last two weeks of September
1998, ABN AMRO contacted the four parties which had previously expressed the
highest economic proposals to re-affirm their interest. Two parties re-affirmed
their economic level of interest, one party increased its economic proposal, and
one party decreased its economic proposal.
In consultation with Northwest's management, ABN AMRO invited two of
the foregoing four parties, one of which was Bremer, to conduct an on-site "due
diligence" review of Northwest. Bremer conducted this review during mid-October.
The other party withdrew its proposal prior to commencing its review, citing
market conditions. On October 19, 1998, Bremer provided Northwest with a "final"
written, non-binding proposal to enter into a transaction.
On October 20, 1998, the Northwest Board held a meeting, which included
the participation of an ABN AMRO representative. At this meeting, the Northwest
Board reviewed the strategic alliance search process to date; a comparative
analysis of the initial and then current strategic alliance transaction
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proposals; the written proposal of Bremer received on October 19, 1998; and
prevailing stock and merger-and-acquisition market conditions. At the conclusion
of this meeting, the Northwest Board authorized its management and ABN AMRO to
negotiate toward a definitive merger agreement with Bremer, subject to the
condition that ABN AMRO contact each of the parties that had provided a written
or oral strategic alliance proposal with a final opportunity to improve the
economic level of each party's proposal. Subsequent to the meeting, ABN AMRO
contacted these parties, and none expressed an interest in a transaction at or
above the Bremer proposal. Thereafter, Northwest management, assisted by ABN
AMRO and Mallery & Zimmerman, S.C. ("M&Z"), counsel to Northwest, negotiated the
terms of the Merger Agreement.
On February 16, 1999, the Northwest Board held a meeting that included
the participation of ABN AMRO and M&Z. The meeting included a detailed
discussion of the proposed transaction and explanatory materials previously
furnished to members of the Northwest Board. ABN AMRO reviewed the process
leading to the proposed transaction, provided a financial analysis of the
proposed transaction, and expressed orally an opinion that the Merger Per Share
Consideration to be received by Northwest stockholders in the Merger was fair to
such stockholders from a financial point of view. ABN AMRO confirmed this oral
opinion in writing by letter dated February 16, 1999. At the conclusion of this
portion of the meeting, the Northwest Board determined that the proposed
transaction with Bremer was in the best interests of its stockholders and
unanimously approved the Merger Agreement, including the transactions
contemplated thereby.
Subsequent Merger Events
Following execution of the Merger Agreement on February 16, 1999,
Bremer and Northwest began corresponding on the regulatory approval process and
timeline thereof. During this correspondence, it became apparent that delays in
the regulatory application and approval process would preclude regulatory
filings being made within the time frame specified in the Merger Agreement.
Bremer and Northwest agreed to extensions of the filing requirement by
amendments to the Merger Agreement on each of April 21, 1999, and May 11, 1999.
Following these amendments, Northwest became concerned that continued delay in
seeking regulatory approval would not permit consummation of the Merger upon a
schedule consistent with the overall terms and conditions of the Merger
Agreement. On July 15, 1999, Northwest's Chief Executive Officer and a
representative of ABN AMRO, Northwest's financial adviser, met with Bremer's
Chief Executive Officer and Chief Financial Officer in Bremer's St. Paul,
Minnesota executive offices. Following this meeting, the parties began working
on a third amendment to the Merger Agreement which was executed on July 26,
1999. The third amendment provides for extensions of deadlines to file
regulatory applications and consummate the Merger as well as an adjustment to
the purchase price to reflect Northwest's earnings and dividends between
September 1, 1999, and the consummation of the Merger.
Reasons for the Merger
Northwest's Board of Directors has determined that the terms of the
proposed Merger are fair to, and in the best interests of, Northwest and its
stockholders. In reaching its determination, the Northwest Board consulted with
legal counsel with respect to: (i) the legal duties of the Northwest Board, (ii)
the Merger Agreement and related issues, and (iii) tax matters. The Northwest
Board also consulted with ABN AMRO, its financial adviser, with respect to the
fairness of the Consideration to Northwest's stockholders from a financial point
of view. The Northwest Board considered a number of factors, which included:
(i) Information concerning the business, earnings, operations,
financial condition, prospects, capital, and asset quality of Northwest
including, but not limited to, recent and historic stock and earnings
performance. In addition to its own knowledge of Northwest, the Northwest Board
considered the detailed financial analyses and other information with respect to
Northwest presented to the Northwest Board by ABN AMRO;
(ii) The current and prospective competitive and regulatory
environments in which Northwest operates, including significant recent
consolidations within the banking industry, both nationally and in the
Midwestern United States;
(iii) The challenges of remaining a smaller institution, including (1)
competition on the margins for loans and deposits from existing competitors and
more intense competition from larger financial institutions with greater
financial resources than Northwest, (2) technology costs to remain competitive
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as a smaller entity, (3) continued growth challenges, and (4) other risks;
(iv) Executive management succession;
(v) A review of the strategic options available to Northwest and
indications of interest from other prospective strategic alliance partners;
(vi) The terms, conditions, and course of negotiations relating to the
Merger Agreement;
(vii) The likelihood that the proposed Merger would be consummated;
(viii) The effect of the proposed Merger on Northwest's employees,
customers, and communities in which it operates;
(ix) The recommendations of Northwest 's executive management with
respect to the proposed Merger (which recommendations were considered in light
of certain interests of management in the proposed Merger. See " APPROVAL OF THE
MERGER AGREEMENT--Interests of Certain Persons in the Merger and the Effect of
the Merger on Employees and Benefit Plans); and
(x) The financial advice provided by ABN AMRO and the opinion of ABN
AMRO that the Merger Per Share Consideration to be received by Northwest
stockholders pursuant to the Merger is fair to such stockholders from a
financial point of view.
In view of the wide variety of factors considered in connection with
its evaluation of the proposed Merger, the Northwest Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Northwest Board may have given different
weights to different factors.
For the reasons described above, Northwest's Board of Directors
unanimously approved the Merger Agreement and believes the Merger is fair to,
and in the best interests of, Northwest's stockholders. Accordingly, Northwest's
Board of Directors unanimously recommends that holders of Northwest Common Stock
vote FOR the approval and adoption of the Agreement.
OPINION OF NORTHWEST 'S FINANCIAL ADVISER
Northwest initially retained ABN AMRO to act as financial adviser and
agent for Northwest to provide financial advisory and investment-banking
services in connection with a review of its strategic alternatives which may
result in a transaction in which control or a material interest in the stock or
assets of Northwest would be transferred for consideration. In connection with
such engagement, Northwest requested that ABN AMRO render its opinion as to the
fairness to Northwest's stockholders of the Merger Per Share Consideration to be
received in the Merger. Northwest imposed no limitations upon the scope of
investigation or procedures followed by ABN AMRO in connection with its opinion,
nor did Northwest give ABN AMRO any specific instructions in connection
therewith. The Merger Per Share Consideration was determined through
arm's-length negotiations between Northwest and Bremer, although Northwest was
advised during such negotiations by ABN AMRO.
On February 16, 1999, in connection with the evaluation by the
Northwest Board of the transaction proposed by Bremer, ABN AMRO rendered an
opinion that, as of such date, and subject to certain assumptions, factors, and
limitations set forth in such written opinion as described below, the Merger Per
Share Consideration to be received by Northwest stockholders is fair to such
stockholders from a financial point of view (the "Opinion"). ABN AMRO confirmed
the Opinion as of the date of this Proxy Statement.
The full text of ABN AMRO's written Opinion, dated as of the date of
the Merger Agreement, which sets forth the assumptions made, matters considered,
and limitations on the review undertaken in connection with the Opinion, is
attached as Appendix E to this Proxy Statement and should be read in its
entirety for information with respect to procedures followed, assumptions made,
and matters considered by ABN AMRO in rendering its Opinion. ABN AMRO's Opinion
was prepared for the Northwest Equity Board and addresses only the fairness from
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a financial point of view of the Merger Per Share Consideration to the holders
of Northwest Common Stock. The ABN AMRO Opinion does not address Northwest's
underlying business decision to enter into the Merger nor does it constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the proposed Merger. The summary of the ABN AMRO Opinion set forth in
this Proxy Statement is qualified in its entirety by reference to the full text
of the Opinion.
In connection with its Opinion, ABN AMRO reviewed the Merger Agreement
and certain related documents and held discussions with certain senior officers,
directors and other representatives and advisers of Northwest concerning the
business, operations and prospects of Northwest. ABN AMRO examined certain
publicly available business and financial information relating to Northwest and
Bremer as well as certain financial information and other data for Northwest and
certain financial information and other data related to Bremer which were
provided to or otherwise discussed with ABN AMRO by the respective managements
of Northwest and Bremer. ABN AMRO reviewed the financial terms of the Merger as
set forth in the Agreement in relation to: (i) current and historical market
prices and trading volumes of Northwest Common Stock; (ii) Northwest's financial
and other operating data; and (iii) the capitalization and financial condition
of Northwest. ABN AMRO also considered, to the extent publicly available, the
financial terms of certain other thrift-industry transactions recently effected
which ABN AMRO considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations ABN AMRO considered relevant in
evaluating those of Northwest. In connection with its engagement, and at the
request of the Northwest Board, ABN AMRO approached and held discussions with
certain third parties to solicit indications of interest in a possible
transaction with Northwest.
In rendering its Opinion, ABN AMRO assumed and relied upon the accuracy
and completeness of the financial and other information reviewed by it and it
did not make or obtain or assume any responsibility for independent verification
of such information. In addition, ABN AMRO did not make an independent
evaluation or appraisal of the assets and liabilities of Northwest or any of its
subsidiaries. With respect to the financial data of Northwest, ABN AMRO assumed
that they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Northwest as to the
future financial performance of Northwest.
The following is a summary of the material financial analyses ABN AMRO
employed and summarized for the Northwest Board in connection with its written
Opinion to the Northwest Board dated as of the date of the Merger Agreement.
(1) Stock Trading History. ABN AMRO compared the Merger Per Share
Consideration to Northwest's recent stock price and related 52-week trading
range. This examination showed that the $24.00 per share cash consideration to
be paid pursuant to the proposed Merger was a 29.7% premium over Northwest's
closing market price per share of $18.50 on February 9, 1999. ABN AMRO presented
a graph which showed that over the year prior thereto, Northwest Common Stock
ranged in price from a low of $15.625 to a high of $25.00 per share, noting that
the proposed Merger Per Share Consideration was 53.6% above, and 4.0% below,
these 52-week high and low trading prices. ABN AMRO also presented a graph
showing a spike in Northwest's stock price, which increased by $7.50 per share,
or 42.9%, to its 52-week high of $25.00 per share on December 3, 1998 from
$17.50 per share on November 20, 1998. ABN AMRO also noted that the average
daily trading volume was 2,650 shares over this ten-day period, representing
309.6% of average daily trading volume over the entire 52-week period.
ABN AMRO also examined the total-return performance of the Philadelphia
Stock Exchange Bank Index and the Standard & Poor's 500 Index as well as an
index of Northwest Common Stock and an index of the stocks of the selected
comparable thrifts ("Comparable Index") identified in the "Comparable
Market-Value Analysis" described below, in each case over the one-year period
ended February 5, 1999. This graphical presentation of the examination
illuminated the spike in Northwest's Common Stock price described above. The
graph showed that Northwest Common Stock outperformed the Comparable Index by
over 30 percentage points (not annualized) during the ten-day price-spike period
described above and by over 10 percentage points for the one-year period
overall. ABN AMRO noted that Northwest's then-recent stock price of $18.50 per
share was in line with the market values of comparable thrifts as described
below. ABN AMRO observed that the price-spike could have been a result of
investor speculation in, combined with the low liquidity of, the market for
Northwest Common Stock.
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(2) Comparable Market-Value Analysis. ABN AMRO compared selected
pricing multiples and ratios implied by Northwest's recent Common Stock price
and the Merger Per Share Consideration to corresponding current trading-market
multiples of comparable companies ABN AMRO deemed relevant to Northwest.
ABN AMRO selected publicly traded thrift holding companies based in
non-metropolitan areas of the Midwestern United States with total assets ranging
from $75 million to $125 million. The selected comparable companies included the
following eighteen organizations: (1) ASB Financial Corp., Portsmouth, OH; (2)
Community Investors Bancorp, Bucyrus, OH; (3) Delphos Citizens Bancorp Inc.,
Delphos, OH; (4) FFD Financial Corp., Dover, OH; (5) First Independence Corp.,
Independence, KS; (6) Fulton Bancorp, Inc., Fulton, MO; (7) Home City Financial
Corp., Springfield, OH; (8) Harrodsburg First Financial Bancorp, Harrodsburg,
KY; (9) Kentucky First Bancorp, Inc., Cynthiana, KY; (10) Logansport Financial
Corp., Logansport, IN; (11) Lexington B&L Financial Corp., Lexington, MO; (12)
Montgomery Financial Corp., Crawfordsville, IN; (13) MSB Financial Inc.,
Marshall, MI; (14) Perry County Financial Corp., Perryville, MO; (15) Peoples
Financial Corp., Massillon, OH; (16) Peoples-Sidney Financial Corp., Sidney, OH;
(17) Three Rivers Financial Corp., Three Rivers, MI; and (18) Union Community
Bancorp, Crawfordsville, IN. (the "Comparable Companies")
ABN AMRO calculated the following selected pricing multiples and ratios
using market price data as of February 9, 1999, and financial data as of the
then-most-recently available financial statement date, and for the twelve-month
period then ended. For each of Northwest and the Comparable Companies, ABN AMRO
calculated the multiples of each company's market price per share to: (i) latest
twelve-month earnings per share ("LTM P/E"); (ii) latest twelve-month
capital-equivalent tangible core earnings per share ("Capital-Equivalent LTM
Core P/E"); (iii) the median estimated earnings per share for the current fiscal
year ("Current-Year P/E"); and (iv) the median estimated earnings per share for
the next fiscal year ("Next-Year P/E"). The Capital-Equivalent Core P/E multiple
adjusts both price and earnings (based on an assumed earnings rate) for the
"excess" capital of each company relative to a 7% tangible equity-to-assets
ratio. "Tangible core earnings" excludes intangible-asset amortization expense
and non-recurring income and expense items. "Estimated earnings per share"
figures are those prepared by securities analysts following each company. ABN
AMRO also calculated the ratio of each company's market price per share to: (i)
book value (stockholders' equity) per share ("P/BV"), (ii) tangible book value
(stockholders' equity less intangible assets) per share ("P/TBV"), and (iii)
capital-equivalent tangible book value ("Capital-Equivalent P/TBV"). The
Capital-Equivalent P/TBV ratio adjusts both price and tangible book value for
the "excess" capital of each comparable company relative to a 7% tangible
equity-to-assets ratio. When calculating multiples and ratios involving the
Merger Per Share Consideration, ABN AMRO used the aggregate Consideration
(including payments to option holders) and aggregate earnings and book value
(rather than per share amounts).
The analysis indicated the market price of, and the Merger Per Share
Consideration to be paid for, Northwest Common Stock were: (i) 14.1x and 19.1x
LTM P/E multiples compared to a median of 17.7x and range of 13.1x to 21.4x for
the Comparable Companies, (ii) 11.3x and 18.1x Capital-Equivalent LTM Core P/E
multiples compared to a median of 12.6x and a range of 6.0x to 20.3x for the
Comparable Companies. ABN AMRO focused on the LTM P/E multiple and the
Capital-Equivalent LTM Core P/E multiple, noting that differing fiscal year-ends
and relatively few Next-Year estimates for the Comparable Companies reduced the
comparability of the Current-Year P/E and Next-Year P/E multiples. The analysis
also indicated the market price of, and the Merger Per Share Consideration to be
paid for, Northwest Common Stock were (i) 127.2% and 176.4% P/BV ratios compared
to a median of 97.6% and a range to 76.0% to 129.0% for the Comparable
Companies, (ii) 127.2% and 176.4% P/TBV ratios compared to a median of 97.6% and
a range of 80.8% to 129.0% for the Comparable Companies, and (iii) 149.7% and
239.7% Capital-Equivalent P/TBV ratios compared to a median of 98.2% and a range
of 41.7% to 179.0% for the Comparable Companies.
(3) Stand-Alone Discounted Cash Flow Analysis. ABN AMRO compared the
Merger Per Share Consideration to the imputed values yielded by a discounted
cash flow ("DCF") analysis ABN AMRO performed of Northwest on a "stand-alone"
basis, assuming Northwest would continue to operate as an independent, publicly
traded company. In preparing the DCF analysis, ABN AMRO studied Northwest's
historical and present earnings and growth patterns and then projected income
statements and balance sheets for a five-year period using a series of
assumptions pertaining to growth, interest margins, loan losses, non-interest
income and expenses, income taxes, and cash dividends. Prior to completion, ABN
AMRO reviewed and discussed the financial projections and underlying assumptions
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with Northwest's management. To estimate projected net cash flows, ABN AMRO
adjusted projected earnings for certain non-cash expense items such as loan loss
provisions and certain stock-related benefit plans. ABN AMRO calculated the
terminal value (the value of cash flows following the five-year projection
period) based upon a growth-adjusted perpetuity of the fifth projected year's
estimated net cash flow. To estimate the present value of the five years'
projected net cash flows and terminal value, ABN AMRO used a discount rate of
12.5%. The DCF analysis yielded imputed values for Northwest Common Stock
ranging from $15.22 to $19.80 per share with a midpoint of $17.16 per share,
compared to Consideration of $24.00 per share.
(4) Comparable Transactions Analysis. ABN AMRO compared selected
pricing multiples and ratios implied by the Merger Per Share Consideration to
corresponding merger-and-acquisition multiples and ratios observed in
transactions ABN AMRO deemed to be relevant to the Merger. ABN AMRO selected
thrift-industry mergers-and-acquisitions having aggregate values of $10 million
or more announced since January 1, 1997 in which the acquired company was
headquartered in the Midwestern United States with total assets ranging from $50
million to $250 million ("Comparable Transactions"). The seventeen selected
Comparable Transactions included (the acquirer is the first name and is in
italics followed by the seller): (1) Mahaska Investment Co., Oskaloosa,
IA-Midwest Bancshares, Inc., Burlington, IA; (2) Sky Financial Group, Bowling
Green, OH-Wood Bancorp Inc., Bowling Green, OH; (3) GLB Bancorp Inc., Mentor,
OH-Maple Leaf Financial Inc., Newbury, OH; (4) First FSB Siouxland, Sioux City,
IA-Mid-Iowa Financial Corp., Newton, IA; (5) Enterprise Federal Bancorp, West
Chester, OH-Security Saving Holding Company, Milford, OH; (6) Blackhawk Bancorp,
Beloit, WI-First Financial Bancorp Inc., Belvidere, IL; (7) Central Bancshares
Inc,. Lexington, KY-Pioneer Financial Corp., Winchester, KY; (8) Blue River
Bancshares, Shelbyville, IN-Shelby County Bancorp, Shelbyville, IN; (9) Union
Planters Corp., Memphis, TN--Capital Savings Bancorp, Jefferson City, MO; (10)
AMCORE Financial, Rockford, IL-Midwest Federal Financial, Baraboo, WI; (11)
Waterfield Mortgage, Indianapolis, IN-Indiana Community Bank, Lebanon, IN; (12)
First FSB Siouxland, Sioux City, IA-GFS Bancorp, Inc., Grinnell, IA; (13) North
Central Bancshares, Ft. Dodge, IA-Valley Financial Corp., Burlington, IA; (14)
HMN Financial, Inc., Spring Valley, MN-Marshalltown Financial, Marshalltown, IA;
(15)Peoples Bancorp, Marietta, OH-Gateway Bancorp, Catlettsburg, KY; (16) Fifth
Third Bancorp, Cincinnati-Suburban Bancorp, Cincinnati; and (17) Pinnacle
Financial, St. Joseph, MI-CB Bancorp, Inc., Michigan City, IN.
ABN AMRO calculated several merger-pricing multiples and ratios using
financial data for Northwest and each acquired company as of the most-recent
financial-statement date available at the time the transaction was announced,
and for the twelve-month period then ended. ABN AMRO used merger prices and
related multiples and ratios as of the respective transaction-announcement dates
for each of the Comparable Transactions. The analysis indicated that the Merger
Per Share Consideration represented: (i) a 19.1x LTM P/E multiple compared to a
median of 20.7x and a range of 13.7x to 23.7x for the Comparable Transactions;
(ii) a Current-Year P/E of 18.7x compared to a median of 13.8x and a range of
13.6x to 14.0x for the Comparable Transactions; (iii) 176.4% P/BV and P/TBV
ratios compared to a median of 170.4% and a range of 118.5% to 255.2% for the
Comparable Transactions; (iv) a 239.7% Capital-Equivalent P/TBV ratio compared
to a median of 215.7% and a range of 148.7% to 339.0% for the Comparable
Transactions; and (v) premiums of 29.7%, 33.3%, and 15.7% over Northwest's
one-day-, three-month-, and one-year-earlier market price compared to
corresponding medians of 22.3%, 40.5%, and 38.6% for the Comparable
Transactions. ABN AMRO noted that there were only two available Current-Year P/E
multiples, one of which pertained to Midwest Federal Financial of Baraboo, WI.
ABN AMRO also noted that many of the Comparable Transactions were announced
during periods of time when financial-stock and thrift merger prices were
generally at higher levels than on the date of the Agreement.
In addition, ABN AMRO examined the transaction announced on January 5,
1999, in which Anchor BanCorp Wisconsin of Madison, Wisconsin proposed to
acquire FCB Financial Corp. of Oshkosh, Wisconsin ("FCB") in an all-stock
merger. Though this transaction did not meet the total asset size criterion so
as to be considered a Comparable Transaction (FCB's total assets were $534.9
million at September 30, 1998), ABN AMRO deemed this transaction relevant to the
Merger due to the relatively close geographic proximity and recent announcement
date. This transaction showed an LTM P/E multiple of 24.5x and a 223.3% P/BV
ratio at the announcement date. ABN AMRO recalculated these merger-pricing
relationships based on such merger's indicated exchange ratio and the most
recent financial and market data available as of February 12, 1999. This
analysis showed an LTM P/E multiple of 18.6x for the FCB transaction compared to
19.1x for the Merger and a P/BV ratio of 164.9% for the FCB transaction compared
to 176.4% for the Merger.
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(5) Control Discounted Cash Flow Analysis. ABN AMRO also compared the
Merger Per Share Consideration to the imputed values yielded by a DCF analysis
of Northwest on a "control" basis, assuming certain operational changes a
hypothetical potential acquirer could undertake to improve Northwest's financial
performance. In this analysis ABN AMRO employed the same series of operating and
discount-rate assumptions as for the "stand-alone" DCF analysis outlined above,
except that on a "control" basis a hypothetical potential acquirer would: (i)
reduce Northwest's "excess" capital to finance a portion of a potential purchase
price by liquidating certain earning assets; (ii) reduce general and
administrative expenses significantly over a two-year period, and (iii)
eliminate Northwest's stock-related benefits plans, thereby further reducing
non-interest expenses. ABN AMRO assumed that reducing "excess" capital would
serve to increase the overall yield on the remaining earning assets. As a
transaction with Northwest would likely require an acquirer to employ purchase
accounting, ABN AMRO assumed that the resulting intangible assets (including
"goodwill") and related amortization would not affect: (x) an acquirer's view of
value or (y) its ability to achieve regulatory approval of a transaction. ABN
AMRO noted the importance of the foregoing assumptions in light of: (aa) a
perceived stock-market bias against the effects of purchase accounting which
could influence the decisions of publicly traded potential acquirers, and (bb)
the negative effect of purchase accounting on certain measures of capital on
which potential acquirers are regulated. The "control" DCF analysis yielded
imputed values for Northwest Common Stock ranging from $20.13 to $24.96 per
share with a midpoint of $22.25 per share, compared to the Merger Per Share
Consideration of $24.00 per share.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the process
underlying ABN AMRO's Opinion. In arriving at its fairness determination, ABN
AMRO considered the results of all such analyses. No company or transaction used
in the above analyses as a comparison is identical to Northwest or the Merger.
The analyses were prepared solely for the purposes of ABN AMRO's Opinion
provided to Northwest's Board as to the fairness of the Merger Per Share
Consideration to be received by the stockholders of Northwest pursuant to the
Merger and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
projections of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
ABN AMRO, none of Northwest, ABN AMRO, or any other person assumes
responsibility if future results are materially different from those projected.
ABN AMRO, as part of its investment-banking business, is continually
engaged in the valuation of businesses in connection with mergers and
acquisitions, as well as initial and secondary offerings of securities and
valuations for other purposes. Northwest selected ABN AMRO as its financial
adviser because ABN AMRO is a nationally recognized investment-banking firm that
has substantial experience in transactions similar to the Merger.
ABN AMRO acts as a market maker in Northwest Common Stock. In the
ordinary course of ABN AMRO's business, ABN AMRO and its affiliates may actively
trade securities of Northwest for their own account and for the accounts of
customers, and, accordingly, may at any time hold a long or short position in
such securities.
Northwest retained ABN AMRO as its financial adviser by letter
agreement dated April 14, 1998 ("Engagement Letter"). Pursuant to the terms of
the Engagement Letter, Northwest paid ABN AMRO a $20,000 Strategic Review Fee
upon execution thereof. In addition, upon delivery of ABN AMRO's fairness
opinion, Northwest paid ABN AMRO a $25,000 Fairness Opinion Fee. Upon
consummation of the Merger, Northwest will pay ABN AMRO a cash Financial
Advisory Fee equal to 1.00% of transaction value, as defined in the Engagement
Letter, reduced by the amounts of the Strategic Review Fee and Fairness Opinion
Fee previously paid. Further, in the Engagement Letter, Northwest agreed to
reimburse ABN AMRO for its reasonable out-of-pocket expenses incurred in
connection with its engagement, and to indemnify ABN AMRO against certain
liabilities, including liabilities under securities laws.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Bremer, the Merger Sub and the Company to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions, including, without limitation:
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(1) The approval of the Merger by the shareholders of the Company;
(2) The receipt of all necessary regulatory approvals and expiration of all
notice periods and waiting periods required after the granting of such
approvals;
(3) The absence of any court or agency order, decree or injunction which
enjoins or prohibits consummation of the Merger;
The obligations of Northwest to consummate the Merger are subject to the
fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(1) The representations and warranties of Bremer and the Merger Sub set
forth in the Merger Agreement shall be true and correct in all material respects
as of the date of the Merger Agreement and as of the Effective Time (as though
made on and as of the Effective Time, except (i) to the extent such
representations and warranties are by their express provisions made as of a
specific date or period, (ii) where the facts which caused the failure of any
representation or warranty to be so true and correct have not resulted, and are
not likely to result, in a Material Adverse Effect on Bremer, and (iii) for the
effect of transactions contemplated by the Merger Agreement), and Northwest
shall have received a certificate of the Chief Executive Officer, the Chief
Financial Officer, or an Executive Vice President of Bremer, signing solely in
his capacity as an officer of Bremer, to such effect.
(2) Bremer and the Merger Sub shall have performed in all material respects
all obligations, agreements or covenants required to be performed by them under
the Merger Agreement prior to the Effective Time, and Northwest shall have
received a certificate of an Executive Vice President of Bremer, signing solely
in his capacity as an officer of Bremer, to that effect.
(3) Bremer and the Merger Sub shall have obtained any and all material
permits, authorizations, consents, waivers and approvals required for the lawful
consummation by them of the Merger.
(4) Since the date of the Merger Agreement, there shall have been no
Material Adverse Effect on Bremer.
(5) Bremer shall have delivered to Northwest an opinion of Bremer's counsel
dated as of the Closing Date or a mutually agreeable earlier date in
substantially the form set forth in the Merger Agreement.
(6) Northwest shall have received an opinion from ABN AMRO dated as of the
date of the Merger Agreement and supplemented as necessary as of the date of the
Proxy Statement, to the effect that, subject to the terms, conditions, and
qualifications set forth therein, the Merger Per Share Consideration to be
received by Northwest shareholders pursuant to the Merger Agreement is fair to
such shareholders from a financial point of view.
(7) No action, suit, proceeding or claim shall have been instituted or made
relating to the Merger Agreement or the validity or propriety of the
transactions contemplated therein which would render completion of the Merger
inadvisable in the reasonable opinion of Northwest.
The obligations of Bremer and the Merger Sub to consummate the Merger shall
be subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(1) The representations and warranties of Northwest set forth in the Merger
Agreement shall be true and correct in all material respects as of the date of
the Merger Agreement and as of the Effective Time (as though made on and as of
the Effective Time, except (i) to the extent such representations and warranties
are by their express provisions made as of a specific date or period, (ii) where
the facts which caused the failure of any representation or warranty to be so
true and correct have not resulted, and are not likely to result, in a Material
Adverse Effect on Northwest, and (iii) for the effect of transactions
contemplated by the Merger Agreement) and Bremer and the Merger Sub shall have
received a certificate of the Chief Executive Officer and Chief Accounting
Officer of Northwest, signing solely in their capacities as officers of
Northwest, to such effect.
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(2) Northwest shall have performed in all material respects all
obligations, agreements or covenants required to be performed by it under the
Merger Agreement prior to the Effective Time, and Bremer and the Merger Sub
shall have received a certificate of the Chief Executive Officer and Chief
Accounting Officer of Northwest, signing solely in their capacities as officers
of Northwest, to that effect.
(3) Northwest shall have obtained any and all material permits,
authorizations, consents, waivers and approvals required for the lawful
consummation by it of the Merger.
(4) Since the date of the Merger Agreement, there shall have been no
Material Adverse Effect on Northwest.
(5) Northwest shall have delivered to Bremer and the Merger Sub an opinion
of Northwest's counsel dated as of the Closing Date or a mutually agreeable
earlier date in substantially the form set forth in the Merger Agreement.
(6) The Determination Date Financial Statements as defined in the Merger
Agreement shall reflect that Northwest has stockholders' equity in an amount
equal to or greater than $11,700,000 (exclusive of any accrual for payment of
option settlement amounts and the financial advisory fee paid or due to ABN
AMRO); loans receivable in an amount equal to or greater than $65,000,000 and
savings accounts in amount equal to or greater than $55,000,000
(7) The Voting Agreements and the Amendment and Termination Agreements
required by the Merger Agreement shall have been fully executed, remain
enforceable by the parties thereto and shall not have been amended or modified
since the date of the Merger Agreement.
(8) No action, suit, proceeding or claim shall have been instituted or made
relating to the Merger Agreement or the validity or propriety of the
transactions contemplated hereby which would render completion of the Merger
inadvisable in the reasonable opinion of Bremer.
Either Northwest or Bremer may waive in writing the conditions imposed with
respect to their respective obligations to consummate the Merger, except for the
requirements that the Merger be approved by Northwest's shareholders, that all
required regulatory approvals be received and that all notice periods and
waiting periods be expired.
NO SOLICITATION OF ALTERNATIVE TRANSACTION
Under the terms of the Merger Agreement, Northwest may not, directly or
indirectly, through any officer, director, employee, financial advisor,
representative or agent of such party (1) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, business combination, sale
of substantial assets, sale of shares of capital stock (including, without
limitation, by way of a tender offer) or similar transaction involving the
Company or any of the Company's subsidiaries, other than the transactions
contemplated by the Merger Agreement (any of the foregoing inquiries or
proposals being referred to as an "Acquisition Proposal"), (2) engage in
negotiations or discussions with any person (or any group of persons) other than
Bremer or its affiliates (a "Third Party") concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Proposal, or
(3) agree to or recommend any Acquisition Proposal. However, nothing in the
Merger Agreement shall prevent Northwest from (A) furnishing non-public
information to, or entering into discussions and negotiations with, any person
or entity in connection with an unsolicited bona fide written proposal for an
"Alternative Transaction" (as defined below) by such person or entity or
modifying or withdrawing its recommendation with respect to the transactions
contemplated by the Merger Agreement or recommending an unsolicited bona fide
written proposal for an Alternative Transaction to its shareholders if (i) a
Third Party has made a written proposal to the Board of Directors of Northwest
to consummate an Alternative Transaction and the proposal identifies a price or
range of values to be paid for the outstanding securities or substantially all
of the assets of Northwest, (ii) the Company's Board of Directors believes in
good faith, after consultation with its financial advisor, that such Alternative
Transaction is reasonably capable of being completed on the terms proposed and
would, if consummated, result in a transaction more favorable than the
transaction contemplated by the Merger Agreement (a "Superior Proposal"), (iii)
the Board of Directors of Northwest determines in good faith, based on the
advice of outside legal counsel, that the failure to take such action would be
inconsistent with its fiduciary duties under applicable law, and (iv) prior to
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furnishing such non-public information to, or entering into discussions and
negotiations with, such person or entity, Northwest's Board of Directors
receives from such person or entity an executed confidentiality and standstill
agreement with material terms no less favorable than those contained in the
confidentiality agreement dated July 20, 1998 between Bremer and Northwest; or
(B) complying with Rule 14e-2 under the Exchange Act with regard to an
Acquisition Proposal. Under the Merger Agreement, Northwest agrees not to
release any Third Party from, or waive any provision of any confidentiality and
standstill agreement between it and another person who has made, or who may
reasonably be considered likely to make, an Acquisition Proposal, unless the
Board of Directors of Northwest determines in good faith, based on the written
advice of outside legal counsel, that the failure to take such action would be
inconsistent with its fiduciary duties under applicable law.
Under the Merger Agreement, Northwest must notify Bremer immediately after
receipt by Northwest or any of its advisors of any Acquisition Proposal or any
request for non-public information in connection with an Acquisition Proposal or
for access to the properties, books or records of Northwest by any person or
entity that informs Northwest that it is considering making, or has made, an
Acquisition Proposal. Notwithstanding the foregoing, Northwest shall not accept
or enter into any agreement concerning a Superior Proposal for a period of at
least ten business days after Bremer's receipt of the notification of the terms
thereof, during which period Bremer shall have the opportunity to match the
terms and conditions contained in the Superior Proposal.
The term "Alternative Transaction" means (1) a transaction pursuant to
which any Third Party acquires more than 30% of the outstanding shares of
Northwest Common Stock pursuant to a tender offer or exchange offer or
otherwise, (2) a merger or other business combination involving Northwest
pursuant to which any Third Party (or the stockholders of a Third Party)
acquires more than 30% of the outstanding shares of Northwest Common Stock, as
the case may be, or the entity surviving such merger or business combination, or
(3) any other transaction pursuant to which any Third Party acquires control of
assets (including, for this purpose, the outstanding equity securities of
Northwest's subsidiaries and the entity surviving any merger or business
combination) of Northwest having a fair market value (as determined by the
Northwest Board in good faith) equal to more than 30% of the fair market value
of all of the assets of Northwest and its subsidiaries, taken as a whole,
immediately prior to such transaction.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the
Effective Time by written notice by the terminating party to the other party,
whether before of after approval of the Merger by the shareholders of Northwest:
(1) by mutual written consent of the parties;
(2) by either Bremer or Northwest if the Merger has not been consummated
by March 31, 2000, provided that (a) if the Merger has not been
consummated because the requisite approvals of the Federal Reserve
Board and/or federal or state regulatory agencies has not been
obtained and are still being pursued, either Bremer or Northwest may
extend such date to April 30, 2000, by providing written notice to the
other party on or prior to March 31, 2000, and (b) such right to
terminate the Merger Agreement is not available to any party whose
failure to fulfill any obligation within that party's reasonable
control has been the cause of or resulted in the failure of the Merger
to occur on or before such date;
(3) by either Bremer or Northwest if a court of competent jurisdiction or
governmental entity shall have issued a nonappealable final order,
decree or ruling or taken any other unappealable final action, having
the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger;
(4) by either Bremer or Northwest if at the Shareholder Meeting (including
any adjournment or postponement thereof) to consider and approve the
Merger Agreement, the requisite vote of Northwest's shareholders in
favor of the Merger is not obtained;
(5) by Bremer, if (a) the Northwest Board shall withdraw or modify its
recommendation of the Merger Agreement or the Merger, unless Northwest
would be entitled to terminate the Merger Agreement as described in
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paragraphs (2) or (7) of this section; (b) after the receipt by
Northwest of a proposal for an Alternative Transaction, Bremer
requests in writing that the Board of Directors of Northwest reconfirm
its recommendation of the Merger Agreement and Merger to Northwest
shareholders and the Northwest Board fails to do so within ten
business days after its receipt of Bremer's request; (c) the Board of
Directors of Northwest recommends to the Northwest shareholders, or
enters into a definitive agreement with respect to, an Alternative
Transaction; or (d) for any reason Northwest fails to call and hold
the Special Meeting within 45 days after receipt by Bremer of approval
of the Merger by the Federal Reserve Board (unless at such time
Northwest would be entitled to terminate the Agreement as described in
paragraphs (2) or (7) of this section);
(6) by Northwest, prior to the approval of the Merger Agreement by its
shareholders, if , as a result of a Superior Proposal received by
Northwest from a Third Party, the Board of Directors of Northwest
determines in good faith, based on advice of outside legal counsel,
and after allowing Bremer ten business days to match the terms and
conditions of such Superior Proposal, that the failure to accept such
Superior Proposal would be inconsistent with its fiduciary duties to
its shareholders under applicable law; provided that no termination
shall be effective under these circumstances unless any termination
fee payable by Northwest is paid in full by Northwest concurrently
with the termination;
(7) by Bremer or Northwest, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the
other party, which breach causes the conditions to each party's
obligations not to be satisfied, and the breach is not cured within
thirty (30) calendar days after written notice thereof is given to the
breaching party by the non-breaching party or is not waived by the
non-breaching party;
(8) by the Board of Directors of Bremer in the event it discovers certain
environmental conditions on properties owned by Northwest; or
(9) by the Board of Directors of Bremer if dissenters' rights are
available under applicable provisions of the Wisconsin Business
Corporation Law and shareholders holding 10% or more of the
outstanding shares of Northwest Common Stock satisfy the requirements
of Wisconsin Statutes, Section 180.1321(1) relating to the assertion
of dissenters' rights.
EXPENSES; TERMINATION FEE
Fees and expenses incurred in connection with the Merger Agreement are
to be paid by the party incurring such expenses, whether or not the Merger is
consummated. However, Northwest shall pay Bremer a termination fee of $500,000
upon the earliest to occur of:
(1) termination of the Merger Agreement by Bremer or Northwest following
the failure to obtain the required vote of Northwest shareholders, if
a proposal for an Alternative Transaction involving Northwest has been
publicly announced prior to the Special Meeting and either a
definitive agreement for an Alternative Transaction is entered into or
an Alternative Transaction is consummated within one year of such
termination;
(2) termination of the Merger Agreement by Bremer following the occurrence
of the events outlined in paragraph 5(c) of the section of this Proxy
Statement entitled "Termination of the Merger Agreement;"
(3) termination of this Agreement by Northwest as described in paragraphs
(5)(a) or (b) in the section of the Proxy Statement entitled
"Termination of the Merger Agreement," and either a definitive
agreement for an Alternative Transaction is entered into or an
Alternative Transaction is consummated within one year of such
termination; or
(4) termination of this Agreement by Northwest as described in paragraph
(7) in the section of this Proxy Statement entitled "Termination of
the Merger Agreement."
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Northwest's payment of a termination fee is the sole and exclusive remedy of
Bremer against Northwest and any of Northwest's subsidiaries and their
respective directors, officers, employees, agent, advisors or other
representatives with respect to the occurrences giving rise to such payment.
However, this limitation does not apply in the event of a willful breach of the
Merger Agreement by Northwest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
the Company with respect to the Company and its subsidiaries including, among
other things, representations and warranties as to (1) its organization and good
standing; (2) the identity and ownership of its subsidiaries; (3) its
capitalization and capital stock; (4) the authorization and enforceability of
the Merger Agreement; (5) the conformity to applicable accounting standards of
the Company's financial statements; (6) the accuracy of the Company's filings
with the SEC and government regulatory agencies; (7) the Company's title to and
the condition of its owned properties and assets; (8) the status of owned and
leased real property; (9) taxes; (10) the absence of a Material Adverse Effect
on the Company; (11) the validity and enforceability of certain loans,
commitments and contracts; (12) the absence of any violation of its charter or
bylaws or any default under material contracts, commitments and other
instruments; (13) pending or threatened litigation, claims or proceedings or
orders, judgements and decrees to which Company or its subsidiaries are subject;
(14) liability insurance policies; (15) compliance with laws; (16) the status of
the Company's relationship with its employees; (17) material interests of the
officers, directors and associates; (18) the Company's and its subsidiaries'
allowance for loan and lease losses and the amount of non-performing assets;
(19) the Company and its subsidiaries' employee benefit plans; (20) the conduct
of the Company to the date of the Merger Agreement; (21) the absence of
undisclosed liabilities; (22) the accuracy of the Company's Proxy Statement and
other regulatory filings; (23) the absence of any current obligation to register
transactions under the Securities Act of 1933; (24) the absence of knowledge of
any facts that would materially impede or delay regulatory approvals; (25)
brokers' and finders' fees; (26) suitability of investments; (27) accuracy of
information in the Merger Agreement; (28) year 2000 compliance; (29)
inapplicability of certain Wisconsin anti-takeover statutes and lack of
dissenters' rights for shareholders; (30) insider loans; (31) treatment of
outstanding stock options; (32) receipt of opinion of Financial Advisor; and
(33) lack of knowledge of any reason why required regulatory approvals could not
be obtained.
Representations and warranties of Bremer and the Merger Sub include, among
other things, those as to (1) its organization and good standing; (2) the
authorization and enforceability of the Merger Agreement; (3) the absence of
brokers' or finders' fees; (4) the accuracy of information contained in the
Merger Agreement and schedules; (5) no violations of articles, bylaws or other
law by execution and delivery of the Merger Agreement; (6) required consents and
approvals; (7) pending or threatened litigation, actions, proceedings or
investigations; (8) financial statements of Bremer; (9) Community Reinvestment
Act compliance; (10) absence of knowledge of any facts that would materially
impede or delay regulatory approvals; (11) the accuracy of information regarding
Bremer, the Merger Sub and Bremer Bank in the Company's Proxy Statement and
other regulatory filings; and (12) lack of knowledge of any reason why required
regulatory approvals could not be obtained.
For detailed information on such representations and warranties, see
Articles II and III of the Merger Agreement, as amended, attached hereto as
Appendix A.
AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be amended or supplemented in writing by mutual
agreement of Bremer and the Company, provided that such amendment or supplement
must be approved by the Boards of Directors of Bremer and the Company and
provided further that no amendment or supplement executed after approval of the
Merger Agreement by the Company's shareholders may change the Merger Per Share
Consideration into which each share of the Common Stock will be converted, or
alter the tax treatment of the Merger Per Share Consideration to be received by
the Company's shareholders, without the further approval of the Company's
shareholders.
The Merger Agreement was amended on April 21, 1999, and May 11, 1999, to
extend the time in which Bremer was to file regulatory applications pursuant to
Section 5.2 of the Merger Agreement and to extend the time in which Northwest
could hold a shareholder meeting to consider the Merger Agreement. Copies of the
First and Second Amendments to the Merger Agreement are attached to this Proxy
Statement as Appendices B and C. The Merger Agreement was amended on July 26,
1999, by the Third Amendment to the Merger Agreement to amend the Merger Per
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Share Consideration payable by Bremer, extend the time in which Bremer was to
file regulatory applications and the time in which Northwest could hold a
shareholder meeting to consider the Merger Agreement, adjust the minimum
financial requirements that Northwest is subject to on the Determination Date,
and revise and extend the dates upon which Northwest may declare future
dividends. A copy of the Third Amendment to the Merger Agreement is attached to
this Proxy Statement as Appendix D.
CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME
Pursuant to the Merger Agreement, the Company has agreed that, unless it
has obtained the prior consent of Bremer, and except as otherwise contemplated
by the Merger Agreement, it will operate its business and the businesses of its
subsidiaries and engage in transactions only in the usual and ordinary course
consistent with past and current practices, use their best efforts to maintain
and preserve their business organization, retain employees and advantageous
business relationships and retain the services of present officers and key
employees. In addition, the Company has agreed that, prior to the earlier of the
Effective Time or termination of the Merger Agreement, it will not and will not
permit any subsidiary, except with the prior written consent of Bremer or except
as contemplated in the Merger Agreement, to do any of the following:
(1) declare, set aside or pay any dividends or other distributions,
directly or indirectly, in respect of its capital stock (other than
dividends from any of the Northwest subsidiaries to Northwest or to
another of the Northwest subsidiaries), except that Northwest may
declare and pay regular cash dividends of not more than $0.17 per
share on Northwest Common Stock on each of January 28, 1999, April 22,
1999, July 29, 1999, October 29, 1999, and January 28, 2000, (but only
if such dates occur before the Closing Date);
(2) enter into or amend any employment, severance or similar agreement or
arrangement with any director, officer or employee, or materially
modify any of the Company's employee benefit plans or grant any salary
or wage increase or materially increase any employee benefit
(including incentive or bonus payments), except normal individual
increases in compensation to employees consistent with past practice,
and certain discretionary contributions to the ESOP made solely for
the purpose of retiring the Company's loan to the ESOP, or as required
by law or contract;
(3) authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into an agreement in principle with
respect to, any merger, consolidation or business consolidation (other
than the Merger), any acquisition of a material amount of assets or
securities, any disposition of a material amount of assets or
securities, or any release or relinquishment of any material contract
rights;
(4) propose or adopt any amendment to Northwest's articles of
incorporation or by-laws or to the articles of incorporation or
by-laws of any of Northwest's subsidiaries;
(5) issue, sell, grant, confer or award any equity securities (except that
Northwest may issue up to 7,635 shares of Northwest Common Stock upon
exercise of the stock options outstanding on the date of the Merger
Agreement) or effect any stock split or stock dividend or adjust,
combine, reclassify or otherwise change its capitalization as it
existed on the date of the Merger Agreement;
(6) purchase, redeem, retire, repurchase or exchange, or otherwise acquire
or dispose of, directly or indirectly, any of Northwest's equity
securities, whether pursuant to the terms of such equity securities or
otherwise;
(7) make or commit to make a loan or grant an extension of credit to any
borrower (including any renewals of existing loans or additional
advances on loans to existing borrowers) which would result in the
principal balance owing to Northwest or its subsidiaries in the
aggregate to exceed $150,000 for any secured loan or extension of
credit or $25,000 for any unsecured loan or extension of credit;
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(8) take any action that has the reasonable and foreseeable likelihood of
materially impeding or delaying the consummation of the transactions
contemplated by the Merger Agreement or the ability of Bremer or
Northwest to obtain any approval of any regulatory authority required
for the transactions contemplated by the Merger Agreement or to
perform its covenants and agreements under the Merger Agreement;
(9) obtain any advances from the FHLB of Chicago with maturities in excess
of ninety (90) days or, other than in the ordinary course of business
consistent with past practice, incur any other indebtedness for
borrowed money or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity;
(10) except in connection with continuation of Northwest's practices of
selling fixed rate loans generated by its subsidiaries, sell any
portion or all of the Company's or any of its subsidiaries' loan or
investment portfolios, it being understood that there have been no
sales of all or any portion of the loan or bond portfolios from
September 30, 1998 to the date hereof; or invest any assets in any
marketable securities other than U.S. Treasury or U.S. Agency
securities with a maturity or two years or less or GNMA adjustable
rate mortgage securities purchased at a dollar price not to exceed
101% of par value;
(11) make loans to "insiders," except for renewals of outstanding
indebtedness in the ordinary course of business;
(12) fail to recognize loan losses or fund any of its subsidiaries' loan
loss reserve or allowance except in the ordinary course of business,
consistent with past practices and policies, in accordance with GAAP,
and in accordance with regulatory guidelines, policies and regulations
or as required pursuant to any regulatory examination;
(13) fail to accrue income and expenses on Northwest's or any of its
subsidiaries' books in the ordinary course of business and in
accordance with GAAP;
(14) fail to disclose in writing to Bremer any facts or circumstances which
cause the risk rating for any extension of credit or participation
owned by the Company or any of its subsidiaries with a principal
balance outstanding in excess of $100,000 to be adversely affected;
(15) make any capital expenditures or commitment for capital expenditures
for the Company or any of its subsidiaries except in the ordinary
course of business which individually exceed $20,000 or, in the
aggregate, exceed $50,000;
(16) enter into or amend any other contract, agreement, understanding,
arrangement or commitment involving an obligation by the Company or
any of its subsidiaries of more than $25,000, other than contracts
entered into in respect of deposit agreements; or
(17) agree in writing or otherwise to take any of the foregoing actions or
engage in any activity, enter into any transaction or intentionally
take or omit to take any other act which would make any of its
representations and warranties in the Merger Agreement untrue or
incorrect in any material respect if made anew after engaging in such
activity, entering into such transaction, or taking or omitting such
other act.
REGULATORY CONSIDERATIONS
The Merger is subject to certain regulatory approvals, as set forth below.
To the extent that the following information describes statutes and regulations,
it is qualified in its entirety by reference to the particular statutes and
regulations promulgated under such statutes.
Bremer's acquisition of the Company, which will be effected through the
Merger, is subject to approval by the Board of Governors of the Federal Reserve
System ("Federal Reserve") under the Bank Holding Company Act of 1956, as
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amended (the "BHC Act"), which permits a bank holding company such as Bremer, to
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank or any bank holding company, such as the Company, if the
Federal Reserve has approved the transaction based upon its review of the
financial and managerial resources and future prospects of the existing and
proposed institutions and the convenience and needs of the community to be
served. The Federal Reserve's review includes an evaluation by the Federal
Reserve as to whether the Merger would result in a monopoly or otherwise would
substantially lessen competition or impair the financial and managerial
resources and future prospects of Bremer or the Company. In addition, the
Federal Reserve must take into account the records of Bremer and the Company in
meeting the credit needs of the entire community served by such institutions,
including low- and moderate-income neighborhoods.
In order to effect the Merger, Bremer formed the Merger Sub as a
wholly-owned subsidiary of Bremer. In the Merger, Merger Sub will merge with the
Company and the Company will survive the Merger, making the Company a
wholly-owned subsidiary of Bremer. To accomplish the Merger, Bremer has applied
to (i) the Federal Reserve for approval to acquire the Company and to merge the
Company with and into the Merger Sub, and (ii) the Wisconsin Department of
Financial Institutions (the "WDFI") for approval of the Merger and the
acquisition of Northwest by Bremer.
On December 15, 1999, Bremer submitted its applications for approval of the
Merger to the Federal Reserve Board and on December 22, 1999, it filed
applications for approval with the WDFI. Bremer and the Company anticipate
receiving required regulatory approvals by January 21, 2000, from the Federal
Reserve Board and on or about February 29, 2000, from the WDFI. The Merger
cannot be consummated until all required waiting periods have expired.
Bremer and the Company are not aware of any other governmental approvals or
actions that are required for consummation of the Merger. Should any such
approval or action be required, it is presently contemplated that such approval
or action would be sought or taken. There can be no assurance that any such
approval or action, if needed, could be obtained, would not delay consummation
of the Merger, or would not be conditioned in a manner that would cause Bremer
to abandon the Merger.
CLOSING AND EFFECTIVE TIME
The Merger will not be consummated unless and until the Merger Agreement
and the transactions contemplated thereby are approved by the requisite vote of
the shareholders of the Company, the required regulatory approvals are received,
and the other conditions to the Merger are satisfied (or waived to the extent
permitted by the Merger Agreement or applicable law). The Merger Agreement
provides that the closing of the Merger will occur on a date agreed upon by the
parties as soon as practicable after the expiration of any and all required
approvals of the Merger by governmental or regulatory authorities. The Effective
Time of the Merger shall be the date and time specified in the Articles of
Merger filed with the Wisconsin Department of Financial Institutions.
