Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 (IRS Employer Identification No.)
incorporation or organization)
4949 WEST BROWN DEER ROAD
MILWAUKEE, WI 53223
(414) 354-1500
-----------------------------------------
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes /X/ No / /
Indicate by checkmark whether the registrant is an accelerated file (as defined
in Rule 12b-2 of the Exchange Act).
Yes / / No / / [Not yet applicable]
The number of shares outstanding of the issuer's common stock $0.01 par value
per share, was 21,408,971 shares, at April 30, 2003.
================================================================================
BANK MUTUAL CORPORATION
10-Q INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
ITEM L. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition
as of March 31, 2003 and December 31, 2002 3
Unaudited Consolidated Statements of Income
for the three months ended March 31, 2003 and 2002 4
Unaudited Consolidated Statements of Shareholders' Equity
for the three months ended March 31, 2003 and 2002 5
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 2003 and 2002 6-7
Notes to Unaudited Consolidated Financial Statements 8-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21-35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36-39
ITEM 4. CONTROLS AND PROCEDURES 40
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 41
SIGNATURES 42
CERTIFICATIONS 43-44
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31 DECEMBER 31
2003 2002
--------------------------
(In thousands)
ASSETS
Cash and due from banks $ 35,773 $ 40,297
Federal funds sold 135,000 165,000
Interest-earning deposits 38,445 36,462
--------------------------
Cash and cash equivalents 209,218 241,759
Securities available-for-sale, at fair value:
Investment securities 80,838 73,226
Mortgage-related securities 626,447 618,123
Loans held for sale 55,859 46,971
Loans receivable, net 1,693,898 1,685,662
Goodwill 52,570 52,570
Other intangible assets 5,569 5,734
Mortgage servicing rights 3,175 3,060
Other assets 121,375 116,223
--------------------------
$ 2,848,949 $ 2,843,328
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 2,144,012 $ 2,126,655
Borrowings 329,844 354,978
Advance payments by borrowers for taxes and insurance 11,792 3,060
Other liabilities 47,982 35,560
--------------------------
2,533,630 2,520,253
Shareholders' equity:
Preferred stock - $.01 par value:
Authorized- 10,000,000 shares in 2003 and 2002
Issued and outstanding - none in 2003 and 2002 -- --
Common stock - $.01 par value:
Authorized- 100,000,000 shares in 2003 and 2002
Issued - 22,341,665 shares in 2003 and 2002
Outstanding - 21,408,971 shares in 2003; 21,752,971 in 2002 223 223
Additional paid-in capital 109,299 109,074
Retained earnings 229,778 224,932
Unearned ESOP shares (6,350) (6,647)
Accumulated other comprehensive income 5,140 10,487
Unearned deferred compensation (2,871) (3,133)
Treasury stock - 932,694 in 2003; 588,694 in 2002 (19,900) (11,861)
--------------------------
315,319 323,075
--------------------------
$ 2,848,949 $ 2,843,328
==========================
See Notes to Unaudited Consolidated Financial Statements.
3
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
2003 2002
-----------------------
(In thousands, except per
share data)
Interest income:
Loans $ 27,685 $ 32,842
Investment securities 1,182 1,462
Mortgage-related securities 7,353 7,940
Interest-earning deposits 476 723
-----------------------
Total interest income 36,696 42,967
Interest expense:
Deposits 13,893 17,497
Borrowings 4,607 6,057
Advance payments by borrowers for taxes and insurance 10 24
-----------------------
Total interest expense 18,510 23,578
-----------------------
Net interest income 18,186 19,389
Provision for loan losses 258 15
-----------------------
Net interest income after provision for loan losses 17,928 19,374
Noninterest income:
Service charges on deposits 1,030 1,029
Brokerage and insurance commissions 677 813
Loan related fees and servicing revenue (loss) (84) 47
Gain on sales of loans 1,767 953
Other 1,115 1,001
-----------------------
Total noninterest income 4,505 3,843
Noninterest expenses:
Compensation, payroll taxes and other employee benefits 7,682 7,917
Occupancy and equipment 2,664 2,591
Amortization of other intangible assets 165 165
Other 2,870 2,938
-----------------------
Total noninterest expenses 13,381 13,611
-----------------------
Income before income taxes 9,052 9,606
Income taxes 3,183 3,275
-----------------------
Net income $ 5,869 $ 6,331
=======================
Per share data:
Earnings per share - basic $ 0.28 $ 0.30
=======================
Earnings per share - diluted $ 0.28 $ 0.29
=======================
Cash dividends paid $ 0.10 $ 0.08
=======================
See Notes to Unaudited Consolidated Financial Statements.
4
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL UNEARNED
COMMON PAID-IN RETAINED ESOP
STOCK CAPITAL EARNINGS SHARES
-----------------------------------------------------
(In thousands)
For the Three Months Ended March 31, 2003
Balance at January 1, 2003 $ 223 $ 109,074 $224,932 $ (6,647)
Comprehensive income -
Net income - - 5,869 -
Other comprehensive income
Change in net unrealized
gain on securities available-
for-sale, net of deferred income
tax liability of $1,633 - - - -
Total comprehensive income - - - -
Purchase of treasury stock - - - -
Committed ESOP shares - 230 - 297
Exercise of stock options - (5) - -
Amortization of deferred compensation - - - -
Cash dividends ($0.10 per share) - - (1,023) -
------------------------------------------------------
Balance at March 31, 2003 $ 223 $ 109,299 $229,778 $ (6,350)
======================================================
For the Three Months Ended March 31, 2002
Balance at January 1, 2002 $ 223 $ 108,043 $201,777 $ (7,850)
Comprehensive income -
Net income - - 6,331 -
Other comprehensive income
Change in net unrealized
gain on securities
available-for-sale, net of
deferred income tax liability
of $1,841 - - - -
Total comprehensive income - - - -
Purchase of treasury stock - - - -
Committed ESOP shares - 190 - 297
Amortization of deferred compensation - - - -
Cash dividends ($0.08 per share) - - (891) -
------------------------------------------------------
Balance at March 31, 2002 $ 223 $ 108,233 $207,217 $ (7,553)
======================================================
ACCUMULATED
OTHER UNEARNED
COMPREHENSIVE DEFERRED TREASURY
INCOME COMPENSATION STOCK TOTAL
------------------------------------------------------
(In thousands)
For the Three Months Ended March 31, 2003
Balance at January 1, 2003 $ 10,487 $ (3,133) $(11,861) $323,075
Comprehensive income
Net income - - - 5,869
Other comprehensive income
Change in net unrealized
gain on securities available-
for-sale, net of deferred income
tax liability of $1,633 (5,347) - - (5,347)
--------
Total comprehensive income - - - 522
Purchase of treasury stock - - (8,012) (8,012)
Committed ESOP shares - - - 527
Exercise of stock options - - 17 12
Amortization of deferred compensation - 262 (44) 218
Cash dividends ($0.10 per share) - - - (1,023)
------------------------------------------------------
Balance at March 31, 2003 $ 5,140 $ (2,871) $(19,900) $315,319
======================================================
For the Three Months Ended March 31,2002
Balance at January 1, 2002 $ 6,018 $ (4,047) $ (66) $304,098
Comprehensive income
Net income - - - 6,331
Other comprehensive income
Change in net unrealized
gain on securities
available-for-sale, net of
deferred income tax liability
of $1,841 (3,116) - - (3,116)
--------
Total comprehensive income - - - 3,215
Purchase of treasury stock - - (594) (594)
Committed ESOP shares - - - 487
Amortization of deferred compensation - 221 221
Cash dividends ($0.08 per share) - - - (891)
------------------------------------------------------
Balance at March 31, 2002 $ 2,902 $ (3,826) $ (660) $306,536
======================================================
See Notes to Unaudited Consolidated Financial Statements.
5
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 5,869 $ 6,331
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 258 15
Provision for depreciation 722 680
Amortization of intangibles 165 166
Mortgage servicing rights (115) 221
Amortization of cost of stock benefit plans 745 708
Net (premium) discount amortization on securities 653 (97)
Net change in loans originated for sale (7,121) 15,608
Gains on sales of loans (1,767) (953)
Gain on sale of real estate owned (24) -
Increase (decrease) in other liabilities 14,054 (8,745)
Increase in other assets (3,935) (2,331)
Decrease in accrued interest receivable 601 317
----------------------
Net cash provided by operating activities 10,105 11,920
INVESTING ACTIVITIES:
Net purchases of investments in mutual funds (10,223) (263)
Proceeds from maturities of investment securities 2,750 17,868
Purchases of investment securities (700) (8,390)
Purchases of mortgage-related securities (147,367) (106,024)
Principal repayments on mortgage-related securities 131,971 61,159
Net (increase) decrease in loans receivable (8,844) 39,122
Proceeds from sale of foreclosed properties 290 -
Net increase in Federal Home Loan Bank stock (933) (474)
Net purchases of premises and equipment (1,249) (357)
----------------------
Net cash provided (used) by investing activities (34,305) 2,641
6
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------------------
(In thousands)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 17,084 $ (9,832)
Net decrease in short-term borrowings (22,679) (19,835)
Proceeds from long-term borrowings - 2,245
Repayments on long-term borrowings (2,455) (29,107)
Net increase in advance payments by borrowers for taxes and insurance 8,732 9,203
Proceeds from exercise of stock options 12 -
Cash dividends (1,023) (891)
Purchase of treasury stock (8,012) (594)
----------------------
Net cash used by financing activities (8,341) (48,811)
----------------------
Decrease in cash and cash equivalents (32,541) (34,250)
Cash and cash equivalents at beginning of period 241,759 251,912
----------------------
Cash and cash equivalents at end of period $ 209,218 $ 217,662
======================
Supplemental information:
Interest paid on deposits $ 13,619 $ 18,125
Income taxes paid 1,121 69
Loans transferred to foreclosed properties and repossessed assets 350 395
See Notes to Unaudited Consolidated Financial Statements.
