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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
Commission file number: 000-31207
BANK MUTUAL CORPORATION
(Exact name of registrant as specified in its charter)
UNITED STATES 39-2004336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4949 WEST BROWN DEER ROAD, MILWAUKEE, WI 53223
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(414) 354-1500
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 under the Exchange Act).
Yes |X| No | |
As of June 30, 2002, 22,341,665 shares of Common Stock were validly issued
with 22,151,371 shares outstanding. The aggregate market value of the Common
Stock (based upon the $20.37 last sale price quotation on The Nasdaq Stock
Market(R) on June 30, 2002) held by non-affiliates (excludes a total of
12,703,289 shares reported as beneficially owned by directors and executive
officers, held by Mutual Savings Bancorp, MHC or unallocated shares of the
Employee Stock Ownership Plan at March 10, 2003; does not constitute an
admission as to affiliate status) was approximately $192,457,000.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH
DOCUMENT PORTIONS OF DOCUMENT ARE INCORPORATED
-------- -------------------------------------
Proxy Statement for Annual Meeting of
Shareholders on May 5, 2003 Part III
BANK MUTUAL CORPORATION
FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business .................................................................. 3-32
2. Properties ................................................................ 33-37
3. Legal Proceedings ......................................................... 38
4. Submission of Matters to a Vote of Security Holders ....................... 38
Executive Officers of the Registrant ...................................... 38-39
PART II
5. Market for Registrant's Common Equity and Related Stockholders Matters .... 40
6. Selected Financial Data ................................................... 41-42
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 43-58
7A. Quantitative and Qualitative Disclosures About Market Risk ................ 59-62
8. Financial Statements and Supplementary Data ............................... 63-95
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................................. 96
PART III
10. Directors and Executive Officers of the Registrant ........................ 96
11. Executive Compensation .................................................... 96
12. Security Ownership of Certain Beneficial Owners and Management ............ 96
13. Certain Relationships and Related Transactions ............................ 97
14. Controls and Procedures ................................................... 97
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 98
Signatures ................................................................ 99
Certifications ............................................................ 100-101
2
PART 1
ITEM 1. BUSINESS
GENERAL
Bank Mutual Corporation ("Bank Mutual") is a United States corporation chartered
by the Office of Thrift Supervision ("OTS"). It was chartered on November 1,
2000, to become the mid-tier holding company in the regulatory restructuring of
Mutual Savings Bank into mutual holding company form. To accomplish the
transaction, Mutual Savings Bank adopted a plan of restructuring and, as of
November 1, 2000, converted from a mutual savings bank to a mutual holding
company form. Bank Mutual became a holder of all of the shares of Mutual Savings
Bank, which was rechartered as a federal stock savings bank. Mutual Savings
Bancorp, MHC (the "MHC"), a U.S. -chartered mutual holding company (now known as
"Bank Mutual Bancorp, MHC") of which Mutual Savings Bank's depositors hold all
of the voting and membership rights, owns 11,193,174 shares of common stock, or
51.5% at December 31, 2002, of Bank Mutual's stock. Bank Mutual issued 6,141,006
shares of common stock to public shareholders in the subscription stock offering
conducted in connection with the restructuring.
Also on November 1, 2000, Bank Mutual acquired First Northern Capital Corp.
("First Northern"), the parent of First Northern Savings Bank. In this
transaction, Bank Mutual issued to former First Northern shareholders 5,007,485
shares of Bank Mutual common stock and paid $75.1 million in cash. (In this
report, we refer to this transaction as the "First Northern Acquisition.") The
First Northern Acquisition was accounted for using the purchase method of
accounting; therefore, First Northern Savings Bank results and financial data
are included in Bank Mutual results and financial data only from and after the
November 1, 2000 acquisition date.
On March 16, 2003, Mutual Savings Bank and First Northern Savings Bank (the
"Banks") combined to form a single subsidiary bank of Bank Mutual which is named
"Bank Mutual" (the "Bank").
As a result of these transactions, Bank Mutual is the mid-tier holding company
for the Bank. The following chart shows our structure:
[ORGANIZATIONAL CHART]
This Bank is a community oriented financial institution, which emphasizes
traditional financial services to individuals and businesses within our market
areas. Our principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from other
operations, in residential mortgage loans, consumer loans, commercial real
estate loans, and commercial business loans. We also invest in various
mortgage-related securities and investment securities. The principal lending is
on one-to four-family, owner-occupied homes, home equity loans and lines of
credit, automobile loans, multi-family and commercial real estate loans, and
commercial business loans.
3
Bank Mutual's revenues are derived principally from interest on our loans and
mortgage-related securities, interest and dividends on our investment
securities, and noninterest income (including loan servicing fees, deposit
servicing fees, gains on sales of loans and commissions on insurance, security
and annuity sales). Our primary sources of funds are deposits, borrowings,
scheduled amortization and prepayments of loan principal and mortgage-related
securities, maturities and calls of investment securities and funds provided by
operations.
Bank Mutual maintains a website at www.bankmutualcorp.com. We make available
through that website, free of charge, copies of our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports, as soon as reasonably practical after Bank Mutual electronically
files those materials with, or furnishes them to, the Securities and Exchange
Commission. You may access those reports by following the links under "Financial
Reports" at the Bank Mutual website.
CAUTIONARY FACTORS
This Form 10-K contains or incorporates by reference various forward-looking
statements concerning Bank Mutual's prospects that are based on the current
expectations and beliefs of management. Forward-looking statements may also be
made by Bank Mutual from time to time in other reports and documents as well as
oral presentations. When used in written documents or oral statements, the words
"anticipate," "believe," "estimate," "expect," "objective" and similar
expressions and verbs in the future tense, are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond Bank Mutual's control, that could cause Bank Mutual's
actual results and performance to differ materially from what is expected. In
addition to the assumptions and other factors referenced specifically in
connection with such statements, the following factors could impact the business
and financial prospects of Bank Mutual: general economic conditions; legislative
and regulatory initiatives; increased competition and other effects of the
deregulation and consolidation of the financial services industry; monetary and
fiscal policies of the federal government; deposit flows; disintermediation; the
cost of funds; general market rates of interest; interest rates or investment
returns on competing investments; demand for loan products; demand for financial
services; changes in accounting policies or guidelines; general economic
developments; acts of terrorism and developments in the war on terrorism; and
changes in the quality or composition of loan and investment portfolios. See
also the factors regarding future operations discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below,
particularly those under the caption "Risk Factors."
MARKET AREA
The Bank has 69 banking offices located in 28 counties in Wisconsin, in addition
to the Minnesota office. At June 30, 2002, Bank Mutual had approximately a 2.53%
share of all Wisconsin bank, savings bank, and savings association deposits.
Counties in which Bank Mutual operates include 66% of the population of the
state. Bank Mutual is the fifth largest financial institution holding company
headquartered in the state of Wisconsin, based on asset size.
The largest concentration of our offices is in the Milwaukee metropolitan area,
which includes Milwaukee, Waukesha, Ozaukee, and Washington counties. There are
18 offices in this area, with an additional office expected to open in 2003. The
Milwaukee metro area is the largest population and commercial base in Wisconsin,
representing approximately 28% of Wisconsin's population. The Milwaukee area has
traditionally had an extensive manufacturing economic base, which is
diversifying into service and technology based businesses.
We operate 21 banking offices in nine northeastern counties that make up
approximately 13% of the state's population including the city of Green Bay. The
greater Green Bay area has an economic base of paper and other manufacturing,
health care, insurance and gaming, and is diversifying into technology based
businesses.
We have four offices in the Madison area. Madison is the state capital of
Wisconsin and is the second largest metropolitan area in Wisconsin representing
approximately 8% of the state's population. Our eight other south central and
southeastern Wisconsin offices are located in smaller cities that have economic
concentrations ranging from manufacturing to agriculture.
We also have 19 offices in the northwestern part of the state, largely resulting
from the First Federal Bancshares of Eau Claire, Inc. ("First Federal")
acquisition by Mutual Savings Bank in 1997. This part of the state has medium
sized to smaller cities and towns. Industry includes medium sized and small
business, with a significant agricultural component.
4
The counties in which the northwest region offices are located hold 8% of the
state's population. Our Minnesota office is located near the Wisconsin state
border on the eastern edge of the Minneapolis-St. Paul metropolitan area.
COMPETITION
We face significant competition in making loans and attracting deposits.
Wisconsin has many banks, savings banks, and savings and loan associations,
which offer the same types of banking products. Wisconsin also has an extensive
tax-exempt credit union industry, whose expanded powers have resulted in
increased competition to financial institutions.
Many of our competitors have greater resources than we do. Similarly, many
competitors offer services that we do not provide. For example, the Bank does
not provide trust or money management services. However, the Bank's subsidiary,
Lake Financial and Insurance Services, Inc. offers mutual funds and engages in
the sale of tax deferred annuities, credit life and disability insurance, and
property and casualty insurance. Its Great Northern Financial Services
Corporation subsidiary, which is merging into Lake Financial, offers brokerage
services to the public, including the sale of tax deferred annuities and mutual
funds and engages in the sale of credit life and disability insurance.