TAX CONSEQUENCES OF THE MERGER
Each shareholder of the Company who, pursuant to the Merger Agreement,
receives cash in exchange for shares of the Common Stock generally will, upon
the payment of such cash in exchange for the surrender of the certificate or
certificates representing such stockholder's shares, realize gain or loss for
federal income tax purposes measured by the difference between such
stockholder's cost or other basis in such shares and the amount of cash received
therefor, and the amount of such gain or loss so realized must be recognized by
such stockholder for federal income tax purposes. Such gain or loss will be
capital gain or loss if the shares held by such stockholder constitute capital
assets in the stockholder's hands, and will be long-term capital gain or loss if
such stockholder's holding period for such shares is more than one year. This
summary is not a complete description of all the tax consequences of the Merger
and, in particular, may not address federal income tax considerations that may
affect the holders of the common stock entitled to special treatment under the
Internal Revenue Code of 1986, as amended (the "Code"), such as insurance
companies, dealers in securities, tax exempt organizations, foreign persons or
corporations, or compensation related acquisitions.
SHAREHOLDERS ARE URGED AND ADVISED TO CONSULT THEIR OWN TAX COUNSELORS AND
ADVISORS WITH REGARD TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM,
34
<PAGE>
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE EFFECT OF FEDERAL, STATE,
LOCAL, AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND EFFECT OF THE MERGER ON EMPLOYEES
AND BENEFIT PLANS
Stock Owned by Officers and Directors
Information as to the shares held by directors and executive officers of
the Company is included in the section of this Proxy Statement entitled
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS."
Stock Option Plan
Pursuant to the Company's Stock Option Plan, the directors, officers and
employees of the Company and Bank have been granted currently outstanding
options to purchase a total of 100,980 shares of Common Stock at an average
option exercise price of $10.44. The Stock Option Plan provides that the options
granted vest at a rate of 33.3% on October 10, 1996, and 33.3% on each
subsequent anniversary date until all shares are vested. Under terms of the
Merger Agreement, all stock options will fully vest immediately prior to closing
of the Merger and each option, to the extent not previously exercised prior to
the closing of the Merger, shall automatically be converted into the right to
receive the Merger Per Share Consideration in cash, less the per share option
exercise price. Under terms of the Agreement, immediately before the Effective
Time, Northwest will pay option holders who have executed Voting Agreements or
who have agreed to accept the Option Settlement Amount, the excess of the Merger
Per Share Consideration over the exercise price of the option.
35
<PAGE>
Employee Stock Ownership Plan
The ESOP, using funds loaned to the ESOP by the Company, has purchased
103,250 shares of Common Stock for allocation to plan participants. At the
Effective Time, each participant will receive the Merger Per Share Consideration
in cash in exchange for each share allocated to them under the ESOP. Each
unallocated share remaining in the ESOP at the Effective Time will be exchanged
for the Merger Per Share Consideration in cash, which will be used to repay in
full the unpaid balance of the loan from the Company to the ESOP. Any cash
remaining in the ESOP following repayment of the loan will be allocated to plan
participants in accordance with the terms of the ESOP.
Employment Agreements
Bremer has entered into Amendment and Termination Agreements with Brian L.
Beadle and James Moore amending their employment agreements with the Company to
provide that at the Effective Time, and upon termination of their respective
current employment agreements with the Company, Mr. Beadle will receive $334,373
pursuant to operation of the change of control provisions of his Employment
Agreement and Mr. Moore will receive $113,918 pursuant to operation of the
change in control provisions of his Employment Agreement.
Employees and Benefit Plans
Except for Mr. Beadle and Mr. Moore, all of the Company's and the Bank's
employees will continue to be employees at the Effective Time and shall become
employees of Bremer or Bremer Bank following the Effective Time. If Bremer,
subsequent to the Effective Date, reduces or eliminates employment positions of
Company employees, Bremer will endeavor to offer such employees similar
positions with Bremer Bank or elsewhere within Bremer's system. If acceptable
positions are not available for Company employees, such Company employees will
be entitled to receive severance packages based upon Bremer's then current
severance policies, which policies shall take into consideration each Company
employee's years of service and grade levels with Company prior to the Effective
Time as well as any additional service with Bremer following consummation of the
Merger.
At the Effective Time, each employee of the Company and the Company
subsidiaries (the "Company Employees") shall immediately become entitled to
participate in each of Bremer's employee benefit plans (the "Bremer Plans"),
including, without limitation, any group hospitalization, medical, life and
disability insurance plans, severance plans, qualified retirement, employee
stock ownership and savings plans, stock option plans, and management
recognition plans, in which similarly situated employees of Bremer and its
subsidiaries participate and to the same extent as such employees of Bremer and
it subsidiaries. The period of employment and compensation of each Company
Employee shall be counted for all purposes (except for purposes of benefit
accrual) under the Bremer Plans, including, without limitation , for purposes of
vesting and eligibility. Any expenses incurred by a Company Employee under the
Company's welfare benefits plans (such as deductibles or co-payments) shall be
counted for all purposes under the Bremer Plans. Bremer shall waive any
preexisting condition exclusions for conditions existing on the Effective Time
and actively at work requirements for periods ending on the Effective Time
contained in the Bremer Plans as they apply to Company Employees and former
employees and their dependents; provided that Bremer's waiver of preexisting
conditions shall not extend to any condition which has prevented a Company's
Employee's coverage under comparable benefit plans of the Company or the Company
subsidiaries. The participation by the Company Employees in any of the Bremer
Plans with respect to which the eligibility of employees of Bremer to
participate is at the sole discretion of Bremer and its subsidiaries, shall be a
the sole discretion of Bremer and its subsidiaries applied in the same manner as
such discretion is applied to similarly situated employees of Bremer and its
subsidiaries. Bremer shall have sole discretion with respect to the
determination as to whether to terminate, merge or continue any employee benefit
plan or program of the Company or any of the Company subsidiaries, other than
the ESOP or the Northwest Savings Bank Money Purchase Pension Plan (the "Pension
Plan"); provided, however, that Bremer shall continue to maintain all employee
benefit plans of the Company or any of its subsidiaries (the "Company Employee
Plans") other than stock-based incentive plans and the tax qualified plans of
the Company until the Company Employees are permitted to participate in similar
Bremer Plans. At the Effective Time, Bremer or a subsidiary thereof shall be
substituted for the Company as the sponsoring employer under Company Employee
Plans with respect to which the Company or a Company subsidiary is sponsoring
employer immediately prior to the Effective Time, and which Company Employee
Plan is assumed by Bremer or its subsidiary pursuant to the terms of the Merger
36
<PAGE>
Agreement, and Bremer or a subsidiary thereof shall assume and be vested with
all of the powers, rights, duties, obligations, and liabilities previously
vested in the Company or Company subsidiary with respect to each such plan.
Indemnification; Directors' and Officers' Insurance
Bremer and Northwest as the surviving corporation following the Merger
(the "Surviving Corporation") shall indemnify and hold harmless, as and to the
fullest extent required by Wisconsin law and the Articles of Incorporation or
Bylaws of Northwest or any of its subsidiaries, as applicable and in effect as
of the date of the Merger Agreement (the "Indemnification Provisions"), any
individual who, as of the date of the Merger Agreement, or has been at any time
prior to the date of the Merger Agreement, or who becomes prior to the Effective
Time, a director or officer or employee of Northwest or any of its subsidiaries
(the "Indemnified Parties"), against any losses, claims, damages, liabilities,
costs, expenses (including payment of reasonable attorneys' fees and expenses
and other costs in advance of the final disposition of any claim, suit
proceeding or investigation incurred by each Indemnified Party to the fullest
extent required by the Indemnification Provisions upon receipt of any
undertaking required by the Indemnification Provisions), judgments, fines, and
amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation pertaining to any matter
existing or occurring at or prior to the Effective Time. In the event of any
such threatened or actual claim, action, suit, proceeding or investigation
(whether asserted before or after the Effective Time), the Indemnified Parties
may retain counsel reasonably satisfactory to them after consultation with the
Surviving Corporation; provided, however, (1) Bremer shall have the right to
assume the defense thereof and, upon such assumption, Bremer shall not be liable
to any Indemnified Party for any legal expenses of other counsel or any other
expenses subsequently incurred by any Indemnified Party in connection with the
defense thereof, except that if Bremer elects not to assume such a defense, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Bremer and Bremer shall pay the reasonable fees and expenses
of such counsel for the Indemnified Parties, (2) Bremer shall be obligated to
pay for only one firm of counsel for all Indemnified Parties, unless an
Indemnified Party shall have reasonably concluded, based on an opinion of
counsel, that there is a material conflict of interest between the interests of
such Indemnified Party and the interests of one or more other Indemnified
Parties and that the interests of such Indemnified Party will not be adequately
represented unless separate counsel is retained, in which case Bremer shall be
obligated to pay such separate counsel, (3) Bremer shall not be liable for any
settlement effected without its prior written consent (which consent will not be
unreasonably withheld) and (4) Bremer shall have no obligation to any
Indemnified Party when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and nonappealable,
that indemnification of such Indemnified Party in the manner contemplated by the
Merger Agreement is prohibited by applicable law. Bremer's obligations shall
continue in force and effect for the period of the applicable statute of
limitations; provided, however, that all rights to indemnification hereunder in
respect of any claim asserted or made within such period shall continue until
the final disposition of such claim. The Merger Agreement provisions do not
limit the discretion of Bremer or the Surviving Corporation to indemnify and
hold harmless any Indemnified Party as and to the fullest extent permitted by
Wisconsin law and the Articles of Incorporation or Bylaws of Northwest or any of
its Subsidiaries.
Board Positions
After the Effective Time, Bremer has agreed to offer two members of the
Board of Directors of the Company board positions on the board of Bremer Bank.
Following their appointment to the Board, the appointed members will serve on
the Board until their respective resignation, removal or death or until the next
meeting of shareholders of Bremer Bank at which directors are elected.
Employees
Bremer will attempt to retain qualified employees of the Company
subject to the needs of its business. Any employee who is terminated
involuntarily without cause after the Effective Time of the Merger will be
provided a severance payment under the severance policies of Bremer then in
effect.
37
<PAGE>
ACCOUNTING TREATMENT
The Merger, if completed as proposed, will be treated as a purchase in
accordance with generally accepted accounting principles. Accordingly, the
assets and liabilities of Northwest will be recorded on the consolidated books
of Bremer at their respective fair values at the time of consummation of the
Merger.
EXPENSES OF THE MERGER
The Merger Agreement provides that whether or not the Merger Agreement is
terminated or the transactions contemplated thereunder are consummated, the
Company and Bremer shall each pay its own legal, accounting and financial
advisory fees and all other costs and expenses incurred in connection with the
proposed transactions, subject to the Company's obligation to pay a termination
fee to Bremer under certain circumstances. See "APPROVAL OF THE MERGER AGREEMENT
- - Expenses; Termination Fee".
EFFECT OF THE MERGER ON THE RIGHTS OF THE COMPANY'S SHAREHOLDERS
As a result of the Merger, holders of the Common Stock will exchange their
shares for cash. Under the Company's current charter, shareholders have voting
rights with respect to certain matters relating to the Company, including the
election of directors. After the Merger, shareholders of the Company will not be
shareholders of the Company, Bremer, or Bremer Bank and, therefore, will have no
voting rights with respect to the Company, Bremer, or Bremer Bank, unless such
shareholders otherwise own or purchase voting securities of Bremer.
APPRAISAL RIGHTS
Under Wisconsin law, the Company's shareholders have no right to an
appraisal of the value of their shares in connection with the Merger.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE MERGER. TO
BE APPROVED, A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES ENTITLED TO VOTE AT
THE ANNUAL MEETING MUST VOTE IN FAVOR OF THE MERGER, IN PERSON OR BY PROXY.
INFORMATION ABOUT THE COMPANY AND THE BANK
The Company is a bank holding company registered with the Federal
Reserve under the BHC Act and the savings bank holding company laws of
Wisconsin. The Company's and the Bank's principal office is located at 234 South
Keller Avenue, Amery Wisconsin. The Company's activities consist of investing
the proceeds of its initial public offering which were retained at the holding
company level, holding the indebtedness outstanding from the Bank's ESOP and
owning the Bank. The Company's principal sources of income are earnings on its
investments and interest payments received from the ESOP with respect to the
Company's loan to the ESOP. In addition, the Company receives any dividends
which are declared and paid by the Bank on its capital stock.
The Bank was originally chartered in 1936 and has been a member of the
Federal Home Loan Bank system since 1936. The deposits of the Bank are insured
by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit
Insurance Corporation (the "FDIC") to the maximum amount permitted by law.
The Bank conducts business through its full service offices in Amery, New
Richmond and Siren, Wisconsin. It is primarily engaged in soliciting deposit
accounts from the general public, making mortgage loans to finance the
acquisition and construction of residential dwellings and making limited types
of consumer loans. The Bank's primary source of revenue is interest income from
its lending activities; other major sources of revenue are interest and dividend
income from investments and mortgage-backed securities, interest income from its
interest-bearing deposit balances in other depository institutions and fee
income from its lending and deposit activities. The major expenses of the Bank
are interest on deposits and noninterest expenses such as compensation and
fringe benefits, data processing expenses and branch occupancy and related
expenses.
38
<PAGE>
PRIMARY MARKET AREA
The Company offers a variety of deposit products, services and mortgage
loans primarily in northwestern Wisconsin. The Company's main office is located
at 234 South Keller Avenue, Amery, Wisconsin. The City of Amery is located
approximately 40 miles northeast of Minneapolis and St. Paul, Minnesota. The
Company, in addition to its Amery office, has two full-service branches. One is
located in New Richmond and the other in Siren, Wisconsin. All of the Company's
locations are in counties generally characterized as rural with a total
population of approximately 100,000.
The Company has significant competition in both its mortgage and consumer
lending business, as well as in attracting deposits. The Company's primary
competition for loans are principally from other savings banks, thrift
institutions, mortgage banking companies, insurance companies and commercial
banks. Its most direct competition for deposits historically has come from other
savings banks, thrift institutions, commercial banks, and credit unions. The
Company has faced additional competition for funds from a number of
institutions, including the availability of short-term money market funds and
other corporate and government securities funds offered by other financial
service companies, such as brokerage firms and insurance companies.
SUBSIDIARY ACTIVITIES
The Banks has two wholly-owned subsidiaries, Amery Service Agency, Inc.
("ASA"), organized as a Wisconsin corporation in 1970, and Northwest
Investments, Inc. ("NWI"), organized as a Nevada corporation in 1997.
ASA engages in insurance agency activities permissible under state and
federal law, including the sale of credit life and disability products, and
maintenance of a third party brokerage relationship. The ASA and the Bank have
received approval of the WDFI and the FDIC to engage in the insurance and
brokerage activities.
In January 1983, ASA formed the Pondhurst Condominium Association and
developed 54 residential lots for condominium duplexes and four-plexes on land
adjacent to a golf course in Amery, Wisconsin (the "Pondhurst Project"). As of
March 31, 1999, all 64 residential lots had been sold. On May 8, 1998, ASA sold
an adjacent undeveloped 7.5-acre parcel of land for $65,000. With the sale of
the 7.5 acre parcel, the Bank and ASA has complied with a request by the Federal
Reserve Bank of Minneapolis that ASA divest its holdings in the Pondhurst
Project by May 31, 2000. As of March 31, 1999, ASA had total assets of $48,000.
On May 30, 1997, NWI was established as an investment subsidiary of Bank to
manage a portion of its investments. The establishment and operation of an
investment subsidiary through incorporation and operation in the State of Nevada
provides certain corporate tax advantages to the Bank. As of September 30, 1999,
NWI had total assets of $23.9 million.
EMPLOYEES
At September 30, 1999, the Company had 32 full-time employees and nine
part-time employees. The employees of the Company are not represented by a
collective bargaining unit, and the Company believes its relationship with its
employees to be good.
PROPERTIES
The following table sets forth the location of the Bank's principal office
in Amery and its full service branch offices in New Richmond and Siren, as well
as certain other information relating to these offices as of September 30, 1999.
The Company owns all of the properties on which its offices are located.
Management believes the Company's current facilities are adequate to meet its
present and immediately foreseeable needs.
39
<PAGE>
Net Book Value
Of Properties and
Year Improvements at
Office Location Opened September 30, 1999
- --------------- ------ ------------------
Amery/Home Office 1936 $1,180,000
234 South Keller Avenue
P.O. Box 46
Amery, Wisconsin 54001
New Richmond Office 1972 869,000
532 South Knowles Avenue
New Richmond, Wisconsin 54017
Siren Office 1975 127,000
--------
24082 Wisconsin Highway 35N
Siren, Wisconsin 54872
Net Book Value $2,176,000
Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by the Bank in an effort to recover its investment. As of
September 30, 1999, the Bank had no recorded real estate acquired in settlement
of loans.
LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.
40
<PAGE>
Lending Activities
General
The largest component of the Company's gross loan receivable of
$73.9 million at March 31, 1999, was first mortgage loans secured by
owner-occupied one-to-four family residences and totaled $54.2 million at March
31, 1999, or 73.4% of net loans receivable. Other real estate loans were $8.7
million or 11.8% of net loans receivable at March 31, 1999. Of net loans
receivable, $59.7million or 80.8% were ARM loans. As part of its strategy to
manage interest rate risk, the Company originates primarily ARM loans that have
short and intermediate-term maturities for its own loan portfolio.
One-to-Four Family Mortgage Lending
The Company's primary lending activity is the origination of first
mortgage loans secured by one-to-four family, owner-occupied residences within
the Company's primary lending area. The Company sells substantially all of its
fixed rate mortgage loans it originates to government secondary market
investors. Generally, loans sold to government secondary market investors are
sold as whole loans with servicing retained. Substantially all of the ARM loans
originated by the Company are retained in its loan portfolio. The Company
follows Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines
for its one-to-four family mortgage loans.
The Company offers a variety of rates, fees, origination terms, and
mortgage products. Mortgage loan originations are solicited from real estate
brokers, builders, existing customers, community groups and residents of local
communities located in the Company's primary market area through its loan
origination staff. The Company also advertises its products through local
newspapers, periodicals and radio. Upon receipt of a completed mortgage
application from a prospective borrower, a credit report is ordered, an
appraisal from an independent third party is obtained, income and other deposit
information are verified, and, as necessary, additional financial information is
requested. The Company requires title insurance or evidence of marketable title
and lien position (consisting of an abstract and legal opinion) on all first
mortgage loans. Borrowers must present evidence of appropriate hazard insurance
and flood insurance (if applicable) prior to the closing. On loans with high
loan to value ratios, borrowers are required to escrow funds on a monthly basis
for real estate taxes, hazard insurance, and, in some cases, flood insurance. On
those loans with no escrow requirement, the Company verifies payment of real
estate taxes on a semi-annual basis and requires evidence from the borrower
annually of hazard insurance and flood insurance. The lending policy of the
Company restricts mortgage loan amounts to 80% of the lesser of the appraised
value or purchase price of the real estate to be mortgaged to the Company. The
Company makes mortgage loans in amounts up to 95% of the lesser of the appraised
value or purchase price, subject to availability of private mortgage insurance
insuring the amount in excess of 80% of the appraised value or purchase price.
Exceptions to this policy are ARM loans, in which case the Company loans up to
90% of the appraised value or purchase price with the appropriate private
mortgage insurance. In addition, the Company may make loans to its most
creditworthy customers up to 90% of the appraised value without private mortgage
insurance. The Company also currently offers a program for low to moderate
income families to lend up to 90% of the appraised value of the property without
private mortgage insurance, provided certain credit, property and cost criteria
are met.
The Company's underwriting department reviews all the pertinent
information and makes a credit decision for approval or denial within
established Company policy guidelines. Recommendations to deny applications
based on underwriting considerations are reviewed by the Company's senior
underwriter prior to a final disposition of the loan application. The Board of
Directors and the Loan Committee review summaries of all one-to-four family
mortgage loan applications on a monthly basis. Mortgage loans held in the
Company's loan portfolio generally include due-on-sale clauses, which provide
the Company with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers the ownership of the property
without the Company's prior consent.
The Company enforces the due-on-sale clauses of its mortgage loans.
The Company makes loans under various governmental programs including
the Wisconsin Housing and Economic Development Authority ("WHEDA"), the Federal
Housing Administration, the Farmers Home Administration ("FHA") and the Federal
Veterans Administration ("VA"). These programs generally have lower down payment
and less restrictive qualification ratios. The WHEDA loans are serviced through
WHEDA and originated for them, and the Federal Housing Administration, FHA and
VA loans are sold in the secondary market with servicing retained.
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<PAGE>
Composition of Loan Portfolio
The following table sets forth the composition of the Company's loan
portfolio, including loans held for sale, in dollar amounts and in percentages
of the gross loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $54,223 73.38% $58,120 73.64% $55,581 71.14%
Multi-family 627 0.85% 536 0.67% 931 1.19%
Commercial 5,944 8.04% 5,261 6.67% 6,443 8.25%
Construction and land 2,094 2.83% 2,785 3.53% 3,299 4.22%
-------- -------- -------- -------- -------- --------
Total real estate loans 62,888 85.10% 66,702 84.51% 66,254 84.80%
-------- -------- -------- -------- -------- --------
Consumer loans:
Home equity - - - - - -
Automobile 5,248 7.10% 5,706 7.23% 4,856 6.22%
Credit card 265 0.36% 312 0.40% 304 0.39%
Other consumer loans 1,596 2.16% 1,809 2.29% 2,047 2.62%
-------- -------- -------- -------- -------- --------
Total consumer loans 7,109 9.62% 7,827 9.92% 7,207 9.23%
-------- -------- --------- -------- -------- --------
Commercial loans 3,899 5.28% 4,397 5.57% 4,663 5.97%
-------- -------- --------- -------- --------- --------
Gross loans receivable 73,896 100.00% 78,926 100.00% 78,124 100.00%
-------- ======== -------- ======== --------- ========
Add:
Accrued interest, net 456 492 448
Less:
Loans in process - - -
Deferred fees and discounts (31) (3) (8)
Allowance for loan losses (375) (484) (461)
--------- -------- --------
Total additions/deductions 50 5 (21)
--------- -------- --------
Loans receivable, net $73,946 $78,931 $78,103
========= ========= ==========
</TABLE>
42
<PAGE>
Loan Maturity
The following table shows the contractual maturity of the
Company's loan and mortgage-backed and related securities portfolio at March 31,
1999. Loans that have adjustable rates are shown as being due in the period
during which the underlying contracts mature. Demand loans that have no schedule
for repayment and no stated maturity are reported as due in one year or less.
The table does not include estimated prepayments or scheduled principal
amortization.
<TABLE>
At March 31, 1999
------------------------------------------------------------------------------------------
Total
Mortgage-
One-to- Commercial Construction Backed and
Four Multi- Real and Related
Family Family Estate Land Commercial Consumer Securities Total
------ ------ ------ ---- ---------- -------- ---------- -----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due :
Within one year $1,123 $ - $3 $1,573 $1,912 $765 $ - $5,376
-------- ----- ------- ------- -------- ------- -------- -------
After one year:
One to three years 1,698 - 746 0 1,079 2,617 - 6,140
Three to five years 2,856 - 225 0 200 3,325 - 6,606
Five to ten years 4,182 - 1,694 0 708 311 995 7,890
Ten to twenty years 11,231 - 1,259 89 - 37 1,842 14,458
Over twenty years 32,102 627 2,017 432 - 54 3,200 39,432
-------- ----- ------- -------- -------- ------- ------- -------
Total due after one year 53,069 627 5,941 521 1,987 6,344 6,037 74,526
======== ===== ======= ======== ======== ======= ======= =======
Total amounts due 54,192 627 5,944 2,094 3,899 7,109 6,037 79,902
======== ===== ======= ======== ======== ======= ======= =======
Less:
Allowance for loan losses (50) (1) (12) (2) (224) (86) - (375)
-------- ----- ------ -------- -------- ------- ------- -------
Loans receivable and mortgage-
backed securities, net $54,142 $626 $5,932 $2,092 $3,675 $7,023 $6,037 $79,527
======== ===== ====== ======== ======== ======= ======= =======
</TABLE>
43
<PAGE>
The following table sets forth at March 31, 1999 the dollar amount of
all loans and mortgage-backed and related securities due after March 31, 2000,
such loans and whether such loans have fixed interest rates or adjustable
interest rates.
---------------------------------
Due After March 31, 2000
---------------------------------
---------------------------------
Fixed Adjustable Total
---------------------------------
(In thousands)
Mortgage loans:
One-to-four family $4,991 $48,109 $53,100
Multi-family - 627 627
Commercial 1,299 4,642 5,941
Construction and land 26 495 521
------- -------- --------
Total mortgage loans 6,316 53,873 60,189
Consumer loans 6,027 317 6,344
Comercial loans 795 1,192 1,987
------- -------- --------
Gross loans receivable 13,138 55,382 68,520
Mortgage-backed securities 5,587 450 6,037
------- -------- --------
Gross loans receivable and mortgage-
backed securities $18,725 $55,832 $74,557
======== ======== ========
One-to-Four Family Mortgage Lending(concluded)
The Company offers one and three-year ARM loans. ARM loans currently
adjust a maximum of two percentage points per year with a lifetime interest cap
of six percentage points above the initial interest rate. Monthly payments of
principal and interest are adjusted when the interest rate adjusts to maintain
full amortization of the mortgage loan within the remaining term. The initial
rates offered on ARM loans fluctuate with general interest rates changes and are
determined by competitive conditions and the Company's yield requirements. The
Company currently uses the one-year and three-year, Constant Maturity United
States Treasury indexes to determine the interest rate payable upon the
adjustment date of outstanding ARM loans. The Company also originates ARM loans
with initial interest rates below the fully indexed rate by permitting the
borrower to choose the number of percentage points the initial interest rate is
below the fully indexed rate (up to two points) and pay origination points in a
corresponding amount. Borrowers choosing these ARM loans can effectively lower
the lifetime interest rate cap by decreasing the initial interest rate. ARM
loans generally pose different risks than fixed rate loans. In a rising interest
rate environment, the underlying ARM loan payment rises, increasing the
potential for default, and the marketability of the underlying property may be
adversely affected. In a decreasing interest rate environment, mortgagors tend
to refinance to fixed rate loans. The Company's delinquency experience on its
ARM loans generally has been satisfactory to date.
The Company has continued to generate a significant amount of
adjustable rate loans. The Company's continued ability to originate ARM loans is
primarily due to the nature of its market area, which includes rural and
vacation properties. Loans on properties with excessive acreage, hobby farm
activities or three-season cabins generally cannot be sold into the secondary
market, thus making these loans less attractive to competitors of the Company
that only originate loans for sale into the secondary market. Furthermore, many
of the Company's customers desiring a loan term of short-to-medium-duration
(i.e., less than ten years) often prefer ARM loans because of the generally
lower closing costs compared to fixed rate loans. The Company generally obtains
an abstract and title opinion, rather than title insurance, on loans originated
for retention in its portfolio and has not experienced losses attributable to
the lack of title insurance.
Commercial Real Estate Lending
At March 31, 1999, the Company's commercial real estate loan portfolio
totaled $5.9 million or 8.0% of net loans receivable. The commercial real estate
loans in the Company's portfolio consist of fixed rate and ARM loans generally
secured by small office buildings, retail stores and farms, and occupied by the
borrower. The Company currently originates ARM loans secured by commercial real
estate at 375 to 525 basis points above the rate on U.S. Treasury securities for
comparable maturities. These loans typically do not exceed 65% of the lesser of
44
<PAGE>
the purchase price or the appraised value of the underlying collateral. At March
31, 1999, the largest outstanding commercial real estate loan was $1.4 million.
In underwriting commercial real estate loans, the Company's
underwriting procedures require a review of the borrower's credit history,
income taxes, personal financial statements, banking relationships, property
management experience. An analysis of the property is also required, including
cash flow projections, historical operating statements, environmental concerns,
compliance with regulations, and prevailing market conditions. Loans secured by
commercial real estate properties involve a greater degree of risk than
residential mortgage loans. Payments on loans secured by commercial real estate
properties are often susceptible to adverse conditions in the real estate market
or the economy. The Company seeks to minimize these risks by originating
commercial real estate loans principally in its primary market area where it has
the ability to more closely monitor and anticipate adverse conditions.
Commercial Lending
The Company engages in a limited amount of commercial business lending
activities, generally with existing customers, including secured and unsecured
loans and letters of credit. At March 31, 1999, the Company had $ 3.9million in
commercial business loans outstanding, which represented 5.3% of net loans
receivable. Term loans are amortized over a one to five year term and lines of
credit are reviewed annually. Such loans generally are originated at 375 to 525
basis points above the rate on U.S. Treasury securities for comparable
maturities. At March 31, 1999, the largest outstanding commercial loan was $0.6
million.
The Company originated a majority of the commercial loans in its loan
portfolio in the mid-1980's when it hired a commercial loan officer to expand
its activity in this area. The Company currently is not actively seeking new
commercial lending business and substantially all of its commercial lending
consists of renewals of existing commercial loans. The commercial loans in the
portfolio are generally performing and, management believes, adequately
reserved.
Commercial business loans are of higher risk and typically are made on
the basis of borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent upon the general
economic environment. The Company's commercial business loans usually include
personal guarantees and are usually, but not always, secured by business assets,
such as accounts receivable, equipment and inventory as well as real estate.
However, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business.
Consumer Lending
The Company held $7.1 million or 9.6% of net loans receivable of
consumer loans at March 31, 1999. Consumer loans generally have shorter terms
and higher interest rates than mortgage loans, but generally involve more risk
than mortgage loans because of the type and nature of the collateral and, in
certain cases, the absence of collateral. Consumer loans generally are dependent
on the borrower's continuing financial stability and thus are more likely to be
affected by adverse personal circumstances. Often the loans are secured by
rapidly depreciable personal property, such as automobiles. Automobile loans
generally are underwritten in amounts up to 90% of the purchase price for new
and used vehicles. The term of the loans generally cannot exceed six years for
new vehicles and five years for used vehicles. The Company's delinquent consumer
loans as a percentage of total consumer loans has been minimal.
Multi-Family Lending
The Company held $.6million or .85%net loans receivable of multi-family
loans at March 31, 1999. The rates charged on the Company's multi-family loans
typically are slightly higher than rates charged on loans secured by one-to-four
family residential properties. Multi-family ARM loans typically adjust in a
manner similar to that of the Company's other ARM loans, although generally at a
slightly higher margin. An origination fee equal to 1% of the principal amount
is usually charged on such loans.
Multi-family loans are generally underwritten in amounts to 80% of the
lesser of the appraised value or purchase price of the underlying property. An
independent appraiser designated by the Company at the time the application is
submitted performs appraisals of multi-family properties. In addition, the
Company's underwriting procedures require review of the borrower's credit
history, income, personal financial statements and banking relationships. A
review of the property includes cash flow projections and historical operating
results. The Company evaluates all aspects of multi-family lending to mitigate
risk to the extent possible. The Company seeks to ensure that the property
securing the loans will generate sufficient cash flow to adequately cover
operating expenses and debt service payments. The Company obtains individual
guarantees for substantially all of its multi-family loans.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family mortgage loans and carry larger
45
<PAGE>
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loans may be impaired. Despite the risks inherent in
multi-family real estate lending, the Company's delinquent multi-family loans as
a percentage of loans receivable has been minimal.
Construction and Land Lending
The Company offers one-to-four family residential and other
construction loans and land loans. At March 31, 1999, construction and land
loans totaled $2.1 million or 2.8% of net loans receivable. Construction loans
are made to individuals intending to occupy a home who have signed construction
contracts with a builder. These loans have loan-to-value ratios not exceeding
90%. When the loan-to-value ratios exceed 80%, private mortgage insurance is
required. The Bank offers permanent financing, primarily one-to three-year ARM
loans, on residential construction loans that enables borrowers to avoid
duplicative closing costs normally associated with temporary financing during
construction periods and permanent financing upon completion of construction.
The Company has had minimal delinquent residential construction loans to date.
Loan Approval
Loan approval is based on a customer's aggregate amount of loans
outstanding, including the loan application under review. One member of the Loan
Committee and a loan officer may approve loan amounts of $100,000 or less. Loan
amounts exceeding $100,000 up to $500,000 require the approval of two members of
the Loan Committee and a loan officer. Any single loan exceeding $500,000
requires approval from the Board of Directors and a loan officer. Any loans over
$25,000 that exceed the aggregate amount of $625,000 require Board approval.
Originations, Purchase and Sales of Loans
Mortgage loans are solicited from real estate brokers, builders,
developers, existing or past customers, and residents of the local communities
located in the Company's primary market areas. The Company advertises its
mortgage products in newspapers and other media in addition to using its loan
officers to directly solicit potential borrowers. The following table sets forth
the Company's loan originations, purchases, sales and principal repayments for
the periods indicated. Mortgage loans and mortgage-backed and related securities
held for sale are included in the totals.
46
<PAGE>
<TABLE>
Fiscal Years Ended March 31,
--------------------------------
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross)
At beginning of period $66,702 $66,254 $59,604
-------- -------- --------
Mortgage loans originated:
One-to-four family 36,564 25,216 21,223
Commercial 1,987 226 1,072
Multi-family 472 - -
Construction and land 8,740 3,809 6,690
-------- -------- --------
Total mortgage loans originated 47,763 29,251 28,985
-------- -------- --------
Mortgage loans purchased 581 368 101
-------- -------- --------
Total mortgage loans originated and purchased 48,344 29,619 29,086
-------- -------- --------
Transfer of mortgage loans to foreclosed
real estate (254) (159) (72)
Principal repayments (32,773) (17,796) (17,890)
Sales of fixed rate loans (19,131) (11,216) (4,474)
-------- -------- --------
Total reductions (52,158) (29,171) (22,436)
-------- -------- --------
At end of period $62,888 $66,702 $66,254
======== ======== ========
Consumer loans:
At beginning of period $7,827 $7,207 $6,897
Consumer loans originated 5,397 6,796 5,313
Principal repayments (6,115) (6,176) (5,003)
------- -------- --------
At end of period $7,109 $7,827 $7,207
======= ======== ========
Commercial loans:
At beginning of period $4,397 $4,663 $4,612
Commercial loans originated and purchased 5,798 3,879 3,356
Principal repayments (6,296) (4,145) (3,305)
------- -------- --------
At end of period $3,899 $4,397 $4,663
======= ======== ========
Mortgage-backed and related securities:
At beginning of period $6,398 $7,421 $5,373
Mortgage-backed securities
purchased 2,601 - 2772
Amortization and repayments (2,962) (1,023) (724)
------- -------- -------
At end of period $6,037 $6,398 $7,421
======= ======== =======
</TABLE>
47
<PAGE>
<TABLE>
The following table sets forth the Company's loan originations and purchases in
various loan categories according to whether the loan is fixed rate versus
adjustable rate for the periods indicated.
Fiscal Years Ended March 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
Fixed Adjustable Total Fixed Adjustable Total Fixed Adjustable Total
-------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $22,828 $14,156 $36,984 12,658 $12,926 $25,584 $7,796 $13,427 $21,223
Multi-family - 633 633 - - - - - -
Commercial - 1,987 1,987 - 226 226 69 1,003 1,072
Construction and land 7,634 1,106 8,740 3,102 707 3,809 5,423 1,368 6,791
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total mortgage loans 30,462 17,882 48,344 15,760 13,859 29,619 13,288 15,798 29,086
Consumer loans 5,397 - 5,397 6,781 15 6,796 5,313 - 5,313
Comercial loans 3,851 1,947 5,798 3,432 447 3,879 2,308 1,048 3,356
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total loans originated
and purchased $39,710 $19,829 $59,539 $25,973 $14,321 $40,294 $20,909 $16,846 $37,755
======== ======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
48
<PAGE>
Participation Loans
In order to meet asset/liability management objectives that are
enhanced by loans with higher rates and shorter repricing periods, the Company
has purchased from time to time participation interests in a variety of real
estate loans, including commercial real estate loans. Prior to purchase, the
Company reviews each participation to ensure that the underlying loan complies
with the Company's lending policy as in effect and the loans-to-one borrower
limitations.
The purchase of participation loans involves the same risks as the
origination of the same types of loans as well as additional risks related to
the purchaser's lower level of control over the origination and subsequent
administration of the loan. Many of the participation loans purchased by the
Company in the past also have been on projects located outside the State of
Wisconsin, primarily in the Minneapolis/St. Paul, Minnesota area. Management
does not anticipate future purchases to be significant, and will continue to
investigate purchase opportunities on an individual basis.
Sale of Mortgage Loans
The Company sells loans that it originates, on a non-recourse basis,
into the secondary market to the FHLMC, Federal National Mortgage Association
("FNMA") and WHEDA. The amount of loans sold by the Company is based upon market
conditions and the Company's asset/liability strategy. For the past three fiscal
years, the Company has sold substantially all of the fixed rate loans originated
to governmental secondary market purchasers in order to manage interest rate
risk. For the fiscal year ended March 31, 1999, the Company's fixed rate loan
sales to governmental investors totaled $19.1 million with associated gains of
$206,000.
The Company is subject to interest rate risk on fixed rate loans in its
pipeline from the point in time that the rate is locked with the borrower until
it is sold into the secondary market. In a declining interest rate environment,
the interest rate is locked in at the time of loan approval and held for sale to
take advantage of the market rate of interest. In order to minimize the interest
rate risk in a rising interest rate environment, the interest rate is locked in
at the time of loan approval and a commitment to sell the loan is obtained
simultaneously. These loans are sold on an individual basis when the loan is
closed.
All mortgage loans are made and underwritten pursuant to the
requirements of secondary market investors. The Company retains servicing on
loans sold to FHLMC and FNMA, receiving a servicing fee, which represents the
difference between the contract rate on the loans sold and the yield at which
such loans are sold. The servicing spread earned by the Company is typically
0.25%.
The Company also acts as a conduit for loans sold to WHEDA. For those
borrowers who qualify under WHEDA guidelines, the Company originates the loan
for a $500 fee and sells the loan to WHEDA, on a non-recourse basis, servicing
released.
Loan Origination, Servicing and Other Fees
In addition to interest earned on loans, the Company receives income
through fees in connection with loan originations, loan sales, loan
modifications, late payments, loan servicing, and for miscellaneous services
related to its loans. Income from these activities varies from period to period
with the volume and type of loans originated.
In connection with the origination of mortgage loans, the Company
requires borrower reimbursement for out-of-pocket costs associated with
obtaining independent appraisals, credit reports, title insurance or abstract
and title opinion, private mortgage insurance and other items. While origination
fees ranging from zero to two points generally have been quoted on mortgage
loans in recent years, most of the Company's borrowers typically accept a
slightly higher interest rate and pay zero points.
For loans sold to FHLMC and FNMA, the Company retains the
responsibility for servicing such loans. At March 31, 1999, 1998 and 1997, the
Bank serviced $46.3 million, $30.7 million and $25.3 million loans for others,
respectively. Fee income received in connection with loans serviced for others
was $94,000, $77,000 and $77,000 for the fiscal years ended March 31, 1999, 1998
and 1997, respectively.
The contractual right to service mortgage loans sold has an economic value.
The value results from the future income stream of the servicing fees, the
availability of the cash balances associated with escrow funds for real estate
taxes and insurance, the availability of the cash from monthly principal and
interest payments from the collection date to the remittance date, and the
ability of the servicer to cross-sell other products and services. The actual
value of a servicing portfolio is dependent upon such factors as the age,
maturity and prepayment rate of the loans in the portfolio, the average dollar
balance of the loans, the location of the collateral property, the average
amount of escrow funds held, the interest rates and delinquency experience of
the loans, the types of loans, and other factors.
49
<PAGE>
Delinquencies, Nonperforming Assets and Classified Assets
Delinquent Loans
When a borrower fails to make a required payment by the end of the
month in which the payment is due, the Company generally initiates collection
procedures. The Company will send a late notice, and in most cases,
delinquencies are cured promptly. However, if a loan becomes delinquent for more
than 60 days, the Company contacts the borrower directly, to determine the
reason for the delinquency and effect a cure. Where it believes appropriate, the
Company may review the condition of the property and the financial position of
the borrower. At that time, the Company may: (i) accept a repayment program for
the arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv) initiate
foreclosure proceedings. When a loan secured by a mortgage is delinquent for
three or more monthly installments, the Company generally will initiate
foreclosure proceedings. With respect to delinquencies on loans sold to FHLMC or
FNMA, or insured by FHA or guaranteed by VA, the Company follows the appropriate
notification and foreclosure procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the
Company receives monthly reports from its loan servicers with which it monitors
the loan portfolio. The Company relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts, and to initiate foreclosure proceedings,
when necessary, in accordance with applicable laws, regulations, and the terms
of the servicing agreements between the Company and its servicing agents.
Total loans delinquent 90 days or more totaled $.2 million or .3%
of loans receivable at March 31, 1999.
Classification of Assets
The FDIC requires each federally insured bank to classify its assets on
a regular basis in accordance with the guidelines set forth in the FDIC Manual
of Examination Policies. In addition, in connection with examinations of insured
banks by the FDIC, FDIC examiners have authority to identify problem assets as
Substandard, Doubtful or Loss. Substandard assets have one or more well defined
weaknesses that jeopardize the liquidation of the debt and are characterized by
the distinct possibility that the bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. An asset classified
as Loss is considered uncollectible and of such little value that continuance as
an asset of the bank is not warranted. The Company has adopted an asset
classification methodology that parallels that required by federal regulators.
At March 31, 1999, based upon the Company's asset classification methodology,
the Company had assets classified as Substandard of $364 million, none as
Doubtful and none as Loss. Assets that are classified as Loss are charged off.
The FDIC examination policies include a Special Mention category, consisting of
assets that currently do not expose the Company to a sufficient degree of risk
to warrant adverse classification, but do possess credit deficiencies deserving
management's close attention. At March 31, 1999, $238,000 of the Company's
assets were classified as Special Mention.
Non-Performing Assets
Loans are placed on non-accrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Bank discontinues the
accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a loan
is placed on non-accrual status, all of the accrued interest on that loan is
reversed by way of a charge to interest income. Accrual of interest on a
non-accrual loan is resumed when all contractually past due payments are current
and when management believes the outstanding loan principal and contractually
due interest is no longer doubtful of collection. The Bank discontinues the
accrual of interest on loans more than 90 days past due, at which time all
accrued but uncollected interest is reversed by way of a charge to income.
Property acquired by the Bank as a result of a foreclosure is
classified as real estate owned. Foreclosed properties are recorded at the lower
of the unpaid principal balance of the related loan or fair value, less
estimated costs to sell. The amount by which the recorded loan balance exceeds
the fair value at the time a property is classified a foreclosed property is
charged against the allowance for loan losses. Any subsequent reduction in the
fair value of a foreclosed property, along with expenses incurred to maintain or
dispose of a foreclosed property, is charged against current earnings. At March
31, 1999, the Company had $63,000 of property in real estate owned.
50
<PAGE>
At March 31, 1999, 1998, and 1997, delinquencies in the Company's loan portfolio
were as follows:
<TABLE>
At March 31, 1999 At March 31, 1998 At March 31, 1997
---------------------------------------------------------------------------------------------------------
31-89 Days 90 Days or more 31-89 Days 90 Days or more 31-89 Days 90 Days or more
---------------------------------------------------------------------------------------------------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
---------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 20 $904 2 $53 22 $754 5 $109 45 $2,399 7 $179
Multi-family -- -- -- -- -- -- -- -- -- -- -- --
Residential construction -- -- -- -- 1 62 -- -- 1 84 -- --
Commercial 2 114 -- -- 6 471 3 280 6 406 2 199
---- ------- ---- ---- ---- ----- ----- ----- ---- ------ ---- -----
Total mortgage loans 22 $1,018 2 $53 29 $1,287 8 $389 52 $2,889 9 378
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- -----
Consumer loans 24 55 3 17 31 161 32 129 39 191 9 137
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- -----
Comercial loans 1 10 3 159 1 3 9 858 4 204 6 556
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ----- -----
Total 47 $1,083 8 $229 61 $1,451 49 $1,376 95 $3,284 24 $1,071
==== ======= ===== ===== ==== ======= ===== ======= ==== ======= ===== ======
Delinquent loans to gross 1.47% 0.31% 1.84% 1.74% 4.16% 1.36%
loans(2)
<FN>
- --------------------------
-1 The Company discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest
payment by 90 days or more.
-2 Excluding mortgage-backed securities.
</FN>
</TABLE>
51
<PAGE>
Nonperforming loans include loans placed on non-accrual status and
troubled debt restructurings. Non-performing assets include non-performing loans
and foreclosed properties. The following table sets forth non-performing loans
and assets.
<TABLE>
March 31,
--------------------------------
1999 1998 1997
<CAPTION>
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans 90 days or more past due $53 $389 $378
Non-accrual consumer loans 90 days or more past due 17 116 128
Non-accrual commerical loans 90 days or more past due 159 858 556
Loans 90 days or more past due and still accruing - 14 9
Troubled debt restructurings 9 11 -
----- ------- -------
Total non-performing loans $238 $1,388 $1,071
===== ======= =======
Total real estate owned and in judgement, net of
related allowance for losses 63 159 -
----- ------- -------
Total non-performing assets $301 $1,547 $1,071
===== ======= =======
Total non-performing loans to gross loans receivable 0.32% 1.76% 1.37%
Total non-performing assets to total assets 0.31% 1.57% 1.13%
Total classified assets $602 $1,885 $1,330
Total classified assets to total assets 0.62% 1.91% 1.40%
Interest income that would have been recorded on non-
performing loans if current $15 $89 $59
Interest income on non-performing loans included
in net income $3 $21 $13
</TABLE>
As of March 31, 1999, management was not aware of any loans not
included in the foregoing tables or discussed above that the borrower could not
comply with the loan repayment terms.
Allowance for Loan Losses
Under federal regulations, when an insured institution classifies
problem assets as either Substandard or Doubtful, it is required to establish a
general allowance for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Bank may establish specific loss
reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances that have been established to recognize the
inherent risks associated with lending activities, but which, unlike specific
allowances, have not been allocated to recognize probable losses on particular
problem assets. The Bank's determination as to its classification of assets and
the amount of its specific and general valuation allowances are subject to
review by the DFI and the FDIC, either one of which can order the establishment
of additional general or specific loss allowances.
The allowance for loan losses is established through a provision for loan
losses, which reduces net interest income. The Company's allowance for loan
losses at March 31, 1999, totaled $375,000 or 61.0% of cumulative net
charge-offs during the last three fiscal years. The allowance for loan losses is
determined by multiplying the average balance of real estate loans; installment
and credit card loans; and commercial and other loans by the percentage of
actual loss experience for the last three years for each category of loans plus
15% for any substandard loans in each category of loans. Substandard loans are
evaluated individually and actual loss percentage to the average balance of each
category of loans as a group. Any unallocated portion of the allowance is
applied to the category with the highest percentage of loss experience for the
prior three years. A self-correcting mechanism to reduce differences between
estimated and actual observed losses is not necessary since the allowance is
determined by actual observed losses. The average balance of each category of
loans reflects changes in loan concentration. Loan quality is reflected in the
15% allowance for any substandard loan. As the allowance is based on actual loss
experience and the current level of substandard loans, no elimination methods
and assumptions are used in determining the allowance. A change in substandard
loans and the average balance of the categories of loans will be immediately
reflected in the allowance. The level of the allowance is equal to historical
net loss experience plus the 15% allowance for the current level of substandard
assets. The ratio of allowance for loan losses to gross loans receivable was
0.50% at March 31, 1999.
52
<PAGE>
The following table sets forth activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
For the Fiscal Year Ended March 31,
---------------------------------------------------
1999 1998 1997
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $484 $461 $433
Additions charged to operations:
One-to-four family - 0 0
Multi-family and commercial real estate 2 0 0
Commercial 291 76 75
Consumer 83 24 6
------ ------ ------
376 100 81
Recoveries:
One-to-four family 0 0 19
Multi-family and commercial real estate 7 3 3
Commercial 0 0 0
Consumer 7 7 0
------ ------ ------
14 10 22
Charge-offs:
One-to-four family 0 0 0
Multi-family and commercial real estate (2) 0 0
Commercial (413) 0 (19)
Consumer (84) (87) (56)
------ ------ -------
(499) (87) (75)
Net charge-offs (485) (77) (53)
------ ------ -------
Balance at end of period $375 $484 $461
====== ====== =======
Percentage of loans to gross loans receivable
Mortgage loans 85.10% 84.51% 84.80%
Consumer loans 9.62% 9.92% 9.23%
Ratio of allowance for loan losses to gross
loans receivable at the end of period 0.51% 0.61% 0.59%
Ratio of allowance for loan losses to
non-performing loans at the end of period(1) 157.56 34.87 43.04
Ratio of net charge-offs to average gross
loans during period 0.62% 0.10% 0.07%
Average gross loans outstanding $78,341 $79,471 $76,240
Gross loans receivable at the end of period $73,896 $78,923 $78,116
<FN>
- -------------------------------------------
(1) Non-performing loans include non-accrual loans, loans 90 days or more
past due and still accruing, and troubled debt restructurings.
</FN>
</TABLE>
53
<PAGE>
The following table shows the Company's allowance for loan losses and
the allocation to the various categories of loans held for investment at the
dates indicated. Allocations to a particular category do not restrict the
Company's ability to use such allowance in any other category.
<TABLE>
At March 31,
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
<CAPTION>
Loans In Loans In Loans In
Category Category Category
% of to Total % of to Total % of to Total
total Out- total Out- total Out-
Loans by standing Loans by standing Loans by standing
Amount Category Loans Amount Category Loans Amount Category Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans:
One-to-four family $50 0.09% 73.38% $50 0.09% 73.64% $36 0.06% 71.14%
Multi-family 1 0.16% 0.85% 1 0.19% 0.67% - 0.00% 1.19%
Commercial/nonresidential 12 0.20% 8.04% 5 0.10% 6.67% 34 0.65% 8.25%
Construction and land 2 0.10% 2.83% 2 0.07% 3.53% 1 0.04% 4.22%
------ ------- ------ -------- ------ --------
Total mortgage loans 65 85.10% 58 84.51% 71 84.80%
Consumer loans 86 1.21% 9.62% 80 1.02% 9.92% 50 0.69% 9.23%
-------
Commercial loans 224 5.75% 5.28% 346 7.87% 5.57% 340 7.29% 5.97%
------ ------- ------ -------- ------ --------
Total allowance for loan losses $375 100.00% $484 100.00% $461 100.00%
======= ======== ====== ======== ======= ========
</TABLE>
54
<PAGE>
Investment Activities
General
The investment policy of the Company, which is established by the Board
of Directors and implemented by the Company's President, is designed to provide
a required level of liquidity and minimize potential losses due to interest rate
fluctuations without incurring undue credit risk. The Company is authorized by
regulation to invest in various types of liquid assets, including United States
Treasury obligations, securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB-Chicago, certain certificates of
deposit of federally insured institutions, certain bankers' acceptances and
federal funds. The Company also invests in mortgage-backed and related
securities, securities that are either of investment grade or issued or
guaranteed by FHLMC, the FNMA or the Government National Mortgage Association
("GNMA"), and investment grade corporate debt.
The Company categorizes the securities it purchases into a
"Held-to-Maturity" or an "Available-For-Sale" portfolio as follows:
1. Securities Held-to-Maturity. The Company has the ability and
intent to hold these assets to maturity. Upon acquisition, securities
are classified as to the Company's intent and a sale would only be
effected due to deteriorating investment quality. The investment
portfolio is not used for speculative purposes and is carried at
amortized cost. In the event the Company sells securities from this
portfolio for other than credit quality reasons, all securities
within the investment portfolio with matching characteristics may be
reclassified as assets held for sale.
2. Securities Available-for-Sale. The Company does not intend to hold
the assets to maturity and thus are carried at fair value, with the
unrealized gains or losses, net of tax, reported as a separate
component of the stockholders equity. This portion of the securities
portfolio is designed to meet anticipated loan demand and deposit
runoff or to take advantage of market opportunities.
Effective April 1, 1993, the Company adopted SFAS No. 115 that requires
that the Company classify investments in marketable equity securities with
readily determinable fair value and all investments in debt securities as
held-to-maturity, trading or available-for-sale. The Company classified the
securities as of the date of adoption of SFAS 115 and subsequently at the time
of purchase and reviews the appropriateness of the classification at each
reporting date as follows:
1. Securities Held-to-Maturity. The Company has both the intent and
ability to hold these debt securities to maturity. Securities in this
category are carried at amortized cost.