7
BANK MUTUAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bank Mutual
Corporation and its wholly-owned subsidiary Bank Mutual (the "Bank") and its
subsidiaries.
Bank Mutual Corporation is a United States corporation chartered by the Office
of Thrift Supervision. It was chartered on November 1, 2000, to become the
mid-tier holding company in the regulatory restructuring of the Bank, then named
"Mutual Savings Bank" into mutual holding company form. On that day, Bank Mutual
Corporation also acquired First Northern Capital Corporation and its subsidiary
First Northern Savings Bank.
Until March 16, 2003, Bank Mutual Corporation operated with two savings bank
subsidiaries. On that day, First Northern Savings Bank merged into the Bank,
creating a single bank subsidiary. In addition, see "Note 13--Recent
Developments" regarding the recently-announced plans for full conversion of Bank
Mutual Corporation.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial information. In
the opinion of Bank Mutual Corporation, the accompanying Unaudited Consolidated
Statements of Financial Condition, Unaudited Consolidated Statements of Income,
Unaudited Consolidated Statements of Shareholders' Equity and Unaudited
Consolidated Statements of Cash Flows contain all adjustments, which are of a
normal recurring nature, necessary to present fairly the consolidated financial
position of Bank Mutual Corporation and subsidiaries at March 31, 2003 and
December 31, 2002, the results of their income for the three months ended March
31, 2003 and 2002, the changes in shareholders' equity for the three months
ended March 31, 2003 and 2002, and their cash flows for the three months ended
March 31, 2003 and 2002. The accompanying Unaudited Consolidated Financial
Statements and related notes should be read in conjunction with Bank Mutual
Corporation's 2002 Annual Report on Form 10-K. Operating results for the three
months ended March 31, 2003, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003.
8
NOTE 2 - SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of investment securities available-for-sale
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------
At March 31, 2003:
Investment securities:
U.S. government and federal agency obligations $ 25,213 $ 852 $ - $ 26,065
Corporate issue obligations 8,579 116 (152) 8,543
Taxable municipal obligations 700 - - 700
Mutual funds 44,371 25 (140) 44,256
Federal Home Loan Mortgage Corporation stock 1,440 - (166) 1,274
------------------------------------------
Total investment securities 80,303 993 (458) 80,838
Mortgage-related securities:
Federal Home Loan Mortgage Corporation 278,321 3,844 (2,301) 279,864
Federal National Mortgage Association 311,065 8,998 (2,648) 317,415
Private Placement CMOs 4,288 50 - 4,338
Government National Mortgage Association 24,024 806 - 24,830
------------------------------------------
Total mortgage-related securities 617,698 13,698 (4,949) 626,447
==========================================
Total $698,001 $ 14,691 $ (5,407) $707,285
==========================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------
At December 31, 2002:
Investment securities:
U.S. government and federal agency obligations $ 26,955 $ 1,257 $ - $ 28,212
Corporate issue obligations 9,586 59 (82) 9,563
Mutual funds 34,148 26 (140) 34,034
Federal Home Loan Mortgage Corporation stock 1,440 - (23) 1,417
------------------------------------------
Total investment securities 72,129 1,342 (245) 73,226
Mortgage-related securities:
Federal Home Loan Mortgage Corporation 284,647 3,610 (144) 288,113
Federal National Mortgage Association 285,817 10,856 (69) 296,604
Private Placement CMOs 8,208 198 - 8,406
Government National Mortgage Association 24,286 714 - 25,000
------------------------------------------
Total mortgage-related securities 602,958 15,378 (213) 618,123
==========================================
Total $675,087 $ 16,720 $ (458) $691,349
==========================================
The amortized cost and fair values of investment securities by contractual
maturity at March 31, 2003, are shown below. Actual maturities may differ from
contractual maturities because issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
9
Amortized Fair
Cost Value
-------------------
Due in one year or less $ 18,279 $ 18,593
Due after one year through five years 15,513 16,015
Due after five years through ten years 700 700
Mutual funds 44,371 44,256
Federal Home Loan Mortgage Corporation stock 1,440 1,274
Mortgage-related securities 617,698 626,447
-------------------
$698,001 $707,285
===================
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
MARCH 31 DECEMBER 31
2003 2002
-----------------------
Mortgage loans:
One-to-four family $ 823,617 $ 827,648
Multifamily 113,767 112,189
Commercial real estate 197,317 186,960
Construction and development 117,905 127,174
-----------------------
Total mortgage loans 1,252,606 1,253,971
Consumer loans:
Fixed rate home equity 239,827 234,049
Home equity lines of credit 77,454 77,697
Student 22,393 22,636
Home improvement 7,044 6,993
Automobile 64,932 68,140
Other 20,882 22,434
-----------------------
Total consumer loans 432,532 431,949
Total commercial business loans 70,881 61,060
-----------------------
Total loans receivable 1,756,019 1,746,980
Less:
Undisbursed loan proceeds 46,707 46,048
Allowance for loan losses 13,018 12,743
Unearned loan fees and discounts 2,396 2,527
-----------------------
Total loans receivable - net $1,693,898 $1,685,662
=======================
Bank Mutual Corporation's mortgage loans and home equity loans are primarily
secured by properties housing one-to-four families which are generally located
in Bank Mutual Corporation's local lending areas in Wisconsin and Minnesota.
10
NOTE 4 - OTHER ASSETS
Other Assets are summarized as follows:
MARCH 31 DECEMBER 31
2003 2002
-----------------------
Accrued interest:
Mortgage-related securities $ 2,197 $ 2,481
Investment securities 892 1,516
Loans receivable 7,706 7,399
-------------------
Total accrued interest 10,795 11,396
Foreclosed properties and repossessed assets 741 750
Premises and equipment 44,561 44,034
Federal Home Loan Bank stock, at cost 33,818 32,885
Life insurance policies 17,449 17,141
Other 14,011 10,017
-------------------
$121,375 $116,223
===================
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
MARCH 31 DECEMBER 31
2003 2002
------------------------
Checking accounts:
Noninterest-bearing $ 114,288 $ 98,941
Interest-bearing 138,864 149,008
----------------------
253,152 247,949
Money market accounts 352,056 351,433
Savings accounts 240,199 230,170
Certificate accounts:
Due within one year 662,918 681,339
After one but within two years 201,723 185,125
After two but within three years 212,889 216,002
After three but within four years 106,691 58,768
After four but within five years 114,384 155,869
After five years - -
----------------------
1,298,605 1,297,103
----------------------
$2,144,012 $2,126,655
======================
11
NOTE 6 - BORROWINGS
Borrowings consist of the following:
MARCH 31 DECEMBER 31
2003 2002
------------------------- --------------------------
Weighted- Weighted-
Average Average
Balance Rate Balance Rate
------------------------- --------------------------
Federal Home Loan Bank
advances maturing:
2003 $ 58,421 5.51% $ 60,888 5.50%
2004 231,771 5.61 231,765 5.61
2005 17,994 5.20 17,990 5.21
2006 7,948 4.85 7,946 4.86
2007 - - - -
Thereafter 13,710 5.65 13,710 5.65
Other borrowings - - 22,679 0.99
--------- ---------
$ 329,844 $ 354,978
========= =========
Advances that mature in the year 2004 consist of borrowings that are redeemable
at any time until then at the option of the FHLB.
The Bank is required to maintain unencumbered mortgage loans in its portfolio
aggregating at least 167% of the amount of outstanding advances from the FHLB as
collateral. The Bank's borrowings at the FHLB are limited to the lesser of 35%
of total assets or 60% of the book value of certain mortgage loans. In addition,
these notes are collateralized by FHLB stock of $33,818 and $32,885 at March 31,
2003 and December 31, 2002, respectively.
The Bank had been a Treasury Tax & Loan (TT&L) depository for the Federal
Reserve Bank (FRB), and as such, had accepted TT&L deposits. The Bank had been
allowed to hold these deposits on behalf of the FRB until they were called. The
interest rate is the federal funds rate less 25 basis points. U.S. Treasury
Securities with a face value greater than or equal to the amount held were
pledged as a condition of holding TT&L deposits. As a result of the merger on
March 16, 2003, the Bank will be applying to the FRB to continue to be an
approved depository as soon as possible.
NOTE 7 - SHAREHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that, if undertaken, could have a direct material effect on Bank
Mutual Corporation's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and
12
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by federal regulation to ensure adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital to risk-weighted assets (as these
terms are defined in regulations), and of Tier I capital to total assets (as
these terms are defined in regulations). Management believes, as of March 31,
2003, that the Bank meets or exceeds all capital adequacy requirements to which
it is subject.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------------------- -------------------- ----------------
The Bank
As of March 31, 2003:
Total risk-based capital $251,777 16.76% $120,171 8.00% $150,214 10.00%
(to risk-weighted assets)
Tier I capital 240,324 16.00% 60,085 4.00% 90,128 6.00%
(to risk-weighted assets)
Tier I capital 240,324 8.64% 111,269 4.00% 139,086 5.00%
(to average assets)
Bank Mutual Corporation is not aware of any conditions or events which would
change the Bank's status as well capitalized. There are no conditions or events
that management believes have changed the Bank's category.