Most of our competition for loans traditionally has come from commercial banks,
savings banks, savings and loan associations and credit unions. Increasingly,
other types of companies, such as mortgage banking firms, finance companies,
insurance companies, and other providers of financial services also compete for
these products. For deposits, we also compete with traditional financial
institutions. However, competition for deposits now also includes mutual funds,
particularly short-term money market funds, and brokerage firms and insurance
companies. The recent increase in electronic commerce also increases competition
from institutions and other entities outside of Wisconsin.
LENDING ACTIVITIES
Loan Portfolio Composition. Bank Mutual's loan portfolio primarily consists of
one-to four-family residential mortgage loans. To a lesser degree, the loan
portfolio includes consumer loans, including home equity lines of credit and
fixed rate and adjustable rate second mortgage loans, automobile loans,
multi-family loans, commercial real estate loans and commercial business loans.
At December 31, 2002, our loan portfolio totaled $1.7 billion, of which $1.3
billion, or 71.8%, were mortgage loans. The remainder of our loans at December
31, 2002, amounting to $493.0 million, or 28.2% of total loans, consisted of
consumer loans ($431.9 million or 24.7%) and commercial business loans ($61.1
million or 3.5%).
We originate primarily adjustable rate mortgage ("ARM") loans for our own
portfolio. We also originate fixed rate mortgage loans with terms of 10 to 30
years. Most of the 20 year and longer fixed rate mortgage loans are immediately
sold into the secondary market. At times, we may also sell 15 year fixed rate
mortgage loans depending on the percentage of fixed interest rate loans in our
portfolio and the interest rate environment we are anticipating. We sold a large
portion of our 15 year fixed rate mortgage loan originations in 2002.
The loans that we originate are subject to federal and state laws and
regulations. The interest rates we charge on loans are affected principally by
the demand for loans, the cost and supply of money available for lending
purposes and the interest rates offered by our competitors. These factors are in
turn affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, legislative tax
policies and governmental budgetary matters.
5
The following table presents the composition of our loan portfolio in dollar
amounts and in percentages of the total portfolio at the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000(1)
---- ---- -------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ -----
Mortgage loans:
One to four-family ....................... $ 827,648 47.37% $ 992,126 52.46% $1,207,912 59.56%
Multi-family ............................. 112,189 6.42 131,925 6.97 105,925 5.22
Commercial real estate ................... 186,960 10.70 165,556 8.75 118,636 5.85
Construction and development ............. 127,174 7.28 125,611 6.64 94,235 4.65
---------- ------ ---------- ------ ---------- ------
Total mortgage loans ............ 1,253,971 71.77 1,415,218 74.82 $1,526,708 75.28
---------- ------ ---------- ------ ---------- ------
Consumer loans:
Fixed equity ............................. 234,049 13.40 200,500 10.61 193,394 9.54
Home equity lines of credit .............. 77,697 4.45 76,472 4.04 80,447 3.97
Student .................................. 22,636 1.30 25,410 1.34 27,076 1.34
Home improvement ......................... 6,993 0.40 9,439 0.50 12,778 0.63
Automobile ............................... 68,140 3.90 77,621 4.10 99,844 4.92
Other .................................... 22,434 1.28 25,886 1.37 27,827 1.37
---------- ------ ---------- ------ ---------- ------
Total consumer loans ............ 431,949 24.73 415,328 21.96 441,366 21.77
---------- ------ ---------- ------ ---------- ------
Commercial business loans .................... 61,060 3.50 60,932 3.22 59,844 2.95
---------- ------ ---------- ------ ---------- ------
Total loans receivable .......... 1,746,980 100.00% 1,891,478 100.00% 2,027,918 100.00%
Less:
Undisbursed loan proceeds ................ 46,048 44,467 37,490
Deferred fees and discounts .............. 12,743 12,245 5,554
Allowance for loan losses ................ 2,527 3,611 12,238
---------- ---------- ----------
Total loans receivable, net ..... $1,685,662 $1,831,155 $1,972,636
========== ========== ==========
AT DECEMBER 31,
-------------------------------------------------
1999 1998
---- ----
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
Mortgage loans:
One to four-family ....................... $ 743,993 67.37% $ 742,231 70.56%
Multi-family ............................. 53,777 4.87 53,521 5.09
Commercial real estate ................... 52,375 4.74 40,922 3.89
Construction and development ............. 26,530 2.40 21,939 2.09
---------- ------ ---------- ------
Total mortgage loans ............ 876,675 79.38 858,613 81.63
---------- ------ ---------- ------
Consumer loans:
Fixed equity ............................. 89,315 8.09 67,629 6.42
Home equity lines of credit .............. 50,618 4.58 45,827 4.36
Student .................................. 28,371 2.57 29,634 2.82
Home improvement ......................... 9,920 0.90 8,373 0.80
Automobile ............................... 5,902 0.54 8,762 0.83
Other .................................... 4,126 0.37 4,208 0.40
---------- ------ ---------- ------
Total consumer loans ............ 188,252 17.05 164,433 15.63
---------- ------ ---------- ------
Commercial business loans .................... 39,488 3.57 28,839 2.74
---------- ------ ---------- ------
Total loans receivable .......... 1,104,415 100.00% 1,051,885 100.00%
Less:
Undisbursed loan proceeds ................ 14,658 7,001
Deferred fees and discounts .............. 14 440
Allowance for loan losses ................ 6,948 6,855
---------- ----------
Total loans receivable, net ..... $1,082,795 $1,037,589
========== ==========
(1) On November 1, 2000, Bank Mutual Corporation acquired First Northern.
Under the purchase accounting method, First Northern's results are
included from the date of acquisition.
At December 31, 2002, our one-to four-family first mortgage loans were pledged
as collateral under a blanket pledge to the Federal Home Loan Bank ("FHLB") of
Chicago. As of December 31, 2002, there were no other significant concentrations
of loans such as loans to a number of borrowers engaged in similar activities.
Bank Mutual's mortgage loans, fixed equity, home equity lines of credit and home
improvement loans are primarily secured by properties housing one-to
four-families which are generally located in our local lending areas in
Wisconsin.
6
Loan Maturity. The following table presents the contractual maturity of our
loans at December 31, 2002. The table does not include the effect of prepayments
or scheduled principal amortization.
AT DECEMBER 31, 2002
-----------------------------------------------------------------
COMMERCIAL
MORTGAGE LOANS CONSUMER LOANS BUSINESS LOANS TOTAL
-------------- -------------- -------------- -----
(IN THOUSANDS)
AMOUNTS DUE:
Within one year ..................... $ 44,706 $ 36,829 $27,194 $ 108,729
After one year
One to two years ................ 42,083 26,470 15,169 83,722
Two to three years .............. 35,839 27,719 5,405 68,963
Three to five years ............. 49,279 77,831 8,453 135,563
Five to ten years ............... 160,043 205,383 268 365,694
Ten to twenty years ............. 441,406 57,717 4,571 503,694
Over twenty years ............... 480,615 -- -- 480,615
---------- -------- ------- ----------
Total due after one year ... 1,209,265 395,120 33,866 1,638,251
---------- -------- ------- ----------
Total loans receivable ..... $1,253,971 $431,949 $61,060 $1,746,980
========== ======== ======= ==========
The following table presents, as of December 31, 2002, the dollar amount of all
loans due after December 31, 2003, and whether these loans have fixed interest
rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2003
--------------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
Mortgage loans ................................ $482,228 $727,037 $1,209,265
Consumer loans ................................ 254,467 140,653 395,120
Commercial business loans ..................... 29,903 3,963 33,866
-------- -------- ----------
Total loans due after one year ... $766,598 $871,653 $1,638,251
======== ======== ==========
The following table presents our loan originations, purchases, sales and
principal payments for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Balance outstanding at beginning of period ........... $1,923,799 $2,035,387 $1,104,956
ORIGINATIONS:
Mortgage loans .................................. 752,771 691,466 189,706
Consumer loans ................................. 293,320 242,580 141,943
Commercial business loans ....................... 27,141 30,202 23,189
---------- ---------- ----------
Total loan originations ................ 1,073,232 964,248 354,838
---------- ---------- ----------
PURCHASES:
One-to four-family mortgage loans ............... 4,042 8,885 19,213
First Northern loans (1) ........................ -- -- 847,888
---------- ---------- ----------
Total loan purchases .................... 4,042 8,885 867,101
---------- ---------- ----------
LESS:
Principal payments and repayments:
Mortgage loans ............................... 537,368 483,298 134,317
Consumer loans ............................... 276,728 267,592 89,637
Commercial business loans .................... 23,158 23,792 32,412
---------- ---------- ----------
Total principal payments ................ 837,254 774,682 256,366
---------- ---------- ----------
Transfers to foreclosed real estate ............. 1,271 409 2,697
---------- ---------- ----------
Loan sales:
Mortgage loans ............................... 368,597 307,843 32,397
Education loans .............................. -- 1,787 48
---------- ---------- ----------
Total loan sales ........................ 368,597 309,630 32,445
---------- ---------- ----------
Total loans receivable and loans held for sale .. $1,793,951 $1,923,799 $2,035,387
========== ========== ==========
(1) First Northern loans before deductions of undisbursed loan proceeds,
allowances for loan losses, discounts and premiums.