2. Securities Classified as Trading. The Company acquires these
securities with the intent to resell them in the near term and are
held only for a short period of time. Securities in this category are
carried at fair value, with unrealized holding gains and losses
included in earnings.
3. Securities Available-for-Sale. This category includes all
securities not classified as held-to-maturity or trading. Securities
in this category are carried at fair value, with unrealized holding
gains and losses reported, net of deferred income taxes, in a
separate component of equity. These securities may be sold, for
example, in response to changes in market interest rates, liquidity
needs, availability of higher yielding instruments and changes in
funding sources.
The investment activities of the Company consist primarily of
investments in mortgage-backed and related securities and other investment
securities, consisting primarily of securities issued or guaranteed by the
United States Government or agencies thereof. Typical investments include
federally sponsored agency mortgage pass-throughs, and federally sponsored
agency and mortgage related securities. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in the Company's investment policy. The Company performs analyses on
mortgage related securities prior to purchase and on an ongoing basis to
determine the impact on earnings and market value of various interest rate and
prepayment conditions.
Mortgage-Backed Securities
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators through intermediaries
(generally federal government-sponsored enterprises) that pool and repackage the
participation interest in the form of securities to investors such as the
Company. Such federal government-sponsored enterprises, which guarantee the
payment of principal and interest to investors, include FHLMC, FNMA and GNMA.
55
<PAGE>
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company.
FHLMC, and FNMA were established to provide support for low and
middle-income housing. There are limits to the maximum size of loans that
qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts and pools of mortgage loans with interest rates that are within a range
and have varying maturities back the securities. The underlying pool of mortgage
loans can be composed of either fixed rate mortgage or ARM loans.
Mortgage-backed securities commonly are referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgage loans, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgage loans.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgages repay or prepay the underlying mortgage loans. Prepayments of
the underlying mortgage loans may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumption used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual prepayment of the underlying mortgage
loans depends on many factors, including type of mortgage loans, the coupon
rate, the age of the mortgage loans, the geographical location of the real
estate collateralizing the mortgage loans and general levels of market interest
rates. The difference between the interest rates on the underlying mortgage
loans and the prevailing mortgage interest rates is an important determinant in
the rate of prepayments.. During periods of decreasing mortgage interest rates,
prepayments generally increase. If the coupon rate of the underlying mortgage
loans significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgage loans. Prepayment experience is more difficult to
estimate for adjustable rate mortgage-backed securities.
Investment Securities
The Company invests in various types of liquid assets that are
permissible investments for Wisconsin-chartered savings banks, including United
States Treasury obligations and securities of various federal agencies. The
Company also invests its assets in commercial paper and mutual funds, the assets
of which conform to the investments that a Wisconsin-chartered savings bank is
otherwise authorized to make directly. The Company's current investment policy
only permits purchases of investments rated investment grade by a nationally
recognized rating agency and does not permit purchases of securities of
non-investment grade quality.
Composition of Securities Held-to-Maturity
At March 31, 1999, the Company held $9.4 million in its securities
held-to-maturity portfolio, consisting of $6.0 million in mortgage-backed
certificates issued by various federal agencies and $3.4 million in the
investment securities portfolio, consisting of securities of various federal
agencies. At March 31, 1999, the mortgage-backed securities portfolio
represented 6.2% of the Company's total assets and the investment securities
portfolio represented 3.5% of the Company's total assets.
Composition of Securities Classified as Trading
At March 31, 1999 and 1998, the Company did not have any investment
securities or mortgage-related securities classified as trading.
Composition of Securities Available for Sale
At March 31, 1999, the Company did not have any investment securities
or mortgage-related securities classified as available for sale.
56
<PAGE>
The table below sets forth certain information regarding the carrying
value, composition and market value of the Company's securities available for
sale and mortgage-backed securities held-to-maturity at March 31, 1999, 1998,
and 1997.
<TABLE>
At March 31, 1999 At March 31, 1998 At March 31, 1997
----------------- ----------------- -----------------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. govt securities and other agency obligations
FNMA $ - - $ - $ - - $ - $1,963 71.33% $1,963
FHLB - - - - - - 488 17.73% 488
FHLMC - - - - - - 300 10.90% 300
Money Market Mutual Fund - - - - - - 1 0.04% 1
------- ------ ------ ------- ------- ------- ------- ------- ------
Total securities available-for-sale $ - - $ - $ - - $ - $2,752 100.00% $2,752
======= ====== ====== ======= ======= ======= ======= ======= ======
Securities held-to-maturity
Mortgage-backed securities
FNMA $3,189 33.80% $3,224 $3,868 41.16% $3,926 $4,622 62.28% $4,523
FHLMC 1,214 12.86% 1,208 377 4.01% 384 434 5.85% 420
GNMA 1,634 17.32% 1,698 2,153 22.91% 2,236 2,365 31.87% 2,365
U.S. govt securities and other agency obligations
FFCB - 0.00% - 500 5.32% 500 - - -
FHLB 2,098 22.24% 2,083 1,700 18.09% 1,700 - - -
FHLMC 800 8.48% 803 800 8.51% 799 - - -
FNMA 500 5.30% 500 - - -
------- ------- ------- ------- ------- ------- ------- ------- ------
Total securities held-to-maturity $9,435 100.00% $9,516 $9,398 100.00% $9,545 $7,421 100.00% $7,308
======= ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
At March 31, 1999, the aggregate book value and the aggregate market
value of securities issued by FNMA totaled $3.9 million and $3.9 million,
respectively. At March 31, 1999, the aggregate book value and the aggregate
market value of securities issued by GNMA totaled $1.6 million and $1.7 million,
respectively. Both FNMA and GNMA securities exceed 10% of stockholder equity at
March 31, 1999.
57
<PAGE>
The following table shows the maturity or period to repricing of the
Company's mortgage-backed securities portfolio held-to-maturity at March 31,
1999:
At March 31, 1999
--------------------------------------
Adjustable Fixed
Rate Rate Total
Mortgage Mortgage Mortgage-
Backed Backed backed
Securities Securities Securities
Amounts due or repricing:
Within one year $450 - - $450
After one year:
One to three years - - - - - -
Five to ten years - - $995 $995
Ten to 20 years - - 1677 1677
Over 20 years - - 2,915 2,915
------ ------- -------
Total due or repricing after one year - - 5,587 5,587
Total due or repricing 450 5,587 6,037
------ ------- -------
Less:
Unearned discounts
and premiums, net - - - - - -
------- ------- -------
Mortgage-backed securities, net $450 $5,587 $6,037
======= ======= =======
Sources of Funds
General
The Company's primary sources of funds for use in lending, investing
and for other general purposes are deposits, proceeds from principal and
interest payments on loans, mortgage-backed and related securities and
investment securities, and to a lesser extent, FHLB-Chicago advances.
Contractual loan payments are a relatively stable source of funds, while deposit
inflows and outflows and loan payments are significantly influenced by general
market interest rates and economic conditions. Borrowings may be used on a
short-term basis to compensate for seasonal or other reductions in normal
sources of funds or for deposit inflows at less than projected levels.
Borrowings also may be used on a longer-term basis to support expanded lending
or investment activities. The Company primarily utilizes advances from the
FHLB-Chicago as sources for its borrowings. At March 31, 1999, 1998 and 1997 the
Company had advances from the FHLB-Chicago of $17.0 million or 17.4% of total
assets, $19.1 million or 19.3% of total assets, and $17.6 million or 18.5% of
total assets, respectively. Of the Company's outstanding FHLB-Chicago advances
at March 31, 1999, $4.5 million will mature before March 31, 2000. The Company
also had borrowings consisting of repurchase agreements of $5.6 million, $5.3
million and $4.5 million at March 31, 1999, 1998 and 1997, respectively.
Deposits
The Company offers a variety of deposit accounts having a range of interest
rates and terms. The Company's deposits principally consist of core deposits
(NOW, money market deposit and passbook accounts) and certificates of deposits.
The flow of deposits is influenced significantly by general economic conditions,
changes in prevailing interest rates and competition. The Company's deposits are
obtained primarily from the areas in which its branches are located, and the
Company relies principally on customer service, marketing programs and
long-standing relationships with customers to attract and retain these deposits.
Various types of advertising and promotion to attract and retain deposit
accounts also are used. The Company does not currently solicit or accept
brokered deposits. Management monitors the Company's certificates of deposit
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in considering its deposit offerings
and promotions. The Company believes it has been competitive in the types of
accounts and interest rates it has offered on its deposit products. The Company
intends to continue its efforts to attract and retain deposits as a primary
source of funds for supporting its lending and investing activities.
58
<PAGE>
<TABLE>
The following table presents the deposit activity of the Company for the
periods indicated:
Fiscal Year Ended March 31,
1999 1998 1997
---- ---- ----
<CAPTION>
(In thousands)
<S> <C> <C> <C>
Net Deposits (Withdrawals) $(3,003) $(1,613) $1,627
Interest credited on deposits 2,728 2,334 2,674
-------- -------- -------
Total increase (decrease) in deposits $(275) $721 $4,301
</TABLE>
At March 31, 1999, the Company had $3.6 million in certificates
of deposit outstanding in amounts of $100,000 or more maturing as follows:
Amount at
March 31, 1999
(In thousands)
Three months or less $ 358
Over three through six months 894
Over six through 12 months 1,257
Over 12 months 1,051
-----------------
Total $ 3,560
=================
59
<PAGE>
The following table sets forth the distribution of the Company's core
deposits and certificate accounts at the dates indicated and the weighted
average nominal interest rates on each category of deposits presented:
<TABLE>
At March 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- -------------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of total Nominal of total Nominal of total Nominal
Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Core Deposits:
Non-interest bearing $3,590 5.79% - $3,823 6.14% - $2,792 4.54% -
NOW accounts 6,346 10.23% 2.20% 5,910 9.49% 2.15% 5,989 9.73% 2.26%
Money market 6,856 11.07% 4.59% 6,026 9.68% 4.87% 5,029 8.17% 4.61%
Passbook 6,563 10.58% 2.15% 6,091 9.78% 2.31% 5,905 9.59% 2.16%
-------- ------- ------ ------- ------- ------ ------- ------ ------
Total 23,355 37.67% 2.55% 21,850 35.08% 2.57% 19,715 32.03% 2.51%
Certificates accounts
(current term to maturity):
One to six months 17,269 27.86% 5.61% 22,514 36.15% 5.69% 15,941 25.90% 5.43%
six to 12 months 11,218 18.09% 5.48% 6,889 11.06% 5.75% 9,443 15.34% 5.71%
13 to 36 months 8,878 14.32% 5.63% 9,435 15.15% 6.05% 14,151 22.99% 6.07%
37 to 60 months 1,137 1.82% 5.76% 1,389 2.24% 6.08% 2,110 3.43% 6.11%
61 to 96 months 109 0.18% 6.70% 167 0.27% 6.54% 120 0.19% 6.33%
97 to 132 months 37 0.06% 6.35% 34 0.05% 6.35% 77 0 6.96%
-------- ------ ------ ------- ------ ------ ------- ------ ------
Total certificates 38,648 62.33% 5.71% 40,428 64.92% 5.75% 41,842 67.97% 5.75%
Total deposits $62,003 100.00% 4.49% $62,278 100.00% 4.62% $61,557 100.00% 4.71%
======= ======= ===== ======= ======= ====== ======= ======= ======
</TABLE>
60
<PAGE>
The following table presents, by various rate categories, the amount
of certificates of deposit outstanding at March 31, 1998 and March 31, 1999:
At March 31,
1999 1998
--------------
Certificates of Deposit: (In thousands)
2.00% to 2.99% 0 100
3.00% to 3.99% 122 -
4.00% to 4.99% 7,176 538
5.00% to 5.99% 24,893 22,861
6.00% to 6.99% 5,764 16,229
7.00% to 7.99% 663 670
8.00% to 8.99% 30 30
-------- --------
Total $38,648 $40,428
======== ========
Borrowings and Other Financing Transactions
Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings as part of its assets/liability
management strategy. Borrowings are secured when management believes it can
profitably re-invest those funds for the benefit of the Company. The Company's
primary form of borrowing consists of advances from the FHLB-Chicago. These
advances are collateralized by the capital stock of the FHLB-Chicago held by the
Company and certain of its mortgage loans and mortgage-backed and related
securities. Such advances are made pursuant to several different credit
programs, each of which has it's own interest rate and range of maturities. The
maximum amount the FHLB-Chicago will advance to member institutions, including
the Company, for purposes other than meeting withdrawals fluctuates from time to
time in accordance with policies the FHLB-Chicago. At March 31, 1999, the
Company's FHLB-Chicago advances totaled $17.0 million, representing 19.9% of
total liabilities. The Company intends to continue to leverage its capital base
by utilizing FHLB borrowings to originate or purchase loans in fiscal 1999.
The Company's borrowings from time to time include repurchase
agreements. These agreements generally are entered into with local businesses
and institutions that seek to deposit funds in excess of insurable limits. These
transactions are treated as borrowings collateralized by the securities sold,
which generally are mortgage-backed securities, and are therefore included as
other borrowings in the Company's Consolidated Financial Statements.
While increases in borrowings and changes in the collateralization
levels due to market interest rate changes could require the Company to add
collateral to secure its borrowings, the Company does not anticipate having a
shortage of qualified collateral to pledge against its borrowings. At March 31,
1999, there were $5.6 million in repurchase agreements outstanding.
61
<PAGE>
The following table sets forth certain information regarding the
Company's FHLB-Chicago advances and repurchases agreements at or for the periods
ended on the dates indicated.
<TABLE>
At or For the Fiscal Years Ended March 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
FHLB- Chicago advances:
Average balance outstanding $17,488 $17,912 $15,751
Maximum amount outstanding at any
month-end during the period 19,062 23,173 18,245
Balance outstanding at end of period 16,990 19,062 17,634
Weighted average interest rate during
the period(1) 5.44% 5.88% 5.87%
Weighted average interest rate at end
of period 5.30% 5.49% 5.91%
Repuchase agreements:
Average balance outstanding $5,597 $4,937 $4,808
Maximum amount outstanding at any
month-end during the period 6,473 6,501 5,761
Balance outstanding at end of period 5,625 5,258 4,463
Weighted average interest rate during
the period 5.19% 6.00% 5.74%
Weighted average interest rate at end
of period 5.38% 6.08% 6.13%
Total advances and repurchase agreements:
Average balance outstanding $23,085 $22,850 $20,559
Maximum amount outstanding at any
month-end during the period 25,535 29,674 24,006
Balance outstanding at end of period 22,615 24,320 22,097
Weighted average interest rate during
the period 5.91% 5.91% 5.78%
Weighted average interest rate at end
of period 5.32% 5.62% 5.95%
<FN>
- -------------------------------
(1) Computed on the basis of average monthly balances.
</FN>
</TABLE>
Regulation
The following discussion is intended to be a summary of regulatory issues
and not a comprehensive description of all applicable regulations.
The Bank is a Wisconsin-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
Bank is subject to extensive regulation by the Wisconsin Department of Financial
Institutions ("WDFI"), as its chartering agency, and by the FDIC, as its deposit
insurer and principal federal regulator. The lending and investment authority of
the Bank is prescribed by Wisconsin law and regulations, as well as applicable
federal law and regulations, and the Bank is prohibited from engaging in any
activities not permitted by such law and regulations. The Company is a unitary
bank holding company subject to regulatory oversight by the Board of Governors
of the Federal Reserve System (the "FRB"), the WDFI the Securities and Exchange
Commission ("SEC").
Wisconsin Savings Bank Regulation
Regulations adopted by the WDFI govern various aspects of the activities
and the operation of Wisconsin-chartered savings banks.
62
<PAGE>
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to
periodic examinations by the WDFI. Savings banks are required to pay examination
fees and annual assessments to fund the supervisory operations of the WDFI. On
June 23, 1998, the DFI assessed the Bank a $4,176.52 fee based the Bank's total
assets of $99.4 million at December 31, 1997. On March 25, 1999, the DFI
assessed the Bank a $12,989.25 examination charge and the Company a $2,484
examination charge.
Loans and Investments
The Bank is authorized to make, invest in, sell, purchase, participate or
otherwise deal in mortgage loans or interests in mortgage loans without
geographic restriction, including loans made on the security of residential and
commercial property. Savings banks also may lend funds on a secured or unsecured
basis for business, corporate commercial or agricultural purposes provided the
total of all such loans do not exceed 10% of the Bank's total assets, unless the
WDFI authorizes a greater amount. Loans are subject to certain limitations,
including percentage restrictions based on the Bank's total assets.
Under regulations established for state savings banks by the Savings
Institutions Division of the WDFI and implemented by the Administrator of the
WDFI, the Bank is limited in the amount of commercial real estate and commercial
business loans it can hold in its loan portfolio. This limit is currently 20% of
the Bank's total assets and may be increased with the approval of the WDFI. At
March 31, 1999, the Bank had $9.8 million of such loans in its portfolio with a
current limit based on the Bank's asset base of $97.6 million. The Bank does not
anticipate exceeding regulatory limitations on such commercial lending in the
foreseeable future.
Savings banks may invest funds in certain types of debt and equity
securities, including obligations of federal, state and local governments and
agencies. Subject to the prior approval of the WDFI, compliance with capital
requirements and certain other restrictions, savings banks may invest in
residential housing development projects. Savings banks may invest in service
corporations or subsidiaries with the prior approval of the WDFI, subject to
certain restrictions. The lending and investment powers of Wisconsin savings
banks also are limited by FDIC regulations and other federal laws and
regulations.
The Bank's subsidiary operations also are regulated by the FDIC and the
FRB. See "-Federal Deposit Insurance Corporation Improvement Act" and "-Holding
Company Regulation." At March 31, 1999, the Bank's subsidiary operations were
not under any WDFI, FRB or FDIC order to divest or terminate any activity. The
lending and investment powers of Wisconsin savings banks also are limited by
FDIC regulations and other federal law and regulations. See "Federal Deposit
Insurance Corporation Improvement Act of 1991 Restrictions on State-Chartered
Banks."
Loans to One Borrower
Savings banks may make loans and extensions of credit, both direct and
indirect, to one borrower in amounts up to 15% of capital plus an additional 10%
for loans fully secured by readily marketable collateral. In addition, savings
banks may make loans to one borrower for any purpose in an amount not to exceed
$500,000, or to develop domestic residential housing units in an amount not to
exceed the lesser of $30 million or 30% of capital, subject to certain
conditions. At March 31, 1999, the Bank did not have any loans that exceeded the
loans-to-one borrower limitations.
Qualified Thrift Requirement
The Bank must qualify for and maintain a level of qualified thrift
investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended. At March 31, 1999, the Bank
maintained 92.1% of its assets in qualified thrift investments and therefore met
the qualified thrift lender requirement.
Dividend Limitations
A savings bank that meets its regulatory capital requirement may declare
dividends on capital stock based upon net profits, provided that its paid-in
surplus equals its capital stock. If the paid-in surplus of the savings bank
does not equal its capital stock, the board of directors may not declare a
dividend unless at least 10% of the net profits of the preceding half year in
the case of quarterly or semi-annual dividends, or 10% of the net profits of the
preceding year in case of annual dividends, has been transferred to paid-in
surplus. In addition, prior approval of the WDFI is required before dividends
exceeding 50% of profits for any calendar year may be declared and before a
dividend may be declared out of retained earnings. Under the WDFI's regulations,
a savings bank which converted from mutual to stock form also would be
prohibited from paying a dividend on its capital stock if the effect thereof
would cause the regulatory capital of the savings bank to be reduced below the
amount required for its liquidation account.
63
<PAGE>
Liquidity
Savings banks are required to maintain an average daily balance of liquid
assets of not less than 8% of its average daily balance of net withdrawable
accounts plus its short-term borrowings. Also required is a "primary liquid
assets" ratio of at least 4% of average daily withdrawable accounts and
short-term borrowings. Primary liquid assets is defined as primarily short-term
liquid assets and U.S. government and U.S. government agency securities. At
March 31, 1999, the Bank's daily liquidity ratio was 22.7%.
Restrictions on Loans to and Transactions with Insiders and Affiliates
FRB regulations limit the total amount a savings bank may lend to its
executive officers, directors, principal shareholders, and their related
interests. Generally, an affiliated person may borrow an aggregate amount not
exceeding 15% of a savings bank's unimpaired capital and unimpaired surplus on
an unsecured basis and an additional 10% on a secured basis. The regulations
limit, with certain exceptions, the aggregate amount a depository institution
may lend to affiliated persons as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus.
In addition, WDFI regulations place certain restrictions and limits on
loans and other transactions with the Bank's affiliated persons to ensure that
such loans and transactions are on terms which would be available to members of
the general public for similar credit extensions.
The Bank also must comply with Sections 23A and 23B of the Federal Reserve
Act relative to transactions with affiliates in the same manner and to the same
extent as if the Bank were a Federal Reserve member bank. Generally, Sections
23A and 23B limit the extent to which an insured institution or its subsidiaries
may engage in certain "covered transactions" with an affiliate to an amount
equal to 10% of such institution's capital and surplus, plus an aggregate limit
on all such transactions with affiliates to an amount equal to 20% of such
capital and surplus, and require that all transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, the purchase of assets, issuance of a guaranty and similar other types
of transactions. The WDFI may, for safety and soundness reasons, impose more
stringent restrictions on savings banks but may not exempt transactions from or
otherwise abridge Sections 23A and 23B.
Unless prior approval of the WDFI is obtained, a savings bank may not
purchase, lease or acquire a site for an office building or an interest in real
estate from an affiliated person, including a stockholder owning more than 10%
of its capital stock, or from any firm, corporation, entity or family in which
an affiliated person or 10% stockholder has a direct or indirect interest.
The Bank has not been significantly affected by the applicable restrictions
on loans to and transactions with affiliates.
Insurance of Deposits
The Bank's deposits are insured to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC. FDIC regulations assign
institutions to a particular capital group based on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized." These groups are each then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund unless
effective corrective action is taken.
The Bank is currently assessed deposit insurance premiums at the rate of
$0.065 per one hundred dollars of deposits. The Bank's expense related to FDIC
premiums was $38,000 and $39,000 for the fiscal year ended March 31, 1999 and
1998. Deposit premium levels are set in order to permit the SAIF to achieve a
ratio of reserves to insured deposits of 1.25%, and the FDIC may adjust
assessment rates in order to maintain the target ratio. While an increase in
premiums for the Bank could have an adverse effect on earnings, a decrease in
premiums could have a positive impact on earnings. The Bank does not anticipate
any increase in the insurance premium in the foreseeable future.
The FDIC insures commercial bank deposits through a separate fund, the Bank
Insurance Fund ("BIF"). During 1995, BIF assessment rates were reduced and as a
result, BIF member institutions were paying lower deposit insurance premiums
than SAIF-member institutions. Legislation passed during 1996 addressed the
BIF/SAIF premium disparity and other matters related to deposit insurance
obligations. See " -Regulatory Legislation Affecting Deposit Insurance."
Under the FDIC Act, insurance of deposits may be terminated by the FDIC
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
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applicable law, regulation, rule, order or condition imposed by the FDIC.
Management of the Company does not know of any practice, condition or violation
that might lead to the termination of deposit insurance for the Bank.
Certain Federal Regulations
Provisions of federal law address risk reduction and the promotion of
standards of safety and soundness for insured depository institutions.
Examinations and Audits
Federal regulations require annual on-site examinations for all depository
institutions except those well-capitalized institutions with assets of less than
$100 million; annual audits by independent public accountants for all insured
institutions with assets in excess of $500 million; the formation of independent
audit committees of the boards of directors of insured depository institutions
for institutions with assets equal to or in excess of $500 million; and
management of depository institutions to prepare certain financial reports
annually and to establish internal compliance procedures.
Prompt Corrective Regulatory Action
Federal bank regulators are required to take certain supervisory actions
with respect to undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. The regulations provide that an
insured institution that has a ratio of total capital to risk-based assets of
less than 8.0%, core capital to risk-based assets of less than 4.0% or a
leverage ratio that is less than 4.0%, would be considered "undercapitalized."
An insured institution that has a ratio of total capital to risk-based assets of
less than 6.0%, core capital to risk-based assets of less than 3.0% or a
leverage ratio that is less than 3.0%, would be considered "significantly
undercapitalized" and an insured institution that has tangible capital to assets
ratio equal to or less than 2.0% would be deemed "critically undercapitalized."
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person or
entity. Undercapitalized and significantly undercapitalized institutions face
more severe restrictions. The Bank currently exceeds all applicable regulatory
capital requirements and, therefore, is not subject to prompt correctional
action.
Brokered Deposits
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and pursuant to what limitations an institution may accept brokered
deposits. A "well-capitalized" institution (one that significantly exceeds
specified capital ratios) may accept brokered deposits without restriction.
"Undercapitalized" institutions (those that fail to meet minimum regulatory
capital requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well-capitalized" or
"undercapitalized") may only accept such deposits with the consent of the FDIC.
The definitions of "well-capitalized", "adequately capitalized" and
"undercapitalized" governing the acceptance of brokered deposits conform to the
definitions used in the regulations implementing the prompt corrective action
provisions of the FDICIA. The Bank is a "well-capitalized" institution and
therefore may accept brokered deposits without restriction. At March 31, 1999,
the Bank had no brokered deposits.
Uniform Lending Standards
Savings 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 federal bank regulators. The Bank has adopted and maintains such policies.
Standards for Safety and Soundness
On July 10, 1995, federal bank regulators adopted Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans and operational and managerial standards for all
insured depository institutions relating to internal controls, information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; and compensation fees and benefits. The
compensation standards prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. Federal bank regulators are authorized,
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but not required, to request a compliance plan for failure to satisfy the safety
and soundness standards set out in the Guidelines.
The Bank believes that its operational and managerial standards
substantially comply with the standards set forth in the Guidelines and that
compliance with the Guidelines will therefore not impose a significant burden on
Bank operations.
Restrictions upon State-Chartered Banks
FDIC regulations governing Bank equity investments prohibit certain equity
investments and generally limit equity investments to those permissible for
federally-chartered banks and their subsidiaries. Institutions holding
impermissible equity investments that do not receive FDIC approval must submit
to the FDIC a plan for divesting such investments. At March 31, 1999, the Bank
did not hold any impermissible equity investments.
Under FDIC regulations, the Bank must obtain the FDIC's prior approval
before directly, or indirectly through a majority-owned subsidiary, engaging "as
principal" in any activity that is not permissible for a national bank unless
certain exceptions apply. The activity regulations provide that state banks
which meet applicable minimum capital requirements would be permitted to engage
certain activities that are not permissible for national banks, including
guaranteeing obligations of others, activities which the FRB has found to be
closely related to banking and certain securities activities conducted through
subsidiaries. The FDIC will not approve an activity that it determines presents
a significant risk to the FDIC insurance funds. As a SAIF-insured,
state-chartered savings bank which was formerly a state-chartered savings
association, the Bank continues to be subject to certain restrictions which are
imposed by federal law on state-chartered savings associations. The activities
of the Bank and its subsidiaries are of a type permissible under applicable
federal regulations.
Gramm-Leach Financial Services Modernization Act of 1999
In November 1999, Congress passed and the President signed into law
broad ranging financial legislation designed to modernize America's financial
services system (the "Gramm-Leach" or the "Legislation"). In general, the
Legislation effectively lifts restrictions that previously complicated
combinations between banks, securities and insurance firms.
Title I of Gramm-Leach facilitates affiliations among banks, securities
and insurance companies. The Legislation repeals the current restrictions on
banks affiliating with securities firms contained in Sections 20 and 32 of the
Glass Steagall Act. Gramm-Leach creates a new form of financial services company
called a "financial holding company" under Section 4 of the Bank Holding Company
Act. Such a holding company may engage in a statutorily provided list of
financial activities, including insurance and securities underwriting and agency
activities, merchant banking and insurance company portfolio investment
activities. Activities that are deemed "complimentary" to financial activities
are also authorized. The non-financial activities of firms predominantly (at
least 85%) engaged in financial activities are grandfathered for at least 10
years with a possibility for an additional five year extension.
The legislation permits national banks to engage in new financial
activities through financial subsidiaries, except for insurance underwriting,
merchant banking, insurance company portfolio investments, real estate
development and real estate investment, so long as the aggregate assets of all
financial subsidiaries do not exceed 45% of the parent bank's assets or 50
billion dollars, whichever is less. To take advantage of the new activities
through a financial subsidiary, a national bank must be well capitalized and
well managed. In addition, the top 100 banks are required to have issued
outstanding subordinated debt.
Gramm-Leach amends the functional regulation of financial services
industry to streamline bank holding company supervision by clarifying the
regulatory roles of the Federal Reserve Board as the umbrella holding company
supervisor and state and other Federal financial regulators as the functional
regulators of various bank holding company affiliates. The Legislation amends
federal securities laws to incorporate functional regulation of bank securities
activities. The broad exemptions banks currently have from broker dealer
regulation will be replaced by more limited exemptions designed to permit banks
to continue their current activities and to develop new products.
The Legislation provided for functional regulation of insurance
activities and establishes which insurance product banks and bank subsidiaries
may provide as principals. In general, Gramm-Leach prohibits national banks not
currently engaged in the underwriting or sale of title insurance from commencing
that activity. However, sales activities by banks are permitted in states that
specifically authorize such sales for state banks, but only on the same
conditions as prescribed for such state entities. National bank subsidiaries are
permitted to sell all types of insurance, including title insurance, and
affiliates may underwrite or sell all types of insurance including title
insurance.
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The Legislation provides that de novo unitary thrift holding company
applications received by the Office of Thrift Supervision after May 4, 1999
shall not be approved. Gramm-Leach provides that existing unitary thrift holding
companies will be grandfathered, but such thrift holding companies may only be
sold to financial companies.
Gramm-Leach requires clear disclosure by all financial institutions of
the privacy policy regarding the sharing of none-public, personal information
with affiliates and third parties. The Legislation requires a notice to
consumers and an opportunity to "opt out" of sharing of non-public, personal
information with non-affiliated third parties subject to certain limited
exceptions. The Legislation provides for separate agency rule making related to
privacy policies; however, agencies are to consult and coordinate with one
another to insure that such regulations are consistent. The Legislation mandates
an effective date of eighteen months after the date on which rule making is
completed in order to permit sufficient time for state legislatures to empower
state insurance regulators to comply with the new requirements.
Gramm-Leach provides for a new permanent capital structure for the
Federal Home Loan Bank System with two classes of stock redeemable on sixth
month and five-year notices. The stock purchase requirements for banks and
thrifts are equalized under the Legislation and voluntary membership for federal
savings associations will take effect six months after the enactment of the
Legislation.
The Legislation requires full public disclosure of all CRA agreements
between banks and non-bank parties and requires that parties to such agreements
make annual public reports on how the money and resources involved have been
used. The Legislation grants regulatory relief to small financial institutions
(250 million dollars or less in assets) regarding the frequency of CRA
examinations. Small institutions having received an outstanding rating in their
most recent CRA examination shall not receive a routine CRA exam more often than
once each five years and those having received a satisfactory rating no more
often than once each four years.
Gramm-Leach provides that the SAIF special reserve of one Billion
dollars be folded back into the Savings Association Insurance Fund to direct
benefit of insured institutions. This provision is likely to benefit
institutions through reductions in their FDIC assessments on a going-forward
basis.
Gramm-Leach contains additional provisions related to the modernization
of the financial services industry. As a general matter, Northwest does not
believe that the revisions provided by the Legislation will have a immediate
direct impact on its operations. Of course, Northwest's subsidiary bank would be
subject to the reduced CRA examination schedule set forth in the Legislation and
would also be in a position to receive benefits through reduced FDIC premiums as
a result of the reversal of the SAIF special reserve. However, Northwest
believes Gramm-Leach is likely to have a more immediate impact on larger banking
companies through elimination of revenue limitations to which such entities have
been subject in connection with their securities and insurance related
activities and expanded ability to provide a broader range of brokerage firm
affiliations.
Capital Maintenance
FDIC Regulation
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based capital requirements. The Bank is required
to meet the following capital standards to remain adequately capitalized and not
be subject to corrective action: (i) "Tier 1 capital" in an amount not less than
3% of total assets; (ii) "Tier 1 capital" in an amount not less than 4% of
risk-weighted assets; and (iii) "total capital" in an amount not less than 8% of
risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are also required to maintain "Tier 1 capital" equal to at
least 3% of total assets (the "leverage capital" requirement). Tier 1 capital is
defined to include the sum of common shareholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and minority
interests in consolidated subsidiaries, minus all intangible assets (with
certain exceptions), identified losses, and qualifying investments in securities
subsidiaries. An institution that fails to meet the minimum leverage limit
requirement must file a capital restoration plan with the appropriate FDIC
regional director. At March 31, 1999, the Bank's ratio of Tier 1 capital to
total assets was 10.14%, or 7.14 percentage points in excess of the minimum
leverage capital requirement, the Bank's Tier 1 capital to risk-weighted assets
was 16.09%, or 12.09 percentage points in excess of the FDIC requirement, and
the Bank's total capital to risk-weighted assets was 16.71%, or 8.71 percentage
points in excess of the FDIC requirement.
Wisconsin Regulation
Wisconsin-chartered savings banks are required to maintain a minimum
capital to assets ratio of 6% and must maintain total capital necessary to
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ensure the continuation of insurance of deposit accounts by the FDIC. If the
WDFI determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the WDFI may require a higher
minimum capital level for the savings bank. If a savings bank's capital ratio
falls below the required level, the WDFI may direct the savings bank to adhere
to a specific written plan established by the WDFI to correct the savings bank's
capital deficiency, as well as a number of other restrictions on the savings
bank's operations, including a prohibition on the declaration of dividends. At
March 31, 1999, the Bank's total capital, as calculated under Wisconsin law, was
$9.8million or 9.4% of total assets, which was 3.4% in excess of the required
amount.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977, as amended (the "CRA"),
as implemented by FDIC regulations, the Bank 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 it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution. The law requires public disclosure of an
institution's CRA rating and also requires the primary regulator to provide a
written evaluation of an institution's CRA performance. . The Bank had a CRA
examination on February 12, 1998, and received a "Outstanding" CRA rating.
Federal Reserve System
The FRB's Regulation D imposes reserve requirements on all depository
institutions which maintain transaction accounts or non-personal time deposits.
Checking accounts, NOW accounts and certain other types of accounts that permit
payments or transfers to third parties fall within the definition of transaction
accounts and are subject to Regulation D reserve requirements, as are any
non-personal time deposits (including certain money market deposit accounts) at
a savings institution. For 1997, a depository institution must maintain average
daily reserves equal to 3% on the first $49.3 million of transaction accounts
and an initial reserve of $1.5 million, plus 10% of that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustment by the FRB) are exempt from
the reserve requirements. These percentages and threshold limits are subject to
adjustment by the FRB. As of March 31, 1999, the Bank met its Regulation D
reserve requirements.
Thrift institutions also have authority to borrow from the Federal Reserve
Bank "discount window," but FRB policy generally requires thrift institutions to
exhaust all FHLB sources before borrowing from the Federal Reserve System. The
Bank had no discount window borrowings as of March 31, 1999.
Federal Home Loan Bank System
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire and hold
shares of capital stock in the FHLB-Chicago in an amount equal to the greater of
(i) 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or (ii) 0.3% of total assets. The Bank is in compliance with this
requirement with an investment in FHLB-Chicago stock of $850,000at March 31,
1999.
Among other benefits, the FHLBs provide a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB-Chicago. At March 31, 1999, the Bank had
$17.0 million in advances from the FHLB-Chicago.
Holding Company Regulation
Federal Regulation
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As such, the Company is
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB. The FRB has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to those
of the FDIC for the Bank. Failure to meet the capital adequacy requirements may
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result in supervisory or enforcement action by the FRB. The Company's pro forma
total and Tier 1 capital significantly exceed such capital adequacy
requirements.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval is required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. The BHCA also prohibits the acquisition by the
Company of more than 5% of the voting shares, or substantially all the assets of
a bank located outside the State of Wisconsin unless such an acquisition is
specifically authorized by the laws of the state in which such bank is located.
FRB regulations govern a variety of bank holding company matters, including
redemption of outstanding equity securities and a bank holding company engaging
in non-banking activities. Pursuant to FRB policy, dividends should be paid only
out of current earnings and only if the prospective rate of earnings retention
by the bank holding company appears consistent with its capital needs, asset
quality and overall financial condition. The FRB policy also requires that a
bank holding company serve as a source of financial strength to its subsidiary
banks by standing ready to use available resources to provide adequate capital
funds to those banks during periods of financial stress or adversity. These
policies could affect the ability of the Holding Company to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
See " -Restrictions on Loans to and Transactions with Affiliates." Moreover,
subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the Company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or
furnishing of services.
The Company and its subsidiary, the Bank, are affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the Company
to accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
State Savings Bank Holding Company Regulation
In addition to the FRB bank holding company regulations, a bank holding
company that owns or controls, directly or indirectly, more than 25% of the
voting securities of a state savings bank also is subject to regulation as a
savings bank holding company by the WDFI. The WDFI has not yet issued proposed
regulations governing savings bank holding companies.
Acquisition of the Company
Under the Change in Bank Control Act of 1978, as amended (the "CBCA"), a
notice must be submitted to the FRB if any person (including a company), or
group acting in concert, seeks to acquire 10% or more of the Company's shares of
common stock outstanding, unless the FRB has found that the acquisition will not
result in a change in control of the Company. Under the CBCA, the FRB has 60
days within which to act on such notices, taking into consideration certain
factors, including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by the Company and the Bank, and
the anti-trust effects of the acquisition.
Under the Bank Holding Capital Act ("BHCA"), any company would be required
to obtain prior approval from the FRB before it may obtain "control" of the
Company within the meaning of the BHCA. Control is generally defined to mean
ownership or power to vote 25 percent or more of any class of voting securities
of the Company or the ability to control in any manner the election of a
majority of the Company's directors. In addition, the BHCA prohibits the
acquisition of the Company by a bank holding company located outside the State
of Wisconsin, unless such acquisition is specifically authorized by Wisconsin
law. See "Holding Company Regulation."
Federal Securities Laws
The Company filed with the Commission a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock was registered with the Commission under
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the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of the shares of the Common Stock
does not cover the resale of such shares. Shares of Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Holding Company will be
subject to the resale restrictions of Rule 144 under the Securities Act. If the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
Regulatory Legislation Affecting Deposit Insurance
Deposits of the Bank currently are insured to applicable limits by the FDIC
under the Savings Associations Insurance Fund ("SAIF"). The FDIC also insures
commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels
are set in order to permit the funds to be capitalized at a level equal to 1.25%
of total fund deposits. Assessment rate changes made in 1995 created a deposit
insurance premium disparity between the two funds; while most BIF members were
paying only a nominal $2,000 annual premium, SAIF members were paying average
rates of 23.4 basis points of deposits.
The FDIC has established a permanent base assessment schedule for the
SAIF and set assessment rates at a range of 4 to 31 basis points. Current
regulations provide for an adjusted assessment schedule reducing these rates by
4 basis points to reflect current conditions, producing an effective SAIF
assessment range of 0 to 27 basis points beginning October 1, 1996. This
assessment range, which applies to all SAIF institutions other than SAIF member
savings associations, is comparable to the current schedule for BIF-
institutions. A special interim rate schedule ranging from 16 to 27 basis points
applied to SAIF-member savings associations for the last quarter of 1996,
reflecting the fact that assessments related to certain bond obligations of the
Financial Corporation ("FICO"), which were issued to resolve the savings and
loan crisis in the 1980's, will be included in the SAIF rates for these
institutions during that period. Because the Bank is a "Sasser bank" (a bank
that converted its charter from a savings association to a state savings bank
charter, yet remains a SAIF member in accordance with the so-called "Sasser
Amendment"), it was not assessed this interim rate and received a credit in
January 1997 for its entire FDIC premium for the quarter ended December 31,
1996.
Certain bond obligations of the Financial Corporation ("FICO"), which were
issued to resolve the savings and loan crisis in the 1980's, are being shared by
all insured depository institutions beginning after December 31, 1996. This
obligation had previously been the sole responsibility of SAIF-insured
institutions and had been funded through SAIF assessments. BIF-member
institutions will pay one-fifth the rate to be paid by SAIF members, for the
first three years. The annual FICO assessment is 1.3 and 6.5 basis points of
deposits for BIF and SAIF members, respectively. After January 1, 2000, BIF and
SAIF members will share the FICO payments on a pro-rata basis, which is assessed
at 2.4 basis points, until the bonds mature in 2017.
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MARKET AND DIVIDEND INFORMATION
The table below gives the high and low sales prices for Northwest
Common Stock for the calendar quarters indicated and the dividends per share
declared on Northwest Common Stock for each quarter.
HIGH LOW CASH DIVIDENDS PAID
1999
First Quarter 23.00 18.50 .17
Second Quarter 23.00 21.75 .17
Third Quarter 23.50 21.50 .17
1998
First Quarter 22.25 20.63 .16
Second Quarter 22.00 19.50 .17
Third Quarter 20.50 15.63 .17
Fourth Quarter 25.00 15.75 .17
1997
First Quarter 14.50 11.50 .12
Second Quarter 15.00 13.75 .13
Third Quarter 16.75 14.38 .14
Fourth Quarter 20.75 16.00 .15
1996
First Quarter 11.00 10.00 .09
Second Quarter 11.00 10.00 .10
Third Quarter 11.25 10.25 .10
Fourth Quarter 12.50 11.13 .11
MARKET PRICES OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the symbol "NWEQ".
The last reported sales price of Northwest Common Stock of February 16,
1999 the last trading day immediately prior to public announcement of the
execution of the Merger Agreement, was $18.75 per share. On January 12, 2000
(the last practicable date prior to the mailing of this Proxy Statement), the
last reported sales price of Northwest Common Stock was $22.25 per share.
Shareholders are advised to obtain current market quotations for their shares.
On October 12, 1999, Northwest declared a cash dividend, which was payable on
November 5, 1999, to shareholders of record on October 29, 1999, in the amount
of $0.17 per share for the calendar quarter ended September 30, 1999.
SELECTED PER SHARE DATA OF THE COMPANY
The following per share data has been derived from the Selected
Consolidated Financial Data of the Company contained elsewhere in this Proxy
Statement. See "INFORMATION ABOUT THE COMPANY AND THE BANK - Market and Dividend
Information" for a discussion of the Company's payout of dividends.
Northwest Equity Corp. Fiscal year Ended March 31
--------------------------
1999 1998 1997
---- ---- ----
(in dollars)
Per Share Data:
Net Income (l) 1.45 1.44 0.84
Basic 1.45 1.44 0.84
Diluted 1.37 1.37 0.83
Cash Dividends 0.67 0.54 0.40
- -------------------------------------------------------------------------------
(1) Reflects the change in fair value of the common stock held by the ESOP
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP.
Set forth below are selected consolidated financial and other data of
the Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Company and notes
thereto that are presented elsewhere in this Proxy.
<TABLE>
<CAPTION>
At Sept. 30 At March 31,
----------- ----------------------------------------------
1999 1999 1998 1997
----------- ----------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Selected Financial Data:
Total assets $94,666 $97,585 $98,739 $95,097
Loans receivable, net 75,689 73,347 78,297 77,240
Loans held for sale 234 143 142 415
Cash and cash equivalents 4,988 10,470 6,047 2,980
Securities available-for-sale - - - 2,752
Mortgage-backed and related securities 5,451 6,037 6,398 7,421
FHLB stock 712 850 1,159 912
Deposits 62,959 62,003 62,278 61,557
FHLB advances and other borrowings 18,287 22,615 24,320 22,097
Shareholder's Equity - substantially restricted 12,791 12,361 11,514 10,859
Six months ended
September 30, 1999 Fiscal Year Ended March 31,
1999 1999 1998 1997
----------- ------------ ------------ -----------
(In thousands)
Selected Operating Data:
Total interest income $3,617 $7,781 $7,763 $7,492
Total interest expense 1,782 4,052 4,243 4,072
------ ----- ----- -----
Net interest income 1,835 3,729 3,520 3,420
Provision for loan losses 22 376 100 81
------ ----- ----- -----
Net interest income after provision for loan
losses 1,813 3,353 3,420 3,339
Non-interest income:
Mortgage servicing fees 53 94 77 77
Service charges on deposits 141 252 251 220
Loss on sale of investments - - (24) -
Gain on sale of mortgage loans 38 206 130 59
Other non-interest income 75 184 174 175
----- ----- ----- -----
Total other non-interest income 307 736 608 531
Total general and administrative expenses 1,183 2,465 2,298 2,643
----- ----- ----- -----
Income before income tax expense 937 1,624 1,730 1,227
Income tax expense 329 491 610 517
----- ----- ------ -----
Net Income 608 1,133 1,120 710
</TABLE>
72
<PAGE>
<TABLE>
Selected Financial Ratios and Other Data: At or For the Six Months At or For the Fiscal Year
Ended Sept. 30, Ended March 31,
-----------------------------------------
Performance Ratios 1999 1999 1998 1997
--------- ---------- --------- --------
<CAPTION>
<S> <C> <C> <C> <C>
Return on average assets 1.28% 1.15% 1.15% 0.76%
Return on average equity 9.70% 9.50% 9.85% 6.18%
Interest rate spread during period(1) 3.90% 3.50% 3.50% 3.51%
Net interest margin(1) 4.24% 4.08% 3.85% 3.88%
Non-interest expense to average assets 2.51 2.89 2.47 2.84
Non-interest income to average assets .65 0.75 0.63 0.57
Average interest-earning assets to
average interest-bearing liabilities 1.08x 1.07x 1.07x 1.08x
Asset Quality Ratios
Non-performing loans to gross loans(2) 0.10% 0.32% 1.76% 1.37%
Non-performing assets to total assets(2) 0.14% 0.31% 1.57% 1.13%
Allowance for loan losses to non-performing
loans(2) 444.74% 157.56% 34.87% 43.04%
Classified assets to total assets 0.15% 0.66% 1.91% 1.40%
Net charge-offs to average gross loans 0.08% 0.62% 0.11% 0.07%
Capital Ratios
Average Equity to average assets 13.39% 12.14% 11.51% 12.36%
Equity to total assets at end of period 13.51% 12.67% 11.66% 11.42%
Other Data
Number of deposit accounts 9,038 9,448 9,519 9,440
Number of real estate loans outstanding 1,418 1,464 1,652 1,670
Number of real estate loans serviced 2,136 2,146 2,318 2,206
Number of consumer loans outstanding 876 974 1,092 1,108
Mortgage loan originations (in thousands) $17,411 $47,763 $29,720 $29,086
Full-service facilities 3 3 3 3
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Information required by this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Northwest Equity Corp." in the Registrant's Annual Report to
Shareholders for the fiscal year ended March 31, 1999, which has been filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-3 under
the Securities Exchange Act of 1934 as amended and in accordance with General
Instruction E(2) to Form 10-KSB, and which section is hereby incorporated herein
by reference.
General
Northwest Equity Corp., a Wisconsin corporation (the "Company"), is a
holding company that owns all of the issued and outstanding stock of Northwest
Savings Bank, a Wisconsin-chartered stock savings bank (the "Bank"). In this
discussion and analysis, reference to the operations and financial condition of
the Company includes the operations and financial condition of the Bank.
The Company was incorporated on November 3, 1993, at the direction of
the Bank to become a bank holding company and own all of the Bank's capital
stock to be issued upon its conversion from mutual form to stock ownership (the
"Conversion"). On October 7, 1994, the Bank completed the Conversion. On that
date, the Company issued and sold 1,032,517 shares of its Common Stock at $8.00
per share. The gross proceeds from the sale of the shares of Common Stock were
$8.3 million. Net proceeds to the Company were $6.9 million, after deduction of
Conversion expenses of $0.6 million and after lending $0.8 million to the Bank's
Employee Stock Ownership Plan. The Company used $3.4 million of the net proceeds
to acquire all of the issued and outstanding stock of the Bank.
The Company's business currently consists of the business of the Bank.
The Bank is a community-oriented, full-service financial institution offering a
variety of retail financial services to meet the needs of the communities it
serves. The Bank's principal business consists of attracting funds in the form
of deposits and other borrowings and investing such funds primarily in
residential real estate loans, mortgage-backed securities, mortgage related
securities, including collateralized mortgage obligations, and various types of
commercial and consumer loans. The Bank's primary sources of funds are deposits,
repayment on loans and mortgage-backed and related securities, and advances from
the Federal Home Loan Bank of Chicago ("FHLB-Chicago"). The Bank utilizes these
funds to invest primarily in mortgage loans secured by one-to-four family
properties, and to a lesser extent, consumer, commercial and other loans, and to
invest in mortgage-backed and related securities and other investment
securities. The Bank is regulated by the Wisconsin Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"), and
its deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF"). The Bank also is a member of the Federal Home Loan Bank
System.
The earnings of the Company depend primarily on its level of net
interest income. Net interest income is the difference between interest earned
on interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed and related securities and other investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits
and advances from the FHLB-Chicago. Net interest income is a function of the
Company's "interest rate spread," which is the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest bearing-liabilities. Many of the
Company's assets, including mortgage loans and mortgage-backed and related
securities, are subject to reinvestment risk. During periods of falling interest
rates, higher yielding loans and mortgage-backed securities are more likely to
prepay, and the Company may not be able to reinvest the proceeds from
prepayments in loans or securities with yields similar to those prepaying. The
Company's operating results also are affected to a lesser extent by the amount
of its non-interest income, including loan servicing and loan related fees,
gains on sales of mortgage loans, as well as transactional and other fee income.
Additionally, gains or losses on the sale of investment securities and
mortgage-backed and related securities may affect net income. The Company's
non-interest expense consists principally of employee compensation, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses. General economic conditions and the monetary, fiscal
and regulatory policies of governmental agencies significantly affect the
Company's operating results. The demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds
influence lending activities. Deposit flows and prevailing market rates of
interest on competing investment alternatives, account maturities and the levels
of personal income and savings in the Company's market areas likewise heavily
influences the costs of funds.
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<PAGE>
Regulatory Developments Related to Deposit Insurance
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of federally insured banks and savings
institutions and safeguards the safety and soundness of the banking and savings
industries. Two separated insurance funds, the Bank Insurance Fund ("BIF") and
the Savings Associations Insurance Fund ("SAIF") are maintained and administered
by the FDIC. The Bank is a member of SAIF and the FDIC has examination authority
over the Bank. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to it target level within a reasonable
time and may decrease such assessment rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments are set within a range, based on the
risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Management Strategy
Management's strategy has focused on managing the Company's interest
rate risk and maintaining credit quality by emphasizing residential lending,
primarily loans secured by one-to-four family, owner-occupied dwellings.
Residential Mortgage Lending Emphasis: The Company's primary investing
activity is the origination of one-to-four family residential mortgage loans
secured by owner-occupied properties. At March 31, 1999, $54.1 million or 73.4%
of gross loans consisted of such loans. Mortgage loan originations totaled $47.8
million, $29.3 million and $29.0 million for the fiscal years ended March 31,
1999, 1998 and 1997, respectively. The Company generally originates ARM loans
for retention in its loan portfolio and generally sells all fixed rate loans
originated to the secondary markets.
Management of Interest Rate Risk: The Company has attempted to reduce
its interest rate risk by emphasizing the origination of ARM loans for retention
in its loan portfolio and by selling substantially all of its fixed rate loans
originated. At March 31, 1999, $59.7 million or 81.4% of net loans receivable
were ARM loans. Management believes this strategy has reduced income due to
lower initial yields on these investments in comparison to longer-term fixed
rate investments. However, management believes reducing its exposure to interest
rate fluctuations tends to reduce the volatility of the Company's net interest
income over the long-term.