Following are reconciliations of the Bank's equity under generally accepted
accounting principles to capital as determined by regulators:
THE BANK
----------------------
RISK- TIER I
BASED (CORE)
CAPITAL CAPITAL
--------- ---------
As of March 31, 2003:
Equity per Bank records $ 303,280 $ 303,280
Unrealized gains on investments (5,140) (5,140)
Goodwill and deposit base intangibles, net of
deferred taxes (55,851) (55,851)
Investment in "nonincludable" subsidiaries (1,774) (1,774)
Disallowed servicing assets (191) (191)
Equity investments required to be deducted (1,565) -
Allowance for loan losses 13,018 -
--------- ---------
Regulatory capital $ 251,777 $ 240,324
========= =========
13
In May 2001, Bank Mutual Corporation shareholders approved the 2001 Stock
Incentive Plan, providing for the grant of stock options and restricted stock
(Management Recognition Plan ("MRP")) awards. Because of OTS regulatory
requirements resulting from the mutual holding company structure, Bank Mutual
Corporation, in its present structure, cannot newly issue additional shares for
awards which have been made under the Stock Incentive Plan. Therefore, the 1.45
million shares that have been or can be granted under the Stock Incentive Plan
must be purchased in the open market. Bank Mutual Corporation had repurchased
1,298,000 shares through March 31, 2003 and no specific schedule was announced
for the completion of these purchases. Because of the options' vesting schedules
under the Stock Incentive Plan, Bank Mutual Corporation would not be required to
repurchase in the near future all of the shares which the Stock Incentive Plan
will ultimately require.
Since the inception of the Stock Incentive Plan, 330,000 treasury shares were
reissued (of which 5,800 shares were forfeited) to recipients of the MRP awards
thereby creating unearned deferred compensation. The unearned deferred
compensation is an adjustment to shareholders' equity and will be adjusted as
the MRP shares are vested.
NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Off-Balance sheet financial instruments whose contract amounts represent credit
and/or interest rate risk at March 31, 2003 and December 31, 2002 are as
follows:
MARCH 31 DECEMBER 31
2003 2002
---------------------
Unused consumer lines of credit $157,865 $ 145,306
Unused commercial lines of credit 11,056 29,106
Commitments to extend credit:
Fixed rate 43,514 40,920
Adjustable rate 11,165 8,055
Credit enhancement under the Federal Home Loan Bank
of Chicago Mortgage Partnership Finance program 11 34
Forward commitments to sell mortgage loans of $104.6 million at March 31, 2003,
represent commitments obtained by the Bank from a secondary market agency to
purchase mortgages from the Bank. Commitments to sell loans expose the Bank to
interest rate risk if market rates of interest decrease during the commitment
period. Commitments to sell loans are made to mitigate interest rate risk on
commitments to originate loans and loans held for sale. There were $73.8 million
of forward commitments at December 31, 2002.
14
NOTE 9 - SHARES OUTSTANDING
The computation of basic and diluted earnings per share is presented in the
following table:
THREE MONTHS ENDED
MARCH 31
2003 2002
-------------------------
(DOLLARS IN THOUSANDS)
BASIC EARNINGS PER SHARE
Net Income $ 5,869 $ 6,331
=========== ===========
Weighted average shares outstanding 20,705,959 21,247,745
Allocated ESOP shares for period 22,297 22,297
Vested MRP shares for period 16,266 16,449
----------- -----------
20,744,522 21,286,491
=========== ===========
Basic earnings per share $ 0.28 $ 0.30
=========== ===========
DILUTED EARNINGS PER SHARE
Net Income $ 5,869 $ 6,331
=========== ===========
Weighted average shares outstanding
used in basic earnings per share 20,744,522 21,286,491
Net dilutive effect of:
Stock option shares 435,335 267,911
Unvested MRP shares 88,359 50,100
----------- -----------
21,268,216 21,604,502
=========== ===========
Diluted earnings per share $ 0.28 $ 0.29
=========== ===========
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies Emerging Issues Task
Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" and requires that a liability for costs associated with an
exit or disposal activity be recognized when the liability is probable and
represents obligations to transfer assets or provide services as a result of
past transactions. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002 and are not
expected to have a material impact on Bank Mutual Corporation's consolidated
financial statements.
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of
15
significant accounting policies of the effect of Bank Mutual Corporation's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148's amendment of the transition and annual disclosure provisions of
SFAS No. 123 are effective for fiscal years ending after December 15, 2002. Bank
Mutual Corporation will continue to account for stock-based compensation in
accordance with APB Opinion 25 as allowed under FASB No. 123.
In May 2001, Bank Mutual Corporation shareholders approved the 2001 Stock
Incentive Plan, providing for the grant of stock options up to 1,114,849 shares
and restricted stock ("MRP") awards up to 334,454 shares. Of these, 330,000 MRP
shares were granted during the year ended December 31, 2001 to employees in
management positions and 5,800 shares were subsequently forfeited. No shares
were granted during the year ended December 31, 2002 or in the first quarter of
2003. The outstanding MRP grants had a fair value of $6.5 million at March 31,
2003. The grants under the MRP are being amortized to compensation expense as
Bank Mutual Corporation's employees become vested in the awarded shares.
The amount amortized to expense was $173,000 for the first quarter of 2003 and
$195,000 for the same period in 2002. The remaining unamortized cost of the MRP
is reflected as a reduction of shareholders' equity as unearned deferred
compensation.
Options for 1,104,000 shares were granted on May 8, 2001 at an exercise price of
$11.76. Options for 1,040,094 shares remain outstanding at March 31, 2003, of
which options for 177,694 shares were vested. In addition, options for 41,106
shares were exercised and options for 22,000 shares have been forfeited.
As a result of OTS regulatory requirements resulting from the mutual holding
company structure, Bank Mutual Corporation will need to purchase up to
approximately 1.45 million shares of its common stock for issuance pursuant to
awards which have been or are made under the Stock Incentive Plan. Bank Mutual
Corporation has repurchased 1,298,000 shares through March 31, 2003 with no
specific schedule announced for the completion of these purchases. Because of
the options' vesting schedules under the Stock Incentive Plan, Bank Mutual
Corporation would not be required to repurchase in the near future all of the
shares which the Stock Incentive Plan will ultimately require.
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The following summarizes the weighted
average assumptions used in the model:
FOR THE THREE MONTHS ENDED
MARCH 31
2003 2002
--------------------------
Risk-free interest rate 5.30% 5.30%
Dividend yield 2.00% 2.00%
Expected stock volatility 26.30% 26.30%
Expected years until exercise 6.75 7.75
16
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation models such as the Black-Scholes require the
input of highly subjective assumptions including the expected stock price
volatility. Bank Mutual Corporation's stock options have characteristics
significantly different from traded options and inasmuch, changes in the
subjective input assumptions can materially affect the fair value estimate. In
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
Bank Mutual Corporation accounts for the stock options in accordance with APB
Opinion 25, as allowed under FASB No. 123, and, therefore, no compensation cost
has been recognized in connection with stock options granted in any year.
Pursuant to FASB No. 123 disclosure requirements, pro forma net income and
earnings per share are presented below as if compensation cost for stock options
was determined under the fair value method and amortized to expense over the
options' vesting periods.
FOR THE THREE MONTHS ENDED
MARCH 31
2003 2002
--------------------------
Net income:
As reported $ 5,869 $ 6,331
Pro forma $ 5,689 $ 6,151
Basic earnings per share:
As reported $ 0.28 $ 0.30
Pro forma $ 0.27 $ 0.29
Diluted earnings per share:
As reported $ 0.28 $ 0.29
Pro forma $ 0.27 $ 0.28
The pro forma amounts may not be indicative of the effect on reported net income
and earnings per share for future years as current options vest over five years.
17
NOTE 11 - AMORTIZING INTANGIBLE ASSETS
The carrying amount of mortgage servicing rights net of accumulated amortization
and the associated valuation allowance at March 31, 2003 and December 31, 2002
is presented in the following table.
MARCH 31 DECEMBER 31
2003 2002
---------------------
Mortgage servicing rights at beginning of year $ 3,060 $ 4,738
Capitalized servicing rights 1,016 3,251
Amortization of servicing rights (666) (1,840)
------- -------
Mortgage servicing rights at end of period 3,410 6,149
Change in valuation allowance (235) (3,089)
------- -------
Balance $ 3,175 $ 3,060
======= =======
The carrying amounts of the intangible assets, net of accumulated amortization,
valuation allowance and intangible assets at March 31, 2003 are presented in the
following table.
INTANGIBLE ASSET AMOUNT
NET OF ACCUMULATED VALUATION CARRYING
INTANGIBLE ASSETS AMORTIZATION ALLOWANCE AMOUNT
----------------- ----------------------- --------- --------
Goodwill $52,570 $ - $52,570
Mortgage servicing rights 6,600 (3,425) 3,175
Deposit base intangibles 5,569 - 5,569
------- ------- -------
Total $64,739 $(3,425) $61,314
======= ======= =======
Deposit base intangibles had a carrying amount and a value net of accumulated
amortization of $5,734 at December 31, 2002.