7
Residential Mortgage Lending. Our primary lending activity has been the
origination of first mortgage loans secured by one- to four-family properties,
within our primary lending area. Most of these loans are owner-occupied;
however, we do originate first mortgage loans on second homes, seasonal homes
and investment properties. In addition to our loan originations, we have
purchased one- to four-family first mortgage loans of $4.0 million in 2002, $8.9
million in 2001, and $19.2 million in 2000. We review these loans for compliance
with our underwriting standards, and generally only invest in loans in the
midwestern United States.
We offer conventional fixed rate mortgage loans and ARM loans with maturity
dates up to 30 years. Residential mortgage loans generally are underwritten to
Federal National Mortgage Association Standards ("Fannie Mae") or Federal Home
Loan Mortgage Corporation ("Freddie Mac") guidelines. All ARM mortgage loans and
some fixed rate mortgage loans with maturities of up to 20 years are held in our
portfolio. Fixed rate mortgage loans with maturities greater than 15 years
typically are sold without recourse, servicing retained, into the secondary
market. During the past few years we have generally not charged loan origination
fees. The interest rates charged on mortgage loan originations at any given date
will vary, depending upon conditions in the local and secondary markets.
We also originate "jumbo single family mortgage loans" in excess of the Fannie
Mae or Freddie Mac maximum loan amount, which was $300,700 for both agencies in
2002. Effective for 2003, the maximum loan amount increased to $322,700 for both
agencies. Fixed rate jumbo mortgage loans generally are sold servicing released
without recourse to secondary market purchasers of such loans. ARM jumbo
mortgage loans are underwritten in accordance with our underwriting guidelines
and are retained in our loan portfolio.
Mortgage loan originations are solicited from real estate brokers, builders,
existing customers, community groups and residents of the local communities
located in our primary market area through our loan origination staff. We also
advertise our mortgage loan products through local newspapers, periodicals,
internal customer communications and our website.
We currently offer loans that conform to underwriting standards that are based
on standards specified by Fannie Mae or Freddie Mac ("conforming loans") and
also originate a limited amount of non-conforming loans for our own portfolio or
for sale. Loans may be fixed rate one- to four-family mortgage loans or
adjustable rate one- to four-family mortgage loans with maturities of up to 30
years. The average size of our one- to four-family mortgage loans originated in
2002, 2001 and 2000 was approximately $114,000, $105,000 and $94,000,
respectively. The overall average size of our one- to four-family mortgage loans
was approximately $114,382 at December 31, 2002. We are an approved
seller/servicer for Fannie Mae, Freddie Mac, the FHLB of Chicago's Mortgage
Partnership Finance Program, Wisconsin Housing and Economic Development
Authority ("WHEDA") and Wisconsin Department of Veterans Affairs ("WDVA").
The focus of our residential mortgage loan portfolio is the origination of 30
year ARM loans with interest rates adjustable in one, two, three, or five years.
ARM loans typically are adjusted by a maximum of 200 basis points per adjustment
period. Prior to the merger of the Banks, there was a lifetime cap of 6% above
the origination rate for First Northern Savings Bank and a lifetime interest
rate cap of 12.9% for Mutual Savings Bank. Going forward, the Bank will
originate ARM loans with a lifetime cap of 6% above the origination rate.
Monthly payments of principal and interest are adjusted when the interest rate
adjusts. We do not offer ARM loans which provide for negative amortization. The
initial rates offered on ARM loans fluctuate with general interest rate changes
and are determined by secondary market pricing, competitive conditions and our
yield requirements. We currently utilize the monthly average yield on United
States treasury securities, adjusted to a constant maturity of one year
("constant treasury maturity index") or the National Monthly Median Cost of
Funds ("NMCOF") for Savings Association Insurance Fund ("SAIF") insured
institutions as the indexes to determine the interest rate payable upon the
adjustment date of our ARM loans. Some of the ARM loans are granted with
conversion options which provide terms under which the borrower may convert the
mortgage loan to a fixed rate mortgage loan for a limited period early in the
term of the ARM loan. The terms at which the ARM loan may be converted to a
fixed rate loan are established at the date of loan origination and are set at a
level allowing us to sell the loan into the secondary market upon conversion.
ARM loans may pose credit risks different from the risks inherent in fixed rate
loans, primarily because as interest rates rise, the underlying payments from
the borrowers rise, thereby increasing the potential for payment default. At the
same time, the marketability of the underlying property may be adversely
affected by higher interest rates.
8
The volume and types of ARM loans we originate have been affected by the level
of market interest rates, competition, consumer preferences and the availability
of funds. Although we will continue to offer ARM loans, we cannot guarantee that
we will be able to originate a sufficient volume of ARM loans to increase or
maintain the proportion that these loans bear to our total loans.
In addition to conventional fixed rate and ARM loans, we are authorized to
originate mortgages utilizing various government programs, including programs
offered by the Federal Housing Administration, the Federal Veterans
Administration, and Guaranteed Rural Housing. We also participate in two
state-sponsored mortgage programs operated by WHEDA and WDVA. We originate these
state-sponsored loans as an agent and assign them to the agency immediately
after closing. Servicing is retained by us on both WHEDA and WDVA loans.
Upon receipt of a completed mortgage loan application from a prospective
borrower, a credit report is ordered, income and other information is verified,
and if necessary, additional financial information is requested. An appraisal of
the real estate to secure the loan is required, which must be performed by a
certified appraiser approved by the board of directors. A title insurance policy
is required on all real estate first mortgage loans. Evidence of adequate hazard
insurance and flood insurance, if applicable, is required prior to closing.
Borrowers are required to make monthly payments to fund principal and interest
as well as private mortgage insurance and flood insurance, if applicable. With
some exceptions for lower loan-to-value ratio loans, borrowers also generally
are required to escrow in advance for real estate taxes. We make disbursements
for these items from the escrow account as the obligations become due.
In addition to our full documentation loan program, increasingly we process
loans as reduced documentation loans. These loans are processed under the Fannie
Mae or Freddie Mac alternative documentation program. We require applicants for
reduced documentation loans to complete a Fannie Mae or Freddie Mac loan
application and request income, asset and debt information from the borrower. In
addition to obtaining outside vendor credit reports on all borrowers, we also
look at other information to ascertain the creditworthiness of the borrower. In
most instances, we utilize the Fannie Mae's "Desktop Underwriter" or Freddie
Mac's "Loan Prospector" automated underwriting process to further reduce the
necessary documentation. For example, a simplified appraisal or inspection may
be used to verify the value of the property. All loans that are processed with
reduced documentation conform to secondary market standards and are generally
saleable.
Our Underwriting Department reviews all pertinent information prior to making a
credit decision to approve or deny an application. All recommendations to deny
are reviewed by a designated officer of the Bank prior to the final disposition
of the loan application. Our lending policies generally limit the maximum
loan-to-value ratio on one- to four-family mortgage loans secured by
owner-occupied properties to 97% of the lesser of the appraised value or
purchase price of the property. Loans above 80% loan-to-value ratios are subject
to the availability of private mortgage insurance. Coverage is required to
reduce our exposure to less than 80% of value.
Our originations of residential mortgage loans amounted to $700.5 million in
2002, $617.8 million in 2001, and $117.6 million in 2000. A number of our
mortgage loan originations have been the result of refinancing of our existing
loans due to the relatively low interest rate levels over the past three years.
The First Northern acquisition also affects the comparison between 2000 and
other years. Total refinancings of our existing mortgage loans were as follows:
PERCENTAGE OF
MORTGAGE LOAN
PERIOD AMOUNT ORIGINATIONS
- ------ ------ ------------
(DOLLARS IN MILLIONS)
Year ended December 31, 2002 .................. $278.6 40.1%
Year ended December 31, 2001 .................. 239.2 34.6
Year ended December 31, 2000 .................. 17.6 9.3
In addition to our standard mortgage and consumer credit products, we have
developed mortgage programs designed to specifically address the credit needs of
low- to moderate-income home mortgage applicants and first-time home buyers.
Among the features of the low- to moderate-income home mortgage and first-time
home buyer's programs are reduced rates, lower down payments, reduced fees and
closing costs, and generally less restrictive requirements for qualification
compared with our traditional one- to four-family mortgage loans. For instance,
certain of these programs currently provide for loans with up to 97%
loan-to-value ratios and rates which are lower than our traditional mortgage
loans.
9
Consumer Loans. We have been expanding our consumer loan originations because
higher yields can be obtained, there is strong consumer demand for such
products, and we have experienced relatively low delinquency and few losses on
such products. In addition, we believe that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities. At December 31, 2002, $431.9 million, or 24.7%, of our gross loan
portfolio was in consumer loans. Consumer loan products offered within our
market areas include home equity loans, home equity lines of credit, home
improvement loans, automobile loans, recreational vehicle loans, marine loans,
deposit account loans, overdraft protection lines of credit, unsecured consumer
loans through the MasterCard and Visa credit card programs (offered through Elan
Financial Services), unsecured consumer loans with existing customers and
federally guaranteed student loans.