To maintain the Company's net interest margin, satisfy certain
liquidity requirements by the Department of Financial Institutions ("DFI") and
manage interest rate risk, the Company has maintained a portfolio of
mortgage-backed and related securities held-to-maturity. The Company's
mortgage-backed securities held-to-maturity at March 31, 1999, were $6.0 million
or 6.1% of total assets, and at March 31, 1998, were $6.4 million or 6.5% of
total assets.
Management has adopted a strategy designed to achieve acceptable levels
of matching of its assets and liabilities and their repricing characteristics.
The primary elements of this strategy involve emphasizing the origination and
purchase of adjustable-rate assets, and utilizing FHLB-Chicago advances to
purchase participation interests in loans with similar terms to maturities and
higher yields. Over the last five fiscal years, the Company has emphasized the
matching of interest rate sensitivities through the sale of fixed rate mortgage
loans originated, the origination of ARM loans, the repayment of fixed rate
mortgage assets, and the purchase of short-term and adjustable-rate
mortgage-backed and related securities. At March 31, 1999, the Company's
one-year interest rate sensitivity gap as a percentage of total assets was a
negative 4.43%. During periods of rising interest rates, a negative rate
sensitivity gap would tend to negatively affect net interest income; however,
during periods of falling interest rates, a negative interest rate sensitivity
gap would tend to positively affect net interest income.
In fiscal 1999, the Company leveraged its capital base by using the
proceeds of borrowings from the FHLB-Chicago and deposits to originate
additional loans. FHLB advances decreased to $17.0 million at March 31, 1999,
compared to $19.1 million at March 31, 1998. The Company intends to continue to
leverage its capital base by using FHLB-advances.
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<PAGE>
Asset Quality: The Company emphasizes high asset quality in both its
investment portfolio and lending activities. Non-performing assets have ranged
between .31% and 1.57% of total assets during the last three years and were .31%
of total assets at March 31, 1999. During the fiscal years ended March 31, 1999,
1998 and 1997, the Company recorded provisions for loan losses of $376,000,
$100,000, and $81,000, respectively, to its allowance for loan losses and had
net charge-offs of $485,000, $77,000, $53,000, respectively. The Company's
allowance for loan losses at March 31, 1999, totaled $375,000 or 61.0% of
cumulative net charge-offs during the last three fiscal years. The allowance for
loan losses is determined by multiplying the average balance of real estate
loans, installment and credit card loans, and commercial and other loans by the
percentage of actual loss experience for the last three years for each category
of loans, plus 15% for any substandard loans in each category of loans.
Substandard loans are evaluated individually and actual loss percentage to the
average balance of each category of loans as a group. Any unallocated portion of
the allowance is applied to the category with the highest percentage of loss
experience for the prior three years. A self-correcting mechanism to reduce
differences between estimated and actual observed losses is not necessary since
the allowance is determined by actual observed losses. The average balance of
each category of loans reflects changes in loan concentration. Loan quality is
reflected in the 15% allowance for any substandard loan. As the allowance is
based on actual loss experience and the current level of substandard loans, no
elimination methods and assumptions are used in determining the allowance. A
change in substandard loans and the average balance of the categories of loans
will be immediately reflected in the allowance. The level of the allowance is
equal to historical net loss experience plus the 15% allowance for the current
level of substandard assets. The ratio of allowance for loan losses to gross
loans receivable was 0.51% at March 31, 1999.
Management and Development of Customer Base: The Company has focused on
managing deposits to maintain its capital ratios and improve the stability of
its deposit base. In this regard, management has emphasized an increased level
of service to its customers to retain and attract core deposits. In 1988, the
Bank built and opened a new home office and implemented a strategy to expand the
services it offers beyond those services traditionally offered by thrift
institutions. These services include checking accounts, ATMs, night
depositories, safe deposit boxes, drive-through banking, and investment products
through its subsidiary, in order to create broad banking relationships with its
customers. This expansion of services continued with the grand opening of the
remodeled and expanded branch office in New Richmond, Wisconsin in June 1996.
Comparison of Operating Results for the Six Months Ended September 30, 1998
and September 30, 1999
Net Income
Net income for the six months ended September 30, 1999, decreased
$24,000 or 3.8% to $608,000 from $632,000 for the six months ended September 30,
1998. The decrease in net income was primarily due to an decrease in total other
income of $81,000 from $388,000 for the six months ended September 30, 1998, to
$307,000 for the six months ended September 30, 1999. Other income decreased
$44,000 from $119,000 for the six months ended September 30, 1998, to $75,000
for the six months ended September 30, 1999. The decrease in other income was
partially due to a decrease in the profit on sale of real estate held in the
Bank's subsidiary of $50,000 from $50,000 for the six months ended September 30,
1998, to $0 for the six months ended September 30, 1999. Net interest income
decreased $11,000 from $1,846,000 for the six months ended September 30, 1998 to
$1,835,000 for the six months ended September 30, 1999. General and
administrative expenses decreased $35,000 from $1,218,000 for the six months
ended September 30, 1998, to $1,183,000 for the six months ended September 30,
1999. Provision for income taxes decreased $5,000 from $334,000 for the six
months ended September 30, 1998, to $329,000 for the six months ended September
30, 1999.
Net Interest Income
Net interest income decreased by $11,000 from $1,846,000 for the six
months ended September 30, 1998, to $1,835,000 for the six months ended
September 30, 1999. The decrease in net interest income is a result of a
decrease in interest income of $309,000 to $3,617,000 for the six months ended
September 30, 1999, from $3,926,000 for the six months ended September 30, 1998;
combined with a decrease in interest expense of $298,000 to $1,782,000 for the
six months ended September 30, 1999, from $2,080,000 for the six months ended
September 30, 1998.
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Interest Income
Interest income decreased $309,000 or 7.9% to $3,617,000 for the six
months ended September 30, 1999, from $3,926,000 for the six months ended
September 30, 1998. The decrease was primarily due to a $302,000 decrease in
interest and fees on loans to $3,223,000 for the six months ended September 30,
1999, from $3,525,000 for the six months ended September 30, 1998. This decrease
was due to the decrease of $5.1 million in the average outstanding balance of
total loans to $74.4 million for the six months ended September 30, 1999, from
$79.5 million for the six months ended September 30, 1998. The decrease in the
average outstanding balance of total loans was due to a decrease in market
interest rates over the two comparable periods which encouraged customers to
refinance adjustable rate mortgages which are held in the portfolio with fixed
rate loans which are sold on the secondary market. The average yield/rate on
total loans decreased 0.20% from 8.87% for the six months ended September 30,
1998, to 8.67% for the six months ended September 30, 1999. Interest on
mortgage-backed and related securities decreased $34,000 or 15.1% to $191,000
for the six months ended September 30, 1999, from $225,000 for the six months
ended September 30, 1998. This decrease was due to a decrease in the average
outstanding balance of mortgage backed and related securities from $6.3 million
for the six months ended September 30, 1998, to an average balance of $5.7
million for the six months ended September 30, 1999. The decrease was the result
of regularly scheduled principle payments and prepayments on the securities
throughout the period. Interest on investments increased $27,000 to $203,000 for
the six months ended September 30, 1999, from $176,000 for the six months ended
September 30, 1998, as a result of an increase in the average outstanding
balances of interest-bearing deposits in other financial institutions,
securities held for sale, and Federal Home Loan Bank stock from $5.9 million for
the six months ended September 30, l998, to $7.2 million for the six months
ended September 30, 1999.
Interest Expense
Interest expense decreased $298,000 or 14.3% to $1,782,000 for the six
months ended September 30, 1999, from $2,080,000 for the six months ended
September 30, 1998. Interest on deposits decreased $150,000 or 10.5% from
$1,432,000 for the six months ended September 30, 1998, to $1,282,000 for the
six months ended September 30, 1999. The decrease reflects a decrease of 0.51%in
the average yield/rate of total deposits to 4.14% for the six months ended
September 30, 1999, from an average yield/rate of 4.65% for the six months ended
September 30, 1998. The average outstanding balance of total deposits increased
$0.4 million to $62.0 million for the six months ended September 30, 1999, from
an average balance of $61.6 million for the six months ended September 30, 1998.
Interest on borrowings decreased $148,000 or 22.8% from $648,000 for the six
months ended September 30, 1998, to $500,000 for the six months ended September
30, 1999. The decrease reflects a decrease of 0.30% in average yield/rate of
advances and other borrowings from 5.62% for the six months ended September 30,
1998, to 5.32% for the six months ended September 30, 1999.
Provision for Loan Losses
The provision for loan losses decreased $28,000 to $22,000 for the six
months ended September 30, 1999, from $50,000 for the six months ended September
30, 1998. The decrease results from the settlement of a lawsuit involving a
commercial loan in the quarter ended December 31, 1998, that the Board had
previously established a loss provision of $25,000 per quarter. The allowance
for loan losses totaled $338,000 at September 30, 1999, from $484,000 at
September 30, 1998, and represented 0.44% and 0.60% of gross loans and 444.7%
and 34.2% of non-performing loans, respectively. The allowance for loan losses
calculation is based on a three year actual loss average. The non-performing
assets to total assets ratio decreased to 0.14% at September 30, 1999 from 1.71%
at September 30, 1998.
Other Income
Total other income decreased $81,000 or 20.9% to $307,000 for the six
months ended September 30, 1999, from $388,000 for the six months ended
September 30, 1998. The decrease results from a decrease of $44,000 in other
income from $119,000 for the six months ended September 30, 1998 to $75,000 for
the six months ended September 30, 1999. The decrease in other income was due to
a decrease of $50,000 in the profit on sale of real estate held in the Bank's
subsidiary to $00 for the six months ended September 30, 1999, from $50,000 for
the six months ended September 30, 1998. The transaction consummated in the
quarter ending June 30, 1998 divested all of the real estate holdings of the
subsidiary. Gain on sale of mortgage loans decreased $59,000 to $38,000 for the
six months ended September 30, 1999 from $97,000 for the six months ended
September 30, 1998. The decrease in the gain on sale of mortgage loans results
from the recent upward trend in mortgage interest rates during the current
period that acts to reduce gains on sale of mortgage loans sold in the secondary
market. Service charges on deposits increased $13,000 from $128,000 for the six
months ended September 30, 1998, to $128,000 for the six months ended September
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30, 1999. The increase is a result of an increase in the average outstanding
balance of NOW accounts of $0.8 million from $10.1 million for the six months
ended September 30, 1998, to $10.9 million for the six months ended September
30, 1999. Mortgage servicing fees increased $9,000 from $44,000 for the six
months ended September 30, 1998, to $53,000 for the six months ended September
30, 1999.
General and Administrative Expenses
General and administrative expenses decreased $35,000 or 2.87% to
$1,183,000 for the six months ended September 30, 1999, from $1,218,000 for the
six months ended September 30, 1998. The decrease was primarily due to a
decrease of $60,000 in other expenses from $289,000 for the six months ended
September 30, 1998, to $229,000 for the six months ended September 30, 1999. The
decreases are the result of an accumulation of small decreases in eight
different categories of expenses. The decreases are the result of a cost-cutting
effort on the part of the Bank to offset decreases in net interest income. The
decrease in other expenses was offset by a $29,000 increase in salaries and
employee benefits from $659,000 for the six months ended September 30, 1998, to
$688,000 for the six months ended September 30, 1999. The increase reflects cost
of living salary increases.
Income Tax Expense
Income tax expense decreased $5,000 or 1.49% from $334,000 for the six
months ended September 30, 1998, to $329,000 for the six months ended September
30, 1999. The decrease in income tax expense is the direct result of a decrease
in income before taxes of $29,000 from $966,000 for the six months ended
September 30, 1998, to $937,000 for the six months ended September 30, 1999. The
effective tax rate for the six months ended September 30, 1999, was 35.1%
compared to 34.6% for the six months ended September 30, 1998.
Comparison of Operating Results for the Fiscal Years Ended March 31, 1999 and
March 31, 1998
General
Net income for the fiscal year ended March 31, 1999, increased $13,000
or 1.2% to $1,133,000 from $1,120,000 for the fiscal year ended March 31, 1998.
The increase in net income was primarily due to an increase in net interest
income of $209,000 from $3.5 million for the fiscal year ended March 31, 1998,
to $3.7 million for the fiscal year ended March 31, 1999, and a $128,000
increase in total other income to $736,000 for the fiscal year ended March 31,
1999, from $608,000 for the fiscal year ended March 31, 1998. These increases
was offset by a $276,000 increase in the provision for loan losses to $376,000
for the fiscal year ended March 31, 1999, from $100,000 for the for the fiscal
year ended March 31, 1998. The increase in the provision for loan losses
reflects the settlement of the case first reported under Part II, Item 1. Legal
Proceedings in the Form 10QSB dated September 30, 1996, and in subsequent 10QSB
and 10KSB reports. Return on average assets increased 1.16 % for the fiscal year
ended March 31, 1999, from 1.15% for the prior year and return on average equity
decreased 9.59 % from 9.85% for the same years. General and administrative
expenses for the fiscal year ended March 31, 1999, increased $167,000 or 7.3% to
$2.5 million from $2.3 million for the prior fiscal year. This increase was
partially offset by a reduction of $119,000 in provision for income taxes from
$610,000 for the fiscal year ended March 31, 1998, to $491,000 for the fiscal
year ended March 31, 1999.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1999, increased
$209,000 or 5.9% to $3.7 million from $3.5 million for the fiscal year ended
March 31, 1998. The increase in net interest income is a result of an increase
in interest income of $18,000 to $7,781,000 for the fiscal year ended March 31,
1999, compared to $7,763,000 for the fiscal year ended March 31, 1999; combined
with a decrease in interest expense of $191,000 to $4,052,000 for the fiscal
year ended March 31, 1999, from $4,243,000 for the fiscal year ended March 31,
1998.
Interest Income
Interest income increased $18,000 or 0.23% to $7.78 million for the
fiscal year ended March 31, 1999 from $7.76 million for the fiscal year ended
March 31, 1998. Interest income on loans decreased $12,000 from $6.97 million
for the fiscal year ended March 31, 1998, to $6.96 million for the fiscal year
ended March 31, 1999. The decrease in interest income on loans results from an
decrease of $1.13 million in the average outstanding balance of total loans to
$78.3 million for the fiscal year ended March 31, 1999 from $79.5 million for
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the fiscal year ended March 31, 1998. Interest on mortgage-backed securities
decreased $64,000 to $430,000 for the fiscal year ended March 31,1999, from
$494,000 for the fiscal year ended March 31,1998. This decrease was due to a
decrease in the average outstanding balance of mortgage backed securities from
$6.9 million for the fiscal year ended March 31,1998, to an average outstanding
balance of $6.2 million for the fiscal year ended March 31,1999. Interest on
investments increased $94,000 to $394,000 for the fiscal year ended March
31,1999, compared to $300,000 for the fiscal year ended March 31,1998. The
increase was due to an increase in the average outstanding balances of
interest-bearing deposits in other financial institutions, investment
securities, and Federal Home Loan Bank ("FHLB") stock of $1.9 million from $5.0
million for the fiscal year ended March 31,1998, to $6.9 million for the fiscal
year ended March 31,1999.
Interest Expense
Interest expense decreased $191,000 or 4.5% to $4.05 million for the
fiscal year ended March 31, 1999, from $4.24 million for the fiscal year ended
March 31, 1998. The decrease is due to the decrease in the average rate paid on
interest-bearing liabilities of 0.26% from 4.99% for the fiscal year ended March
31, 1998, to 4.73% for the fiscal year ended March 31, 1999. The average
outstanding balance of interest-bearing liabilities increased $0.6 million from
$85.1 million for the fiscal year ended March 31, 1998 to $85.7 million for the
fiscal year ended March 31, 1999.. Interest on savings decreased $84,000 or 2.9%
to $2.8 million for the fiscal year ended March 31, 1999, from $2.9 million for
the fiscal year ended March 31, 1998. The decrease in interest expense was the
result of a decrease of 0.16% from 4.65% in the average yield/rate during the
fiscal year ended March 31, 1998, to 4.49% during the fiscal year ended March
31, 1999. The average outstanding balance of deposits increased $339,000 to
$62.6 million for the fiscal year ended March 31, 1999, from $62.3 million for
the fiscal year ended March 31, 1998. Interest on borrowings decreased $107,000
or 7.9% to $1.24 million for the fiscal year ended March 31, 1999, from $1.35
million for the fiscal year ended March 31, 1998. The decrease in interest on
borrowings was the result of an decrease in the average rate on advances and
other borrowings to 5.38% for the fiscal year ended March 31, 1999, from 5.91%
for the fiscal year ended March 31, 1998. The decrease in the average rate was
the result of lower interest rates offered by the FHLB during the fiscal year.
The average balance of advances and other borrowings increased $236,000 from
$22.8 million for the fiscal year ended March 31, 1998, to $23.1 million for the
fiscal year ended March 31, 1999.
Provision for Loan Losses
The provision for loan losses increased $276,000 to $376,000 for the
fiscal year ended March 31, 1999, compared to $100,000 for the fiscal year ended
March 31, 1998. The increase provides for the settlement of a loan reported in
the Legal Proceedings and Provision for Loan Losses sections of 10QSB and 10KSB
reports since September 30, 1996. The allowance for loan losses totaled $375,000
at March 31, 1999, compared to $484,000 at March 31, 1998, and represented 0.50
% and 0.61% of gross loans and 157.6% and 34.9% of non-performing loans,
respectively. The allowance for loan losses calculation is based on a three year
actual loss average, and the current allowance calculation incorporates the
effect of the loan provided for in the provision for loan losses mentioned
above.
Other Income
Total other income increased $128,000 or 21.1% to $736,000 for
the fiscal year ended March 31, 1999, from $608,000 for the fiscal year ended
March 31, 1998. The increase is primarily due to an increase in gain on sale of
mortgage loans of $76,000 from $130,000 for the fiscal year ended March 31,
1998, to $206,000 for the fiscal year ended March 31, 1999. The increase in gain
on sale of mortgage loans is due to the general decline of mortgage interest
rates over the two comparable periods which enhances the bank's ability to
generate gains on sale of mortgages. The increase is also partially due to
absence of a loss on sale of investments in the fiscal year ended March 31,
1999, compared to ($24,000) for the fiscal year ended March 31, 1998. Mortgage
servicing fees increased $17,000 from $77,000 for the fiscal year ended March
31, 1998, to $94,000 for the fiscal year ended March 31, 1999. Again this is a
reflection of the general decline of mortgage interest rates over the two
comparable periods, which encouraged loan-refinancing activity into fixed rates
loans that are sold on the secondary market and thus increase mortgage-servicing
fees. Other income increased $10,000 from $174,000 for the fiscal year ended
March 31,1998, to $184,000 for the fiscal year ended March 31,1999. The increase
is partially due to an increase of $17,000 in brokerage commissions in the
bank's subsidiary to $71,000 for the fiscal year ended March 31,1999, from
$54,000 for the fiscal year ended March 31,1998. This increase was offset by a
decrease of $11,000 in the profit on sale of real estate held in the Bank's
subsidiary to $50,000 for the fiscal year ended March 31,1999, compared to
$61,000 for the fiscal year ended March 31,1998. With the transaction
consummated in the quarter ending June 30, 1998, the Bank's subsidiary divested
all of its real estate holdings.
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General and Administrative Expenses
General and administrative expenses increased $167,000 or 7.3%
to $2.5 million for the fiscal year ended March 31,1999, compared to $2.3
million for the fiscal year ended March 31,1998. The increase was primarily due
to an increase of $118,000 in salaries and employee benefits from $1.2 million
for the fiscal year ended March 31,1998, to $1.3 million for the fiscal year
ended March 31,1999. The increase was due to adjustments in employee salaries in
response to intense wage competition for employees in the marketplace. Data
processing expenses increased $33,000 from $135,000 for the fiscal year ended
March 31,1998, to $168,000 for the fiscal year ended March 31,1999. The increase
was due to a scheduled contractual increase in the fee based on transaction
volumes and a $20,000 fee for testing the data processing system for Year 2000
compliance. Net occupancy expense increased $15,000 from $350,000 for the fiscal
year ended March 31,1998, to $365,000 for the fiscal year ended March 31,1999,
and reflects some extraordinary maintenance items occurring during the current
period.
Income Tax Expense
Income tax expense decreased $119,000 or 19.5% from $610,000 for the
fiscal year ended March 31,1998, to $491,000 for the fiscal year ended March
31,1999. The decrease in income tax expense is the direct result of a decrease
in income before taxes of $106,000 from $1,730,000 for the fiscal year ended
March 31,1998, to $1,624,000 for the fiscal year ended March 31,1999. The
effective tax rate for the fiscal year ended March 31,1998, was 35.3% compared
to 30.2% for the fiscal year ended March 31,1999. The decrease is the effective
rate was due to tax accounting related to the restricted stock plan award.
Comparison of Operating Results for the Fiscal Years Ended March 31, 1998 and
March 31, 1997
General
Net income for the fiscal year ended March 31, 1998, increased $410,000
or 57.7% to $1.1 million from $710,000 for the fiscal year ended March 31, 1997.
Return on average assets increased to 1.15% for the fiscal year ended March 31,
1998, from 0.76% for the prior year and return on average equity increased to
9.85% from 6.18% for the same years. The increase in the return on average
assets was primarily due to the $389,000 decrease in federal insurance premiums
from $428,000 for the fiscal year ended March 31, 1997 to $39,000 for the fiscal
year ended March 31, 1998. The decrease resulted from the absence in the current
fiscal year of the one-time $350,000 special assessment to recapitalize the SAIF
insurance fund paid to the FDIC in the quarter ended September 30, 1997. Net
interest income before provision for loan losses increased $100,000 or 2.9% to
$3.5 million for the fiscal year ended March 31, 1998, from $3.4 million for the
fiscal year ended March 31, 1997. This increase was primarily due to an increase
in interest income of $271,000, partially offset by an increase in interest
expense of $171,000. Provision for loan losses increased 23.5% to $100,000 for
the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended
March 31, 1997. The increase reflects a full fiscal year's provisions for a
large commercial loan discussed previously under Asset Quality. Total other
income increased by $77,000 to $608,000 for the fiscal year ended March 31,
1998, from $531,000 for the fiscal year ended March 31, 1997. This was primarily
due to an increase gain on sale of mortgage loans of $71,000 from $59,000 for
the fiscal year ended March 31, 1997, to $130,000 for the fiscal year ended
March 31, 1998. General and administrative expenses for the fiscal year ended
March 31, 1998, decreased $345,000 or 13.1% to $2.3 million from $2.6 million
for the prior fiscal year. The decrease was due to a $389,000 decrease federal
insurance premiums that was offset by an increase of $10,000 in salaries and
employee benefits, and a $14,000 increase in net occupancy expense and a $16,000
increase in other expense.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1998, increased
$100,000 or 2.9% to $3.5 million from $3.4 million for the prior year. The
increase was due to an increase in interest income of $271,000, partially offset
by an increase in interest expense of $171,000. The improvement in net interest
income primarily reflects an increase in the average outstanding balance of
total interest-earning assets to $91.4 million for the fiscal year ended March
31, 1998 compared to $88.1 million for the prior fiscal year. The increase in
the Company's net earning asset position was attributable primarily to an
increase in the average outstanding balance of total loans funded by the
increase in total deposits and advances and other borrowings.
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Interest Income
Interest income increased $271,000 or 3.6% to $7.8 million for the
fiscal year ended March 31, 1998 from $7.5 million for the fiscal year ended
March 31, 1997. The increase is partially due to a $267,000 increase in interest
income on loans from $6.7 million for the fiscal year ended March 31, 1997, to
$7.0 million for the fiscal year ended March 31, 1998. The increase in interest
income on loans results from an increase of $2.9 million in the average
outstanding balance of mortgage loans to $67.1 million for the fiscal year ended
March 31, 1998 from $64.2 million for the fiscal year ended March 31, 1997.
Interest on commercial loans decreased $46,000 from $417,000 for the fiscal year
ended March 31, 1997, to $371,000 for the fiscal year ended March 31, 1998. The
decrease is due to the non-accrual status of the large commercial loan discussed
under Asset Quality. As a result, the average yield on commercial loans
decreased from 9.19% for the fiscal year ended March 31, 1997, to 7.80% for the
fiscal year ended March 31, 1998. Interest on consumer loans increased $18,000
from $731,000 for the fiscal year ended March 31, 1997, to $749,000 for the
fiscal year ended March 31, 1998. The increase results from an increase in the
average outstanding balance of consumer loans to $7.7 million during the fiscal
year ended March 31, 1998, from $7.5 million during the fiscal year ended March
31, 1997. Interest on mortgage-backed and related securities decreased $62,000
to $494,000 for the fiscal year ended March 31, 1998, from $556,000 for the
prior fiscal year. The decrease is the result of the decrease in the average
balance of mortgage-backed and related securities from $7.6 million for the
fiscal year ended March 31, 1997, to $6.9 million for the fiscal year ended
March 31, 1998. The decrease in mortgage-backed securities was due to scheduled
principal payments and prepayments. Interest on interest bearing deposits in
other financial institutions increased $52,000 from $23,000 for the fiscal year
ended March 31, 1997, to $75,000 for the fiscal year ended March 31, 1998. The
average outstanding balance of interest bearing deposits in other financial
institutions increased from $461,000 during the fiscal year ended March 31, 1997
to $818,000 during the fiscal year ended March 31, 1998. The increase reflects
the larger cash balances held as a result of the establishment of the Nevada
investment subsidiary. Interest and dividends on investments increased $66,000
to $300,000 for the fiscal year ended March 31, 1998, from $234,000 for the
fiscal year ended March 31, 1997. The increase was partially due to a increase
in the average yield of investment securities to 5.95% for the fiscal year ended
March 31, 1998 from 5.53% for the fiscal year ended March 31, 1997. This
increase resulted from the restructuring of the investment portfolio, which
created a $24,000 loss on the sale of investments, but acted to increase the
current yield of the remaining investments. Dividends on Federal Home Loan Bank
stock increased $14,000 to $68,000 for the fiscal year ended March 31, 1998,
from $54,000 for the fiscal year ended March 31, 1997. The increase was due to
an increase of the average outstanding balance of Federal Home Loan Bank stock
from $837,000 during the fiscal year ended March 31, 1997, to $996,000 during
the fiscal year ended March 31, 1998. The increase in the stock balance was a
requirement of the Federal Home Loan Bank due to the increase in advances during
the fiscal year ended March 31, 1998. The average yield on all of the Company's
total interest-earning assets of 8.50% for the fiscal year ended March 31, 1998,
remained relatively unchanged from the 8.51% for the fiscal year ended March 31,
1997. The increase in average balances of loans and mortgage-backed and related
securities were principally funded by increases in deposits and advances from
the FHLB-Chicago.
Interest Expense
Interest expense increased $171,000 or 4.2% to $4.2 million for the
fiscal year ended March 31, 1998, from $4.1 million for the fiscal year ended
March 31, 1997. The increase is due to the increase in the average outstanding
balance of interest-bearing liabilities of $3.7 million from $81.4 million for
the fiscal year ended March 31, 1997 to $85.1 million for the fiscal year ended
March 31, 1998. The average rate paid on interest-bearing liabilities decreased
slightly from 5.00% for the fiscal year ended March 31, 1997, to 4.99% for the
fiscal year ended March 31, 1998. Interest on savings increased $9,000 or 0.31%
to $2.9 million for the fiscal year ended March 31, 1998, from $2.9 million for
the fiscal year ended March 31, 1997. The increase in interest expense on
deposits was the result of an increase in average deposits to $62.3 million for
the fiscal year ended March 31, 1998, from $60.8 million for the fiscal year
ended March 31, 1997. The increase in interest on the increased savings balances
was offset by an almost identical decrease in interest expense due to the
average yield during the fiscal year ended March 31, 1997, decreasing from 4.74%
to 4.65% during the fiscal year ended March 31, 1998. Interest on borrowings
increased $162,000 or 13.5% to $1.4 million for the fiscal year ended March 31,
1998, from $1.2 million for the fiscal year ended March 31, 1997. The increase
in interest on borrowings was the result of an increase in the average balances
of advances from $20.6 million for the fiscal year ended March 31, 1997, to
$22.8 million for the fiscal year ended March 31, 1998. The increase was also
due to an increase in the average rate on advances and other borrowings to 5.91%
for the fiscal year ended March 31, 1998, from 5.78% for the fiscal year ended
March 31, 1997. The increase in the average rate was the result higher interest
rates offered by FHLB during the fiscal year.
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Provision for Loan Losses
The provision for loan losses increased $19,000 or 23.5% to $100,000
for the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended
March 31, 1997. The desired level of allowance for loan losses is determined by
the Company's historical loan loss experience, the condition and composition of
the Company's loan portfolio and general conditions. The higher provisions
during the fiscal year ended March 31, 1998, reflects provisions for a large
commercial loan discussed previously under Asset Quality. The allowance for loan
losses totaled $461,000 at March 31, 1997 and $484,000 at March 31, 1998, and
represented 0.59% and 0.61% of gross loans and 43.0% and 34.9% of non-performing
loans, respectively. Management currently believes the allowance for loan losses
is at an adequate level to provide for potential loan losses and that future
provisions for loan losses will be remain at $25,000 per quarter until the
status of the above-mentioned commercial loan is determined.
Other Income
Total other income increased $77,000 or 14.5% to $608,000 for the
fiscal year ended March 31, 1998, from $531,000 for the fiscal year ended March
31, 1997. The increase is partially due to an increase in gain on sale of
mortgage loans of $71,000 from $59,000 for the fiscal year ended March 31, 1997,
to $130,000 for the fiscal year ended March 31, 1998. The decrease in the market
level of mortgage interest during the fiscal year acts to generate gains on sale
of mortgage loans. An increase in service charges on deposits of $31,000 from
$220,000 for the fiscal year ended March 31, 1997 to $251,000 for the fiscal
year ended March 31, 1998, was offset by a $24,000 increase in loss on sale of
investments from $0 for the fiscal year ended March 31, 1997, to $24,000 for the
fiscal year ended March 31, 1998. The losses were incurred while restructuring
the investment portfolio to eliminate assets classified as "available-for-sale"
to investments classified as "held-to-maturity".
General and Administrative Expenses
General and administrative expenses decreased $345,000 or 13.3% to $2.3
million for the fiscal year ended March 31, 1998, from $2.6 million for the
prior fiscal year. The decrease is due to an decrease of $389,000 in federal
insurance premiums from $428,000 for the fiscal year ended March 31, 1997, to
$39,000 for the fiscal year ended March 31, 1998. The decrease resulted from the
absence in the current fiscal year of the one-time $350,000 special assessment
to recapitalize the SAIF insurance fund paid to the FDIC in the quarter ended
September 30, 1997. The increase in salaries and employee benefit expense due to
cost of living salary increases, additional personnel, and the initiation of a
loan production incentive program to enhance loan officer salaries. This was
almost exactly offset by a decrease in expense from accounting for Company's
stock incentive plan of $115,000 to $89,000 for the fiscal year ended March 31,
1998, from $204,000 for the fiscal year ended March 31, 1997. Applicable
accounting standards required that 61.1% of the three-year cost be amortized in
the first year, 27.8% in the second year and 11.1% in the third year. The
accounting for this expense began with the approval of the Company's stock
incentive plan in October 1995, and will be fully expensed the in the quarter
ending September 30, 1998. The expense associated with the Bank's Employee Stock
Ownership Plan (`ESOP') increased $28,000 from $141,000 for the fiscal year
ended March 31, 1997, to $169,000 for the fiscal year ended March 31, 1998. The
expense for the ESOP reflects the ESOP loan payments made by the Bank to the
Company, which vary each year and also reflect the application of dividends of
the ESOP stock to the balance of the note. Dividends on the ESOP stock increased
$0.14 per share from $0.40 per share for the fiscal year ended March 31, 1997,
to $0.54 per share for the fiscal year ended March 31, 1998. Net occupancy
expense increased $14,000 or 4.2% from $336,000 for the fiscal year ended March
31, 1997, to $350,000 for the fiscal year ended March 31, 1998. Other expense
increased $16,000 or 2.8% to $581,000 for the fiscal year ended March 31, 1998,
from $565,000 for the fiscal year ended March 31, 1997. General and
administrative expenses as a ratio of average assets decreased to 2.36% for the
fiscal year ended March 31, 1998, compared to 2.84% for the fiscal year ended
March 31, 1997, due to the decrease in Federal insurance premiums over the
period..
Income Tax Expense
Income tax expense increased $93,000 or 18.0% to $610,000 for the
fiscal year ended March 31, 1998, from $517,000 for the fiscal year ended March
31, 1997. The increase reflects the increase in income before taxes of $503,000
from $1.2 million for the fiscal year ended March 31, 1997, to $1.7 million for
the fiscal year ended March 31, 1998. The effective tax rates were 35.3% and
42.1% for the fiscal years ended March 31, 1998, and 1997, respectively. The
decrease in effective rate is due to the establishment of a Nevada investment
subsidiary of the Bank, which acts to eliminate the Wisconsin state income tax
obligation of 7.9% of net income. Because state income tax is deductible for
federal income tax purposes, the state income tax savings is reduced by about
the federal tax rate of 34% or an effective state tax rate savings of 5.2%
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Liquidity, Capital Resources and Regulatory Capital
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, principal and interest payments on
mortgage-backed and related securities and FHLB-Chicago advances. Although
maturity and scheduled amortization of loans are predictable sources of funds,
deposit flows, mortgage prepayments and prepayments on mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Principal collected on long-term loans for
the fiscal year ended March 31, 1999 increased to $45.2 million from $28.0
million for the fiscal year ended March 31, 1998. Principal collected on
mortgage-backed securities for the year ended March 31, 1999 increased to
$3.0million from $1.0 million for the fiscal year ended March 31, 1998.
The primary investing activity of the Company is the origination of
mortgage loans. For the fiscal years ended March 31, 1999 and 1998, the Company
originated or acquired long-term loans in the amount of $48.3 million and $29.6
million, respectively. The Company purchased $2.6 million of mortgage-backed
securities and $0 during the fiscal years ended March 31, 1999 and 1998,
respectively. For the fiscal years ended March 31, 1999 and 1998, these
activities were funded primarily by principal repayments on long-term loans and
mortgage backed securities of $48.2 million and $29.1 million, respectively.
The Company is required to maintain minimum levels of liquid assets
under the DFI's regulations for state-chartered mutual savings banks. Savings
banks are required to maintain an average daily balance of liquid assets of not
less than 8% of its average daily balance of net withdrawal accounts plus
short-term borrowings. These assets include cash, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations. The Company's liquidity ratios
were 22.7% and 15.2 % at March 31, 1999 and 1998, respectively. The Company
adjusts its liquidity levels to meet various funding needs and to meet its asset
and liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 1999 and 1998, cash
and cash equivalents were $10.5 million and $6.0 million, respectively. The
increase in cash and cash equivalents was due to general interest rate market
conditions that encouraged the Bank's loan customers to refinance into fixed
rate loans that are sold on the secondary market from adjustable rate loans that
are held in the Bank's portfolio. This acts to increase cash and decrease loans
receivable.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds are
generally invested in short-term investments such as a cash management account
or overnight deposits at the FHLB-Chicago. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available and obtained from borrowings from the FHLB-Chicago. The Company
utilizes its borrowing capabilities on a regular basis. At March 31, 1999,
FHLB-Chicago advances were $17.0 million or 19.9% of total liabilities and at
March 31, 1998, FHLB-Chicago advances were $19.1 million or 21.9% of total
liabilities. The Company also had other borrowings consisting of repurchase
agreements amounting to $5.6 million and $5.3 million at March 31, 1999 and
1998, respectively. The Company did not have any reverse repurchase agreements
outstanding at any of the aforementioned periods. In a rising interest rate
environment, such short-term borrowings present the risk that upon maturity, the
borrowings will have to be replaced with higher rate borrowings.
At March 31, 1999, the Company had outstanding loan commitments of $5.7
million. The Company had no commitments to purchase mortgage-backed and related
securities at that date. The Company anticipates it will have sufficient funds
available to meet its current loan commitments, including loan applications
received and in process prior to the issuance of firm commitments. Certificates
of deposit that are scheduled to mature in one year or less at March 31, 1999
are $28.5 million. Based on its historical experience, management believes that
a significant portion of such deposits will remain with the Company.
Effective June 30, 1993, the Bank, as a Wisconsin chartered mutual
savings bank, is subject to regulation by the FDIC and the DFI. Applicable FDIC
regulations require institutions to meet three capital standards: (i) "Tier 1
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capital" in an amount not less than 3% of total assets, (ii) "Tier 1 capital" in
an amount not less than 4% of risk-weighted assets, and (iii) "total capital" in
an amount not less than 8% of risk-weighted assets. Wisconsin chartered savings
banks also are required to maintain a minimum capital to assets ratio of 6%. The
percentage of assets for Wisconsin regulatory capital purposes is based on total
unconsolidated assets. Note 15 of the Notes to the Company's Audited
Consolidated Financial Statements contains a summary of the Bank's compliance
with its regulatory capital standards at March 31, 1999.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements and Notes thereto have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all of the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Current Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. A special accounting for
qualifying hedges typically allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting treatment.
Statement 133 is effective for fiscal years beginning after June 15, 2000.
A company may also implement the Statement as of the beginning of any quarter
after issuance. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantially modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).
The statement could increase volatility in earnings and other comprehensive
income. The Company believes that based on their existing derivative
instruments, the impact of adopting Statement 133 on its financial statements
will not be material. The Company has not determined the timing or method of
adoption.
Forward-Looking Statements
The discussion in this Annual Report may include certain forward-looking
statements based on current management expectations. Factors which could cause
future results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and fiscal
policies of the federal government; deposit flows; the cost of funds; general
market rates of interest; interest rates on competing investments; demand for
loan products; demand for financial services; changes in accounting policies or
guidelines; and changes in the quality or composition of the Company's loan and
investment portfolios. Additional factors are described in the Company's other
reports filed with the Securities and Exchange Commission.
Disclosures Involving Year 2000 Issues
Issues related to the century date change and the impact on computer
systems and business operations are receiving prominent publicity and attention.
Depositors, business partners, investors, and the general public are
specifically interested in the effect on the financial condition of each
depository institution. The FDIC has advised state savings banks that safe and
sound banking practices require them to address Year 2000 issues. The Securities
and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to
provide specific guidance on disclosure associated with Year 2000 obligations
for companies registered under federal securities laws.
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Computer programs generally abbreviated dates by eliminating the century
digits of the year. Many resources, such as software; hardware; telephones;
voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems")
are affected. These Systems were designed to assume a century value of "19" to
save memory and disk space within their programs. In addition, many Systems use
a value of "99" in a year or "99/99/99" in a date to indicate "no date"or "any
date" or even a default expiration date. As the year 2000 approaches, this
abbreviated date mechanism within Systems threatens to disrupt the function of
computer software at nearly every business which relies heavily on computer
systems for account and other recordkeeping functions. If the millennium issue
is ignored, system failures or miscalculations could occur, causing disruptions
of operations and a temporary inability to process business transactions.
The Bank has an inventory of personal computers that access a data
processing system provided by EDS in Des Moines, Iowa. If the personal computers
and data processing systems fail to process the century date change, it may
impair the Bank's ability to process loan payments, accept deposits, and address
other operational issues. The Bank's customers, suppliers, other constituents
may also be impaired to meet their contractual obligations with the Bank. The
Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to
identify the systems, assess the risk, and conduct inventories as necessary to
assure compliance with the Plan. The Plan calls for identifying all systems in
need of remediation by June 30, 1999, and remedying all systems in need of
remediation by September 30, 1999. As of March 31, 1999, the Bank estimates it
will have to purchase hardware and equipment in the amount of $17,000 (pre-tax)
to address the Y2K issues. The expenditures would be amortized over a 5-year
period, and would add approximately $3,400 in furniture and fixture expense per
year for the next 5 years. In addition, the Bank paid in the quarter ended
December 31, 1998, a one-time fee of $20,000 by EDS to support the FFIEC's
testing guidance regarding Year 2000 efforts of financial institutions as
outlined in the April 10, 1998, Interagency Statement. These amounts are not
considered to be material.
On February 24, 1998, the FDIC conducted an on-site visitation of the
Bank's Year 2000 process. The examiner followed guidelines and recommendations
contained in the FFIEC Interagency Statement on Year 2000 Project Management
Awareness, dated May 5, 1997, and subsequent publications. In a letter dated
March 17, 1998, the FDIC stated that the Bank's Year 2000 Committee is
adequately monitoring Year 2000 compliance. In a letter dated September 8, 1998,
The FDIC reported to the Board of Directors that the Federal Reserve Bank of
Dallas had conducted an examination of Electronic Data Systems, Inc.,(EDS)
Plano, Texas, the Bank's data processor. The Board of Directors reviewed the
Exam at its September 18, 1998, meeting and the record of this action was
entered into the minutes. The results of the examination are deemed to be
confidential by the FDIC. On October 9, 1998, the Bank received an extensive Y2k
Contingency Plan from EDS. On February 4, 1999, the FDIC conducted an on-site
Year 2000 readiness examination. Again, the FDIC mandates that the results of
that examination be held confidential. In a letter dated April 30, 1999, EDS
reported that the overall product line remediation was now 100% complete.
Asset/Liability Management
The Company's profitability, like that of most financial institutions,
depends to a large extent upon its net interest income, which is the difference
between interest earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. Net interest income is significantly affected by changes in
market interest rates. During periods of rising interest rates, the Company is
required to pay higher rates to attract deposits. That can result in a decline
in net interest income if the Company is unable to increase the yield on its
interest-earning assets sufficiently to compensate for the increase in its cost
of funds. Conversely, during periods of declining interest rates, the Company
may experience prepayments of its fixed rate earning assets and downward
adjustments on its adjustable rate assets. That can result in a decrease in net
interest income if the Company is unable to lower its cost of funds sufficiently
to compensate for the decrease in its asset yields.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it matures or reprices within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
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<PAGE>
period. An interest rate sensitivity gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities that mature or reprice within a specified time period. An interest
rate sensitivity gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets that
mature or reprice within a specified time period.
In an attempt to manage vulnerability to interest rate changes,
management closely monitors the Company's interest rate risk. The Company has
established an investment strategy through its Asset/Liability Committee.
Management continually reviews the Company's interest rate risk position,
maturing securities and borrowings, interest rates and programs for raising
deposits and originating loans, and develops policies regarding these issues.
The Board of Directors reviews quarterly asset/liability management and
investment strategy reports prepared by management.
The Company utilizes basic strategies in managing its assets and
liabilities by managing or maximizing the net interest income under various
interest rate scenarios. More complex techniques such as hedging through the use
of options, financial futures, and interest rate swaps are not utilized. In
addition to monitoring interest rate risk on a continual basis, the Company
reviews deposit rates weekly. The emphasis has been on prudent pricing as
opposed to increasing market share, and the Company has supplemented and
substituted deposits using FHLB-Chicago advances in past periods when advance
rates are more attractive than those obtainable on retail deposits.
Generally, the Company utilizes the following strategies to manage its
interest rate risk: (i) the Company sells substantially all of its fixed rate
loans originated; (ii) the Company seeks to originate and retain ARM loans and
mortgage-backed and related securities with short- to medium-term periods to
re-pricing; (iii) the Company attempts to extend the maturities of deposits when
deemed cost effective through the pricing and promotion of certificates of
deposit with longer terms, and periodically utilizes deposit marketing programs
offering maturity and repricing terms structured to complement the repricing and
maturity characteristics of the existing asset/liability mix; and (iv) the
Company utilizes longer-term borrowings from the FHLB-Chicago to manage its
assets and liabilities and enhance earnings. One of the Company's
asset/liability management techniques involves borrowing from the FHLB-Chicago
and utilizing proceeds thereof to invest in assets that mature at the same time
or close to the same time as the advances are due. This use of FHLB-Chicago
advances is part of the overall interest rate risk management strategy of the
company. At March 31, 1999, FHLB-Chicago advances were $17.0 million or 17.4% of
total assets, compared to $19.1 million or 19.3 % of total assets at March 31,
1998.
Originating ARM rate loans and investing in adjustable-rate
mortgage-backed and related security has enabled the Company to reduce interest
rate risk by more closely matching the terms and repricing characteristics of
its assets and liabilities. In addition, because of the relative liquidity of
mortgage-backed and related securities, the Company can restructure its
interest-earning asset portfolios more quickly and effectively in a changing
interest rate environment. The Company's ARM loans and ARM mortgage-backed and
related securities typically have annual and lifetime interest rate caps that
reduce their ability to protect the Company against a prolonged and significant
increase in interest rates. Further, mortgage-backed and related securities are
subject to reinvestment risk. For example, during periods of decreasing interest
rates, mortgage-backed and related securities are more likely to prepay, and the
Company may not be able to reinvest the proceeds from prepayments in securities
or other assets with yields similar to those of the prepaying mortgage-backed
and related securities. However, mortgage-backed and related securities also are
subject to extension risk, which is the risk that the effective maturity of the
security may increase in a rising interest rate environment. The market value of
a security with a longer maturity typically is more sensitive to changes in
market rates of interest, and rising interest rates may have a more pronounced
adverse effect on the market value of mortgage-backed and related securities
than on other types of investment securities.
At March 31, 1999, total interest-bearing liabilities repricing within
one year exceeded total interest-bearing assets repricing in the same period by
$4.4million, representing a negative cumulative one-year interest rate
sensitivity gap equal to 4.48% of total assets. During periods of rising
interest rates, a positive interest rate sensitivity gap would tend to
positively affect net interest income while a negative interest rate sensitivity
gap would tend to negatively affect net interest income. Notwithstanding the
negative effect on net interest income anticipated as a result of falling
interest rates due to the Company's one-year gap position, the Company could
experience substantial prepayments of its fixed rate mortgage loans during
periods of falling interest rates. That may result in the reinvestment of such
proceeds at market rates that are lower than current rates.
The following table sets forth at March 31, 1999 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
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The following table sets forth at March 31, 1999 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
Amount Maturing or Repricing as of March 31, 1999
-------------------------------------------------------------------------------------
More Than More Than
Within Four to One Year Three years
Three Twelve to Three to Five Over five
Months Months Years Years Years Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets(1)
Mortgage loans:
Fixed rate $159 $489 $1,726 $1,762 $2,716 $6,852
Adjustable rate 9,694 21,408 22,755 2,036 0 55,893
Consumer loans 635 488 2,509 3,277 200 7,109
Commercial loans 1,442 1,118 419 52 868 3,899
Mortgage-backed securities:
Fixed rate - - - - 5,587 5,587
Adjustable rate 285 165 - - - 450
Interest bearing deposits 5,721 - - - - 5,721
Investment securities - - - 3,398 850 4,248
------- -------- -------- ------- -------- -------
Total interest-earning assets $17,936 $23,668 $27,409 $10,525 $10,221 $89,759
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits(2):
Certificates of deposit 9,486 19,001 8,878 1,137 146 38,648
Money market 686 2,057 1,645 1,950 518 6,856
NOW accounts 994 2,980 2,385 2,826 751 9,936
Passbook savings 591 2,034 1,575 1,867 496 6,563
Borrowings(3) 5,584 2,562 2,346 7,000 5,121 22,613
------- ------- -------- -------- -------- --------
Total interest-bearing liabilities $17,341 $28,634 $16,829 $14,780 $7,032 $84,616
======== ======== ======== ======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $595 $(4,966) $10,580 $(4,255) $3,189 $5,143
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $595 $(4,371) $6,209 $1,954 $5,143 $5,143
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets 0.61% -4.48% 6.36% 2.00% 5.27% 5.27%
======== ======== ======== ======== ======= ========
<FN>
(1) Adjustable and floating rate assets are included in the period in
which interest rates are next scheduled to adjust rather than in the period
in which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization.
(2) Although the Company's negotiable order of withdrawal ("NOW")
accounts and passbook savings accounts generally are subject to immediate
withdrawal, management considers a certain historical amount of such
accounts to be core deposits. These deposits have significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. Money market, NOW accounts, and passbook savings accounts are
assumed to be withdrawn at annual rates of 40%, 40% and 79%, respectively,
of the declining balance of such accounts during the period shown. The
withdrawal rates used are higher than the Company's historical rates but
are considered by management to be more indicative of expected withdrawal
rates currently. Much of the recent growth in these deposit accounts is
assumed to be the result of low interest rates and it is assumed that the
accounts are more susceptible to withdrawal than in the past. If all of the
Company's NOW accounts, passbook savings accounts and money market deposit
accounts had been assumed to be subject to repricing within one year, the
one-year cumulative deficiency of interest-earning assets over
interest-bearing liabilities would have been $13.4 million or 13.6% of
total assets.
(3) Adjustable and floating rate borrowings are included in the period
in which their interest rates are next scheduled to adjust rather than in
the period in which they are due.
</FN>
</TABLE>
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Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. 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. The 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. Additionally, certain assets, such as ARM loans and mortgage-backed and
related securities, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In addition, the proportion of
ARM loans and mortgage-backed and related securities in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to service their adjustable rate debt may decrease in the event
of an interest rate increase.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's consolidated average balance sheets and the consolidated statements of
operations at and for the fiscal years ended March 31, 1999, 1998 and 1997. It
reflects the average yields on interest-earning assets and average rates on
interest-bearing liabilities for the periods indicated. Dividing income or
expense derives yields and rates by the average balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods shown.
Average balances are derived principally from average monthly balances and
include non-accruing loans. Interest income on non-accrual loans is reflected in
the period it is collected and not in the period it is earned. Such amounts are
not material to net interest income or net change in net interest income in any
period. Non-accruing loans are included in the average balances and do not have
a material effect on the average yield.
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<PAGE>
<TABLE>
MANAGEMENT' S DISCUSSION(CONT.)
Fiscal Years Ended March 31,
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
<CAPTION>
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans $66,333 $5,837 8.80% $67,052 $5,849 8.72% $64,208 $5,554 8.65%
Commercial loans 4,331 370 8.54 4,754 371 7.80 4,539 417 9.19
Consumer loans 7,677 751 9.78 7,665 749 9.77 7,493 731 9.76
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans 78,341 6,957 8.88 79,471 6,969 8.77% 76,240 6,702 8.79%
Mortgage-backed securities 6,164 430 6.98 6,938 494 7.12 7,603 556 7.31
Interest bearing deposits in other
financial institutions 3,058 153 5.02 1,377 76 5.52 461 23 5.06
Investment securities 2,950 180 6.10 2,665 156 5.87 2,938 157 5.33
Federal Home Loan Bank stock 937 61 6.51 996 68 6.77 837 54 6.46
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 91,450 7,781 8.51% 91,448 $7,763 8.49% 88,079 $7,492 8.51%
Non-interest earning assets 6,765 5,681 4,976
--------- -------- --------
Total assets $98,215 $97,128 $93,055
========= ======== ========
Liabilities and retained earnings:
Deposits:
NOW accounts(1) 10,592 140 1.32% 9,491 138 1.45% $8,934 $149 1.66%
Money market deposit accounts 6,823 313 4.59 5,552 260 4.68 4,109 194 4.72
Passbook 6,252 134 2.15 6,013 129 2.15 6,440 147 2.28
Certificates of deposit 38,922 2,222 5.71 41,194 2,366 5.74 41,314 2,395 5.80
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits 62,589 2,809 4.49 62,250 2,893 4.65 60,797 2,884 4.74
Advances and other borrowings 23,084 1,243 5.38 22,849 1,350 5.91 20,559 1,188 5.78
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 85,673 4,052 4.73% 85,099 4,243 4.99% 81,356 4,072 5.00%
Non-interest bearing liabilities 615 655 202
Equity 11,927 11,374 11,497
--------- -------- --------
Total liabilities and retained earnings $98,215 $97,128 $93,055
========= ======== ========
Net interest income/interest rate spread(2) $3,729 3.50% $3,520 3.50% $3,420 3.51%
======= ====== ======= ====== ======= ======
Net earning assets/net interest margin(3) $5,777 4.08% $6,348 3.85% $6,723 3.88%
========= ====== ======== ====== ======= =======
Average interest-earning assets to
average interest-bearing liabilities 1.07 1.07 1.08
========= ======== =======
<FN>
________________________
(1) Includes non-interest bearing NOW accounts.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
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<PAGE>
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 the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume), and (iii) 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>
Fiscal Year Ended March 31, 1999 Fiscal Year Ended March 31, 1998
Compared to Compared to
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
--------------------------------- --------------------------------
Increase(Decrease) Increase(Decrease)
Due to Due to
--------------------------------- --------------------------------
Rate Volume Total Rate Volume Total
--------------------------------- --------------------------------
<CAPTION>
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $87 (99) $(12) $(15) 282 $267
Mortgage-backed securities (10) (54) (64) (14) (48) (62)
Deposits (7) 84 77 2 51 53
Securities 6 18 24 16 (17) (1)
FHLB stock (3) (4) (7) 3 11 14
----- ----- ------ ------ ----- -----
Total 73 (55) 18 (8) 279 271
----- ----- ------ ------ ----- -----
Interest-bearing liabilities:
Deposits (100) 16 (84) (57) 66 9
Borrowings (121) 14 (107) 27 135 162
----- ----- ------ ------ ----- -----
Total (221) 30 (191) (30) 201 171
------ ----- ------ ------ ----- -----
Net change in net interest income $294 $(85) $209 $22 $78 $100
====== ===== ====== ====== ===== =====
</TABLE>
The Bank has two wholly owned subsidiaries, Amery Service Agency, Inc.