The projections of amortization expense shown below for mortgage servicing
rights are based on existing asset balances and the existing interest rate
environment as of March 31, 2003. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.
18
The following table shows the current period and estimated future amortization
expense for amortizable intangible assets:
MORTGAGE
SERVICING DEPOSIT BASE
RIGHTS INTANGIBLES TOTAL
--------- ------------ -----
(IN THOUSANDS)
Quarter ended March 31, 2003 (actual) $ 666 $ 165 $ 831
Nine months ending December 31, 2003 (estimate) 1,343 495 1,838
Estimate for year ending December 31,
2004 1,511 660 2,171
2005 321 660 981
2006 660 660
2007 660 660
2008 660 660
Thereafter 1,774 1,774
------- ------- ------
$ 3,175 $ 5,569 $8,744
======= ======= ======
NOTE 12 - GUARANTEES
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (the Interpretation). The Interpretation changed the
accounting for, and disclosure of, guarantees beginning January 1, 2003. The
Interpretation requires certain guarantees to be recorded at fair value, which
is different from accounting practices prior to 2003, which were generally to
record a liability only when a loss is probable and reasonably estimatable, as
those terms are defined in FASB Statement No. 5, "Accounting for Contingencies."
Bank Mutual Corporation recorded a liability of $4.3 million in the first
quarter of 2003 however, the recording of this liability did not materially
affect Bank Mutual Corporation's financial condition.
The Bank has entered into an agreement whereby, for an initial fee and annual
fee, certain of its United States Treasury notes are pledged as collateral for
an Industrial Development Revenue Bond which was issued by a local municipality
to finance commercial real estate owned by a third party, unrelated to Bank
Mutual Corporation Under the terms of the agreement, the Bank must maintain with
a trustee collateral with a fair market value, as defined, aggregating 108% or
more of the sum of the outstanding principal balance of the bonds plus accrued
interest on the outstanding principal. The Bank continues to receive interest
payments on the collateral.
19
At March 31, 2003 and December 31, 2002, United States Treasury notes with
outstanding principal balances aggregating approximately $10,000 were held by
the trustee as collateral for these bonds which had an outstanding principal
balance of $4,305 at March 31, 2003 and at December 31, 2002. The third-party
borrower is current on all scheduled payments due under the bond issue, which
has a scheduled maturity of December 15, 2009.
NOTE 13 - RECENT DEVELOPMENTS
The boards of directors of Bank Mutual Corporation and Bank Mutual Bancorp, MHC
(the "MHC") adopted on April 21, 2003 a Plan of Restructuring for the conversion
and restructuring of the MHC and Bank Mutual Corporation into a full stock
organization (the "Conversion"). After the transaction, the mutual holding
company form of ownership will end, and Bank Mutual Corporation will be fully
owned by public shareholders. The MHC currently owns approximately 52.3% of the
outstanding common stock of Bank Mutual Corporation, and public shareholders own
the remaining Bank Mutual Corporation shares.
Under the Plan of Restructuring, existing shares of Bank Mutual Corporation's
common stock held by its public shareholders will be exchanged for new shares of
a successor company, at an exchange ratio based on the ownership percentage and
an independent appraisal. Under that plan, immediately after the Conversion,
public shareholders of Bank Mutual Corporation will own the same percentage of
the successor company as they will own at the time of the Conversion.
The successor company simultaneously will conduct a subscription offering of
common stock to eligible MHC members, who generally are depositors of Bank
Mutual. Shares not subscribed for in the subscription offering are expected to
be available for sale in a community offering to our local communities and the
general public. The number and price of shares to be issued in the Conversion
offering (the "Offering"), and the exact exchange ratio for current Bank Mutual
Corporation shareholders, will be based on an independent appraisal that has yet
to be performed.
The Conversion and the Offering are expected to be completed in the third
quarter of 2003, subject to regulatory reviews. After completion of the
Conversion, the MHC will cease to exist, and the mutual form of ownership will
cease.
The Conversion is subject to approval by the Office of Thrift Supervision, as
well as approval by the public shareholders of Bank Mutual Corporation and by
the MHC's members. Proxy materials providing detailed information relating to
the Conversion and related transactions will be sent to the members of the MHC
and the shareholders of Bank Mutual Corporation for their consideration. The
transactions are also subject to other customary conditions which are included
in the Plan of Restructuring.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements concerning Bank Mutual
Corporation's prospects that are based on the current expectations and beliefs
of management. Forward-looking statements may also be made by Bank Mutual
Corporation from time to time in other reports and documents as well as oral
presentations. When used in written documents or oral presentations, the words
"anticipate," "believe," "estimate," "expect," "objective," "projection" and
similar expressions or use of 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 Corporation's control, that could cause
Bank Mutual Corporation'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
Corporation: general economic conditions; negative developments affecting
particular borrowers; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; deposit flows; disintermediation; the
cost of funds and changes in those costs; 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; changes in the quality or composition of Bank Mutual's loan and
investment portfolios; general economic and political developments; and other
factors referred to in the reports filed by Bank Mutual Corporation with the
Securities and Exchange Commission (particularly under "Risk Factors" in Item 7
of Bank Mutual Corporation's 2002 Annual Report on Form 10-K).
OVERVIEW
Bank Mutual Corporation is a United States corporation chartered by the OTS. It
was chartered on November 1, 2000, to become the mid-tier holding company in the
regulatory restructuring of the Bank, then known as "Mutual Savings Bank," into
mutual holding company form. Bank Mutual Bancorp, MHC (the "MHC"), a
U.S.-chartered mutual holding company of which the Bank's depositors hold all of
the voting and membership rights, owns 11,193,174 shares, or 52.3% of Bank
Mutual Corporation's outstanding common stock.
On November 1, 2000, Bank Mutual Corporation also acquired First Northern
Capital Corp., the parent of First Northern Savings Bank. On March 16, 2003, the
Bank and First Northern Savings Bank combined to form a single subsidiary bank
of Bank Mutual Corporation.
Bank Mutual Corporation has recently announced adoption of a Plan of
Restructuring of the MHC. When completed, this conversion would eliminate the
mutual holding company form and, in essence, result in the sale of the MHC's
interest in Bank Mutual Corporation to the public. Existing Bank Mutual
Corporation shareholders would maintain their percentage ownership. See Notes to
Unaudited Consolidated Financial Statements, Note 13, Recent Developments.
21
SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that we established which require us
to use our judgment. Some of the more significant policies are as follows:
- Establishing the amount of the allowance for loan losses requires the
use of our judgment. We evaluate our assets at least quarterly, and
review their risk components as a part of that evaluation. If we
misjudge a major component and experience a loss, it will likely
affect our earnings. In addition, by the very nature of this
allowance, developments as to particular loans can affect
quarter-to-quarter provision amounts. We consistently challenge
ourselves in the review of the risk components to identify any changes
in trends and their cause.
- Another valuation that requires our judgment relates to mortgage
servicing rights. Essentially, mortgage servicing rights are
established on loans (primarily mortgage loans) that we originate and
sell. We allocate a portion of a loan's book basis to mortgage
servicing rights when a loan is sold with servicing retained, based
upon its relative fair value. The fair value of mortgage servicing
rights is the present value of estimated future net cash flows from
the servicing relationship using current market assumptions for
prepayments, servicing costs and other factors. As the loans are
repaid and net servicing revenue is earned, mortgage servicing rights
are amortized into expense. Net servicing revenues are expected to
exceed this amortization expense. However, if our actual prepayment
experience exceeds what we originally anticipated, net servicing
revenues may be less than expected and mortgage servicing rights may
be impaired. This impairment would be recorded as a charge to
earnings.
- We also use our judgment in the valuation of other intangible assets
(core deposit base intangibles). Core deposit base intangible assets
have been recorded for core deposits (defined as checking, money
market and savings deposits) that have been acquired in acquisitions
that were accounted for as purchase business combinations. The core
deposit base intangible assets have been recorded using the assumption
that they provide a more favorable source of funding than more
expensive wholesale borrowings. An intangible asset has been recorded
for the present value of the difference between the expected interest
to be incurred on these deposits and interest expense that would be
expected if these deposits were replaced by wholesale borrowings, over
the expected lives of the core deposits. We currently estimate that
the underlying core deposits have lives of seven to fifteen years. If
we find these deposits have a shorter life, we will have to write down
the asset by expensing the amount that is impaired.
- We review goodwill at least annually for impairment, which requires
the use of our judgment. Goodwill has been recorded as a result of two
acquisitions in which the purchase price exceeded the fair value of
net tangible assets acquired. We analyze the prices paid for those
acquisitions and compare those to a number of current indices. In
particular, we look at the price paid as a percent of assets; price
paid to deposits; premium paid to core deposits; and other indicators.
If the current indices would indicate that the
22
existing goodwill is more than the goodwill that would be developed by
doing the same transaction today, impairment would occur and as such,
would be charged to current earnings.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND DECEMBER 31, 2002
TOTAL ASSETS. Bank Mutual Corporation's total assets increased $5.6 million in
the first quarter of 2003 primarily as a result of the increase in the loan
portfolio, specifically, the commercial loan portfolio. Total assets at March
31, 2003 were $2.85 billion as compared to $2.84 billion at December 31, 2002.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $32.5 million in
the first quarter of 2003 primarily as a result of using cash to fund loans,
purchase securities and repurchase shares.