Our focus in consumer lending has been the origination of home equity loans,
home improvement, home equity lines of credit and automobile loans. At December
31, 2002, we had $386.9 million or 89.6% of the consumer loan portfolio in such
loans. Underwriting procedures for the home equity and home equity lines of
credit loans include a comprehensive review of the loan application, and require
an acceptable credit rating and verification of the value of the equity in the
home and income of the borrower. The loan-to-value ratio and the total debt
ratios to income are determining factors in the underwriting process. Home
equity loan and home improvement loan originations are developed through the use
of direct mail, cross-sales to existing customers, radio advertisement, and
advertisements in local newspapers.
We make indirect automobile loans through applications taken by selected
automobile dealers on application forms approved by us. The applications are
delivered to Savings Financial Corporation ("SFC"), a 50% owned subsidiary of
the Bank, for underwriting. If an application is approved, money is funded to
the dealer and the loan becomes a part of the SFC automobile portfolio. From
time to time, the SFC automobile portfolio is then sold to either of the parent
companies of SFC or to the Bank's subsidiary First Northern Investments Inc.
We originate both fixed rate and variable rate home equity loans and home
improvement loans with combined loan-to-value ratios to 100%. Pricing on fixed
rate home equity and home improvement loans is reviewed by management, and
generally terms are in the three to fifteen year range in order to minimize
interest rate risk. During 2002 we originated approximately $130.9 million of
fixed rate home equity or home improvement loans. These loans carry a weighted
average written term of 8.9 years and a fixed rate ranging from 3.75% to 12.75%.
We also offer adjustable rate home equity and home improvement loans. At
December 31, 2002, $78.2 million or 32.5% of the home equity and home
improvement loan portfolio carried an adjustable rate. The adjustable rate loans
have a fixed rate for six months to three years then adjust annually or monthly
depending upon the offering, with terms of up to twenty years. Our home equity
and home improvement loans are originated in amounts which, together with the
amount of the first mortgage, do not exceed 100% of the value of the property
securing the loan. Many of our home equity and home improvement loans are
secured by a first mortgage.
Our home equity credit line loans, which totaled $77.7 million, or 18.0% of
total consumer loans at December 31, 2002, are adjustable rate loans secured by
a first or second mortgage on owner-occupied one- to four-family residences
located in the state of Wisconsin. Current interest rates on home equity credit
lines are tied to the prime rate, adjust monthly after an initial interest rate
lock period, and range from prime rate to 350 basis points over the prime rate,
depending on the loan-to-value ratio. Home equity line of credit loans are made
for terms up to 10 years and require a minimum monthly payment of interest only
or the greater of $100 or 1 1/2% of the month end balance. An annual fee is
charged on home equity lines of credit.
At December 31, 2002, student loans amounted to $22.6 million, or 5.2% of our
consumer loan portfolio. These loans are serviced by Great Lakes Higher
Education Servicing Corporation.
Multi-family and Commercial Real Estate Loans. At December 31, 2002, our
multi-family and commercial real estate loan portfolio was $299.1 million or
17.1% of our total loans receivable. The multi-family and commercial real estate
loan portfolio consist of fixed rate, ARM and balloon loans originated at
prevailing market rates. This portfolio generally consists of loans secured by
apartment buildings, office buildings, warehouses, industrial buildings and
retail centers. These loans typically do not exceed 80% of the lesser of the
purchase price or an appraisal by an appraiser
10
designated by us. Balloon loans generally are amortized on a 15 to 25 year basis
with a typical loan term of 3 to 10 years.
Loans secured by multi-family and commercial real estate are granted based on
the income producing potential of the property and the financial strength of the
borrower. The net operating income, which is the income derived from the
operation of the property less all operating expenses, must be sufficient to
cover the payments relating to the outstanding debt. In most cases, we obtain
joint and several personal guarantees from the principals involved. We generally
require an assignment of rents or leases in order to be assured that the cash
flow from the project will be used to repay the debt. Appraisals on properties
securing multi-family and commercial real estate loans are performed by
independent state certified fee appraisers approved by the board of directors.
Title and hazard insurance are required as well as flood insurance, if
applicable. Environmental assessments are performed on certain multi-family and
commercial real estate loans in excess of $500,000. In addition, an annual
review is performed by us on multi-family and commercial real estate loans over
$1.0 million.
At December 31, 2002, the largest outstanding loan on a multi-family property
was $12.0 million on a 148 unit apartment project located in Oak Creek,
Wisconsin. At the same date, the largest outstanding loan on a commercial real
estate property was $21.3 million on a retail/office building complex located in
Brookfield, Wisconsin. At December 31, 2002, these loans were current and
performing in accordance with their terms.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project decreases, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
Commercial Business Loans. At December 31, 2002, our commercial business loan
portfolio consisted of loans totaling $61.1 million or 3.5% of our total loans
receivable. The commercial loan portfolio consists of loans to businesses for
equipment purchases, working capital lines of credit, debt refinancing, SBA
loans and domestic stand-by letters of credit. Typically, these loans are
secured by business assets and personal guarantees. We offer both variable and
fixed rate loans. Approximately 22.5% of the commercial business loans have an
interest rate adjusted monthly based on the prevailing prime rate. Term loans
are generally amortized over a three to seven year period. Fixed rate loans are
priced at a margin over the yield on US Treasury issues with maturities that
correspond to the maturities of the notes. All lines of credit and term loans
with balances over $500,000 are reviewed annually. The largest commercial
business loan at December 31, 2002 had an outstanding balance of $16.8 million
and was secured by equipment and chattel paper.
LOAN APPROVAL AUTHORITY
Prior to their merger, Mutual Savings Bank and First Northern Savings Bank had
somewhat different underwriting approval limits and authority. Both Banks have
reviewed their approval limits through a combined "best practices" committee and
the new loan approval authority for the Bank is summarized below.
For one- to four- family residential loans intended for sale into the secondary
market, the underwriters are authorized by the board of directors to approve
loans processed through the Fannie Mae "Desktop Underwriter" automated
underwriting system or the Freddie Mac "Loan Prospector" automated underwriting
system up to the Fannie Mae/Freddie Mac limits ($322,700 for a single family
residential units; higher limits for two, three, and four family units). For
one- to eight- family residential loans intended to be held in the Bank's
portfolio, the underwriters are authorized to approve loans processed through
the Fannie Mae "Desktop Underwriter" automated underwriting system or the
Freddie Mac " Loan Prospector" automated underwriting system up to $200,000,
provided the loan-to-value is 80% or less and the loan meets other specific
underwriting criteria. All portfolio loans in excess of $200,000, with a
loan-to-value greater than 80%, or failing to meet other specific underwriting
criteria must be approved by a senior officer.
Consumer loan underwriters have individual approval authorities for secured
loans ranging from $20,000 to $100,000 provided the loan-to-value on real estate
does not exceed 80% or 90% on personal property and that the loan meets
11
other specific underwriting criteria. All consumer loans in excess of $100,000,
with a loan-to-value greater than 80% on real estate, 90% on personal property,
or failing to meet other specific underwriting criteria must be approved by a
senior officer. Consumer loan underwriters have individual approval authorities
for unsecured loans ranging from $2,000 to $15,000 provided the loan meets other
specific underwriting criteria. All unsecured consumer loans in excess of
$15,000, or not meeting specific underwriting criteria, must be approved by a
senior officer.
Individual lenders in the investment real estate department have lending
authorities of $100,000 for multi-family and commercial loan proposals for both
existing and proposed construction of investment real estate properties. Senior
officers have individual lending authority of $250,000 and two senior officers
together have lending authority of $500,000 for investment real estate loans.
All investment real estate loans over $500,000 require approval of the executive
committee of the board of directors.
Individual lenders in the commercial banking department have individual lending
authorities ranging from $50,000 to $150,000 for secured commercial business
loans. Senior officers have individual lending authority of $250,000 and two
senior officers together have lending authority of $500,000 for secured
commercial business loans. All secured business loans over $500,000 require
approval of the executive committee of the board of directors. Individual
lenders in the commercial banking department have individual lending authorities
ranging from $10,000 to $25,000 for unsecured commercial business loans. Senior
officers have individual lending authority of $50,000 and two senior officers
together have lending authority of $150,000 for unsecured commercial business
loans. All unsecured business loans over $150,000 require approval of the
executive committee of the board of directors.
All loans approved by individuals and senior officers must be ratified by the
board of directors at the next meeting following the approval.
ASSET QUALITY
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Through a variety of strategies, including, but not
limited to, borrower workout arrangements and aggressive marketing of foreclosed
properties and repossessed assets, we have been proactive in addressing problem
and non-performing assets. These strategies, as well as our emphasis on quality
loan underwriting, our maintenance of sound credit standards for new loan
originations and relatively favorable economic and real estate market conditions
have resulted in historically low delinquency ratios. However in 2002, we did
experience a rise in commercial business loan delinquencies.. These factors have
helped strengthen our financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make required
payments on a loan, we take a number of steps to induce the borrower to cure the
delinquency and restore the loan to a current status. In the case of one-to-four
family mortgage loans, our loan servicing department is responsible for
collection procedures from the 15th day of delinquency through the completion of
foreclosure. Specific procedures include a late charge notice being sent at the
time a payment is over 15 days past due with a second notice (in the form of a
billing coupon) being sent before the payment becomes 30 days past due. Once the
account is 30 days past due, we attempt telephone contact with the borrower.