("ASA"), organized as a Wisconsin corporation in 1970 and Northwest Investments
Inc. ("NWI") organized as a Nevada corporation in 1997.
ASA engages in insurance agency activities permissible under state and
federal law, including the sale of credit life and disability products, and
maintenance of a third party brokerage relationship. The ASA and the Bank have
received approval of the Wisconsin Department of Financial Institutions and the
FDIC to engage in the insurance and brokerage activities.
In January 1983, ASA formed the Pondhurst Condominium Association and
developed 64 residential lots for condominium duplexes and four-plexes on land
adjacent to a golf course in Amery, Wisconsin (the "Pondhurst Project"). As of
March 31, 1999, all 64 residential lots had been sold. On May 8, 1998, ASA sold
an adjacent undeveloped 7.5-acre parcel of land for $65,000. With the sale of
the 7.5 acre parcel, the Bank and ASA has complied with a request by the Federal
Reserve bank of Minneapolis that ASA divest its holdings in the Pondhurst
Project by May 31, 2000. As of March 31, 1999, ASA had total assets of $48,000.
On May 30, 1997, NWI was established as an investment subsidiary of Bank to
manage a portion of its investments. The establishment and operation of a
investment subsidiary through incorporation and operation in the state of Nevada
provides certain corporate tax advantages to the Bank. As of March 31, 1999, NWI
had total assets of $23.9 million.
INFORMATION ABOUT BREMER
Bremer is an employee-owned regional financial services company
headquartered in St. Paul, Minnesota. It was incorporated under Minnesota law on
December 7, 1943. As of September 30, 1999, Bremer owned at least 95% of the
total outstanding capital stock of each of its 14 subsidiary banks ("Subsidiary
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Banks"). The Subsidiary Banks are located in Minnesota, Wisconsin and North
Dakota and have a total of over 100 offices located throughout these states. The
Subsidiary Banks ranged in size from $68 million to $488 million in total assets
and from $62 million to $330 million in total deposits as of September 30, 1999.
As of September 30, 1999, Bremer and its subsidiaries (including its Subsidiary
Banks) had consolidated assets of $3.8 billion and consolidated deposits of $2.8
billion
Bremer also owns several financial services subsidiaries in addition to
the Subsidiary Banks. It owns all of the outstanding capital stock of Bremer
Trust, National Association, which provides trust and other fiduciary services
to most of the Minnesota communities served by the Subsidiary Banks; Bremer
Insurance Agencies, Inc., which provides insurance agency services to the
Subsidiary Banks' communities; Bremer Financial Services, Inc., which provides
management and support services to Bremer and its other subsidiaries; Bremer
Premium Finance Corporation, which provides commercial insurance premium
financing services in Wisconsin, Minnesota and North Dakota; Bremer Business
Finance Corporation, which provides asset-based lending and leasing services;
and Bremer Services, Inc., which provides operations and support services to the
Subsidiary Banks. Bremer also owns a controlling portion of the capital stock of
Bremer Life Insurance Company, which is engaged in the underwriting and
reinsurance of credit life and health insurance sold in conjunction with the
extension of credit by the Subsidiary Banks.
Consumer investment products and services are available at the
Subsidiary Banks through INVEST Financial Corporation of Tampa, Florida
("INVEST"). Bremer and the Subsidiary Banks have entered into an agreement with
INVEST whereby Bremer and its subsidiaries deliver investment services to its
customers through a network of Subsidiary Banks' offices and receive a portion
of the commissions earned by the investment representatives.
Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding
shares of Bremer's Class A Common Stock and 100% of the outstanding shares of
its Class B Common Stock, for a total of 92% of the outstanding shares of
Bremer's capital stock. Both Bremer and the Foundation are bank holding
companies subject to the Federal Bank Holding Company Act of 1956, as amended,
and to regulation and supervision by the Federal Reserve System (including the
Board of Governors of the Federal Reserve System.).
Bremer's principal executive offices are located at 445 Minnesota
Street, St Paul, Minnesota 55101, and its telephone number is 651-227-7621.
MATTER 2-- PROPOSAL TO ADJOURN THE SPECIAL MEETING
As described herein, the Northwest Board believes that shareholder
approval of the Merger proposal is in the best interests of Northwest's
shareholders. Also as noted herein, approval of the Merger proposal requires an
affirmative vote of the holders of a majority of the shares of Northwest Common
Stock entitled to vote on the Merger Agreement and Plan of Merger at the Special
Meeting.
If by the date of the Special Meeting, including any adjournments
thereof, the required vote for approval of the Merger proposal has not been
obtained, there are an insufficient number of persons present in person or by
proxy to constitute a quorum, or events subsequent to the date of this Proxy
Statement require Northwest to furnish additional proxy soliciting information
to the Northwest shareholders and to give the shareholders time to assimilate
such information, the Northwest Board intends to sponsor a proposal (or
proposals), at such times and as often as necessary, to adjourn the Special
Meeting to a later date for the purpose of soliciting additional votes on the
Merger proposal. At any subsequent reconvening of the Special Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the Special Meeting (except for any proxies which
have theretofore effectively been revoked or withdrawn). The time, date and
place at and to which the Special Meeting would be reconvened will be announced
at the Special Meeting, and at any adjournments thereof. If, however, the
Special Meeting is adjourned more than 120 days after the date for which the
meeting was originally noticed, a new voting record date would be fixed for the
adjourned meeting and written notice of the place, date and time of the
adjourned meeting will be given.
In order to approve a proposal for adjournment of the Special Meeting,
the affirmative vote of a majority of the total votes cast in person or by proxy
must vote in favor of the proposal. In order to allow Northwest's management to
vote proxies received by Northwest at the time of the Special Meeting in favor
of such an adjournment, if Northwest's Board determines, in its sole discretion,
that such an adjournment is in the best interests of Northwest and its
shareholders, Northwest has submitted the question of or adjournment as a
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<PAGE>
separate matter for the consideration and vote of the shareholders. The
Northwest Board recommends that shareholders vote FOR the proposal to adjourn
the Special Meeting so that such proxies may be voted in favor of such
adjournment under the circumstances described under this proposal.
Bremer or Northwest may terminate the Merger Agreement if the Merger is
not consummated by March 31, 2000 (subject to extension to April 30, 2000, in
the case of a delay in receiving all required regulatory approvals) (the
"Termination Date"). If the Special Meeting is adjourned to a date after the
Termination Date, the Northwest Board would seek to obtain an extension of the
Termination Date from Bremer on terms and conditions acceptable to the parties.
No assurances can be made that the parties will agree to the extension, or that
other closing conditions would not be adversely affected. The fact of the
possible extension of the Termination Date will not be deemed to invalidate
proxies previously received, unless Northwest receives a later-dated proxy
superseding a prior one.
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Due to the proposed Merger, Northwest does not currently expect to hold
a 2000 Annual Meeting of Shareholders because Northwest anticipates that it will
be merged with and into the Merger Sub, with Northwest being a wholly-owned
subsidiary following the Merger. In the event the Merger is not consummated and
such a meeting is held, the following outlines the requirements for shareholders
proposals and voting on such proposals.
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR INCLUSION IN 2000 PROXY
MATERIALS
Any proposal which a shareholder wishes to have included in the proxy
materials of Northwest relating to the 2000 annual meeting of the shareholders
of Northwest, which is scheduled to be held in July 2000, must have been
received at the principal executive offices of Northwest, 234 Keller Avenue
South, Amery, Wisconsin 54001, Attention: James Moore, Secretary, no later than
March 1, 2000. If such proposal is in compliance with all of the requirements of
Rule 14a-8 under the Exchange Act, it will be included in the proxy statement
and set forth on the form of proxy issued for such annual meeting of
shareholders. It is urged that any such proposals be sent certified mail, return
receipt requested.
Nothing in this section shall be deemed to require Northwest to include
in its proxy statement and proxy relating to the 2000 Annual Meeting any
shareholder proposal which does not meet all of the requirements for inclusion
established by the SEC in effect at the time such proposal is received.
ADVANCE NOTICE REQUIREMENT FOR ANY PROPOSAL OR NOMINATION TO BE RAISED BY A
SHAREHOLDER
Shareholder proposals which are not submitted for inclusion in
Northwest's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Northwest
Articles, which provides that: (i) with respect to proposals to be brought
before an annual meeting, such proposal must be received by Northwest not less
than 60 days nor more than 90 days prior to the date of the previous year's
annual meeting of shareholders, or in the event no annual meeting was held in
the previous year, no later than ten days following the date notice of the
annual meeting is mailed to shareholders; and (ii) with respect to proposals to
be brought before a Annual meeting, not later than the close of business on the
tenth day following the date notice of such Annual meeting is mailed to
shareholders.
In accordance with Article VII of the Northwest Articles, the advance
notice of a proposal described above must set forth certain information,
including the shareholder's name and address, as they appear on Northwest's
record of shareholders, the class and number of shares of Northwest Common Stock
beneficially owned by such shareholder, a brief description of the proposed
business, the reason for considering the business at the shareholder meeting and
any material interest of the shareholder in the proposed business. In addition,
with respect to nominations for election to the Board of Directors made by a
shareholder, in accordance with Article VII of the Northwest Articles and
Article III of the Northwest bylaws, the following information must be provided:
(i) the name and address of the shareholder who intends to make the nomination
and of the person (s) to be nominate; (ii) a representation that the shareholder
is a holder of record of the stock of Northwest entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting and to nominate the
person(s) specified in the notice; (iii) a description of all arrangements or
understanding between the shareholder and each nominee and any other person(s)
(naming such person(s)) pursuant to which the nomination(s) are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
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<PAGE>
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC; and (v) written consent of each nominee
to serve as a director of Northwest if so elected.
DISCRETIONARY VOTING OF 2000 PROXIES
Effective June 29, 1998, the SEC amended Rule 14a-4(c) under the
Exchange Act that governs a company's use of discretionary proxy voting
authority with respect to shareholder proposals that are not being included in a
company's proxy solicitation materials pursuant to Rule 14a-8 of the Exchange
Act. New Rule 14a-4(c)(1) provides that if a shareholder fails to notify
Northwest of such proposal at least 45 days prior to the month and day of
mailing of the prior year's proxy statement, then the management proxies named
in the form of proxy distributed in connection with Northwest's proxy statement
would be allowed to use their discretionary voting authority to address the
proposal submitted by the shareholder, without discussion of the proposal in the
proxy statement. Accordingly, if a shareholder who intends to present a proposal
at the 2000 Annual Meeting does not notify Northwest of such proposal on or
prior to June 6, 2000, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the annual meeting, even though there is no discussion of the proposal
in the 2000 proxy statement.
OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE SPECIAL MEETING
The Board of Directors knows of no business that will be presented for
consideration at the Annual Meeting other than as stated in the Notice of
Special Meeting of Shareholders. If, however, other matters are properly brought
before the Special Meeting or any adjournments or postponement thereof, it is
the intention of the persons named in the accompanying Proxy to vote the shares
represented thereby on such matters in accordance with their best judgment.
By order of the Board of Directors
_/s/_James L. Moore_______
James L. Moore
Secretary
Amery, Wisconsin
February 2, 2000
================================================================================
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSEDPOSTAGE PAID ENVELOPE.
================================================================================
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INDEX TO FINANCIAL STATEMENTS OF NORTHWEST EQUITY CORP.
Independent Auditors Report F-1
Statements of Financial Condition for the Years Ended March 31, 1999
and 1998 F-2
Statements of Operations for the Years Ended March 31, 1999, 1998,
and 1997 F-3
Statements of Changes in Equity for the Years Ended March 31, 1999,
1998, and 1997 F-4
Statements of Cash Flows for the Years Ended March 31, 1999, 1998,
and 1997 F-5
Notes to Consolidated Financial Statements for the Years Ended
March 31, 1999 and 1998 F-7
Consolidated Interim Statements of Financial Condition (Unaudited) for
the Six Months Ended September 30, 1999 and March 31, 1999 F-30
Consolidated Interim Statements of Operations (Unaudited) for the Six
Months Ended September 30, 1999 and September 30, 1998 F-31
Consolidated Interim Statements of Stockholders Equity (Unaudited) for
the Six Months Ended September 30, 1999 and September 30, 1998 F-32
Consolidated Interim Statements of Cash Flows (Unaudited) for the
Six Months Ended September 30, 1999 and September 30, 1998 F-33
94
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of
Directors
Northwest Equity Corp.
We have audited the accompanying consolidated balance sheets of Northwest Equity
Corp. and Subsidiary as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Northwest Equity Corp. and Subsidiary at March 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years ended March 31, 1999 in conformity with generally accepted
accounting principles.
__/s/Wipfli Ullrich Bertelson LLP__
Wipfli Ullrich Bertelson LLP
Wisconsin Rapids, Wisconsin
April 30, 1999
F-1
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $4,749 $2,642
Interest-bearing deposits with financial institutions 5,721 3,405
Securities held to maturity 9,435 9,398
Investment in Federal Home Loan Bank stock 850 1,159
Loans held for sale 143 142
Loans receivable - net of allowance for loan losses of
$375 and $484 in 1999 and 1998, respectively 73,347 78,297
Foreclosed properties and properties subject to foreclosure 63 159
Accrued interest receivable 556 578
Premises and equipment 2,176 2,250
Prepaid expenses and other assets 545 709
--------- ---------
TOTAL ASSETS $97,585 $98,739
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------- -------------
Liabilities:
Deposits:
Demand and NOW deposits $9,936 $9,733
Savings and money market deposits 13,419 12,117
Certificates of deposit 38,648 40,428
---------- ---------
Total deposits 62,003 62,278
Advances from Federal Home Loan Bank 16,990 19,062
Borrowed funds 5,625 5,258
Accounts payable and accrued expenses 606 627
--------- ---------
Total liabilities 85,224 87,225
--------- ---------
Stockholders' equity:
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 825,301 shares outstanding at March 31, 1999
and 824,654 shares outstanding at March 31, 1998 1,033 1,033
Additional paid-in capital 6,582 6,584
Less unearned restricted stock plan award - - (26)
Less unearned Employee Stock Ownership Plan (155) (389)
Less treasury stock - at cost (2,549) (2,557)
Retained earnings - substantially restricted 7,450 6,869
--------- ---------
Total stockholders' equity 12,361 11,514
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,585 $98,739
========= =========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-2
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1999, 1998 and 1997
(In Thousands except for per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6,957 $6,969 $6,702
Interest on mortgage-backed and related securities 430 494 556
Interest and dividends on investments 394 300 234
------------- ------------- -------------
Total interest income 7,781 7,763 7,492
------------- ------------- -------------
Interest expense:
Interest on deposits 2,809 2,893 2,884
Interest on borrowings 1,243 1,350 1,188
------------- ------------- -------------
Total interest expense 4,052 4,243 4,072
------------- ------------- -------------
Net interest income 3,729 3,520 3,420
Provision for loan losses 376 100 81
------------- ------------- -------------
Net interest income after provision for loan losses 3,353 3,420 3,339
------------- ------------- -------------
Noninterest income (deductions):
Mortgage servicing fees 94 77 77
Service charges on deposits 252 251 220
Loss on sale of investments - - (24) - -
Gain on sale of mortgage loans 206 130 59
Other 184 174 175
------------- ------------- -------------
Total noninterest income 736 608 531
------------- ------------- -------------
General and administrative expenses:
Salaries and employee benefits 1,311 1,193 1,183
Net occupancy expense 365 350 336
Data processing 168 135 131
Federal insurance premiums 38 39 428
Other 583 581 565
------------- ------------- -------------
Total general and administrative expense 2,465 2,298 2,643
------------- ------------- -------------
Income before provision for income taxes 1,624 1,730 1,227
Provision for income taxes 491 610 517
------------- ------------- -------------
Net income $1,133 $1,120 $710
============= ============= =============
Basic earnings per share $1.45 $1.44 $0.84
============= ============= =============
Diluted earnings per share $1.37 $1.37 $0.83
============= ============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-3
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Accumulated
Additional Unearned ESOP Other
Common Paid-In Restricted Compen- Treasury Retained Comprehensive
Stock Capital Stock sation Stock Earnings Income Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1996 $1,033 $6,584 $(319) $(699) $(561) $5,860 $(34) $11,864
Comprehensive income:
Net income - - - - - - - - - - 710 - - 710
Other comprehensive income-unrealized
gain on securities available for sale net of
deferred taxes of $48 - - - - - - - - - - - - 5 5
Total comprehensive income 715
Amortization of unearned ESOP and restriced stock
award - - - - 204 141 - - - - - - 345
Purchase of treasury stock - 51,625 shares - - - - - - - - (1,695) - - - - (1,695)
Cash dividends - $.33 per share - - - - - - - - - - (370) - - (370)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1997 1,033 6,584 (115) (558) (2,256) 6,200 (29) 10,859
Comprehensive income:
Net income - - - - - - - - - - 1,120 - - 1,120
Other comprehensive income - unrealized
gain on securities available for sale, net of
deferred taxes of $2 - - - - - - - - - - - - 29 29
Total comprehensive income 1,149
Amortization of unearned ESOP and restricted stock
award - - - - 89 169 - - - - - - 258
Purchase of treasury stock - 142,138 shares - - - - - - - - (301) - - - - (301)
Cash dividends - $.40 per share - - - - - - - - - - (451) - - (451)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1998 1,033 6,584 (26) (389) (2,557) 6,869 - - 11,514
Comprehensive income:
Net income - - - - - - - - - - 1,133 - - 1,133
Amortization of unearned ESOP and restricted stock
award - - - - 26 234 - - - - - - 260
Exercise of incentive stock options - 647 shares - - (2) - - - - 8 - - - - 6
Cash dividends - $.67 per share - - - - - - - - - - (552) - - (552)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1999 $1,033 $6,582 $- - $(155) $(2,549) $7,450 $- - $12,361
======== ======= ======= ====== ======= ======= ====== ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,133 $1,120 $710
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 143 145 152
Provision for loan losses 376 100 81
Loss on sale of investments - - 24 - -
Provision for deferred income taxes 109 68 (43)
Amortization of ESOP and restricted stock awards 260 258 345
Proceeds from sales of mortgage loans 19,131 11,216 4,533
Loans originated for sale (19,132) (10,813) (4,172)
Changes in operating assets and liabilities:
Accrued interest receivable 22 78 (54)
Prepaid expenses and other assets 211 (329) (80)
Accrued interest payable (86) 83 (92)
Accrued income taxes payable (101) (112) 97
Other accrued liabilities 10 53 256
------------- ------------- -------------
Net cash provided by operating activities 2,076 1,891 1,733
------------- ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with
financial institutions (2,316) (1,684) 744
Proceeds from sales of available for sale securities - - 2,776 - -
Proceeds from sales of Federal Home Loan Bank stock 309 - - - -
Proceeds from maturities of held to maturity securities 1,699 - - 114
Proceeds from sale of foreclosed property 350 - - - -
Purchase of held to maturity securities (2,098) (3,286) (127)
Purchase of mortgage backed securities (2,601) - - (2,772)
Principle collected on mortgage-backed securities 2,963 1,023 724
Net (increase) decrease in loans 4,320 (1,475) (7,231)
Purchase of office properties and equipment (69) (54) (294)
------------- ------------- -------------
Net cash (used in) investing activities 2,557 (2,700) (8,842)
============= ============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-5
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits (275) 721 4,301
Net increase (decrease) in short-term borrowings (1,853) 795 (1,543)
Net increase in long-term borrowings 148 1,428 6,728
Purchases of treasury stock - - (301) (1,695)
Proceeds from exercise of stock options 6 - - - -
Dividends paid (552) (451) (370)
------------- ------------- -------------
Net cash provided by financing activities (2,526) 2,192 7,421
------------- ------------- -------------
Increase in cash and due from banks 2,107 1,383 312
Cash and due from banks at beginning 2,642 1,259 947
------------- ------------- -------------
Cash and due from banks at end $4,749 $2,642 $1,259
============= ============= =============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $254 $159 $72
Loans charged off 500 87 62
Interest paid 4,138 4,160 4,164
Income taxes paid 578 739 517
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-6
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies:
The accounting policies of Northwest Equity Corp. and Subsidiary (the Company)
conform to generally accepted accounting principles and prevailing practices
within the banking industry. A summary of the more significant accounting
policies follows:
Nature of Operations
Northwest Equity Corp. is the holding company for Northwest Savings Bank
(the "Bank"), a Wisconsin state-chartered savings bank. The Company provides a
wide range of financial services to individual customers through the Bank with
Wisconsin locations in Polk, St. Croix and Burnett Counties. The Bank is subject
to the regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities. The Bank holds a variety of
securities through it's wholly owned Subsidiary, Northwest Investments, Inc.,
a Nevada investment corporation.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its wholly- owned subsidiary, Northwest Savings Bank, and its wholly-owned
subsidiaries, Amery Service Agency, Inc. and Northwest Investments, Inc.
Significant intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results may differ from these estimates.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and investments with initial
maturities of three months or less. For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the statement of financial condition caption "cash and due from
banks."
F-7
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
Securities:
Investment securities are assigned an appropriate classification at the time of
purchase in accordance with management's intent. Securities held to maturity
represent those securities for which the Bank has the positive intent and
ability to hold to maturity. Accordingly, these securities are carried at cost
adjusted for amortization of premium and accretion of discount calculated using
the effective yield method. Unrealized gains and losses on securities held to
maturity are not recognized in the financial statements.
Trading securities include those securities bought and held principally for the
purpose of selling them in the near future. The Bank has no trading securities.
Securities not classified either as securities held to maturity or trading
securities are considered available for sale and reported at fair value
determined from estimates of brokers or other sources. Unrealized gains and
losses are excluded from earnings but are reported as a separate component of
net worth, net of income tax effects.
Any gains and losses on sales of securities are recognized at the time of sale
using the specific identification method.
Loans Held for Sale:
Loans held for sale in the secondary market are recorded at lower of aggregate
cost or market and generally consist of current production of fixed-rate
mortgage loans. Fees received from the borrower are deferred and recorded as an
adjustment of the sales price. A gain or loss is recognized at the time of sale
reflecting the present value of the difference between the contractual interest
rate of the loans sold and the yield to the investor.
Loans Receivable:
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net of deferred loan origination fees and discounts.
Interest income is recognized using methods which approximate a level yield on
principal amounts outstanding. Accrual of interest is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. At that time, any accrued but uncollected
interest is reversed, and additional income is recorded only to the extent that
payments are received and the collection of principal is reasonably assured.
F-8
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
Allowance for Loan Losses:
The allowance for credit losses is maintained at a level which management
believes is adequate to provide for possible credit losses. Management
periodically evaluates the adequacy of the allowance using the Company's past
loan loss experience, known and inherent risks in the portfolio, composition
of the portfolio, current economic conditions, and other relevant factors.
This evaluation is inherently subjective since it requires material estimates
that may be susceptible to significant change.
Foreclosed Properties and Properties Subject to Foreclosure:
Real estate owned which was acquired by foreclosure or by deed in lieu of
foreclosure is initially recorded at the lower of cost or fair value less
estimated costs to sell at date of foreclosure. Costs related to the development
and improvement of property are capitalized, whereas costs related to holding
property are expensed. Valuations are periodically performed by management, and
an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated costs to
sell. Real estate in judgment and subject to redemption is carried at cost less
an allowance for estimated losses.
Loan Fees:
Certain loan origination fees, commitment fees and direct loan origination costs
are being deferred and the net amounts amortized as an adjustment of the related
loan's yield. The Bank is amortizing these amounts into interest income, using
the level yield method, over the contractual life of the related loan.
The other origination and commitment fees not required to be recognized as a
yield adjustment are included in loan fees and service charges.
Premises and Equipment:
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of premises and
equipment are reflected in income. Depreciation is computed on the
straight-line method and is based on the estimated useful lives of the assets
which range from three to thirty-five years.
F-9
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
Income Taxes:
The Company and its subsidiary file a consolidated federal income tax return and
separate state income tax returns. Financial statement provisions are made in
the income tax expense accounts for deferred taxes applicable to income and
expense items reported in different periods than for income tax purposes. The
Company accounts for income taxes on the liability method. Deferred income
tax assets and liabilities are adjusted regularly to amounts estimated to be
receivable or payable based on current tax law.
Advertising:
The Company expenses advertising costs as incurred.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securitites
available for sale which are recognized as a seperate component of equity,
accumulated other comprehensive income.
Change In Accounting Principles:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 128, which became
effective for the Company for reporting periods ending after December 15, 1998.
Under the provisions of SFAS No. 128, primary and fully-diluted earnings per
share were replaced with basic and diluted earnings per share in an effort to
simplify the computation of these measures and align them more closely with the
methodology used internationally. Basic earnings per share is arrived at by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings per share
calculation method is arrived at by dividing net income by the weighted-average
number of shares outstanding, adjusted for the dilutive effect of outstanding
stock options. For purposes of comparability, all prior-period earnings per
share data have been restated.
F-10
<PAGE>
Note 1. Summary of Significant Accounting Policies - Continued:
Change In Accounting Principles - Continued:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise display an
amount representing total comprehensive income for the period in a financial
statement, but does not require a specific format for that financial statement.
This statement also requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
consolidated balance sheet. The statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of consolidated financial
statements for earlier periods provided for comparative purposes is required.
The adoption of SFAS No. 130 did not have an impact on the Company's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. This statement supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise," but retains the requirement to
report information about major customers. It also amends SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries," to remove the special
disclosure requirements for previously unconsolidated subsidiaries. The
statement is effective for fiscal years beginning after December 15, 1998. In
the initial year of application, comparative information for earlier years is to
be restated. The adoption of SFAS No. 131 did not have an impact on the
Company's financial position or results of operations.
Reclassifications:
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 reporting classification.
F-11
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities Held to Maturity:
Securities held to maturity consist of the following at March 31:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<CAPTION>
(In Thousands)
1999
----------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency obligations $3,398 $3 $15 $3,386
-------- ---- ----- --------
Mortgage backed securities:
FNMA certificates 3,189 35 - - 3,224
GNMA certificates 1,634 64 - - 1,698
FHLMC certificates 1,214 6 12 1,208
-------- ---- ----- --------
Total mortgage backed securities 6,037 105 12 6,130
-------- ---- ----- --------
Total securities held to maturity $9,435 $108 $27 $9,516
======== ==== ===== ========
1998
----------------------------
U.S. Treasury and agency obligations $3,000 $- - $1 $2,999
-------- ----- ------ --------
Mortgage backed securities:
FNMA certificates 3,868 59 1 3,926
GNMA certificates 2,153 83 - - 2,236
FHLMC certificates 377 7 - - 384
-------- ----- ------ --------
Total mortgage backed securities 6,398 149 1 6,546
-------- ----- ------ --------
Total securities held to maturity $9,398 $149 $2 $9,545
======== ===== ====== ========
</TABLE>
There were no sales of securities held to maturity during the years ended March
31, 1999 and 1998.
Investment securities with an amortized cost of $4,898,000 and estimated fair
value of $4,959,000 were pledged to secure other borrowing as of March 31, 1999
During the year ended March 31, 1998, the Company sold securities available for
sale for total proceeds of $2,776,000 resulting in realized gains of $2,000 and
realized losses of $26,000. There were no sales of securities available for sale
during the years ended March 31, 1999.
F-12
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities Held to Maturity - Continued:
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1999 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
------------ -----------
Investment securities:
Due in one year or less $1,100 $1,103
Due after one year through five years 2,298 2,283
------------ -----------
Total investment securities 3,398 3,386
Mortgage backed securities 6,037 6,130
------------ -----------
Totals $9,435 $9,516
============ ===========
Note 3. Investment in Federal Home Loan Bank Stock:
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to
hold stock in the FHLB based on asset size. The stock is recorded at cost which
approximates fair value. Transfer of the stock is substantially restricted.
Note 4. Loans Receivable:
Loans receivable are summarized as follows as of March 31:
1999 1998
------------- -------------
Real estate mortgage loans: (In Thousands)
One to four families $54,049 $57,975
Other 8,665 8,582
Commercial loans 3,899 4,397
Consumer loans 7,109 7,827
------------- -------------
Totals 73,722 78,781
Less: Allowance for losses (375) (484)
------------- -------------
Total loans receivable $73,347 $78,297
============= =============
The following is an analysis of the allowance for loan losses for the years
ended March 31:
1999 1998 1997
------- ------ -------
(In Thousands)
Balance at beginning $484 $461 $433
Provision charged to income 376 100 81
Loans charged off - Net of recoveries (485) (77) (53)
----- ------ -----
Balance at end $375 $484 $461
====== ====== =====
F-13
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans Receivable - Continued:
Loans serviced for others are not included in the above amounts. They totaled
$46,290,000, $30,691,000 and $25,250,000 at March 31, 1999, 1998 and 1997,
respectively.
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired and which fall within the scope of SFAS
No. 114. A loan is impaired when, based on current information, it is probable
that the Bank will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based on
discounted cash flows of expected future payments using the loan's initial
effective interest rate or the fair value of the collateral if the loan is
collateral dependent.
There were no loans considered impaired as of March 31, 1999. Impaired loans at
March 31, 1998 consisted of:
Impaired loans - nonaccrual $685,000
Less - allowance for credit losses 90,000
-------------
Net investment in impaired loans $595,000
=============
The average recorded investment in impaired loans during 1999 and 1998 was
$397,000 and $595,000, respectively. There was no interest income recognized
on the impaired loans during the years ended March 31, 1999, 1998 and 1997.
The Bank, in the ordinary course of business, grants loans to the Company's
executive officers and directors, including their families at terms comparable
to transactions with other customers. In the opinion of management, such loans
do not involve more than the normal risk of collectibility or present other
unfavorable features.
Activity in related party loans during the years ended March 31, 1999 and 1998
is summarized below:
1999 1998
------------ -------------
Loans outstanding at beginning $39,485 $132,915
New loans 99,000 - -
Repayments (28,583) (93,430)
------------- -------------
Loans outstanding at end $109,902 $39,485
============= =============
F-14
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Premises and Equipment:
Premises and equipment are summarized by major classification as follows at
March 31:
1999 1998
------------- -------------
(In Thousands)
Land and improvements $569 $569
Buildings and improvements 1,543 1,543
Furniture, fixtures and equipment 1,090 1,043
------------- -------------
Total 3,202 3,155
Less - Accumulated depreciation 1,026 905
------------- -------------
$2,176 $2,250
============= =============
Depreciation charged to operations totaled $143,000, $145,000 and $152,000 for
the years ended March 31, 1999, 1998 and 1997, respectively.
Note 6. Foreclosed Properties and Properties Subject to Foreclosure:
Properties subject to foreclosure were $63,000 and $159,000 at March 31, 1999
and 1998, respectively. There were no foreclosed properties at March 31, 1999
and 1998.
Note 7. Accrued Interest Receivable:
Accrued interest receivable is comprised of the following at March 31:
1999 1998
------------- -------------
(In Thousands)
Loans receivable $456 $493
Mortgage backed obligations 34 39
Investments 66 46
------------- -------------
Totals $556 $578
============= =============
The Bank has provided an allowance for uncollected interest on loans at March
31, 1999 and 1998 of $6,000 and $17,000, respectively.
F-15
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Savings Accounts:
Savings accounts are summarized as follows at March 31:
<TABLE>
1999 1998
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Noninterest bearing demand deposit $3,590 $3,823
------------- -------------
Interest bearing deposits
NOW accounts 6,346 2.17% 5,910 2.31%
Passbook rates 6,563 2.13% 6,091 2.15%
Money market accounts 6,856 4.48% 6,026 4.87%
Certificates of deposit 38,648 5.71% 40,428 5.73%
------------- ------------- ------------- -------------
Total interest bearing deposits 58,413 4.79% 58,455 4.95%
------------- ============= ------------- =============
Total deposits $62,003 $62,278
============= =============
</TABLE>
Certificates of deposit have scheduled maturity dates as follows at March 31,
1999 (in thousands):
2000 $28,487
2001 7,167
2002 1,711
2003 775
2004 and thereafter 508
The total amount of certificates of deposits with balances in excess of
$100,000 was $3,560,000 and $3,243,000 at March 31, 1999 and 1998, respectively.
Deposits from Company directors, executive officers, and related firms in which
they are principal owners totaled $358,000 and $302,000 at March 31, 1999 and
1998, respectively.
Interest on savings deposits is summarized as follows for the years ended
March 31:
1999 1998 1997
------------- ------------- -------------
(In Thousands)
MMDA and NOW accounts $454 $398 $343
Savings deposits 133 130 132
Certificates of deposit 2,222 2,365 2,409
------------- ------------- -------------
Total $2,809 $2,893 $2,884
============= ============= =============
F-16
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Advances From Federal Home Loan Bank:
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"),
advances are secured by all stock in the FHLB and qualifying first mortgage
loans aggregating 170% of the amount of outstanding advances. The following is
a summary of these advances at March 31:
1999 1998
------------- -------------
(In Thousands)
Advances due in the following years
with rates from 4.00% to 8.31% 1999 $2,750 $5,050
2000 1,700 4,450
2001 419 419
2003 7,000 7,000
2005 2,121 2,143
2008 3,000 - -
------------- ------------
$16,990 $19,062
============= ============
The Bank can borrow up to 35 percent of total assets through FHLB advances. At
March 31, 1999 and 1998, the amount of unused credit available to the Bank was
approximately $19,648,000 and $16,631,000, respectively.
Note 10. Other Borrowed Money:
Other borrowed money is summarized as follows at March 31:
1999 1998
------------- -------------
(In Thousands)
Retail security repurchase agreements with
weighted-average interest rates of 5.57%
and 6.08% at March 31, 1999 and
1998, respectively. $5,625 $5,258
The retail repurchase agreements are generally for terms of less than one year
and are collateralized by investments and loans with carrying values of
$8,056,000 and $6,780,000 at March 31, 1999 and 1998, respectively.
The following information relates to securities sold under repurchase agreements
for the years ended March 31:
1999 1998 1997
------------- ------------- -------------
(In Thousands)
For the year:
Highest month-end balance $6,473 $6,501 $5,761
Daily average balance $5,597 $4,937 $4,808
Weighted average rate 5.19% 6.00% 5.74%
F-17
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Income Taxes:
The provision for income taxes differs from that computed at the federal and
state statutory corporate rates as follows for the years ended March 31:
1999 1998 1997
-------- -------- --------
(In Thousands)
Tax at federal statutory rate (34%) $552 $588 $417
Increases (decreases) in taxes:
State income taxes net of federal benefit 4 25 68
Tax benefit of incentive stock options (90) (63)
Other 25 60 125
-------- -------- --------
Federal and state income taxes $491 $610 $517
======== ======== ========
The provision for income taxes consists of the following for the years ended
March 31:
1999 1998 1997
-------- -------- --------
(In Thousands)
Current $382 $542 $560
Deferred 109 68 (43)
-------- -------- --------
$491 $610 $517
======== ======== ========
For income tax purposes, the Company has state net operating loss carryforwards
of $392,000 which expire in 2014.
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are summarized as follows at March 31:
1999 1998
------ ------
(In Thousands)
Allowance for loan losses $88 $102
Accrued compensation 18 22
Deferred compensation 24 56
Stock incentive plan - - 43
State net operating loss carryforward 31 - -
------ ------
Total deferred tax assets 161 223
------ ------
Premises and equipment (152) (137)
Dividends on ESOP Plan (84) (52)
FHLB common stock dividends (17) (17)
------ ------
Total deferred tax liabilities (253) (206)
------ ------
$(92) $17
======= ======
F-18
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Financial Instruments With Off-Balance Sheet Risk:
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist of commitments to extend credit. Commitments to
extend credit involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract
amount reflects the extent of involvement the Company has in this particular
financial instrument.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. As some commitments expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates the creditworthiness of each customer on a
case by case basis. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments.
The Company generally extends credit only on a secured basis. Collateral
obtained varies, but consists primarily of one-to-four family residences located
in Northwestern Wisconsin. Commitments to sell mortgage loans represent
commitments to sell mortgage loans to other entities at a future date and at a
specified price. Commitments to sell mortgage loans and commitments to extend
credit are generally exercised and fulfilled within ninety days. The fair value
of mortgage loans held for sale plus the commitments to extend credit generally
offset the commitments to sell mortgage loans. Both the commitments to extend
credit and the commitments to sell mortgage loans are at current market rates.
At March 31, 1999, the Company was committed to originate approximately
$1,069,000 of first mortgage loans. In addition, the undisbursed portion of
other credit lines were $4,665,000 at March 31, 1999.
The Company originates and holds adjustable rate loans with variable rates of
interest. The rate of interest on these loans is capped over the life of the
loan. At March 31, 1999, none of the approximately $55,351,000 of variable
rate loans had reached the interest rate cap.
Note 13. Employee Benefit Plans:
The Company has a qualified defined contribution plan covering substantially all
full-time employees who have completed one year of service and are at least 21
years old. During the years ended March 31, 1999, 1998 and 1997, the Bank
contributed $25,000, $53,000 and $39,000, respectively, to this plan.
F-19
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Employee Benefit Plans - Continued:
On April 1, 1994, the Company established an Employee Stock Ownership Plan
("ESOP") for substantially all of its full-time employees. As part of the stock
conversion, the ESOP borrowed $826,000 from the Company and purchased 103,250
shares of the Company's common stock. The debt bears interest at 8% and is
collateralized by the shares of common stock held by the ESOP. The Bank is
committed to make cash payments to the ESOP in amounts sufficient for it to meet
the debt service requirements over a seven year term. Cash dividends on common
stock held by the ESOP are applied to debt principal and interest. The unpaid
balance of the ESOP loan has been eliminated in consolidation and the amount of
unearned ESOP compensation expense is shown as a reduction of stockholders'
equity. ESOP expense for the year ended March 31, 1999 , 1998 and 1997 totaled
$208,000, $163,000 and $160,000, respectively. At March 31, 1999 the number of
shares allocated, committed to be released and suspense shares were 44,250,
14,750 and 44,250, respectively. The fair value of unearned shares at March 31,
1999 was $1,313,000.
The Bank established an employee stock incentive plan on October 10, 1995. The
Bank purchased 41,300 shares for $459,000 and awarded them to officers and
employees of the Bank. The shares awarded vest 33.33% per year commencing
October, 1997. The aggregate purchase price of the shares is being amortized to
compensation expense as the participants become vested. The unamortized cost is
being reflected as a reduction of shareholders' equity as unearned restricted
stock. Compensation expense of $25,000, $89,000 and $204,000 was recognized for
the years ended March 31, 1999, 1998 and 1997, respectively.
During the year ended March 31, 1997, the Bank established a deferred
compensation agreement with it's President to defer the amounts due until his
retirement. Amounts deferred under the deferred compensation plan were $79,000
for the year ended March 31, 1997.
Note 14. Stock Options:
On October 10, 1995, the Company adopted a Stock Option Plan and granted options
for 103,251 shares of common stock for a non-qualified stock option plan for
directors and a qualified incentive stock option plan for employees. All such
options are currently exercisable at $10.44 per share and expire in October
2005.
A summary of the status of the stock option plan as of March 31, 1999 and 1998
is as follows:
1999 1998
------------- -------------
Options outstanding - April 1, 101,627 103,251
Granted - - - -
Exercised (647) (542)
Forfeited - - (1,082)
------------- -------------
Options outstanding - March 31, 100,980 101,627
============= =============
F-20
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Stock Options - Continued:
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1998 1997
------------- -------------
Net income (In Thousands) $1,066 $ 656
Basic earnings per share $ 1.38 $ 0.77
Diluted earnings per share $ 1.31 $ 0.76
The stock option plans were fully vested in 1999, there is no pro forma effect
on the Company's net income and earnings per share.
Note 15. Capital Requirements:
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company 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 Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in regulations) to risk-weighted
assets (as defined), and of Tier 1 captial (as defined) to average assets (as
defined). Management believes, as of September 30, 1998 and 1997, the Company
meets all capital adequacy requirements to which it is subject.
As of March 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since notification that management believes have changed
the institution's category.
F-21
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Capital Requirements - Continued:
The Company's and Bank's actual capital amounts and ratios are presented in
the following tables:
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total capital (to risk
weighted assets)
Consolidated $14,407 22.84% $5,047 > 8.00% N/A
-
Subsidiary Bank $10,161 16.71% $4,864 > 8.00% $6,080 > 10.00%
- -
Tier 1 capital (to risk
weighted assets)
Consolidated $14,032 22.24% $2,524 > 4.00% N/A
-
Subsidiary Bank $9,786 16.09% $2,432 > 4.00% $3,648 > 6.00%
- -
Tier 1 capital (to
average assets)
Consolidated $14,032 14.29% $3,926 > 4.00% N/A
-
Subsidiary Bank $9,786 10.07% $3,888 > 4.00% $4,861 > 5.00%
- -
As of March 31, 1998:
Total captial (to risk
weighted assets)
Consolidated $13,937 22.12% $5,041 > 8.00% N/A
-
Subsidiary Bank $9,236 14.74% $5,012 > 8.00% $6,264 > 10.00%
- -
Tier 1 capital (to risk
weighted assets)
Consolidated $13,453 21.35% $2,521 > 4.00% N/A
-
Subsidiary Bank $8,752 13.97% $2,506 > 4.00% $3,759 > 6.00%
- -
Tier 1 capital (to
average assets)
Consolidated $13,453 13.88% $3,877 > 4.00% N/A
-
Subsidiary Bank $8,752 9.21% $3,803 > 4.00% $4,753 > 5.00%
- -
</TABLE>
F-22
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Capital Requirements - Continued:
As a state chartered savings bank, the Company is also subject to the
minimum regulatory captial requirements of the state of Wisconsin. At March 31,
1999, the Company's regulatory capital exceeded the state regulatory capital
requirement of $6,281,000.
Note 16. Restrictions on Retained Earnings:
The Company has qualified under the provisions of the Internal Revenue Code
which permit as a deduction from taxable income an allowance for bad debts which
differs from the provision for such losses charged to income. Accordingly,
retained earning at March 31, 1999, includes approximately $1,295,000
representing the Company's federal bad debt deduction in excess of actual losses
for which no provision for income taxes has been made. If in the future this
portion of retained earnings is used for any purpose other than to absorb bad
debt losses, federal income taxes may be imposed at the then applicable rates.
Note 17. Fair Values of Financial Instruments:
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets fair values.
Securities: Fair values for investments and mortgage-backed securities are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate mortgage loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics.
The fair values for commercial real estate loans, rental property mortgage loans
and consumer and other loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest
approximates its fair value.
F-23
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Fair Values of Financial Instruments - Continued:
Deposits: The fair values disclosed for interest and noninterest checking
accounts, passbook accounts and money market accounts are, by definition, equal
to the amount payable on demand at the reporting date. The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities of the outstanding
certificates of deposit.
Federal Home Loan Bank Advances: The Bank's long-term borrowings are estimated
using the discounted cash flow analysis, based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at March 31:
<TABLE>
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<CAPTION>
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $10,470 $10,470 $ 6,047 $ 6,047
Securities 4,248 4,236 4,159 4,158
Mortgage-backed securities 6,037 6,130 6,398 6,546
Loans receivable:
Real estate - one-to-four family 54,192 54,441 58,117 58,617
Real estate - other 8,665 8,705 8,582 8,656
Other loans 11,008 11,064 12,224 12,228
------------- ------------- ------------- -------------
$84,150 $84,576 $89,480 $90,205
============= ============= ============= =============
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
Financial liabilities:
Savings deposits and checking accounts $19,765 $19,765 $18,027 $18,027
Certificates of deposit 38,648 38,259 40,428 40,395
Federal Home Loan Bank Advances 16,990 16,511 19,062 18,616
Other borrowed money 5,625 5,620 5,258 5,251
------------- ------------- ------------- -------------
$81,028 $80,155 $82,775 $82,289
============= ============= ============= =============
</TABLE>
F-24
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Earnings Per Share:
Earnings per share are based upon the weighted average number of shares
outstanding. The following shows the computation of the basic and diluted
earnings per share.
Weighted
Average Earnings
Net Number of Per
Income Shares Share
--------- ----------- ----------
Year Ended March 31, 1999:
Earnings Per Share - Basic $1,133 779,731 $1.45
==========
Effect of Stock Options - - 48,119
--------- -----------
Earnings Per Share - Diluted $1,133 827,850 $1.37
========= =========== ==========
Year Ended March 31, 1998:
Earnings Per Share - Basic $1,120 775,112 $1.44
==========
Effect of Stock Options - - 39,603
--------- -----------
Earnings Per Share - Diluted $1,120 814,715 $1.37
========= =========== ==========
Year Ended March 31, 1997:
Earnings Per Share - Basic $710 847,090 $0.84
==========
Effect of Stock Options - - 11,198
--------- -----------
Earnings Per Share - Diluted $710 858,288 $ 0.83
========= =========== ==========
Note 19. Condensed Parent Company Only Financial Information:
Balance Sheets - at March 31: 1999 1998
------------- -------------
(In Thousands)
Assets:
Cash and cash equivalents $2,414 $2,653
Investment in subsidiary 9,787 8,752
Deferred income tax assets 32 93
Other current assets 281 161
------------- -------------
$12,514 $11,659
============= =============
Liabilities $ 153 $ 145
Stockholders' Equity 12,361 11,514
------------ -------------
$12,514 $11,659
============ =============
F-25
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 19. Condensed Parent Company Only Financial Information - Continued:
Statements of Operations - for the years ended March 31:
<TABLE>
1999 1998 1997
------ ------ ------
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Income:
Interest from affiliate $155 $197 $271
Expense:
Compensation 25 89 204
Other expense 57 59 69
------- ------- ------
Total expense 82 148 273
Income (loss) before for income taxes and equity in
undistributed net income of affiliates 73 49 (2)
Provision for income taxes (26) 21 - -
-------- ------- -------
Income (loss) before equity in undistributed net
income of affiliates 99 28 (2)
Equity is undistributed net income of affiliate 1,034 1,092 712
-------- ------- -------
Net income $1,133 $1,120 $710
======== ======= =======
</TABLE>
Statements of Cash Flows - for the years ended March 31:
<TABLE>
1999 1998 1997
-------- ------ -------
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,133 $1,120 $710
-------- ------ -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (1,034) (1,092) (712)
Deferred income taxes 61 19 (57)
Amortization of ESOP and restricted stock awards 260 258 345
Change in operating assets and liabilities:
Other current assets (121) (79) (74)
Other liabilities 8 3 120
-------- ------ -------
Net cash provided by operating activities 307 229 332
-------- ------ -------
Cash flows from investment activities:
Cash dividends from subsidiary - - - - 2,670
-------- ------ -------
Net cash provided by investment activities - - - - 2,670
-------- ------ -------
Cash flows from financing activities:
Purchase of common stock for the treasury - - (301) (1,695)
Proceeds from exercise of stock options 6 - - - -
Cash dividends (552) (451) (370)
-------- ------ -------
Net cash used in financing activities (546) (752) (2,065)
-------- ------ -------
Net increase (decrease) in cash (239) (523) 937
Cash and cash equivalents at beginning 2,653 3,176 2,239
-------- ------ -------
Cash and cash equivalents at end $2,414 $2,653 $3,176
======== ====== =======
</TABLE>
F-26
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 20. Quarterly Consolidated Financial Information (Unaudited):
<TABLE>
1998 1999
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Interest and dividend income $1,957 $1,969 $1,957 $1,898
Interest expense 1,046 1,034 1,008 964
------------- ------------- ------------- -------------
Net interest income 911 935 949 934
Provision for loan losses 25 25 323 3
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 886 910 626 931
Non-interest income 204 184 198 150
Non-interest expense 601 617 615 632
------------- ------------- ------------- -------------
Income before income taxes 489 477 209 449
Income taxes 167 167 60 97
------------- ------------- ------------- -------------
Net income $322 $310 $149 $352
============= ============= ============= =============
Earnings per share $0.42 $0.40 $0.19 $0.45
Dividends $0.16 $0.17 $0.17 $0.17
Market information:
Trading range - high $22.00 $20.50 $25.00 $23.00
low $19.50 $15.63 $15.75 $18.50
close $20.25 $18.75 $22.00 $22.25
1997 1998
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
Interest and dividend income $1,911 $1,928 $1,959 $1,965
Interest expense 1,050 1,066 1,075 1,052
------------- ------------- ------------- -------------
Net interest income 861 862 884 913
Provision for loan losses 25 25 25 25
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 836 837 859 888
Non-interest income 130 136 135 207
Non-interest expense 561 582 560 595
------------- ------------- ------------- -------------
Income before income taxes 405 391 434 500
Income taxes 153 135 149 173
------------- ------------- ------------- -------------
Net income $252 $256 $285 $327
============= ============= ============= =============
</TABLE>
F-27
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 20. Quarterly Consolidated Financial Information (Unaudited) -
Continued:
<TABLE>
1997 1998
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Earnings per share $0.33 $0.33 $0.37 $0.42
Dividends $0.12 $0.13 $0.14 $0.15
Market information:
Trading range - high $13.63 $16.75 $20.75 $22.25
low $15.00 $14.63 $16.13 $20.75
close $15.00 $16.13 $20.75 $21.13
1996 1997
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
Interest and dividend income $1,802 $1,868 $1,903 $1,919
Interest expense 972 1,010 1,052 1,038
------------- ------------- ------------- -------------
Net interest income 830 858 851 881
Provision for loan losses 6 25 25 25
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 824 833 826 856
Non-interest income 140 141 146 104
Non-interest expense 577 954 547 565
------------- ------------- ------------- -------------
Income before income taxes 387 20 425 395
Income taxes 164 8 177 168
------------- ------------- ------------- -------------
Net income $223 $12 $248 $227
============= ============= ============= =============
Earnings per share $0.25 $0.01 $0.29 $0.29
Dividends $0.09 $0.10 $0.10 $0.11
Market information:
Trading range - high $10.38 $11.25 $12.50 $14.50
low $10.25 $10.25 $11.25 $13.50
close $10.38 $11.25 $12.13 $14.13
</TABLE>
F-28
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 21. Concentration of Credit Risk:
The Bank grants residential, commercial and consumer loans primarily in
Northwestern Wisconsin. The ability of its debtors to honor their contracts
is dependent on the performance of the local economy.
Note 22. Contingencies:
In the normal course of business, various legal proceedings involving the
Company are pending. Management, based upon advice from legal counsel, does
not anticipate any significant losses as a result of these actions.
Note 23. Pending Transaction:
On February 17, 1999, the board announced that it had entered into a definitive
agreement and plan of merger with Bremer Financial Corporation ("Bremer"), for
Bremer to acquire Northwest Equity Corp. in a stock transaction. The
agreement is subject to final regulatory and shareholder approval.
F-29
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
September 30,
1999 March 31,
(unaudited) 1999
--------- ---------
Cash and due from banks $4,808 $4,749
Interest-bearing deposits with financial institutions 1,180 5,721
Securities held to maturity 8,850 9,435
Investment in Federal Home Loan Bank stock 712 850
Loans held for sale 234 143
Loans receivable - Net of allowance for loan losses 75,689 73,347
Foreclosed properties and properties subject to foreclosure 63 63
Accrued interest receivable 544 556
Premises and equipment 2,112 2,176
Prepaid expenses and other assets 474 545
-------- --------
TOTAL ASSETS $94,666 $97,585
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand and NOW deposits $12,363 $9,936
Savings and money market deposits 14,549 13,419
Certificates of deposit 36,047 38,648
--------- --------
Total deposits 62,959 62,003
Advances from Federal Home Loan Bank 12,829 16,990
Borrowed funds 5,458 5,625
Accounts payable and accrued expenses 629 606
--------- ---------
Total liabilities 81,875 85,224
--------- ---------
Stockholders' equity
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033
Additional paid-in capital 6,582 6,582
Less unearned Employee Stock Ownership Plan (52) (155)
Less 207,216 treasury stock - at cost (2,549) (2,549)
Retained earnings - Substantially restricted 7,777 7,450
--------- --------
Total stockholders' equity 12,791 12,361
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $94,666 $97,585
========= ========
See accompanying Notes to Consolidated Financial Statements
F-30
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,604 $1,780 $3,223 $3,525
Interest on mortgage-backed securities 94 110 191 225
Interest and dividends on investments 92 79 203 176
------------ ------------ ----------- ------------
Total interest income 1,790 1,969 3,617 3,926
------------ ------------ ----------- ------------
Interest expense:
Interest on deposits 627 712 1,282 1,432
Interest on borrowings 245 322 500 648
------------ ------------ ----------- ------------
Total interest expense 872 1,034 1,782 2,080
------------ ------------ ----------- ------------
Net interest income 918 935 1,835 1,846
Provision for loan losses 22 25 22 50
------------ ------------ ----------- ------------
Net interest income after provision for loan losses 896 910 1,813 1,796
------------ ------------ ----------- ------------
Other income:
Mortgage servicing fees 27 23 53 44
Service charges on deposits 70 66 141 128
Gain on sale of mortgage loans 30 59 38 97
Other 36 36 75 119
------------ ------------ ----------- ------------
Total other income 163 184 307 388
------------ ------------ ----------- ------------
General and administrative expenses:
Salaries and employee benefits 321 323 688 659
Net occupancy expense 94 92 178 178
Data processing 36 37 71 72
Federal insurance premiums 9 10 17 20
Other 114 155 229 289
------------ ------------ ----------- ------------
Total general and administrative expense 574 617 1,183 1,218
------------ ------------ ----------- ------------
Income before provision for income taxes 485 477 937 966
Provision for income taxes 172 167 329 334
------------ ------------ ----------- ------------
Net income $313 $310 $608 $632
============ ============ =========== ============
Basic earnings per share $0.39 $0.40 $0.77 $0.82
============ ============ =========== ============
Diluted earnings per share $0.37 $0.38 $0.72 $0.77
============ ============ =========== ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-31
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In Thousands)
<CAPTION>
Unearned
Additional Unearned ESOP
Common Paid-In Restricted Compen- Treasury Retained
Stock Capital Stock sation Stock Earnings Total
-------- ---------- ----------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1998
Balance - March 31, 1998 $1,033 $6,584 $(26) $(389) $(2,557) $6,869 $11,514
Comprehensive income:
Net income - - - - - - - - - - 632 632
Amortization of unearned ESOP and restricted stock
award - - - - 26 92 - - - - 118
Exercise of incentive stock options - - (2) - - - - 8 - - 6
Cash dividends - $.33 per share - - - - - - - - - - (272) (272)
--------- -------- ------- ------- -------- ------- --------
Balance - September 30, 1998 1,033 6,582 $ - (297) (2,549) 7,229 11,998
========= ======== ======= ======= ======== ======= ========
Six Months Ended September 30, 1999
Balance - March 31, 1999 1,033 6,582 - - (155) (2,549) 7,450 12,361
Comprehensive income:
Net income - - - - - - - - - - 608 608
Amortization of unearned ESOP and restricted stock
award - - - - - - 103 - - - - 103
Cash dividends - $.34 per share - - - - - - - - - - (281) (281)
--------- ------- ------- ------- -------- ------ --------
Balance - September 30, 1999 $1,033 $6,582 $ - - $(52) $(2,549) $7,777 $12,791
========= ======== ======= ======= ======= ======= ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
F-32
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Six Months Ended
September 30,
1999 1998
------ ------
Cash flows from operating activities:
Net income $608 $632
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 73 72
Provision for loan losses 22 50
Amortization of ESOP and restricted stock awards 103 118
Proceeds from sales of mortgage loans 3,610 8,632
Loans originated for sale (3,701) (8,726)
Changes in operating assets and liabilities:
Accrued interest receivable 12 2
Prepaid expenses and other assets 71 (41)
Accrued interest payable 135 128
Accrued income taxes payable 222 (94)
Other accrued liabilities (334) (130)
------- -------
Net cash provided by operating activities 821 643
------- -------
Cash flows from investing activities:
Net decrease in interest-bearing deposits with
financial institutions 4,541 1,854
Proceeds from sales of Federal Home Loan Bank stock 138 206
Proceeds from maturities of held to maturity securities - - 1,700
Purchase of held to maturity securities (500) (2,100)
Principal collected on held to maturity securities 499 - -
Principal collected on mortgage-backed securities 586 791
Net (increase) in loans (2,364) (1,724)
Purchase of office properties and equipment (9) (54)
------- -------
Net cash provided by investing activities 2,891 673
------- -------
See accompanying Notes to Consolidated Financial Statements
F-33
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
September 30,
1999 1998
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 956 (197)
Net (decrease) in short-term borrowings (4,509) (1,093)
Net increase in long-term borrowings 181 1,274
Proceeds from exercise of stock options - - 8
Dividends paid (281) (272)
-------- --------
Net cash (used in) financing activities (3,653) (280)
-------- --------
Increase in cash and due from banks 59 1,036
Cash and due from banks at beginning 4,749 2,642
-------- --------
Cash and due from banks at end $4,808 $3,678
======== ========
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $ - - $166
Loans charged off 67 58
Interest Paid 1,647 1,952
Income taxes paid 107 428
See accompanying Notes to Consolidated Financial Statements
F-34
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is made and entered into
as of February 16, 1999 by and among Bremer Financial Corporation, a Minnesota
corporation ("BFC"), Bremer Acquisition Corporation, a Wisconsin corporation
("Merger Sub" and, collectively, with BFC, the "Buyers"), and Northwest Equity
Corp., a Wisconsin corporation ("Seller").
WHEREAS, Merger Sub is a wholly-owned subsidiary of BFC, and BFC is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA");
WHEREAS, Seller is registered as a bank holding company under the BHCA;
WHEREAS, the respective Boards of Directors of Seller, Merger Sub and BFC all
have approved the merger (the "Merger") of Merger Sub with and into Seller
pursuant to the terms and subject to the conditions contained in this Agreement;
WHEREAS, the parties desire to provide certain undertakings, conditions,
representations, warranties and covenants in connection with the transactions
contemplated by this Agreement;
WHEREAS, concurrently with the execution and delivery of this Agreement, and as
a condition of inducement to each of BFC's and Merger Sub's willingness to enter
into this Agreement, certain stockholders of Seller have entered into Voting
Agreements with BFC dated as of the date of this Agreement in the form attached
hereto as Exhibit A (the "Voting Agreements") pursuant to which such
stockholders have agreed, among other things, to vote all voting securities of
Seller beneficially owned by them in favor of approval and adoption of the
Agreement and the Merger; and
WHEREAS, concurrently with the execution and delivery of this Agreement, and as
a condition of inducement to each of BFC's and Merger Sub's willingness to enter
into this Agreement, certain employees of Seller and/or Northwest Savings Bank
have entered into the Amendment Agreement in the form attached hereto as Exhibit
B (the "Amendment Agreements") pursuant to which such employees have agreed,
among other things, to amend the terms and conditions of those certain
Employment Agreements entered into by them and Northwest Savings Bank;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
Merger Sub shall be merged with and into Seller in accordance with the
applicable provisions of the Wisconsin Business Corporation Law (the "WBCL"),
and the separate corporate existence of the Merger Sub shall cease. Seller shall
be the surviving corporation in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation") and shall continue to be governed by the laws of
the State of Wisconsin.
1.2 Closing. The closing (the "Closing") of the Merger, unless the parties
hereto shall otherwise mutually agree, shall take place at the offices of
Winthrop & Weinstine, P.A., 30 East Seventh Street, Suite 3200 in St. Paul,
Minnesota, at 10:00 a.m., local time, on the date that the Effective Time (as
defined in Section 1.3) occurs (the "Closing Date").
1.3 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 VI 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 ("WDFI"). The date and time at which the
Merger shall become effective is referred to in this Agreement as the "Effective
Time." Unless otherwise mutually agreed in writing by Buyers and Seller, subject
to the terms and conditions of this Agreement, the Effective Time shall occur on
such date as Buyers shall notify Seller in writing (such notice to be at least
A-1
<PAGE>
five business days in advance of the Effective Time). On the Closing Date, the
parties hereto will cause the Merger to be consummated by delivering to the
WDFI, for filing, Articles of Merger, in such form as required by, and executed
and acknowledged in accordance with, the relevant provisions of WBCL.
1.4 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable to
(a) vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Seller or Merger Sub, or (b) otherwise carry out the
purposes of this Agreement, Seller and its officers and directors shall be
deemed to have granted to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such deeds, assignments or assurances in law
and to do all acts necessary or proper to vest, perfect or confirm title to and
possession of such rights, properties or assets in the Surviving Corporation and
otherwise to carry out the purposes of this Agreement, and the officers and
directors of the Surviving Corporation are authorized in the name of Seller or
otherwise to take any and all such action.
1.5 Articles of Incorporation and By-Laws. The Articles of Incorporation
and By-Laws of Seller in effect immediately prior to the Effective Time shall be
the Articles of Incorporation and By-Laws of the Surviving Corporation following
the Merger, unless otherwise repealed or amended.
1.6 Board of Directors and Officers. At the Effective Time, the directors
and officers of Merger Sub immediately prior to the Effective Time shall be the
directors and officers, respectively, of the Surviving Corporation following the
Merger, and such directors and officers shall hold office in accordance with the
Surviving Corporation's By-Laws and applicable law.
1.7 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of the Buyers, Seller or the holder of
any of the following securities:
(a) Each share of the common stock, $1.00 per share par value, of
Merger Sub that is issued and outstanding immediately prior to the
Effective Time shall be converted into one share of common stock of
the Surviving Corporation and shall thereafter constitute all of
the issued and outstanding capital stock of the Surviving Corporation;
and
(b) Subject to Section 1.10, each share of common stock, $1.00
par value, of Seller ("Seller Common Stock") issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares,
if any (as defined in Section 1.10 hereof), shall cease to be
outstanding, and shall be converted into and become the right to
receive cash in the amount of $24.00 per share (the "Merger Per Share
Consideration") in the manner and form, and on the terms and
conditions, set forth in this Agreement. All such shares of Seller
Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate
previously representing any such shares shall thereafter represent the
right to receive cash at the rate of the Merger Per Share
Consideration. Each share of Seller Common Stock held in the treasury
of Seller or owned by Seller or any Seller Subsidiary (as hereinafter
defined) for its own account (other than shares of Seller Common Stock
held directly or indirectly in trust accounts, managed accounts, and
the like, or otherwise held in a fiduciary capacity beneficially owned
by third parties) immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof, and no
payment shall be made with respect thereto. (c) At the Closing and
prior to the Effective Time, BFC shall deliver to BFC's duly appointed
exchange agent (the "Exchange Agent"), by a single wire transfer of
immediately available funds, to an account in the United States of
America designated by the Exchange Agent, an amount (the "Payment
Fund") equal to the product of the Merger Per Share Consideration and
the total number of shares of Seller Common Stock outstanding as of
the Closing Date.
1.8 Surrender of Certificates; Payment Procedures.
(a) As soon as practicable following the Effective Time, and in
no event later than five (5) business days after the Effective Time,
BFC shall mail or cause to be mailed to holders of record of
certificates formerly representing Seller Common Stock (the
"Certificates"), as identified on the Seller Stockholder List (as
provided pursuant to Section 1.11(b) hereof), letters advising them of
the effectiveness of the Merger and instructing them to tender such
Certificates to the Exchange Agent, or in lieu thereof, such evidence
A-2
<PAGE>
of lost, stolen or mutilated Certificates and such surety bond or
other security as the Exchange Agent may reasonably require (the
"Required Documentation").
(b) Subject to Section 1.10, after the Effective Time, each
holder of a Certificate that surrenders such Certificate or in lieu
thereof, the Required Documentation, to the Exchange Agent, with a
properly completed and executed letter of transmittal with respect to
such Certificate, will be entitled to the Merger Per Share
Consideration into which the Certificate so surrendered shall have
been converted pursuant to this Agreement. The Merger Per Share
Consideration shall be delivered by the Exchange Agent to each such
holder as promptly as practicable after such surrender.
(c) Each outstanding Certificate, until duly surrendered to the
Exchange Agent, shall be deemed to evidence ownership of the Merger
Per Share Consideration into which the Seller Common Stock previously
represented by such Certificate shall have been converted pursuant to
this Agreement, and until the holder of a Certificate surrenders such
Certificate (or the Required Documentation) together with an executed
letter of transmittal as required pursuant to Section 1.8(b), the
holder of any such Certificate shall not receive the Merger Per Share
Consideration. No interest shall accrue or be payable with respect to
any amounts which any holder of Seller Common Stock or "Options" (as
defined in Section 1.9(a)) shall be entitled to receive pursuant to
this Agreement.
(d) After the Effective Time, holders of Certificates shall cease
to have rights with respect to the Seller Common Stock previously
represented by such Certificates, and their sole rights shall be to
exchange such certificates for the Merger Per Share Consideration to
which the shareholder may be entitled pursuant to the provisions of
Section 1.7 hereof. After the closing of the transfer books as
described in Section 1.11 hereof, there shall be no further transfer
of Certificates on the records of Seller, and if such Certificates are
presented to Seller for transfer, they shall be canceled against
delivery of the Merger Per Share Consideration. Neither Buyers nor the
Exchange Agent shall be obligated to deliver the Merger Per Share
Consideration until such holder surrenders the Certificates or
furnishes the Required Documentation as provided herein together with
the executed letter of transmittal required pursuant to Section
1.8(b). Neither BFC, the Exchange Agent nor any party to this
Agreement nor any affiliate thereof shall be liable to any holder of
Seller Common Stock represented by any Certificate for any Merger Per
Share Consideration payable in the Merger that is paid to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
(e) Any portion of the Payment Fund which remains undistributed
to the shareholders of the Seller six (6) months after the Effective
Time shall be returned, at BFC's request, by the Exchange Agent to
BFC, and thereafter BFC shall act as Exchange Agent subject to the
rights of holders of unsurrendered Certificates under this Article I
and subject to applicable law.
(f) BFC shall be entitled to deduct and withhold from the Merger
Per Share Consideration otherwise payable pursuant to this Agreement
to any holder of Seller Common Stock such amounts as BFC is required
to deduct and withhold with respect to the making of such payment
under the Internal Revenue Code of 1986, as amended ("Code"), or any
provision of state, local or foreign tax law. To the extent that
amounts are so withheld by BFC, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder
of the Seller Common Stock in respect of which such deduction and
withholding was made by BFC.
1.9 Seller Options.
(a) Immediately before the Closing, each unexpired and
unexercised outstanding option, whether or not then vested or
exercisable in accordance with its terms, to purchase shares of Seller
Common Stock ("Option") previously granted by Seller under Seller's
Amended Northwest Equity Corp. 1995 Stock Option Plan (the "Seller
Stock Option Plan") will become exercisable in full. At or prior to
Closing, and before the Effective Time, the Seller or the Exchange
Agent shall pay to each holder of an Option in cancellation thereof an
amount (subject to applicable income tax withholding and employer
taxes) equal to the excess, if any, of the Merger Per Share
Consideration over the per share exercise price of such Option,
multiplied by the number of shares of Seller Common Stock subject to
such Option (the "Option Settlement Amount"). The Option Settlement
Amount shall be paid by the Seller or the Exchange Agent to each
holder of an Option in cash at Closing and before the Effective Time.
A-3
<PAGE>
From and after the Effective Time, any and all Options shall represent
only the right of the holders of such Options to receive payment of
the Option Settlement Amount upon the surrender thereof. The
acceptance of the Option Settlement Amount in cancellation of an
Option shall constitute a release of any and all rights the holder had
or may have in respect of such Option. All agreements, plans, programs
or arrangements of Seller and the Seller Subsidiaries, including,
without limitation, the Seller Stock Option Plan, that provide for the
issuance or grant of Options or any other interest with respect to the
capital stock of Seller or capital stock of or other ownership
interest in any Seller Subsidiary shall terminate as of the Effective
Time. Seller shall take any and all actions necessary to ensure that,
following the Effective Time, no participant in any agreement, plan,
program or arrangement of Seller, including, without limitation, the
Seller Stock Option Plan, shall have any right thereunder to acquire
equity securities or other ownership interests of Seller, the
Surviving Corporation or any Subsidiary thereof and to terminate all
such plans.
(b) At least two (2) business days prior to the Closing, Seller
shall deliver to the Exchange Agent, by a single wire transfer of
immediately available funds, to an account in the United States of
America designated by the Exchange Agent, an amount equal to the
Option Settlement Amount for all holders of options who have signed a
Voting Agreement or have otherwise agreed to accept the Option
Settlement Amount as provided in Section 5.10 of this Agreement.
1.10 Dissenting Shares.
(a) "Dissenting Shares" means any shares of Seller Common Stock
owned by any holder who becomes entitled to payment of the fair value
of such shares under Sections 180.1301 through 180.1331 of the WBCL
(inclusive). Any holders of Dissenting Shares shall be entitled to
payment for such shares only to the extent permitted by and in
accordance with the provisions of the WBCL; provided, however, that
if, in accordance with the WBCL, any holder of Dissenting Shares shall
forfeit such right to payment of the fair value of such Dissenting
Shares, such shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, as of the Effective Time,
the right to receive the Merger Per Share Consideration.
(b) Seller shall give to BFC (i) prompt notice of any written
objections to the Merger and/or any written demands for the payment of
the fair value of any shares of Seller Common Stock, withdrawals of
such demands, and any other documents or instruments served pursuant
to Sections 180.1301 through 180.1331 of the WBCL (inclusive) received
by Seller, and (ii) the opportunity to participate in all negotiations
and proceedings with respect to such demands under the WBCL. Seller
shall not voluntarily make any payment with respect to demands for
payment of fair value and shall not, except with the prior consent of
BFC, settle or offer to settle any such demands.
1.11 Closing of Stock Transfer Books.
(a) The stock transfer books of Seller shall be closed at the end
of business on the business day immediately preceding the Closing
Date. In the event of a transfer of ownership of Seller Common Stock
that is not registered in the transfer records prior to the closing of
such record books, the Merger Per Share Consideration issuable or
payable with respect to such Seller Common Stock may be delivered to
the transferee, if the Certificate or Certificates representing such
Seller Common Stock is presented to BFC accompanied by all documents
required to evidence and effect such transfer and all applicable stock
transfer taxes are paid.
(b) At the Effective Time, Seller shall provide Buyers with a
complete and verified list of registered holders of Seller Common
Stock based upon its stock transfer books or corporate records as of
the closing of said transfer books, including the names, addresses,
certificate numbers and taxpayer identification numbers of such
holders (the "Seller Stockholder List"). Buyers shall be entitled to
rely upon the Seller Stockholder List to establish the identity of
those persons entitled to receive the Merger Per Share Consideration,
which list shall be conclusive with respect thereto. If there is a
dispute with respect to ownership of stock represented by any
Certificate, Buyers shall be entitled to deposit any Merger Per Share
Consideration represented thereby in escrow with an independent third
party and thereafter be relieved with respect to any claims thereto.
A-4
<PAGE>
1.12 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
1.12(b) and 1.12(c) of this Agreement.
(b) The corporate identity, existence, purposes, powers,
franchises, privileges, assets, properties and rights of both Seller
and Merger Sub shall be merged into and continued in the Surviving
Corporation, and the Surviving Corporation shall be fully vested
therewith. Separate existence of Merger Sub, except insofar as
specifically provided by law, shall cease at the Effective Time,
whereupon Merger Sub and the Surviving Corporation shall be and become
one single corporation.
(c) At the Effective Time, the Surviving Corporation shall
succeed to, without other transfer, and shall possess and enjoy, all
the rights, privileges, assets, properties, powers and franchises,
both of a public and private nature, and be subject to all the
restrictions, disabilities and duties of Seller and Merger Sub, and
all the rights, privileges, assets, properties, powers and franchises
of Seller or Merger Sub and all property, real, personal and mixed,
tangible or intangible, and all debts due to Seller or Merger Sub on
whatever account, shall be vested in the Surviving Corporation; and
all rights, privileges, assets, properties, powers and franchises, and
all and every other interest shall be thereafter as effectively the
property of the Surviving Corporation as they were of Seller or Merger
Sub; and the title to or any interest in any real estate vested by
deed or otherwise in Seller or Merger Sub 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 Seller or
Merger Sub shall be preserved and unimpaired, and all debts,
liabilities and duties of Seller or Merger Sub shall thenceforth
attach to the Surviving Corporation and may be enforced against the
Surviving Corporation to the same extent as if said debts, liabilities
and duties have been incurred, or contracted by, the Surviving
Corporation.
1.13 Reservation of Right to Revise Transaction. Buyers may at any time
(change the method of effecting the acquisition of Seller by Buyers including,
without limitation, the provisions of this Article I) if and to the extent
Buyers deem such change to be desirable, including, without limitation, to
provide for (i) a merger of Seller with and into Merger Sub, in which Merger Sub
is the surviving corporation, or (ii) a merger of Seller directly into BFC, in
which BFC is the surviving corporation; provided, however, that no such change
shall (A) alter or change the amount or kind of the Merger Per Share
Consideration to be received by the holders of Seller Common Stock, (B)
materially impede or delay receipt of any approvals referred to in Section
6.1(b) or the consummation of the transactions contemplated by this Agreement,
or (C) alter the tax treatment of the consideration to be received in the Merger
by holders of the Seller Common Stock.
1.14 Material Adverse Effect. As used in this Agreement, the term "Material
Adverse Effect" with respect to an entity means any condition, event, change or
occurrence that has or may reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), properties, business or
results of operations, of such entity and its "Subsidiaries" (as such term is
defined in Section 2.2(a)), taken as a whole as reflected in the "Seller
Financial Statements" (as such term is defined in Section 2.5(b)) with respect
to the Seller, and as reflected in the "Buyer Financial Statements" (as such
term is defined in Section 3.8(a)) with respect to the Buyer; it being
understood that a Material Adverse Effect shall not include: (i) a change with
respect to, or effect on, such entity and its Subsidiaries resulting from a
change in law, rule, regulation, generally accepted accounting principles or
regulatory accounting principles; or (ii) a change with respect to, or effect
on, such entity and its Subsidiaries resulting from any other matter affecting
depository institutions generally including, without limitation, changes in
general economic conditions and changes in prevailing interest and deposit
rates.
1.15 Determination Date Financial Statements. For purposes of this
Agreement, the Determination Date shall be the last day of the calendar month
prior to the Closing Date, unless the Closing Date occurs on or before the 20th
day of any month, in which case the Determination Date will be the last day of
the calendar month prior to the most recent month end prior to the Closing Date.
For example, if the Closing Date occurs on May 1, 1999, the Determination Date
would be March 31, 1999. The Seller shall prepare and deliver consolidated
financial statements of the Seller (including, without limitation, a balance
sheet and income statement of the Seller) as of the Determination Date that have
been reviewed by the Seller's regularly employed accountants in accordance with
the requirements for a review contained in the Statements on Standards for
Accounting and Review Services of the American Institute of Certified Public
Accountants (the "Determination Date Financial Statements"). The Determination
Date Financial Statements shall be prepared in accordance with generally
A-5
<PAGE>
accepted accounting principles and consistent with past practices. A copy of the
Determination Date Financial Statements shall be provided to BFC as soon as
available and in no event less than five (5) days prior to the Closing Date. Any
disputes regarding the Determination Date Financial Statements shall be
submitted to an independent accounting firm mutually agreeable to BFC and the
Seller for a binding resolution. The cost of retaining the independent
accounting firm shall be borne 50 percent by Buyers and 50 percent by the
Seller.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
In connection with and as inducement to Buyers to enter into and be bound by the
terms of the Agreement, Seller hereby represents and warrants to the Buyers as
follows:
2.1 Organization and Authority. Seller is a corporation duly organized,
validly existing and in good standing (meaning that it has filed its most recent
requested annual report and has not filed articles of dissolution, and that all
of its franchise taxes due and owing have been paid) under the laws of the State
of Wisconsin, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified, except where the failure of Seller to
so qualify would not have a Material Adverse Effect on Seller and the Seller
Subsidiaries (as defined in Section 2.2(a)), taken as a whole, and has the
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted. Seller is a registered bank holding
company with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") under the BHCA. True and complete copies of the Articles of
Incorporation and By-Laws of Seller as in effect on the date of this Agreement
have been provided to BFC prior to the date hereof.
2.2 Subsidiaries.
(a) Schedule 2.2 sets forth a complete and correct list of all of
Seller's "Subsidiaries" (as defined in Section 225.2(o) of Regulation
Y promulgated by the Federal Reserve Board; each a "Seller Subsidiary"
and, collectively, the "Seller Subsidiaries"), and all outstanding
Equity Securities (as defined in Section 2.3) of each Seller
Subsidiary, all of which are owned directly or indirectly by Seller.
Except as disclosed in Schedule 2.2, all of the outstanding shares of
capital stock of the Seller Subsidiaries owned directly or indirectly
by Seller are validly issued, fully paid and nonassessable (subject to
a limitation with respect to common stock of the Seller Subsidiaries
which are Wisconsin corporations contained in Section 180.0622(2)(b)
of the WBCL, as judicially interpreted, which provides that
shareholders of Wisconsin corporations may be personally liable for
all debts owing to employees of the corporation for services performed
for the corporation for up to six months in any one case, but not in
an amount greater than the consideration paid for each such share) and
are owned free and clear of any lien, claim, charge, option,
encumbrance, agreement, mortgage, pledge, security interest or
restriction (a "Lien" and, collectively, "Liens") with respect
thereto. Each of the Seller Subsidiaries is a corporation, bank or
savings bank duly incorporated or organized and validly existing under
the laws of its jurisdiction of incorporation or organization, and has
corporate power and authority to own or lease its properties and
assets and to carry on its business as it is now being conducted. Each
of the Seller Subsidiaries is duly qualified to do business in each
jurisdiction where its ownership or leasing of property or the conduct
of its business requires it so to be qualified, except where the
failure to so qualify would not have a Material Adverse Effect on
Seller and the Seller Subsidiaries. Except as set forth in Schedule
2.2, neither Seller nor any Seller Subsidiary owns beneficially,
directly or indirectly, any shares of any class of Equity Securities
(as defined in Section 2.3) or similar interests of any corporation,
bank, business trust, association or organization, or any interest in
a partnership or joint venture of any kind, other than those
identified as Seller Subsidiaries in Schedule 2.2 hereof. True and
correct copies of the Articles of Incorporation or Certificate of
Incorporation and Bylaws for each of the Seller Subsidiaries as in
effect as of the date of this Agreement have been provided to BFC
prior to the date hereof.
(b) Northwest Savings Bank, a Seller Subsidiary, is a stock
savings bank duly organized and validly existing under the laws of the
State of Wisconsin.
2.3 Capitalization. As of the date of this Agreement, the authorized capital
stock of Seller consists of (i) 4,000,000 shares of Seller Common Stock, of
which 1,032,517 shares are issued and 825,301 shares are outstanding, with
207,216 shares of Seller Common Stock held in treasury, and (ii) 2,000,000
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shares of preferred stock, $1.00 par value per share, of which no shares are
issued or outstanding. As of the date of this Agreement, the issued and
outstanding shares of Seller Common Stock include 100,071 shares held by the
Northwest Savings Bank Employee Stock Ownership Plan ("ESOP") and 41,300 shares
issued under the Northwest Equity Corp. Incentive Plan ("Incentive Plan"). As of
the date of this Agreement, Seller had reserved no shares of Seller Common Stock
for issuance under the Seller Stock Option Plan, pursuant to which Options
covering 100,980 shares of Seller Common Stock were outstanding. As of the date
of this Agreement, the Seller Stock Option Plan, the agreements evidencing
Options granted thereunder, and the ESOP are the only plans, agreements,
programs or arrangements of Seller and Seller Subsidiaries that provide for the
issuance or grant of Options, warrants or any other rights to acquire capital
stock of the Seller or capital stock of a Seller Subsidiary. "Equity Securities"
of an issuer means capital stock or other equity securities of such issuer,
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into,
shares of any capital stock or other equity securities of such issuer, or
contracts, commitments, understandings or arrangements by which such issuer is
or may become bound to issue additional shares of its capital stock or other
equity securities of such issuer, or options, warrants, scrip or rights to
purchase, acquire, subscribe to, calls on or commitments for any shares of its
capital stock or other equity securities. Except as set forth above, the Seller
has no other class of stock and there are no other Equity Securities of Seller
outstanding. All of the issued and outstanding shares of Seller Common Stock are
validly issued, fully paid and nonassessable (subject to a limitation with
respect to Seller Common Stock contained in Section 180.0622(2)(b) of the WBCL,
as judicially interpreted, which provides that shareholders of Wisconsin
corporations may be personally liable for all debts owing to employees of the
corporation for services performed for the corporation for up to six months in
any one case, but not in an amount greater than the consideration paid for each
such share) and have not been issued in violation of any preemptive right of any
stockholder of Seller.
2.4 Authorization.
(a) Seller has the corporate power and authority to enter into
this Agreement and, subject to the approval of this Agreement by the
stockholders of Seller and the "Regulatory Authorities" and
"Additional Regulatory Authorities" (as such terms are defined in
Section 2.6), to carry out its obligations hereunder. The only
stockholder vote required for Seller to approve this Agreement is the
affirmative vote of the holders of a majority of the outstanding
shares of Seller Common Stock entitled to vote at a meeting of
Seller's stockholders called for such purpose or any adjournment
thereof ("Special Meeting"). The execution, delivery and performance
of this Agreement by Seller and the consummation by Seller of the
transactions contemplated hereby in accordance with and subject to the
terms of this Agreement have been duly authorized by the Board of
Directors of Seller. Subject to the approval of Seller's stockholders
and subject to the receipt of such approvals of the Regulatory
Authorities and Additional Regulatory Authorities as may be required
by statute or regulation, this Agreement is a valid and binding
obligation of Seller enforceable against Seller in accordance with its
terms, except as (i) the enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, and similar laws now or
hereafter in effect relating to the enforcement of creditors' remedies
generally and except to the extent equitable principles may limit the
right to specific performance or other equitable remedies, and (ii)
considerations of public policy may affect the enforceability of the
indemnification provisions thereof.
(b) Except as disclosed on Schedule 2.4(b), neither the
execution, delivery nor performance by Seller of this Agreement, nor
the consummation by Seller of the transactions contemplated hereby,
nor compliance by Seller with any of the provisions hereof, will (i)
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result
in a right of termination or acceleration of, or result in the
creation of, any Lien upon any of the properties or assets of Seller
or any of the Seller Subsidiaries under any of the terms, conditions
or provisions of (x) Seller's or any of Seller Subsidiaries' Articles
of Incorporation, charter or By-Laws or (y) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Seller or any of the Seller
Subsidiaries is a party or by which it may be bound, or to which
Seller or any of the Seller Subsidiaries or any of the properties or
assets of Seller or any of the Seller Subsidiaries may be subject,
other than those as to which any such violation, conflict, breach,
event, termination, acceleration or creation would not have or be
reasonably likely to have a Material Adverse Effect on Seller or (ii)
subject to compliance with the statutes and regulations referred to in
Section 2.4(c), violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to Seller or any of the
Seller Subsidiaries or any of their respective properties or assets;
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other than violations, conflicts, breaches, defaults, terminations,
accelerations or liens which would not have or be reasonably likely to
have a Material Adverse Effect on Seller.
(c) Other than in connection or in compliance with the provisions
of the WBCL or the Securities Act of 1933, as amended, and the rules
and regulations thereunder (collectively, the "Securities Act"), the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (collectively, the "Exchange Act"), the securities or blue
sky laws of the various states or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHCA, or
any required approvals of the Federal Reserve Board, the Federal
Deposit Insurance Corporation ("FDIC") or other governmental agencies
or governing boards having regulatory authority over Seller or any
Seller Subsidiary, no consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative
agency, commission, banking authority or other governmental authority
or instrumentality ("Governmental Entity") is required by or with
respect to Seller or any of the Seller Subsidiaries in connection with
the execution or delivery of this Agreement or the consummation by
Seller of the transactions contemplated by this Agreement.
2.5 Seller Financial Statements.
(a) Attached hereto as Schedule 2.5(a) are copies of the
following documents filed by the Seller with the Securities and
Exchange Commission ("SEC"): (i) Seller's Annual Report on Form 10-KSB
for the fiscal years ended March 31, 1997 and 1998; (ii) Seller's
Quarterly Reports on Form 10-QSB for the quarters ended June 30, 1998,
September 30, 1998 and December 31, 1998; (iii) any of Seller's
Current Reports on Form 8-K filed with the SEC since March 31, 1998;
(iv) Seller's Annual Report to Shareholders for its fiscal year ending
March 31, 1998; (v) Seller's proxy statements and any related proxy
materials delivered to Seller's shareholders in connection with any
shareholders' meetings held after March 31, 1998; and (vi) any
amendments or supplements to such documents and reports.
(b) The financial statements contained in the documents
referenced in Schedule 2.5(a) and the Determination Date Financial
Statements are referred to collectively as the "Seller Financial
Statements." Except as referenced in Schedule 2.5(b), the Seller
Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied during
the periods involved, and present fairly the consolidated financial
position of Seller and the Seller Subsidiaries, taken as a whole, at
the dates thereof and the consolidated results of operations, changes
in stockholders' equity and cash flows, as applicable, of Seller and
the Seller Subsidiaries for the periods stated therein.
c) Except as referenced in Schedule 2.5(b), Seller and the
Seller Subsidiaries each has prepared, kept and maintained through the
date hereof financial books and records maintained in all material
respects in accordance with GAAP and all other applicable accounting
requirements and which fairly reflect their respective financial
conditions, results of operations, changes in stockholders' equity and
cash flows.
2.6 Seller Reports. Since August 5, 1994, each of Seller and the Seller
Subsidiaries has timely filed any and all reports, registrations and statements,
together with any required amendments thereto, that it was required to file with
(i) the SEC, including, but not limited to, Forms 10-KSB, Forms 10-QSB and Forms
8-K, (ii) the Federal Reserve Board, (iii) the FDIC; and (iv) the WDFI (the
entities in the foregoing clauses (i) through (iv) being referred to herein
collectively as the "Regulatory Authorities" and individually as a "Regulatory
Authority"). Seller and Seller Subsidiaries have filed all material reports,
registrations and statements, together with any required amendments thereto,
with any and all federal, state, municipal or local government, securities,
banking, savings and loan, environmental, insurance and other governmental or
regulatory authority, and the agencies and staffs thereof having jurisdiction
over the affairs of it (collectively, the "Additional Regulatory Authorities"
and, individually, the "Additional Regulatory Authority"). All such reports and
statements filed with any Regulatory Authority or Additional Regulatory
Authority are collectively referred to herein as the "Seller Reports." As of
each of their respective dates, the Seller Reports complied in all material
respects with all the rules and regulations promulgated by the applicable
Regulatory Authority or Additional Regulatory Authority. With respect to Seller
Reports filed with the Regulatory Authorities or Additional Regulatory
Authorities, there is no unresolved violation, criticism or exception by any
Regulatory Authority or Additional Regulatory Authority with respect to any
report or statement filed by, or any examinations of, Seller or any of the
Seller Subsidiaries.
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2.7 Title to and Condition of Assets.
(a) Except as set forth in Schedule 2.7(a), and except as may be
reflected in the Seller Financial Statements and with the exception of
all "Real Property" (which is the subject of Section 2.8 hereof),
Seller and the Seller Subsidiaries have, and at the Closing Date will
have, good and marketable title to their owned properties and assets,
including, without limitation, those reflected in the Seller Financial
Statements (except those disposed of in the ordinary course of
business since the date thereof), free and clear of any Lien, except
for Liens for (i) taxes, assessments or other governmental charges not
yet delinquent, (ii) as set forth or described in the Seller Financial
Statements, and (iii) pledges to secure deposits and other Liens
incurred in the ordinary course of business.
(b) Except as set forth in Schedule 2.7(b), no material
properties or assets that are reflected as owned by Seller or any of
the Seller Subsidiaries in the Seller Financial Statements as of
September 30, 1998 have been sold, leased, transferred, assigned or
otherwise disposed of since such date, except in the ordinary course
of business.
(c) Except as set forth in Schedule 2.7(c), all furniture,
fixtures, vehicles, machinery and equipment and computer software
owned or used by Seller or the Seller Subsidiaries, including any such
items leased as a lessee (taken as a whole as to each of the foregoing
with no single item deemed to be of material importance) are in good
working order and free of known defects, subject only to normal wear
and tear. The operation by Seller or the Seller Subsidiaries of such
properties and assets is in compliance in all material respects with
all applicable laws, ordinances and rules and regulations of any
governmental authority having jurisdiction over such use.
2.8 Real Property.
(a) A list of each parcel of real property owned by Seller or any
of the Seller Subsidiaries (other than real property acquired in
foreclosure or in lieu of foreclosure in the course of the collection
of loans and being held by Seller or a Seller Subsidiary for
disposition as required by law) is set forth in Schedule 2.8(a) under
the heading "Owned Real Property" (such real property being herein
referred to as the "Owned Real Property"). A list of each parcel of
real property leased by Seller or any of the Seller Subsidiaries is
also set forth in Schedule 2.8(a) under the heading "Leased Real
Property" (such real property being herein referred to as the "Leased
Real Property"). Collectively, the Owned Real Property and the Leased
Real Property are herein referred to as the "Real Property."
(b) There is no pending action involving Seller or any of the
Seller Subsidiaries as to the title of or the right to use any of the
Real Property.
(c) Except as disclosed on Schedule 2.8(c), neither Seller nor
any of the Seller Subsidiaries has any interest in any real property
other than as described above in Section 2.8(a) except interests as a
mortgagee, any real property acquired in foreclosure or in lieu of
foreclosure and being held for disposition as required by law and
property held by any Seller Subsidiary in its capacity as trustee.
(d) To the best knowledge of Seller, none of the buildings,
structures or other improvements located on the Real Property
encroaches upon or over any adjoining parcel of real estate or any
easement or right-of-way or "setback" line, and all such buildings,
structures and improvements are located and constructed in conformity
with all applicable zoning ordinances and building codes.
(e) None of the buildings, structures or improvements located on
the Owned Real Property is the subject of any official complaint or
notice by any governmental authority of violation of any applicable
zoning ordinance or building code, and there is no zoning ordinance,
building code, use or occupancy restriction or condemnation action or
proceeding pending, or, to the best knowledge of Seller, threatened,
with respect to any such building, structure or improvement. The Owned
Real Property is in generally good condition for its intended purpose,
ordinary wear and tear excepted, and has been maintained in accordance
with reasonable and prudent business practices applicable to like
facilities.
(f) Except as may be reflected in the Seller Financial Statements
or with respect to such easements, Liens, defects or encumbrances as
do not individually or in the aggregate materially adversely affect
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the use or value of the parcel of Owned Real Property, Seller and the
Seller Subsidiaries have, and at the Closing Date will have, good and
marketable title to their respective Owned Real Properties or will
have maintained insurance in sufficient amounts against any such
defect in title.
(g) Neither Seller nor any of the Seller Subsidiaries has caused
or allowed the generation, treatment, storage, disposal or release at
any Real Property of any Toxic Substance (as such term is hereinafter
defined), except for Toxic Substances of the types and in the
quantities typically associated with Seller's or Seller Subsidiaries'
businesses and in accordance in all material respects with all
applicable federal, state and local laws and regulations. "Toxic
Substance" means any hazardous, toxic or dangerous substance,
pollutant, waste, gas or material, including, without limitation,
petroleum and petroleum products, metals, liquids, semi-solids or
solids, that are regulated under any federal, state or local statute,
ordinance, rule, regulation or other law pertaining to environmental
protection, contamination, quality, waste management or cleanup.
Neither Seller nor any Seller Subsidiary has knowledge of any
underground storage tanks located on, in or under any Owned Real
Property or Leased Real Property.
2.9 Taxes. Seller and each Seller Subsidiary have timely filed or will timely
file (including extensions) all tax returns required to be filed at or prior to
the Closing Date ("Seller Returns"). Each of Seller and the Seller Subsidiaries
has paid, or set up adequate reserves on the Seller Financial Statements for the
payment of, all taxes required to be paid in respect of the periods covered by
such Seller Returns and has set up adequate reserves on the most recent Seller
Financial Statements for the payment of all taxes anticipated to be payable in
respect of all periods up to and including the latest period covered by such
Seller Financial Statements. Neither Seller nor any Seller Subsidiary has or, to
the best knowledge of Seller, will have any material liability for any such
taxes in excess of the amounts so paid or reserves so established, and no
material deficiencies for any tax, assessment or governmental charge has been
proposed, asserted or assessed in writing (tentatively or definitely) against
Seller or any of the Seller Subsidiaries which have not been settled or would
not be covered by existing reserves. Except as set forth in Schedule 2.9,
neither Seller nor any of the Seller Subsidiaries is delinquent in the payment
of any tax, assessment or governmental charge, nor has it requested any
extension of time within which to file any tax returns in respect of any fiscal
year which have not since been filed and no requests for waivers of the time to
assess any tax are pending. Except as set forth on Schedule 2.9, no federal or
state income tax return of Seller or any Seller Subsidiaries has been audited by
the Internal Revenue Service (the "IRS") or any state tax authority for the
seven most recent full fiscal years of Seller. Except as set forth on Schedule
2.9, there is no deficiency or refund litigation or, to the best knowledge of
Seller, matter in controversy with respect to Seller Returns. Except as set
forth on Schedule 2.9 hereof, neither Seller nor any of the Seller Subsidiaries
has extended or waived any statute of limitations on the assessment of any tax
due that is currently in effect.
2.10 Material Adverse Effect. Since September 30, 1998, there has been no
Material Adverse Effect on Seller.
2.11 Loans, Commitments Contracts.
(a) Schedule 2.11(a) contains a complete and accurate listing of
(i) all contracts entered into with respect to deposits and repurchase
agreements of $1,000,000 or more, by account, as of September 30,
1998, (ii) all loan agreements, notes, security agreements, bankers'
acceptances, outstanding letters of credit, participation agreements,
and other documents relating to or involving extensions of credit by
Seller or any of the Seller Subsidiaries in excess of $250,000 to
which Seller or any of the Seller Subsidiaries is a party or by which
it is bound, by account, as of January 26, 1999, and (iii) all loan
commitments and commitments to issue letters of credit and other
commitments to extend credit with respect to any one entity or related
group of entities in excess of $250,000 to which Seller or any of the
Seller Subsidiaries is a party or by which it is bound, by account, as
of December 30, 1998. The Seller hereby represents that during the
period from January 26, 1999 to and including the date of this
Agreement, there have been no extensions of credit of the type
described in Section 2.11(a)(ii), and that during the period from
December 31, 1998 to and including the date of this Agreement, there
have been no commitments of the type described in Section
2.11(a)(iii). After the date of this Agreement, the Seller shall
promptly inform Buyers of any extensions of credit described in
Section 2.11(a)(ii) or commitments described in Section 2.11(a)(iii)
that arise or are entered into or that have arisen or been entered
into after January 26, 1999 and December 31, 1998, respectively.
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(b) Except for the contracts and agreements required to be listed
on Schedule 2.11(a) and the loans required to be listed on Schedule
2.11(f), and except as otherwise listed on Schedule 2.11(b), neither
Seller nor any of the Seller Subsidiaries is a party to or is bound by
any:
(i) agreement, contract, arrangement, understandin or
commitment with any labor union;
(ii) material franchise or license agreement, excluding
software license agreements entered into in the ordinary
course of business;
(iii) written employment, severance, termination pay,
agency, consulting or similar agreement or commitment in
respect of personal services;
(iv) material agreement, arrangement or commitment (A)
not made in the ordinary course of business, and (B)
pursuant to which Seller or any of the Seller Subsidiaries
is or may become obligated to invest in or contribute to any
Seller Subsidiary other than pursuant to Seller Employee
Plans (as that term is defined in Section 2.19 hereof) or
agreements relating to joint ventures or partnerships set
forth in Schedule 2.2, true and complete copies of which
have been furnished to Buyers;
(v) agreement, indenture or other instrument not
disclosed in the Seller Financial Statements relating to the
borrowing of money by Seller or any of the Seller
Subsidiaries or the guarantee by Seller or any of the Seller
Subsidiaries of any such obligation (other than trade
payables or instruments related to transactions entered into
in the ordinary course of business by Seller or any of the
Seller Subsidiaries, such as deposits, Federal Home Loan
Bank ("FHLB") and Federal Funds borrowings and repurchase
and reverse repurchase agreements);
(vi) contract containing covenants which limit the
ability of Seller or any of the Seller Subsidiaries to
compete in any line of business or with any person or which
involves any restrictions on the geographical area in which,
or method by which, Seller or any of the Seller Subsidiaries
may carry on their respective businesses (other than as may
be required by law or any applicable Regulatory Authority or
Additional Regulatory Authority);
(vii) contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of
Regulation S-K as promulgated by the SEC to be performed
after the date of this Agreement that has not been filed or
incorporated by reference in the Seller Reports;
(viii) lease with annual rental payments aggregating
$10,000 or more;
(ix) loans or other obligations payable or owing to any
officer, director or employee except (A) salaries, wages and
directors' fees or other compensation incurred and accrued
in the ordinary course of business and (B) obligations due
in respect of any depository accounts maintained by any of
the foregoing with Seller or any of the Seller Subsidiaries
in the ordinary course of business; or
(x) other agreement, contract, arrangement,
understanding or commitment involving an obligation by
Seller or any of the Seller Subsidiaries of more than
$10,000 and extending beyond six months from the date hereof
that cannot be canceled without cost or penalty upon notice
of thirty (30) days or less, other than contracts entered
into in respect of deposits, loan agreements and
commitments, notes, security agreements, repurchase and
reverse repurchase agreements, Treasury, tax and loan notes,
bankers' acceptances, outstanding letters of credit and
commitments to issue letters of credit, participation
agreements and other documents relating to transactions
entered into by Seller or any of the Seller Subsidiaries in
the ordinary course of business and not involving extensions
of credit with respect to any one entity or related group of
entities in excess of $250,000.
(c) Seller and/or the Seller Subsidiaries carry property,
liability, director and officer, errors and omissions, products
liability and other insurance coverage as set forth in Schedule
2.11(c) under the heading "Insurance."
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(d) True, correct, and complete copies of the agreements,
contracts, leases and other documents referred to in Section 2.11(b)
have been included with Schedule 2.11(b) hereto. True, correct and
complete copies of the agreements, contracts, leases, insurance
policies and other documents referred to in Schedules 2.11(a) and (c)
have been or shall be furnished or made available to Buyers.
(e) Each of the agreements, contracts, leases, insurance policies
and other documents referred to in Schedules 2.11(a), (b) and (c) is a
valid, binding and enforceable obligation of the parties sought to be
bound thereby, except as the enforceability thereof against the
parties thereto (other than Seller or any of the Seller Subsidiaries)
may be limited by bankruptcy, insolvency, reorganization, moratorium
and other laws now or hereafter in effect relating to the enforcement
of creditors' rights generally, and except that equitable principles
may limit the right to obtain specific performance or other equitable
remedies.
(f) Except as set forth on Schedule 2.11(f), as of January 31,
1999, neither the Seller nor any of the Seller Subsidiaries was a
party to any written or oral loan agreement, note or borrowing
arrangement (including, without limitation, leases, credit
enhancements, commitments, guarantees and interest-bearing assets)
(collectively, "Loans"), other than Loans the unpaid principal balance
of which did not exceed $50,000, under the terms of which the obligor
was, as of January 31, 1999, over ninety (90) days delinquent in
payment of principal or interest or in default under any other
provision. After the date of this Agreement, the Seller shall promptly
deliver to Buyers, as soon as they become available, Seller's monthly
scheduled items reports which shall set forth any Loans, other than
Loans the unpaid principal balance of which did not exceed $50,000,
under the terms of which the obligor has become, since January 31,
1999, over ninety (90) days delinquent in payment of principal or
interest or in default under any other provision. Schedule 2.11(f)
sets forth each of the Loans of Seller or any of the Seller
Subsidiaries with an unpaid principal amount in excess of $50,000 and
that as of the date of this Agreement are internally classified as (i)
"Substandard," "Doubtful," "Loss" or "Classified," (ii) "Criticized,"
"Other Loans Especially Mentioned" or "Special Mention," or (iii)
"Credit Risk Assets," "Concerned Loans," "Watch List" or words of
similar import, in each case together with the unpaid principal amount
of and any accrued and unpaid interest on each of such Loans and the
identity of the borrower thereunder; together with the aggregate
principal amount of and accrued and unpaid interest on all such Loans
by category. After the date of this Agreement, the Seller shall
promptly inform Buyers of any Loans that become classified since
January 31, 1999 in the manner described in the previous sentence, or
any Loans the classification of which is changed at any time after
January 31, 1999. The Seller and its Subsidiaries have internally
classified, in the manner described above, all Loans that any auditor
or government examiner has criticized or classified, and the internal
classification of such Loan is at least as strict as the criticism or
classification thereof by the auditor or government examiner. Schedule
2.11(f) also sets forth, as of January 31, 1999, by account, each
borrower, customer or other party which has notified Seller or any of
the Seller Subsidiaries during the past twelve months of, or has
asserted against Seller or any of the Seller Subsidiaries, in each
case in writing, any "lender liability" or similar claim, and, to the
best knowledge of Seller, each borrower, customer or other party which
has given Seller or any of the Seller Subsidiaries any oral
notification of, or orally asserted to or against Seller or any of the
Seller Subsidiaries, any such claim. After the date of this Agreement,
the Seller shall promptly inform Buyers of any lender liability or
similar claim made or asserted in writing of the type described in the
immediately preceding sentence that has arisen since January 31, 1999.
2.12 Absence of Defaults. Neither Seller nor any of the Seller Subsidiaries
is in violation of its charter documents or By-Laws or in default under any
material agreement, commitment, arrangement, lease, insurance policy or other
instrument, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that, with the
lapse of time or giving of notice or both, would constitute such a default,
except in all cases where such default would not have a Material Adverse Effect
on Seller.
2.13 Litigation and Other Proceedings. Except as set forth on Schedule 2.13
or otherwise disclosed in the Seller Financial Statements, neither Seller nor
any of the Seller Subsidiaries is a party to any pending or, to the best
knowledge of Seller, threatened claim, action, suit, investigation or
proceeding, or is subject to any order, judgment or decree including, without
limitation, any such claim, action, suit, investigation or proceeding involving
any state or federal bank regulatory agency, whether of a formal or informal
nature. Without limiting the generality of the foregoing, there are no actions,
suits or proceedings pending or, to the best knowledge of Seller, threatened
against Seller or any of the Seller Subsidiaries or any of their respective
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officers or directors by any stockholder of Seller or any of the Seller
Subsidiaries (or any former stockholder of Seller or any of the Seller
Subsidiaries) or involving claims under the Community Reinvestment Act of 1977,
as amended, and the regulations promulgated thereunder ("CRA"), the Bank Secrecy
Act, the fair lending laws or any other similar laws.