SECURITIES AVAILABLE-FOR-SALE. Investment securities available-for-sale
increased $7.6 million in the first three months of 2003 as a result of
purchasing investments.
Mortgage-related securities available-for-sale increased $8.3 million primarily
as a result of the cash generated by loan sales and deposit growth being
invested in mortgage-related securities.
LOANS HELD FOR SALE. Loans held for sale at March 31, 2003 as compared to
December 31, 2002 increased $8.9 million as a result of fixed rate mortgage loan
originations exceeding the sales of fixed rate mortgage loans. Currently, we
sell all of our 30 year fixed rate mortgage loan originations and some of our 20
and 15 year fixed rate mortgage loan originations in the secondary mortgage
market.
LOANS RECEIVABLE. Loans receivable increased $8.2 million in the first three
months of 2003 primarily as a result of growth in the commercial loan portfolio.
The mortgage loan portfolio decreased $1.4 million in the first three months of
2003 primarily as a result of consumers continuing to refinance their existing
adjustable and fixed rate mortgage loans to new lower fixed rate mortgage loans.
Market interest rates for fixed rate mortgages were again attractive in the
first three months of 2003. We retain all adjustable rate mortgage loans in our
portfolio and sell the 30 year and some of the 20 and 15 year fixed rate
mortgage loans in the secondary market. We sold $116.0 million of fixed rate
mortgage loans in the first quarter of 2003 as compared to $64.0 million in the
first quarter of 2002.
The consumer loan portfolio increase of $583,000 in the first three months of
2003 was primarily the result of growth in the fixed equity loan portfolio
partially offset by the reduction in the automobile loan portfolio. We continue
to emphasize and market 10 year fixed rate second mortgage loans.
As car manufacturers provided and promoted "0%" financing on their cars, our
automobile loan originations remained fairly low. This reduced level of
automobile loan originations offset by
23
continued repayments and prepayments of existing automobile loans resulted in
the automobile portfolio decreasing $3.2 million in the first quarter of 2003.
The commercial business loan portfolio increased $9.8 million during the three
months ended March 31, 2003. This increase was the result of increased
commercial business loan originations and the use of existing lines of credit by
commercial borrowers.
LOAN ORIGINATIONS AND PURCHASES
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------------------
(IN THOUSANDS)
Originations:
Mortgage loans $236,429 $125,978
Consumer loans 65,724 51,106
Commercial business loans 15,494 9,160
-------------------
Total loan originations 317,647 186,244
Purchases:
Mortgage loans - 3,024
-------------------
Total loans purchased - 3,024
-------------------
Total loans originated and purchased $317,647 $189,268
===================
Management will continue to emphasize consumer, non-residential mortgage loan
and commercial loan originations, as we believe they will continue to add to the
overall profitability and aid in the management of interest rate risk. However,
these loans can present higher risks than residential mortgage loans.
DEPOSITS. Deposits increased $17.4 million in the first three months of 2003. We
continue to emphasize and market checking accounts, as we believe this is a core
customer account which helps to promote further business with them. We also
believe that deposit growth (or shrinkage) in the balance of 2003 and future
periods will depend, in significant part, on the performance of other investment
alternatives and world events. We believe that significant numbers of investors
have chosen the relative safety of deposit accounts over market investments due
to the weakness in the stock market and world events.
BORROWINGS. Borrowings decreased $25.1 million in the first three months of
2003, to $329.8 million at March 31, 2003, as compared to $355.0 million at
December 31, 2002. This decrease is the result of using proceeds of the deposit
growth, mortgage loan sales and federal fund investments to repay maturing
borrowings.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments by
borrowers for taxes and insurance ("escrows") increased $8.7 million in the
first three months of 2003. The increase of escrow dollars was the result of
payments received for customers' escrow accounts and is seasonally normal.
24
SHAREHOLDERS' EQUITY. Bank Mutual paid a cash dividend of $0.10 per share on
March 4, 2003, to shareholders of record on February 19, 2003. The first quarter
dividend payout ratio was 17.4% since Bank Mutual Bancorp, MHC has elected to
waive cash dividends in 2003 for the 11,193,174 Bank Mutual Corporation's shares
that it owns. In addition, Bank Mutual Corporation at March 31, 2003, had
repurchased a total of 1,298,000 shares at an average cost of $19.53 per share,
including 342,000 shares in the first quarter at a weighted average price of
$23.43 per shares. Of the total shares repurchased, 330,000 shares have been
granted as awards to MRP recipients (of which 5,800 MRP shares were forfeited).
Unvested MRP shares are a decrease to shareholders' equity. See Notes to
Unaudited Consolidated Financial Statements - Note 7. Shareholders' Equity.
The $5.1 million of accumulated other comprehensive income, which is a part of
shareholders' equity, consists of increased market value of securities
available-for-sale over its cost basis. Accumulated other comprehensive income
decreased $5.3 million in the first quarter of 2003, primarily as a result of
higher interest mortgage-related securities being repaid and reinvestment of the
proceeds into mortgage-related securities at current market values.
25
ASSET QUALITY
The following table summarizes non-performing loans and assets:
NON-PERFORMING LOANS AND ASSETS
AT MARCH 31, AT DECEMBER 31,
2003 2002
----------- ---------------
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans $1,869 $1,399
Non-accrual consumer loans 578 527
Non-accrual commercial business loans 5,184 5,357
Accruing loans delinquent 90 days or more 941 1,108
------ ------
Total non-performing loans 8,572 8,391
Foreclosed properties and repossessed assets, net 741 750
------ ------
Total non-performing assets $9,313 $9,141
====== ======
Non-performing loans to total loans 0.51% 0.50%
====== ======
Non-performing assets to total assets 0.33% 0.32%
====== ======
Additional interest income that would have been
recognized if non-accrual loans had been current $ 190 $ 375
====== ======
Allowance for loan losses as a percent of
non-performing assets 139.78% 139.40%
====== ======
Total non-performing loans increased as of March 31, 2003, as compared to
December 31, 2002, primarily as a result of an increase in non-accrual mortgage
loans. The increase relating to consumer loans results from the general decline
in economic conditions. 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.
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. As previously disclosed as
of December 31, 2002, there is one commercial borrower that has three commercial
loans which total $4.9 million which the Bank is closely monitoring. While this
borrower was current in its payments at March 31, 2003, economic market
conditions for that company's business merited a substandard classification on
$3.5 million of its loans. The remaining $1.4 million is well collateralized and
performing. We provided an additional $258,000 to the loan loss provision in the
first quarter of 2003 primarily as a result of this classification.
26
The ultimate results with this, and other, commercial loans will depend on the
success of the related business or projects, economic performance and other
factors affecting loans and borrowers.
A summary of the allowance for loan losses is shown below:
ALLOWANCE FOR LOAN LOSSES
AT AND FOR THE AT AND FOR THE
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2003 DECEMBER 31, 2002
------------------ -----------------
(DOLLARS IN THOUSANDS)
Balance at the beginning of the period $ 12,743 $ 12,245
Provisions for the period 258 760
Charge-offs:
Mortgage loans - (14)
Consumer loans (86) (428)
Commercial business loans (19) (39)
-------- --------
Total charge-offs (105) (481)
Recoveries:
Mortgage loans 113 66
Consumer loans 9 40
Commercial business loans - 113
-------- --------
Total recoveries 122 219
-------- --------
Net recoveries (charge-offs) 17 (262)
-------- --------
Balance at the end of the period $ 13,018 $ 12,743
======== ========
Net recoveries (charge-offs) to average loans 0.00% (0.01)%
======== ========
Allowance as a percent of total loans 0.77% 0.76%
======== ========
Allowance as a percent of non-performing loans 151.87% 151.87%
======== ========
The allowance for loan losses has been determined in accordance with accounting
principles generally accepted in the United States. 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.
The level of loan allowances has been established by an internal risk evaluation
by loan category. Various factors are taken into consideration including:
historical loss experience, economic factors and other factors, that in
management's judgment would affect the collectibility of the portfolio as of the
evaluation date. Shortfalls in 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
27
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 subsidiary board of directors also reviews the adequacy of the
allowance for loan losses on at least a quarterly basis. See "Non-performing
Loans" for factors affecting some particular loans which affected the provisions
for the period.
COMPARISON OF OPERATING RESULTS
The national and local economies have generally experienced significant
challenges, disruptions, and weaknesses in recent periods, and equity markets
have experienced declines and volatility. Among other things, the continuing
slowdown, market events, and world events could affect the ability of individual
and business borrowers to repay their obligations to Bank Mutual, or otherwise
affect our operations or financial condition in future periods.
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
The following table presents certain information regarding Bank Mutual
Corporation's financial condition and net interest income at and for the three
months ended March 31, 2003 and 2002. The table presents the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. The yields and costs are derived by dividing income or
expense by the average balance of interest-earnings assets or interest-bearing
liabilities respectively, for the periods shown. The average balances are
derived from daily balances over the periods indicated. Interest income includes
fees, which we considered adjustments to yields. Net interest spread is the
difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities. Net interest margin is derived by dividing net
interest income by net interest-earning assets. No tax equivalent adjustments
were made since we do not have any tax exempt investments.