Letters are sent if contact has not been established by the 45th day of
delinquency. On the 60th day of delinquency, attempts at telephone contact
continue and stronger letters, including foreclosure notices, are sent. If
telephone contact cannot be made, we send our property inspector or a loan
officer to the property.
When contact is made with the borrower, we attempt to obtain full payment or
work out a repayment schedule to avoid foreclosure. All properties are inspected
prior to foreclosure approval. Most borrowers pay before the deadline given and
it is not necessary to start foreclosure action. If it is, action starts when
the loan is between the 90th and 120th day of delinquency. We normally seek the
shortest redemption period possible. If we obtain the property at the
foreclosure sale, we hold the property as real estate owned. It is marketed
after a market evaluation is obtained and any PMI claims are filed. The
collection procedures and guidelines as outlined by Fannie Mae, Freddie Mac,
Federal Housing Administration (FHA), Veterans Administration (VA), Department
of Veterans Affairs (DVA), Wisconsin Housing and Economic Development Authority
(WHEDA) and Guaranteed Rural Housing are followed.
The collection procedures for consumer loans, excluding student loans and
indirect consumer loans, include sending periodic late notices to a borrower
once a loan is 5 to 15 days past due depending upon the grace period associated
with
12
a loan. We attempt to make direct contact with a borrower once a loan becomes 30
days past due. Supervisory personnel review loans 60 days or more delinquent on
a regular basis. If collection activity is unsuccessful after 90 days, we may
pursue legal remedies ourselves or refer the matter to our legal counsel for
further collection effort or charge-off a loan. Loans we deem to be
uncollectible are proposed for charge off. Charge-offs of consumer loans require
the approval of our consumer loan manager, a senior officer or a management
committee. All student loans are serviced by the Great Lakes Higher Education
Servicing Corporation or Student Loan Marketing Association ("Sallie Mae") which
guarantees their servicing to comply with all Department of Education
Guidelines. Our student loan portfolio is guaranteed by the Great Lakes Higher
Education Guaranty Corporation, which is reinsured by the U.S. Department of
Education.
The collection procedures for multi-family, commercial real estate and
commercial business loans include sending periodic late notices to a borrower
once a loan is past due. We attempt to make direct contact with a borrower once
a loan becomes 15 days past due. A loan servicing manager or a manager of
multi-family and commercial real estate loans reviews loans 15 days or more
delinquent on a regular basis. The commercial banking manager reviews commercial
business loans 10 days or more delinquent on a regular basis. If collection
activity is unsuccessful, we may refer the matter to our legal counsel for
further collection effort. Within 90 days, loans we deem to be uncollectible are
proposed for repossession or foreclosure and charge-off. This action requires
the approval of our board of directors.
Our policies require that management continuously monitor the status of the loan
portfolio and report to the board of directors on a monthly basis. These reports
include information on delinquent loans and foreclosed real estate.
The following table presents information regarding non-accrual mortgage,
consumer and other loans, commercial business loans. accruing loans delinquent
90 days or more, and foreclosed properties and repossessed assets as of the
dates indicated.
AT DECEMBER 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans .................. $1,399 $1,814 $ 730 $3,372 $ 2,793
Non-accrual consumer loans .................. 527 444 383 283 320
Non-accrual commercial business loans ....... 5,357 346 750 -- --
Accruing loans delinquent 90 days or more ... 1,108 936 1,258 1,152 3,617
------ ------ ------ ------ -------
Total non-performing loans ........ 8,391 3,540 3,121 4,807 6,730
Foreclosed properties and repossessed
assets, net .............................. 750 383 2,281 3,018 3,505
------ ------ ------ ------ -------
Total non-performing assets ....... $9,141 $3,923 $5,402 $7,825 $10,235
====== ====== ====== ====== =======
Non-performing loans to total loans ......... 0.50% 0.19% 0.16% 0.44% 0.65%
Non-performing assets to total asset ........ 0.32 0.14 0.19 0.44 0.55
Interest income that would have been
recognized if non-accrual loans
had been current ...................... $ 375 $ 139 $ 77 $ 245 $ 185
====== ====== ====== ====== =======
There was no specific reserve related to any loans for any date presented. There
are no significant loans, which were considered to be impaired as defined in
Statement of Financial Accounting Standards ("SFAS") No. 114 at December 31,
2002, 2001, 2000, 1999, or 1998.
There are no restructured loans at the dates presented.
Total non-performing loans increased as of December 31, 2002, as compared to
December 31, 2001, primarily as a result of an increase in non-accrual business
and non-accrual consumer loans. Even with the reported increase, we believe
non-performing loans and assets, expressed as a percentage of total loans and
assets, are still below national averages for financial institutions, due in
part to our loan underwriting standards. The increase relating to consumer and
commercial loans results from the general decline in economic conditions.
In view of the continuing weakness in the economy, we have been increasing the
amount of management time to monitor the commercial loan portfolio since that is
an area particularly sensitive to economic downturns.
13
In light of the economic downturn, there are two commercial borrowers that we
have on our watch list. One commercial borrower has loans that total $5.5
million and are current at December 31, 2002. We have provided $277,000 to the
loan loss allowance on one of these loans of $1.8 million. At present, we do not
anticipate any loss from the other commercial loans of $3.7 million but continue
to carefully monitor this borrower.
The other commercial borrower has three loans which total $4.6 million that we
are monitoring closely. This borrower is current at December 31, 2002, however,
its business is being affected by the general economic slowdown. If this
company's sales do not improve by the end of the first quarter of 2003, we may
place these loans in a substandard classification and create a loan loss
allowance for the loans.
The ultimate results with these, and other, commercial loans will depend on the
success of the related business or projects, economic performance and other
factors affecting loans and borrowers.
With the exception of mortgage loans insured or guaranteed by the FHA, VA or
Guaranteed Rural Housing, we stop accruing income on loans when interest or
principal payments are greater than 90 days in arrears or earlier when the
timely collectibility of such interest or principal is doubtful. We designate
loans on which we stop accruing income as non-accrual loans and we reverse
outstanding interest that we previously credited to income. We may recognize
income in the period that we collect it when the ultimate collectibility of
principal is no longer in doubt. We return a non-accrual loan to accrual status
when factors indicating doubtful collection no longer exist. We had $7.3 and
$2.6 million of non-accrual loans at December 31, 2002 and 2001, respectively.
Interest income that would have been recognized had such loans been performing
in accordance with their contractual terms totaled approximately $375,000 and
$139,000 for the years December 31, 2002 and 2001, respectively. A total of
approximately $557,000 and $85,000 of interest income was actually recorded on
such loans in 2002 and 2001, respectively.
All commercial real estate loans which are greater than 90 days past due are
considered to be potentially impaired. Impaired loans are individually assessed
to determine whether a loan's carrying value is in excess of the fair value of
the collateral or the present value of the loan's cash flows discounted at the
loan's effective interest rate and if the carrying value is in excess, a loan
loss allowance will be established.
Foreclosed real estate consists of property we acquired through foreclosure or
deed in lieu of foreclosure. Foreclosed real estate properties are initially
recorded at the lower of the recorded investment in the loan or fair value.
Thereafter, we carry foreclosed real estate at fair value less estimated selling
costs. Foreclosed real estate is inspected periodically. Additional outside
appraisals are obtained if we consider that appropriate. Additional write-downs
may occur if the property value deteriorates. These additional write-downs are
charged directly to current operations.
14
Allowance for Loan Losses. The following table presents the activity in our
allowance for loan losses at or for the periods indicated.
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period .... $ 12,245 $ 12,238 $ 6,948 $ 6,855 $ 7,195
Provision for loan losses ......... 760 723 423 350 637
Purchase of
First Northern ................ -- -- 5,028 -- --
Charge-offs:
Mortgage loans ................ (14) (65) (38) (152) (997
Consumer loans ................ (428) (337) (156) (189) (223)
Commercial business loans ..... (39) (415) -- -- --
-------- -------- -------- ------- -------
Total charge-offs ......... (481) (817) (194) (341) (1,220)
Recoveries:
Mortgage loans ................ 66 26 1 40 206
Consumer loans ................ 40 57 32 44 37
Commercial business loans ..... 113 18 -- -- --
-------- -------- -------- ------- -------
Total recoveries .......... 219 101 33 84 243
-------- -------- -------- ------- -------
Net charge-offs ............... (262) (716) (161) (257) (977)
-------- -------- -------- ------- -------
Balance at end of period .......... $ 12,743 $ 12,245 $ 12,238 $ 6,948 $ 6,855
======== ======== ======== ======= =======
Net charge-offs to average loans .. 0.01% 0.04% 0.01% 0.02% 0.08%
Allowance for loan losses
to total loans .................. 0.76% 0.67% 0.62% 0.64% 0.66%
Allowance for loan losses to
non-performing loans ............ 151.87% 345.90% 392.12% 144.54% 101.86%
The allowance for loan losses has been determined in accordance with generally
accepted accounting principles. We are responsible for the timely and periodic
determination of the amount of the allowance required. We believe that our
allowance for loan losses is adequate to cover specifically identifiable loan
losses, as well as estimated losses inherent in our portfolio for which certain
losses are probable but not specifically identifiable.