2.14 Directors' and Officers' Insurance. Each of Seller and the Seller
Subsidiaries has taken or will take all requisite action (including, without
limitation, the making of claims and the giving of notices) pursuant to its
directors' and officers' liability insurance policy or policies in order to
preserve all rights thereunder with respect to all matters (other than matters
arising in connection with this Agreement and the transactions contemplated
hereby) occurring prior to the Effective Time that are known to Seller.
2.15 Compliance with Laws
(a) Seller and each of the Seller Subsidiaries have all permits,
licenses, authorizations, orders and approvals of, and have made all
filings, applications and registrations with, all Regulatory
Authorities and Additional Regulatory Authorities that are required in
order to permit them to own or lease their respective properties and
assets and to carry on their respective businesses in all material
respects as presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are in full force and
effect and, to the best knowledge of Seller, no suspension or
cancellation of any of them is threatened; and all such filings,
applications and registrations are current; in each case except for
permits, licenses, authorizations, orders, approvals, filings,
applications and registrations the failure to have (or have made)
would not have a Material Adverse Effect on Seller and the Seller
Subsidiaries.
(b) (i) Each of Seller and the Seller Subsidiaries has complied
in all material respects with all laws, regulations and orders
(including, without limitation, zoning ordinances, building codes, and
securities, tax, environmental, civil rights, and occupational health
and safety laws and regulations including, without limitation, in the
case of Seller or any Seller Subsidiary that is a savings bank or
savings association, banking organization, banking corporation or
trust company, all statutes, rules, regulations and policy statements
pertaining to the conduct of a banking, deposit-taking, lending or
related business, or to the exercise of trust powers) and governing
instruments applicable to it and to the conduct of its business, and
(ii) neither Seller nor any of the Seller Subsidiaries is in material
default under, and no event has occurred which, with the lapse of time
or notice or both, could result in the material default under, the
terms of any judgment, order, writ, decree, permit, or license of any
Regulatory Authority, Additional Regulatory Authority or court,
whether federal, state, municipal or local, and whether at law or in
equity.
(c) Except as set forth on Schedule 2.15(c), neither Seller nor
any of the Seller Subsidiaries is subject to or, to the best knowledge
of Seller, reasonably likely to incur a liability as a result of its
ownership, operation, or use of any Property (as defined below) of
Seller (whether directly or as a consequence of such Property being
acquired in foreclosure or in lieu of foreclosure or being part of the
investment portfolio of Seller or any of the Seller Subsidiaries) (A)
that is contaminated by or contains any Toxic Substance (as defined in
Section 2.8(g)), including, without limitation, petroleum and
petroleum products, asbestos, PCBs, pesticides, herbicides and any
other substance or waste that is hazardous to human health or the
environment and regulated by federal, state or local law, or (B) on
which any Toxic Substance has been stored, disposed of, placed or used
at the Property or in the construction of structures thereon.
"Property" shall include all property (real or personal, tangible or
intangible) owned or controlled by Seller or any of the Seller
Subsidiaries, including, without limitation, property acquired under
foreclosure or in lieu of foreclosure, property in which any venture
capital or similar unit of Seller or any of the Seller Subsidiaries
has an interest and property held by Seller or any of the Seller
Subsidiaries in its capacity as a trustee. No claim, action, suit or
proceeding is pending or, to the best knowledge of Seller, threatened,
and no claim has been asserted against Seller or any of the Seller
Subsidiaries relating to Property of Seller or any of the Seller
Subsidiaries before any court or other Regulatory Authority or
Additional Regulatory Authority or arbitration tribunal relating to
Toxic Substances, pollution or the environment, and there is no
outstanding judgment, order, writ, injunction, decree or award against
or affecting Seller or any of the Seller Subsidiaries with respect to
the same.
(d) Neither Seller nor any of the Seller Subsidiaries has
received any notification or communication that has not been finally
resolved from any Regulatory Authority or Additional Regulatory
Authority (i) asserting that the Seller or any of the Seller
Subsidiaries or any Property is not in substantial compliance with any
of the statutes, regulations or ordinances that such Regulatory
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Authority or Additional Regulatory Authority enforces, (ii)
threatening to revoke any license, franchise, permit or governmental
authorization, including, without limitation, such company's status as
an insured depository institution under the Federal Deposit Insurance
Act, as amended (the "FDI Act"), or (iii) requiring or threatening to
require Seller or any of the Seller Subsidiaries, or indicating that
Seller or any of the Seller Subsidiaries may be required, to enter
into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting or
purporting to direct, restrict or limit in any manner the operations
of Seller or any of the Seller Subsidiaries, including, without
limitation, any restriction on the payment of dividends. No such cease
and desist order, agreement or memorandum of understanding or other
agreement is currently in effect.
(e) Neither Seller nor any of the Seller Subsidiaries is required
by Section 32 of the FDI Act to give prior notice to any federal
banking agency of the proposed addition of an individual to its board
of directors or the employment of an individual as a senior executive
officer.
2.16 Labor. No work stoppage involving Seller or any of the Seller
Subsidiaries is pending or, to the best knowledge of Seller, threatened. Except
as set forth on Schedule 2.16, neither Seller nor any of the Seller Subsidiaries
is involved in, or, to the best knowledge of Seller, threatened with or affected
by, any labor dispute, arbitration, lawsuit or administrative proceeding that
reasonably could be expected to have a Material Adverse Effect on the Seller.
None of the employees of Seller or the Seller Subsidiaries is represented by any
labor union or any collective bargaining organization.
2.17 Material Interests of Certain Persons. Except as set forth in Seller's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and/or in
its proxy statement and other proxy solicitation materials for Seller's annual
stockholders' meeting held in fiscal 1999, and except as set forth in Schedule
2.17, no officer or director of Seller or any of the Seller Subsidiaries, or any
"associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of
any such officer or director, has any interest in any contract or property (real
or personal, tangible or intangible), used in, or pertaining to the business of,
Seller or any of the Seller Subsidiaries, which in the case of Seller and each
of the Seller Subsidiaries would be required to be disclosed by Item 404 of
Regulation S-K promulgated by the SEC.
2.18 Allowance for Loan and Lease Losses; Non-Performing Assets; Financial
Assets.
(a) Except as set forth on Schedule 2.18(a), all of the accounts,
notes and other receivables that are reflected in the Seller Financial
Statements as of September 30, 1998, were acquired in the ordinary
course of business and were collectible in full in the ordinary course
of business, except for possible loan and lease losses that are
adequately provided for in the allowance for loan and lease losses
reflected in such Seller Financial Statements, and the collection
experience of Seller and the Seller Subsidiaries since September 30,
1998 to the date hereof has not deviated in any material and adverse
manner from the credit and collection experience of Seller and the
Seller Subsidiaries, taken as a whole, for the six months ended
September 30, 1998.
(b) The allowances for loan losses contained in the Seller
Financial Statements were established in accordance with the past
practices and experiences of Seller and the Seller Subsidiaries, and
the allowance for loan and lease losses shown on the consolidated
balance sheet of Seller and the Seller Subsidiaries as of the
Determination Date will be adequate under the requirements of GAAP, or
regulatory accounting principles, as the case may be, to provide for
possible losses on loans and leases (including, without limitation,
accrued interest receivable) and credit commitments (including,
without limitation, stand-by letters of credit) as of the date of such
balance sheet.
(c) Schedule 2.18(c) sets forth as of the date of this Agreement
all assets classified by Seller as real estate acquired through
foreclosure or repossession, including foreclosed assets.
(d) As of September 30, 1998, the aggregate amount of all
Non-Performing Assets (as defined below) on the books of Seller and
the Seller Subsidiaries did not exceed 1.71% of total assets.
"Non-Performing Assets" shall mean (i) all loans (A) that are
contractually past due 90 days or more in the payment of principal
and/or interest, (B) that are on nonaccrual status, (C) that have been
classified "doubtful," "loss" or the equivalent thereof by any
Regulatory Agency or (D) where the interest rate terms have been
reduced and/or the maturity dates have been extended subsequent to the
agreement under which the loan was originally created due to concerns
regarding the borrower's ability to pay in accordance with such
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initial terms, and (ii) all assets classified by Seller as real estate
acquired through foreclosure or in lieu of foreclosure, including
in-substance foreclosures, and all other assets acquired through
foreclosure or in lieu of foreclosure.
(e) All loans receivable (including discounts) and accrued
interest entered on the books of Seller and the Seller Subsidiaries,
to the extent unpaid on the Closing Date, arose out of bona fide
arm's-length transactions, were made for good and valuable
consideration in the ordinary course of Seller's or the appropriate
Seller Subsidiary's respective business, and the notes or other
evidences of indebtedness with respect to such loans or discounts are
true and genuine and are what they purport to be. To the best
knowledge of Seller, the loans, discounts and the accrued interest
reflected on the books of Seller and the Seller Subsidiaries are
subject to no defenses, set-offs or counterclaims (including, without
limitation, those afforded by usury or truth-in-lending laws), except
as may be provided by bankruptcy, insolvency or similar laws affecting
creditors' rights generally or by general principles of equity. All
such loans are owned by Seller or the appropriate Seller Subsidiary
free and clear of any liens, restrictions or encumbrances.
(f) The notes and other evidences of indebtedness evidencing the
loans described in Section 2.18(e) above, and all pledges, mortgages,
deeds of trust and other collateral documents or security instruments
relating thereto are and will be, in all material respects, valid,
true, genuine and enforceable, and what they purport to be. Seller and
each of the Seller Subsidiaries has good and valid title to the
investment securities shown on the Seller Financial Statements. A
complete and accurate list of such investment securities as of
September 30, 1998 is attached as Schedule 2.18(f).
2.19 Employee Benefit Plans.
(a) Schedule 2.19(a) lists all pension, retirement, supplemental
retirement, stock option, stock purchase, stock ownership,
savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, medical, disability,
workers' compensation, vacation, group insurance, severance
and other employee benefit, incentive and welfare policies,
contracts, plans and arrangements, and all trust agreements
related thereto, maintained by or contributed to by the
Seller or any of the Seller Subsidiaries as of the date
hereof in respect of any of the present or former directors,
officers, or other employees of and/or consultants to the
Seller or any of the Seller Subsidiaries (collectively
"Seller Employee Plans"). The Sellers have furnished the
Buyers with the following documents with respect to each
Seller Employee Plan: (i) a true and complete copy of all
written documents comprising such Seller Employee Plan
(including amendments and individual agreements relating
thereto) or, if there is no such written document, an
accurate and complete description of the Seller Employee
Plan; (ii) the most recently filed Form 5500 or Form
5500-C/R (including all schedules thereto), if applicable;
(iii) the most recent financial statements and actuarial
reports, if any; (iv) the summary plan description currently
in effect and all material modifications thereof, if any;
and (v) the most recent IRS determination letter, if any.
The Incentive Plan was terminated effective as of October
10, 1998, and there are no further rights, obligations, or
liabilities that exist or will exist under the Incentive
Plan.
(b) All Seller Employee Plans have been maintained and operated
in all material respects in accordance with their terms and
are in all material respects in compliance with the
requirements of all applicable statutes, orders, rules and
final regulations, including, without limitation, to the
extent applicable, the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and the Code. All
contributions required to be made to the Seller Employee
Plans have been made or reserved.
(c) With respect to each of the Seller Employee Plans which is a
"pension plan" (as that term is defined in Section 3(2) of
ERISA) (the "Pension Plans"): (i) each Pension Plan which is
intended to be "qualified" within the meaning of Section
401(a) of the Code has been determined to be so qualified by
the IRS, and the Seller has no knowledge of any
circumstances that might result in the revocation of any
such qualification, and each related trust is exempt from
taxation under Section 501(a) of the Code; (ii) the present
value of all benefits vested and all benefits accrued under
each Pension Plan which is subject to Title IV of ERISA did
not, in each case, as of the last applicable annual
valuation date (as indicated on Schedule 2.19(a)), exceed
the value of the assets of the Pension Plan allocable to
such vested or accrued benefits; (iii) the Seller has no
knowledge of and has not engaged in any "prohibited
transaction," as such term is defined in Section 4975 of the
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Code or Section 406 of ERISA, which could subject any
Pension Plan or associated trust, or the Seller or any of
the Seller Subsidiaries, to any material tax or penalty;
(iv) no defined benefit Pension Plan or any trust created
thereunder has been terminated, nor has there been any
notice of any "reportable event" (as that term is defined in
Section 4043 of ERISA) that has been required to be filed
with respect to any Pension Plan during the three (3) years
preceding the date of this Agreement; and (v) no Pension
Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in
Section 302 of ERISA (whether or not waived). No Pension
Plan is a "multiemployer plan," as that term is defined in
Section 3(37) of ERISA.
(d) Except as disclosed in Schedule 2.19(d) or as reflected on
the Seller Financial Statements or the notes thereto,
neither the Seller nor any of the Seller Subsidiaries has
any liability for any post-retirement health, medical or
similar benefit of any kind whatsoever, except as required
by statute or regulation.
(e) Neither the Seller nor any of the Seller Subsidiaries has
any material liability under ERISA or the Code as a result
of its being a member of a group described in Sections
414(b), (c), (m) or (o) of the Code.
(f) Except as disclosed in Schedule 2.19(f), neither the
execution nor delivery of this Agreement, nor the
consummation of any of the transactions contemplated hereby,
will (i) result in any payment (including, without
limitation, severance, unemployment compensation or golden
parachute payment) becoming due to any director or employee
of the Seller or any of the Seller Subsidiaries from any of
such entities, (ii) increase any benefit otherwise payable
under any of the Seller Employee Plans or (iii) result in
the acceleration of the time of payment of any such benefit.
The Seller shall use its best efforts to insure that no
amounts paid or payable by the Seller, the Seller
Subsidiaries or Buyers to or with respect to any employee or
former employee of the Seller or any of the Seller
Subsidiaries will, taken by itself, fail to be deductible
for federal income tax purposes by reason of Section 280G of
the Code.
(g) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have
been duly authorized by all requisite action and do not and
will not (i) violate the terms of any of the Seller's
Pension Plans; (ii) violate any provision of ERISA or the
Code including, but not limited to, Code Section 409(e);
(iii) constitute a "prohibited transaction," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA,
for which there is no exemption available to Seller; or (iv)
cause any Pension Plan to cease to be "qualified" within the
meaning of Section 401(a) of the Code.
2.20 Conduct of Seller to Date. Except as set forth in Schedule 2.20, from
and after September 30, 1998 through the date of this Agreement: (i) Seller and
the Seller Subsidiaries have conducted their respective businesses in the
ordinary and usual course consistent with past practices; (ii) neither Seller
nor any of the Seller Subsidiaries has issued, sold, granted, conferred or
awarded any of its Equity Securities, or any corporate debt securities which
would be classified under GAAP as long-term debt on the balance sheets of Seller
or the Seller Subsidiaries; (iii) Seller has not effected any stock split or
adjusted, combined, reclassified or otherwise changed its capitalization; (iv)
Seller has not declared, set aside or paid any dividend (other than its regular
quarterly dividends) or other distribution in respect of its capital stock, or
purchased, redeemed, retired, repurchased or exchanged, or otherwise acquired or
disposed of, directly or indirectly, any of its Equity Securities, whether
pursuant to the terms of such Equity Securities or otherwise; (v) neither Seller
nor any of the Seller Subsidiaries has incurred any obligation or liability
(absolute or contingent), except liabilities incurred in the ordinary course of
business or in connection with the transactions contemplated by this Agreement,
or subjected to Lien any of its assets or properties other than in the ordinary
course of business consistent with past practice; (vi) neither Seller nor any of
the Seller Subsidiaries has discharged or satisfied any Lien or paid any
obligation or liability (absolute or contingent), other than in the ordinary
course of business; (vii) neither Seller nor any of the Seller Subsidiaries has
sold, assigned, transferred, leased, exchanged, or otherwise disposed of any of
its properties or assets other than for a fair consideration in the ordinary
course of business; (viii) except as required by contract or law, neither Seller
nor any of the Seller Subsidiaries has (A) increased the rate of compensation
of, or paid any bonus to, any of its directors, officers, or other employees,
except in accordance with existing policy, (B) entered into any new, or amended
or supplemented any existing, employment, management, consulting, deferred
compensation, severance, or other similar contract, (C) entered into,
terminated, or substantially modified any of the Seller Employee Plans or (D)
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agreed to do any of the foregoing; (ix) neither Seller nor any Seller Subsidiary
has suffered any material damage, destruction, or loss, whether as the result of
fire, explosion, earthquake, accident, casualty, labor trouble, requisition, or
taking of property by any Regulatory Authority or Additional Regulatory
Authority, flood, windstorm, embargo, riot, act of God or the enemy, or other
casualty or event, and whether or not covered by insurance; (x) neither Seller
nor any of the Seller Subsidiaries has canceled or compromised any debt, except
for debts charged off or compromised in accordance with the past practice of
Seller and the Seller Subsidiaries; and (xi) neither Seller nor any of the
Seller Subsidiaries has entered into any material transaction, contract or
commitment outside the ordinary course of its business, except in connection
with the transactions contemplated by this Agreement.
2.21 Absence of Undisclosed Liabilities. Except as set forth on Schedule
2.21(a), neither Seller nor any of the Seller Subsidiaries has any debts,
liabilities or obligations, whether accrued, absolute, contingent or otherwise
and whether due or to become due, which would be required to be reflected in the
Seller Financial Statements or the notes thereto in accordance with GAAP,
except:
(a) debts, liabilities or obligations reflected on the Seller
Financial Statements and the notes thereto;
(b) operating leases reflected on Schedule 2.11(b); and
(c) debts, liabilities or obligations incurred in the ordinary
and usual course of their respective businesses, which are not for
breach of contract, breach of warranty, torts, infringements or
lawsuits and which do not have a Material Adverse Effect on Seller.
2.22 Proxy Statement, Etc. None of the information regarding Seller or any
of the Seller Subsidiaries to be supplied by Seller for inclusion or included in
(i) the proxy statement to be mailed to Seller's stockholders in connection with
the Special Meeting to be called to consider this Agreement and the Merger, as
such Proxy Statement may be amended or supplemented (the "Proxy Statement"), or
(ii) any other documents to be filed with any Regulatory Authority or Additional
Regulatory Authority in connection with the transactions contemplated hereby, at
the respective times such documents are filed with any Regulatory Authority or
Additional Regulatory Authority and, with respect to the Proxy Statement, when
mailed, will contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading or, in the case
of the Proxy Statement, at the time of the Special Meeting of Seller's
stockholders referred to in Section 5.3, will contain any untrue statement of a
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Special Meeting. All documents which Seller or any of the Seller
Subsidiaries are responsible for filing with any Regulatory Authority or
Additional Regulatory Authority in connection with the Merger will comply as to
form in all material respects with the provisions of applicable law.
2.23 Registration Obligations. Neither Seller nor any of the Seller
Subsidiaries is under any obligation, contingent or otherwise, which will
survive the Effective Time, by reason of any agreement to register any
transaction involving any of its securities under the Securities Act.
2.24 Tax, Regulatory and Accounting Matters. Neither Seller nor any of the
Seller Subsidiaries has taken or agreed to take any action or has any knowledge
of any fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 6.1(b) or the consummation of the transactions
contemplated by this Agreement.
2.25 Brokers and Finders. Except for ABN AMRO Incorporated, neither Seller
nor any of the Seller Subsidiaries nor any of their respective officers,
directors or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for
Seller or any of the Seller Subsidiaries in connection with this Agreement or
the transactions contemplated hereby.
2.26 Investments. All investment securities owned by the Seller and any of
the Seller Subsidiaries are suitable investments under the Federal Financial
Institutions Examination Council ("FFIEC") Supervisory Policy statement on
securities activities.
2.27 Accuracy of Information. The statements contained in this Agreement,
the Schedules and any other written document executed and delivered by or on
behalf of Seller pursuant to the terms of this Agreement are true and correct as
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of the date hereof or as of the date delivered in all material respects, and
such statements and documents do not omit to state a material fact necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
2.28 Year 2000 Compliance. Both Seller and the Seller Subsidiaries have
complied with regulatory bulletins issued through October 31, 1998 by the FFIEC
on the subject of Year 2000 Compliance. The Seller and the Seller Subsidiaries
have exercised ordinary care in assessing Year 2000 Compliance status of all
material computer software, firmware and hardware used in the ordinary course of
business as set forth on Schedule 2.28.
2.29 Insider Loans. Set forth on Schedule 2.29 is a list of any and all
outstanding notes or other evidences of indebtedness executed and delivered by
insiders of the Seller or the Seller Subsidiaries to the Seller or the Seller
Subsidiaries (as the term "insiders" is hereinafter defined). On the Closing
Date, the Sellers shall also provide BFC with a list of insider loans
outstanding as of the Closing Date. For purposes of this Section 2.29, "insider"
shall mean any officer or director of the Seller or any of the Seller
Subsidiaries or any shareholder of the Seller owning 5% or more of the Seller's
stock or any members of the immediate families or related interests of such
officers, directors or shareholders, as the terms "immediate families" and
"related interests" are defined in Sections 215.2(g) and (n) of Regulation O
promulgated by the Federal Reserve Board (12 C.F.R. Sections 215.2(g) and (n)).
2.30 Wisconsin Takeover Statute; Rights of Dissenting Stockholders.
(a) As of the date hereof, and at all times on or prior to the
Effective Date: (i) Sections 180.1140 through 180.1144 of the WBCL
(inclusive) are, and shall be, inapplicable to the Merger and the
transactions contemplated by this Agreement based on BFC's
representation to Seller that BFC does not meet the definition of an
"interested shareholder" under Section 180.1140(8) of the WBCL and the
Merger and the transactions contemplated by this Agreement do not
constitute a "business combination" under Section 180.1140(4) of the
WBCL; (ii) Section 180.1150 of the WBCL is, and shall be, inapplicable
to the Merger and the transactions contemplated by this Agreement
because the Merger and the transactions contemplated by this Agreement
qualify as a merger under Section 180.1101 of the WBCL; and (iii)
Chapter 552 of the Wisconsin Statutes is, and shall be, inapplicable
to the Merger and the transactions contemplated by this Agreement.
(b) As of the date hereof, no holder of Seller Common Stock or
Options has any rights under Sections 180.1301 through 180.1331
(inclusive) of the WBCL to dissent from the Merger and to obtain the
fair value of their shares of Seller Common Stock.
2.31 Treatment of Outstanding Options. Set forth on Schedule 2.31 is a list
of Options outstanding as of the date of this Agreement showing the number of
shares of Seller Common Stock underlying each Option and identifying the person
holding such Option. With respect to the Options outstanding as of the date of
this Agreement, all of such Options, whether or not then vested or exercisable
in accordance with their terms, will become exercisable in full at or
immediately before the Effective Time. With respect to employees of the Seller
who hold Options and who receive Option Settlement Amounts as provided in
Section 5.11, the Option Settlement Amounts will be reportable on a Form W-2 to
be filed with the IRS, and, with respect to non-employees of the Seller who hold
Options and who receive Option Settlement Amounts as provided in Section 5.11,
the Option Settlement Amounts will be reportable on a Form 1099 filed with the
IRS. There are no "limited rights" outstanding under the Seller Stock Option
Plan, as such term is defined in the Seller Stock Option Plan.
2.32 Opinion of Financial Advisor. Seller has received the opinion of ABN
AMRO Incorporated dated the date of this Agreement, to the effect that, subject
to the terms, conditions and qualifications set forth therein, the consideration
set forth herein to be received in the Merger by the shareholders of the Seller
is fair to the shareholders of the Seller from a financial point of view.
2.33 Approvals. To the best knowledge of Seller, it is not aware of any
reason why the Regulatory Authorities or any Additional Regulatory Authority
whose approval is required would not provide the approvals necessary to permit
Seller and Buyers to consummate the Merger and the other transactions
contemplated hereunder in the manner provided herein.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
As an inducement to Seller to enter into and perform its obligations under this
Agreement, the Buyers hereby represent and warrant to Seller as follows:
3.1 Organization and Authority. BFC and Merger Sub are each corporations
duly organized, validly existing and in good standing under the laws of the
State of Minnesota and Wisconsin, respectively, are each qualified to do
business and are each in good standing in all jurisdictions where its ownership
or leasing of property or the conduct of its business requires it to be so
qualified, except where the failure to be so qualified would not have a Material
Adverse Effect on BFC or the Merger Sub, and each has the corporate power and
authority to own its properties and assets and to carry on its business as it is
now being conducted. BFC is registered as a bank holding company with the
Federal Reserve Board under the BHCA.
3.2 Authorization.
(a) BFC and Merger Sub each has the corporate power and authority
to enter into this Agreement and to carry out their respective
obligations hereunder. The execution, delivery and performance of this
Agreement by BFC and Merger Sub and the consummation by BFC and Merger
Sub of the transactions contemplated hereby have been duly authorized
by all requisite corporate action of BFC and Merger Sub. Subject to
the receipt of such approvals of the Regulatory Authorities and the
Additional Regulatory Authorities as may be required by statute or
regulation, this Agreement is a valid and binding obligation of BFC
and Merger Sub enforceable against each in accordance with its terms,
except as (i) the enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, and similar laws now or
hereafter in effect relating to the enforcement of creditors' remedies
generally and except to the extent equitable principles may limit the
right to specific performance or other equitable remedies, and (ii)
considerations of public policy may affect the enforceability of the
indemnification provisions thereof. The execution, delivery and
performance of this Agreement by Buyers and the consummation by Buyers
of the transactions contemplated hereby in accordance with and subject
to the terms of this Agreement have been duly authorized by the
respective Boards of Directors of BFC and Merger Sub. BFC is not
required under applicable law to submit the Merger and the Merger
Agreement to its stockholders for approval.
(b) Neither the execution, delivery and performance by BFC and
Merger Sub of this Agreement, nor the consummation by BFC and Merger
Sub of the transactions contemplated hereby, nor compliance by BFC and
Merger Sub with any of the provisions hereof, will (i) violate,
conflict with or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) or result in the termination of,
or accelerate the performance required by, or result in a right of
termination or acceleration of, or result in the creation of, any Lien
upon any of the properties or assets of BFC or Merger Sub under any of
the terms, conditions or provisions of (x) their respective Articles
of Incorporation or By-Laws, or (y) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which BFC or Merger Sub is a party or by
which they may be bound, or to which BFC or Merger Sub or any of their
respective properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in Section
3.2(c), violate any judgment, ruling, order, writ, injunction, decree,
statute, rule or regulation applicable to BFC or Merger Sub or any of
their respective properties or assets; other than violations,
conflicts, breaches, defaults, terminations, accelerations or Liens
which would not have a Material Adverse Effect on BFC.
(c) Other than in connection with or in compliance with the
provisions of the WBCL, the Securities Act, the Exchange Act, the
securities or blue sky laws of the various states or filings,
consents, reviews, authorizations, approvals or exemptions required
under the BHCA, the FDI Act or any required approvals of the Federal
Reserve Board, the FDIC or any other Regulatory Authority or
Additional Regulatory Authority, no notice to, filing with, exemption
or review by, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by BFC and Merger
Sub of the transactions contemplated by this Agreement.
3.3 Brokers and Finders. Neither BFC, Merger Sub nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
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commissions or finder's fees, and no broker or finder has acted directly or
indirectly for BFC or Merger Sub in connection with this Agreement or the
transactions contemplated hereby.
3.4 Accuracy of Information. The statements contained in this Agreement,
the Schedules and any other written document executed and delivered by or on
behalf of Buyers pursuant to the terms of this Agreement are true and correct as
of the date hereof in all material respects, and such statements and documents
do not omit to state a material fact necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
3.5 No Violation. Except as set forth on Schedule 3.5, neither the
execution and delivery of this Agreement by the Buyers, the consummation by
Buyers of the transactions contemplated hereby, nor compliance by the Buyers
with any of the terms or provisions hereof, will (a) violate any provision of
the respective Articles of Incorporation or Bylaws of Buyers, or (b) assuming
that the consents and approvals referred to in Section 3.6 hereof are duly
obtained, (i) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Buyers, other than violations
that would not have a Material Adverse Effect on Buyers, or (ii) violate,
conflict with, result in a breach of any material provision of or the loss of
any material benefit, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any material Lien upon any
of the respective properties or assets of Buyers or any of their Subsidiaries
under any of the material terms, conditions or provision of any material note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which either of Buyers is a party, except for such
violations, conflicts, breaches, defaults, terminations, cancellations,
accelerations, or creations which, either individually or in the aggregate,
would not have or be reasonably likely to have a Material Adverse Effect on
Buyers.
3.6 Consents and Approvals. Except for (a) the filing of applications,
notices or other documents necessary to obtain, and the receipt of, regulatory
approvals, (b) the filing with the SEC of any necessary registration statement,
(c) the filing of Articles of Merger with the WDFI pursuant to the provisions of
the WBCL, (d) the approval of the Merger, the Merger Agreement and any and all
transactions thereunder by Seller's Board of Directors and the holders of the
requisite number of shares of the Seller Common Stock, (e) the filing by Seller
of its proxy materials with the SEC and the successful conclusion of the review
of Seller's proxy materials by the SEC, and (f) such filing, authorizations or
approvals as may be set forth on Schedule 3.6, no consents or approvals of or
filings or registrations with any governmental entity or with any third party
are necessary in connection with the execution and delivery by Buyers of this
Agreement, or the consummation by Buyers of the transactions contemplated
herein.
3.7 Litigation. As of the date of this Agreement, except as set forth on
Schedule 3.7 or otherwise disclosed in BFC's Annual Report on Form 10-K for the
year ended December 31, 1997 as filed with the SEC (the "1997 Annual Report") or
its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1998 as filed with the SEC (collectively, the "1998 Quarterly
Reports"), there are no legal, administrative or other actions, suits,
proceedings or investigations of any kind or nature pending or, to the best
knowledge of BFC, threatened against Buyers that challenge the validity or
propriety of the transactions contemplated by this Agreement or which would have
a Material Adverse Effect on BFC. Neither BFC nor its Subsidiaries is subject
to, or in default with respect to, nor are any of its or their assets subject
to, any outstanding judgment, order or decree of any court or of any
governmental agency or instrumentality that has or is reasonably expected to
have a Material Adverse Effect on BFC.
3.8 Financial Statements.
(a) BFC has furnished to the Seller true, correct and complete
copies of the audited Consolidated Statement of Financial Condition of
BFC as of the fiscal year ended December 31, 1997 and the related
Consolidated Statements of Income, Consolidated Statements of Changes
in Shareholders' Equity and the Consolidated Statements of Cash Flows
for the fiscal year ended December 31, 1997, including the respective
notes thereto, together with the reports of its accountants relating
thereto (the "Buyer Financial Statements"). Such Buyer Financial
Statements fairly represent the consolidated financial position of BFC
as of and for the periods ended on their respective dates and the
consolidated operating results and changes in financial position of
BFC for the indicated periods in conformity with GAAP applied on a
consistent basis.
(b) BFC has furnished to the Seller copies of its 1997 Annual
Report and 1998 Quarterly Reports and will furnish to the Seller
copies of its Annual Report on Form 10-K as filed with the SEC for the
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year ended December 31, 1998 and its Quarterly Reports on Form 10-Q as
filed with the SEC for each quarterly period subsequent to December
31, 1998 until the Closing Date ("Subsequent Buyer Financial
Statements"). Since September 30, 1998, to the best knowledge of BFC,
there have not been any material adverse changes in BFC's consolidated
financial condition, assets, liabilities or business, other than
changes in the ordinary course of business.
(c) All of the Buyer Financial Statements have been, and, with
respect to the Subsequent Buyer Financial Statements, will be,
prepared in accordance with GAAP, utilizing accounting practices
consistent with prior years except as otherwise disclosed, and comply
or will comply with applicable accounting requirements and with the
rules and regulations of the SEC with respect thereto. All of the
Buyer Financial Statements present fairly, and all of the Subsequent
Buyer Financial Statements will present fairly, the financial position
of BFC and its Subsidiaries taken as a whole and the results of its
and their operations and changes in its and their financial position
as of and for the periods ending on their respective dates. The books
and records of BFC and its Subsidiaries have been and are being
maintained in all material respects in accordance with GAAP and all
other applicable legal and accounting requirements and reflect only
actual transactions. Except with respect to this Agreement and the
transactions contemplated herein, there are, and with respect to the
Subsequent Buyer Financial Statement will be, no agreements, contracts
or other instruments to which BFC or its Subsidiaries are a party or
by which it or they or (to the best knowledge of BFC) any of the
officers, directors, employees or shareholders of the Buyers or its
Subsidiaries have rights which would have a Material Adverse Effect on
the consolidated financial position of BFC or the financial position
of its Subsidiaries which are not disclosed herein or reflected in the
Buyer Financial Statements and the Subsequent Buyer Financial
Statements.
3.9 Community Reinvestment Act Compliance. Except as set forth on Schedule
3.9, BFC and BFC's Subsidiaries that are banks are in compliance, in all
material respects, with the applicable provisions of the CRA. There is no bank
Subsidiary of BFC which has, as of the date of this Agreement, a CRA rating
which is less than "satisfactory." BFC is not aware of any facts or
circumstances related to any planned or threatened CRA protest of the
transactions contemplated by this Agreement.
3.10 Tax, Regulatory and Accounting Matters. BFC has not taken or agreed to
take any action and, except as Buyers may have otherwise disclosed to Seller in
writing as of or prior to the date of this Agreement, does not have knowledge of
any fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 6.1(b) or the consummation of the transactions
contemplated by this Agreement.
3.11 Proxy Statement, Etc. None of the information regarding BFC or any of
its Subsidiaries to be supplied by BFC for inclusion or included in (i) the
Proxy Statement or (ii) any other documents to be filed with any Regulatory
Authority or Additional Regulatory Authority in connection with the transactions
contemplated hereby, at the respective times such documents are filed with any
Regulatory Authority or Additional Regulatory Authority and, with respect to the
Proxy Statement, when mailed, will contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading or, in the case of the Proxy Statement, at the time of the
Special Meeting of Seller's stockholders referred to in Section 5.3, will
contain any untrue statement of a material fact, or omit to state a material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of any proxy for the Special Meeting. All documents
which BFC or any of its Subsidiaries are responsible for filing with any
Regulatory Authority or Additional Regulatory Authority in connection with the
Merger will comply as to form in all material respects with the provisions of
applicable law.
3.12 Approvals. To the best knowledge of Buyers, and except as Buyers may
have otherwise disclosed to Seller in writing as of or prior to the date of this
Agreement, they are not aware of any reason why the Regulatory Authorities or
any Additional Regulatory Authority whose approval is required would not provide
the approvals necessary to permit Seller and Buyers to consummate the Merger and
the other transactions contemplated hereunder in the manner provided herein.
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ARTICLE IV
CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Businesses Prior to the Effective Time. During the period
from the date of this Agreement to the Effective Time, Seller and each of the
Seller Subsidiaries shall conduct their respective businesses according to the
ordinary and usual course consistent with past and current practices and shall
use their best efforts to maintain and preserve their business organization,
employees and advantageous business relationships and retain the services of
their officers and key employees.
4.2 Forbearances of Seller. Except as set forth in Schedule 4.2, without
the prior written consent of Buyers (unless otherwise specifically noted in this
Section 4.2), during the period from the date of this Agreement to the Effective
Time, Seller shall not and shall not permit any of the Seller Subsidiaries to:
(a) declare, set aside or pay any dividends or other
distributions, directly or indirectly, in respect of its capital stock
(other than dividends from any of the Seller Subsidiaries to Seller or
to another of the Seller Subsidiaries), except that between the date
of this Agreement and the Closing Date, Seller may declare and pay
regular cash dividends of not more than $0.17 per share on the Seller
Common Stock on each of January 28, 1999, April 22, 1999 and July 29,
1999 (but only if such dates occur before the Closing Date);
(b) enter into or amend any employment, severance or similar
agreement or arrangement with any director, officer or employee, or
materially modify any of the Seller Employee Plans or grant any salary
or wage increase or materially increase any employee benefit
(including incentive or bonus payments), except (i) normal individual
increases in compensation to employees consistent with past practice,
(ii) subject to the limitation of Section 5.8(b), discretionary
contributions to the ESOP made solely for the purpose of retiring the
ESOP loan to the Seller, or (iii) as required by law or contract;
(c) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement in
principle with respect to, any merger, consolidation or business
combination (other than the Merger), any acquisition of a material
amount of assets or securities, any disposition of a material amount
of assets or securities or any release or relinquishment of any
material contract rights;
(d) propose or adopt any amendments to its Certificate or
Articles of Incorporation or other charter document or By-Laws or to
the Certificate or Articles of Incorporation or other charter document
or By-Laws of any of the Seller Subsidiaries;
(e) issue, sell, grant, confer or award any of its Equity
Securities (except that the Seller may issue up to 7,635 shares of
Seller Common Stock upon exercise of the Seller Stock Options
outstanding on the date of this Agreement) or effect any stock split
or stock dividend or adjust, combine, reclassify or otherwise change
its capitalization as it existed on the date of this Agreement;
(f) purchase, redeem, retire, repurchase or exchange, or
otherwise acquire or dispose of, directly or indirectly, any of its
Equity Securities, whether pursuant to the terms of such Equity
Securities or otherwise;
(g) make or commit to make a loan or grant an extension of credit
to any borrower (including any renewals of existing loans or
additional advances on loans to existing borrowers of the Seller or
any of the Seller Subsidiaries) which will result in the principal
balance owing to the Seller or any of the Seller Subsidiaries in the
aggregate to exceed $150,000 for any secured loan or extension of
credit or $25,000 for any unsecured loan or extension of credit;
(h) take any action that has the reasonable and foreseeable
likelihood of materially impeding or delaying the consummation of the
transactions contemplated by this Agreement or the ability of Buyers
or Seller to obtain any approval of any Regulatory Authority or
Additional Regulatory Authority required for the transactions
contemplated by this Agreement or to perform its covenants and
agreements under this Agreement;
(i) obtain any advances from the FHLB of Chicago with maturities
in excess of ninety (90) days or, other than in the ordinary course of
business consistent with past practice, incur any other indebtedness
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for borrowed money or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity;
(j) except as provided in Schedule 4.2(j) in connection with
Seller's continuation of its practice of selling fixed rate loans that
are generated by the Seller Subsidiaries, sell any portion or all of
the Seller's or any of the Seller Subsidiaries' loan or investment
portfolios, it being understood that there have been no sales of all
or any portion of the loan or bond portfolios from September 30, 1998
to the date hereof; or invest any of the Seller's or any of the Seller
Subsidiaries' assets in any marketable securities other than U.S.
Treasury or U.S. Agency securities with a maturity of two years or
less or GNMA adjustable rate mortgage securities purchased at a dollar
price not to exceed 101% of par value;
(k) make loans to "insiders," as that term is defined in Section
2.29, except for renewals of outstanding indebtedness in the ordinary
course of business;
(l) fail to recognize loan losses or fund any of the Seller
Subsidiaries' loan loss reserve or allowance except (i) in the
ordinary course of business, consistent with past practices and the
policies of the Seller and the Seller Subsidiaries, (ii) in accordance
with GAAP and (iii) in accordance with regulatory guidelines, policies
and regulations or as required pursuant to any regulatory examination
of any of the Seller Subsidiaries;
(m) fail to accrue income and expenses on the Seller's and any of
the Seller Subsidiaries' books in the ordinary course of business and
in accordance with GAAP;
(n) fail to disclose in writing to BFC any facts or circumstances
which cause the risk rating for any extension of credit or
participation owned by the Seller or any of the Seller Subsidiaries
with a principal balance outstanding in excess of $100,000 to be
adversely affected;
(o) make any capital expenditures or commitment for capital
expenditures for the Seller and the Seller Subsidiaries, except in the
ordinary course of business which individually exceed $20,000 or, in
the aggregate, exceed $50,000;
(p) enter into or amend any other contract, agreement,
understanding, arrangement or commitment not already described or
addressed in this Section 4.2 involving an obligation by Seller or any
of the Seller Subsidiaries of more than $25,000, other than contracts
entered into in respect of deposit agreements; or
(q) agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction or
intentionally take or omit to take any other act which would make any
of the representations and warranties in Article II of this Agreement
untrue or incorrect in any material respect if made anew after
engaging in such activity, entering into such transaction, or taking
or omitting such other act.
4.3 No Solicitation.
(a) Seller shall not, directly or indirectly, through any
officer, director, employee, financial advisor, representative or
agent of such party (i) solicit, initiate, or encourage any inquiries
or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, business
combination, sale of substantial assets, sale of shares of capital
stock (including, without limitation, by way of a tender offer) or
similar transaction involving Seller or any Seller Subsidiaries, other
than the transactions contemplated by this Agreement (any of the
foregoing inquiries or proposals being referred to in this Agreement
as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions with any person (or any group of persons) other than BFC
or its affiliates (a "Third Party") concerning, or provide any
non-public information to any person or entity relating to, any
Acquisition Proposal, or (iii) agree to or recommend any Acquisition
Proposal. However, nothing contained in this Agreement shall prevent
Seller or its Board of Directors from (A) furnishing non-public
information to, or entering into discussions and negotiations with,
any person or entity in connection with an unsolicited bona fide
written proposal for an Alternative Transaction (as defined below) by
such person or entity or modifying or withdrawing its recommendation
with respect to the transactions contemplated hereby or recommending
an unsolicited bona fide written proposal for an Alternative
Transaction to the stockholders of Seller, if (1) a Third Party has
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made a written proposal to the Board of Directors of Seller to
consummate an Alternative Transaction, which proposal identifies a
price or range of values to be paid for the outstanding securities or
substantially all of the assets of Seller, (2) the Board of Directors
of Seller believes in good faith, after consultation with its
financial advisor, that such Alternative Transaction is reasonably
capable of being completed on the terms proposed and would, if
consummated, result in a transaction more favorable than the
transaction contemplated by this Agreement (a "Superior Proposal"),
(3) the Board of Directors of Seller determines in good faith, based
on the advice of outside legal counsel, that the failure to take such
action would be inconsistent with its fiduciary duties under
applicable law, and (4) prior to furnishing such non-public
information to, or entering into discussions and negotiations with,
such person or entity, Seller's Board of Directors receives from such
person or entity an executed confidentiality and standstill agreement
with material terms no less favorable to such party than those
contained in the Confidentiality Agreement dated July 20, 1998 between
BFC and Seller (the "Confidentiality Agreement"); or (B) complying
with Rule 14e-2 under the Exchange Act with regard to an Acquisition
Proposal. Seller agrees not to release any Third Party from, or waive
any provision of any confidentiality and standstill agreement between
it and another person who has made, or who may reasonably be
considered likely to make, an Acquisition Proposal, unless the Board
of Directors of Seller determines in good faith, based on the written
advice of outside legal counsel, that the failure to take such action
would be inconsistent with its fiduciary duties under applicable law.
(b) Seller shall notify BFC immediately after receipt by Seller
or any of its advisors of any Acquisition Proposal or any request for
non-public information in connection with an Acquisition Proposal or
for access to the properties, books or records of such party by any
person or entity that informs such party that it is considering
making, or has made, an Acquisition Proposal. Such notice shall be
made orally and in writing and shall indicate the identity of the
offeror and the terms and conditions of such proposal, inquiry or
contact. Notwithstanding the foregoing, Seller shall not accept or
enter into any agreement concerning a Superior Proposal for a period
of at least ten (10) business days after BFC's receipt of the
notification of the terms thereof pursuant to the first sentence of
this Section 4.3(b), during which period BFC shall have the
opportunity to match the terms and conditions contained in such
Superior Proposal.
(c) As used in this Agreement, the term "Alternative Transaction"
means (i) a transaction pursuant to which any Third Party acquires
more than 30% of the outstanding shares of Seller Common Stock
pursuant to a tender offer or exchange offer or otherwise, (ii) a
merger or other business combination involving Seller pursuant to
which any Third Party (or the stockholders of a Third Party) acquires
more than 30% of the outstanding shares of Seller Common Stock, as the
case may be, or the entity surviving such merger or business
combination, or (iii) any other transaction pursuant to which any
Third Party acquires control of assets (including, for this purpose,
the outstanding Equity Securities of the Seller Subsidiaries and the
entity surviving any merger or business combination) of Seller having
a fair market value (as determined by the Board of Directors of
Seller, in good faith) equal to more than 30% of the fair market value
of all of the assets of Seller and the Seller Subsidiaries, taken as a
whole, immediately prior to such transaction.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Access and Information. Seller shall afford BFC and BFC's accountants,
counsel and other representatives, upon reasonable notice, full access during
normal business hours, during the period prior to the Effective Time, to all the
properties, books, contracts, commitments and records of Seller and the Seller
Subsidiaries and, during such period, each shall furnish promptly to BFC (i) a
copy of each report, schedule and other document filed or received by it during
such period pursuant to the requirements of federal and state securities laws
and (ii) all other information concerning its business, properties and personnel
as BFC may reasonably request. BFC shall, and shall cause its advisors and
representatives and Merger Sub to, (A) hold confidential all information
obtained in connection with any transaction contemplated hereby with respect to
the Seller which is not otherwise public knowledge, (B) in the event of a
termination of this Agreement, return all documents (including copies thereof)
obtained hereunder from the Seller or any of the Seller Subsidiaries to the
Seller or the Seller Subsidiaries and (C) use its best efforts to cause all
information obtained pursuant to this Agreement or in connection with the
negotiation of this Agreement to be treated as confidential and not use, or
knowingly permit others to use, any such information unless such information
becomes generally available to the public.
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5.2 Regulatory Matters.
(a) Within forty-five (45) days of the date of this Agreement,
BFC shall file an application for approval of the Merger with the
Federal Reserve Board and such additional regulatory authorities as
may require an application.
(b) Seller and Buyers shall cooperate and use their respective
best efforts to prepare all documentation, to effect all filings and
to obtain all permits, consents, approvals and authorizations of all
third parties, Regulatory Authorities and Additional Regulatory
Authorities necessary to consummate the transactions contemplated by
this Agreement and, as and if directed by BFC, to consummate such
other transactions by and among BFC's Subsidiaries and the Seller
Subsidiaries concurrently with or following the Effective Time;
provided, however, that such actions do not (i) materially impede or
delay the receipt of any approval referred to in Section 6.1(b); or
(ii) materially impede or delay the consummation of the transactions
contemplated by this Agreement.
5.3 Proxy Statement; Special Meeting.
(a) As promptly as practical after the execution of this
Agreement, Seller shall prepare and file with the SEC the Proxy
Statement under the Exchange Act, and it then shall use its reasonable
best efforts to have the Proxy Statement cleared by the SEC as soon as
practical after such filing. The Buyers and Seller shall cooperate
with each other in preparing the Proxy Statement, and Seller shall
promptly notify BFC of the receipt of any comments of the SEC with
respect to the Proxy Statement and of any requests by the SEC for any
amendment or supplement thereto or for additional information and
shall promptly provide to BFC copies of all correspondence between the
Seller or any representative of the Seller and the SEC. Seller shall
give BFC and its counsel the opportunity to review the Proxy Statement
prior to its being filed with the SEC and shall give BFC and its
counsel the opportunity to review all amendments and supplements to
the Proxy Statement and all responses to requests for additional
information and replies to comments prior to their being filed with,
or sent to, the SEC. Each of the Buyers and Seller agrees to use all
reasonable best efforts, after consultation with the other parties
hereto, to respond promptly to any and all such comments of and
requests by the SEC and to cause the Proxy Statement and all required
amendments and supplements thereto to be mailed to the holders of
shares of Seller Common Stock entitled to vote at the Special Meeting.
(b) Subject to the provisions of Section 4.3, the Proxy Statement
shall include the recommendation of the Board of Directors of Seller
in favor of adoption of this Agreement and the Merger; provided that
the Board of Directors of Seller may modify or withdraw such
recommendation if Seller's Board of Directors believes in good faith,
based on the advice of outside legal counsel, that the failure to
modify or withdraw such recommendation would be inconsistent with its
fiduciary duties to Seller's stockholders under applicable law.
(c) Seller shall call the Special Meeting of its stockholders to
be held as promptly as practicable for the purpose of voting upon this
Agreement and the Merger. Subject to Sections 4.3 and 5.3(b), Seller
shall, through its Board of Directors, recommend to its stockholders
adoption of this Agreement and the Merger and approval of such matters
and shall use its best efforts to hold the Special Meeting as soon as
practicable after the date hereof. Seller shall use its best efforts
to solicit from its stockholders proxies in favor of such matters
unless doing so would be inconsistent with the Seller Board of
Directors' fiduciary duties to its stockholders under applicable law
based on the advice of outside legal counsel.
5.4 Current Information. During the period from the date of this Agreement
to the Closing Date, (i) Seller will promptly furnish BFC with copies of all
monthly and other interim financial statements as the same become available and
shall cause one or more of its designated representatives to confer on a regular
and frequent basis with representatives of BFC and (ii) BFC shall promptly
furnish to the Seller copies of all filings by BFC with the Federal Reserve
Board. Each party shall promptly notify the other party of the following events
immediately upon learning of the occurrence thereof, describing the same and, if
applicable, the steps being taken by the affected party with respect thereto:
(A) the occurrence of any event which could cause any representation or warranty
of such party or any schedule, statement, report, notice, certificate or other
writing furnished by such party to be untrue or misleading in any material
respect; or (B) any Material Adverse Effect.
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5.5 Environmental Reports. Buyers may retain an environmental consultant
to perform, at the Seller's expense, as soon as reasonably practicable, but not
later than thirty (30) days after the date hereof, a phase one environmental
investigation by any firm designated by Buyers, or any of them, (the
"Environmental Firm") on all real property owned, leased or operated by Seller
or any of the Seller Subsidiaries as of the date hereof, including, without
limitation, other real estate owned. Within one week of Buyers' receipt of the
phase one report, Buyers shall provide a copy of the full report to the Seller.
If the results of the phase one investigation indicate, in Buyers' reasonable
opinion, that additional investigation is warranted, Buyers may perform a phase
two subsurface investigation or investigations by the Environmental Firm on
properties deemed to warrant such additional study. The cost of any such phase
two investigation shall be paid 50 percent by Seller and 50 percent by Buyers.
Buyers shall perform any such phase two investigation as soon as reasonably
practicable after receipt of the phase one report(s) for such properties and, in
any event, shall notify Seller and the Environmental Firm within fifteen (15)
days after receipt of the phase one report that the Environmental Firm should
promptly commence any such phase two investigation. Within one week of Buyers'
receipt of the phase two report, Buyers shall deliver a copy of the full report
to Seller. If, based on the results of the phase two report, the cost of taking
all remedial or other corrective actions and measures (i) required by applicable
law or (ii) recommended by the Environmental Firm in such phase one or two
report or reports, in the aggregate, and after reduction to reflect any federal
and Wisconsin PECFA financial contribution to the expense, exceed the sum of
$300,000, as reasonably estimated by the Environmental Firm, or if the costs of
such actions or measures cannot be so reasonably estimated by the Environmental
Firm to be such amounts or less with any reasonable degree of certainty, Buyers
shall have the right pursuant to Section 7.1(h) hereof, for a period of fifteen
(15) business days following receipt from the Environmental Firm of such
estimate or indication that the cost of such actions and measures cannot be so
reasonably estimated, to terminate this Agreement.
5.6 Expenses. Unless otherwise specifically provided herein, each party
hereto shall pay all of its own fees and expenses incident to the negotiation,
preparation, execution and performance of this Agreement and all applications
filed in connection with seeking regulatory approval of the Agreement and the
filings associated with the Proxy Statement and Special Meeting held pursuant to
the Agreement, including the fees and expenses of their own counsel,
accountants, investment bankers and other experts, whether or not the
transactions contemplated by this Agreement are consummated. Buyers shall be
responsible for fees and expenses related to the services of the Exchange Agent
in connection with the exchange of shares and Options pursuant to Article I
hereof. Seller shall be responsible for payment to ABN AMRO, Inc. for services
rendered as financial advisor to Seller in connection with the transactions
contemplated herein pursuant to its letter agreement dated April 14, 1998.
Seller has or shall establish fee arrangements with all outside counsel,
accountants and other independent experts and advisors, including any proxy
solicitation firm engaged consistent with its obligations under Section 5.3 of
the Agreement, that it has or plans to use in connection with the transactions
contemplated in this Agreement, which agreements provided that such attorneys,
accountants, independent experts, advisors and proxy solicitors will be
compensated only at their normal hourly or per diem rates plus reasonable
out-of-pocket expenses. Seller shall pay all printing expenses and filing fees
incurred in connection with this Agreement and the Proxy Statement and any
materials accompanying the Proxy Statement.
5.7 Miscellaneous Agreements and Consents. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
respective best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement as expeditiously as possible, including, without
limitation, using its respective best efforts to lift or rescind any injunction
or restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby. Each party shall,
and shall cause each of its respective Subsidiaries to, use its best efforts to
obtain consents of all third parties and Regulatory Authorities necessary or, in
the opinion of the parties, desirable for the consummation of the transactions
contemplated by this Agreement.
5.8 Employee Agreements and Benefits.
(a) Stock Options. As provided in Section 1.9, the provisions of
the Seller Stock Option Plan and any other plan, program or
arrangement providing for the issuance or grant of any other interest
in respect of the Equity Securities of Seller or any of the Seller
Subsidiaries shall be deleted and terminated as of the Effective Time.
(b) ESOP. Immediately prior to the Effective Time, Seller shall
make to the ESOP the largest contribution permitted by Section 415 of
the Code, which shall be allocated for the plan year in which the
contribution is made. If the Effective Time is after March 31, 1999,
Seller shall also make the largest contribution permitted by Section
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415 of the Code for the year ended March 31, 2000. However, (i) the
amount of the contributions made pursuant to the preceding two
sentences shall be used by the ESOP only to make payments on the then
remaining unpaid loan balance owed by the ESOP only to the Seller,
(ii) the amount of the foregoing contributions shall in no event
exceed the then remaining unpaid loan balance, and (iii) amounts
payable under the Amendment Agreements shall not be considered for the
purpose of calculating the amount of the foregoing contributions. The
ESOP shall receive the Merger Per Share Consideration in exchange for
its shares of Seller Common Stock. As of the Effective Time, the ESOP
shall be terminated as BFC and the Seller shall mutually determine,
and the remaining unpaid loan balance, if any, between Seller and the
ESOP shall be repaid in full with consideration received by the ESOP
with respect to unallocated shares of Seller Common Stock held in
suspense account under the ESOP. Any cash consideration received with
respect to such Seller Common Stock held in the suspense account under
the ESOP remaining after such repayment shall be allocated to the ESOP
accounts of those employees of Seller and the Seller Subsidiaries who
are ESOP participants and beneficiaries ("ESOP participants") in
proportion to their ESOP account balances and in accordance with the
terms of the ESOP as amended as hereinafter provided with respect to
such termination. The ESOP shall be amended to provide that
participation in the ESOP shall be limited to those who are ESOP
participants as of the Effective Date. All ESOP participants shall
fully vest and have a nonforfeitable interest in their accounts under
the ESOP, determined as of the Effective Time. As soon as practicable
after the receipt of a favorable determination letter from the IRS as
to the tax qualified status of the ESOP upon its termination under
Sections 401(a) and 4975(e) of the Code (the "Final Determination
Letter"), distribution of the benefits under the ESOP shall be made to
ESOP participants. From and after the date of this Agreement, and in
anticipation of such determination and distribution, BFC, Seller and
their respective representatives, prior to the Effective Time, and BFC
and its representatives, after the Effective Time, shall use their
best efforts to apply for and obtain such favorable Final
Determination Letter from the IRS. If BFC, Seller and their respective
representatives, prior to the Effective Time, and BFC and its
representatives, after the Effective Time, reasonably determine that
the ESOP cannot obtain a favorable Final Determination Letter, or that
the amounts held therein cannot be so applied, allocated or
distributed without causing the ESOP to lose its tax qualified status,
the Seller, prior to the Effective Time, and BFC, after the Effective
Time, shall take such action as they may determine with respect to the
distribution of benefits to the ESOP participants, provided that the
assets of the ESOP shall be held or paid for the benefit of the ESOP
participants, and provided further that in no event shall any portion
of the amounts held in the ESOP revert, directly or indirectly, to the
Seller or any affiliate thereof or to BFC or any affiliate or
Subsidiary thereof in a manner contrary to the Code and ERISA.
(c) Seller Pension Plan. All participants in the Northwest
Savings Bank Money Purchase Pension Plan ("Seller Pension Plan") shall
be fully vested as of the Effective Time in their accrued benefits
thereunder, and all amounts contributed by the Seller to the Seller
Pension Plan prior to the Effective Time shall be applied to provide
benefits to participants. As of the Effective Time, the Seller's
participation in the Seller Pension Plan shall terminate.
(d) Benefit Plans. At the Effective Time, each employee of the
Seller and the Seller Subsidiaries (the "Seller Employees") shall
immediately become entitled to participate in each of the Buyers'
employee benefit plans ("Buyers' Plans"), including, without
limitation, any group hospitalization, medical, life and disability
insurance plans, severance plans, qualified retirement, employee stock
ownership and savings plans, stock option plans, and management
recognition plans, in which similarly situated employees of BFC and
its Subsidiaries participate and to the same extent as such employees
of BFC and its Subsidiaries. The period of employment and compensation
of each Seller Employee with the Seller and the Seller Subsidiaries
shall be counted for all purposes (except for purposes of benefit
accrual) under the Buyers' Plans, including, without limitation, for
purposes of vesting and eligibility. Any expenses incurred by a Seller
Employee under the Seller's welfare benefits plans (such as
deductibles or co-payments) shall be counted for all purposes under
the Buyers' Plans. Buyers shall waive any preexisting condition
exclusions for conditions existing on the Effective Time and actively
at work requirements for periods ending on the Effective Time
contained in the Buyers' Plans as they apply to Seller Employees and
former employees and their dependents; provided that the Buyers'
waiver of preexisting conditions shall not extend to any condition
which has prevented a Seller Employee's coverage under comparable
benefit plans of the Seller or the Seller Subsidiaries.
Notwithstanding anything in this Section 5.8 to the contrary, the
participation by the Seller Employees in any of the Buyers' Plans with
respect to which the eligibility of employees of Buyers to participate
is at the sole discretion of BFC and its Subsidiaries, shall be at the
sole discretion of BFC and its Subsidiaries applied in the same manner
as such discretion is applied to similarly situated employees of BFC
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and its Subsidiaries. Also, notwithstanding anything in this Section
5.8 to the contrary, BFC shall have sole discretion with respect to
the determination as to whether to terminate, merge or continue any
employee benefit plan or program of the Seller or any of the Seller
Subsidiaries (other than the ESOP or the Seller Pension Plan);
provided, however, that BFC shall continue to maintain the Seller
Employee Plans other than stock-based incentive plans and the tax
qualified plans of the Seller until the Seller Employees are permitted
to participate in similar Buyers' Plans. At the Effective Time, BFC or
a Subsidiary thereof shall be substituted for the Seller as the
sponsoring employer under those Employee Plans with respect to which
the Seller or a Seller Subsidiary is a sponsoring employer immediately
prior to the Effective Time, and which Employee Plan is assumed by BFC
or its Subsidiary pursuant to the terms of this Agreement, and BFC or
a Subsidiary thereof shall assume and be vested with all of the
powers, rights, duties, obligations, and liabilities previously vested
in the Seller or a Seller Subsidiary with respect to each such plan.
(e) Successors of BFC. The provisions of this Section 5.8 shall
be binding upon and inure to the benefit of any successor to BFC and
its Subsidiaries.
5.9 Publicity. BFC and Seller shall agree on the form and content of the
initial press release regarding the transactions contemplated hereby and
thereafter shall consult with each other before issuing, and use all reasonable
efforts to agree upon, any press release or other public statement with respect
to any of the transactions contemplated hereby and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by law.
5.10 [RESERVED.]
5.11 Tax Returns. The Seller agrees that it will not endeavor to prepare or
file any income tax returns for the Seller or Seller Subsidiaries for any such
income tax returns which have a filing deadline or any extension of such filing
deadline which occurs after the Closing Date.
5.12 Indemnification. It is understood and agreed that after the Effective
Time, BFC shall (and shall cause the Surviving Corporation to) indemnify and
hold harmless, as and to the fullest extent required by Wisconsin law and the
Articles of Incorporation or Bylaws of Seller or any of Seller Subsidiaries, as
applicable and in effect as of the date of this Agreement (the "Indemnification
Provisions"), any individual who is now, or has been at any time prior to the
date of this Agreement, or who becomes prior to the Effective Time, a director
or officer or employee of the Seller or any of the Seller Subsidiaries (the
"Seller Indemnified Parties"), against any losses, claims, damages, liabilities,
costs, expenses (including payment of reasonable attorneys' fees and expenses
and other costs in advance of the final disposition of any claim, suit,
proceeding or investigation incurred by each Seller Indemnified Party to the
fullest extent required by the Indemnification Provisions upon receipt of any
undertaking required by the Indemnification Provisions), judgments, fines and
amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation pertaining to any matter
existing or occurring at or prior to the Effective Time and, in the event of any
such threatened or actual claim, action, suit, proceeding or investigation
(whether asserted before or after the Effective Time), the Seller Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with the Surviving Corporation; provided, however, (A) Buyers shall have the
right to assume the defense thereof and, upon such assumption, Buyers shall not
be liable to any Seller Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Seller Indemnified
Party in connection with the defense thereof, except that if Buyers elect not to
assume such defense, the Seller Indemnified Parties may retain counsel
reasonably satisfactory to them after consultation with Buyers and Buyers shall
pay the reasonable fees and expenses of such counsel for the Seller Indemnified
Parties, (B) Buyers shall be obligated pursuant to this paragraph to pay for
only one firm of counsel for all Seller Indemnified Parties, unless a Seller
Indemnified Party shall have reasonably concluded, based on an opinion of
counsel, that there is a material conflict of interest between the interests of
such Seller Indemnified Party and the interests of one or more other Seller
Indemnified Parties and that the interests of such Seller Indemnified Party will
not be adequately represented unless separate counsel is retained, in which case
Buyers shall be obligated to pay such separate counsel, (C) Buyers shall not be
liable for any settlement effected without their prior written consent (which
consent shall not be unreasonably withheld) and (D) Buyers shall have no
obligation hereunder to any Seller Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and nonappealable, that indemnification of such Seller
Indemnified Party in the manner contemplated hereby is prohibited by applicable
law. Any Seller Indemnified Party wishing to claim indemnification under this
Section, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify BFC thereof, provided that the failure to so notify
shall not affect the obligations of Buyers under this Section, except to the
extent such failure to notify materially prejudices Buyers. Buyers' obligations
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under this Section shall continue in full force and effect for the period of the
applicable statute of limitations; provided, however, that all rights to
indemnification hereunder in respect of any claim (a "Claim") asserted or made
within such period shall continue until the final disposition of such Claim.
Nothing in this Section 5.12 shall be deemed or construed to limit the
discretion of BFC or the Surviving Corporation to indemnify and hold harmless
any Seller Indemnified Party as and to the fullest extent permitted by Wisconsin
law and the Articles of Incorporation or Bylaws of Seller or any of the Seller
Subsidiaries.
5.13 Seller Employees. If Buyers, subsequent to the Effective
Date, reduce or eliminate employment positions of Seller Employees, Buyers will
endeavor to offer such Seller Employees similar positions with Bremer Bank,
National Association, Menomonie, Wisconsin ("Bremer Bank Wisconsin") or
elsewhere within BFC's system. If acceptable positions are not available for
Seller Employees, such Seller Employees will be entitled to receive severance
packages based upon Buyers' then current severance policies, which policies
shall take into consideration each Seller Employee's years of service and grade
levels with Seller prior to the Effective Time as well as any additional service
with Buyers following consummation of the transactions contemplated by this
Agreement. A copy of Buyers' current severance policies is set forth in Schedule
5.13.
5.14 Director Positions. After the Effective Time, BFC will offer positions
on the Board of Directors of Bremer Bank Wisconsin to not fewer than two members
of the Board of Directors of the Seller as it exists as of the Effective Time
and, if such individuals accept such offer, will appoint them to the Board of
Directors of Bremer Bank Wisconsin to serve in such capacities until their
respective resignation, removal or death or until the next meeting of
shareholders of Bremer Bank Wisconsin at which directors are elected.
5.15 Articles of Incorporation. At or prior to the Effective Time, Seller
shall cause Northwest Savings Bank to restate its Articles of Incorporation in
the form of Articles of Incorporation provided by Buyer to Seller.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. The approval of this Agreement and the
Merger shall have received the requisite vote of stockholders of
Seller at the Special Meeting of stockholders called pursuant to
Section 5.3 hereof.
(b) Regulatory Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the Federal Reserve
Board and any other federal and/or state regulatory agencies
(including the FDIC and WDFI) whose approval is required for
consummation of the transactions contemplated hereby, and all
requisite waiting periods imposed by the foregoing shall have expired
and such approvals and the transactions contemplated thereby shall not
have been contested by any federal or state governmental authority.
(c) No Judicial Prohibition. Neither Seller, BFC nor Merger Sub
shall be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger.
6.2 Conditions to Obligations of Seller. The obligations of Seller to
effect the Merger shall be subject to the fulfillment or waiver at or prior to
the Effective Time of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Buyers set forth in Article III of this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time (as though made on and as of
the Effective Time, except (i) to the extent such representations and
warranties are by their express provisions made as of a specific date
or period, (ii) where the facts which caused the failure of any
representation or warranty to be so true and correct have not
resulted, and are not likely to result, in a Material Adverse Effect
on BFC, and (iii) for the effect of transactions contemplated by this
Agreement), and Seller shall have received a certificate of the Chief
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Executive Officer, the Chief Financial Officer, or any Executive Vice
President of BFC, signing solely in his capacity as an officer of BFC,
to such effect.
(b) Performance of Obligations. Buyers shall have performed in
all material respects all obligations, agreements or covenants
required to be performed by them under this Agreement prior to the
Effective Time, and Seller shall have received a certificate of any
Executive Vice President of BFC, signing solely in his capacity as an
officer of BFC, to that effect.
(c) Permits, Authorizations, etc. Buyers shall have obtained any
and all material permits, authorizations, consents, waivers and
approvals required for the lawful consummation by them of the Merger.
(d) No Material Adverse Effect. Since the date of this Agreement,
there shall have been no Material Adverse Effect on BFC.
(e) Opinion of Counsel. BFC shall have delivered to Seller an
opinion of BFC's counsel dated as of the Closing Date or a mutually
agreeable earlier date in substantially the form set forth as Exhibit
C to this Agreement.
(f) Fair Value Opinion. Seller shall have received an opinion
from ABN AMRO, Inc., dated as of the date of this Agreement and
supplemented as necessary as of the date of the Proxy Statement, to
the effect that, subject to the terms, conditions, and qualifications
set forth therein, the consideration as set forth herein to be
received by the shareholders of Seller pursuant to this Agreement is
fair to such shareholders from a financial point of view.
(g) Litigation. No action, suit, proceeding or claim shall have
been instituted or made relating to this Agreement or the validity or
propriety of the transactions contemplated hereby which would render
completion of the Merger inadvisable in the reasonable opinion of
Seller.
6.3 Conditions to Obligations of the Buyers. The obligations of the Buyers
to effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Seller set forth in Article II of this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time (as though made on and as of
the Effective Time, except (i) to the extent such representations and
warranties are by their express provisions made as of a specific date
or period, (ii) where the facts which caused the failure of any
representation or warranty to be so true and correct have not
resulted, and are not likely to result, in a Material Adverse Effect
on Seller, and (iii) for the effect of transactions contemplated by
this Agreement) and Buyers shall have received a certificate of the
Chief Executive Officer and Chief Accounting Officer of Seller,
signing solely in their capacities as officers of Seller, to such
effect.
(b) Performance of Obligations. Seller shall have performed in
all material respects all obligations agreements or covenants required
to be performed by it under this Agreement prior to the Effective
Time, and Buyers shall have received a certificate of the Chief
Executive Officer and Chief Accounting Officer of Seller, signing
solely in their capacities as officers of Seller, to that effect.
(c) Permits, Authorizations, etc. Seller shall have obtained any
and all material permits, authorizations, consents, waivers and
approvals required for the lawful consummation by it of the Merger.
(d) No Material Adverse Effect. Since the date of this Agreement,
there shall have been no Material Adverse Effect on Seller.
(e) Opinion of Counsel. Seller shall have delivered to Buyers an
opinion of Seller's counsel dated as of the Closing Date or a mutually
agreeable earlier date in substantially the form set forth as Exhibit
D to this Agreement.
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(f) Minimum Financial Requirements. The Determination Date
Financial Statements shall reflect that Seller has (i) stockholders'
equity in an amount equal to or greater than $11,700,000 (exclusive of
any accrual for payment of Option Settlement Amounts and the financial
advisory fee paid or due to ABN AMRO, Inc.); (ii) loans receivable in
an amount equal to or greater than $70,000,000 and (iii) savings
accounts in an amount equal to or greater than $55,000,000.
(g) Voting Agreements and Amendment Agreements. The Voting
Agreements and the Amendment Agreements shall have been fully
executed, remain enforceable by the parties thereto and shall not have
been amended or modified since the date of this Agreement.
(h) Litigation. No action, suit, proceeding or claim shall have
been instituted or made relating to this Agreement or the validity or
propriety of the transactions contemplated hereby which would render
completion of the Merger inadvisable in the reasonable opinion of BFC.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time (with respect to Sections 7.1(b) through 7.1(h), inclusive, by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of Seller:
(a) by mutual written consent of the Board of Directors of BFC
and the Board of Directors of Seller; or
(b) by either BFC or Seller if the Merger shall not have been
consummated by July 31, 1999 (provided that (i) if the Merger shall
not have been consummated because the requisite approval of the
Federal Reserve Board and/or federal or state regulatory agencies
required under Section 6.1(b) of this Agreement shall not have been
obtained and are still being pursued, either BFC or Seller may extend
such date to August 31, 1999 by providing written notice thereof to
the other party on or prior to July 31, 1999 and (ii) the right to
terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation within
that party's reasonable control under this Agreement has been the
cause of or resulted in the failure of the Merger to occur on or
before such date);
(c) by either BFC or Seller if a court of competent jurisdiction
or Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other unappealable final action, in each
case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either BFC or Seller if, at the Special Meeting (including
any adjournment or postponement thereof), the requisite vote of the
stockholders of Seller in favor of the approval and adoption of this
Agreement and the Merger shall not have been obtained;
(e) by BFC, if (i) the Board of Directors of Seller shall have
withdrawn or modified its recommendation of this Agreement or the
Merger in accordance with Sections 4.3, 5.3(b) and 5.3(c) (provided
that BFC's right to terminate this Agreement under this clause (i)
shall not be available if at such time Seller would be entitled to
terminate this Agreement under Section 7.1(b) or (g)); (ii) after the
receipt by Seller of a proposal for an Alternative Transaction, BFC
requests in writing that the Board of Directors of Seller reconfirm
its recommendation of this Agreement and Merger to the Stockholders of
Seller and the Board of Directors of Seller fails to do so within ten
(10) business days after its receipt of BFC's request; (iii) the Board
of Directors of Seller shall have recommended to the stockholders of
Seller, or entered into a definitive agreement with respect to, an
Alternative Transaction; or (iv) for any reason Seller fails to call
and hold the Special Meeting by July 31, 1999 (provided that BFC's
right to terminate this Agreement under this clause (iv) shall not be
available if at such time Seller would be entitled to terminate this
Agreement under Section 7.1(b) or (g));
(f) by Seller, prior to the approval of this Agreement by its
stockholders, if, as a result of a Superior Proposal received by
Seller from a Third Party, the Board of Directors of Seller determines
in good faith, based on advice of outside legal counsel, and after
allowing BFC ten (10) business days to match the terms and conditions
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of such Superior Proposal pursuant to Section 4.3(b), that the failure
to accept such Superior Proposal would be inconsistent with its
fiduciary duties to stockholders under applicable law; provided,
however, that no termination shall be effective pursuant to this
Section 7.1(f) under circumstances in which a termination fee is
payable by Seller pursuant to Section 7.3(b)(iv), unless concurrently
with such termination, such termination fee is paid in full by Seller
in accordance with Section 7.3(b)(iv);
(g) by BFC or Seller, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the
other party set forth in this Agreement, which breach will cause the
conditions set forth in Section 6.2(a) or (b) (in the case of
termination by Seller) or 6.3(a) or (b) (in the case of termination by
BFC) not to be satisfied which breach is not cured within thirty (30)
calendar days after written notice thereof if given to the breaching
party by the non-breaching party or is not waived by the non-breaching
party during such period;
(h) by the Board of Directors of BFC pursuant to and in
accordance with Section 5.5; or
(i) by the Board of Directors of BFC if dissenters' rights are
available under applicable provision of the WBCL and shareholders
holding 10% or more of the outstanding shares of Seller Common Stock
satisfy the requirements of Wisconsin Statutes, Section 180.1321(l)
relating to the assertion of dissenters' rights under the WBCL.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1 above, this Agreement shall immediately become void,
and there shall be no liability on the part of Buyers or Seller or their
respective officers, directors, stockholders or affiliates (as the term
"affiliates" is used in Rule 144 under the Securities Act) except as set forth
in the second sentence of Section 5.1 and in Sections 5.6, 7.3 and 8.2; and
except that no termination of this Agreement pursuant to Section 7.1(g) shall
relieve the breaching party of any liability to the non-breaching party hereto
arising from the intentional, deliberate or willful breach of any
representation, warranty, covenant or agreement contained herein.
7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such expenses, whether or not the Merger is consummated.
(b) Seller shall pay BFC a termination fee of $500,000 upon the
earliest to occur of the following events:
(i) the termination of this Agreement by BFC or Seller
pursuant to Section 7.1(d), if a proposal for an Alternative
Transaction involving Seller shall have been publicly
announced prior to the Special Meeting and either a
definitive agreement for an Alternative Transaction is
entered into, or an Alternative Transaction is consummated,
within one year of such termination;
(ii) the termination of this Agreement by BFC pursuant
to Section 7.1(e)(iii);
(iii) the termination of this Agreement by BFC pursuant
to Section 7.1(e)(i) or (ii), and either a definitive
agreement for an Alternative Transaction is entered into, or
an Alternative Transaction is consummated, within one year
of such termination; or
(iv) the termination of this Agreement by Seller
pursuant to Section 7.1(f).
Seller's payment of a termination fee pursuant to this Section
shall be the sole and exclusive remedy of BFC against Seller and any
of the Seller Subsidiaries and their respective directors, officers,
employees, agents, advisors or other representatives with respect to
the occurrences giving rise to such payment; provided that this
limitation shall not apply in the event of a willful breach of this
Agreement by Seller.
(c) The fees payable pursuant to Section 7.3(b) shall be paid in
immediately available funds within five (5) business days after
delivery of notice of entitlement by BFC to Seller following the first
to occur of the events described in Section 7.3(b)(i), (ii) or (iii),
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<PAGE>
and, in the event of the termination of this Agreement by Seller
pursuant to Section 7.1(f) as described in Section 7.3(b)(iv),
concurrently with such termination.
7.4 Amendment. This Agreement and the Exhibits and the Schedules hereto
may be amended by the parties hereto, by action taken by or on behalf of their
respective Boards of Directors, at any time before or after approval of this
Agreement and the Merger by the stockholders of Seller; provided, however, that
after any such approval by the stockholders of Seller, no such modification
shall be made which (i) alters or changes the amount or kind of Merger
Consideration to be received by holders of Seller Common Stock as provided in
this Agreement, (ii) alters the tax treatment of the consideration to be
received by holders of Seller Common Stock, or (iii) which by law requires
further approval by the Seller's stockholders, in each case without such further
approval. This Agreement and the Exhibits and the Schedules hereto may not be
amended except by an instrument in writing signed on behalf of each of Buyers
and Seller.
7.5 Waiver. Any term, condition or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders or
stockholders, as the case may be, are, entitled to the benefits thereof.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties and Agreements. No
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein,
and each such representation and warranty shall survive such investigation.
Except as set forth below in this Section 8.1, all representations, warranties
and agreements in this Agreement of Buyers and Seller or in any instrument
delivered by Buyers or Seller pursuant to or in connection with this Agreement
shall expire at the Effective Time or upon termination of this Agreement in
accordance with its terms. In the event of consummation of the Merger, the
agreements contained in or referred to in Sections 1.5 through 1.12 (inclusive),
5.6, 5.7, 5.8(b), 5.11, 5.12 and 7.3 shall survive the Effective Time. In the
event of termination of this Agreement in accordance with its terms, the
agreements contained in or referred to in the second sentence of Section 5.1 and
in Sections 5.6, 7.3 and 8.2 shall survive such termination.
8.2 Indemnification. Buyers and Seller(hereinafter, in such capacity being
referred to as the "Indemnifying Party") agree to indemnify and hold harmless
each other and their officers, directors and controlling persons (each such
other party being hereinafter referred to, individually and/or collectively, as
the "Indemnified Party") against any and all losses, claims, damages or
liabilities, joint or several, to which the Indemnified Party may become subject
under the Securities Act, the Exchange Act or other federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof): (a) arise primarily out of any
information furnished to the Indemnified Party by the Indemnifying Party and
included in the Proxy Statement, or in any amendment therefor or supplement
thereof, or are based primarily upon any untrue statement or alleged untrue
statement of a material fact contained in the Proxy Statement, or in any
amendment therefor or supplement thereof, and provided for inclusion thereof by
the Indemnifying Party or (b) arise primarily out of or are based primarily upon
the omission or alleged omission by the Indemnifying Party to state in the Proxy
Statement, or in any amendment therefor or supplement thereof, a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading, and
agrees to reimburse each such Indemnified Party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
8.3 No Assignment; Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors (including any corporation deemed to be a successor corporation of
any of the parties by operation of law) and assigns. Neither this Agreement nor
any right or obligation set forth in any provision hereof may be transferred or
assigned (except by operation of law) by any party hereto without the prior
written consent of all other parties, and any purported transfer or assignment
in violation of this Section 8.3 shall be void and of no effect. There shall not
be any third party beneficiaries of any provisions hereof.
8.4 Interpretation and Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remaining provisions of this Agreement.
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<PAGE>
8.5 No Implied Waiver. No failure or delay on the part of any party hereto
to exercise any right, power or privilege hereunder or under any instrument
executed pursuant hereto shall operate as a waiver nor shall any single or
partial exercise of any right, power or privilege preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
8.6 Headings. Article, section, subsection and paragraph titles, captions
and headings herein are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provision hereof.
8.7 Entire Agreement. This Agreement and the Schedules and Exhibits hereto
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior negotiations, representations, warranties,
commitments, offers, letters of interest or intent, proposal letters, contracts,
writings or other agreements or understandings with respect thereto. No waiver,
and no modification or amendment, of any provision of this Agreement, shall be
effective unless specifically made in writing and duly signed by all parties
thereto.
8.8 Counterparts. This Agreement may be executed in one or more
counterparts, and any party to this Agreement may execute and deliver this
Agreement by executing and delivering any of such counterparts, each of which
when executed and delivered shall be deemed to be an original and all of which
taken together shall constitute one and the same instrument.
8.9 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to be duly received (a) on the date given if
delivered personally or by cable, telegram, telex or facsimile (which is
confirmed) or (b) on the date received if mailed by registered or certified mail
(return receipt requested), to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(i) if to the Buyers, to:
Bremer Financial Corporation
445 Minnesota Street, Suite 2000
St. Paul, Minnesota 55101
Attention: Terry M. Cummings
Facsimile: (651) 227-2522
Telephone: (651) 227-7621
Copy to:
Winthrop & Weinstine, P.A.
3000 Dain Rauscher Plaza
60 South 6th Street
Minneapolis, Minnesota 55402
Attention: Edward J. Drenttel
Facsimile: (612) 347-0600
Telephone: (612) 347-0700
(ii) if to Seller, to:
Northwest Equity Corp.
234 Keller Avenue South
Amery, WI 54001
Attention: Brian L. Beadle, President
Telephone: (715) 268-7105
Facsimile: (715) 268-7207
A-34
<PAGE>
Copy to:
Mallery & Zimmerman, S.C.
731 North Jackson Street, Suite 900
Milwaukee, Wisconsin 53202
Attention: Gregory G. Johnson
Telephone: (414) 271-2424; direct dial (414) 270-1006
Facsimile: (414) 271-8678; (414) 270-1001
8.10 Governing Law. This Agreement shall be governed by and controlled as
to validity, enforcement, interpretation, effect and in all other respects by
the internal laws of the State of Wisconsin applicable to contracts made in that
state without regard to any applicable conflict of law.
8.11 Knowledge. "Knowledge" or "best knowledge" when used with respect to a
person shall mean those facts that are known by the executive officers of such
person.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
written above.
BREMER FINANCIAL CORPORATION
By _/s/ Terry Cummings_____
Signature
_Terry Cummings____________
Name Typed or Printed
Its:_Chairman______________
Title Typed or Printed
BREMER ACQUISITION CORPORATION
By _/s/ Robert B. Buck_____
Signature
_Robert B. Buck____________
Name Typed or Printed
Its:_President_____________
Title Typed or Printed
NORTHWEST EQUITY CORP.
By _/s/ Brian L. Beadle____
Signature
_Brian L. Beadle___________
Name Typed or Printed
Its:_President_____________
Title Typed or Printed
MPL1: 264665-8
A-36
<PAGE>
SCHEDULES
Schedule 2.2 - Seller's Subsidiaries
Schedule 2.4(b) - Authorization
Schedule 2.5(a) - Seller's Financial Statements
Schedule 2.5(b) - Exception to GAAP
Schedule 2.7(a) - Title to and Condition of Assets
Schedule 2.7(b) - Material Properties and Assets
Schedule 2.7(c) - Furniture, Fixture, Vehicles, Machinery and
Equipment and Computer Software
Schedule 2.8(a) - Owned and Leased Real Property
Schedule 2.8(c) - Other Real Property
Schedule 2.9 - Taxes
Schedule 2.11(a) - Loans, Deposits, Repurchase Agreements
Schedule 2.11(b) - Contracts
Schedule 2.11(c) - Insurance
Schedule 2.11(f) - Loans
Schedule 2.13 - Litigation and Other Proceedings
Schedule 2.15(c) - Compliance with Law
Schedule 2.16 - Labor
Schedule 2.17 - Material Interests
Schedule 2.18(a) - Allowance for Loan and Lease Losses
Schedule 2.18(c) - Real Estate Assets
Schedule 2.18(f) - Investment Securities
Schedule 2.19(a) - Retirement Plans
Schedule 2.19(d) - Post-Retirement Plans
Schedule 2.19(f) - Modifications to Certain Benefits due Directors and
Officers
Schedule 2.20 - Conduct of Seller
Schedule 2.21(a) - Undisclosed Liabilities
Schedule 2.28 - Year 2000 Compliance
Schedule 2.29 - Insider Loans
A-37
<PAGE>
Schedule 2.31 - Options Outstanding
Schedule 3.5 - No Violation
Schedule 3.6 - Consents and Approvals
Schedule 3.7 - Litigation
Schedule 3.9 - Community Reinvestment Act Compliance
Schedule 4.2 - Forbearances of Seller
Schedule 4.2(j) - Sale of Fixed Rate Loans
Schedule 5.13 - Severance Policies
EXHIBITS
Exhibit A - Voting Agreement
Exhibit B - Amendment Agreement
Exhibit C - Seller Opinion of Counsel
Exhibit D Buyer Opinion of Counsel
A-38
<PAGE>
APPENDIX B
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT entered into this 21st day of April, 1999, by and among
Bremer Financial Corporation, a Minnesota corporation ("BFC"), Bremer
Acquisition Corporation, a Wisconsin corporation ("Merger Sub" and,
collectively, with BFC, the "Buyers"), and Northwest Equity Corp., a Wisconsin
corporation ("Seller").
W I T N E S S E T H:
WHEREAS, BFC Merger Sub and Seller previously entered into that certain
Agreement and Plan of Merger dated February 16, 1999 (the "Merger Agreement");
WHEREAS, the Merger Agreement provides that Merger Sub shall merge with and into
the Seller (the "Merger") pursuant to the terms and subject to the conditions
contained in the Merger Agreement;
WHEREAS, the parties have determined that it is in their best interest to extend
the time by which BFC must file an application for approval of the Merger with
the Federal Reserve Board and other applicable regulatory authorities; and
WHEREAS, the respective Boards of Directors of Seller, Merger Sub and BFC all
have approved the extension of time within which BFC must file an application
for approval of the Merger with the Federal Reserve Board.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
1. Paragraph (a) of Section 5.2 of the Merger Agreement is hereby amended
to read in its entirety as follows:
"(a) On or before May 7, 1999, BFC shall file an application for
approval of the Merger with the Federal Reserve Board and such
additional regulatory authorities as may require an
application."
2. Except as otherwise amended herein, the terms and conditions of the
Merger Agreement shall remain unchanged and shall remain in full force
and effect.
3. This First Amendment may be executed in any one or more counterparts,
each of which shall be deemed an original, but all of which will
constitute one and the same instrument.
B-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
BREMER FINANCIAL CORPORATION
By _/S/ Terry Cummings__________
Signature
____Terry Cummings_______________
Name Typed or Printed
Its:___Chairman__________________
Title Typed or Printed
BREMER ACQUISITION CORPORATION
By _/S/ Robert B. Buck___________
Signature
_Robert B. Buck_______________
Name Typed or Printed
Its:_President____________________
Title Typed or Printed
NORTHWEST EQUITY CORP.
By _/S/ Brian L. Beadle__________
Signature
_Brian L. Beadle______________
Name Typed or Printed
Its:_President____________________
Title Typed or Printed
MPL1: 288172-1
1129-82
B-2
<PAGE>
APPENDIX C
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT entered into this 11th day of May, 1999, by and among
Bremer Financial Corporation, a Minnesota corporation ("BFC"), Bremer
Acquisition Corporation, a Wisconsin corporation ("Merger Sub" and,
collectively, with BFC, the "Buyers"), and Northwest Equity Corp., a Wisconsin
corporation ("Seller").
W I T N E S S E T H:
WHEREAS, BFC, Merger Sub and Seller previously entered into that certain
Agreement and Plan of Merger dated February 16, 1999 and that certain First
Amendment to Agreement and Plan of Merger dated April 21, 1999 (collectively,
the "Merger Agreement");
WHEREAS, the Merger Agreement provides that Merger Sub shall merge with and into
the Seller (the "Merger") pursuant to the terms and subject to the conditions
contained in the Merger Agreement;
WHEREAS, the parties have determined that it is in their best interest to extend
the time by which BFC must file an application for approval of the Merger with
the Federal Reserve Board and other applicable regulatory authorities and desire
to modify certain other provisions of the Merger Agreement as specified herein;
and
WHEREAS, the respective Boards of Directors of Seller, Merger Sub and BFC all
have approved the execution and delivery of this Second Amendment.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
1. Paragraph (a) of Section 5.2 of the Merger Agreement is hereby amended
to read in its entirety as follows:
"(a) On or before June 7, 1999, BFC shall file an application for
approval of the Merger with the Federal Reserve Board and such
additional regulatory authorities as may require an
application."
2. The fifth sentence of Section 5.5 of the Merger Agreement is hereby
amended to read in its entirety as follows:
"Buyer's shall perform any such Phase II investigation as soon as
reasonably practical after receipt of the Phase I reports for
such properties and, in any event, shall notify Seller and the
Environmental Firm on or before June 7, 1999 that the
Environmental Firm should promptly commence any such Phase II
investigation."
3. Section 7.1(e)(iv) of the Merger Agreement is hereby amended to read in
its entirety as follows:
"(iv) for any reason Seller fails to call and hold the Special
Meeting (which shall be deemed to include the Seller's Annual
Shareholder Meeting, assuming the requirements of Section 5.3
of this Agreement are met with respect to said Annual meeting)
by August 20, 1999 (provided that BFC's right to terminate
this Agreement under this clause (iv) shall not be available
if at such time Seller would be entitled to terminate this
Agreement under Section 7.1(b) or (g));"
4. Except as otherwise amended herein, the terms and conditions of the
Merger Agreement shall remain unchanged and shall remain in full force
and effect.
5. This Second Amendment may be executed in any one or more counterparts,
each of which shall be deemed an original, but all of which will
constitute one and the same instrument.
C-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
BREMER FINANCIAL CORPORATION
By _/S/ Terry Cummings__________
Signature
____Terry Cummings_______________
Name Typed or Printed
Its:___Chairman__________________
Title Typed or Printed
BREMER ACQUISITION CORPORATION
By _/S/ Robert B. Buck___________
Signature
_Robert B. Buck_______________
Name Typed or Printed
Its:_President____________________
Title Typed or Printed
NORTHWEST EQUITY CORP.
By _/S/ Brian L. Beadle__________
Signature
_Brian L. Beadle______________
Name Typed or Printed
Its:_President____________________
Title Typed or Printed
MPL1: 288172-1
1129-82
C-2
APPENDIX D
THIRD AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS THIRD AMENDMENT entered into this 26th day of July, 1999, by and among
Bremer Financial Corporation, a Minnesota corporation ("BFC"), Bremer
Acquisition Corporation, a Wisconsin corporation ("Merger Sub" and,
collectively, with BFC, the "Buyers"), and Northwest Equity Corp., a Wisconsin
corporation ("Seller").
WITNESSETH:
WHEREAS, BFC, Merger Sub and Seller previously entered into that certain
Agreement and Plan of Merger dated February 16, 1999, that certain First
Amendment to Agreement and Plan of Merger dated April 21, 1999 and that certain
Second Amendment to Agreement and Plan of Merger dated May 11, 1999
(collectively, the "Merger Agreement");
WHEREAS, the Merger Agreement provides that Merger Sub shall merge with and into
the Seller (the "Merger") pursuant to the terms and subject to the conditions
contained in the Merger Agreement; and
WHEREAS, the parties have determined that it is in their best interest to modify
certain provisions of the Merger Agreement as specified herein.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
1. Paragraph (b) of Section 1.7 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(b) Subject to Section 1.10, each share of common stock, $1.00
par value, of Seller ("Seller Common Stock") issued and
outstanding immediately prior to the Effective Time, other
than Dissenting Shares, if any (as defined in Section 1.10
hereof), shall cease to be outstanding, and shall be converted
into and become the right to receive cash in the amount of
$24.00 per share (the "Merger Per Share Consideration") in the
manner and form, and on the terms and conditions, set forth in
this Agreement; provided, however, if the closing occurs after
August 31, 1999, the Merger Per Share Consideration shall be
increased or decreased by an amount equal to the sum of the
Earnings (as hereinafter defined) of Seller from September 1,
1999 through the date of the Determination Date Financial
Statements, less the amount of any dividends declared by
Seller after August 31, 1999 and prior to the Closing, divided
by the sum of the number of issued and outstanding shares of
Seller Common Stock immediately prior to the Effective Time
plus the number of shares of Seller Common Stock issuable upon
the exercise of the Options. For purposes of this Agreement,
Earnings shall mean the consolidated net earnings or losses
after tax for the Seller and the Seller Subsidiaries as
determined by and in accordance with generally accepted
accounting principles applied on a consistent basis, except as
set forth on Schedule 1.7(b). Earnings shall be calculated and
determined based upon the Determination Date Financial
Statements. For purposes of determining the earnings of the
Seller from September 1, 1999 through September 30, 1999, the
Earnings for the Seller from July 1, 1999 through September
30, 1999 shall be determined the "1999 Third Quarter
Earnings") and the Earnings for the period from September 1,
1999 through September 30, 1999 shall be deemed to equal 33.3%
of the 1999 Third Quarter Earnings. The Merger Per Share
Consideration shall be rounded to the nearest whole cent. All
such shares of Seller Common Stock shall no longer be
outstanding and shall automatically be canceled and retired
and shall cease to exist, and each certificate previously
representing and such shares shall thereafter represent the
right to receive cash at the rate of the Merger Per Share
Consideration. Each share of Seller Common Stock held in the
treasury of Seller or owned by Seller or any Seller Subsidiary
(as hereinafter defined) for its own account (other than
shares of Seller Common Stock held directly or indirectly in
trust accounts, managed accounts, and the like, or otherwise
held in a fiduciary capacity beneficially owned by third
parties) immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof, and
no payment shall be made with respect thereto.
D-1
<PAGE>
2. Section 1.15 of the Merger Agreement is hereby amended to read in its
entirety as follows:
1.15 Determination Date Financial Statements. For purposes of
this Agreement, the Determination Date shall be the last day
of the calendar month prior to the Closing Date, unless the
Closing Date occurs on or before the 12th day of any month, in
which case the Determination Date will be the last day of the
calendar month prior to the most recent month end prior to the
Closing Date. For example, if the Closing Date occurs on May
1, 1999, the Determination Date would be March 31, 1999. The
Seller shall prepare and deliver consolidated financial
statements of the Seller (including, without limitation, a
balance sheet and income statement of the Seller) as of the
Determination Date that have been reviewed by the Seller's
regularly employed accountants in accordance with the
requirements for a review contained in the Statements on
Standards for Accounting and Review Services of the American
Institute of Certified Public Accountants (the "Determination
Date Financial Statements"). The Determination Date Financial
Statements shall be prepared in accordance with generally
accepted accounting principles and consistent with past
practices. A copy of the Determination Date Financial
Statements shall be provided to BFC as soon as available and
in no event less than four (4) days prior to the Closing Date.
Any disputes regarding the Determination Date Financial
Statements shall be submitted to an independent accounting
firm mutually agreeable to BFC and the Seller for a binding
resolution. The cost of retaining the independent accounting
firm shall be borne 50 percent by Buyers and 50 percent by the
Seller.
3. Paragraph (a) of Section 4.2 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(a) declare, set aside or pay any dividends or other
distributions, directly or indirectly, in respect of its
capital stock (other than dividends from any of the Seller
Subsidiaries to Seller or to another of the Seller
Subsidiaries), except that between the date of this Agreement
and the Closing Date, Seller may declare and pay regular cash
dividends or not more than $0.17 per share on the Seller
Common Stock on each of January 28, 1999, April 22, 1999, July
29, 1999, October 29, 1999 and January 28, 2000 (but only on
such dates occurring before the Closing Date);
4. Paragraph (a) of Section 5.2 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(a) As soon as practicable (as determined by BFC in its
discretion), but in no event later than December 31, 1999, BFC
shall file an application for approval of the Merger with the
Federal Reserve Board and such additional or alternative
regulatory authorities as may require an application.
5. Paragraph (a) of Section 5.3 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(a) As promptly as practical after receipt of the requisite
approval of the Federal Reserve Board and /or federal or state
regulatory agencies required under Section 6.1(b) of this
Agreement, Seller shall prepare and file with the SEC the
Proxy Statement under the Exchange Act, and it then shall use
its reasonable best efforts to have the Proxy Statement
cleared by the SEC as soon as practical after such filing. The
Buyers and Seller shall cooperate with each other in preparing
the Proxy Statement, and Seller shall promptly notify BFC of
the receipt of any comments of the SEC with respect to the
Proxy Statement and of any requests by the SEC for any
amendment or supplement thereto or for additional information
and shall promptly provide to BFC copies of all correspondence
between the Seller or any representative of the Seller and the
SEC. Seller shall give BFC and its counsel the opportunity to
review the Proxy Statement prior to its being filed with the
SEC and shall give BFC and its counsel the opportunity to
review all amendments and supplements to the Proxy Statement
and all responses to request for additional information and
replies to comments prior to their being filed with, or sent
to, the SEC. Each of the Buyers and Seller agrees to use all
reasonable best efforts, after consultation with the other
parties hereto, to respond promptly to any and all such
comments of and requests by the SEC and to cause the Proxy
Statement and all required amendments and supplements thereto
to be mailed to the holders of shares of Seller Common Stock
entitled to vote at the Special Meeting.
D-2
<PAGE>
6. Paragraph (f) of Section 6.3 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(f) Minimum Financial Requirements. The Determination Date
Financial Statements shall reflect that Seller has (i) stockholders'
equity in an amount equal to or greater than $11,700,000 (exclusive of
any accrual for payment of Option Settlement Amounts and the financial
advisory fee paid or due to ABN AMRO, Inc.); (ii) loans receivable in
an amount equal to or greater than $65,000,000 and (iii) savings
accounts in an amount equal to or greater than $55,000,000.
7. Paragraph (b) of Section 7.1 of the Merger Agreement is hereby amended
to read in its entirety as follows:
(b) by either BFC or Seller if the Merger shall not have been
consummated by March 31, 2000 (provided that (i) if the Merger
shall not have been consummated because the requisite approval
of the Federal Reserve Board and/or federal or state
regulatory agencies required under Section 6.1(b) of this
Agreement shall not have been obtained and are still being
pursued, either BFC or Seller may extend such date to April
30, 2000 by providing written notice thereof to the party on
or prior to March 31, 2000 and (ii) the right to terminate
this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation
within that party's reasonable control under this Agreement
has been the cause of or resulted in the failure of the Merger
to occur on or before such date);
8. Section 7.1(e)(iv) of the Merger Agreement is hereby amended to read in
its entirety as follows:
(iv) for any reason Seller fails to call and hold the Special
Meeting (which shall be deemed to include the Seller's Annual
Shareholder Meeting, assuming the requirements of Section 5.3 of this
Agreement are met with respect to said Annual meeting) within 45 after
days after receipt by BFC of approval of the Merger from the Federal
Reserve Board (provided that BFC's right to terminate this Agreement
under this clause (iv) shall not be available if as such time Seller
would be entitled to terminate this Agreement under Section 7.1(b) or
(g));
9. The parties agree that the form, content and timing of any announcement
or notice regarding this Third Amendment Agreement shall be subject to
and conducted in accordance with the provisions of Section 5.9 of the
Merger Agreement.
10. Except as otherwise amended herein, the terms and conditions of the
Merger Agreement shall remain unchanged and shall remain in full force
and effect.
11. This Third Amendment may be executed in any one or more counterparts,
each of which shall be deemed an original, but all of which will
constitute one and the same instrument.
12. All capitalized terms not specifically defined herein shall have the meaning
specified in the Merger Agreement.
D-3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
signed by their respective officers thereunto duly authorized, all as
of he date first written above.
BREMER FINANCIAL CORPORATION
_/s/_Stan K. Dardis_____
Stan K. Dardis
Its: President and CEO
BREMER ACQUISITION CORPORATION
_/s/_Robert B. Buck_____
Robert B. Buck
Its: President and CEO
NORTHWEST EQUITY CORP.
_/s/_Brian L. Beadle____
Brian L. Beadle
Its: President
Schedule 1.7(b)
Northwest has capitalized certain expenses in connection with this
Agreement including legal fees, investment banking fees, and the costs of
certain environmental work. It is understood that these types of expenses
associated with the Agreement will continue to be capitalized and will not be
expensed prior to the date of the Determination Date Financial Statements.
To the extent that this method of handling expenses is noted as an
exception to generally accepted accounting principles, it will be deemed a
permissible exception for purposes of the Agreement. The earnings of Seller
after September 1, 1999 determined in connection with Section 1.7(b) will not be
impacted by these expenses.
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February 16, 1999
Board of Directors
Northwest Equity Corp.
234 Keller Avenue South
Amery, Wisconsin 54001
Members of the Board:
We understand that Northwest Equity Corp. ("NWEQ") and Bremer Financial
Corporation ("Bremer") propose to enter into an Agreement and Plan of Merger
dated February 16, 1999 (the "Agreement") pursuant to which NWEQ will be merged
with and into a first-tier subsidiary of Bremer in a transaction (the "Merger")
in which each issued and outstanding share of common stock of NWEQ, $1.00 par
value per share ("NWEQ Common Stock"), will be converted into the right to
receive cash consideration equal to $24.00 (the "Consideration").
You have asked us whether, in our opinion, the Consideration to be received
by the holders of NWEQ Common Stock in the Merger is fair to such stockholders
from a financial point of view.
In connection with this opinion, we have reviewed the Agreement and certain
related documents and held discussions with certain senior officers, directors
and other representatives and advisers of NWEQ concerning the business,
operations and prospects of NWEQ. We have examined certain publicly available
business and financial information relating to NWEQ and Bremer. We have also
examined certain financial information and other data for NWEQ and certain
financial information and other data related to Bremer which were provided to or
otherwise discussed with us by the respective management of NWEQ and Bremer. We
have reviewed the financial terms of the Merger as set forth in the Agreement in
relation to: (i) current and historical market prices and trading volumes of
NWEQ Common Stock; (ii) NWEQ's financial and other operating data; and (iii) the
capitalization and financial condition of NWEQ. We have also considered, to the
extent publicly available, the financial terms of certain other thrift-industry
transactions recently effected which we considered relevant in evaluating the
Merger. We have also analyzed certain financial, stock market and other publicly
available information relating to the businesses of other companies whose
operations we considered relevant in evaluating those of NWEQ. In connection
with our engagement, and upon your request, we approached and held discussions
with certain third parties to solicit indications of interest in a possible
transaction with NWEQ.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information reviewed by us and we have
not made or obtained or assumed any responsibility for independent verification
of such information. In addition, we have not made an independent evaluation
or appraisal of the assets and liabilities of NWEQ or any of its
subsidiaries. With respect to the financial data of NWEQ, we have assumed
that it has been reasonably prepared on bases reflecting the best currently
available estimates and judgements of the management of NWEQ as to the future
financial performance of NWEQ. We have assumed that the Merger will be
consummated in accordance with the terms of the Agreement.
ABN AMRO Incorporated ("ABN AMRO"), as part of its investment banking
business, is continually engaged in the valuation of businesses in connection
with mergers and acquisitions, as well as initial and secondary offerings of
securities and valuations for other purposes. We have acted as financial adviser
to the Board of Directors of NWEQ in connection with this transaction and will
receive a fee for our services, including rendering this opinion, a significant
portion of which is contingent upon the consummation of the Merger. ABN AMRO
acts as a market maker in NWEQ Common Stock. In the ordinary course of our
business, ABN AMRO and its affiliates may actively trade securities of NWEQ for
their own account and for the accounts of customers and,accordingly, may at any
time hold a long or short position in such securities.
It is understood that this letter is for the benefit and use of the Board
of Directors of NWEQ in its consideration of the Merger and may not be used for
any other purpose. This letter may not be reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent, except that this letter may be used as part of any proxy
statement relating to the Merger. This letter does not address NWEQ's underlying
business decision to enter into the Merger or constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the proposed
Merger. Finally, our opinion is necessarily based on economic, monetary, market
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Board of Directors
February 16, 1999
Page 2
and other conditions as in effect on, and the information made available to us,
as of the date hereof, and we assume no responsibility to update or revise our
opinion based upon circumstances or events occurring after the date hereof.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Consideration to be received by NWEQ stockholders pursuant
to the Merger is fair to such stockholders from a financial point of view.
Sincerely,
_/s/_ABN AMRO INCORPORATED___________
ABN AMRO INCORPORATED
February 2, 2000
Board of Directors
Northwest Equity Corp.
234 Keller Avenue South
Amery, Wisconsin 54001
Members of the Board:
We understand that Northwest Equity Corp. ("NWEQ") and Bremer Financial
Corporation have amended their Agreement and Plan of Merger dated February 16,
1999 (the "Agreement"). In addition to the cash consideration of $24.00 per
share contemplated in the original Agreement, NWEQ stockholders will receive
cash consideration based on NWEQ's earnings less dividends paid subsequent to
August 31, 1999 (the "Consideration") under the Agreement as amended through
July 26, 1999.
ABN AMRO Incorporated hereby confirms, as of the date of this letter,
the opinion set forth in its letter dated February 16, 1999 as to the
fairness of the Consideration from a financial point of view to the stockholders
of NWEQ.
Sincerely,
_/s/_ABN AMRO INCORPORATED___________
ABN AMRO INCORPORATED
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