28
AVERAGE BALANCE SHEET, INTEREST AND RATE PAID
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNING ASSETS:
Loans receivable (1) $1,753,760 $27,685 6.31% $1,842,185 $32,842 7.13%
Mortgage-related securities 628,236 7,353 4.68 539,078 7,940 5.89
Investment securities (2) 111,024 1,182 4.26 124,929 1,462 4.68
Interest-earning deposits 32,170 75 0.93 29,662 118 1.59
Federal funds 131,556 401 1.22 140,944 605 1.72
---------------------------------- ----------------------------------
Total interest earning assets 2,656,746 36,696 5.52 2,676,798 42,967 6.42
Noninterest-earning assets 178,340 182,554
---------- ----------
Total average assets $2,835,086 $2,859,352
========== ==========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
Savings deposits $ 232,267 367 0.63 $ 218,131 627 1.15
Money market accounts 354,279 1,346 1.52 339,841 1,686 1.98
Interest-bearing demand accounts 140,401 132 0.38 131,654 213 0.65
Time deposits 1,293,510 12,048 3.73 1,281,075 14,971 4.67
---------------------------------- ----------------------------------
Total deposits 2,020,457 13,893 2.75 1,970,701 17,497 3.55
Advance payments by borrowers for
taxes and insurance 7,356 10 0.54 7,907 24 1.21
Borrowings 332,389 4,607 5.54 434,179 6,057 5.58
---------------------------------- ----------------------------------
Total Interest-bearing liabilities 2,360,202 18,510 3.14 2,412,787 23,578 3.91
---------------------------------- ----------------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 102,079 88,810
Other noninterest-bearing liabilities 54,455 50,513
---------- ----------
Total noninterest-bearing
liabilities 156,534 139,323
---------- ----------
Total liabilities 2,516,736 2,552,110
Shareholders' equity 318,350 307,242
---------- ----------
Total average liabilities and
equity $2,835,086 $2,859,352
========== ==========
Net interest income and net interest
rate spread (3) $18,186 2.38 $19,389 2.51
======= =======
Net interest margin (4) 2.74% 2.90%
======= =======
Average interest-earning assets to
average interest-bearing liabilities 1.13x 1.11x
========== ==========
(1) For the purposes of these computations, non-accruing loans and loans held
for sale are included in the average loans outstanding.
(2) Federal Home Loan Bank stock is included in investment securities dollars
outstanding and yields.
(3) Interest rate spread is the difference between the average yield on
interest-earning assets and the average rate on interest-bearing
liabilities.
(4) Net interest margin is determined by dividing annualized net interest
income by total interest- earning assets.
29
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) changes attributable to changes in volume (change in volume multiplied
by prior rate);
(2) changes attributable to change in rate (changes in rate multiplied by
prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, 2003 COMPARED TO MARCH 31, 2002
----------------------------------------------
INCREASE (DECREASE) DUE TO:
----------------------------------------------
VOLUME (1) RATE (2) NET (3)
---------- -------- -------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable $(1,523) $(3,634) $(5,157)
Mortgage-related securities 1,193 (1,780) (587)
Investment securities (155) (125) (280)
Interest-earning deposits 9 (52) (43)
Federal funds (38) (166) (204)
------- ------- -------
Total (514) (5,757) (6,271)
------- ------- -------
Interest-bearing liabilities:
Savings deposits 39 (299) (260)
Money market deposits 68 (408) (340)
Interest-bearing demand deposits 13 (94) (81)
Time deposits 144 (3,067) (2,923)
------- ------- -------
Total deposits 264 (3,868) (3,604)
Advance payments by borrowers for taxes
and insurance (2) (12) (14)
Borrowings (1,410) (40) (1,450)
------- ------- -------
Total (1,148) (3,920) (5,068)
------- ------- -------
Net change in net interest income $ 634 $(1,837) $(1,203)
======= ======= =======
30
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002
GENERAL. Net income was $5.9 million for the first quarter of 2003 as compared
to $6.3 million for the first quarter of 2002. The decrease is primarily the
result of decreased net interest margin and increased provisions for loan losses
partially offset by an increase in the gains on the sales of loans and a
decrease in noninterest expenses. Decreased net interest margins resulted
primarily from the refinancing of relatively higher-yielding loans and market
conditions which did not allow us to reduce interest rates on deposits to the
degree that interest rates on assets were reduced.
NET INTEREST INCOME. Net interest income decreased $1.2 million, or 6.2%, to
$18.2 million in the first quarter of 2003 as compared to $19.4 million for the
first quarter of 2002. Net interest income decreased primarily as a result of
the decrease in the net interest margin. The net interest margin for the first
quarter of 2003 was 2.74%, as compared to 2.90% for the same period in 2002.
Because of the length of time in which interest rates have been declining and
the unprecedented levels of refinancing activity, we have experienced, at least
in early 2003, a somewhat different effect than we experienced in 2001 and 2002.
The refinancing of loans has reduced yields on loans going forward more quickly
than we have been able to reduce the already substantially lowered interest
rates on deposits and other interest-bearing liabilities. Further, a significant
portion of the proceeds of loan refinancings have been reinvested in relatively
lower-yielding investment securities, as we generally sell fixed rate mortgages.
If interest rates continue to remain stable or move lower in 2003, we anticipate
that our net interest margin would continue to be compressed (reduced) as a
result of the continued reductions to the yields on interest-earning assets as
compared to a more modest decrease to rates on our interest-bearing liabilities.
As a result of that compression, we would anticipate that our net interest
income would continue to be reduced in later quarters of 2003 as compared to
2002, which we expect would reduce net income. If, however, interest rates begin
to rise during 2003, there could be a positive effect on the loan portfolio,
resulting from increased originations of adjustable rate loans, which in turn
may offset the reductions in yields and net interest income.
TOTAL INTEREST INCOME. Total interest income decreased $6.3 million or 14.6% to
$36.7 million in the first quarter of 2003 as compared to $43.0 million in the
same period in 2002 primarily as a result of a decrease in the yields on the
loan and investment portfolios and a decrease in the dollar amount of the loan
portfolio.
Interest income on loans decreased $5.2 million for the three months ended March
31, 2003 primarily as a result of the decreased dollar amount of the loan
portfolio outstanding and a decreased yield on the loan portfolio. Market
interest rates remained at a level at which consumers were attracted to fixed
rate mortgage loans. Our new loans, in a large part, were to existing customers
who refinanced their existing adjustable rate or fixed rate mortgage loans and
consolidated their other debt into new fixed rate mortgage loans at lower
interest rate. We also allowed some customers with our adjustable interest rate
mortgage loans to reduce their interest rate for a fee, before the expiration of
their initial lock-in period or next adjustment date. We sell the
31
majority of our 30 year and some of our 20 and 15 year fixed rate mortgage loan
originations in the secondary market. In addition, both adjustable and fixed
rate mortgage loan originations were at interest rates that were below the
existing yield on the loan portfolio. We retain all of the adjustable interest
rate loans in the portfolio.
Interest income on investments decreased $280,000 for the first quarter of 2003
as a result of the decreased average size of the investment portfolio and the
decreased average yield on investment securities. As investment securities
matured, they were primarily reinvested into mortgage-related securities or
reinvested into another investment security. However, these reinvestments into
new investment securities were generally at interest rates that were below the
existing yield on the portfolio.
Interest income on mortgage-related securities decreased $587,000 as a result of
the decreased yields, partially offset by an increase in the average dollars, on
the mortgage-related securities portfolio. As market interest rates moved lower,
the underlying mortgage loans with higher interest rates prepaid. These
prepayments were re-invested into mortgage-related securities that had lower
yields than the existing mortgage-related securities portfolio.
Interest income on interest-earning deposits decreased $247,000 for the first
quarter of 2003 as a result of a decrease in the average yields earned on
interest-earning deposits and a decrease in the average dollar amount in
interest-earning deposits. A large portion of interest-earning deposits is
federal funds sold which earn overnight market interest rates. As market
interest rates decline or increase, interest rates on federal funds sold move in
the same direction. The average federal funds outstanding in the first three
months of 2003 decreased $9.4 million as compared to the first three months of
2002. This decrease was the result of using federal funds to fund loan
originations. We anticipate using federal funds to fund loan originations and to
continue to invest in securities (mortgage-related or investment).
INTEREST EXPENSE. Interest expense on deposits decreased $3.6 million or 20.6%
to $13.9 million for the three months ended March 31, 2003 from $17.5 million in
the same period in 2002, primarily as a result of a decrease in the cost of
deposits partially offset by growth in deposits. We believe the growth in
deposits continued to be a result of uncertainties and weakness in the stock
market and world events, which caused many investors to choose relatively safe
investments. At the same time, market interest rates were further decreased
thereby reducing the cost of new and renewing deposits, although not to the same
degree that the rates on interest earning assets decreased. The average cost of
deposits for the first quarter of 2003 was 2.75% as compared to 3.55% for the
period in 2002. If stock market values would rise or world events stabilize, we
believe that some of the deposits we recently acquired may be withdrawn to fund
customers' investments in the stock market. In addition, market interest rates
may rise, which would increase the cost of our deposits.
Interest expense on borrowings decreased $1.5 million for the first quarter of
2003 primarily as a result of maturing borrowings being paid off. We primarily
borrow from the Federal Home Loan Bank ("FHLB") of Chicago and those borrowings
have fixed terms and interest rates.
32
PROVISIONS FOR LOAN LOSSES. Provisions for loan losses were $258,000 for the
first quarter of 2003, compared to $15,000 in the comparable period of 2002. The
increase from 2002 was primarily a result of $3.5 million of commercial loans
being classified as substandard. The total allowance for loan losses at March
31, 2003 was $13.0 million or 151.9% of non-performing loans, compared to $12.7
million or 151.9% of non-performing loans at December 31, 2002. The loan loss
allowance to total loans was 0.77% at March 31, 2003, as compared to 0.76% at
December 31, 2002.
NONINTEREST INCOME. Total noninterest income increased $662,000 or 17.2% to $4.5
million in the first quarter of 2003 as compared to $3.8 million in the
comparable period in 2002. This increase was primarily a result of increased
gains on the sales of loans partially offset by decreased brokerage and
insurance commissions and decreased loan fees and servicing revenues.
Brokerage and insurance commissions decreased $136,000 in the first quarter of
2003 primarily as a result of decreased securities and fixed rate tax deferred
annuity sales.
Loan fees and servicing revenues decreased $131,000 in the first three months of
2003 primarily as a result of the amortization and impairment of mortgage
servicing rights. The impairment for the first quarter of 2003 was $235,000 and
is reflected as a decrease to mortgage servicing fee revenues.
Gain on sales of loans increased $814,000 in the first quarter 2003 as a result
of the increased dollar amount of loans sold. We sold $116.0 million of fixed
rate mortgage loans in the first quarter of 2003 as compared to $64.0 million in
the first quarter of 2002. "See Comparison of Financial Condition - Loans
Receivable." Gains on the sales of loans are primarily dependent on the dollar
amount of fixed rate mortgage loan originations and the sale of those loans. If
interest rates remain flat or increase, these gains could be reduced in future
periods.
Other noninterest income increased $114,000 in the first quarter of 2003 as a
result of an increase in debit card fees and income on a nonqualified defined
benefit plan.
NONINTEREST EXPENSE. Total noninterest expense decreased $230,000 primarily as a
result of a decrease in compensation and other employee benefit expense.
Compensation, payroll taxes and other employee benefit expense decreased
$235,000 for the first quarter of 2003 primarily as a result of a $150,000
recapture of First Northern's self funded health plan reserves and a decrease in
the ESOP funding expense. As a result of compressed net interest margins Bank
Mutual Corporation chose to modify its funding of the ESOP plan.
Occupancy and equipment expense rose $73,000 in the first quarter of 2003 as a
result of our deploying upgraded teller PCs and the purchase of new teller
software throughout our bank office network in 2002.
Other expenses decreased $68,000 for the first three months of 2003 as a result
of a decrease in marketing and other expenses. Although marketing expense
decreased in the first quarter of 2003 as compared to the same period in 2002,
$257,000 of marketing expense in the first quarter
33
of 2003 was attributed to the combination of the two banking subsidiaries on
March 16, 2003. We anticipate additional marketing expenses through the second
quarter of 2003 to promote the combination of the two bank subsidiaries.
INCOME TAXES. The effective tax rate for the first quarter of 2003 was 35.2% as
compared to 34.1% for the same period in 2002.
IMPACT OF INFLATION AND CHANGING PRICES. The financial statements and
accompanying notes of Bank Mutual Corporation have been prepared in accordance
with the generally accepted accounting principles ("GAAP"). GAAP generally
requires the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of our operations. Unlike industrial companies, our assets
and liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than do the effects of
inflation.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts of cash
to fund loan originations, loan purchases, deposit withdrawals, and operating
expenses. Our primary sources of funds are deposits, scheduled amortization and
prepayments of loan principal and mortgage-related securities, maturities and
calls of investment securities, borrowings from the FHLB of Chicago and funds
provided by our operations. Historically, these sources of funds have been
adequate to maintain liquidity, with the subsidiary bank borrowing
correspondingly more in periods in which its operation generates less cash. In
the event these sources of liquidity would become inadequate, we believe that we
could access the wholesale deposit market, although there can be no assurances
that wholesale deposits would be available if needed.
Loan repayments and maturing investment securities are a relatively predictable
source of funds. However, deposit flows, calls of investment securities and
prepayments of loans and mortgage-related securities are strongly influenced by
interest rates, general and local economic conditions and competition in the
marketplace. For example, during the first three months of 2003, loan
prepayments were significant because of the reduced interest rate environment;
another very different interest rate environment could lead to a significantly
different result. These factors reduce the predictability of the timing of these
sources of funds.
We are committed to maintaining a strong liquidity position; therefore, we
monitor our liquidity position on a daily basis. Based upon our historical
experience and available sources of liquidity, we anticipate that we will have
sufficient funds to meet current funding commitments. See also "Qualitative and
Quantitative Disclosures about Market Risk - Gap Analysis" in Item 3 hereof,
which is incorporated herein by reference, which discusses maturities.
Our primary investing activities are the origination and purchase of one-to
four-family real estate loans, multi-family and commercial real estate loans,
home equity loans, other consumer loans, commercial business loans, the purchase
of mortgage-related securities, and to a lesser extent, the purchase of
investment securities. These investing activities are funded by principal
payments on
34
mortgage loans and mortgage-related securities, calls and maturities on
investment securities, borrowings, deposit growth, and funds provided by our
operating activities.
Cash and cash equivalents decreased $32.5 million during the first three months
of 2003. Investing activities utilized $34.3 million of cash, primarily as a
result of the increase in the loan portfolio (primarily as a result of the
commercial loan originations), investment in a mutual fund, and mortgage-related
securities purchases, partially offset by principal repayments on
mortgage-related securities. Cash used by financing activities of $8.3 million
resulted primarily from net repayments on short and long term borrowings,
purchases of treasury shares and payment of cash dividends offset by deposit
growth and the increase in escrow payments. Net cash provided by operating
activities of $10.1 million consisted primarily of net income and an increase in
other liabilities offset by an increase in loans originated for sale and an
increase in other assets.
At March 31, 2003, we exceeded each of the applicable regulatory capital
requirements for the Bank. In order to be classified as "well-capitalized" by
the FDIC we are required to have leverage (Tier I) capital to average assets of
at least 5.00%. To be classified as a well-capitalized bank by the FDIC, we must
also have a total risk-based capital to risk-weighted assets ratio of at least
10.00%. At March 31, 2003, the Bank had a total risk-based capital ratio of
16.76%. See Notes to Unaudited Consolidated Financial Statements - Note 7 -
Shareholders' Equity.
OFF-BALANCE SHEET OBLIGATIONS
Because Bank Mutual Corporation is in the financial services industry, it
regularly commits to lend funds in the ordinary course of its business. Those
lending commitments give rise to potential future obligations and potential
liquidity needs that are not, and cannot meaningfully be, reflected on Bank
Mutual Corporation's balance sheet. At March 31, 2003, Bank Mutual Corporation
had:
- outstanding loan commitments to borrowers of approximately $54.7
million;
- unused commercial lines of credit of approximately $11.1 million;
- unused letters of credit of approximately $7.6 million; and
- available home equity, overdraft lines of credit and unused credit
card lines of credit of approximately $157.9 million.
See Notes to Unaudited Consolidated Financial Statements - Note 8 - Financial
Instruments with Off-Balance Sheet Risk. Other than a credit enhancement
instrument of $4.3 million, there were no outstanding commitments to purchase
securities at March 31, 2003. Other than these commitments and future
obligations under leases and similar contracts, Bank Mutual Corporation does not
engage in off-balance sheet financing or have other off-balance sheet
obligations.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GAP ANALYSIS. Repricing characteristics of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring a financial institution's interest
rate sensitivity "gap." An asset or liability is said to be "interest rate
sensitive" within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets maturing
or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
At March 31, 2003, based on the assumptions below, our interest-bearing assets
maturing or repricing within one year exceeded our interest-earning liabilities
maturing or repricing within the same period by $316.9 million. This represents
a positive cumulative one-year interest rate sensitivity gap of 11.1%, and a
ratio of interest-earning assets maturing or repricing within one year to
interest-bearing liabilities maturing or repricing within one year of 127.2%.
The cumulative gap ratio is significantly affected by $200.0 million of
long-term FHLB borrowings which had an original call option in the second
quarter of 2001 and which are quarterly callable thereafter. For the March 31,
2003 gap analysis, we have placed the $200 million long-term borrowing in its
final maturity period of 2004 as market interest rates are lower than the
interest rate on the borrowing. As such, the likelihood of the FHLB calling this
borrowing is significantly reduced. This call option is at the FHLB of Chicago's
discretion; however if the borrowings are called, the FHLB of Chicago has given
us indications that alternative borrowings would be available. While we have no
reason to believe that the FHLB of Chicago would not follow through on its
indications, there is no binding commitment and we therefore cannot provide an
assurance that these alternatives would be available. A call of these
obligations without a replacement would materially adversely affect our
liquidity, and we would need to use an alternative source of funds.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2003, which we anticipate
to reprice or mature in each of the future time periods shown. The information
presented in the following table is based on the following assumptions:
i) Investment securities - based upon contractual maturities and if
applicable, call dates.
ii) Mortgage-related securities - based upon an independent outside source
for
36
determining estimated cash flows (expected prepayment speeds).
iii) Loans - based upon contractual maturities, repricing dates, if
applicable, scheduled repayments of principal and projected
prepayments of principal based upon our historical experience or
anticipated prepayments.
iv) Deposits - based upon contractual maturities and our historical decay
rates.
v) Borrowings - based upon the earlier of call date or final maturity.