Loan loss allowances are reviewed monthly. General allowances are maintained by
the following categories for performing loans to provide for unidentified
inherent losses in the portfolios:
- One-to-four family
- Consumer
- Multi-family and commercial real estate
- Commercial business
Allowance goals have been established based on an internal risk evaluation by
loan category. Various factors are taken into consideration including:
historical loss experience, economic factors and other factors, that, in
management's judgement would affect the collectibility of the portfolio as of
the evaluation date. Adjustments to the allowance for loan losses are charged
against operations as provision for loan losses to maintain allowances at the
desired levels.
The appropriateness of the allowance is reviewed by senior management based upon
its evaluation of then-existing economic and business conditions affecting the
key lending areas of the Bank. Other outside factors such as credit quality
trends, collateral values, loan volumes and concentrations, specific industry
conditions within portfolio segments and recent loss experience in particular
segments of the portfolio that existed as of the balance sheet date and the
impact that such conditions were believed to have had on the collectibility of
the loan are also considered. Our board of directors also reviews the loan loss
allowances compared to the relative size of the portfolio on at least a
quarterly basis.
15
Delinquent and Non-performing loans. One-to four-family loans delinquent more
than 90 days, multi-family and commercial real estate loans delinquent more than
60 days, consumer loans delinquent more than 90 days and commercial business
loans more than 60 days are reviewed and analyzed by senior officers on an
individual basis. Any potential loss is charged against the allowance by
establishing a corresponding specific allowance for that loan from the general
allowance. In such an event, the loan is then reduced by the amount of the
specific allowance and a corresponding amount is charged off to the allowance
for losses on loans.
By following careful underwriting guidelines, we have historically maintained
low levels of non-performing loans to total loans. Our ratio of non-performing
loans to total loans at December 31, 1998 was 0.65% and continued to decrease
until December 31, 2002 at which time it increased to 0.50%. This increase was
the result of a couple of commercial loans where the economic slowdown has
impacted their businesses.
We believe the primary risks inherent in our portfolio are possible increases in
interest rates, a possible continued decline in the economy, generally, and a
possible decline in real estate market values. Any one or a combination of these
events may adversely affect our loan portfolio resulting in increased
delinquencies and loan losses. Accordingly, and because of the increased
concentration of consumer loans, we have taken steps to increase our level of
loan loss allowances over the last 5 years. At December 31, 2002, the allowance
for loan losses as a percentage of total loans was 0.76% compared with 0.66% at
December 31, 1998. Furthermore, the increase in the allowance for loan losses
each year from 1998 to 2002 reflects our strategy of resolving non-performing
loans while providing adequate allowances for inherent losses in the portfolio,
identifying potential losses in a timely manner, and providing an adequate
allowance to reflect changes in the components of the portfolio during that
period.
Although we believe that we have established and maintained the allowance for
loan losses at adequate levels, future additions may be necessary if economic
and other conditions in the future differ substantially from the current
operating environment. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review our loan and foreclosed
real estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. One or more of these agencies,
specifically the OTS or the Federal Deposit Insurance Corporation ("FDIC"), may
require us to increase the allowance for loan losses or the valuation allowance
for foreclosed real estate based on their judgements of information available to
them at the time of their examination, thereby adversely affecting our results
of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the years ended December 31,
2002 and 2001--Provision for Loan Losses." The following tables represent our
allocation of allowance for loan losses by loan category on the dates indicated:
AT DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
One-to four-family ........ $ 4,701 52.46% $ 5,608 52.46% $ 6,279 59.56%
Other ..................... 3,160 22.37 2,875 22.36 2,173 15.72
------- ------ ------- ------ ------- ------
Total mortgage loans ... 7,861 74.83 8,483 74.82 8,452 75.28
Home equity lines ............ 1,171 4.04 1,803 4.04 519 3.97
Consumer ..................... 1,705 17.91 1,007 17.92 2,483 17.80
Commercial business loans .... 1,507 3.22 952 3.22 784 2.95
Unallocated .................. 499 0.00 -- 0.00 -- 0.00
------- ------ ------- ------ ------- ------
Total allowance for
loan losses ........... $12,743 100.00% $12,245 100.00% $12,238 100.00%
======= ====== ======= ------ ======= ======
AT DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
PERCENTAGE PERCENTAGE
OF OF
LOANS IN LOANS IN
CATEGORY CATEGORY
TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
One-to four-family ........ $4,736 67.37% $5,189 70.56%
Other ..................... 822 12.01 596 11.07
------ ------ ------ ------
Total mortgage loans ... 5,558 79.38 5,785 81.63
Home equity lines ............ 253 4.58 229 4.36
Consumer ..................... 617 12.47 439 11.27
Commercial business loans .... 520 3.57 402 2.74
Unallocated .................. -- 0.00 -- 0.00
------ ------ ------ ------
Total allowance for
loan losses ........... $6,948 100.00% $6,855 100.00%
====== ====== ====== ======
16
INVESTMENT ACTIVITIES
Investment Securities. The Bank's board of directors reviews and approves its
investment policy on an annual basis. Senior officers, as authorized by the
board of directors, implement this policy. The board of directors reviews
investment activity on a monthly basis.
Our investment objectives are to meet liquidity requirements, generate a
favorable return on investments without undue compromise to our other business
objectives and our levels of interest rate risk, credit risk and investment
portfolio concentrations. Federally chartered savings banks have authority to
invest in various types of assets, including U.S. Treasury obligations,
securities of various federal agencies, state and municipal obligations,
mortgage-related securities, mortgage derivative securities, certain time
deposits of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements, loans of federal funds, and, subject to
certain limits, corporate debt and equity securities, commercial paper and
mutual funds.
The Bank's investment policy allows participation in hedging strategies or the
use of financial futures, options or forward commitments or interest rate swaps
but only with prior approval of the board of directors. We did not have any such
hedging transactions in place at December 31, 2002. Our investment policy
prohibits the purchase of non-investment grade bonds. Our investment policy also
provides that we will not engage in any practice that the Federal Financial
Institutions Examination Council considers to be an unsuitable investment
practice. For information regarding the carrying values, yields and maturities
of our investment securities and mortgage-related securities, see "--Carrying
Values, Yields and Maturities."
We classify securities as trading, held-to-maturity, or available-for-sale at
the date of purchase. At December 31, 2002, all investment securities are
classified as available-for-sale. These securities are carried at fair value
with the change in fair value recorded as a component of shareholders' equity.
Mortgage-related Securities. Most of our mortgage-related securities are
directly or indirectly insured or guaranteed by the Government National Mortgage
Association ("GNMA"), Freddie Mac or Fannie Mae. The rest of the securities are
private placement collateralized mortgage obligations ("CMOs"). Private
placement CMOs carry higher credit risks and higher yields than CMOs insured or
guaranteed by agencies of the U.S. Government. We classify our entire
mortgage-related securities portfolio as available-for-sale.
At December 31, 2002, mortgage-related securities available-for-sale totaled
$618.1 million, or 21.7% of total assets. At December 31, 2002, the
mortgage-related securities portfolio had a weighted average yield of 5.39%. Of
the mortgage-related securities we held at December 31, 2002, $553.1 million, or
89.5%, had fixed rates and $65.1 million, or 10.5%, had adjustable-rates.
Mortgage-related securities at December 31, 2002 included real estate mortgage
investment conduits ("REMICs"), which are securities derived by reallocating
cash flows from mortgage pass-through securities or from pools of mortgage loans
held by a trust. REMICs are a form of, and are often referred to as CMOs.
Our CMOs have fixed and variable coupon rates ranging from 1.72% to 6.50% and a
weighted average yield of 4.99% at December 31, 2002. At December 31, 2002, CMOs
totaled $443.1 million, which constituted 71.7% of the mortgage-related
securities portfolio, or 15.6% of total assets. Our CMOs had an expected average
life of 2.0 years at December 31, 2002. For a further discussion of our
investment policies, including those for mortgage-related securities, see
"--Investment Securities." Purchases of mortgage-related securities may decline
in the future to offset any significant increase in demand for one- to
four-family mortgage loans and other loans.
Mortgage-related securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-related securities are more liquid
than individual mortgage loans. In general, mortgage-related securities issued
or guaranteed by GNMA, Freddie Mac and Fannie Mae are weighted at no more than
20% for risk-based capital purposes, compared to the 50% risk weighting assigned
to most non-securitized residential mortgage loans.
17
While mortgage-related securities carry a reduced credit risk as compared to
whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates and
value of mortgage-related securities.