AT MARCH 31, 2003
MORE THAN MORE THAN
WITHIN THREE TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable:
Mortgage loans:
Fixed $117,315 $148,851 $216,810 $ 72,416 $ 39,079 $ 594,471
Adjustable 139,858 270,015 200,969 55,127 1,318 667,287
Consumer loans 135,894 117,800 124,467 36,379 18,015 432,555
Commercial business loans 20,144 21,519 23,357 4,404 1,457 70,881
Interest-earning deposits 173,445 - - - - 173,445
Investment securities 47,783 17,028 11,518 3,996 - 80,325
Mortgage-related securities:
Fixed 59,215 131,160 300,843 65,775 12,280 569,273
Adjustable 48,425 - - - - 48,425
Other interest-earning assets 33,797 - - - - 33,797
----------------------------------------------------------------------------------
Total interest-earning assets 775,876 706,373 877,964 238,097 72,149 2,670,459
----------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Interest-bearing demand accounts 3,191 9,139 21,472 17,828 87,215 138,845
Savings accounts 6,421 14,927 35,295 29,588 153,966 240,197
Money market accounts 351,851 - - - - 351,851
Time deposits 312,699 386,882 375,965 220,467 - 1,296,013
Advance payments by borrowers for
taxes and insurance - 11,792 - - - 11,792
Borrowings 17,312 51,169 241,104 8,345 11,992 329,922
----------------------------------------------------------------------------------
Total interest-bearing liabilities 691,474 473,909 673,836 276,228 253,173 2,368,620
----------------------------------------------------------------------------------
Interest rate sensitivity gap $ 84,402 $232,464 $204,128 $ (38,131) $(181,024) $ 301,839
==================================================================================
Cumulative interest rate sensitivity gap $ 84,402 $316,866 $520,994 $ 482,863 $ 301,839
==================================================================
Cumulative interest rate sensitivity
gap as a percentage of total assets 2.96% 11.11% 18.27% 16.93% 10.58%
==================================================================
Cumulative interest-earning assets as a
percentage of interest bearing liabilities 112.21% 127.19.% 128.33% 122.83% 112.74%
==================================================================
37
The methods used in the previous table have some shortcomings. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans, have features which limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change,
prepayment, and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates
increase.
NET EQUITY SENSITIVITY
In addition to the gap analysis table, we also use simulation models to monitor
interest rate risk. The models report the present value of equity in different
interest rate environments, assuming an instantaneous and permanent interest
rate shock to all interest rate-sensitive assets and liabilities. The present
value of equity is the difference between the present value of expected cash
flows of interest rate-sensitive assets and liabilities. The changes in market
value of assets and liabilities due to changes in interest rates reflect the
interest rate sensitivity of those assets and liabilities as their values are
derived from the characteristics of the asset or liability (i.e., fixed rate,
adjustable-rate, caps, floors) relative to the current interest rate
environment. For example, in a rising interest rate environment the fair market
value of a fixed rate asset will decline, whereas the fair market value of an
adjustable-rate asset, depending on its repricing characteristics, may not
decline. Increases in the market value of assets will increase the present value
of equity whereas decreases in market value of assets will decrease the present
value of equity. Conversely, increases in the market value of liabilities will
decrease the present value of equity whereas decreases in the market value of
liabilities will increase the present value of equity.
The following table presents the estimated present value of equity over a range
of interest rate change scenarios at March 31, 2003. The present value ratio
shown in the table is the present value of equity as a percent of the present
value of total assets in each of the different rate environments. For purposes
of this table, we have made assumptions such as prepayment rates and decay rates
similar to those used for the gap analysis table.
PRESENT VALUE OF EQUITY
AS A PERCENT OF
PRESENT VALUE OF EQUITY PRESENT VALUE OF ASSETS
-------- --------------- --------------- ------------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE RATIO CHANGE
- ----------------------- ---------------------------------------- ------------------------------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
+200 $348,943 $(3,619) (1.0)% 12.21% 1.1%
+100 353,638 1,076 0.3 12.23 1.3
0 352,562 0 0.0 12.07 0.0
-100 348,518 (4,044) (1.1) 11.83 (2.1)
-200 332,081 (20,481) (5.8) 11.22 (7.1)
38
As in the case of the gap analysis table, the methods we used in the previous
table have some shortcomings. This type of modeling requires that we make
assumptions which may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. For example, we make assumptions
regarding the acceleration rate of the prepayment speeds of higher yielding
mortgage loans. Prepayments will accelerate in a falling rate environment and
the reverse will occur in a rising rate environment. We also assume that decay
rates on core deposits will accelerate in a rising rate environment and the
reverse in a falling rate environment. The table assumes that we will take no
action in response to the changes in interest rates, when in practice rate
changes on certain products, such as savings deposits, may lag market changes.
In addition, prepayment estimates and other assumptions within the model are
subjective in nature, involve uncertainties, and therefore cannot be determined
with precision. Accordingly, although the present value of equity model may
provide an estimate of our interest rate risk at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in interest rates on our present value of equity.
39
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. In response to the
adoption of the Sarbanes-Oxley Act of 2002, Bank Mutual Corporation
and the certifying officers of this report have implemented disclosure
controls and procedures to ensure that material information relating
to Bank Mutual Corporation is made known to the signing officers, and
consequently reflected in periodic SEC reports. These controls and
procedures build upon Bank Mutual Corporation's pre-existing
practices. Bank Mutual Corporation and those officers have evaluated
for this report, and will regularly evaluate, the effectiveness of
those disclosures controls and procedures within 90 days prior to
filing of any periodic SEC report, including this report. Bank Mutual
Corporation and the certifying officers believe that these disclosure
controls and procedures are effective, based upon this evaluation.
(b) Changes in internal controls. During the period covered by this
report, there were not any significant changes in Bank Mutual
Corporation's internal controls or in other factors that could
significantly effect these controls subsequent to the date of their
evaluation, including any corrective actions with respect to
significant deficiencies and material weaknesses.
(c) Asset-backed issuers. Not applicable.
40
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At Bank Mutual Corporation's annual meeting of shareholders on May 5,
2003, the four continuing directors who were management's nominees
for re-election were elected to Bank Mutual Corporation's Board of
Directors. The directors were re-elected, for terms ending in 2006,
with the following votes (rounded for fractional interests voted
through the dividend reinvestment plan or 401(k) plans):
Authority for
Director's Name Class Votes For Voting Withheld
--------------- ----- --------- ---------------
Thomas H. Buestrin 2006 19,885,262 145,938
Michael T. Crowley, Jr. 2006 19,803,204 227,997
Michael D. Meeuwsen 2006 19,807,832 223,368
William J. Mielke 2006 19,888,534 142,666
Michael T. Crowley, Sr., Raymond W. Dwyer, Mark C. Herr, Thomas J.
Lopina, Sr., Robert B. Olson, David J. Rolfs and J. Gus Swoboda remain
as continuing directors, with terms expiring in 2004 or 2005.
The votes "for" each of the directors included the affirmative vote of
11,193,174 shares cast by Bank Mutual Bancorp, MHC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index, which follows the signature page
hereof.
(b) Reports on Form 8-K: In the quarter ended March 31, 2003, the
Registrant did not file any Reports on Form 8-K. However, a Form
8-K dated April 21, 2003 disclosed Bank Mutual Corporation's
earnings release for the quarter ended March 31, 2003 and another
Form 8-K dated April 21, 2003 disclosed the announcement of the
plan for the full conversion of Bank Mutual Corporation.
41
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK MUTUAL CORPORATION
------------------------------------
(Registrant)
Date: May 15, 2003
/s/ Michael T. Crowley, Jr.
------------------------------------
Michael T. Crowley, Jr.
Chairman and Chief Executive Officer
Date: May 15, 2003
/s/ Rick B. Colberg
------------------------------------
Rick B. Colberg
Chief Financial Officer
42
CERTIFICATIONS
I, Michael T. Crowley, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bank Mutual
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Michael T. Crowley, Jr.
------------------------------------
Michael T. Crowley, Jr.
Chairman and Chief Executive Officer
43
I, Rick B. Colberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bank Mutual
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/Rick B. Colberg
------------------------------------
Rick B. Colberg
Chief Financial Officer
44
EXHIBIT INDEX
BANK MUTUAL CORPORATION
Form 10-Q for Quarter Ended March 31, 2003
Exhibit No. Description Filed Herewith
- ----------- ----------- --------------
4.1 Plan of Restructuring for the Conversion and X
Reorganization of Bank Mutual Bancorp, MHC, as adopted
on April 21, 2003
99.1 Certification required by Section 906 of the X
Sarbanes-Oxley Act of 2002 signed by the Chairman and
Chief Executive Officer of Bank Mutual Corporation
99.2 Certification required by Section 906 of the X
Sarbanes-Oxley Act of 2002 signed by the Chief Financial
Officer of Bank Mutual Corporation