The following table presents our investment securities and mortgage-related
securities activities for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
Carrying value at beginning of period .............. $ 93,059 $ 94,129 $ 57,763
--------- --------- ---------
Purchases .......................................... 36,390 174,938 47,509
Purchase of First Northern ......................... -- -- 39,320
Calls .............................................. (4,023) (14,000) --
Maturities ......................................... (50,960) (163,178) (52,160)
Principal payments ................................. (937) (563) (13)
Premium amortization and discount accretion, net ... 134 503 (15)
(Decrease) increase in unrealized gains ............ (437) 1,230 1,725
--------- --------- ---------
Net increase (decrease) in investment securities ... (19,833) (1,070) 36,366
--------- --------- ---------
Carrying value at end of period .................... $ 73,226 $ 93,059 $ 94,129
========= ========= =========
MORTGAGE-RELATED SECURITIES AVAILABLE-FOR-SALE:
Carrying value at beginning of period .............. $ 521,084 $ 464,873 $ 374,100
--------- --------- ---------
Purchases .......................................... 365,312 176,658 120,690
Purchase of First Northern ......................... -- -- 13,569
Principal payments ................................. (275,518) (128,256) (52,467)
Premium amortization and discount accretion, net ... (253) 723 501
Increase in unrealized gains ....................... 7,498 7,086 8,480
--------- --------- ---------
Net increase in mortgage-related securities ........ 97,039 56,211 90,773
--------- --------- ---------
Carrying value at end of period .................... $ 618,123 $ 521,084 $ 464,873
========= ========= =========
18
The following table presents the fair value of our money market investments,
investment securities and mortgage-related securities portfolios at the dates
indicated. It also presents the coupon type for the mortgage-related securities
portfolio. For all securities and for all periods presented, the carrying value
is equal to fair value.
AT DECEMBER 31,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
CARRYING/ CARRYING/ CARRYING/
FAIR VALUE FAIR VALUE FAIR VALUE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS
Interest-earning deposits .................................. $ 36,462 $ 35,338 $ 15,097
Federal funds sold ......................................... 165,000 175,000 20,000
-------- -------- --------
Total money market investments ......................... $201,462 $210,338 $ 35,097
======== ======== ========
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Mutual funds ............................................... $ 34,034 $ 32,982 $ 31,080
United States government and federal agency obligations .... 28,212 41,319 60,397
Corporate issue securities ................................. 9,563 17,189 999
Freddie Mac stock .......................................... 1,417 1,569 1,653
-------- -------- --------
Total investment securities available-for-sale ......... $ 73,226 $ 93,059 $ 94,129
======== ======== ========
MORTGAGE-RELATED SECURITIES AVAILABLE-FOR-
SALE BY ISSUER:
Freddie Mac ................................................ $288,113 $161,895 $ 70,106
Fannie Mae ................................................. 296,604 328,630 377,027
Private placement CMO's .................................... 8,406 28,783 15,489
GNMA ....................................................... 25,000 1,776 2,251
-------- -------- --------
Total mortgage-related securities ...................... $618,123 $521,084 $464,873
======== ======== ========
TOTAL INVESTMENT PORTFOLIO ..................................... $892,811 $824,481 $594,099
======== ======== ========
Carrying Values, Yields and Maturities. The table below presents information
regarding the carrying values, weighted average yields and contractual
maturities of our investment securities and mortgage-related securities at
December 31, 2001. Mortgage-related securities are presented by issuer and by
coupon type.
AT DECEMBER 31, 2002
---------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
Mutual funds ...................................... $34,034 2.97% $ -- --% $ -- --
United States government and agencies ............. 17,990 5.82 10,222 6.40 -- --
Corporate issues .................................. 1,540 6.42 8,023 6.11 -- --
Freddie Mac stock ................................. 1,417 1.47 -- -- -- --
------- ---- ------- ---- ------- ----
Total investment securities .................. $54,981 3.94 $18,245 6.27 $ -- --
======= ======= =======
MORTGAGE-RELATED SECURITIES AVAILABLE-FOR-SALE:
BY ISSUER:
GNMA pass-through certificates ................. $ -- $ -- $ 108 7.94 $ 81 8.50
Fannie Mae pass-through certificates ........... -- -- 10 7.70 24, 929 6.40
Freddie Mac pass- through certificates ......... -- -- -- -- -- --
Private CMO's .................................. 6 7.20 412 6.74 2,175 5.81
Freddie Mac, Fannie Mae and GNMA-REMICs ........ -- -- -- -- 38,521 4.60
------- ---- ------- ---- ------- ----
Total mortgage-related securities .......... $ 6 7.20 $ 530 7.00 $65,706 5.30
======= ======= =======
BY COUPON TYPE:
Adjustable rate ................................... $ -- -- $ -- -- $ 3,349 5.64
Fixed rate ........................................ 6 7.20 530 7.00 62,357 5.28
------- ---- ------- ---- ------- ----
Total mortgage-related securities .......... $ 6 7.20 $ 530 7.00 $65,706 5.30
======= ======= =======
Total investment and mortgage-related
securities portfolio ............................ $54,987 3.94% $18,775 6.29% $65,706 5.30%
======= ======= =======
AT DECEMBER 31, 2002
-------------------------------------------
MORE THAN TEN YEARS TOTAL
-------------------- --------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
----- ----- ----- -----
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
Mutual funds ...................................... $ -- -- $ 34,034 2.97%
United States government and agencies ............. -- -- 28,212 6.02
Corporate issues .................................. -- -- 9,563 6.16
Freddie Mac stock ................................. -- -- 1,417 1.47
-------- ---- -------- ----
Total investment securities .................. $ -- -- $ 73,226 4.50
======== ========
MORTGAGE-RELATED SECURITIES AVAILABLE-FOR-SALE:
BY ISSUER:
GNMA pass-through certificates ................. $ 4,056 4.76 $ 4,245 4.91
Fannie Mae pass-through certificates ........... 137,406 6.51 162,345 6.49
Freddie Mac pass- through certificates ......... 8,406 6.36 8,406 6.36
Private CMO's .................................. 16,472 5.40 19,065 5.48
Freddie Mac, Fannie Mae and GNMA-REMICs ........ 385,541 5.00 424,062 4.97
-------- ---- -------- ----
Total mortgage-related securities .......... $551,881 5.39 $618,123 5.39
======== ========
BY COUPON TYPE:
Adjustable rate ................................... $ 61,707 4.64 $ 65,056 4.70
Fixed rate ........................................ 490,174 5.48 553,067 5.46
-------- ---- -------- ----
Total mortgage-related securities .......... $551,881 5.39 $618,123 5.39
======== ========
Total investment and mortgage-related
securities portfolio ............................ $551,881 5.39% $691,349 5.29%
======== ========
19
DEPOSITS
We offer a variety of deposit accounts having a range of interest rates and
terms. We currently offer regular savings accounts (consisting of passbook and
statement savings accounts), interest-bearing demand accounts,
non-interest-bearing demand accounts, money market accounts, and time deposits.
We also offer IRA time deposit accounts.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our 70
bank offices and we rely primarily on paying competitive rates, service, and
long-standing relationships with customers to attract and retain these deposits.
We do use brokers to obtain wholesale deposits to a limited extent. At December
31, 2002, we had approximately $17.9 million of brokered wholesale deposits.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings accounts, money market accounts and
demand accounts) represented 39.0% of total deposits on December 31, 2002. At
December 31, 2002, time deposits with remaining terms to maturity of less than
one year amounted to $681.3 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Analysis of Net Interest
Income."
The following table presents our deposit activity for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Total deposits at beginning of period .. $ 2,090,440 $1,894,820 $ 1,343,007
Net deposits (withdrawals) ............. (26,619) 115,105 (85,790)
Acquisition of First Northern .......... -- -- 578,588
Interest credited, net of penalties .... 62,834 80,515 59,015
----------- ---------- -----------
Total deposits at end of period ........ $ 2,126,655 $2,090,440 $ 1,894,820
=========== ========== ===========
Net increase (decrease) ................ $ 36,215 $ 195,620 $ 551,813
=========== ========== ===========
Percentage increase (decrease) ......... 1.73% 10.32% 41.09%
At December 31, 2002, we had $166.9 million in time deposits with balances of
$100,000 and over maturing as follows:
MATURITY PERIOD AMOUNT
- --------------- ------
(IN THOUSANDS)
Three months or less .............................................. $ 48,979
Over three months through six months .............................. 12,845
Over six months through 12 months ................................. 27,175
Over 12 months through 24 months .................................. 20,130
Over 24 months through 36 months .................................. 26,204
Over 36 months .................................................... 31,531
--------
Total ............................................................. $166,864
========
20
The following table presents the distribution of our deposit accounts at the
dates indicated by dollar amount and percent of portfolio, and the weighted
average nominal interest rate on each category of deposits.
AT DECEMBER 31,
------------------------------------------------------------------------
2002 2001
---- ----
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------ -------- ---- ------ -------- ----
(DOLLARS IN THOUSANDS)
Savings ............................................. $ 230,170 10.82% 0.63% $ 214,859 10.28% 1.19%
Interest-bearing demand ............................. 149,008 7.01 0.37 137,317 6.57 0.64
Money market ........................................ 351,433 16.53 1.62 335,946 16.07 2.08
Non-interest bearing demand ......................... 98,941 4.65 0.00 96,362 4.61 0.00
---------- ------ ------ ---------- ------ ------
Total ....................................... 829,552 39.01 0.93 784,484 37.53 1.33
---------- ------ ------ ---------- ------ ------
Certificates:
Time deposits with
original maturities of:
Three months or less ........................... 125,771 5.91 2.06 95,946 4.59 2.68
Over three months to twelve months ............. 248,269 11.67 2.53 187,960 8.99 3.94
Over twelve months to twenty-four months ....... 336,919 15.84 3.83 713,413 34.12 5.43
Over twenty-four months to thirty-six months ... 167,574 7.88 5.12 208,859 9.99 5.79
Over thirty-six months to forty-eight months ... 188,180 8.85 4.34 29,998 1.44 5.50
Over forty-eight months to sixty months ........ 227,265 10.69 5.31 67,717 3.24 5.80
Over sixty months .............................. 3,125 0.15 5.90 2,063 0.10 6.41
---------- ------ ------ ---------- ------ ------
Total time deposits ......................... 1,297,103 60.99 3.91 1,305,956 62.47 5.09
---------- ------ ------ ---------- ------ ------
Total deposits .............................. $2,126,655 100.00% 2.75% $2,090,440 100.00% 3.68%
========== ====== ====== ========== ====== ======
AT DECEMBER 31,
-------------------------------------
2000
----
WEIGHTED
PERCENT AVERAGE
OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE
------ -------- ----
(DOLLARS IN THOUSANDS)
Savings ............................................. $ 200,915 10.60% 2.40%
Interest-bearing demand ............................. 133,975 7.07 1.12
Money market ........................................ 290,947 15.35 5.41
Non-interest bearing demand ......................... 87,079 4.60 0.00
---------- ------ ------
Total ....................................... 712,916 37.62 3.09
---------- ------ ------
Certificates:
Time deposits with
original maturities of:
Three months or less ........................... 150,613 7.95 6.03
Over three months to twelve months ............. 260,978 13.78 5.87
Over twelve months to twenty-four months ....... 563,858 29.76 6.25
Over twenty-four months to thirty-six months ... 137,810 7.27 6.15
Over thirty-six months to forty-eight months ... 7,587 0.40 5.66
Over forty-eight months to sixty months ........ 58,909 3.11 6.01
Over sixty months .............................. 2,149 0.11 6.48
---------- ------ ------
Total time deposits ......................... 1,181,904 62.38 6.11
---------- ------ ------
Total deposits .............................. 1,894,820 100.00% 4.98%
========== ====== ======
BORROWINGS
We borrow funds to finance our lending and investing activities. Substantially
all of our borrowings take the form of advances from the FHLB of Chicago. At
December 31, 2002 we had borrowings totaling $83.6 million with maturities of
less than one year, and $271.4 million of borrowings with longer stated terms
but which are callable by the FHLB of Chicago. We have pledged certain loans as
blanket collateral for these advances and future advances. The FHLB of Chicago
offers a variety of borrowing options with fixed or variable rates, flexible
repayment options, and fixed or callable terms. We choose the rate, repayment
option, and term to fit the purpose of the borrowing. See "Notes to Consolidated
Financial Statements--Note 7. Borrowings."
The following table sets forth certain information regarding borrowings by Bank
Mutual at the end of and during the periods indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance outstanding at end of year:
Notes payable to FHLB ........................ $332,299 $442,025 $546,489
Overnight borrowings from FHLB ............... -- -- 20,225
Other borrowings ............................. 22,679 23,335 910
Weighted average interest rate at end of year:
Notes payable to FHLB ........................ 5.57% 5.75% 6.31%
Overnight borrowings from FHLB ............... -- -- 6.85%
Other borrowings ............................. 0.99% 1.39% 5.74%
Maximum amount outstanding during the year:
Notes payable to FHLB ........................ $445,914 $547,653 $546,760
Overnight borrowings from FHLB ............... 5,480 39,275 120,900
Other borrowings ............................. 19,835 60,720 2,820
Average amount outstanding during the year:
Notes payable to FHLB ........................ $395,351 $491,248 $289,032
Overnight borrowings from FHLB ............... 25 6,348 20,145
Other borrowings ............................. 3,309 5,285 84
Weighted average interest rate during the year:
Fixed interest rate notes payable to FHLB .... 5.68% 5.91% 6.56%
Overnight borrowings from FHLB ............... 1.53% 5.74% 6.56%
Other borrowings ............................. 1.45% 3.38% 6.29%
21
Borrowings decreased to $355.0 million at December 31, 2002, as compared to
$465.4 million at December 31, 2001, primarily as a result of the proceeds of
loan sales and deposit growth. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Comparisons of Financial
Condition at December 31, 2002 and 2001."
AVERAGE BALANCE SHEET AND RATE YIELD ANALYSIS
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
AVERAGE EQUITY TO AVERAGE ASSETS
The ratio of average equity to average assets measures a financial institution's
financial strength. At December 31, 2002, 2001, 2000, 1999, and 1998 our average
equity to average assets ratio was 10.9%, 10.4%, 9.7%, 9.6%, and 9.2%,
respectively.
CASH DIVIDENDS
We paid cash dividends of $0.34 per share in 2002 and $0.28 per share in 2001.
We did not pay any cash dividends in 2000. We also increased the cash dividend
paid in the first quarter of 2003 to $0.10 per share or a 11.1% increase when
compared to the $0.09 per share paid in the first quarter of 2002. The MHC has
waived dividend payments for 2003, 2002 and 2001.
SUBSIDIARIES
Lake Financial and Insurance Service, Inc., a wholly owned subsidiary of the
Bank, provides investment and insurance services to the Bank's customers and the
general public. Investment services include tax deferred and tax free
investments, mutual funds, and government securities. Personal insurance,
business insurance, life and disability insurance and mortgage protection
products are also offered by Lake Financial.
Mutual Investment Corporation, a wholly owned subsidiary of the Bank, owns and
manages part of the Bank's Investment portfolio. First Northern Investment Inc.
("FNII"), a wholly owned subsidiary of the Bank, owns and manages part of the
Bank's investments and SFC's indirect automobile loans.
MC Development LTD, a wholly owned subsidiary of the Bank, is involved in land
development and sales. It owns two parcels of undeveloped land consisting of 15
acres in Brown Deer, Wisconsin and 318 acres in Oconomowoc, Wisconsin. See
"Properties."
Great Northern Financial Savings Corp. ("GNFSC"), a wholly owned subsidiary of
the Bank, engages in the sale of credit life and disability insurance, and
offers brokerage services to the public, including the sale of tax deferred
annuities and mutual funds. GNFSC will be consolidated into Lake Financial on
April 1, 2003.
SFC, 50% owned by the Bank and 50% owned by another financial institution,
originates, sells, and services the indirect automobile loans. SFC sells the
loans on a regular basis to FNII or the Bank, but retains the servicing rights
in the loans.
In addition, the Bank has five wholly owned subsidiaries that are inactive but
will continue to be wholly owned subsidiaries for possible future use in a
related or other area.
EMPLOYEES
At December 31, 2002, Bank Mutual employed 691 full time and 131 part time
associates. Management considers its relations with its associates to be good.
22
REGULATION
Set forth below is a brief description of certain laws and regulations that
relate to the regulation of the Bank, Bank Mutual, and the MHC.
GENERAL
The Bank is a federally chartered stock savings bank whose primary regulator is
the OTS. The FDIC under the SAIF insures its deposit accounts up to applicable
limits. The Bank is currently subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and by the FDIC as its deposit
insurer. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approval prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions and opening or acquiring branch offices. In
addition, the Bank's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents.
The OTS currently conducts periodic examinations to assess the Bank's compliance
with various regulatory requirements. In addition, the FDIC has the right to
perform examinations of the Bank should the OTS or the FDIC determine the Bank
is in a weakened financial condition or a failure is foreseeable. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Bank Mutual, as a federal stock corporation in a mutual holding company
structure, is deemed a federal stock holding company within the meaning of
Section 10(o) of the Home Owners' Loan Act. Bank Mutual is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. Bank Mutual is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the Securities and Exchange
Commission ("SEC") under the federal securities laws.
The MHC is a federal mutual holding company within the meaning of Section 10(o)
of the Home Owners' Loan Act. As such, the MHC has registered with the OTS and
is subject to OTS examination and supervision as well as certain reporting
requirements.
Any change in these laws and regulations, whether by the OTS, the FDIC, the SEC,
or through legislation, could have a material adverse impact on the Bank, Bank
Mutual, and the MHC and their operations and shareholders.
Certain of the laws and regulations applicable to the Bank, Bank Mutual, and the
MHC are summarized below. These summaries do not purport to be complete and are
qualified in their entirety by reference to such laws and regulations.
FEDERAL REGULATION OF THE BANK
General. As a federally chartered, SAIF-insured savings bank, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments