As filed with the Securities and Exchange Commission on November 18, 2005
Registration No. 333-______
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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MUTUAL FEDERAL BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
FEDERAL 6035 TO BE APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
2212 WEST CERMAK ROAD
CHICAGO, ILLINOIS 60608
(773) 847-7747
(Address and Telephone Number of Principal Executive Offices)
2212 WEST CERMAK ROAD
CHICAGO, ILLINOIS 60608
(Address of Principal Place of Business)
STEPHEN M. OKSAS
MUTUAL FEDERAL BANCORP, INC.
2212 WEST CERMAK ROAD
CHICAGO, ILLINOIS 60608
(773) 847-7747
(Name, Address and Telephone Number of Agent for Service)
---------------
COPIES TO:
DANIEL C. MCKAY II, ESQ. KIP A. WEISSMAN, ESQ.
JENNIFER DURHAM KING, ESQ. LUSE GORMAN POMERENK & SCHICK, P.C.
VEDDER, PRICE, KAUFMAN & KAMMHOLZ, P.C. 5335 WISCONSIN AVENUE, N.W.
222 NORTH LASALLE STREET, SUITE 2600 SUITE 400
CHICAGO, ILLINOIS 60601 WASHINGTON, D.C. 20015
(312) 609-7500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: []
If this Form is filed to register additional securities for a offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: []
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: []
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: []
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box: []
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.10 par value per share. 1,091,062 shares $10.00 $10,910,620(1) $1,285
====================================================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
</FN>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
This preliminary prospectus is not complete and may be changed. These shares may
not be sold until the registration statement filed with the U.S. Securities and
Exchange Commission is effective. This preliminary prospectus is not an offer to
sell nor does it seek an offer to buy these shares in any jurisdiction where the
offer or sale is not permitted.
Subject to Completion, Dated November 18, 2005
PRELIMINARY PROSPECTUS
MUTUAL FEDERAL BANCORP, INC.
PROPOSED HOLDING COMPANY FOR MUTUAL FEDERAL
SAVINGS AND LOAN ASSOCIATION OF CHICAGO
UP TO 948,750 SHARES OF COMMON STOCK
================================================================================
Mutual Federal Bancorp, Inc. is offering for sale up to 948,750 shares
of its common stock on a best efforts basis. The shares being offered represent
30% of the shares of common stock of Mutual Federal Bancorp, Inc. that will be
outstanding following the offering. In connection with the offering, Mutual
Federal Bancorp, MHC, a federally chartered mutual holding company, will form
Mutual Federal Bancorp, Inc. as a federally chartered corporation. Mutual
Federal Bancorp, Inc. will own 100% of the outstanding stock of Mutual Federal
Savings and Loan Association of Chicago. After the offering, Mutual Federal
Bancorp, MHC will own 70% of Mutual Federal Bancorp, Inc.
We must sell a minimum of 701,250 shares in order to complete the
offering and we will terminate the offering if we do not sell the minimum number
of shares. We may sell up to a maximum of 1,091,062 shares because of regulatory
considerations or changes in market or economic conditions without resoliciting
subscribers. The offering is scheduled to terminate on _________, 2006. We may
extend the termination date without notice to you, until _________, 2006, unless
the Office of Thrift Supervision approves a later date.
The minimum purchase is 25 shares of common stock. The maximum purchase
that an individual may make through a single deposit account is $150,000, and no
person either alone, or with an associate or group of persons acting together,
may purchase more than $250,000. Once submitted, orders are irrevocable unless
the offering is terminated or extended beyond _________, 2006. If the offering
is extended beyond _________, 2006, you will have the right to modify or rescind
your purchase orders. Funds received prior to the completion of the offering
will be held by us in an account that will bear interest at our passbook savings
rate, which is currently _____% per annum. If the offering is terminated, we
will return your funds promptly, with interest.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist us
in selling our common stock but is not obligated to purchase any of the common
stock that is being offered for sale. Subscribers will not pay any commissions
to purchase shares of common stock in the offering. There is currently no public
market for the common stock. Sandler O'Neill & Partners, L.P. has advised us
that it intends to make a market in the common stock but is under no obligation
to do so. We expect that the common stock will be quoted on the OTC Bulletin
Board.
THIS INVESTMENT INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL. PLEASE READ "RISK FACTORS" BEGINNING ON PAGE 15.
================================================================================
OFFERING SUMMARY
PRICE PER SHARE: $10.00
MINIMUM MAXIMUM ADJUSTED MAXIMUM
----------- ------------ ----------------
Number of shares............................ 701,250 948,750 1,091,062
Estimated offering expenses, excluding
selling agent commissions and expenses... $ 579,285 $ 579,285 $ 579,285
Selling agent commissions and expenses(1)... 105,345 136,085 153,760
Net proceeds................................ 6,328,000 8,773,000 10,178,000
Net proceeds per share...................... 9.02 9.25 9.33
- ---------------------------
<FN>
(1) See "The Stock Offering--Plan of Distribution and Marketing
Arrangements" at page 92 for a discussion of the compensation to be
paid to Sandler O'Neill & Partners, L.P. in connection with the
offering.
</FN>
---------------
THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR HAS DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
SANDLER O'NEILL & PARTNERS, L.P.
-------------------
The date of this prospectus is ________, 2006
[MAP]
TABLE OF CONTENTS
PAGE NO.
--------
Summary........................................................................1
Risk Factors..................................................................15
Selected Consolidated Financial and Other Data................................21
Forward Looking Statements....................................................23
Use of Proceeds from the Offering.............................................24
Our Policy Regarding Dividends................................................26
Market for Our Common Stock...................................................27
Regulatory Capital Compliance.................................................28
Capitalization................................................................29
Pro Forma Data................................................................31
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................37
Business of Mutual Federal Bancorp, Inc.......................................49
Business of Mutual Federal Savings and Loan Association of Chicago............49
Federal and State Taxation....................................................63
Supervision and Regulation....................................................64
Management....................................................................73
The Stock Offering............................................................83
Restrictions on the Acquisition of Mutual Federal Bancorp, Inc. and the Bank..98
Description of Capital Stock of Mutual Federal Bancorp, Inc..................100
Transfer Agent and Registrar.................................................101
Legal and Tax Matters........................................................101
Experts ....................................................................101
Where You Can Find More Information..........................................102
Registration Requirements....................................................102
i
SUMMARY
The following summary provides selected information regarding the
offering of common stock by Mutual Federal Bancorp, Inc. and the business of
Mutual Federal Bancorp, MHC and Mutual Federal Savings and Loan Association of
Chicago. However, no summary can contain all the information that may be
important to you. For additional information, you should read this prospectus
carefully, including the consolidated financial statements and the notes to the
consolidated financial statements of Mutual Federal Bancorp, MHC.
In this prospectus, we use the terms "we," "us" and "our" to refer
collectively to Mutual Federal Bancorp, MHC, Mutual Federal Savings and Loan
Association of Chicago and, where appropriate, Mutual Federal Bancorp, Inc.
unless the context clearly indicates otherwise. We use the terms "Mutual MHC" to
refer solely to Mutual Federal Bancorp, MHC, "Mutual Bancorp" to refer solely to
Mutual Federal Bancorp, Inc. and "the Bank" to refer solely to Mutual Federal
Savings and Loan Association of Chicago.
OUR ORGANIZATION
In November 2001, the Bank reorganized into a mutual holding company
structure. As part of the reorganization, the Bank formed Mutual MHC. Also, at
that time, the Bank became a capital stock savings and loan association and a
wholly owned subsidiary of Mutual MHC. The same directors and officers who
manage the Bank manage Mutual MHC. As part of the reorganization, the Bank's
former members became members of Mutual MHC.
The following chart shows our current ownership structure:
[GRAPHIC OMITTED]
THE COMPANIES
MUTUAL FEDERAL BANCORP, MHC
Mutual Federal Bancorp, MHC is a federally chartered mutual holding
company and currently owns 100% of the outstanding shares of common stock of the
Bank. Mutual MHC has not engaged in any significant business activity other than
owning the common stock of the Bank and does not intend to do so after the stock
offering. After the completion of the stock offering, Mutual MHC is expected to
own 70% of the outstanding shares of common stock of Mutual Bancorp. So long as
Mutual MHC exists, it must own a majority of the voting stock of Mutual Bancorp.
As a result, stockholders other than Mutual MHC will not be able to exercise
voting control over most matters put to a vote of stockholders, because Mutual
MHC, through its board of directors, will be able to do so.
MUTUAL FEDERAL BANCORP, INC.
Mutual Federal Bancorp, Inc. will be the federally chartered mid-tier
stock holding company for the Bank. Upon the completion of the offering, Mutual
Bancorp will own 100% of the common stock of the Bank. Prior to the offering,
Mutual Bancorp will not have engaged in any significant business activity and,
other than owning the common stock of the Bank, does not currently anticipate
doing so after the stock offering. The executive office of Mutual Bancorp will
be located at 2212 West Cermak Road, Chicago, Illinois 60608, and its telephone
number will be (773) 847-7747.
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
Mutual Federal Savings and Loan Association of Chicago is a federally
chartered savings and loan association headquartered in Chicago, Illinois. The
Bank was originally founded in 1905 as a state-chartered mutual savings and loan
association. We conduct our business from one full-service banking office.
At September 30, 2005, we had total assets of $65.3 million, total
deposits of $45.4 million and stockholder's equity of $18.2 million. Our net
income for the nine months ended September 30, 2005 was $656,000. Our principal
business activity is the origination of fixed-rate mortgage loans secured by
one- to four-family residential real estate. We also originate loans secured by
multi-family real estate and, to a lesser extent, non-residential real estate.
The Bank's deposit accounts include primarily passbook savings and certificates
of deposit, and a small number of non-interest-bearing checking accounts. As a
community-oriented institution, we seek to emphasize personal and efficient
service for our customers in an attempt to effectively compete against other
financial institutions and better serve the financial needs of our customers.
BUSINESS STRATEGY
Our business strategy is to grow and improve our profitability by:
o maintaining our emphasis on one- to four-family residential
real estate lending, while continuing to originate
multi-family real estate loans;
o utilizing the capital raised in the offering to pursue
opportunities for growth, including organic growth and, where
opportunities arise, acquiring financial institutions or
branches and establishing de novo branches, although no
specific transactions are being considered at this time;
o expanding and strengthening our customer base by offering new
products and services to our customers;
o continuing to manage our interest rate risk; and
o maintaining high asset quality.
Historically, we have not experienced rapid growth in our business, but
rather have grown at a more modest pace. We believe our best opportunities for
growth are through potential acquisitions or through de novo branching. While
our business plan provides for us to seek to grow by pursuing acquisition
opportunities as well as establishing new branches, if we ultimately are not
successful in identifying and completing suitable acquisitions or establishing
new branches, we may not be able to grow our business as we hope.
2
A full description of our products and services begins on page 49 of
this prospectus.
THE STOCK OFFERING
Because federal regulations require that Mutual MHC own a majority of
the outstanding shares of common stock of Mutual Bancorp, the shares that we are
permitted to sell in the stock offering must represent a minority of the
outstanding common stock of Mutual Bancorp. Based on these restrictions, our
board of directors has decided to offer and sell shares equal to 30% of Mutual
Bancorp's outstanding common stock, with the remaining 70% to be held by Mutual
MHC.
The following chart shows our contemplated structure following the
offering:
[GRAPHIC OMITTED]
Mutual MHC has no plans, understandings or agreements to sell or
otherwise dispose of the shares that will comprise its 70% ownership of Mutual
Bancorp after the offering. However, in the future, Mutual MHC has the option of
causing Mutual Bancorp to issue additional shares of its common stock and
remaining a mutual holding company (so long as it continues to hold a majority
of Mutual Bancorp's common stock) or converting to a full stock company.
REASONS FOR THE STOCK OFFERING
The primary reasons for our decision to conduct the offering are to (1)
increase our capital to support future growth; (2) permit us to issue capital
stock, which is a source of capital not available in our current mutual holding
company structure; and (3) offer our depositors, employees, management and
directors an indirect equity ownership interest in Mutual Bancorp and thereby an
economic interest in its future success.
The capital raised in the offering is expected to:
o improve our ability to grow our loans and deposits, including
through potential acquisitions or, should suitable acquisition
opportunities not emerge, through de novo branching, although
no specific transactions are being considered at this time;
o increase our lending capacity by providing us with additional
capital to support new loans and higher lending limits;
o support the introduction of new financial products and
services, which will help us more effectively compete in our
market area;
3
o increase our capital base, which will provide greater
flexibility to invest in longer-term, higher yielding assets;
and
o enable us to establish stock benefit plans for management and
employees, which will improve our ability to attract and
retain qualified personnel.
TERMS OF THE OFFERING
We are offering between 701,250 and 948,750 shares of our common stock
at an offering price of $10.00 per share. The maximum number of shares that we
sell in the offering may increase by up to 15%, to 1,091,062 shares, as a result
of regulatory considerations, strong demand for the shares in the offering, or
positive changes in financial markets generally and financial institution stocks
in particular. Unless our pro forma market value decreases below $23.4 million
or increases above $36.4 million, or if the offering is extended beyond
__________, 2006, you may not change or cancel your subscription once it has
been submitted.
Sandler O'Neill & Partners, L.P., our marketing agent in connection
with the offering, will use its best efforts to assist us in selling our shares
of common stock but is not obligated to purchase any shares in the offering.
PERSONS WHO MAY SUBSCRIBE FOR STOCK IN THE OFFERING
Under the terms of a stock issuance plan adopted by Mutual MHC, we are
offering shares of common stock in a "subscription offering" in the following
order of priority:
(1) depositors who had accounts at the Bank with aggregate
balances of at least $50 on June 30, 2004;
(2) the Bank's employee stock ownership plan ("ESOP");
(3) depositors who had accounts at the Bank with aggregate
balances of at least $50 on _________, 2005; and
(4) each voting member of Mutual MHC on _________, 2006, which
means all holders of savings, demand or other authorized
accounts of the Bank, including all borrowers of the Bank as
of November 2, 2001 whose borrowings remain outstanding as of
___________, 2006.
If any shares remain unsold in the subscription offering, we will offer
these shares for sale in a community offering directly to the general public;
however, natural persons residing in Cook County, Illinois will have a purchase
preference in any community offering. The community offering, if any, may
commence concurrently with, during or promptly after the subscription offering.
We also may offer shares not purchased in the subscription offering or the
community offering through a syndicate of brokers in what is referred to as a
syndicated community offering. The syndicated community offering, if necessary,
would be managed by Sandler O'Neill & Partners, L.P. and would commence as soon
as practicable after the termination of the subscription offering and the
community offering, if any, and would be open to the general public. We have the
right to accept or reject, in our sole discretion, orders received in the
community offering and the syndicated community offering.
To ensure that your purchase eligibility and priority are properly
identified, you must list all accounts on the stock order form, giving all names
on each account, in which you had an ownership interest as of the appropriate
eligibility date. Failure to list an account or provide correct information
4
could result in the loss of all or part of a subscriber's stock allocation. We
will strive to identify your ownership in all accounts held at the Bank but
cannot guarantee that we will be able to do so. Our interpretation of the terms
and conditions of the stock issuance plan and of the acceptability of the order
forms will be final.
LIMITS ON THE AMOUNT OF SHARES OF COMMON STOCK YOU MAY PURCHASE
You must purchase at least 25 shares of common stock. Generally, no
individual, or individuals through a single account, may purchase more than
$150,000 (15,000 shares) of common stock. If any of the following persons
purchase shares through other accounts, their purchases when combined with your
purchases cannot exceed $250,000 (25,000 shares) of common stock:
o your spouse or relatives of you or your spouse if such person
lives in your house or is one of our directors or senior
officers;
o companies or other organizations in which you beneficially
own, directly or indirectly, a 10% or greater equity interest
or in which you serve as a senior officer or partner;
o a trust or other estate if you have a substantial beneficial
interest in the trust or estate or you are a trustee or
fiduciary of the trust or estate; or
o other persons who may be acting in concert with you
(including, but not limited to, persons who file jointly a
Schedule 13-G or Schedule 13-D Beneficial Ownership Report
with the Securities and Exchange Commission).
A detailed discussion of the limitations on purchases of common stock
is set forth under the caption "The Stock Offering--Offering of Common
Stock--Additional Limitations on Purchase of Shares" beginning on page 88.
Subject to OTS approval, we may increase or decrease the purchase
limitations in the offering at any time. In addition, in any direct community
offering or syndicated community offering, we will first fill orders for our
common stock up to a maximum of 2% of the shares sold. Thereafter, we will
allocate any remaining shares of common stock on an equal number of shares per
order basis, until we fill all orders. Our qualified tax-exempt benefit plan,
which consists of our ESOP, is authorized to purchase up to 10% of the shares
offered in the stock offering without regard to these purchase limitations, or
up to 70,125 and 94,875 shares, respectively, at the minimum and maximum of the
offering range.
HOW WE DETERMINED TO OFFER BETWEEN 701,250 SHARES AND 948,750 SHARES AND THE
$10.00 PRICE PER SHARE
We decided to offer between 701,250 shares and 948,750 shares, which is
our offering range, based on an independent appraisal of our pro forma market
value prepared by RP Financial, L.C. ("RP Financial"), a firm experienced in
appraisals of financial institutions. RP Financial is of the opinion that as of
November 4, 2005, the estimated pro forma value of our common stock on a fully
converted basis was between $23,375,000 and $31,625,000, with a midpoint of
$27,500,000. The term "fully converted" assumes that 100% of our common stock
had been sold to the public, as opposed to the 30% that will be sold in the
offering.
5
In preparing its appraisal, RP Financial considered the information
contained in this prospectus, including our consolidated financial statements.
RP Financial also considered the following factors, among others:
o our present and projected operating results and financial
condition and the economic and demographic conditions in our
existing marketing area;
o certain historical, financial and other information relating
to the Bank;
o a comparative evaluation of the operating and financial
statistics of the Bank with those of other similarly situated
publicly traded savings institutions, and mutual holding
companies (our peer group);
o the aggregate size of the offering;
o the impact of the offering on Mutual Bancorp's consolidated
net worth and earnings potential; and
o the trading market for securities of comparable institutions
and general conditions in the market for such securities.
In reviewing the appraisal, our board of directors considered the
methodologies and the appropriateness of the assumptions used by RP Financial in
addition to the factors listed above, and our board of directors believes that
these assumptions were reasonable.
Our board of directors determined that the common stock should be sold
at $10.00 per share and that 30% of the shares of our common stock should be
offered for sale in the offering, and 70% should be held by Mutual MHC. Based on
the estimated valuation range and the purchase price, the number of shares of
our common stock that will be outstanding upon completion of the stock offering
will range from 2,337,500 to 3,162,500 (subject to adjustment to 3,636,875), and
the number of shares of our common stock that will be sold in the stock offering
will range from 701,250 shares to 948,750 shares (subject to adjustment to
1,091,062), with a midpoint of 825,000 shares. The number of shares that Mutual
MHC will own after the offering will range from 1,636,250 to 2,213,750 (subject
to adjustment to 2,545,813). The estimated valuation range may be amended with
the approval of the OTS, if required, or if necessary because of subsequent
developments in our financial condition or market conditions generally, or to
fill the order of the ESOP.
The appraisal will be updated before we complete the stock offering. If
the pro forma market value of the common stock at that time is either below
$23.4 million or above $36.4 million, then we, after consulting with the OTS,
may:
o terminate the stock offering and return all funds promptly;
o extend or hold a new subscription or community offering, or
both;
o establish a new offering range and commence a resolicitation
of subscribers; or
o take such other actions as may be permitted by the OTS.
Under any of these circumstances, we will notify you, and you will have the
opportunity to change or cancel your order.
6
Two measures investors use to analyze an issuer's stock are the ratio
of the offering price to the issuer's pro forma book value and the ratio of the
offering price to the issuer's pro forma annual net income. According to RP
Financial, while it and other appraisers (as well as investors) use both ratios
to evaluate an issuer's stock, the price-to-book-value ratio historically has
been the most frequently used method due to the volatility of earnings in the
thrift industry. RP Financial considered these ratios, among other factors, in
preparing its appraisal. Book value is the same as total equity, and represents
the difference between the issuer's assets and liabilities. The following table
presents the ratio of the offering price to our pro forma book value and
earnings per share for the period indicated. See "Pro Forma Data" for a
description of the assumptions we used in making these calculations.
AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
------------------------------------------------------
701,250 825,000 948,750 1,091,062
SHARES SHARES SHARES SHARES
SOLD SOLD SOLD SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
Pro forma price-to-book-value ratio... 99.30% 111.86% 123.61% 135.69%
Pro forma price-to-earnings ratio..... 27.78x 34.09x 39.47x 46.88x
Below we compare our pricing ratios to the pricing ratios of our peer
group companies, i.e., mutual holding companies whose shares trade on the Nasdaq
National Market or the American Stock Exchange, using financial information as
of or for the twelve months ended September 30, 2005 for the Bank. The following
table presents a summary of selected pricing ratios for the peer group companies
and for us on a non-fully converted basis. Compared to the average pricing
ratios of the peer group, our pro forma pricing ratios at the maximum of the
offering range indicated a discount of 20.8% on a price-to-earnings basis, a
premium of 127.4% on a core earnings basis, and a discount of 25.6% on a
price-to-book basis.
NON-FULLY CONVERTED NON-FULLY CONVERTED NON-FULLY CONVERTED
PRO FORMA PRICE-TO- PRO FORMA PRICE-TO- PRO FORMA PRICE-TO-
EARNINGS MULTIPLE CORE EARNINGS BOOK VALUE RATIO
------------------- ------------------- -------------------
MUTUAL BANCORP (AS OF OR FOR THE TWELVE
MONTHS ENDED SEPTEMBER 30, 2005)
Maximum............................... 23.27x 66.75x 123.45%
Minimum............................... 17.17x 49.11x 99.33%
NON-FULLY CONVERTED NON-FULLY CONVERTED NON-FULLY CONVERTED
ACTUAL PRICE-TO- ACTUAL PRICE-TO- ACTUAL PRICE-TO-
EARNINGS MULTIPLE CORE EARNINGS BOOK VALUE RATIO
------------------- ------------------- -------------------
VALUATION OF PEER GROUP COMPANIES
AS OF NOVEMBER 4, 2005
Averages.............................. 29.38x 29.36x 165.93%
Medians............................... 27.87x 29.01x 148.40%
The following table presents a summary of selected pricing ratios for
the peer group companies and for us, with the ratios adjusted to the
hypothetical case of being fully converted utilizing financial data as of or for
the twelve months ended September 30, 2005 for the Bank. Compared to the average
fully converted pricing ratios of the peer group, our pro forma fully converted
pricing ratios at the maximum of the offering range indicated a discount of
29.0% on a price-to-earnings basis, a premium of 52.2% on a core earnings basis
and a discount of 20.6% on a price-to-book basis. RP Financial's calculations of
the fully converted pricing multiples for the peer group companies assume the
pro forma impact of selling the mutual holding company shares of each of the
peer group companies at their
7
respective trading prices as of November 4, 2005. RP Financial's calculation of
the fully converted pricing multiples for Mutual Bancorp assumes the pro forma
impact of selling 100% of the shares to be issued to the public at $10.00 per
share.
FULLY CONVERTED FULLY CONVERTED
EQUIVALENT PRO FORMA FULLY CONVERTED EQUIVALENT PRO FORMA
PRICE-TO- EQUIVALENT PRO FORMA PRICE-TO-BOOK
EARNINGS MULTIPLE PRICE-TO-CORE EARNINGS VALUE RATIO
-------------------- ---------------------- --------------------
MUTUAL BANCORP
Maximum...................... 19.86x 44.71x 70.18%
Minimum...................... 15.24x 36.04x 61.67%
VALUATION OF PEER GROUP
COMPANIES
AS OF NOVEMBER 4, 2005
Averages..................... 27.98x 29.38x 88.41%
Medians...................... 27.35x 30.00x 86.63%
As shown in the above tables, our pro forma fully converted and
non-fully converted price-to-book value ratios are discounted compared to the
average trading price to book value of the peer group companies. A reason for
the price-to-book value ratio discount shown in the above tables is that if our
pro forma non-fully converted price-to-book value ratio was increased to the
ratio for the peer group companies, our price-to-earnings and price-to-core
earnings multiples would substantially exceed that of the peer group companies.
As shown in the above tables, our pro forma price-to-earnings multiple
is at a discount to that of the peer group companies.
The pro forma fully converted calculations for the PEER GROUP COMPANIES
include, but are not limited to, the following assumptions:
o 8.0% of the shares sold in an offering would be purchased by
an employee stock ownership plan, with the expense to be
amortized over 10 years;
o 4.0% of the shares sold in an offering would be purchased by a
stock-based incentive plan, with the expense to be amortized
over five years; and
o offering expenses would equal 2.0% of the offering amount.
With respect to Mutual Bancorp, the pro forma fully converted
calculations use the same assumptions as applied to the peer group companies,
except that:
o the expense of the ESOP will be recognized over 20 years;
o our stock option and management recognition plans will acquire
shares equal to 6.86% of the number of shares outstanding
after the offering; and
o offering expenses will be 3.4% of the offering amount.
THE INDEPENDENT APPRAISAL DOES NOT INDICATE STOCK MARKET VALUE. DO NOT
ASSUME OR EXPECT THAT OUR VALUATION AS INDICATED ABOVE MEANS THAT THE COMMON
STOCK WILL TRADE AT OR ABOVE THE $10.00 PURCHASE PRICE AFTER THE STOCK OFFERING.
8
AFTER-MARKET PERFORMANCE INFORMATION
The following table presents stock price information for all mutual
holding company initial public offerings completed between January 1, 2004 and
November 4, 2005. The offerings are listed in reverse chronological order so
that the most recent offering appears first.
PRICE PERFORMANCE FROM INITIAL TRADING DATE
----------------------------------------------------------------
ASSET THROUGH
SIZE AT ONE DAY ONE WEEK ONE MONTH NOVEMBER 4,
TIME OF PERCENTAGE PERCENTAGE PERCENTAGE 2005
TRANSACTION IPO CHANGE CHANGE CHANGE (%)
- ----------------------------------------- ------- ---------- ---------- ---------- -----------
($IN MILLIONS)
2005
Investors Bancorp, Inc................... $4,962 0.2% 1.0% 5.3% 5.3%
Wauwatosa Holdings, Inc.................. 1,345 12.5 7.3 9.5 9.5
Ottawa Savings Bancorp, Inc.............. 173 4.0 5.0 7.0 2.0
United Financial Bancorp, Inc............ 796 17.5 16.0 17.0 13.2
Heritage Financial Group................. 348 7.5 7.5 9.3 8.2
Colonial Bancshares, Inc................. 296 6.0 9.9 7.5 (0.5)
North Penn Bancorp, Inc.................. 93 10.0 2.5 1.5 2.0
Rockville Financial, Inc................. 890 4.8 10.5 20.0 30.4
FedFirst Financial Corp.................. 270 (6.6) (9.3) (14.5) (13.1)
Brooklyn Federal Bancorp, Inc............ 304 (0.5) (1.0) (5.0) 10.0
Prudential Bancorp, Inc.................. 407 (1.5) (6.5) (12.5) 17.5
Kentucky First Federal Bancorp .......... 295 7.9 12.0 12.4 (0.5)
Kearny Financial Corp.................... 1,904 13.9 15.0 11.3 19.2
Home Federal Bancorp, Inc. of LA ........ 98 (1.0) 0.5 (0.8) (4.5)
BV Financial, Inc........................ 100 (6.5) (5.0) (0.7) (17.0)
Georgetown Bancorp, Inc.................. 143 2.0 (0.5) 0.5 (17.0)
2004
SFSB, Inc................................ $ 148 7.5% (0.9)% (1.5)% (8.1)%
Ocean Shore Holding Company ............. 515 21.5 22.0 6.3 7.5
Lincoln Park Bancorp, Inc................ 81 10.0 12.5 0.0 (11.5)
Abington Comm Bancorp, Inc............... 658 33.5 33.0 29.0 20.8
Home Federal Bancorp, Inc................ 519 24.9 26.8 23.3 21.2
PSB Holdings, Inc........................ 279 5.0 6.0 5.0 5.0
Atlantic Coast Federal Corp.............. 580 17.5 23.1 30.0 43.9
Naugatuck Valley Financial Corp ......... 254 8.0 8.1 8.0 3.0
SI Financial Group, Inc.................. 555 12.0 10.6 10.3 16.0
First Federal Financial Services, Inc.... 123 15.0 22.5 35.0 32.5
Monadnock Community Bancorp, Inc. ....... 45 3.8 0.0 (3.8) 4.1
Wawel Savings Bank....................... 65 29.5 25.0 12.5 (1.5)
Osage Federal Financial, Inc............. 79 20.0 22.5 9.5 45.4
K-Fed Bancorp............................ 874 34.9 29.3 15.9 22.8
Citizens Community Bancorp, Inc. ........ 134 23.7 27.5 18.0 18.0
Clifton Savings Bancorp, Inc. ........... 636 22.5 37.8 32.9 3.9
Cheviot Financial Corp................... 246 33.2 33.5 34.2 15.0
The table above presents only short-term historical information on
stock price performance, which may not be indicative of the longer-term
performance of such stock prices. The data presented in the table are not
intended to predict how our shares of common stock may perform following the
offering.
THERE CAN BE NO ASSURANCE THAT OUR STOCK PRICE WILL NOT TRADE BELOW
$10.00 PER SHARE, AS HAS BEEN THE CASE FOR SOME MUTUAL HOLDING COMPANY OFFERINGS
REFLECTED IN THE TABLE ABOVE. Although the stock prices for the companies in the
above table have, on average, increased during the periods presented, data
represented in the table may not be meaningful to investors for several reasons,
including:
9
o the data has been derived from a small sample of publicly
traded institutions;
o the data has been derived from transactions that occurred
primarily in a low market interest-rate environment, during
which time the value of financial institution equities
typically increases--as interest rates rise, net interest
income, and therefore, overall profitability may decline and
the value of financial institution assets can be reduced,
which can negatively affect stock prices. See "Risk
Factors--The future price of our common stock may be less than
the purchase price in the offering" on page 18 and "--Rising
interest rates may reduce our profits" on page 16; and
o stock prices are affected by general market conditions, the
interest rate environment, merger or takeover transactions,
speculative market pressures and other unforeseeable events.
Finally, a particular company's stock price is subject to various
company-specific factors, including the amount of offering proceeds a company
raises, the quality of its management and management's ability to deploy the
offering proceeds (such as through investments, the acquisition of other
financial institutions or other businesses, and common stock repurchases). See
"Risk Factors--We have broad discretion in allocating the proceeds of the
offering. Our failure to effectively utilize such proceeds could reduce our
profits" on page 19.
HOW YOU MAY SUBSCRIBE AND PAY FOR YOUR SHARES
You can subscribe for shares of common stock in the offering by
delivering a signed and completed original stock order form, together with full
payment, on or prior to the expiration date specified on the stock order form.
In the subscription offering and the community offering, you may pay for your
shares only by:
(1) personal check, bank check or money order; or
(2) authorizing us to withdraw money from your deposit account(s)
maintained at the Bank.
Please be aware that the Bank is not permitted to lend funds to anyone
for the purpose of purchasing shares of common stock in the offering.
We will pay interest at the Bank's passbook savings rate from the date
funds are received until completion or termination of the offering. Withdrawals
from certificates of deposit at the Bank for the purpose of purchasing common
stock in the offering may be made without incurring an early withdrawal penalty.
All funds authorized for withdrawal from a deposit account with the Bank must be
in the account at the time the stock order form is received. However, funds will
not be withdrawn from an account until the offering is completed, and will
continue to earn interest at the applicable deposit account rate until the
completion of the offering. A hold will be placed on those funds when your stock
order is received, making the designated funds unavailable to you. Payment may
not be made by wire transfer or any other electronic transfer of funds. In
addition, we are not required to accept copies or facsimiles of order forms.
For a further discussion regarding the stock ordering procedures see
"The Stock Offering--Prospectus Delivery and Procedure for Purchasing Shares" on
page 95.
DEADLINE TO PURCHASE SHARES OF COMMON STOCK
If you wish to purchase shares in the offering, we must receive your
properly completed stock order form, together with payment for the shares, no
later than 12:00 noon, Central Daylight time, on
10
___________, 2006, unless we extend this deadline. You may submit your stock
order form by mail using the return envelope provided, by overnight courier to
the indicated address on the stock order form, or by bringing your stock order
form to our main office. Once submitted, your stock order is irrevocable unless
the offering is terminated or extended beyond ___________, 2006.
YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS
If you subscribe for shares in the subscription offering, you will be
required to state that you are purchasing the shares for yourself and that you
have no agreement or understanding to sell or transfer your subscription rights.
We will not accept your subscription if we have reason to believe that you sold
or transferred your subscription rights. In addition, joint stock registration
will only be allowed if the qualified deposit account is so registered.
We intend to take legal action, including reporting persons to federal
or state regulatory agencies, against anyone who we believe sells or gives away
his or her subscription rights. Eligible depositors who enter into agreements to
allow ineligible investors to participate in the subscription offering may be
violating federal law and may be subject to civil enforcement action and
criminal prosecution.
EXPIRATION OF THE OFFERING
The subscription offering will expire at 12:00 noon, Central Daylight
time, on ___________, 2006. We expect that the community offering, if any, would
terminate at the same time. We may extend this expiration date without notice to
you until ___________, 2006, unless the OTS approves a later date. If the
subscription offering and/or community offerings extend beyond ___________,
2006, we will be required to resolicit subscriptions before proceeding with the
offering. If a resolicitation occurs and you decide not to subscribe for shares
of our common stock, your funds will be returned promptly and with interest.
STEPS WE MAY TAKE IF WE DO NOT RECEIVE ORDERS FOR THE MINIMUM NUMBER OF SHARES
If we do not receive orders for at least 701,250 shares of common stock
and choose not to terminate the offering, we may take several steps in order to
sell the minimum number of shares in the offering range. Specifically, we may:
o increase the purchase limitations, and/or
o seek regulatory approval to extend the offering beyond the
___________, 2006 expiration date, which would require us to
resolicit subscriptions received in the offering.
OUR POLICY REGARDING DIVIDENDS
After the completion of the offering, the board of directors of Mutual
Bancorp will have the authority to declare dividends on our common stock,
subject to statutory and regulatory requirements. However, no decision has been
made with respect to the amount, if any, and timing of any dividend payments. If
we do decide to pay dividends, the payment will depend upon a number of factors
that may limit the timing and amount of the dividends payable to our
stockholders. See "Our Policy Regarding Dividends" on page 26.
11
MARKET FOR THE COMMON STOCK
We anticipate that the common stock sold in the offering will be quoted
on the OTC Bulletin Board. Sandler O'Neill & Partners, L.P. currently intends to
make a market in the common stock, but is under no obligation to do so.
HOW WE INTEND TO USE THE PROCEEDS WE RAISE FROM THE OFFERING
The following table summarizes how the proceeds of the offering will be
used, based on the sale of shares at the minimum and maximum of the offering
range:
701,250 SHARES 948,750 SHARES
AT $10.00 PER AT $10.00 PER
SHARE SHARE
-------------- --------------
(IN THOUSANDS)
Offering proceeds............................. $7,013 $9,488
Less: estimated offering expenses............ (685) (715)
------ ------
Net offering proceeds......................... 6,328 8,773
Proceeds contributed to Bank............... 3,164 4,387
Proceeds used for loan to ESOP............. 561 759
------ ------
Proceeds retained by Mutual Bancorp........ $2,603 $3,627
====== ======
Mutual Bancorp will initially use the net proceeds of the offering to
invest in short-term securities, and, over time, to finance the possible
acquisition of other financial institutions or financial service businesses or
for other general corporate purposes. Initially, the Bank will use the proceeds
it receives to purchase securities and to make loans. Thereafter, the Bank may
use the proceeds it receives to expand its banking franchise internally or
through acquisitions and for general corporate purposes.
ONCE SUBMITTED, YOUR PURCHASE ORDER MAY NOT BE REVOKED UNLESS THE OFFERING IS
TERMINATED OR EXTENDED BEYOND ___________, 2006.
Funds that you use to purchase shares of our common stock in the
offering will be held in an interest-bearing account until the termination or
completion of the offering, including any extension of the expiration date.
Because completion of the offering will be subject to an update of the
independent appraisal, among other factors, there may be one or more delays in
the completion of the offering. Any orders that you submit to purchase shares of
our common stock in the offering are irrevocable, and you will not have access
to the funds in your account allocated to your subscription unless the stock
offering is terminated, or extended beyond ___________, 2006.
PROPOSED STOCK PURCHASES BY MANAGEMENT
Our directors and executive officers and their associates are expected
to purchase approximately 90,000 shares of common stock in the offering, which
represents 10.9% of the shares sold to the public and 3.3% of the total shares
to be outstanding after the offering at the midpoint of the offering range.
Directors and executive officers will pay the same $10.00 per share price paid
by all other persons who purchase shares in the offering. These shares will be
counted in determining whether the minimum of the range of the offering is
reached.
OUR OFFICERS, DIRECTORS AND EMPLOYEES WILL RECEIVE ADDITIONAL COMPENSATION AND
HAVE THE OPPORTUNITY TO PARTICIPATE IN NEWLY ESTABLISHED BENEFIT PROGRAMS AFTER
THE OFFERING
We intend to establish an employee stock ownership plan, or ESOP, and
anticipate implementing a stock option plan and a management recognition and
retention plan. The ESOP will allocate shares of
12
our common stock to eligible employees based on their compensation. Our board of
directors will, at the completion of the offering, ratify the action to make the
ESOP loan and to allow the ESOP to acquire shares of our common stock. Our ESOP
is authorized to purchase up to 10% of the shares sold in the offering; however,
we anticipate that the ESOP will purchase 8% of the shares sold in the offering.
In addition to the ESOP, we may grant awards under one or more stock
benefit plans we intend to establish after the offering, including a stock
option plan and management recognition and retention plan, in an amount up to
25% of the number of outstanding shares of common stock held by persons other
than Mutual MHC. The recognition and retention plan and stock option plan cannot
be established sooner than six months after the offering and would require the
approval of our stockholders by a majority of the votes eligible to be cast
(excluding the votes eligible to be cast by Mutual MHC), unless another vote
requirement is permitted or required by the Office of Thrift Supervision. We
expect that the number of options granted under any stock option plan and shares
awarded under any recognition and retention plan will not exceed 4.9% and 1.96%,
respectively, of the total number of shares of common stock issued in the
offering and to Mutual MHC if such plans are adopted within one year from the
date of completion of the offering. If the stock option plan or recognition and
retention plan is adopted after one year from the date of the completion of the
offering, such plan would be permitted to grant or award a greater number of
options and shares of common stock, subject to stockholder approval and the
overall limitations provided for in the stock issuance plan.
The ESOP and the recognition and retention plan will increase our
future compensation costs, thereby reducing our earnings. See "Risk Factors--Our
stock benefit plans will increase our costs, which will reduce our income" on
page 17 and "Management--Future Stock Benefit Plans" on page 79.
The following table summarizes the stock benefits that our officers,
directors and employees may receive following the offering, at the maximum of
the offering range and assuming that we initially implement a stock option plan
granting options to purchase 4.9% of the total number of shares to be issued in
the offering and to Mutual MHC, and a recognition and retention plan awarding
shares of common stock equal to 1.96% of the total number of shares to be issued
in the offering and to Mutual MHC (the maximum amount of shares if such plans
are adopted within one year from the date of completion of the offering):
VALUE
NUMBER AS A % AS A % OF
OF OF OF BENEFITS
SHARES SHARES SHARES BASED
AT ISSUED ISSUED ON
MAXIMUM (INCLUDING (EXCLUDING MAXIMUM
INDIVIDUALS OF TO TO OF
ELIGIBLE TO OFFERING MUTUAL MUTUAL OFFERING
PLAN RECEIVE AWARDS RANGE MHC) MHC) RANGE
- ------------------------------ ------------------- -------- ---------- ---------- ----------
Employee stock ownership plan All employees 75,900 2.4% 8.0% $759,000
Directors and
Recognition and retention plan officers 61,985 1.96(1) 6.53(1) 619,850
Directors, officers
Stock option plan and employees 154,963 4.9(1) 16.33(1) 582,661(2)
- ---------------------
<FN>
(1) The stock option plan and recognition and retention plan may award a
greater number of options and shares, respectively, if the plans are
adopted more than one year after the stock offering.
(2) Stock options will be granted with a per share exercise price at least
equal to the market price of our common stock on the date of grant. The
value of a stock option will depend upon increases, if any, in the
price of our common stock during the period in which the stock option
may be exercised.
</FN>
RESTRICTIONS ON THE ACQUISITION OF MUTUAL BANCORP AND THE BANK
Federal regulation, as well as provisions contained in the charter and
bylaws of the Bank, restrict the ability of any person, firm or entity to
acquire Mutual Bancorp, the Bank, or their respective capital
13
stock. These restrictions include the requirement that a potential acquirer of
common stock obtain the prior approval of the OTS before acquiring in excess of
10% of the voting stock of Mutual Bancorp or the Bank. Because Mutual MHC is
required to own a majority of our outstanding common stock, any transaction in
which we were to be acquired must be approved by Mutual MHC, and Mutual MHC
would not be required to pursue or approve our sale even if such sale were
favored by a majority of our public stockholders.
POSSIBLE CONVERSION OF MUTUAL MHC TO STOCK FORM IN THE FUTURE
In the future, Mutual MHC may convert from the mutual to capital stock
form, in a transaction commonly known as a "second-step conversion." In a
second-step conversion, members of Mutual MHC would have subscription rights to
purchase common stock of Mutual Bancorp or its successor, and public
stockholders would be entitled to exchange their shares of common stock for an
equal percentage of shares of the converted Mutual MHC. This percentage may be
adjusted to reflect any assets owned by Mutual MHC. Our public stockholders,
therefore, would own approximately the same percentage of the resulting entity
as they owned in Mutual Bancorp prior to the second-step conversion. The board
of directors of Mutual MHC has no current plan to undertake a second-step
conversion transaction.
HOW YOU MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE OFFERING
If you have any questions regarding the offering, please call the Stock
Information Center at (___) ___-____, Monday through Friday between 9:00 a.m.
and 5:00 p.m., or Saturday between 9:00 a.m. and 1:00 p.m., Central Daylight
time.
14
RISK FACTORS
You should consider carefully the following risk factors in evaluating
an investment in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR SMALL SIZE AND LIMITED PRODUCT LINE IS IMPEDING OUR GROWTH.
We currently operate from a single office location. As a small
institution, the current loan and deposit products that we offer are limited.
For example, unlike some of our competitors, we currently do not offer money
market deposit accounts or any type of adjustable-rate residential mortgage loan
product. Our relatively small size and narrow product offerings have limited,
and in the future may continue to limit, our access to potential customers,
which could adversely affect our future growth.
STRONG COMPETITION WITHIN OUR MARKET AREA ALSO LIMITS OUR GROWTH AND
PROFITABILITY.
Competition in the banking and financial services industry in our
market area is intense. In our market area (the greater Chicago metropolitan
area), we compete with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than we have and offer certain products and services that we do
not or cannot provide. In particular, we face intense competition for deposits,
and we historically have shown little retail deposit growth. Our profitability
depends upon our continued ability to successfully compete in our market area.
The greater resources and deposit and loan products offered by our competition
may limit our ability to increase our interest earning assets. For additional
information see "Business of Mutual Federal Savings and Loan Association of
Chicago--Competition" on page 51.
OUR GEOGRAPHIC CONCENTRATION MAKES US SENSITIVE TO
CHANGES IN THE ECONOMIC, DEMOGRAPHIC AND REGULATORY CONDITIONS IN OUR MARKET
AREA.
As of September 30, 2005, most of our loans were to individuals and/or
secured by properties located in Cook County. As a result, our revenues and
profitability are subject to prevailing economic, regulatory, demographic and
other conditions in this market area. Because our business is concentrated in
this area, adverse economic, regulatory, demographic or other developments that
are limited to this area may have a disproportionately greater effect on us than
they would have if we also did business in markets outside that particular
geographic area.
WE MAY BE UNSUCCESSFUL IN IMPLEMENTING THE ASPECT OF OUR BUSINESS
STRATEGY THAT CALLS FOR GROWTH THROUGH ACQUISITION OR DE NOVO BRANCHING.
Our business strategy consists, in part, of growth through the
identification and successful acquisition of other financial institutions or
branches or, if suitable acquisition opportunities fail to emerge, through de
novo branching. Although we intend to use our excess capital resulting from the
offering to pursue our growth strategy, we have never acquired another financial
institution or established a de novo branch during our operating history. In
pursuing our acquisition strategy, we compete with other financial institutions
that may have similar acquisition strategies, many of which may be larger and
have greater financial and other resources than we do. We cannot assure that we
will be able to successfully identify suitable acquisitions or, once identified,
will be able to consummate an acquisition of or an investment in those
institutions or branches on terms and conditions acceptable to us. Similarly,
should we implement a de novo branching strategy, we may be unsuccessful in
identifying suitable
15
locations and successfully establishing new branches. Additionally, any
consummated acquisition or newly established branch may not provide us with the
level of growth that we hope.
FUTURE ACQUISITIONS OR THE ESTABLISHMENT OF DE NOVO BRANCHES COULD
NEGATIVELY IMPACT OUR FINANCIAL PERFORMANCE.
Any future acquisitions could materially adversely affect our operating
results due to greater than anticipated costs, difficulties in integrating bank
operations or an inability to grow the business as anticipated. The financial
impact of such acquisitions, or the expense of establishing de novo branches,
could have a material adverse effect on our business, financial condition and
results of operations.
OUR ABILITY TO GROW ORGANICALLY MAY CONTINUE TO BE LIMITED.
Our rate of organic growth historically has been limited by our single
location, our limited ability to expand our current premises, such as to add a
drive-through facility, and intense competition for deposits in our immediate
and surrounding market areas. These same factors will continue to impede our
organic growth in the future, particularly if we are unsuccessful in pursuing
our acquisition or expansion strategy.
IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER ACTUAL LOAN
LOSSES, OUR EARNINGS COULD DECREASE.
We make various assumptions and judgments about the collectibility of
our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for
loan losses, we review our loans and our loss and delinquency experience, and we
evaluate economic conditions. If our assumptions are incorrect, our allowance
for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in additions to our allowance. Material additions to our
allowance would materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize
further loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities may have a material
adverse effect on our results of operations and financial condition.
RISING INTEREST RATES MAY REDUCE OUR PROFITS.
Our principal business activity has been and will continue to be the
origination of fixed-rate mortgage loans. As such, our ability to make a profit
largely depends on our net interest income, which could be negatively affected
by changes in interest rates. Net interest income is the difference between:
o the interest income we earn on our interest-earning assets,
such as loans and securities; and
o the interest expense we pay on our interest-bearing
liabilities, such as deposits and amounts we borrow.
The rates we earn on our assets and the rates we pay on our liabilities
are generally fixed for a contractual period of time. Like many savings
institutions, our liabilities generally have shorter contractual maturities than
our assets, which primarily consist of longer term fixed-rate mortgages and
mortgage-backed securities. This imbalance can create significant earnings
volatility, because market interest rates change over time. While in recent
years interest rates have been at or near historically low levels, interest
rates recently have begun to rise. In a period of rising interest rates, the
interest income
16
earned on our assets may not increase as rapidly as the interest paid on our
liabilities, which would have a negative effect on our profitability. For
example, at June 30, 2005, which is the most recent date at which information is
available from the OTS, in the event of an immediate 200 basis point increase in
interest rates, our interest rate sensitivity model projects that we would
experience a 16% decrease in net portfolio value. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management of
Market Risk" on page 44 for a further discussion of interest rate risk.
Changes in interest rates also affect the value of our securities
portfolio. Generally the value of fixed-rate securities fluctuates inversely
with changes in interest rates. Decreases in the fair value of securities
available for sale resulting from increases in interest rates could have an
adverse effect on stockholders' equity.
OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER FINANCIAL
INSTITUTIONS. THIS COULD NEGATIVELY AFFECT THE TRADING PRICE OF OUR COMMON
STOCK.
Net income divided by average equity, commonly referred to as "return
on equity," is a ratio many investors use to compare the performance of a
financial institution to its peers. Following the offering, we expect our return
on equity to remain below the industry average until we are able to leverage the
additional capital generated from the proceeds of the offering. Our return on
equity will be reduced by the proceeds raised in the offering, higher expenses
associated with the costs of being a public company, and added expenses
associated with our ESOP and our expected management recognition and retention
plan. Until we can increase our net interest income and non-interest income, we
expect our return on equity and earnings per share to be below the industry
average, which may limit the value of our common stock. For the nine months
ended September 30, 2005, our return on average equity was 4.77%. This compares
to a return on average equity of 7.78% for all publicly traded savings
institutions. Following the offering we expect our consolidated equity to
increase from $18.2 million to between $23.5 million at the minimum and $26.8
million at the adjusted maximum of the offering range, which will contribute to
our return on equity remaining below that of our publicly traded thrift peers.
OUR STOCK BENEFIT PLANS WILL INCREASE OUR COSTS, WHICH WILL REDUCE OUR
INCOME.
We anticipate that our ESOP will purchase 8% of the shares of common
stock sold in the offering with funds borrowed from us. If the ESOP purchases
shares in the offering, the cost of acquiring the shares will be between
$561,000 at the minimum of the offering range and $873,000 at the adjusted
maximum of the offering range. We will record annual ESOP expense in an amount
equal to the fair value of shares of common stock committed to be released to
employees. If shares of common stock appreciate in value over time, compensation
expense relating to the ESOP will increase.
We also intend to adopt a recognition and retention plan and a stock
option plan after the offering, under which participants will be eligible to
receive awards of common stock (at no cost to them) or options to purchase
common stock. We anticipate that the number of options granted or shares awarded
under any initial stock option plan or recognition and retention plan will not
exceed 4.9% and 1.96%, respectively, of the total number of shares to be issued
in the offering and to Mutual MHC, if such plans are adopted within one year
from the date of completion of the offering. However, these amounts may be
increased if the plans are adopted after one year from the date of the
completion of the offering, and larger grants would increase our costs further.
We will expense shares of common stock granted under our recognition
and retention plan over their vesting period at the fair market value of the
shares on the date they are awarded. If the shares of common stock to be granted
under the plan are issued directly from our authorized but unissued shares
(rather than repurchased in the open market) and cost the same as the purchase
price of our common stock issued in the offering, the increase to stockholders'
equity due to the plan would be between $458,000 at
17
the minimum of the offering range and $620,000 at the maximum of the offering
range. To the extent we repurchase shares of common stock in the open market to
fund the grants of shares under the plan, and the price of such shares exceeds
the offering price of $10.00 per share, the reduction to stockholders' equity
would exceed the range described above. Conversely, to the extent the price of
such shares is below the offering price of $10.00 per share, the reduction to
stockholders' equity would be less than the range described above.
New accounting rules require public companies to recognize in the
income statement the grant-date fair value of stock options beginning in their
first fiscal year beginning after June 15, 2005, which, for us, will be the
fiscal year beginning January 1, 2006. Once we grant options we will record an
expense for the options granted using the fair value method as described in the
new accounting rules, which will require us to incur significant compensation
and benefits expense. We estimate this annual expense could be at least $117,000
on a pre-tax basis, assuming the maximum number of shares is sold in the
offering and an option plan is approved by the shareholders.
WE WILL INCUR ADDITIONAL EXPENSES AFTER THE OFFERING FROM OPERATING AS
A PUBLIC COMPANY, WHICH MAY ADVERSELY AFFECT OUR PROFITABILITY.
Following the offering, our non-interest expenses will increase as a
result of the financial accounting, legal and various other additional expenses
usually associated with operating as a public company. The federal securities
laws and the regulations of the Securities and Exchange Commission require that
we file annual, quarterly and current reports and that we maintain effective
disclosure controls and procedures and internal control over financial
reporting. This may require that we implement additional finance and accounting
systems, procedures and controls in order to satisfy our new public company
reporting requirements. We expect that the obligations of being a public
company, including substantial public reporting obligations, will require
significant expenditures relative to our size and place additional demands on
our management team, including diverting our management's attention from our
day-to-day business operations.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER OR CHIEF FINANCIAL OFFICER
COULD HURT OUR OPERATIONS.
Not unlike many small institutions, we rely substantially on our
President and Chief Executive Officer, Stephen M. Oksas. He performs many
functions that typically are delegated to other officers in larger institutions.
In addition to Mr. Oksas, John L. Garlanger, our Executive Vice President and
Chief Financial Officer, provides key management services to our organization.
In the event we lose the services of either Mr. Oksas or Mr. Garlanger, our
business could be adversely affected. We do not have key-man life insurance on
either of these officers.
RISKS RELATED TO OUR OFFERING
THE FUTURE PRICE OF OUR COMMON STOCK MAY BE LESS THAN THE PURCHASE
PRICE IN THE OFFERING.
We cannot assure you that if you purchase shares of common stock in the
offering you will later be able to sell them at or above the price you paid. The
final aggregate purchase price of the shares will be based on an independent
appraisal. The appraisal is not intended, and should not be construed, as a
recommendation of any kind as to the advisability of purchasing shares in the
offering. The valuation is based on estimates and projections of a number of
matters, all of which are subject to change from time to time. In addition,
current OTS regulations permit mutual holding companies to be acquired by a
mutual institution. The possibility of such a transaction has resulted in a
degree of takeover speculation that is reflected in the per share price of
mutual holding companies' common stock. The OTS has issued a policy statement
indicating that it views so-called "remutualization" transactions as raising
significant issues concerning disparate treatment of minority stockholders and
mutual members. Under certain
18
circumstances the OTS intends to give these issues special scrutiny and reject
applications providing for the remutualization of a mutual holding company
unless the applicant can clearly demonstrate that the OTS's concerns are not
warranted in the particular case. Should the OTS prohibit or otherwise restrict
these transactions in the future, our per-share stock price may be adversely
affected.
THERE WILL BE A LIMITED TRADING MARKET FOR OUR COMMON STOCK, WHICH MAY
HINDER YOUR ABILITY TO SELL YOUR SHARES AND MAY LOWER OUR STOCK PRICE.
Mutual Bancorp has never issued capital stock and there currently is no
established market for the common stock. While we expect that our common stock
will be quoted on the OTC Bulletin Board after the offering, it is not likely
that an active and liquid trading market for our common stock will develop.
Sandler O'Neill & Partners, L.P. has advised us that it intends to make a market
in our common stock after the offering, but is under no obligation to do so. The
lack of an active, liquid market in our shares may make it difficult for you to
sell your shares when you want and may reduce the market value of our common
stock. Moreover, in our expected limited trading market, the sale of a large
number of shares at one time may temporarily depress the market price of our
common stock, which may further restrict your ability to sell shares at a price
equal to or above the purchase price in the offering. For additional information
see "Market for the Common Stock" on page 27.
THE IMPLEMENTATION OF STOCK-BASED BENEFIT PLANS WILL DILUTE YOUR
OWNERSHIP INTEREST.
We intend to adopt a stock option plan and a management recognition and
retention plan following the offering. These stock benefit plans will be funded
through either open market purchases, if permitted, or from issuances from our
authorized but unissued shares. Stockholders would experience a reduction in
ownership interest (including shares held by Mutual MHC) totaling 6.42% in the
event newly issued shares are used to fund stock options under the stock option
plan and awards made under the recognition and retention plan in an amount equal
to 4.9% and 1.96%, respectively, of the total number of shares to be issued in
the offering and to Mutual MHC.
WE HAVE BROAD DISCRETION IN ALLOCATING THE PROCEEDS OF THE OFFERING.
OUR FAILURE TO EFFECTIVELY UTILIZE SUCH PROCEEDS COULD REDUCE OUR PROFITS.
Mutual Bancorp intends to retain 50% of the net proceeds from the
offering and contribute the remainder of the net proceeds of the offering to the
Bank. Mutual Bancorp will use a portion of the net proceeds to fund the ESOP and
may use the remaining net proceeds to acquire other financial institutions,
repurchase shares of common stock, purchase investment securities, or for other
general corporate purposes. The Bank may use the proceeds it receives to fund
new loans, establish or acquire new branches, purchase investment securities, or
for general corporate purposes. We have not, however, allocated specific amounts
of proceeds for any of these purposes and we will have significant flexibility
in determining the amount of net proceeds we apply to different uses and the
timing of such applications. Our failure to utilize these funds effectively
could reduce our profitability.
PERSONS WHO PURCHASE STOCK IN THE OFFERING WILL OWN A MINORITY OF OUR
COMMON STOCK AND WILL NOT BE ABLE TO EXERCISE VOTING CONTROL OVER MOST MATTERS
PUT TO A VOTE OF STOCKHOLDERS.
Public stockholders will own a minority of our outstanding shares of
common stock. As a result, stockholders other than Mutual MHC will not be able
to exercise voting control over most matters put to a vote of stockholders. The
only matters as to which stockholders other than Mutual MHC may be able to
exercise voting control include any proposal to implement a recognition and
retention stock plan or stock option plan within one year of the offering. In
addition, Mutual MHC, through its board of directors, may exercise its voting
control to prevent a sale or merger transaction in which stockholders could
receive a premium for their shares.
19
OUR STOCK VALUE MAY BE NEGATIVELY AFFECTED BY FEDERAL REGULATIONS
RESTRICTING TAKEOVERS AND OUR MUTUAL HOLDING COMPANY STRUCTURE.
Federal regulations restricting takeovers. For three years following
the offering, OTS regulations prohibit any person from acquiring or offering to
acquire more than 10% of our common stock without the prior written approval of
the OTS. Moreover, current OTS policy prohibits the acquisition of a mutual
holding company subsidiary by any person or entity other than a mutual holding
company or a mutual institution. See "Restrictions on the Acquisition of Mutual
Federal Bancorp, Inc. and the Bank" on page 98 for a discussion of applicable
OTS regulations regarding acquisitions.
Mutual holding company structure may impede takeovers. Mutual MHC, as
our majority stockholder, will be able to control the outcome of virtually all
matters presented to our stockholders for their approval. Accordingly, Mutual
MHC may prevent the sale of control or merger of Mutual Bancorp or its
subsidiaries even if such a transaction were favored by a majority of our public
stockholders.
20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below at each date or for each period
presented is derived in part from our consolidated financial statements. The
following information is only a summary, and should be read in conjunction with
our consolidated financial statements and notes beginning on page F-1 of this
prospectus. The operating data for the nine months ended September 30, 2005 and
2004 and the financial condition data at September 30, 2005 were not audited.
However, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for the unaudited periods have been made. No adjustments were made
other than normal recurring entries. The results of operations for the nine
months ended September 30, 2005 are not necessarily indicative of the results of
operations that may be expected for the entire year.
AT DECEMBER 31,
AT SEPTEMBER 30, ---------------------------
2005 2004 2003
---------------- ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets.......................... $65,324 $64,745 $67,508
Loans, net............................ 34,127 28,326 30,396
Interest-bearing deposits............. 3,173 2,607 2,813
Securities available-for-sale......... 25,270 31,596 31,714
Federal Home Loan Bank stock, at cost. 496 477 449
Deposits.............................. 45,373 44,571 47,026
Equity................................ 18,224 18,540 18,836
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- -------------------
2005 2004 2004 2003
---------- ---------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SELECTED OPERATING DATA:
Total interest and dividend income... $2,406 $2,409 $3,193 $3,511
Total interest expense............... 566 552 728 948
------ ------ ------ ------
Net interest income............... 1,840 1,857 2,465 2,563
Provision for loan losses............ -- -- -- --
------ ------ ------ ------
Net interest income after
provision for loan losses...... 1,840 1,857 2,465 2,563
Total non-interest income............ 513 634 1,609 308
Total non-interest expense........... 1,305 1,215 1,627 1,630
------ ------ ------ ------
Income before income tax expense..... 1,048 1,276 2,447 1,241
Income tax expense................... 392 476 921 448
------ ------ ------ ------
Net income........................ $ 656 $ 800 $1,526 $ 793
====== ====== ====== ======
21
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------- -----------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Performance Ratios:
Return on average assets............. 1.35% 1.56% 2.25% 1.15%
Return on average equity............. 4.77 5.65 8.08 4.30
Average interest rate spread(1)...... 3.49 3.46 3.44 3.52
Net interest margin(2)............... 3.97 3.85 3.85 4.00
Efficiency ratio(3).................. 69.79 64.56 65.16 62.69
Non-interest expense to average
total assets...................... 2.68 2.37 2.39 2.37
Average interest-earning assets to
average interest-bearing
liabilities....................... 139.08 134.87 135.80 132.53
Asset Quality Ratios:
Non-performing assets to total assets 0.29% 0.32% 0.47% 0.30%
Non-performing loans to total loans.. 0.55 0.72 1.07 0.66
Allowance for loan losses to
non-performing loans.............. 0.80x 0.70x 0.49x 0.75x
Allowance for loan losses to total
loans............................. 0.44% 0.51% 0.53% 0.49%
Capital Ratios:
Equity to total assets............... 27.90% 28.31% 28.64% 27.90%
Tangible capital..................... 27.80 27.31 28.02 26.60
Tier 1 (core) capital................ 27.80 27.31 28.02 26.60
Tier 1 risk-based ratio(4)........... 75.20 71.05 76.91 67.60
- ---------------------------
<FN>
(1) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents other net interest income as a
percent of average interest-earning assets for the period.
(3) The efficiency ratio represents other expense as a percent of net
interest income plus other income less securities gains.
(4) Tier 1 risk-based ratio represents Tier 1 capital of the Bank divided
by its risk-weighted assets as defined in federal regulations on
required capital.
</FN>
22
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans and prospects and
growth and operating strategies;
o statements regarding the asset quality of our loan and
investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
o significantly increased competition among depository and other
financial institutions;
o our ability to enter new markets successfully and take
advantage of growth opportunities;
o our ability to successfully implement our business plan;
o inflation and changes in the interest rate environment that
reduce our margins or reduce the fair value of financial
instruments;
o general economic conditions, either nationally or in our
market area, that are worse than expected;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our
business;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be
adopted by the bank regulatory agencies, the Financial
Accounting Standards Board and the PCAOB; and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may
be materially different from the results indicated by these forward-looking
statements. We discuss these and other uncertainties in "Risk Factors" beginning
on page 15.
23
USE OF PROCEEDS FROM THE OFFERING
Although we will not be able to determine the amount of actual net
proceeds we will receive from the sale of shares of common stock until the
offering is completed, we anticipate that the net proceeds will be between $6.3
million and $8.8 million, or $10.2 million if the offering is increased by 15%.
We intend to distribute the net proceeds from the offering as follows:
MINIMUM MIDPOINT MAXIMUM ADJUSTED MAXIMUM(1)
------------------ ------------------ ----------------- -------------------
PERCENT PERCENT PERCENT PERCENT
OF NET OF NET OF NET OF NET
AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Offering proceeds.......... $7,013 $8,250 $9,488 $10,911
Less: estimated offering
expenses ............... (685) (700) (715) (733)
------ ---- ------ ---- ------ ---- ------- ----
Net offering proceeds...... 6,328 100% 7,550 100% 8,773 100% 10,178 100%
Less:
Proceeds contributed to
Bank................. 3,164 50.0% 3,775 50.0% 4,387 50.0% 5,089 50.0%
Proceeds used for loan
to ESOP ............. 561 8.9% 660 8.7% 759 8.7% 873 8.6%
------ ---- ------ ---- ------ ---- ------- ----
Proceeds retained by
Mutual Bancorp.......... $2,603 41.1% $3,115 41.3% $3,627 41.3% $ 4,216 41.4%
====== ==== ====== ==== ====== ==== ======= ====
- ---------------------------
<FN>
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the offering if the maximum offering
range is increased. See "The Stock Offering."
</FN>
The net proceeds may vary because total expenses relating to the
offering may be more or less than our estimates. For example, our expenses would
increase if a syndicated community offering were used to sell shares of common
stock not purchased in the subscription offering and any community offering.
Payments for shares made through withdrawals from existing deposit accounts will
not result in the receipt of new funds for investment but will result in a
reduction of the Bank's deposits. In all instances, the Bank will receive at
least 50% of the net proceeds of the offering.
We are undertaking the offering at this time in order to have the
flexibility and capital resources available to expand our business. For further
information, see "Business of Mutual Federal Savings and Loan Association of
Chicago--Business Strategy" on page 49. The offering proceeds will increase the
amount of funds available to us for lending and investment purposes and allow us
to finance the purchase of common stock in the offering by our ESOP. The
proceeds also will give us greater ability to grow through de novo branching or
acquisitions, although no specific transactions are being considered at this
time, diversify our operations and broaden the products and services we offer to
our customers.
In addition, we may use the proceeds received in the offering:
o to fund new loans by the Bank;
o to repurchase shares of Mutual Bancorp common stock, subject
to regulatory restrictions;
o to pay cash dividends to Mutual Bancorp's stockholders,
although cash dividends are not being considered at this time;
and
o for general corporate purposes.
24
Under current OTS regulations, we may not repurchase shares of our common stock
during the first year following the offering, except when extraordinary
circumstances exist and with prior regulatory approval. The loan that will be
used to fund the purchases of our common stock by the ESOP will accrue interest.
The use of the proceeds outlined above may change based on changes in
interest rates, equity markets, laws and regulations affecting the financial
services industry, our relative position in the financial services industry, the
attractiveness of potential acquisitions, and overall market conditions.
25
OUR POLICY REGARDING DIVIDENDS
After the completion of the offering, our board of directors will have
the authority to declare dividends on our common stock, subject to statutory and
regulatory requirements. However, no decision has been made with respect to the
payment of dividends. The payment of dividends in the future, if any, would
depend upon a number of factors, including capital requirements, our financial
condition and results of operations, tax considerations, statutory and
regulatory limitations and general economic conditions. Special cash dividends,
stock dividends or returns of capital may, to the extent permitted by OTS policy
and regulations, be paid in addition to, or in lieu of, regular cash dividends.
The Bank has filed consolidated federal and state income tax returns with Mutual
MHC. As a result, we anticipate that any cash distributions made by Mutual
Bancorp to its stockholders would be treated as cash dividends and not as a
non-taxable return of capital for federal and state tax purposes.
In the future, if we determine that dividends should be paid, our
dividends may depend, in part, upon receipt of dividends from the Bank, because
Mutual Bancorp initially will have no source of income other than dividends from
the Bank, earnings from the investment of proceeds from the sale of shares of
common stock, and interest payments with respect to the loan to the employee
stock ownership plan. A regulation of the OTS imposes limitations on "capital
distributions" by savings institutions. See "Supervision and
Regulation--Regulation of Federal Savings Institutions--Limitation on Capital
Distributions" on page 66.
If in the future we decide to pay dividends to our stockholders, we
also will be required to pay dividends to Mutual MHC, unless Mutual MHC elects
to waive the receipt of dividends. We anticipate that Mutual MHC will waive
receipt of any such dividends. Any decision to waive dividends will be subject
to regulatory approval. Under OTS regulations, public stockholders would not be
diluted for any dividends waived by Mutual MHC in the event Mutual MHC converts
to stock form. See "Supervision and Regulation--Holding Company Regulation" on
page 69.
26
MARKET FOR OUR COMMON STOCK
Mutual Bancorp has never issued capital stock and there currently is no
established market for the common stock. We anticipate that Mutual Bancorp's
common stock will be quoted on the OTC Bulletin Board. Sandler O'Neill &
Partners, L.P. has advised us that it intends to make a market in the common
stock following the offering, but it is under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our common
stock at any particular time may be limited. Under such circumstances, you could
have difficulty selling your shares on short notice, and, therefore, you should
not view the purchase of our common stock as a short-term investment. We cannot
assure you that an active trading market for the common stock will develop or
that, if it develops, it will continue. Nor can we assure you that, if you
purchase shares of common stock in the offering, you will be able to sell them
at or above $10.00 per share.
27
REGULATORY CAPITAL COMPLIANCE
At September 30, 2005, the Bank's capital exceeded all regulatory
capital requirements. The following table sets forth our compliance as of
September 30, 2005 with the regulatory capital standards on a historical and pro
forma basis, assuming that the indicated number of shares of common stock were
sold as of such date at $10.00 per share, the Bank received 50% of the estimated
net proceeds after adjustment for stock benefit plans, and 50% of the net
proceeds are retained by Mutual Bancorp. Accordingly, proceeds received by the
Bank have been assumed to equal $3.2 million, $3.8 million, $4.4 million and
$5.1 million at the minimum, midpoint, maximum and adjusted maximum of the
offering range, respectively. For a discussion of the applicable capital
requirements, see "Supervision and Regulation--Regulation of Federal Savings
Institutions--Capital Requirements" on page 65.
PRO FORMA AT SEPTEMBER 30, 2005 BASED UPON THE SALE OF
--------------------------------------------------------------------------------------
1,091,062 SHARES
701,250 SHARES 825,000 SHARES 948,750 SHARES AT ADJUSTED
HISTORICAL AT AT MINIMUM OF AT MIDPOINT OF AT MAXIMUM OF MAXIMUM OF
SEPTEMBER 30, 2005 OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE(1)
--------------------- -------------------- -------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2)(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3)
------- ------------ ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
GAAP capital.......... $18,224 27.90% $20,369 30.19% $20,800 30.63% $21,233 31.07% $21,728 31.57%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible
capital:
Actual
level(3)(4)(7).. $18,166 27.80% $20,311 30.10% $20,742 30.54% $21,175 30.98% $21,670 31.48%
Requirement........ 980 1.50 1,012 1.50 1,019 1.50 1,025 1.50 1,033 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $17,186 26.30% $19,299 28.60% $19,723 29.04% $20,150 29.48% $20,637 29.98%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
Actual
level(3)(4)(7).. $18,166 27.80% $20,311 30.10% $20,742 30.54% $21,175 30.98% $21,670 31.48%
Requirement(5) 2,614 4.00 2,699 4.00 2,717 4.00 2,734 4.00 2,754 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $15,552 23.80% $17,612 26.10% $18,025 26.54% $18,441 26.98% $18,916 27.48%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tier I
Risk-based
capital:
Actual level(3)(4)
(6)(7).......... $18,166 75.20% $20,311 82.62% $20,742 84.08% $21,175 85.53% $21,670 87.18%
Requirement........ 966 4.00 983 4.00 987 4.00 990 4.00 994 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $17,200 71.20% $19,328 78.62% $19,755 80.08% $20,185 81.53% $20,676 83.18%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total
Risk-based
capital:
Actual level(3)(4)
(6)(7).......... $18,509 76.62% $20,654 84.01% $21,085 85.47% $21,518 86.91% $22,013 88.56%
Requirement........ 1,932 8.00 1,967 8.00 1,974 8.00 1,981 8.00 1,989 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $16,577 68.62% $18,687 76.01% $19,111 77.47% $19,537 78.91% $20,024 80.56%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- --------------------------------
<FN>
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the offering which could occur due to an
increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares, or changes in market
conditions or general economic conditions following the commencement of
the offering.
(2) Based on adjusted total assets of $65,340 for the purposes of the
tangible and core capital requirements, and risk-weighted assets of
$24,156 for the purposes of the risk-based capital requirement.
(3) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(4) Pro forma capital levels assume that we fund the recognition and
retention plan with purchases of shares of common stock in the open
market equal to 1.96% of the total number of shares issued in the
offering and to Mutual MHC, and that the ESOP purchases 8% of the
shares of common stock sold in the offering with funds borrowed from
us.
(5) The current core capital requirement for savings institutions that
receive the highest supervisory rating for safety and soundness is 3%
of total adjusted assets and 4% to 5% of total adjusted assets for all
other savings institutions. See "Supervision and Regulation--Federal
Banking Regulation--Capital Requirements."
(6) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
(7) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the sale of common stock in the offering.
</FN>
28
CAPITALIZATION
The following table presents the historical consolidated capitalization
of the Bank at September 30, 2005, and our pro forma consolidated capitalization
after giving effect to the offering, based upon the sale of the number of shares
of common stock indicated in the table and the other assumptions set forth under
"Pro Forma Data."
PRO FORMA CONSOLIDATED CAPITALIZATION OF
MUTUAL BANCORP BASED UPON THE SALE FOR
$10.00 PER SHARE OF
---------------------------------------------------------
701,250 825,000 948,750 1,091,062
SHARES AT SHARES AT SHARES AT SHARES AT
BANK MINIMUM MIDPOINT MAXIMUM ADJUSTED
HISTORICAL OF OFFERING OF OFFERING OF OFFERING OF OFFERING
CAPITALIZATION RANGE RANGE RANGE RANGE(1)
-------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Deposits(2)........................... $45,373 $ 45,373 $ 45,373 $ 45,373 $ 45,373
Borrowings............................ -- -- -- -- --
------- ---------- ---------- ---------- ----------
Total deposits and borrowings......... $45,373 $ 45,373 $ 45,373 $ 45,373 $ 45,373
======= ========== ========== ========== ==========
Stockholders' equity:
Preferred Stock, $0.01 par value
per share, 1,000,000 shares
authorized; none to be issued... $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par value
per share, 12,000,000 shares
authorized; shares to be
issued as reflected........... 1 23 28 32 36
Additional paid-in capital(3)...... -- 6,305 7,522 8,743 10,142
Retained earnings.................. 18,165 18,166 18,166 18,166 18,166
Accumulated other comprehensive
income (loss)................... 58 58 58 58 58
Less:
Common Stock acquired by
employee stock ownership
plan(4)....................... -- (561) (660) (759) (873)
Common Stock acquired by
recognition and retention
plan(5)....................... -- (458) (539) (620) (713)
------- ---------- ---------- ---------- ----------
Total stockholders' equity(6)...... $18,224 $ 23,533 $ 24,575 $ 25,620 $ 26,816
======= ========== ========== ========== ==========
Pro forma shares outstanding:
Total shares outstanding(7)........ 2,337,500 2,750,000 3,162,500 3,636,875
Shares issued to Mutual MHC(7)..... 1,636,250 1,925,000 2,213,750 2,545,813
Shares offered for sale(7)......... 701,250 825,000 948,750 1,091,062
Total stockholders' equity as a
percentage of pro forma total
assets............................. 27.90% 33.32% 34.29% 35.23% 36.28%
- --------------------------------
<FN>
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the offering which could occur due to an
increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares of common stock, or
changes in market conditions or general financial and economic
conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
shares of common stock in the offering. Such withdrawals would reduce
pro forma deposits by the amount of such withdrawals.
(3) The sum of the par value and additional paid-in capital equals the net
conversion proceeds. No effect has been given to the issuance of
additional shares of common stock pursuant to the stock option plan
that we expect to adopt. In addition to tax-qualified employee stock
benefit plans, the stock issuance plan permits Mutual Bancorp to adopt
one or more stock benefit plans, subject to stockholder approval, in an
amount up to 25% of the number of shares of common stock held by
persons other than Mutual MHC.
(4) Assumes that 8% of the shares of common stock sold in the offering will
be purchased by the ESOP and that the funds used to acquire the ESOP
shares will be borrowed from us. The common stock acquired by the ESOP
is reflected as a
29
reduction of stockholders' equity. The Bank will provide the funds to
repay the ESOP loan. See "Management--Benefit Plans."
(5) Assumes that subsequent to the offering, shares of common stock equal
to approximately 1.96% of the total number of shares issued in the
offering and to Mutual MHC are purchased with funds provided by us by
the recognition and retention plan in the open market at a price equal
to the price for which the shares are sold in the offering. The shares
of common stock to be purchased by the recognition and retention plan
is reflected as a reduction of stockholders' equity. See "Pro Forma
Data" and "Management." In addition to tax-qualified employee stock
benefit plans, the stock issuance plan permits us to adopt one or more
stock benefit plans, in an amount up to 25% of the number of shares of
common stock held by persons other than Mutual Bancorp. The recognition
and retention plan will not be implemented for at least six months
after the offering and until it has been approved by stockholders.
(6) Pro forma stockholders' equity equals GAAP capital plus 50% of the net
offering proceeds retained by Mutual Bancorp.
(7) The Bank issued 10,000 shares of common stock to Mutual MHC in
connection with our mutual holding company reorganization in 2001.
</FN>
30
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the common
stock until the offering is completed. However, we estimate that net proceeds
will be between $6.3 million and $8.8 million, or $10.2 million if the offering
range is increased by 15%, based upon the following assumptions:
o we will sell all shares of common stock in the subscription
offering and community offering;
o our ESOP will purchase 8% of the shares of common stock sold
in the offering with a loan from us. The loan will be repaid
in substantially equal principal payments over a period of 20
years;
o 50,000 shares of common stock will be purchased by our
executive officers and directors, and their immediate family
members;
o Sandler O'Neill & Partners, L.P. will receive a fee equal to
1.35% of the dollar amount of shares of common stock sold in
the offering; and
o total expenses of the offering, including the marketing fees
to be paid to Sandler O'Neill & Partners, L.P., will be
between $685,000 at the minimum of the offering range and
$733,000 at the maximum of the offering range, as adjusted.
We calculated the pro forma consolidated net income and stockholders'
equity of Mutual Bancorp for the year ended December 31, 2004 and the nine
months ended September 30, 2005, as if the shares of common stock had been sold
at the beginning of those periods and as if the estimated net proceeds we
received had been invested at an assumed interest rate of 2.75% and 4.01%,
respectively (1.68% and 2.45%, respectively, on an after-tax basis), which
represented the yield on the one-year U.S. Treasury Bill for the respective
periods (which the Bank considers to more accurately reflect the pro forma
reinvestment rate than an arithmetic average method in light of current market
interest rates). The effect of withdrawals from deposit accounts for the
purchase of shares of common stock has not been reflected. Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of common stock. No effect has
been given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. It is assumed that the Bank will retain between
$3.2 million and $4.4 million of the estimated net proceeds in the offering, or
$5.1 million if the offering range is increased by 15%. The actual net proceeds
from the sale of shares of common stock will not be determined until the
offering is completed. It is assumed that all shares of common stock will be
sold in the subscription and community offerings.
The pro forma table gives effect to the implementation of a recognition
and retention plan. Subject to the receipt of stockholder approvals, we have
assumed that the recognition and retention plan will acquire an amount of common
stock equal to 1.96% of the outstanding shares of common stock after the
offering because, under federal regulation, this is the maximum amount of shares
that may be granted if such a plan is adopted within one year from the date of
completion of the offering. In preparing the table below, we assumed that
stockholder approval has been obtained and that the recognition and retention
plan purchases in the open market a number of shares equal to 1.96% of the
outstanding shares after the offering at the same price for which shares were
sold in the offering. We assume that shares of common stock are granted under
the plan in awards that vest over a five year period.
The pro forma table gives effect to the implementation of a stock
option plan. Subject to receipt of stockholder approval, we also have assumed
that the stock option plan will grant options to acquire common stock equal to
4.90% of the outstanding shares of common stock after the offering. In preparing
the table below, we also assumed that stockholder approval was obtained, that
the exercise price of the
31
stock options and the market price of the stock at the date of grant were $10.00
per share and that the stock options had a term of ten years and vested over
five years. We applied the Black-Scholes option pricing model to estimate a
grant-date fair value of $3.76 for each option. In addition to the terms of the
options described above, the Black-Scholes option pricing model incorporated an
estimated volatility rate of 12.87% for the common stock based on an index of
publicly traded mutual holding companies, a dividend yield of zero, an expected
option life of 10 years and a risk free interest rate of 4.34%.
As discussed under "Use of Proceeds from the Offering," Mutual Bancorp
intends to retain 50% of the net proceeds from the offering and to contribute
the remaining net proceeds from the offering to the Bank. Mutual Bancorp will
use a portion of the proceeds it retains to make a loan to the ESOP, and retain
the rest of the proceeds for future use.
The pro forma table does not give effect to:
o withdrawals from deposit accounts for the purpose of
purchasing shares of common stock in the offering;
o our results of operations after the offering; or
o changes in the market price of the common stock after the
offering.
The following pro forma information may not represent the financial
effects of the offering at the date on which the offering actually occurs, and
you should not use the table to indicate future results of operations. Pro forma
stockholders' equity represents the difference between the stated amount of
assets and liabilities of the Bank computed in accordance with generally
accepted accounting principles. We did not increase or decrease stockholders'
equity to reflect the difference between the carrying value of loans and other
assets and their market value. Pro forma stockholders' equity is not intended to
represent the fair market value of the common stock and may be different than
the amounts that would be available for distribution to stockholders if we
liquidated. Pro forma stockholders' equity does not give effect to the impact of
tax bad-debt reserves in the event we liquidated.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
BASED UPON THE SALE AT $10.00 PER SHARE OF
-------------------------------------------------------------
1,091,062
701,250 825,000 948,750 SHARES
SHARES SHARES SHARES 15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
OFFERING OFFERING OFFERING OFFERING
RANGE RANGE RANGE RANGE(1)
---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds............................... $ 7,013 $ 8,250 $ 9,488 $ 10,911
Less: Estimated expenses..................... (685) (700) (715) (733)
---------- ---------- ---------- ----------
Estimated net proceeds.................... 6,328 7,550 8,773 10,178
Less: Common stock acquired by employee
stock ownership plan(2)................... (561) (660) (759) (873)
Less: Common stock acquired by recognition
and retention plan(3)..................... (458) (539) (620) (713)
---------- ---------- ---------- ----------
Estimated net cash proceeds............... $ 5,309 $ 6,351 $ 7,394 $ 8,592
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Consolidated Net income:
Historical................................ $ 656 $ 656 $ 656 $ 656
Pro forma adjustments:
Income on adjusted net proceeds........... 98 116 136 158
32
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
BASED UPON THE SALE AT $10.00 PER SHARE OF
-------------------------------------------------------------
1,091,062
701,250 825,000 948,750 SHARES
SHARES SHARES SHARES 15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
OFFERING OFFERING OFFERING OFFERING
RANGE RANGE RANGE RANGE(1)
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Employee stock ownership plan(2).......... (13) (15) (17) (20)
Recognition and retention plan(3)......... (42) (50) (57) (65)
Stock option plan(4)...................... (59) (68) (79) (91)
---------- ---------- ---------- ----------
Pro forma net income................... 640 640 639 637
Per share net income:
Historical................................ 0.29 0.24 0.21 0.18
Pro forma adjustments:
Income on net proceeds, as adjusted....... 0.04 0.04 0.04 0.04
Employee stock ownership plan(2).......... (0.01) (0.01) (0.01) (0.01)
Recognition and retention plan(3)......... (0.02) (0.02) (0.02) (0.02)
Stock option plan(4)...................... (0.03) (0.03) (0.03) (0.03)
---------- ---------- ---------- ----------
Pro forma net income per share(2)(3)(4) 0.27 0.22 0.19 0.16
Offering price as a multiple of pro forma
net earnings per share.................... 27.78 34.09 39.47 46.88
Shares considered outstanding in calculating
pro forma net income per share............ 2,283,504 2,686,475 3,089,446 3,552,863
AT SEPTEMBER 30, 2005
Stockholders' equity:
Historical................................ $ 18,224 $ 18,224 $ 18,224 $ 18,224
Estimated net proceeds.................... 6,328 7,550 8,775 10,178
Less:
Common stock acquired by employee
stock ownership plan(2).............. (561) (660) (759) (873)
Common stock acquired by recognition
and retention plan(3)................ (458) (539) (620) (713)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(5).... $ 23,532 $ 24,575 $ 25,620 $ 26,816
========== ========== ========== ==========
Stockholders' equity per share:
Historical................................ $ 7.80 $ 6.63 $ 5.76 $ 5.01
Estimated net proceeds.................... 2.71 2.75 2.77 2.80
Less:
Common stock acquired by employee
stock ownership plan(2).............. (0.24) (0.24) (0.24) (0.24)
Common stock acquired by recognition
and retention plan(3)................ (0.20) (0.20) (0.20) (0.20)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per
share(3)(4)(5).................... $ 10.07 $ 8.94 $ 8.09 $ 7.37
========== ========== ========== ==========
Offering price as percentage of pro forma
stockholders' equity per share............ 99.30% 111.86% 123.61% 135.69%
========== ========== ========== ==========
Shares considered outstanding in calculating
offering price as a percentage of pro
forma stockholders' equity per share...... 2,337,500 2,750,000 3,162,500 3,636,875
Public ownership............................. 30.00% 30.00% 30.00% 30.00%
- --------------------------------
<FN>
(1) As adjusted to give effect to a 15% increase in the number of shares
outstanding after the offering that could occur due to an increase in
the maximum of the independent valuation as a result of regulatory
considerations, demand for the shares or changes in market conditions
or general financial and economic conditions following the commencement
of the offering.
(2) It is assumed that 8% of the shares sold in the stock offering will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from
Mutual Bancorp. The amount to be borrowed is reflected as a reduction
of stockholders' equity. The Bank intends to make annual
</FN>
33
contributions to the ESOP in an amount at least equal to the principal
and interest requirement of the debt. The Bank's total annual payment
of the ESOP debt is based upon twenty equal annual installments of
principal and interest. The pro forma net earnings information makes
the following assumptions: (i) the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the period presented and
was made at the end of the period; (ii) 2,103, 2,475, 2,846 and 3,273
shares at the minimum, midpoint, maximum and adjusted maximum of the
offering range, respectively, were committed to be released during the
nine months ended September 30, 2005, at an average fair value equal to
the price for which the shares are sold in the stock offering in
accordance with Statement of Position 93-6; and (iii) only the ESOP
shares committed to be released were considered outstanding for
purposes of the net earnings per share calculations. See
"Management--Future Stock Benefit Plans" for a summary of the ESOP.
(3) Gives effect to the recognition and retention plan expected to be
adopted following the stock offering. We have assumed that this plan
acquires a number of shares of common stock equal to 1.96% of the
outstanding shares of common stock after the offering either through
open market purchases or from authorized but unissued shares of common
stock or treasury stock of Mutual Bancorp, if any. Funds used by the
recognition and retention plan to purchase the shares will be
contributed to the plan by Mutual Bancorp. In calculating the pro forma
effect of the recognition and retention plan, it is assumed that the
shares were acquired by the plan in open market purchases at the
beginning of the period presented for a purchase price equal to the
price for which the shares are sold in the stock offering, and that 15%
of the amount contributed was an amortized expense (based upon a
five-year vesting period) during the nine months ended September 30,
2005. There can be no assurance that the actual purchase price of the
shares granted under the recognition and retention plan will be equal
to the $10.00 subscription price. If shares are acquired from
authorized but unissued shares of common stock or from treasury shares
of Mutual Bancorp, there will be a dilutive effect of approximately
1.9% (at the maximum of the offering range) on the ownership interest
of stockholders.
(4) Gives effect to the issuance of additional shares of common stock
pursuant to the stock option plan, which is expected to be adopted by
Mutual Bancorp following the offering and presented to stockholders for
approval not earlier than six months after the completion of the
offering. If the stock option plan is approved by stockholders, a
number of shares up to 4.9% of the total number of shares issued in the
offering and to Mutual MHC is expected to be reserved for future
issuance upon the exercise of options to be granted under the stock
option plan.
(5) The retained earnings of the Bank will continue to be substantially
restricted after the stock offering. See "Supervision and
Regulation--Regulation of Federal Savings Institutions."
34
AT OR FOR THE YEAR ENDED DECEMBER 31, 2004
BASED UPON THE SALE AT $10.00 PER SHARE OF
------------------------------------------------------------
1,091,062
701,250 825,000 948,750 SHARES
SHARES SHARES SHARES 15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
OFFERING OFFERING OFFERING OFFERING
RANGE RANGE RANGE RANGE(1)
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds............................... $ 7,013 $ 8,250 $ 9,488 $ 10,911
Less: Estimated expenses..................... (685) (700) (715) (733)
---------- ---------- ---------- ----------
Estimated net proceeds.................... $ 6,328 $ 7,550 $ 8,773 $ 10,178
Less: Common stock acquired by employee
stock ownership plan(2)................... (561) (660) (759) (873)
Less: Common stock acquired by recognition
and retention plan(3)..................... (458) (539) (620) (713)
---------- ---------- ---------- ----------
Estimated net cash proceeds............... $ 5,309 $ 6,351 $ 7,394 $ 8,592
FOR THE YEAR ENDED DECEMBER 31, 2004
Consolidated Net income:
Historical................................ $ 1,526 $ 1,526 $ 1,526 $ 1,526
Pro forma adjustments:
Income on adjusted net proceeds........... 130 155 181 210
Employee stock ownership plan(2).......... (17) (20) (23) (27)
Recognition and retention plan(3)......... (56) (66) (76) (87)
Stock option plan(4)...................... (78) (91) (105) (121)
---------- ---------- ---------- ----------
Pro forma net income................... $ 1,505 $ 1,504 $ 1,503 $ 1,501
Per share net income:
Historical................................ $ 0.67 $ 0.57 $ 0.49 $ 0.43
Pro forma adjustments:
Income on net proceeds, as adjusted....... 0.06 0.06 0.06 0.06
Employee stock ownership plan(2).......... (0.01) (0.01) (0.01) (0.01)
Recognition and retention plan(3)......... (0.02) (0.02) (0.02) (0.02)
Stock option plan(4)...................... (0.03) (0.03) (0.03) (0.03)
---------- ---------- ---------- ----------
Pro forma net income per share(2)(3)(4) $ 0.67 $ 0.57 $ 0.49 $ 0.43
Offering price as a multiple of pro forma
net earnings per share.................... 14.93 17.54 20.41 23.26
Shares considered outstanding in calculating
pro forma net income per share............ 2,284,205 2,687,300 3,090,395 3,553,954
AT DECEMBER 31, 2004
Stockholders' equity:
Historical................................ $ 18,540 $ 18,540 $ 18,540 $ 18,540
Estimated net proceeds.................... 6,328 7,550 8,775 10,178
Less:
Common stock acquired by employee
stock ownership plan(2).............. (561) (660) (759) (873)
Common stock acquired by recognition
and retention plan(3)................ (458) (539) (620) (713)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(5).... $ 23,849 $ 24,891 $ 25,936 $ 27,132
========== ========== ========== ==========
Stockholders' equity per share:
Historical................................ $ 7.93 $ 6.74 $ 5.86 $ 5.10
Estimated net proceeds.................... 2.71 2.75 2.77 2.80
Less:
Common stock acquired by employee
stock ownership plan(2).............. (0.24) (0.24) (0.24) (0.24)
Common stock acquired by recognition
and retention plan(3)................ (0.20) (0.20) (0.20) (0.20)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per
share(3)(4)(5).................... $ 10.20 $ 9.05 $ 8.19 $ 7.46
========== ========== ========== ==========
35
AT OR FOR THE YEAR ENDED DECEMBER 31, 2004
BASED UPON THE SALE AT $10.00 PER SHARE OF
------------------------------------------------------------
1,091,062
701,250 825,000 948,750 SHARES
SHARES SHARES SHARES 15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
OFFERING OFFERING OFFERING OFFERING
RANGE RANGE RANGE RANGE(1)
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Offering price as percentage of pro forma
stockholders' equity per share............ 98.04% 110.50% 122.10% 134.05%
Shares considered outstanding in calculating
offering price as a percentage of pro
forma stockholders' equity per share...... 2,337,500 2,750,000 3,162,500 3,636,875
Public ownership............................. 30.00% 30.00% 30.00% 30.00%
- --------------------------------
<FN>
(1) As adjusted to give effect to a 15% increase in the number of shares
outstanding after the offering that could occur due to an increase in
the maximum of the independent valuation as a result of regulatory
considerations, demand for the shares or changes in market conditions
or general financial and economic conditions following the commencement
of the offering.
(2) It is assumed that 8% of the shares sold in the stock offering will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from
Mutual Bancorp. The amount to be borrowed is reflected as a reduction
of stockholders' equity. The Bank intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Bank's total annual payment of the ESOP
debt is based upon twenty equal annual installments of principal and
interest. The pro forma net earnings information makes the following
assumptions: (i) the Bank's contribution to the ESOP is equivalent to
the debt service requirement for the period presented and was made at
the end of the period; (ii) 2,805, 3,300, 3,795 and 4,364 shares at the
minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively, were committed to be released during the nine months
ended September 30, 2005, at an average fair value equal to the price
for which the shares are sold in the stock offering in accordance with
Statement of Position 93-6; and (iii) only the ESOP shares committed to
be released were considered outstanding for purposes of the net
earnings per share calculations. See "Management--Future Stock Benefit
Plans" for a summary of the ESOP.
(3) Gives effect to the recognition and retention plan expected to be
adopted following the stock offering. We have assumed that this plan
acquires a number of shares of common stock equal to 1.96% of the
outstanding shares of common stock after the offering either through
open market purchases or from authorized but unissued shares of common
stock or treasury stock of Mutual Bancorp, if any. Funds used by the
recognition and retention plan to purchase the shares will be
contributed to the plan by Mutual Bancorp. In calculating the pro forma
effect of the recognition and retention plan, it is assumed that the
shares were acquired by the plan in open market purchases at the
beginning of the period presented for a purchase price equal to the
price for which the shares are sold in the stock offering, and that 20%
of the amount contributed was an amortized expense (based upon a
five-year vesting period) during the twelve months ended December 31,
2004. There can be no assurance that the actual purchase price of the
shares granted under the recognition and retention plan will be equal
to the $10.00 subscription price. If shares are acquired from
authorized but unissued shares of common stock or from treasury shares
of Mutual Bancorp, there will be a dilutive effect of approximately
1.9% (at the maximum of the offering range) on the ownership interest
of stockholders.
(4) Gives effect to the issuance of additional shares of common stock
pursuant to the stock option plan, which is expected to be adopted by
Mutual Bancorp following the offering and presented to stockholders for
approval not earlier than six months after the completion of the
offering. If the stock option plan is approved by stockholders, a
number of shares up to 4.9% of the total number of shares issued in the
offering and to Mutual MHC is expected to be reserved for future
issuance upon the exercise of options to be granted under the stock
option plan.
(5) The retained earnings of the Bank will continue to be substantially
restricted after the stock offering. See "Supervision and
Regulation--Regulation of Federal Savings Institutions."
</FN>
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects our consolidated financial
statements and other relevant statistical data and is intended to enhance your
understanding of our financial condition and results of operations. You should
read the information in this section in conjunction with our audited
consolidated financial statements, which begin on page F-1 of this prospectus,
and the other business and financial information provided in this prospectus.
OVERVIEW
Our results of operations depend primarily on our net interest income.
Net interest income is the difference between the interest income we earn on our
interest-earning assets, consisting primarily of loans, investment securities,
mortgage-backed securities and other interest-earning assets (primarily cash and
cash equivalents), and the interest we pay on our interest-bearing liabilities,
consisting of savings accounts and time deposits. Our results of operations also
are affected by our provisions for loan losses, non-interest income and
non-interest expense. Non-interest income currently consists primarily of gains
and losses on the sale of securities and miscellaneous other income.
Non-interest expense currently consists primarily of salaries and employee
benefits, occupancy, data processing, and other operating expenses (consisting
primarily of professional fees). Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes
in market interest rates, governmental policies and actions of regulatory
authorities.
CRITICAL ACCOUNTING POLICIES
We consider accounting policies involving significant judgments and
assumptions by management that have, or could have, a material impact on the
carrying value of certain assets or on income to be critical accounting
policies. We consider our critical accounting policies to be those related to
our allowance for loan losses, deferred income taxes and securities available
for sale.
Allowance for Loan Losses. The allowance for loan losses is the
estimated amount considered necessary to cover probable incurred losses in the
loan portfolio at the balance sheet date. The allowance is established through a
provision for loan losses that is charged against income. In determining the
allowance for loan losses, management makes significant estimates and has
identified this policy as one of our most critical.
Management performs a quarterly evaluation of the adequacy of the
allowance for loan losses. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
The analysis has two components: specific and general allocations.
Specific allocations are made for loans that are determined to be impaired.
Impairment is measured by determining the present value of expected future cash
flows or, for collateral-dependent loans, the fair value of the collateral
adjusted for market conditions and selling expenses. The general allocation is
determined by segregating the remaining loans by type of loan, risk weighting
(if applicable) and payment history. We also analyze historical loss experience,
delinquency trends, general economic conditions and geographic and industry
concentrations. This analysis establishes factors that are applied to the loan
groups to determine the amount of the general allowance for loan losses. Actual
loan losses may be significantly more than the allowances we have established
which could have a material negative effect on our financial results.
37
Deferred Income Taxes. We use the asset and liability method of
accounting for income taxes as prescribed in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. If current
available information raises doubt as to the realization of the deferred tax
assets, a valuation allowance is established. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. We exercise significant judgment in evaluating the amount
and timing of recognition of the resulting tax liabilities and assets. These
judgments require us to make projections of future taxable income. The judgments
and estimates we make in determining our deferred tax assets, which are
inherently subjective, are reviewed on a continual basis as regulatory and
business factors change. Any reduction in estimated future taxable income may
require us to record a valuation allowance against our deferred tax assets. A
valuation allowance would result in additional income tax expense in the period,
which would negatively affect earnings.
Fair Value of Investment Securities Available for Sale. Management is
responsible for evaluating all investments with unrealized losses on a regular
basis to determine whether investments with unrealized losses should be written
down to realizable amounts. Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) our intent and ability to retain our investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Our total assets increased by $579,000, or 0.9%, to $65.3 million at
September 30, 2005, from $64.7 million at December 31, 2004. Loans receivable
increased $5.8 million, or 20.5%, to $34.1 million at September 30, 2005, from
$28.3 million at December 31, 2004, reflecting an increase in multi-family
residential mortgage loans of $4.3 million, or 49.2%, to $13.1 million at
September 30, 2005, from $8.8 million at December 31, 2004, and an increase in
one-to-four family residential mortgage loans of $1.5 million, or 7.4%, to $21.2
million, from $19.8 million. Cash and cash equivalents increased $1.1 million,
or 30.6%, to $4.8 million at September 30, 2005, from $3.7 million at December
31, 2004, and securities available for sale decreased $6.3 million, or 20.0%, to
$25.3 million at September 30, 2005, from $31.6 million at December 31, 2004.
Total deposits increased $802,000, or 1.8%, to $45.4 million at
September 30, 2005, from $44.6 million at December 31, 2004. The increase in
deposits resulted primarily from increases in passbook and basic checking
accounts, offset by a small decrease in certificates of deposit.
Equity decreased $316,000, or 1.7%, to $18.2 million at September 30,
2005, from $18.5 million at December 31, 2004, reflecting net income of
$656,000, offset by a $672,000 decrease in accumulated unrealized gains in the
fair value of securities available-for-sale, and a $300,000 dividend paid to
Mutual MHC.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
2004
General. Net income decreased $144,000, or 18.0%, to $656,000 for the
nine months ended September 30, 2005, from $800,000 for the nine months ended
September 30, 2004. The decrease in net income reflected a $126,000 decrease in
gains on the sale of securities and a $90,000 increase in operating expenses,
primarily from a $75,000 increase in salaries and employee benefits. Return on
average assets was 1.35% for the nine months ended September 30, 2005, compared
to 1.56% for the nine
38
months ended September 30, 2004, and return on equity was 4.77% and
5.65% for these same two periods.
Interest Income. Interest and dividend income stayed approximately the
same, at $2.4 million for the nine months ended September 30, 2005 and 2004. A
19 basis point increase in the average yield on interest-earning assets, from
5.00% in 2004 to 5.19% in 2005, was offset by a $2.4 million, or 3.8%, decrease
in the average balance of interest-earning assets.
Interest income and fees from loans receivable increased $46,000, or
3.1%, to $1.5 million for the nine months ended September 30, 2005, from
approximately the same $1.5 million for the nine months ended September 30,
2004. The increase was due to a $1.3 million increase in the average balance of
loans, partially offset by a seven basis point decrease in the average yield to
6.59% in 2005, from 6.66% in 2004. Interest income from securities decreased
$62,000, or 7.3%, to $791,000 for the nine months ended September 30, 2005 from
$853,000 for the nine months ended September 30, 2004. The decrease resulted
from a decrease in the average yield on securities to 3.85% in 2005, from 4.10%
in 2004.
Interest Expense. Total interest expense increased $14,000, or 2.5%, to
$566,000 for 2005, from $552,000 for 2004. The increase in interest expense
resulted from an increase in the average cost of deposits to 1.70% in 2005, from
1.54% in 2004, partially offset by a $3.2 million decrease in the average
balance of interest-bearing deposits. Interest expense on certificates of
deposit increased $16,000, or 4.6%, due to a 21 basis point increase in the
average rate paid on such deposits from 2.05% for the nine months ended
September 30, 2004 to 2.26% for the nine months ended September 30, 2005. This
was partially offset by a decrease in the average balance of certificates of
deposit to $21.7 million from $22.8 million.
Net Interest Income. Net interest income decreased $17,000, or 0.9%, to
$1.8 million for the nine months ended September 30, 2005 from $1.9 million for
the nine months ended September 30, 2004. Our net interest margin increased to
3.97% during 2005, from 3.85% during 2004, while the interest rate spread
increased to 3.49% in 2005, from 3.46% in 2004.
Provision for Loan Losses. We establish provisions for loan losses,
which are charged to operations, at a level necessary to absorb probable
incurred losses at the date of the financial statements. In evaluating the level
of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, peer group information, and
prevailing economic conditions. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision, as more
information becomes available or as future events change. After an evaluation of
these factors, management made no provision for loan losses for the nine months
ended September 30, 2005 and 2004.
During the nine months ended September 30, 2005, our loan portfolio
increased by $5.8 million, including a $4.3 million increase in our multi-family
residential mortgage loans. We consider multi-family loans to present higher
inherent risks than one- to four-family residential mortgage loans because
historically these multi-family loans have higher rates of default and because
repayments may be affected to a greater degree by general economic conditions
and interest rates. The allowance for loan losses was $150,000, or 0.44% of
gross loans outstanding at September 30, 2005, as compared with $150,000, or
0.53% of loans outstanding at December 31, 2004.
The level of the allowance is based on estimates, and the ultimate
losses may vary from the estimates. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment. Management reviews
the level of the allowance on a quarterly basis, and establishes the
39
provision for loan losses based on the composition of the loan portfolio,
delinquency levels, loss experience, economic conditions, and other factors
related to the collectibility of the loan portfolio.
While loan quality has been stable in recent years, with non-performing
loans of $188,000 and $306,000 at September 30, 2005 and December 31, 2004,
respectively, the balance of loans in the loan portfolio has increased. We have
allocated the allowance among categories of loan types as well as classification
status at each period-end date. Assumptions and allocation percentages based on
loan types and classification status have been consistently applied.
Non-performing loans were assigned a higher percentage of allowance allocation.
However, due to the low percentage of such loans, the balance in the allowance
over the period has remained relatively stable.
Although we believe that we use the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. In addition, the Office of
Thrift Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. Such agency may require us to recognize
adjustments to the allowance based on its judgments about information available
to it at the time of its examination.
Non-Interest Income. Non-interest income decreased $121,000, or 19.1%,
to $513,000 for the nine months ended September 30, 2005, from $634,000 for the
nine months ended September 30, 2004. The decrease was due primarily to a
$126,000 decrease in gains on sales of securities.
Non-Interest Expense. Non-interest expense increased $90,000, or 7.4%,
to $1.3 million for the nine months ended September 30, 2005 compared to $1.2
million for the prior period. Compensation and employee benefits increased
$75,000, or 10.8%, to $772,000 in 2005, from $697,000 in 2004, reflecting new
employees, salary increases and higher benefit costs, including those associated
with health insurance. Occupancy expense decreased $24,000, or 14.0%, to
$147,000, from $171,000, and data processing costs increased $8,000, or 11.0%,
to $81,000, from $73,000, and miscellaneous other expenses increased $27,000, or
15.3%, to $204,000 in 2005, from $177,000 in 2004. The ratio of non-interest
expense to average assets was 2.68% for the nine months ended September 30,
2005, compared to 2.37% for the same 2004 period.
Income Tax Expense. The provision for income taxes decreased to
$392,000 for the nine months ended September 30, 2005 from $476,000 for the
prior period, due primarily to our lower level of income before income taxes of
$1.0 million for the nine months ended September 30, 2005 compared with $1.3
million for the same period in 2004. The effective tax rates for the periods
ended September 30, 2005 and 2004 were 37.4% and 37.3%, respectively.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND 2003
Our total assets decreased by $2.8 million, or 4.1%, to $64.7 million
at December 31, 2004, from $67.5 million at December 31, 2003. The decrease in
total assets resulted primarily from a $2.1 million, or 6.8%, decrease in loans
receivable. Cash and cash equivalents decreased $559,000, or 13.2%, to $3.7
million at December 31, 2004, from $4.2 million at December 31, 2003, and
securities available-for-sale decreased $118,000, or 0.4%, to $31.6 million at
December 31, 2004, from $31.7 million at December 31, 2003.
Total deposits decreased $2.5 million, or 5.2%, to $44.6 million at
December 31, 2004, from $47.0 million at December 31, 2003.
Stockholders' equity decreased $296,000, or 1.6%, to $18.5 million at
December 31, 2004, from $18.8 million at December 31, 2003, reflecting net
income of $1.5 million, offset by a $1.0 million
40
dividend to Mutual MHC, and an $822,000 decrease in unrealized gains on
securities available-for-sale (net of income taxes).
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
General. Net income increased $733,000, or 92.4%, to $1.5 million for
the year ended December 31, 2004, from $793,000 for the year ended December 31,
2003. The increase in net income came primarily from a $1.3 million increase in
gains on the sale of securities. Return on average assets for the year ended
December 31, 2004, was 2.25%, compared to 1.15% for the year ended December 31,
2003, and return on equity was 8.08% and 4.30% for 2004 and 2003, respectively.
Interest Income. Interest and dividend income decreased by $318,000, or
9.1%, to $3.2 million for the year ended December 31, 2004, from $3.5 million
for the year ended December 31, 2003. The decrease in interest income resulted
primarily from a 50 basis point decrease in the average yield on
interest-earning assets, to 4.98% for the year ended December 31, 2004, from
5.48% for the year ended December 31, 2003, with decreases reflecting a decrease
in market interest rates for all asset categories except interest earning
deposits.
Interest income and fees from loans receivable decreased $173,000, or
8.1%, to $2.0 million for the year ended December 31, 2004, from $2.1 million
for the year ended December 31, 2003. The decrease was due to a 44 basis point
decrease in the average yield on loans to 6.64% from 7.08%, and a $591,000
decrease in the average balance of loans receivable. Interest income from
securities available-for-sale decreased $168,000, or 12.9%, to $1.1 million for
the year ended December 31, 2004, from $1.3 million for the year ended December
31, 2003. The decrease resulted from a $1.1 million decrease in the average
balance of available-for-sale securities to $28.2 million from $29.3 million,
and from a 41 basis point decrease in the average yield to 4.04%, from 4.45%.
Interest Expense. Total interest expense decreased $220,000, or 23.2%,
to $728,000 for 2004 from $948,000 for 2003. The decrease in interest expense
resulted from a decrease in the average cost of deposits to 1.54% from 1.96%,
reflecting lower market interest rates during 2004. Interest expense on
certificates of deposit decreased $143,000, or 23.6%, due to a 52 basis point
reduction in the average rate paid on such deposits from 2.57% for the year
ended December 31, 2003 to 2.05% for the year ended December 31, 2004. The
average balance of certificates of deposit decreased to $22.6 million in 2004,
from $23.6 million in 2003.
Net Interest Income. Net interest income decreased $98,000, or 3.8%, to
$2.5 million for the year ended December 31, 2004 from $2.6 million for the year
ended December 31, 2003. Our net interest margin decreased to 3.85% during 2004
from 4.00% during 2003, while the interest rate spread decreased to 3.44%, from
3.52%.
Provision for Loan Losses. We establish provisions for loan losses,
which are charged to operations, at a level necessary to absorb probable
incurred losses at the date of the financial statements. Based on the
application of our allowance for loan losses methodology, as discussed
previously, management determined that no provision for loan losses for the
years ended December 31, 2004 and 2003 was necessary.
During the year ended December 31, 2004, our loan portfolio decreased
by $2.1 million. The reduction in our loan portfolio was comprised primarily of
one- to four-family residential mortgage loans, partially offset by a small
increase in multi-family real estate loans of $313,000. We consider multi-family
loans to present higher inherent risks than one- to four-family residential
mortgage loans because historically these loans have higher rates of default and
because repayments may be affected to a greater degree by general economic
conditions and interest rates. The allowance for loan losses was $150,000, or
41
0.53% of gross loans outstanding at December 31, 2004, as compared with
$150,000, or 0.49% of gross loans outstanding at December 31, 2003.
While loan quality has been stable in recent years, with non-performing
loans of $306,000 and $201,000 at December 31, 2004 and December 31, 2003,
respectively, the balance of loans in the loan portfolio decreased. We allocated
the allowance among categories of loan types as well as classification status at
each period-end date. Assumptions and allocation percentages based on loan types
and classification status were consistently applied. Non-performing loans were
assigned a higher percentage of allowance allocation. However, due to the low
percentage of such loans, the balance in the allowance over the period remained
relatively stable.
Non-Interest Income. We had a gain on the sale of FHLMC common stock of
$1.6 million for the year ended December 31, 2004, compared to a similar gain of
$271,000 for the prior year. Our wholly owned insurance agency, EMEFES Service
Corporation, earned $4,000 in commissions in 2004, compared to $7,000 in 2003.
Non-Interest Expense. Non-interest expense remained stable at $1.6
million for the years ended December 31, 2004 and 2003. Compensation and
employee benefits decreased $34,000, or 3.5%, reflecting a reduction in
personnel due to attrition. Occupancy expense decreased $7,000, or 3.2%, and
data processing services decreased $2,000, or 2.0%, in 2004 as compared to 2003.
Professional fees increased $34,000, or 37.4%, to $125,000 in 2004, from $91,000
in 2003, primarily for consulting and legal services associated with strategic
planning. The ratio of non-interest expense to average assets was 2.39% in 2004,
compared to 2.37% in 2003.
Income Tax Expense. The provision for income taxes increased to
$921,000 for the year ended December 31, 2004 from $448,000 for the prior year
period, due primarily to our higher level of income before income taxes of $2.4
million in 2004 compared with $1.2 million in 2003. The effective tax rates for
the years ended December 31, 2004 and 2003 were 37.6% and 36.1%, respectively.
AVERAGE BALANCE SHEET
The following tables set forth average balance sheets, average yields
and costs, and certain other information for the periods indicated. No
tax-equivalent yield adjustments were made, as their effects were not material.
All average balances are based on an average of daily balances. Non-accrual
loans were included in the computation of average balances, but have been
reflected in the table as loans carrying a zero yield. The yields set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or expense.
AT FOR THE NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, --------------------------------------------------------------------------
2005 2005 2004
------------- ----------------------------------- -------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans........................ 6.28% $31,074 $1,536 6.59% $29,816 $1,490 6.66%
Securities available for
sale...................... 4.16 27,377 791 3.85 27,709 853 4.10
Federal Home Loan Bank
Stock..................... 5.00 486 19 5.21 459 21 6.10
Interest earning deposits.... 3.76 2,889 60 2.77 6,291 45 0.95
---- ------- ------ ------ ------- ------ ------
Total interest-earning
assets................. 5.30% 61,826 $2,406 5.19% 64,275 $2,409 5.00%
==== ====== ====== ====== ======
Non-interest-earning assets 2,995 4,093
------- -------
Total assets.............. $64,821 $68,368
======= =======
INTEREST-BEARING
LIABILITIES(1)
Savings deposits............. 1.19% $22,760 199 1.17% $24,810 $ 201 1.08%
Certificates of deposit...... 2.66 21,694 367 2.26 22,847 351 2.05
---- ------- ------ ------ ------- ------ ------
42
AT FOR THE NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, --------------------------------------------------------------------------
2005 2005 2004
------------- ----------------------------------- -------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
Total interest-bearing
liabilities............ 1.88% 44,454 $ 566 1.70% 47,657 $ 552 1.54%
==== ====== ====== ====== ======
Non-interest-bearing
liabilities............... 2,030 1,846
------- -------
Total liabilities......... 46,484 49,503
Stockholders' equity......... 18,337 18,865
------- -------
Total liabilities and
stockholders' equity... $64,821 $68,368
======= =======
NET INTEREST INCOME.......... $1,840 $1,857
====== ======
NET INTEREST RATE SPREAD(2).. 3.49% 3.46%
====== ======
NET INTEREST-EARNING
ASSETS(3)................. $17,372 $16,618
======= =======
NET INTEREST MARGIN(4)....... 3.97% 3.85%
====== ======
RATIO OF INTEREST-EARNING
ASSETS TO
INTEREST-BEARING
LIABILITIES............... 139.08% 134.87%
====== ======
- --------------------------------
<FN>
(1) Non interest-bearing checking deposits are included in
non-interest-bearing liabilities.
(2) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average
interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets
less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
total interest-earning assets.
</FN>
AT FOR THE YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------------------------------------
2004 2004 2003
------------- ----------------------------------- -------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans........................ 6.37% $29,582 $1,963 6.64% $30,173 $2,136 7.08%
Securities available for
sale...................... 4.14 28,152 1,136 4.04 29,292 1,304 4.45
Federal Home Loan Bank
Stock..................... 5.50 462 28 6.06 434 33 7.60
Interest-earning deposits.... 2.02 5,893 66 1.12 4,138 38 0.92
---- ------- ------ ------ ------- ------ ------
Total interest-earning
assets................. 5.09% 64,089 $3,193 4.98% 64,037 $3,511 5.48%
==== ====== ====== ====== ======
Non-interest-earning assets 3,874 4,646
------- -------
Total assets.............. $67,963 $68,683
======= =======
INTEREST-BEARING
LIABILITIES:(1)
Savings deposits............. 1.15% 24,582 $ 265 1.08% $24,730 $ 342 1.38%
Certificates of deposit...... 2.03 22,611 463 2.05% 23,589 606 2.57%
---- ------- ------- ------ ------- ------ ------
Total interest-bearing
liabilities............ 1.58% 47,193 $ 728 1.54% 48,319 $ 948 1.96%
==== ====== ====== ====== ======
Non-interest-bearing
liabilities............... 1,875 1,931
------- -------
Total liabilities......... 49,068 50,250
Stockholders' equity......... 18,895 18,433
------- -------
Total liabilities and
stockholders' equity... $67,963 $68,683
======= =======
NET INTEREST INCOME.......... $2,465 $2,563
====== ======
NET INTEREST RATE SPREAD(2).. 3.44% 3.52%
====== ======
NET INTEREST-EARNING
ASSETS(3)................. $16,896 $15,718
======= =======
NET INTEREST MARGIN(4)....... 3.85% 4.00%
====== ======
RATIO OF INTEREST-EARNING
ASSETS TO
INTEREST-BEARING
LIABILITIES............... 135.80% 132.53%
====== ======
<FN>
- --------------------------------
(1) Non interest-bearing checking deposits are included in
non-interest-bearing liabilities.
(2) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average
interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets
less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
total interest-earning assets.
</FN>
43
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of our interest-earning
assets and interest-bearing liabilities. Information is provided for each
category of interest-earning assets and interest-bearing liabilities with
respect to (i) changes attributable to changes in volume (i.e., changes in
average balances multiplied by the prior-period average rate) and (ii) changes
attributable to rate (i.e., changes in average rate multiplied by prior-period
average balances). For purposes of this table, changes attributable to both rate
and volume, which cannot be segregated, have been allocated proportionately to
the change due to volume and the change due to rate.
NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. 2004
--------------------------------------------------
INCREASE (DECREASE) DUE TO
----------------------------- TOTAL INCREASE
VOLUME RATE (DECREASE)
---------- -------- --------------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................. $ 71 $( 25) $ 46
Securities available for sale..... (17) (45) (62)
Federal Home Loan Bank Stock...... 2 (4) (2)
Interest-earning deposits......... (18) 33 15
---- ----- -----
Total interest-earning assets.. 38 (41) (3)
---- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits.................. (22) 20 (2)
Certificates of deposit........... (21) 37 16
---- ----- -----
Total interest-bearing
liabilities.................. (43) 57 14
---- ----- -----
Change in net interest income.. $ 81 $(98) $ (17)
==== ===== =====
YEARS ENDED DECEMBER 31, 2004 VS. 2003
--------------------------------------------------
INCREASE (DECREASE) DUE TO
---------------------------- TOTAL INCREASE
VOLUME RATE (DECREASE)
---------- -------- --------------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................. $(42) $(131) $(173)
Securities available for sale..... (52) (116) (168)
Federal Home Loan Bank Stock...... 2 (7) (5)
Interest-earning deposits......... 18 10 28
---- ----- -----
Total interest-earning assets.. (74) (244) (318)
---- ----- -----
INTEREST-BEARING LIABILITIES:
Savings deposits.................. (2) (75) (77)
Certificates of deposit........... (26) (117) (143)
---- ----- -----
Total interest-bearing
liabilities.................. (28) (192) (220)
---- ----- -----
Change in net interest income.. $(46) $ (52) $ (98)
==== ===== =====
MANAGEMENT OF MARKET RISK
General. The majority of our assets and liabilities are monetary in
nature. Consequently, our most significant form of market risk is interest rate
risk. Our assets, consisting primarily of mortgage loans, have longer maturities
than our liabilities, which consist primarily of deposits. As a result, a
principal part of our business strategy is to manage interest rate risk and
reduce the exposure of our net interest income to changes in market interest
rates. Our board of directors has approved a series of policies for evaluating
interest rate risk inherent in our assets and liabilities; for determining the
level of risk that is appropriate given our business strategy, operating
environment, capital, liquidity and performance objectives; and for managing
this risk consistent with these policies. Senior management
44
regularly monitors the level of interest rate risk and reports to the board of
directors on our compliance with our asset/liability policies and on our
interest rate risk position.
We have sought to manage our interest rate risk in order to control the
exposure of our earnings and capital to changes in interest rates. During the
low interest rate environment that has existed in recent years, we have managed
our interest rate risk by maintaining a high equity-to-assets ratio and building
and maintaining portfolios of shorter-term fixed rate residential loans and
second mortgage loans. By maintaining a high equity-to-assets ratio, we believe
that we are better positioned to absorb more interest rate risk in order to
improve our net interest margin. However, maintaining high equity balances
reduces our return on equity ratio, and investments in shorter-term assets
generally bear lower yields than longer-term investments.
Net Portfolio Value. In past years, many savings institutions have
measured interest rate sensitivity by computing the "gap" between the assets and
liabilities that are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which the net present value of an institution's cash flow from assets,
liabilities and off balance sheet items (the institution's net portfolio value
or "NPV") would change in the event of a range of assumed changes in market
interest rates. The OTS provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value. The OTS simulation
model uses a discounted cash flow analysis and an option-based pricing approach
to measuring the interest rate sensitivity of net portfolio value. Historically,
the OTS model estimated the economic value of each type of asset, liability and
off-balance sheet contract under the assumption that the United States Treasury
yield curve increases or decreases instantaneously by 100 to 300 basis points in
100 basis point increments. A basis point equals one-hundredth of one percent,
and 100 basis points equals one percent. An increase in interest rates from 3%
to 4% would mean, for example, a 100 basis point increase in the "Change in
Interest Rates" column below. The OTS provides us the results of the interest
rate sensitivity model, which is based on information we provide to the OTS to
estimate the sensitivity of our net portfolio value.
The table below sets forth, as of June 30, 2005 (the latest report
available), the estimated changes in our NPV and our net interest income that
would result from the designated instantaneous changes in the U.S. Treasury
yield curve. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results.
NET PORTFOLIO VALUE AS A
PERCENTAGE OF PRESENT VALUE
NPV OF ASSETS
-------------------------------------------------- ------------------------------
CHANGE IN
INTEREST RATES ESTIMATED AMOUNT PERCENT CHANGE IN
(BASIS POINTS) NPV OF CHANGE OF CHANGE NPV RATIO BASIS POINTS
--------------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
+300 $16,476 $(5,307) -24% 26.49% -569bp
+200 18,334 (3,449) -16 28.59 -359
+100 20,169 (1,614) -7 30.55 -163
Unchanged 21,783 -- -- 32.18 --
-100 22,842 1,058 +5 33.18 +100
-200 23,602 1,819 +8 33.85 +167
45
The table above indicates that at June 30, 2005, in the event of a 200
basis point decrease in interest rates, we would experience a 8% increase in net
portfolio value. In the event of a 200 basis point increase in interest rates,
we would experience a 16% decrease in net portfolio value.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in net portfolio value requires
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our interest rate risk exposure at a particular point in time,
such measurements do not provide a precise forecast of the effect of changes in
market interest rates on net interest income and will differ from actual
results.
LIQUIDITY AND CAPITAL RESOURCES
We maintain liquid assets at levels we consider adequate to meet our
liquidity needs. We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, repay our borrowings and to fund loan
commitments. We also adjust liquidity as appropriate to meet asset and liability
management objectives.
Our primary sources of liquidity are deposits, amortization and
prepayment of loans, maturities of investment securities and other short-term
investments, and earnings and funds provided from operations. While scheduled
principal repayments on loans are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by market interest
rates, economic conditions, and rates offered by our competition. We set the
interest rates on our deposits to maintain a desired level of total deposits. In
addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements.
A portion of our liquidity consists of cash and cash equivalents, which
are a product of our operating, investing and financing activities. At September
30, 2005, $4.8 million of our assets were invested in cash and cash equivalents.
Our primary sources of cash are principal repayments on loans, proceeds from the
calls and maturities of investment securities and increases in deposit accounts.
Our cash flows are derived from operating activities, investing
activities and financing activities as reported in our consolidated statements
of cash flows included with our consolidated financial statements included
elsewhere in this prospectus.
Our primary investing activities are the origination of loans and the
purchase of investment securities. During the nine months ended September 30,
2005, our loan originations, net of collected principal, totaled $5.8 million.
During the nine months ended September 30, 2004, there was a net decrease that
totaled $1.1 million. We did not sell any loans during the nine months ended
September 30, 2005 and 2004. Cash received from calls and maturities of
securities totaled $7.2 million and $9.1 million for the nine months ended
September 30, 2005 and 2004, respectively. We purchased $1.8 million and $9.2
million in securities during the nine months ended September 30, 2005 and 2004,
respectively, and sold $484,000 and $619,000 in securities during the same two
periods.
Deposit flows are generally affected by the level of interest rates,
the interest rates and products offered by us and by local competitors, and
other factors. The net increase in total deposits was $802,000 for the nine
month period ended September 30, 2005, and there was a net decrease in total
deposits of $676,000 for the nine months ended September 30, 2004.
46
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Chicago, which
provide an additional source of funds. At September 30, 2005 and December 31,
2004, we had no outstanding advances from the Federal Home Loan Bank of Chicago.
Our available borrowing limit at September 30, 2005, was $9.9 million.
At September 30, 2005, we had outstanding commitments to originate
loans of $224,000. At September 30, 2005, certificates of deposit scheduled to
mature in less than one year totaled $18.8 million. Based on prior experience,
management believes that a significant portion of such deposits will remain with
us, although there can be no assurance that this will be the case. In the event
we do not retain a significant portion of our maturing certificates of deposit,
we will have to utilize other funding sources, such as Federal Home Loan Bank of
Chicago advances, in order to maintain our level of assets. Alternatively, we
would reduce our level of liquid assets, such as our cash and cash equivalents.
In addition, the cost of such deposits may be significantly higher if market
interest rates are higher at the time of renewal.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bank is a party to
credit-related financial instruments with off-balance-sheet risk to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit. The Bank follows the same credit policies in
making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Therefore, the total commitment amounts do not
necessarily represent future cash requirements.
At September 30, 2005 and December 31, 2004, the Bank had $224,000 and
$1.1 million, respectively, of commitments to grant mortgage loans.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
FASB Statement 123(R), "Shares Based Payment," addresses the accounting
for share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method; and eliminates
an entity's ability to account for share-based compensation transactions using
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees," which was permitted under Statement 123, as
originally issued. The revised Statement requires entities to disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements. Statement 123(R) is
effective for the Bank for fiscal year 2006. The adoption of Statement 123(R) is
expected to reduce reported net income and earnings per share if we have a stock
award program in place after the proposed statement becomes effective.
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and related notes have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP"). GAAP
generally requires the measurement of financial
47
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 the effects of inflation.
48
BUSINESS OF MUTUAL FEDERAL BANCORP, INC.
We intend to form Mutual Bancorp prior to the closing of the stock
offering. Upon completion of the offering, Mutual Bancorp will own all of the
issued and outstanding common stock of the Bank and will retain up to 50% of the
net proceeds from the offering. A portion of the retained net proceeds will be
used to make a loan to fund the purchase of our shares of common stock by the
Bank's ESOP. The remaining net proceeds will be contributed to the Bank as
additional capital. We intend to invest our capital as discussed in "Use of
Proceeds from the Offering."
In the future, as the bank's holding company, Mutual Bancorp will be
authorized to pursue other business activities permitted by applicable laws and
regulations for savings and loan holding companies, which may include the
acquisition of banking and financial services companies. We anticipate pursuing
in the future, but have no current plans for, possible acquisitions or other
diversification of the activities of Mutual Bancorp.
Our cash flow will depend on earnings from the investment of the net
proceeds we retain, and any dividends received from the bank. Mutual Bancorp
initially will neither own nor lease any property but instead uses the premises,
equipment and furniture of the bank. Mutual Bancorp initially will employ as
officers only those persons who are officers of the Bank or Mutual MHC. However,
we will use the support staff of the Bank from time to time. These persons will
not be compensated separately by Mutual Bancorp. Mutual Bancorp may hire
additional employees, as appropriate, to meet future business needs.
BUSINESS OF MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
GENERAL
Our principal business consists of attracting retail deposits from the
general public in the areas surrounding our office location in Chicago, Illinois
and investing those deposits, together with funds generated from operations,
primarily in one- to four-family fixed-rate residential mortgage loans and
multifamily residential mortgage loans, and in investment securities. We also
offer consumer loans secured by deposits as an accommodation to our customers.
Our revenues are derived principally from interest on loans and securities, and
from loan origination and servicing fees. Our primary sources of funds are
deposits and principal and interest payments on loans and securities.
BUSINESS STRATEGY
Our business strategy is to operate as a well-capitalized and
profitable community bank dedicated to providing quality customer service. A
main focus of our business strategy has been to emphasize one- to four-family
residential mortgage lending, and we intend to continue to emphasize this type
of lending. Management, however, has determined to broaden the range of our
products and services to enhance profitability, consistent with maintaining our
safety and soundness. We intend to gradually introduce additional products and
services, such as adjustable-rate mortgage loans, home equity lines of credit
and educational IRA accounts. There can be no assurances that we will
successfully implement our business strategy.
Highlights of our business strategy are as follows:
o Continuing to emphasize fixed-rate one- to four-family
residential real estate lending. Historically, we have
emphasized fixed-rate one- to four-family residential lending
within our market area. As of September 30, 2005, $21.2
million, or 61.7%, of our total loan portfolio consisted of
fixed-rate one- to four-family residential mortgage loans.
During the year ended
49
December 31, 2004, we originated $3.7 million of one- to
four-family residential mortgage loans. We originate all loans
for portfolio and do not sell loans in the secondary market.
While we will continue to emphasize one- to four-family
lending, we also originate loans secured by multi-family
properties. As of September 30, 2005, $13.1 million, or 38.1%,
of our total loan portfolio consisted of multi-family
residential mortgage loans. During the year ended December 31,
2004, we originated $1.8 million of multi-family residential
mortgage loans.
o Seeking growth through expansion. We believe our best
opportunities for growth are through potential acquisitions or
through de novo branching, although we currently have no
specific plans to acquire an existing financial institution or
open a de novo branch. The capital raised in the offering will
enable us to identify and pursue potential acquisitions or,
should suitable acquisition opportunities not emerge,
undertake de novo branching. Completing an acquisition or
opening a new branch will provide us with an additional
location, thereby increasing the potential number of
households and businesses we could serve. An acquisition also
may provide us with an opportunity to enhance our management
depth and augment our current product offerings. Additionally,
any future acquisition may provide us with an opportunity to
pursue an alternate branding strategy for the Bank by
capitalizing on the brand awareness a potential target may
have already established in its market area.
Historically, we have not experienced rapid growth in our
business, but rather have been able to grow our business
consistently over time. While our business plan provides for
us to seek to grow by pursuing acquisition opportunities as
well as establishing new branches, if we ultimately are not
successful in identifying and completing suitable acquisitions
or establishing new branches, we may not be able to grow our
business as we hope.
o Expanding and diversifying our lending portfolio. While
fixed-rate residential loans will continue to constitute a
significant portion of our total loan portfolio, we intend to
expand our loan origination capabilities to include
adjustable-rate residential loans and home equity loans or
lines of credit to our customers. We also intend to continue
offering loans secured by multi-family properties using our
personalized service to attract larger property owners.
o Offering new products and services. We currently are
developing and seek to develop in the future new services and
deposit products for our customers, such as adjustable-rate
mortgage loans, home equity lines of credit and educational
IRA accounts. We expect to be able to begin offering these new
products and services beginning in the second half of 2006. We
believe that these new products will increase our deposit base
and our fee income.
o Maintaining high asset quality. Historically, we have
maintained and will continue to emphasize strong asset quality
by following conservative underwriting criteria and
originating loans secured by real estate. Our non-performing
assets at September 30, 2005 and December 31, 2004 were
$188,000 and $306,000, respectively, or 0.29% and 0.47% of
total assets.
o Maintaining high levels of interest earning assets. We intend
to maintain our high level of interest earning assets. At
September 30, 2005, our interest earning assets were 96.5% of
total assets and our average interest earning assets were 139%
of average interest-bearing liabilities. These ratios reflect
our low level of fixed assets (as we operate from only one
banking office) and non-accruing loans, strong capital
position and the absence of real estate owned and goodwill on
our balance sheet.
50
o Increasing our real estate lending capacity. The additional
capital raised in the offering will increase our lending
capacity by enabling us to originate more loans and loans with
larger balances. This will permit us to serve borrowers with
larger lending needs and to originate larger loans than we
have in the past.
o Remaining a community-oriented institution. We were
established in Chicago, Illinois in 1905 and have been
operating continuously since that time. We have been, and
continue to be, committed to meeting the financial needs of
the communities in which we operate and remain dedicated to
providing high-quality personal and efficient service to our
customers.
COMPETITION
We face intense competition within our market area both in making loans
and attracting deposits. Cook County, Illinois, and specifically the Chicago
metropolitan area have a high concentration of financial institutions including
money centers and other large commercial banks, community banks and credit
unions. Some of our competitors offer products and services that we currently do
not offer, such as trust services, private banking and Internet banking. As of
June 30, 2005, based on the FDIC's annual Summary of Deposits Report, our market
share of deposits represented 8.78% of the deposits in our zip code and 0.03% of
deposits in Cook County.
Our competition for loans and deposits comes principally from
commercial banks, savings institutions, mortgage banking firms and credit unions
in our market area. We face additional competition for deposits from short-term
money market funds, brokerage firms, mutual funds and insurance companies. Our
primary focus is to build and develop profitable customer relationships across
all lines of business while maintaining our role as a community bank.
MARKET AREA
We operate in a primarily urban market area that has a stable
population and household base. Our primary deposit gathering area is
concentrated in the communities immediately surrounding our headquarters located
in the southwestern Chicago metropolitan area, which includes predominantly
Hispanic neighborhoods. Our primary lending area is broader than our
deposit-gathering area and includes all of Cook County. At September 30, 2005,
95% of our mortgage loan portfolio consisted of loans secured by real estate
located in Cook County, Illinois.
The economy of our market area is characterized by a large number of
small retail establishments and small industry. Major employers in our immediate
market area include county government facilities, large medical complexes,
including hospitals, the University of Illinois at Chicago and a rail and
trucking transportation hub.
LENDING ACTIVITIES
Historically, our principal lending activity has been the origination
of first mortgage loans for the purchase or refinancing of one- to four-family
residential real property. We retain all loans that we originate.
One- to four-family residential real estate mortgage loans represented
$21.2 million, or 61.7%, of our loan portfolio at September 30, 2005. We also
offer multifamily real estate loans. Multifamily real estate loans represented
$13.1 million, or 38.1% of our loan portfolio at September 30, 2005. We also
have a small number of loans secured by deposit accounts (share loans) as an
accommodation to customers.
51
Loan Portfolio Composition. The following table sets forth the
composition of our loan portfolio by type of loan and percentage of portfolio at
the dates indicated.
AT SEPTEMBER 30, AT DECEMBER 31,
---------------------- ----------------------------------------------
2005 2004 2003
---------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
One- to four-family residential
mortgage....................... $21,227 61.73% $19,772 69.21% $22,174 72.37%
Multi-family...................... 13,084 38.05 8,772 30.71 8,459 27.61
------- ------ ------- ------ ------- ------
Total mortgage loans........... 34,311 99.78 28,544 99.92 30,633 99.98
Consumer loans.................... 74 0.22 24 0.08 5 0.02
------- ------ ------- ------ ------- ------
Total loans.................... 34,385 100.00% 28,568 100.00% 30,638 100.00%
======= ====== ======= ====== ======= ======
Less:
Deferred loan origination
fees, net................... 89 89 89
Undisbursed portion of loans... 19 3 3
Allowance for loan losses...... 150 150 150
------- ------- -------
Total loans, net............ $34,127 $28,326 $30,396
======= ======= =======
Loan Portfolio Maturities and Yields. The following table summarizes
the remaining contractual maturity of our loans at December 31, 2004. The table
does not include the effect of possible prepayments. We had no adjustable-rate
loans at December 31, 2004.
ONE- TO
FOUR-FAMILY MULTI FAMILY CONSUMER TOTAL
--------------------- -------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---------- -------- ---------- ------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
Due during the
years ending
December 31, 2005.. $ 3 6.81% $ -- -- $ 24 2.62% $ 27 3.17%
2006 to 2007.......... 92 6.88 -- -- ---- -- 92 6.88
2008 to 2009.......... 308 7.21 18 11.50% ---- -- 326 7.45
2010 to 2014.......... 2,882 6.60 867 6.85 ---- -- 3,749 6.66
2015 to 2024.......... 10,920 6.07 7,667 6.65 ---- -- 18,587 6.31
2025 and beyond....... 5,567 6.36 220 6.15 ---- -- 5,787 6.35
------- ---- ------ ----- ---- ---- ------- ----
Total.............. $19,772 6.25% $8,772 6.67% $ 24 2.62% $28,568 6.37%
======= ====== ==== =======
The following table sets forth the remaining contractual maturity of
fixed-rate loans at December 31, 2004 that are contractually due after December
31, 2005. We had no adjustable-rate loans at December 31, 2004.
DUE AFTER DECEMBER 31, 2005
----------------------------
FIXED TOTAL
--------- ---------
(DOLLARS IN THOUSANDS)
One- to four-family residential mortgage loans... $19,769 $19,769
Multi-family..................................... 8,772 8,772
------- -------
Total mortgage loans............................. 28,541 28,541
------- -------
Total loans...................................... $28,541 $28,541
======= =======
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
that are secured primarily by properties located in Cook County. At September
30, 2005, $21.2 million, or 61.7% of our loan portfolio, consisted of one- to
four-family residential mortgage loans. Included within these one- to
four-family loans were $544,000 in second mortgage loans at September 30, 2005.
At September 30, 2005, the average balance of our one- to four-family loans was
$79,000. Generally, one- to four-family residential mortgage loans are
originated in amounts up to 80% of the appraised value of the property. All one-
to four-family residential loans are fixed-rate loans generally originated for
terms up to 20 years and for owner occupied one- to four-family
52
residential loans, up to 30 years. At September 30, 2005, our largest loan
secured by one- to four-family real estate had a principal balance of $327,000
and was performing in accordance with its repayment terms. We currently do not
offer adjustable-rate mortgage loans.
All one- to four-family residential mortgage loans that we originate
include "due-on-sale" clauses, which give us the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
Our second mortgage loans are fixed-rate and offered in amounts up to
80% of the appraised value of the property securing the loan (including prior
liens) and only where we have secured a first-priority lien on the subject
property. Our second mortgage loans generally are made with maturities of 15
years or less and are secured by the borrower's property. Our procedures for
underwriting these loans include an assessment of an applicant's prior loan
history, credit history and an assessment of the value of the collateral in
relation to the proposed loan amount.
Regulations limit the amount that a savings institution may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal of the property at the time the loan is originated.
For all loans originated by the bank, we utilize outside independent appraisers
approved by the bank's board of directors. All borrowers are required to obtain
title insurance. We also require homeowner's insurance and fire and casualty
insurance and, where circumstances warrant, flood insurance on properties
securing real estate loans.
Multi-Family Real Estate Loans. Loans secured by multi-family real
estate totaled $13.1 million, or 38.1%, of our total loan portfolio at September
30, 2005. Multi-family real estate loans generally are secured by small
apartment buildings with fewer than 10 units and includes two- to four-family
residential properties that may also include a commercial or income-producing
element, such as a first floor store-front business. Generally, all of our
multi-family real estate loans are secured by properties located within our
lending area. At September 30, 2005, we had 79 multi-family real estate loans
with an average principal balance of $166,000, and the largest multi-family real
estate loan had a principal balance of $1.3 million. As of September 30, 2005,
none of our loans secured by multi-family real estate were non-performing.
Multi-family real estate loans are offered with fixed interest rates.
Multi-family loans generally are originated for terms of up to 20 years, and in
some cases for owner-occupied multi-family properties, up to 30 years.
We consider a number of factors in originating multi-family real estate
loans. We evaluate the qualifications and financial condition of the borrower
(including credit history), profitability and expertise, as well as the value
and condition of the mortgaged property securing the loan. When evaluating the
qualifications of the borrower, we consider the financial resources of the
borrower, the borrower's experience in owning or managing similar property and
the borrower's payment history with us and other financial institutions. In
evaluating the property securing the loan, the factors we consider include the
net operating income of the mortgaged property before debt service and
depreciation, the debt service coverage ratio (the ratio of net operating income
to debt service), and the ratio of the loan amount to the appraised value of the
mortgaged property. Multi-family real estate loans are originated in amounts up
to 75% of the lower of the sale price or the appraised value of the mortgaged
property securing the loan and up to 80% if owner occupied. All multi-family
real estate loans are appraised by outside independent appraisers approved by
the bank's board of directors. All multi-family borrowers are required to sign
notes in their individual capacity.
While loans secured by multi-family real estate offer larger balances
and higher yields, such loans generally involve a greater degree of credit risk
than one- to four-family residential mortgage loans. This increased credit risk
is a result of several factors, including the concentration of principal in a
limited
53
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multi-family real estate typically depends upon the successful operation of the
real estate property securing the loan. If the cash flow from the project is
reduced, the borrower's ability to repay the loan may be impaired.
Consumer Loans. We offer a small number of consumer loans, secured by
deposits to our customers. Our consumer loans amounted to $74,000, or 0.2%, of
our total loan portfolio at September 30, 2005.
Origination and Servicing of Loans. Loan origination activities are
primarily concentrated in Cook County. New loans are generated primarily from
current and former borrowers, walk-in customers, customer referrals, realtors
and other parties with whom we do business, and from the efforts of employees
and advertising. Loan applications are underwritten and processed at our single
banking office. We service all loans that we originate.
Loan Approval Procedures and Authority. The loan approval process is
intended to assess the borrower's ability to repay the loan, the viability of
the loan, and the adequacy of the value of the property that will secure the
loan. To assess the borrower's ability to repay, we review the employment and
credit history and information on the historical and projected income and
expenses of mortgagors. All one- to four-family loans up to $500,000 and all
multi-family loans up to $400,000 may be approved by any two members of the loan
committee of the board of directors, which committee consists of the President
and three outside directors. All loans secured by deposits require the approval
of the President. All other loans must be approved by the bank's board of
directors.
NON-PERFORMING AND PROBLEM ASSETS
We commence collection efforts when a loan becomes 15 days past due
with a system-generated late-charge notice. Subsequent delinquent notices are
issued and the account is monitored on a regular basis thereafter. Personal,
direct contact with the borrower is attempted early in the collection process as
a courtesy reminder and later to determine the reason for the delinquency and to
safeguard our collateral. When a loan is more than 30 days past due, the credit
file is reviewed and, if deemed necessary, information is updated or confirmed
and collateral re-evaluated. We make efforts to contact the borrower and develop
a plan of repayment to cure the delinquency. A summary report of all loans 90
days or more past due is reported to the board of directors on a monthly basis.
If no repayment plan is in process, the file is referred to counsel for the
commencement of foreclosure or other collection efforts.
Mortgage loans are reviewed on a regular basis and such loans are
placed on non-accrual status when they become more than 90 days delinquent. When
loans are placed on a non-accrual status, unpaid accrued interest is fully
reversed, and further income is recognized only to the extent received.
Non-Performing Loans and Non-Performing Assets. Our non-performing
loans and non-performing assets are as shown in the table below for the periods
indicated. At each date presented, we had no troubled debt restructurings (loans
for which a portion of interest or principal has been forgiven and loans
modified at interest rates materially less than current market rates).
54
AT SEPTEMBER 30, AT DECEMBER 31,
---------------- -----------------------
2005 2004 2003
---------------- -----------------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family..................... $188 $306 $201
Multi-family............................ -- -- --
Consumer................................ -- -- --
---- ---- ----
Total non-accrual loans.............. $188 $306 $201
Accruing loans delinquent 90 days or more:
One- to four-family..................... -- -- --
Multi-family............................ -- -- --
Consumer................................ -- -- --
---- ---- ----
Total non-performing loans........... $188 $306 $201
Real estate owned:
One- to four-family..................... -- -- --
Multi-family............................ -- -- --
Consumer................................ -- -- --
---- ---- ----
Total real estate owned.............. -- -- --
Total non-performing assets................ $188 $306 $201
==== ==== ====
Allowance for loan losses attributable to
non-performing loans.................... -- -- --
Ratios:
Non-performing loans to total loans..... 0.55% 1.07% 0.66%
Non-performing assets to total assets... 0.29 0.47 0.30
The following table sets forth certain information with respect to our
loan portfolio delinquencies at the dates indicated.
LOANS DELINQUENT FOR
-----------------------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
--------------------- -------------------- --------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 2005
One- to four-family..... 6 $428 3 $188 9 $616
Multi-family............ -- -- -- -- -- --
Consumer................ -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total................ 6 $428 3 $188 9 $616
==== ==== ==== ==== ==== ====
AT DECEMBER 31, 2004
One- to four-family..... 6 $336 3 $306 9 $642
Multi-family............ 1 206 -- -- 1 206
Consumer................ -- -- -- -- -- --
---- ---- ---- ---- -- ----
Total................ 7 $542 3 $306 10 $848
==== ==== ==== ==== ==== ====
AT DECEMBER 31, 2003
One- to four-family..... 7 $402 3 $201 10 $603
Multi-family............ -- -- -- -- -- --
Consumer................ -- -- -- -- -- --
---- ---- ---- ---- -- ----
Total................ 7 $402 3 $201 10 $603
==== ==== ==== ==== ==== ====
Real Estate Owned. Real estate we acquire as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until sold.
When property is acquired it is recorded at fair market value at the date of
foreclosure, establishing a new cost basis. Holding costs and declines in fair
value result in charges to expense after acquisition. At September 30, 2005, we
held no real estate owned.
55
Classified Assets. OTS regulations provide that loans and other assets
considered to be of lesser quality be classified as "substandard," "doubtful" or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Not all
classified assets constitute non-performing assets.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the Office of Thrift Supervision which can
order the establishment of additional general or specific loss allowances.
At September 30, 2005, none of our assets were classified as
substandard, doubtful or loss. The loan portfolio is reviewed on a regular basis
to determine whether any loans require classification in accordance with
applicable regulations.
ALLOWANCE FOR LOAN LOSSES
Our allowance for loan losses is maintained at a level necessary to
absorb probable incurred loan losses. Management, in determining the allowance
for loan losses, considers the losses inherent in our loan portfolio and changes
in the nature and volume of loan activities, along with the general economic and
real estate market conditions. The Bank's loan committee determines the type of
loans to be evaluated for impairment on an individual basis and the types of
loan to be evaluated on a collective basis based on similarities in loss
performance, such as our one-to-four family residential loans and multifamily
residential loans. We then utilize a two-tier approach: (1) for the types of
loans to be evaluated on an individual basis, identification of impaired loans
and establishment of specific loss allowances on such loans, and (2) for the
types of loans to be evaluated on a collective basis, establishment of general
valuation allowances.
Once a loan becomes delinquent, we may establish a specific loan loss
allowance should we determine that the loan is impaired. A loan will be
considered impaired when, based on current information and events (such as,
among other things, delinquency status, the size of the loan, the type and
market value of collateral and the financial condition of the borrower), it is
probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All loans identified as impaired are
evaluated independently. We do not aggregate such loans for evaluation purposes.
Specific allowances for impaired loans are established based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical measure, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
General loan loss allowances are based upon historical loan loss
experience as adjusted after evaluation of other factors that may or may not be
present, including changes in the composition of the loan portfolio, current
national and local economic conditions, changes in lending policies and
procedures
56
and personnel changes in our lending management or staff. The allowance is
increased through provisions charged against current earnings and recoveries of
previously charged-off loans. Loans that are determined to be uncollectible are
charged against the allowance. While management uses available information to
recognize probable and reasonably estimable loan losses, future loss provisions
may be necessary based on changing economic conditions or other factors.
Payments received on impaired loans are applied first to accrued interest
receivable and then to principal. The allowance for loan losses as of September
30, 2005 was maintained at a level that represents management's best estimate of
probable incurred losses in the loan portfolio.
In addition, the Office of Thrift Supervision, as an integral part of
their examination process, periodically reviews our allowance for loan losses.
Such agencies may require that we recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
The following table sets forth activity in our allowance for loan
losses for the periods indicated.
AT OR FOR THE NINE MONTHS AT OR FOR THE YEARS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------- -------------------
2005 2004 2004 2003
-------- -------- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year.............. $150 $150 $150 $150
Charge-offs:
One- to four-family.................... -- -- -- --
Multi-family........................... -- -- -- --
Consumer............................... -- -- -- --
Total charge-offs................... -- -- -- --
Recoveries:
One- to four-family.................... -- -- -- --
Multi-family........................... -- -- -- --
Consumer............................... -- -- -- --
Total recoveries.................... -- -- -- --
Net (charge-offs) recoveries.............. -- -- -- --
Provision for loan losses................. -- -- -- --
---- ---- ---- ----
Balance at end of year.................... $150 $150 $150 $150
==== ==== ==== ====
Ratios:
Net charge-offs to average loans
outstanding............................ -- -- -- --
Allowance for loan losses to
non-performing loans................... 0.80x 0.70x 0.49x 0.75x
Allowance for loan losses to total loans.. 0.44% 0.51% 0.53% 0.49%
The Bank has not charged-off a loan since 1996, when it charged-off a
loan with an outstanding principal amount of $19,000.
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category and the percent of loans in each category to total loans at
the dates indicated. The allowance for loan losses allocated to each category is
not necessarily indicative of future losses in any particular category and does
not restrict the use of the allowance to absorb losses in other categories.
57
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
2005 2004
----------------------------------------- --------------------------------------
PERCENT
OF
PERCENT LOANS
OF LOANS IN EACH
LOAN IN EACH ALLOWANCE LOAN CATEGORY
ALLOWANCE BALANCES CATEGORY FOR BALANCES TO
FOR LOAN BY TO TOTAL LOAN BY TOTAL
LOSSES CATEGORY LOANS LOSSES CATEGORY LOANS
----------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
One- to four-family....... $ 50 $21,227 61.73% $ 65 $20,934 70.84%
Multi-family.............. 100 13,084 38.05 85 8,599 29.10
Consumer.................. -- 74 0.22 -- 20 0.06
---- ------- ------ ---- ------- ------
Total allowance........ $150 $34,385 100.00% $150 $29,553 100.00%
==== ======= ====== ==== ======= ======
AT DECEMBER 31,
----------------------------------------------------------------------------------
2004 2003
----------------------------------------- --------------------------------------
PERCENT
OF
PERCENT LOANS
OF LOANS IN EACH
LOAN IN EACH ALLOWANCE LOAN CATEGORY
ALLOWANCE BALANCES CATEGORY FOR BALANCES TO
FOR LOAN BY TO TOTAL LOAN BY TOTAL
LOSSES CATEGORY LOANS LOSSES CATEGORY LOANS
----------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
One- to four-family......... $ 62 $19,772 69.21% $ 68 $22,174 72.37%
Multi-family................ 88 8,772 30.71 82 8,459 27.61
Consumer.................... -- 24 0.08 -- 5 0.02
---- ------- ------ ---- ------- ------
Total allowance.......... $150 $28,568 100.00% $150 $30,638 100.00%
==== ======= ====== ==== ======= ======
Each quarter, management evaluates the total balance of the allowance
for loan losses based on several factors that are not loan specific, but are
reflective of the inherent losses in the loan portfolio. This process includes,
but is not limited to, a periodic review of loan collectibility in light of
historical experience, the nature and volume of loan activity, conditions that
may affect the ability of the borrower to repay, underlying value of collateral,
if applicable, and economic conditions in our immediate market area. First, we
group loans by delinquency status. All loans 90 days or more delinquent are
evaluated individually, based primarily on the value of the collateral securing
the loan. Specific loss allowances are established as required by this analysis.
All loans for which a specific loss allowance has not been assigned are
segregated by type and delinquency status and a loss allowance is established by
using loss experience data and management's judgment concerning other matters it
considers significant. The allowance is allocated to each category of loan based
on the results of the above analysis.
This analysis process is inherently subjective, as it requires us to
make estimates that are susceptible to revisions as more information becomes
available. Although we believe that we have established the allowance at levels
to absorb probable and estimable losses, future additions may be necessary if
economic or other conditions in the future differ from the current environment.
INVESTMENTS
Investments and Mortgage-backed Securities. Our investment portfolio at
September 30, 2005 included $9.1 million in U.S. government and agency
obligations which are all classified as available-for-sale. Our investment
policy objectives are to maintain liquidity, manage risk and maximize returns
within the guidelines established by the bank's board of directors, which
specify eligible investments and approved securities dealers.
Our investment portfolio also includes mortgage-backed securities and
collateralized mortgage obligations, all of which are guaranteed by the United
States government or agencies thereof, all of which are classified as
available-for-sale. At September 30, 2005, our mortgage-backed securities
portfolio
58
totaled $13.1 million, or 20.0% of total assets. The portfolio consisted of $8.0
million in fixed-rate mortgage-backed securities, and $5.1 million in
adjustable-rate mortgage-backed securities, all guaranteed by the Federal Home
Loan Mortgage Corporation, or FHLMC, the Federal National Mortgage Association,
or FNMA, or the Government National Mortgage Association, or GNMA.
We also have investments in Freddie Mac common stock and preferred
stock, and in several mutual funds which are invested in U.S. government and
agency obligations and mortgage-backed securities guaranteed by FHLMC, FNMA or
GNMA.
Available-for-Sale Portfolio. The following table sets forth the
composition of our available-for-sale portfolio at the dates indicated.
AT SEPTEMBER 30, AT DECEMBER 31,
------------------- -----------------------------------------------
2005 2004 2003
------------------- -------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- --------
(IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. government and agency
obligations.................. $ 9,194 $ 9,082 $13,186 $13,152 $15,971 $16,077
Mutual funds.................... 2,227 2,181 2,165 2,151 2,098 2,103
FHLMC stock..................... 508 936 515 1,686 539 2,878
MORTGAGE-BACKED SECURITIES:
GNMA............................ 2,373 2,356 2,931 2,939 945 986
FNMA............................ 6,094 6,009 6,388 6,427 5,476 5,519
FHLMC........................... 4,009 3,947 4,222 4,208 3,133 3,133
Collateralized mortgage
obligations.................. 771 759 996 1,033 1,011 1,018
------- ------- ------- ------- ------- -------
Total securities available for
sale......................... $25,176 $25,270 $30,403 $31,596 $29,173 $31,714
======= ======= ======= ======= ======= =======
Portfolio Maturities and Yields. The composition and maturities of the
investment securities portfolio and the mortgage-backed securities portfolio at
September 30, 2005 are summarized in the following table. Maturities are based
on the final contractual payment dates and do not reflect the impact of
prepayments or early redemptions that may occur. Mutual funds and FHLMC stock
are not included because they do not have contractual maturity dates.
59
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES:
U.S. government and agency
obligations.............. $ 500 4.38% $ 5,700 3.43% $2,994 3.17%
MORTGAGE-BACKED SECURITIES:
GNMA........................ -- -- 115 6.81 -- --
FNMA........................ -- -- 324 6.31 2,888 4.52
FHLMC....................... -- -- 389 4.67 1,255 4.75
Collateralized mortgage
obligations.............. -- -- -- -- -- --
------ ---- ------- ------- ------ ----
Total securities available
for sale................. $ 500 4.38% $ 6,528 3.70% $7,137 4.00%
====== ======= ======
MORE THAN TEN YEARS TOTAL SECURITIES
---------------------- ------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED FAIR AVERAGE
COST YIELD COST VALUE YIELD
--------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES:
U.S. government and agency
securities............... $ -- -- $ 9,194 $ 9,082 3.40%
MORTGAGE-BACKED SECURITIES:
GNMA........................ 2,258 4.37% 2,373 2,356 4.49
FNMA........................ 2,882 4.77 6,094 6,009 4.74
FHLMC....................... 2,365 4.96 4,009 3,947 4.87
Collateralized mortgage
obligations.............. 771 3.27 771 759 3.27
------ ---- =------ ------- -----
Total securities available
for sale................. $8,276 4.58% $22,441 $22,153 4.13%
====== ======= =======
SOURCES OF FUNDS
General. Deposits have traditionally been our primary source of funds
for use in lending and investment activities. In addition to deposits, funds are
derived from scheduled loan payments, investment calls, maturities and sales,
loan prepayments, retained earnings and income on earning assets. During the
nine months ended September 30, 2005, sales of investment securities consisted
of $484,000 of FHLMC common stock. During 2004 and 2003, we sold $1.6 million
and $275,000 of FHLMC common stock, respectively. While scheduled loan payments
and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest
rates, market conditions and levels of competition. Borrowings from the Federal
Home Loan Bank of Chicago may be used in the short term to compensate for
reductions in deposits and to fund loan growth.
Deposits. Deposits are not actively solicited outside of the Chicago
metropolitan area, and a majority of our depositors are persons who work or
reside in Cook County, Illinois. We offer deposit instruments, including
passbook savings (without check drawing features) and fixed-term certificates of
deposit. Deposit account terms vary, with the principal differences being the
minimum balance required,
60
the amount of time the funds must remain on deposit and the interest rate.
Beginning in 2003, we began offering non-interest-bearing checking accounts. We
do not accept brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market rates, liquidity
requirements, rates paid by competitors and growth goals. To attract and retain
deposits, we rely upon personalized customer service, long-standing
relationships and generally rates in the upper half of those offered in our
market area.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates,
competition and our single office location. We believe the products we offer
allow us to be competitive in obtaining funds and responding to changes in
consumer demand. Based on historical experience, management believes our
deposits are relatively stable. However, the ability to attract and maintain
certificates of deposit, and the rates paid on these deposits, have been and
will continue to be significantly affected by market conditions. At September
30, 2005, $21.6 million, or 47.7% of our deposit accounts were certificates of
deposit, of which $18.8 million had maturities of one year or less.
The following table sets forth the distribution of total deposit
accounts, by account type, at the dates indicated.
AT SEPTEMBER 30, AT DECEMBER 31,
---------------------------- ------------------------------------------------------------
2005 2004 2003
---------------------------- ------------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE BALANCE PERCENT RATE
------- ------- ---- ------- ------- ---- ------- ------- -----
(DOLLARS IN THOUSANDS)
Savings deposits......... $23,333 51.43% 1.19% $22,552 50.60% 1.15% $24,496 52.09% 1.09%
Certificates of
deposit............... 21,630 47.67 2.66 21,936 49.21 2.03 22,402 47.64 2.18
Non-interest-bearing
checking accounts..... 410 0.90 -- 83 0.19 -- 128 0.27 --
------- ----- ----- ------- ------ ---- ------- ------ ----
Total deposits.. $45,373 100.00% 1.88% $44,571 100.00% 1.58% $47,026 100.00% 1.60%
======= ====== ======= ====== ======= ======
The following table sets forth certificates of deposit by time
remaining until maturity as of September 30, 2005.
MATURITY
------------------------------------------------
OVER 3 OVER 6 OVER
3 MONTHS TO 6 TO 12 12
OR LESS MONTHS MONTHS MONTHS TOTAL
------- ------ ------ ------ -----
(IN THOUSANDS)
Certificates of deposit less than $100,000 $4,928 $4,867 $3,552 $2,092 $15,439
Certificates of deposit of $100,000 or
more(1)................................... 2,450 923 2,041 777 6,191
------ ------ ------ ------ -------
Total of certificates of deposit.......... $7,378 $5,790 $5,593 $2,869 $21,630
====== ====== ====== ====== =======
<FN>
- --------------------------------
(1) The weighted average interest rates for these accounts, by maturity
period, are: 2.34% for 3 months or less; 2.81% for 3 to 6 months; 3.08%
for 6 to 12 months; and 3.84% for over 12 months. The overall weighted
average interest rate for accounts of $100,000 or more was 2.84%.
</FN>
61
The following table sets forth, by interest rate range, information
concerning certificates of deposit at the dates indicated.
AT SEPTEMBER 30, 2005
-----------------------------------------------------------------------------------
PERIOD TO MATURITY
-----------------------------------------------------------------------------------
MORE
ONE TO TWO TO THAN
LESS THAN TWO THREE THREE PERCENT
ONE YEAR YEARS YEARS YEARS TOTAL OF TOTAL
--------- ------ ----- ----- ----- --------
(DOLLARS IN THOUSANDS)
INTEREST RATE RANGE:
1.99% and below........ $ 1,182 $ -- $ -- $ -- $ 1,182 5.46%
2.00% to 2.99%......... 15,635 628 180 -- 16,443 76.02%
3.00% to 3.99%......... 1,612 427 725 202 2,966 13.71
4.00% to 4.99%......... 332 58 303 -- 693 3.20
5.00% to 5.99%......... -- -- -- 346 346 1.60
------- ------ ------ ---- ------- ------
Total............... $18,761 $1,113 $1,208 $548 $21,630 100.00%
======= ====== ====== ==== ======= ======
BORROWINGS
Due to our current level of available funds for operations, we
historically have not used borrowings. If needed, we may obtain advances from
the Federal Home Loan Bank of Chicago provided certain standards related to
creditworthiness are met.
PROPERTIES
The following table provides certain information with respect to our
banking office as of December 31, 2004:
NET BOOK VALUE
LOCATION LEASED OR OWNED YEAR ACQUIRED OF REAL PROPERTY
- ------------------------ --------------- ------------- ----------------
2212 West Cermak Road Owned 1964 $216,000
Chicago, Illinois 60608
The net book value of our premises, land and equipment was $357,000 at
December 31, 2004.
SUBSIDIARY ACTIVITIES
Mutual Bancorp's only subsidiary will be the Bank. The Bank currently
operates one subsidiary, EMEFES Service Corporation, which provides insurance
brokerage services to our customers. Brokerage commissions earned by EMEFES
totaled approximately $3,000 for the nine months ended September 30, 2005.
Presently, there are no plans to expand the insurance brokerage operations.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings as a defendant
other than routine legal proceedings occurring in the ordinary course of
business. At September 30, 2005, we were not involved in any legal proceedings,
the outcome of which would be material to our financial condition or results of
operations.
62
PERSONNEL
As of September 30, 2005, we had 14 full-time employees and four
part-time employees. Our employees are not represented by any collective
bargaining group. Management believes that we have good relations with our
employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. We are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. Our federal
income tax returns have not been audited by the Internal Revenue Service during
the past five years. The following discussion of federal income taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to Mutual MHC,
Mutual Bancorp or the Bank.
Method of Accounting. For federal income tax purposes, Mutual MHC and
the Bank currently report their income and expenses on the accrual method of
accounting and use a tax year ending December 31 for filing their federal income
tax returns.
Bad Debt Reserves. Prior to the Small Business Protection Act of 1996
(the "1996 Act"), the Bank was permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at our taxable income. The
Bank was required to use the reserve method in computing its bad debt deduction
beginning with its 1997 federal tax return (similar to commercial banks).
Savings institutions were required to recapture any excess reserves over those
established as of December 31, 1987 (base year reserve). At September 30, 2005
the Bank had no remaining reserves subject to recapture.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if the Bank failed to meet certain thrift asset and definitional tests.
Federal legislation has eliminated these thrift related recapture rules. At
December 31, 2004, our total federal pre-1988 base year reserve was
approximately $2.6 million. However, under current law, pre-1988 base year
reserves remain subject to recapture if the Bank makes certain non-dividend
distributions, repurchases any of its stock, pays dividends in excess of tax
earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended
(the "Code" or "Internal Revenue Code"), imposes a corporate alternative minimum
tax ("AMT") at a rate of 20% on a base of regular taxable income plus or minus
certain AMT adjustments, plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in
excess of an exemption amount and the AMT exceeds the regular corporate income
tax. Net operating losses can generally offset no more than 90% of AMTI. Certain
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Bank has not been subject to the alternative
minimum tax and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At September 30, 2005, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Mutual Bancorp may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The
63
corporate dividends-received deduction is 80% in the case of dividends received
from corporations with which a corporate recipient owns at least 20% of the
stock of the corporation but does not file a consolidated return with such
corporation, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends received or
accrued on their behalf.
STATE TAXATION
We are required to file Illinois income tax returns and pay tax at a
stated tax rate of 7.3% of Illinois taxable income. For these purposes, Illinois
taxable income generally means federal taxable income subject to certain
adjustments, including without limitation, the exclusion of interest income on
United States obligations.
SUPERVISION AND REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation, or FDIC, as the insurer of its deposits. The Bank
is a member of the Federal Home Loan Bank System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund, or
SAIF, managed by the FDIC. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and, under certain circumstances, the FDIC to evaluate
the Bank's safety and soundness and compliance with various regulatory
requirements. This regulatory structure is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on us and
our operations. Mutual MHC, as a savings and loan holding company, is required
to file certain reports with, is subject to examination by, and otherwise must
comply with the rules and regulations of the OTS. Mutual Bancorp will also be
subject to those rules as well as the regulations of the Securities and Exchange
Commission under the federal securities laws.
Certain of the regulatory requirements that are or will be applicable
to us are described below. This description of statutes and regulations is not
intended to be a complete explanation of such statutes and regulations and their
effects on us and is qualified in its entirety by reference to the actual
statutes and regulations.
REGULATION OF FEDERAL SAVINGS INSTITUTIONS
Business Activities. Federal law and regulations, primarily the Home
Owners' Loan Act and the regulations of the OTS, govern the activities of
federal savings institutions, such as the Bank. These laws and regulations
delineate the nature and extent of the activities in which federal savings
institutions may engage. In particular, certain lending authority for federal
savings institutions, commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of an institution's capital
or assets.
Branching. Federal savings institutions are authorized to establish
branch offices in any state or states of the United States and its territories,
subject to the approval of the OTS.
64
Capital Requirements. The OTS's capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum of a greater than 2%
tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS system) and, together with the risk-based
capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions generally must deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard requires federal savings institutions
to maintain Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight factor
of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships, non-withdrawable
accounts and remaining goodwill. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At September 30, 2005, the Bank met each of these capital
requirements.
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a leverage ratio of less than 4% (or
less than 3% for institutions with the highest examination rating) is considered
to be "undercapitalized." A savings institution that has a total risk-based
capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator within specified time frames for an institution that
is "critically undercapitalized." An institution must file a capital restoration
plan with the OTS within 45 days of the date it receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. "Significantly undercapitalized" and
"critically undercapitalized" institutions are subject to more extensive
mandatory regulatory actions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
65
Loans to One Borrower. Federal law provides that savings institutions
generally are subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit, if
not fully secured, to a single or related group of borrowers in excess of 15% of
its unimpaired capital and surplus. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if fully secured by specified
readily-marketable collateral.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. If the OTS
determines that a savings institution fails to meet any standard prescribed by
the guidelines, the OTS may require the institution to submit an acceptable plan
to achieve compliance with the standard. The Bank has not received any notice
that it has failed to meet any standard prescribed by the guidelines.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to stockholders of
another institution in a cash-out merger. Under the regulations, an application
to and the prior approval of the OTS is required before any capital distribution
if the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (i.e., generally, examination and Community
Reinvestment Act ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution must still provide prior notice to
the OTS of the capital distribution if, like the bank, it is a subsidiary of a
holding company. If the bank's capital were ever to fall below its regulatory
requirements or the OTS notified it that it was in need of increased
supervision, its ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution that would
otherwise be permitted by the regulation, if the agency determines that such
distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. Federal law requires savings institutions
to meet a qualified thrift lender test. Under the test, a savings institution is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments." As of September 30, 2005, the Bank maintained 97.84% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
Transactions with Related Parties. Federal law limits the bank's
authority to lend to, and engage in certain other transactions with
(collectively, "covered transactions"), "affiliates" (e.g., any company that
controls or is under common control with an institution, including Mutual
Bancorp, Mutual MHC and their non-savings institution subsidiaries). The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. Loans and other specified
transactions with affiliates are required to be secured by collateral in
66
an amount and of a type described in federal law. The purchase of low quality
assets from affiliates is generally prohibited. Transactions with affiliates
must be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The bank's authority to extend credit to its executive officers,
directors and 10% stockholders ("insiders"), as well as entities affiliated with
such persons, is limited. The Bank is restricted both in the individual and the
aggregate amount of loans it may make to insiders based, in part, on the bank's
capital position and the requirement that certain board approval procedures to
be followed. Such loans must be made on terms substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees. There
are additional restrictions applicable to loans to executive officers.
Enforcement. The OTS has primary enforcement responsibility over
federal savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order, to removal of officers and/or directors, to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has authority to recommend to the director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Assessments. Federal savings institutions must pay assessments to the
OTS to fund its operations. The general assessments, paid on a semi-annual
basis, are based upon the savings institution's: total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
thrift financial report; condition; and complexity of business.
Insurance of Deposit Accounts. The FDIC maintains a risk-based
assessment system by which institutions are assigned to one of three categories
based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for SAIF member institutions are determined semi-annually by the FDIC and
currently range from zero basis points of assessable deposits for the healthiest
institutions to 27 basis points of assessable deposits for the riskiest.
The FDIC has authority to increase insurance assessments. A material
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the bank. Management cannot
predict what insurance assessment rates will be in the future.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the SAIF. During the calendar
year ended December 31, 2004, Financing Corporation payments for SAIF members
averaged 0.0148% of assessable deposits. At September 30, 2005, the Bank had
paid all fees and assessments for deposit insurance.
67
The FDIC may terminate an institution's insurance of deposits upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. We do not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank provides a central credit facility primarily for member
institutions. The Bank, as a member of the Federal Home Loan Bank of Chicago, is
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount at least equal to 1.0% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 5% of its advances (borrowings) from the Federal Home Loan
Bank, whichever is greater. The Bank was in compliance with this requirement
with an investment in Federal Home Loan Bank stock at September 30, 2005 of
$496,000.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, our net interest income would likely
also be reduced.
Community Reinvestment Act. Under the Community Reinvestment Act, as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution.
The Community Reinvestment Act requires public disclosure of an
institution's rating and requires the OTS to provide a written evaluation of a
bank's Community Reinvestment Act performance utilizing a four-tiered
descriptive rating system. The Bank received a "satisfactory" rating as a result
of its most recent Community Reinvestment Act assessment.
Liquidity. A federal savings institution is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
Prohibitions Against Tying Arrangements. Federal savings institutions
are prohibited, subject to some exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At September
30, 2005, the Bank was in compliance with these reserve requirements.
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HOLDING COMPANY REGULATION
General. Mutual MHC is, and Mutual Bancorp will be, savings and loan
holding companies within the meaning of federal law. As such, they are
registered with the OTS and are subject to OTS regulations, examinations,
supervision, reporting requirements and regulations concerning corporate
governance and activities. In addition, the OTS has enforcement authority over
Mutual Bancorp and Mutual MHC and their non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the bank.
Restrictions Applicable to Mutual Holding Companies. According to
federal law and OTS regulations, a mutual holding company, such as Mutual MHC,
may generally engage in the following activities: (1) investing in the stock of
a bank; (2) acquiring a mutual association through the merger of such
association into a bank subsidiary of such holding company or an interim bank
subsidiary of such holding company; (3) merging with or acquiring another
holding company, one of whose subsidiaries is a bank; and (4) any activity
approved by the Federal Reserve Board for a bank holding company or financial
holding company or previously approved by OTS for multiple savings and loan
holding companies.
Recent legislation, which authorized mutual holding companies to engage
in activities permitted for financial holding companies, expanded the authorized
activities. Financial holding companies may engage in a broad array of financial
service activities including insurance and securities.
Federal law prohibits a savings and loan holding company, including a
federal mutual holding company, from directly or indirectly, or through one or
more subsidiaries, acquiring more than 5% of the voting stock of another savings
institution, or its holding company, without prior written approval of the OTS.
Federal law also prohibits a savings and loan holding company from acquiring
more than 5% of a company engaged in activities other than those authorized for
savings and loan holding companies by federal law; or acquiring or retaining
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies; and (2) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
If the savings institution subsidiary of a savings and loan holding
company fails to meet the qualified thrift lender test, the holding company must
register with the Federal Reserve Board as a bank holding company within one
year of the savings institution's failure to so qualify.
Stock Holding Company Subsidiary Regulation. The OTS has adopted
regulations governing the two-tier mutual holding company form of organization
and subsidiary stock holding companies that are controlled by mutual holding
companies. We intend to adopt this form of organization and it will continue in
place after the stock offering. Mutual Bancorp is the proposed stock holding
company subsidiary of Mutual MHC. Mutual Bancorp will be permitted to engage in
activities that are permitted for Mutual MHC subject to the same restrictions
and conditions.
69
Waivers of Dividends by Mutual Federal Bancorp MHC. OTS regulations
require Mutual MHC to notify the OTS if it proposes to waive receipt of
dividends from Mutual Bancorp. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings institution subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered as a restriction on the retained earnings of the
savings institution, which restriction, if material, is disclosed in the public
financial statements of the savings institution as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, [in accordance with SFAS 5,] where the savings institution
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; and (iv) the
amount of any waived dividend is considered as having been paid by the savings
institution in evaluating any proposed dividend under OTS capital distribution
regulations. We anticipate that Mutual MHC will waive dividends that Mutual
Bancorp may pay, if any.
Conversion of Mutual MHC to Stock Form. OTS regulations permit Mutual
MHC to convert from the mutual form of organization to the capital stock form of
organization. There can be no assurance when, if ever, a conversion transaction
will occur, and Mutual MHC's board of directors has no current intention or plan
to undertake a conversion transaction. In a conversion transaction a new holding
company would be formed as the successor to Mutual MHC, Mutual MHC's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the new holding company. In a conversion
transaction, each share of Mutual Bancorp common stock held by stockholders
other than Mutual MHC would be automatically converted into a number of shares
of common stock of the new holding company based on an exchange ratio determined
at the time of conversion that ensures that stockholders other than Mutual MHC
own the same percentage of common stock in the new holding company as it owned
in Mutual Bancorp immediately before conversion. Under OTS regulations,
stockholders other than Mutual MHC would not be diluted because of any dividends
waived by Mutual Bancorp (and waived dividends would not be considered in
determining an appropriate exchange ratio), in the event Mutual MHC converts to
stock form. The total number of shares held by stockholders other than Mutual
MHC after a conversion transaction also would be increased by any purchases by
stockholders other than Mutual MHC in the stock offering conducted as part of
the conversion transaction.
Acquisition of Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the OTS if any person (including a company), or
group acting in concert, seeks to acquire "control" of a savings and loan
holding company or savings institution. An acquisition of "control" can occur
upon the acquisition of 10% or more of the voting stock of a savings and loan
holding company or savings institution or as otherwise defined by the OTS. Under
the Change in Bank Control Act, the OTS has 60 days from the filing of a
complete notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of
the acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
SARBANES-OXLEY ACT OF 2002
Through the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, public
companies (including publicly held holding companies such as Mutual Bancorp)
became subject to a broad range of corporate governance and accounting measures.
Sarbanes-Oxley's principal provisions, many of which have been interpreted and
implemented through recently adopted rules, provide for and include, among other
things,
70
corporate governance and responsibility measures, including the requirement that
the chief executive officer and chief financial officer of a public company
certify its financial statements.
In addition, Section 404 of Sarbanes-Oxley, as implemented, requires
that public companies report management's evaluation of the effectiveness of the
company's internal control over financial reporting. Additionally, such
companies' senior management must evaluate, as of the end of each fiscal period,
any change in the company's internal control over financial reporting that
occurred during the period that materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
Recently, however, the SEC has extended the Section 404 compliance deadline for
smaller public companies, such as, following the offering, Mutual Bancorp, while
the costs and other burdens of Section 404 on small issuers is further
evaluated.
Although we anticipate that we will incur additional expense in
complying with the provisions of Sarbanes-Oxley and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
PRIVACY REQUIREMENTS OF THE GLBA
The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial
modernization for commercial banks, savings banks, securities firms, insurance
companies, and other financial institutions operating in the United States.
Among other provisions, the Gramm-Leach-Bliley Act places limitations on the
sharing of consumer financial information with unaffiliated third parties.
Specifically, the Gramm-Leach-Bliley Act requires all financial institutions
offering financial products or services to retail customers to provide such
customers with the financial institution's privacy policy and provide such
customers the opportunity to "opt out" of the sharing of personal financial
information with unaffiliated third parties.
ANTI-MONEY LAUNDERING
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the
"USA PATRIOT Act") significantly expanded the responsibilities of financial
institutions, including savings and loan associations, in preventing the use of
the U.S. financial system to fund terrorist activities. Title III of the USA
PATRIOT Act requires financial institutions operating in the United States to
develop and maintain new anti-money laundering compliance programs, due
diligence policies and controls to ensure the detection and reporting of money
laundering. Such required compliance programs are intended to supplement
existing compliance requirements, also applicable to financial institutions,
under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.
The OTS will carefully review an institution's compliance with the requirements
of the Bank Secrecy Act when examining an institution or evaluating an
application submitted by an institution. The OTS may require an institution to
take various actions to ensure that it is meeting the requirements of the Bank
Secrecy Act.
FEDERAL SECURITIES LAWS
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the shares of common stock to be issued pursuant to the offering. Upon
completion of the offering, Mutual Bancorp will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
The registration under the Securities Act of shares of common stock to
be issued in the offering does not cover the resale of those shares. Shares of
common stock purchased by persons who are not
71
affiliates of Mutual Bancorp may be resold without registration. Shares
purchased by an affiliate of Mutual Bancorp will be subject to the resale
restrictions of Rule 144 under the Securities Act. If Mutual Bancorp meets the
current public information requirements of Rule 144, each affiliate of Mutual
Bancorp that complies with the other conditions of Rule 144, including those
that require the affiliate's sale to be aggregated with those of other persons,
would be able to sell in the public market, without registration, a number of
shares not to exceed, in any three-month period, the greater of 1% of the
outstanding shares of Mutual Bancorp or the average weekly volume of trading in
the shares during the preceding four calendar weeks. In the future, Mutual
Bancorp may permit affiliates to have their shares registered for sale under the
Securities Act, though we currently have no plans to do so.
OTHER REGULATIONS
Interest and other charges collected or contracted for by the Bank are
subject to federal laws concerning interest rates. The bank's loan operations
are also subject to federal laws applicable to credit transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of
the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on
the basis of race, creed or other prohibited factors in
extending credit;
o Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies; and
o rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
o Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative
subpoenas of financial records;
o Electronic Funds Transfer Act and Regulation E promulgated
thereunder, which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines
and other electronic banking services; and
o Check Clearing for the 21st Century Act (also known as "Check
21"), which, effective October 28, 2004, gives "substitute
checks," such as digital check images and copies made from
that image, the same legal standing as the original paper
check.
72
MANAGEMENT
SHARED MANAGEMENT STRUCTURE
Initially, the directors of Mutual Bancorp will be the same persons who
currently are the directors of the Bank and Mutual MHC. In addition, each
executive officer of the Bank will be an executive officer of Mutual Bancorp.
Although there are no present plans to do so, both Mutual Bancorp and the Bank
may choose to appoint additional or different persons as directors and executive
officers in the future. We expect that Mutual MHC, Mutual Bancorp and the Bank
will continue to have common executive officers until there is a business reason
to establish separate management structures. Presently, directors receive fees
for their services from the Bank and Mutual MHC. After the offering, directors
will receive fees from the Bank, Mutual Bancorp and Mutual MHC.
DIRECTORS OF MUTUAL FEDERAL BANCORP, INC.
Initially, the board of directors of Mutual Bancorp will consist of six
members. Directors will serve three-year staggered terms so that approximately
one-third of the directors are elected at each annual meeting of stockholders.
The class of directors whose term of office will expire at the first annual
meeting of stockholders following completion of the offering are directors Julie
H. Oksas and Stephanie Simonaitis. The class of directors whose term will expire
at the second annual meeting of stockholders following completion of the
offering are directors Stanley Balzekas III and Robert P. Kazan. The class of
directors whose term of office will expire at the third annual meeting of
stockholders following the completion of the offering are directors Stephen M.
Oksas and Leonard F. Kosacz. Because we expect our stock to be traded on the OTC
Bulletin Board, we will not be subject to the specific corporate governance
standards of the Nasdaq Stock Market relating to board independence, although we
expect that each of our directors except Stephen M. Oksas and Julie H. Oksas
will be "independent" as defined under those rules.
EXECUTIVE OFFICERS OF MUTUAL FEDERAL BANCORP, INC.
The following individuals will be our executive officers and will hold
the offices set forth below opposite their names.
NAME AGE (1) POSITION
- --------------------------------------------- ------- -------------------------------------------------
Stephen M. Oksas............................. 48 Chairman, President and Chief Executive Officer
John L. Garlanger............................ 59 Executive Vice President, Chief Financial Officer
and Treasurer
Julie H. Oksas............................... 43 Executive Vice President and Secretary
<FN>
- ---------------------
(1) As of November 15, 2005.
</FN>
Executive officers of Mutual Bancorp will be elected annually and will
hold office until their respective successors are elected or until death,
resignation, retirement or removal by the board of directors.
DIRECTORS OF THE BANK AND MUTUAL MHC
Board Composition. The Bank and Mutual MHC each have six directors.
Currently, directors of the Bank are elected annually by Mutual MHC as its sole
stockholder. Following the offering, the directors of the Bank will be elected
by Mutual Bancorp as its sole stockholder.
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The following table includes the directors' names, their ages as of
November 15, 2005, the calendar years when they began serving as directors and
the years their current terms as directors will expire:
POSITION WITH BANK DIRECTOR
DIRECTORS(1) AGE AND MUTUAL MHC SINCE TERM EXPIRES
- -------------------------------- --------- ------------------------ -------- ------------
Leonard F. Kosacz............... 81 Director 1991 2006
Stephen M. Oksas................ 48 Chairman, President 1997 2006
and CEO
Julie H. Oksas.................. 43 Director and Secretary; 2002 2007
Executive Vice President
(Mutual MHC only)
Stephanie Simonaitis............ 93 Director 1969 2007
Stanley Balzekas III............ 50 Director 1999 2008
Robert P. Kazan................. 58 Director 1996 2008
<FN>
- ---------------------
(1) The address for each director is 2212 W. Cermak Road, Chicago, IL 60608.
</FN>
BACKGROUND OF OUR DIRECTORS AND EXECUTIVE OFFICERS
The business experience for the past five years of each of our
directors and executive officers is set forth below.
Stephen M. Oksas. Mr. Oksas has served as a director of the Bank since
January 1997 and was appointed President of the Bank in March 1998 and Chairman
in March 2000. In addition, he has served as President and Chief Executive
Officer of Mutual MHC since November 2001. Prior to joining the bank, he was a
senior examiner with the Federal Reserve Bank of Chicago and held various
positions in finance and credit administration with First Interstate Bancorp and
its subsidiary First Interstate Bank of California. He currently is a director
of the Illinois League of Financial Institutions. Mr. Oksas is the spouse of
Julie H. Oksas.
Stephanie Simonaitis. Ms. Simonaitis is currently retired. Previously,
she was employed by the Bank for 69 years, including several years as a
consultant following her retirement in 1996. Ms. Simonaitis acted as
Secretary/Treasurer of the Bank and managed its daily operations.
Leonard F. Kosacz. Mr. Kosacz, currently retired, was with Metropolitan
Bank in Chicago from 1949 to 1989, most recently as Senior Vice President.
During his 40 years with Metropolitan Bank, his responsibilities included
commercial lending, operations and marketing.
Robert P. Kazan, M.D. Dr. Kazan is a neurosurgeon and has served as the
president of West Suburban Neurosurgical Associates, P.C., in Hinsdale, Illinois
since 2000. He is the nephew of Stephanie Simonaitis.
Stanley Balzekas III. Mr. Balzekas, an attorney, has been the general
manager of Balzekas Motor Sales, Inc. in Chicago, Illinois for over 20 years. He
is actively involved in the Chicago Lithuanian community, including serving as a
director of the Balzekas Museum of Lithuanian Culture and the Lithuanian Chamber
of Commerce.
Julie H. Oksas. Ms. Oksas was appointed Executive Vice President of
Mutual MHC in March 2005 and has served as director of the Bank and Mutual MHC
since January 2002. Prior to joining the Bank, Ms. Oksas served as Vice
President at Bank of America in its commercial real estate lending and loan
workout departments. Since 2002, she has been an Illinois-licensed insurance
salesperson.
74
John L. Garlanger. Mr. Garlanger, a certified public accountant, has
served as Executive Vice President, Chief Financial Officer and Treasurer of
Mutual MHC and the Bank since May 2005. Mr. Garlanger served as a securities and
financial reporting consultant to Chesterfield Financial Corp., the holding
company for Chesterfield Federal Savings and Loan based in Chicago, Illinois,
from December 2001 until the completion of Chesterfield's acquisition in
December 2004. From December 1999 until December 2001, he was the Chief
Financial Officer of Recruiter Toolbox, Inc., an Internet-based recruitment
advertising agency. From December 1974 until May 1999, Mr. Garlanger was with
Calumet Federal Savings and Loan Association of Chicago and its publicly traded
holding company, Calumet Bancorp, Inc., most recently as Senior Vice President
and Chief Financial Officer.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of Mutual Bancorp intends to meet on a monthly
basis and may hold additional special meetings as needed. The boards of
directors of Mutual MHC and the Bank meet on a monthly basis and from time to
time hold additional special meetings. During the year ended December 31, 2004,
each board of directors of the Bank and Mutual MHC held 12 regular and no
special meetings. No director attended fewer than 75% of such meetings.
COMMITTEES OF THE BANK AND MUTUAL MHC
Each board of directors of the Bank and Mutual MHC has a standing audit
committee, which in each case is comprised of Mr. Balzekas, Dr. Kazan and Ms.
Simonaitis. The audit committees are responsible for developing and monitoring
internal audit and compliance programs and also receive and review all reports,
findings and other information presented to them by management and the
independent public accountants regarding financial reporting policies and
practices. The Bank's and Mutual MHC's audit committees each met once during
2004.
The Bank's board of directors also has a CRA committee, a loan
committee, a compensation committee and a human resources committee. The CRA
committee, which consists of Dr. Kazan, Mr. Kosacz and Ms. Oksas, provides
oversight to our compliance staff in adhering with the rules and regulations of
the Community Reinvestment Act. The loan committee, which is comprised of
Messrs. Balzekas, Kosacz and Oksas, and Ms. Simonaitis, oversees the lending
function at the Bank, which includes, among other things, approving loans in
accordance with bank policies and periodically reviewing the adequacy of our
allowance for loan losses. The compensation committee is comprised of Mr.
Balzekas, Dr. Kazan and Mr. Kosacz and is responsible for reviewing and
establishing salaries and benefits for our officers and employees on an annual
basis. The human resources committee, which consists of Mr. Balzekas, Mr. Kosacz
and Ms. Simonaitis, monitors employee/employer relations.
Mutual MHC's board of directors also has a proxy committee currently
comprised of Mr. Kosacz, Mr. Oksas and Ms. Simonaitis, which casts its votes as
directed by the board in favor of the nominees selected by the members'
nominating committee. Mutual MHC's board also has a strategic planning
committee, consisting of Mr. Balzekas, Dr. Kazan and Mr. and Ms. Oksas.
COMMITTEES OF MUTUAL FEDERAL BANCORP, INC.
In connection with Mutual Bancorp's formation, an audit committee, a
compensation committee, a nominating committee and a strategic planning
committee will be established as follows:
The audit committee will be responsible for supervising Mutual
Bancorp's accounting, financial reporting and financial control processes.
Generally, the audit committee will review the quality and integrity of our
financial information and reporting functions, the adequacy and effectiveness of
our system of internal accounting and financial controls, and the independent
audit process, and will annually
75
review the qualifications and approve the engagement of the independent public
accountants. We intend that each member of the audit committee will be deemed
"independent" as defined under the rules of the Securities and Exchange
Commission, or SEC, within one year after the date the offering commences. At
this time, we do not expect that any member of the audit committee will be an
"audit committee financial expert" as defined by SEC regulations, which we will
be required to disclose in Mutual Bancorp's annual reports filed with the SEC.
However, we expect that the financial knowledge and experience of the audit
committee members, including each member's ability to read and understand
fundamental financial statements for a community-based financial institution,
will be cumulatively sufficient to discharge adequately the audit committee's
responsibilities.
The compensation committee will be responsible for reviewing the
performance of the CEO, reviewing and recommending the compensation of our
executive officers, including the CEO, evaluating and recommending additional
employee benefits plans and compensation programs, including stock option
grants, restricted share awards and annual bonuses, reviewing and recommending
director compensation, advising the CEO on miscellaneous compensation issues,
and advising management regarding management succession planning issues. The
compensation committee will also advise and assist management in formulating
policies regarding compensation.
The nominating committee will be responsible for recommending to the
board of directors nominees for election as directors by stockholders at each
annual meeting, and developing and evaluating the effectiveness of policies and
practices relating to corporate governance.
Each of the committees listed above will operate under a written
charter, which will govern its composition, responsibilities and operations.
CODE OF ETHICS
Our current code of ethics, which applies to all employees, officers
and directors, addresses conflicts of interest, the treatment of confidential
information, general employee conduct and compliance with applicable laws, rules
and regulations. In addition, our code of ethics is designed to deter wrongdoing
and to promote honest and ethical conduct, the avoidance of conflicts of
interest, full and accurate disclosure and compliance with all applicable laws,
rules and regulations.
DIRECTOR COMPENSATION
Director Fees. Mutual Bancorp will pay a monthly retainer of $300 to
each director and $200 to each non-employee director for each committee meeting
attended. Currently, the Bank pays each director a monthly retainer fee of $750
and each non-employee director $250 for each committee meeting attended. The
Bank paid fees totaling $55,990 for the year ended December 31, 2004. Effective
January 1, 2006, the Bank will pay each director a monthly retainer of $800. All
outside directors will continue to receive $250 per committee meeting attended,
except that members of the audit committee will receive $350 per meeting.
Currently, Mutual MHC pays each director a monthly retainer of $300,
and $200 to each non-employee director for each committee meeting attended.
After January 1, 2006, directors will not receive a separate fee from Mutual MHC
in the event of a joint committee meeting of the Bank and MHC. Mutual MHC paid
fees totaling $18,600 to its directors during 2004 for board and committee
attendance.
After the offering, directors will not receive a separate fee in the
event of a joint committee meeting of the Bank and Mutual Bancorp.
76
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table sets forth certain
information as to the total remuneration paid by the Bank to our Chief Executive
Officer for the year ended December 31, 2004. No other executive officer
received salary and bonus in excess of $100,000 for 2004.
ANNUAL COMPENSATION (1)
--------------------------------------------
ALL OTHER
SALARY BONUS OTHER ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($) (2)
--------------------------- ---- ------ ----- ---------------- ------------
Stephen M. Oksas, President and
Chief Executive Officer...... 2004 $117,823 $11,000 $ -- $21,178
<FN>
- ---------------------
(1) Summary compensation information is excluded for the fiscal years ended
December 31, 2003 and 2002, as neither the Bank nor Mutual MHC was a
public company during those periods.
(2) Consists of $8,250 in director's fees, of which $7,650 were deferred,
and a profit sharing plan contribution of $12,928.
</FN>
Employment Agreements. In connection with the offering, the Bank and
Mutual Bancorp plan to enter into employment agreements with Mr. Oksas, Mr.
Garlanger and Ms. Oksas.
Stephen M. Oksas. We will enter into an employment agreement with
Stephen M. Oksas, President and Chief Executive Officer, to be effective as of
the closing of the offering. The term of the agreement will be three years and,
subject to Board approval, will be renewed for successive one-year terms, unless
either party gives 90 days' advance notice of an intention to terminate the
agreement. The agreement will provide for an annual base salary of $_______,
subject to review from time to time, and may be increased when and to the extent
the board of directors, in its discretion, determines. Mr. Oksas may receive a
discretionary bonus to the extent determined by the board of directors and will
be entitled to participate in benefit plans and other fringe benefits available
to our executive officers.
Under the agreement, Mr. Oksas' employment may be terminated by us at
any time for "cause," as defined in the agreement. If he resigns without "good
reason," the agreement will immediately terminate, and he would be entitled only
to unpaid benefits accrued during the term of his employment. If Mr. Oksas
chooses to resign with good reason, or we choose to terminate his employment
without cause, he also will be entitled to receive severance in the amount equal
to 200% of his then-current base annual salary, plus the average of the sum of
the bonuses he earned during the previous three years, in addition to a pro rata
bonus for the year of termination based on the prior year's bonus amount, if
any. The agreement also will provide for death benefits equal to six months of
his then-current annual base salary.
In the event that Mr. Oksas is terminated after a change in control (as
will be defined in the agreement) of Mutual Bancorp and the Bank, he will be
entitled to a lump sum payment equal to three times the sum of (1) his annual
base salary; (2) the greater of (a) his bonus amount, if any, for the prior year
or (b) his average bonus, if any, for the three preceding years; and (3) the sum
of the contributions that we would have made to him during the year under
benefit plans and the annual value of any other executive perquisites. The
agreement also will entitle Mr. Oksas to receive gross-up payments to cover any
federal excise taxes payable by him in the event the change in control benefits
are deemed to constitute "excess parachute payments" under section 280G of the
Code. If such a payment was triggered as of September 30, 2005, Mr. Oksas would
be entitled to a payment of $_______, including tax gross-up payments.
The agreement will contain certain nonsolicitation provisions that
prohibit Mr. Oksas from soliciting, either for his own account or for the
benefit of any entity located within a 40 mile radius of any of our locations or
any of our subsidiaries' locations, any of our clients or employees. These
77
nonsolicitation provisions will remain in effect for a period of one year after
the termination of his employment.
Other Executives. We also plan to enter into employment agreements with
John L. Garlanger, Executive Vice President and Chief Financial Officer, and
Julie H. Oksas, Executive Vice President and Secretary (collectively referred to
in this section as the "executives"), which will become effective as of the
closing of the offering. The term of the agreements with each executive will be
two years and, subject to Board approval, will automatically renew for an
additional year, unless either party gives 90 days' advance notice of an
intention to terminate the agreement.
Mr. Garlanger's initial base salary is expected to be his current
salary of $________ and Ms. Oksas' initial base salary is expected to be her
current salary of $_____, which reflects Ms. Oksas' part-time schedule. We and
Ms. Oksas will periodically review her part-time status and she may switch to a
full-time position with a commensurate full-time salary at an undetermined time
in the future. Each executive's base salary will be subject to periodic review
from time to time, and may be increased when and to the extent the board of
directors, in its discretion, determines.
If the executive chooses to resign with good reason, or we choose to
terminate his/her employment without cause, he/she will be entitled to receive
severance in the amount equal to 100% of his/her then-current annual base
salary, plus the average of the sum of any bonuses he/she earned during the
previous three years, in addition to a pro rata bonus for the year of
termination based on the prior year's bonus amount, if any.
In the event the executive is terminated after a change of control (as
defined in the agreement) of Mutual Bancorp and the Bank, he/she will be
entitled to unpaid benefits accrued during the term of his/her employment, a pro
rata bonus for the year of termination based on the prior year's bonus amount,
if any, and a lump-sum payment equal to the sum of: (a) two times annual base
salary; plus (b) the greater of his/her bonus amount, if any, for the prior year
or his/her average bonus, if any, for the three preceding years; and (c) the sum
of contributions that we would have made to him/her during the year under
benefit plans and the annual value of any other executive perquisites. The
executive also will be entitled to outplacement counseling services for a
reasonable period of time following termination.
Each agreement also will contain certain nonsolicitation provisions
that prohibit the executive from soliciting, either for his/her own account or
for the benefit of any entity located within a 40 mile radius of any of our
locations or any of our subsidiaries' locations, any of our clients or
employees. These nonsolicitation provisions remain in effect for a period of one
year after the termination of his/her employment.
BENEFIT PLANS
401(k) Profit Sharing Plan. We have adopted the Financial Institutions
Thrift Plan, a qualified tax-exempt multiple-employer profit sharing plan with a
Code Section 401(k) salary deferral feature. All regular employees who have
attained age 21 and have completed three months of service are eligible to
participate. Under the 401(k) Plan, eligible employees are permitted to make
salary deferral contributions up to $14,000 each year (as indexed annually).
Employees age 50 and older may make additional salary deferral contributions of
up to another $4,000 each year (as indexed annually). The Bank makes safe harbor
matching contributions on behalf of all participants who make salary deferral
contributions. The matching contributions are equal to 100% of a participant's
salary deferral contributions up to 3% of compensation, and 50% of salary
deferral contributions that exceed 3% but do not exceed 5% of compensation. All
employee salary deferral contributions and employer matching contributions and
earnings thereon are fully and immediately vested. The Bank, in its sole
discretion, may make an annual profit sharing contribution to the 401(k) Plan on
behalf of all eligible participants who have attained age
78
21 and completed one year of service. Profit sharing contributions vest in
accordance with a five-year graded vesting schedule at a rate of 20% per year.
Contributions to the Plan were approximately $44,000 for the year ended December
31, 2004, excluding employee salary deferral contributions.
The 401(k) Plan allows participants to direct the investment of their
own accounts into various investment options. Participants are entitled to
payment of the vested balance of their account upon termination of employment,
disability or death. The 401(k) Plan also allows participating employees to
borrow from their Plan account and to make in-service withdrawals from their
vested account balance under limited circumstances.
Medical, Life, Disability Insurance Programs. The Bank provides its
full-time employees and their eligible dependents with health and welfare
benefits through Illinois League of Financial Institutions Trust Fund. Benefits
available include medical, dental, life, accidental death and dismemberment, and
disability insurance. Employees pay a portion of the premiums for the coverage
elected. Certain non-employee directors and their eligible dependents also are
eligible to participate in the group medical insurance plan, with the Bank
contributing approximately 50% of each participating director's individual
premium and none of the dependent coverage premium. In addition, the Bank
provides an optional retiree medical insurance program to its retirees and their
spouses age 65 and older. Retirees must have had 10 or more years of service and
have retired at or after age 65 to be eligible. All retirees who participate
currently do not contribute to the cost of their medical coverage. It is
currently contemplated that the plan will be amended effective June 30, 2006, to
provide that all new retirees will pay 100% of the cost of their coverage, and
the Bank's portion of the premium payment for existing participants will be
capped annually at the lesser of the 2006 premium or the then current year's
premium.
FUTURE STOCK BENEFIT PLANS
Employee Stock Ownership Plan. We intend to establish an employee stock
ownership plan, or ESOP, for our eligible employees to become effective in
connection with our offering. Employees who have been credited with one year of
service (as specified in the ESOP) and who have attained age 21, or who have
attained age 21 on the effective date of the ESOP, will be eligible to
participate in the ESOP, subject to the terms and conditions of the ESOP.
In order to fund the purchase by the ESOP of up to 8% of the common
stock to be issued by Mutual Bancorp, including shares to be issued to Mutual
MHC, we anticipate that the ESOP will borrow funds from Mutual Bancorp. It is
anticipated that such loan will equal 100% of the aggregate purchase price of
the common stock acquired by the ESOP. The ESOP may purchase the shares in the
subscription offering to the extent that sufficient shares remain available
after purchase of shares by eligible account holders. If insufficient shares are
available for the purchase of up to 8% of the shares to be sold in the offering,
the ESOP may purchase shares following the offering in the open market or in
private transactions to the extent that shares are available for purchase on
terms acceptable to the ESOP trustee. The purchase price of shares purchased in
the open market or private transactions may exceed the $10 per share price to be
paid in the offering. Any purchase of shares in the open market or private
transactions for more than $10.00 per share would increase the amount of the
loan that we would need to make to the ESOP. The loan to the ESOP will be repaid
principally from employer contributions to the ESOP over a period currently
anticipated to be 20 years, and the collateral for the loan will be the common
stock purchased by the ESOP (provided that shares of our common stock that are
allocated for a year immediately cease to be part of the loan collateral). The
interest rate for the ESOP loan is expected to be a fixed rate of ___% per
annum. Contributions to the ESOP may be fixed under the terms of the ESOP loan
until the loan is repaid in full, subject to any refinancing of the loan agreed
to by the ESOP trustee. Additional discretionary contributions may be made to
the ESOP for any plan year in either cash or shares of common stock, which may
be acquired through the purchase of outstanding shares in the market or
79
from individual stockholders or upon the original issuance of additional shares
or upon the sale of treasury shares by us. Such purchases, if made, would be
funded through additional borrowings by the ESOP or additional employer
contributions. The timing, amount and manner of future contributions to the ESOP
will be affected by various factors, including prevailing regulatory policies,
the requirements of applicable laws and regulations and market conditions.
Shares of common stock purchased by the ESOP with the loan proceeds
will be held in a suspense account (referred to in the ESOP as the Unallocated
Reserve) and released for allocations to the accounts of eligible participants
based on a formula in federal regulations governing ESOP loans as debt service
payments are made. Shares released from the Unallocated Reserve will be
allocated to each eligible participant's ESOP account based on the ratio of each
such participant's compensation (as defined in the ESOP) up to $210,800 (as
indexed annually) to the total compensation of all eligible ESOP participants.
Forfeitures will be reallocated among eligible participants in a similar manner.
Upon the completion of one year of service, the ESOP account balances of each
participant will become 20% vested and will continue to vest at the rate of 20%
for each additional year of service completed by the participant, such that a
participant will become 100% vested upon the completion of five years of
service. Credit will be given for years of service with the Bank prior to
adoption of the ESOP. In the case of death, retirement (under the ESOP),
disability (under the ESOP) or a change in control (under the ESOP), however,
participants immediately will become fully vested in their ESOP account
balances. Benefits may be distributed from the ESOP after death, retirement or
disability or in the plan year following separation from service if the
participant's accounts do not exceed $5,000. Otherwise, distributions will not
be made until the last quarter of the sixth full plan year following separation
from service or, if later, when the ESOP loan is repaid in full. Distributions
may also be made to a partial degree after a participant attains age 55 and
completes 10 years of active participation in the ESOP, even if a participant
has not separated from service. Upon termination of their employment,
participants in the ESOP who elect to receive their benefit distributions in the
form of Mutual Bancorp common stock may require us to purchase the common stock
distributed at fair value. This contingent repurchase obligation will reduce
stockholders' equity by an amount that represents the market value of all common
stock held by the ESOP and allocated to participants, without regard to whether
it is likely that the shares would be distributed or that the recipients of the
shares would be likely to exercise their right to require us to purchase the
shares.
We expect that First Bankers Trust Services, Inc. will serve as trustee
of the ESOP. Under the ESOP, the trustee must generally vote all allocated
shares of common stock held in the ESOP in accordance with the instructions of
the corresponding participants. Allocated shares for which no directions are
received and unallocated shares will generally be voted, on any matter, in the
same ratio as those allocated shares for which participant instructions are
received, in each case subject to the requirements of applicable law and the
fiduciary duties of the trustee. Similar procedures will apply in the event of a
tender or exchange offer involving the common stock held in the ESOP.
We will reserve the right to amend or terminate the ESOP at any time,
subject to the requirements of applicable law.
Generally accepted accounting principles require that any third-party
borrowing by the ESOP be reflected as a liability on our statement of financial
condition. Because the ESOP intends to borrow from Mutual Bancorp, the loan will
not be treated as a liability but rather will be excluded from stockholders'
equity. If the ESOP purchases newly issued shares from us, total stockholders'
equity would neither increase nor decrease, but per share stockholders' equity
and per share net earnings would decrease as the newly issued shares are
allocated to the ESOP participants.
80
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended, the Code and the related regulations of
the Department of Treasury and the Department of Labor.
Stock Option Plan. We may implement a stock option plan for our
directors, officers and employees of Mutual Bancorp and the Bank after the
offering. OTS regulations prohibit us from implementing this plan until six
months after the offering. If the stock option plan is implemented within the
first 12 months after the offering, OTS regulations require that the plan be
approved by a majority of the outstanding votes of Mutual Bancorp eligible to be
cast (excluding votes eligible to be cast by Mutual MHC). Pursuant to our Stock
Issuance Plan and OTS regulations, in addition to shares awarded under one or
more tax-qualified employee stock benefit plans, we may grant awards under one
or more stock benefit plans, including the stock option plan, in an aggregate
amount up to 25% of the common stock held by persons other than Mutual MHC.
We expect that the stock option plan would authorize a committee of
non-employee directors, or the full board, to grant options to purchase an
amount of shares equal to 4.9% of the total number of shares issued in the
offering and to Mutual MHC by Mutual Bancorp, although we may decide to adopt a
stock option plan providing for greater or fewer stock option grants, if adopted
after one year from the date of completion of the offering. The stock option
plan will have a term of 10 years. The committee will decide which directors,
officers and employees will receive options and the terms of those options.
Generally, no stock option will permit its recipient to purchase shares at a
price that is less than the fair market value of a share on the date the option
is granted, and no option will have a term that is longer than 10 years. If we
implement a stock option plan before the first anniversary of the offering,
current regulations will require that:
o non-employee directors in the aggregate may not receive more
than 30% of the options authorized under the plan;
o any one non-employee director may not receive more than 5% of
the options authorized under the plan;
o any officer or employee may not receive more than 25% of the
options authorized under the plan;
o the options may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan; and
o accelerated vesting is not permitted except for death,
disability or upon a change in control of the Bank or Mutual
Bancorp.
Mutual Bancorp may obtain the shares needed for this plan by issuing
additional shares of common stock or through stock repurchases.
Recognition and Retention Plan. We may implement a recognition and
retention plan for the directors, officers and employees of the Bank and Mutual
Bancorp after the offering. OTS regulations prohibit us from implementing this
plan until six months after the offering. If the recognition plan is implemented
within the first 12 months after the offering, OTS regulations require that the
plan be approved by a majority of the outstanding votes of Mutual Bancorp
(excluding votes eligible to be cast by Mutual MHC). Pursuant to our stock
issuance plan and OTS regulations, in addition to shares awarded under one or
more tax-qualified employee stock benefit plans, we may grant awards under one
or more stock benefit plans, including the recognition and retention plan, in an
amount up to 25% of the common stock held by persons other than Mutual MHC. If
adopted within one year from the date of completion of
81
the offering, the initial recognition and retention plan would authorize awards
of our common stock in an aggregate amount up to 1.96% of the total number of
shares issued in the offering and to Mutual MHC, and would be subject to such
other limitations as may be imposed by the OTS. The recognition and retention
plan may authorize awards of more than 1.96% of the shares of common stock
issued by Mutual Bancorp if it is adopted after one year from the date of the
completion of the offering.
The committee will decide which directors, officers and employees will
receive restricted stock and the terms of those awards. We may obtain the shares
of common stock needed for this plan by issuing additional shares of common
stock or through stock repurchases. If we implement a recognition and retention
plan before the first anniversary of the offering, current regulations will
require that:
o all non-employee directors in the aggregate may not receive
more than 30% of the shares authorized under the plan;
o no non-employee director may receive more than 5% of the
shares authorized under the plan;
o no officer or employee may receive more than 25% of the shares
authorized under the plan;
o the awards may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan;
o accelerated vesting is not permitted except for death,
disability or upon a change of control of the Bank or Mutual
Bancorp.
Restricted stock awards under this plan may contain restrictions that
require continued employment for a period of time for the award to be vested.
Awards are not vested unless the specified employment requirements are
satisfied. However, pending vesting, the award recipient may have voting and
dividend rights. When an award becomes vested, the recipient generally must
include the current fair market value of the vested shares in his or her income
for federal income tax purposes. We will be allowed a federal income tax
deduction in the same amount to the extent reported into income by the employee.
We will have to recognize compensation expense for accounting purposes ratably
over the vesting period, equal to the fair market value of the shares on the
original award date.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
In the ordinary course of business, the Bank makes loans available to
its directors, officers and employees. These loans are made in the ordinary
course of business on substantially the same terms (including interest rate),
including collateral, as comparable loans to other borrowers. Management
believes that these loans neither involve more than the normal risk of
collectibility nor present other unfavorable features. Federal regulations
permit executive officers and directors to participate in loan programs that are
available to other employees, as long as the director or executive officer is
not given preferential treatment compared to other participating employees.
Loans made to directors or executive officers, including any modification of
such loans, must be approved by a majority of disinterested members of the board
of directors. The interest rate on loans to directors and officers is the same
as that offered to other employees.
PARTICIPATION BY MANAGEMENT IN THE OFFERING
The following table sets forth information regarding intended common
stock purchases by each of the directors and executive officers of the Bank and
their associates, and by all directors and executive officers as a group. These
purchases of common stock are for investment purposes, and not for resale. In
the event the individual maximum purchase limitation is increased, persons
subscribing for the maximum
82
amount may increase their purchase order. Directors and executive officers will
purchase shares of common stock at the same $10.00 purchase price per share and
on the same terms as other purchasers in the offering. This table excludes
shares of common stock to be purchased by the employee stock ownership plan, as
well as any recognition and retention plan awards or stock option grants that
may be made no earlier than six months after the completion of the offering. The
directors and officers have indicated their intention to purchase in the
offering an aggregate of $900,000 of common stock, equal to 12.8%, 10.9%, 9.5%
and 8.2% of the number of shares of common stock to be sold in the offering, at
the minimum, midpoint, maximum and adjusted maximum of the estimated valuation
range, respectively.
AGGREGATE NUMBER OF PERCENT AT
NAME PURCHASE PRICE SHARES MIDPOINT
- --------------------------------------------------- -------------- --------- ----------
Stephen M. Oksas(2)................................ $150,000 15,000 1.8%
Stephanie Simonaitis(1)............................ 50,000 5,000 *
Leonard F. Kosacz(1)............................... 150,000 15,000 1.8
Robert P. Kazan(1)................................. 150,000 15,000 1.8
Stanley Balzekas III(1)............................ 150,000 15,000 1.8
Julie H. Oksas(2).................................. 100,000 10,000 1.2
John L. Garlanger(1)............................... 150,000 15,000 1.8
-------- ------ ---
All directors and executive officers as a group.... $900,000 90,000 10.9%
======== ====== ====
<FN>
- ---------------------
* Less than 1%.
(1) Includes purchases by the individual's spouse and other relatives of
the named individual living in the same household. The above named
individuals are not aware of any other purchases by a person who or
entity which would be considered an associate of the named individuals
under the Stock Issuance Plan.
(2) Stephen M. Oksas and Julie H. Oksas are considered associates under the
stock issuance plan.
</FN>
THE STOCK OFFERING
The board of directors of the Bank and Mutual MHC, and the OTS have
approved the stock issuance plan, subject to the satisfaction of certain
conditions imposed by the OTS in its approval. OTS approval does not constitute
a recommendation or endorsement of the plan by the OTS.
General
In July 2005, the board of directors of Mutual MHC unanimously adopted
the stock issuance plan pursuant to which Mutual Bancorp will sell shares of its
common stock to depositors of the Bank and certain other persons, and issue
shares of its common stock to Mutual MHC. After the stock offering, purchasers
in the offering, including the ESOP, will own 30% of our outstanding shares of
common stock, and Mutual MHC will own 70% of our outstanding shares of common
stock.
The aggregate price of the shares of common stock sold in the offering
will be within the offering range of $7,013,000 and $9,488,000, based upon an
independent appraisal of the estimated pro forma market value of our common
stock. The appraisal was prepared by RP Financial, L.C., a consulting firm
experienced in the valuation and appraisal of savings institutions. All shares
of common stock to be sold in the offering will be sold at the same price per
share. The independent appraisal will be affirmed or, if necessary, updated at
the completion of the offering. See "How We Determined to Offer Between 701,250
Shares and 948,750 Shares and the $10.00 Price Per Share" beginning on page 5
for additional information as to the determination of the estimated pro forma
market value of the common stock.
The following is a brief summary of the material aspects of the stock
offering. Prospective purchasers should also carefully review the terms of the
stock issuance plan. A copy of the stock issuance plan is available from the
Bank upon request and is available for inspection at the offices of the Bank and
83
the OTS. The plan is also filed as an exhibit to the registration statement of
which this prospectus is a part, copies of which may be obtained from the SEC.
See "Where You Can Find More Information" on page 102.
REASONS FOR THE STOCK OFFERING
The proceeds from the sale of our common stock will provide the Bank
with additional capital, which may be used to support future growth, both
through acquisitions of other financial institutions or internally, such as
through the introduction of new financial products and services and the
establishment of additional branch offices. The stock offering will also enable
us to increase our capital base, which we can use to support new loans and
higher lending limits, as well as provide us with greater flexibility to invest
in longer-term, higher yielding assets. Although the Bank currently exceeds all
regulatory capital requirements, the sale of common stock will assist the Bank
with the expansion of its capital base to provide flexibility to respond to
sudden and unanticipated capital needs.
In addition, since the Bank competes with local and regional banks not
only for customers but also for employees, we believe that the stock offering
also will afford us the opportunity to enhance our management depth by being
able to attract and retain individuals through the use of various stock-based
benefit plans, including incentive stock option plans, restricted stock plans
and an employee stock ownership plan.
In our current mutual holding company structure, we are not permitted
to issue capital stock. After completion of the offering, the further issuance
of common and preferred stock authorized by our charter, as well as any treasury
shares that we may have repurchased, will permit us to raise additional equity
capital and will permit us to issue equity in connection with possible
acquisitions, subject to market conditions and any required regulatory approval.
We currently have no plans to issue any additional shares of our capital stock
after the offering.
The stock offering proceeds will provide additional flexibility to
allow us to grow through the acquisition of other financial institutions or
branches. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, we will be in a position after the
stock offering to take advantage of any such favorable opportunities that may
arise. See "Use of Proceeds from the Offering" for a description of our intended
use of proceeds.
After considering the advantages and disadvantages of the stock
offering, as well as applicable fiduciary duties, our board of directors
unanimously approved the stock offering as being in the best interests of Mutual
MHC, the Bank, and the Bank's depositors and the communities we serve.
OFFERING OF COMMON STOCK
Under the stock issuance plan, up to 948,750 shares of Mutual Bancorp
common stock will be offered for sale, subject to certain restrictions described
below, through subscription and community offerings.
SUBSCRIPTION OFFERING. The subscription offering will expire at
___________, Central Daylight time, on ________________, 2006, unless otherwise
extended by us. OTS regulations require that all shares subject to the offering
be sold within 90 days after the OTS approves use of the prospectus. The OTS may
extend the offering period in its discretion. This period expires on
________________, 2006, unless the OTS approves an extension. If we do not
complete the offering by ________________, 2006, all subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. In the event of an extension, all
subscribers will be notified in writing of the time period within which
subscribers must notify the Bank of their intention to maintain,
84
modify or rescind their subscriptions. If the subscriber rescinds or does not
respond to the bank's notice, the funds submitted will be refunded to the
subscriber with interest at the bank's current passbook savings rate, and/or the
subscriber's account withdrawal authorization will be terminated. In the event
that the offering is not completed, all funds submitted and not previously
refunded pursuant to the subscription and community offering will be promptly
refunded to subscribers with interest, and all withdrawal authorizations will be
cancelled.
Subscription Rights. Under the stock issuance plan, nontransferable
subscription rights to purchase shares of our common stock have been granted to
certain persons and entities entitled to purchase the shares of common stock in
the subscription offering. The number of shares of common stock that these
persons may purchase will depend on the availability of the common stock for
purchase under the categories of eligible purchasers described in the stock
issuance plan. Subscription priorities have been established for the allocation
of shares to the extent that shares are available. These priorities are as
follows:
Priority 1: Eligible Account Holders. Subject to the maximum purchase
limitations, each depositor with $50.00 or more on deposit at the Bank
(sometimes referred to as a "qualifying deposit"), as of the close of business
on June 30, 2004, will receive nontransferable subscription rights to subscribe
for up to the greater of the following:
(1) $150,000 of common stock;
(2) one-tenth of one percent (0.01%) of the total number of shares
offered by this prospectus; or
(3) 15 times the product, rounded down to the nearest whole
number, obtained by multiplying the total number of shares of
common stock to be issued in the offering by a fraction, the
numerator of which is the amount of the qualifying deposit of
the eligible account holder and the denominator is the total
amount of qualifying deposits of all eligible account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
eligible account holders so as to permit each one, to the extent possible, to
purchase a number of shares sufficient to make the person's total allocation
equal to 100 shares or the number of shares actually subscribed for, whichever
is less. Thereafter, unallocated shares will be allocated pro rata among the
remaining subscribing eligible account holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all remaining
eligible account holders whose subscriptions remain unfilled. No fractional
shares shall be issued. Subscription rights received under this priority by
officers and directors (or their associates) of the Bank or Mutual Bancorp based
on their increased deposits in the Bank in the one-year period preceding June
30, 2004 are subordinated to the subscription rights of other eligible account
holders.
Priority 2: Qualified Tax-Exempt Employee Plans. The stock issuance
plan provides that qualified tax-exempt employee benefit plans of Mutual MHC,
Mutual Bancorp, or the Bank, such as the ESOP, will receive nontransferable
subscription rights to purchase up to 10% of the shares issued in the offering.
Of our qualified tax-exempt plans, the ESOP intends to purchase 8% of the shares
sold in the offering. In the event the number of shares offered is increased
above the maximum of the valuation range, the ESOP will have a priority right to
purchase any shares exceeding that amount, up to a total of 10% of the shares
issued in the offering. If the ESOP's subscription is not filled in its
entirety, the ESOP may purchase shares of common stock in the open market or
directly from Mutual Bancorp.
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Priority 3: Supplemental Eligible Account Holders. If there is a
sufficient number of shares of common stock remaining after the subscriptions of
the eligible account holders and the ESOP have been satisfied, subject to the
maximum purchase limitations, each depositor with $50.00 or more on deposit, as
of the close of business on ________________, 2005, will receive nontransferable
subscription rights to subscribe for up to the greater of:
(1) $150,000 of common stock;
(2) one-tenth of one percent (0.1%) of the total number of shares
of common stock offered by this prospectus; or
(3) 15 times the product, rounded down to the nearest whole
number, obtained by multiplying the total number of shares to
be issued in the offering by a fraction, the numerator of
which is the amount of qualifying deposits of the supplemental
eligible account holder and the denominator is the total
amount of qualifying deposits of all supplemental eligible
account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares will be allocated among subscribing supplemental
eligible account holders so as to permit each such account holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to 100 shares or the number of shares actually subscribed for,
whichever is less. Thereafter, unallocated shares will be allocated pro rata
among subscribing supplemental eligible account holders whose subscriptions
remain unfilled in the same proportion that the amounts of their respective
qualifying deposits bear to total qualifying deposits of all subscribing
supplemental eligible account holders.
Priority 4: Voting Members. If there is a sufficient number of shares
of common stock remaining after the subscriptions of the eligible account
holders, the ESOP, and supplemental eligible account holders have been filled,
subject to the maximum purchase limitations, each voting member of Mutual MHC,
as of the close of business on __________, 2006, other than eligible account
holders and supplemental eligible account holders, will receive nontransferable
subscription rights to subscribe for up to the greater of:
(1) $150,000 of common stock; or
(2) one-tenth of one percent (0.1%) of the total number of shares
of common stock offered by this prospectus; or
(3) 15 times the product, rounded down to the nearest whole
number, obtained by multiplying the total number of shares to
be issued in the offering by a fraction, the numerator of
which is the amount of qualifying deposits of the voting
member and the denominator is the total amount of qualifying
deposits of all voting members.
For this purpose, a voting member of Mutual MHC means all holders of
savings, demand, or other authorized accounts of the Bank as of ___________,
2006, including all borrowers of the Bank as of November 2, 2001 whose
borrowings remain outstanding as of _____________, 2006. If the exercise of
subscription rights in this category results in an oversubscription, shares will
be allocated among voting members so as to permit each voting member, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation equal to 100 shares or the number of shares actually subscribed
for, whichever is less. Thereafter, unallocated shares will be allocated among
subscribing voting members whose subscriptions remain unfilled on a 100 shares
(or whatever lesser amount is available) per order basis until all orders have
been filled or the remaining shares have been allocated.
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We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
shares of common stock pursuant to the stock issuance plan reside. However, no
shares of common stock will be offered or sold under the stock issuance plan to
any person who resides in a foreign country or resides in a state of the United
States in which:
o there are few participants eligible to subscribe for shares
residing in such state, and
o the granting of subscription rights or the offer or sale of
shares of common stock to such participants would require us
to register or qualify the common stock in such state or
require that our respective directors and officers register as
a broker-dealers, salesmen or selling agents in such state, or
require us to qualify as a foreign corporation or file a
consent to service of process in such state; and
o registration or qualification of the common stock in such
state in our judgment would be impracticable or unduly
burdensome for reasons of cost or otherwise.
No payments will be made in lieu of the granting of subscription rights
to any person.
COMMUNITY OFFERING. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered by Mutual Bancorp
in a community offering to members of the general public to whom Mutual Bancorp
delivers a copy of this prospectus and a stock order form, with preference given
to natural persons residing in Cook County, Illinois. Subject to the maximum
purchase limitations, these persons may purchase up to $150,000 of common stock.
The community offering, if any, may be undertaken concurrent with, during, or
promptly after the subscription offering, and may terminate at any time without
notice, but may not terminate later than __________, 2006, unless extended by
Mutual Bancorp and the bank. Subject to any required regulatory approvals,
Mutual Bancorp will determine the advisability of a community offering, the
commencement and termination dates of any community offering, and the methods of
finding potential purchasers in such offering, in its discretion based upon
market conditions. The opportunity to subscribe for shares in the community
offering category is subject to the right of Mutual Bancorp and the Bank, in
their sole discretion, to accept or reject these orders in whole or in part
either at the time of receipt of an order or as soon as practicable thereafter.
If there are not sufficient shares of common stock available to fill
orders in the community offering, the shares of common stock will be allocated
first to each natural person residing in Cook County, Illinois whose order is
accepted by Mutual Bancorp, in an amount equal to the lesser of 1,000 shares of
common stock or the number of shares of common stock subscribed for by each
subscriber residing in Cook County, Illinois, if possible. Thereafter,
unallocated shares of common stock will be allocated among the subscribers
residing outside of Cook County, Illinois whose orders remain unsatisfied. In
the event orders for common stock in the community offering exceed the number of
shares available for sale, shares may be allocated on a pro rata basis based on
the amount of the respective orders. Orders received for common stock in the
community offering (or any syndicated community described below) shall first be
filled up to a maximum of two percent (2%) of the shares sold and thereafter,
remaining shares will be allocated on an equal number of shares basis per order
until all orders are filled.
SYNDICATED COMMUNITY OR UNDERWRITTEN PUBLIC OFFERING. The stock
issuance plan provides that, if necessary, all shares of common stock not
purchased in the subscription offering and community offering may be offered for
sale to the general public in a syndicated community offering to be managed by
Sandler O'Neill & Partners, L.P., acting as our agent. In such capacity, Sandler
O'Neill may form a syndicate of broker-dealers. Alternatively, we may sell any
remaining shares in an underwritten public offering. However, we retain the
right to accept or reject, in whole or in part, any orders in the syndicated
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community offering or underwritten public offering. Neither Sandler O'Neill nor
any registered broker-dealer will have any obligation to take or purchase any
shares of the common stock in the syndicated community offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in any
syndicated community offering. The syndicated community offering would terminate
no later than 45 days after the expiration of the subscription offering, unless
extended by us, with approval of the OTS. See "--Community Offering" above for a
discussion of rights of subscribers in the event an extension is granted.
Common stock sold in the syndicated community offering also will be
sold at the $10.00 per share purchase price. Purchasers in the syndicated
community offering would be eligible to purchase up to $150,000 of common stock
(which equals 15,000 shares). Orders for common stock in the syndicated
community offering would be filled first to a maximum of 2% of the total number
of shares sold in the offering and thereafter any remaining shares will be
allocated on an equal basis per order until all orders have been filled.
However, no fractional shares will be issued. We may begin the syndicated
community offering or underwritten public offering at any time after the
commencement of the subscription offering.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
SYNDICATED COMMUNITY OFFERING OR UNDERWRITTEN PUBLIC OFFERING IS SUBJECT TO OUR
RIGHT IN OUR SOLE DISCRETION TO ACCEPT OR REJECT ORDERS, IN WHOLE OR PART,
EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING
THE EXPIRATION DATE OF THE OFFERING. IF YOUR ORDER IS REJECTED IN PART, YOU WILL
NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF YOUR ORDER.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the OTS and may provide for
purchases by directors, officers, their associates and other persons in excess
of the limitations provided in the stock issuance plan and in excess of the
proposed director purchases discussed earlier, although no purchases are
currently intended. If other purchase arrangements cannot be made, we may
either: terminate the stock offering and promptly return all funds; set a new
offering range, notify all subscribers and give them the opportunity to place a
new order for shares of Mutual Bancorp common stock; or take such other actions
as may be permitted by the OTS.
ADDITIONAL LIMITATIONS ON PURCHASE OF SHARES. The plan provides for
certain limitations on the purchase of shares of common stock in the offering.
These limitations are as follows:
A. The aggregate amount of outstanding common stock of Mutual Bancorp
owned or controlled by persons other than Mutual MHC, at the close of the
offering must be less than 50% of Mutual Bancorp's total outstanding common
stock.
B. The maximum purchase of common stock in the subscription offering by
a person or group of persons through a single deposit account is $150,000. No
person by himself, or with an associate or group of persons acting in concert,
will be allowed to purchase more than $250,000 of the common stock offered in
the offering, except that: (1) Mutual Bancorp may, in its sole discretion and
without further notice to or solicitation of subscribers or other prospective
purchasers, increase such maximum purchase limitation to 5% of the number of
shares offered in the offering; (2) our qualified tax-exempt employee benefit
plans, such as our ESOP, may purchase up to 10% of the shares offered in the
offering; and (3) shares to be held by any qualified tax-exempt employee benefit
plan and attributable to a person shall not be aggregated with other shares
purchased directly by or otherwise attributable to such person.
C. The aggregate amount of common stock acquired in the offering, plus
all prior issuances by Mutual Bancorp, by any non-qualifying employee benefit
plan or any management person and his or her associates, excluding any shares
acquired in the secondary market, cannot not exceed 4.9% of each of
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our outstanding shares and our stockholders' equity at the conclusion of the
offering. In calculating the number of shares held by any management person and
his or her associates under this paragraph, shares held by any of our qualified
or non-qualified employee benefit plans that are attributable to such person
shall not be counted.
D. The aggregate amount of common stock acquired in the offering, plus
all prior issuances by Mutual Bancorp, by any one or more qualified tax-exempt
employee benefit plans, exclusive of any shares of common stock acquired by such
plans in the secondary market, cannot exceed 4.9% of each of our outstanding
shares of common stock and our stockholders' equity at the conclusion of the
offering.
E. The aggregate amount of common stock acquired in the offering,
plus all prior issuances by Mutual Bancorp, by all our stock benefit plans,
other than the ESOP, cannot exceed 25% of our outstanding common stock held by
persons other than Mutual MHC.
F. The aggregate amount of common stock acquired in the offering, plus
all prior issuances by Mutual Bancorp, by all our qualified tax-exempt employee
benefit plans or management persons and their associates, excluding any shares
acquired in the secondary market, cannot exceed 25% of each of our outstanding
shares and our stockholders' equity held by persons other than Mutual MHC, at
the conclusion of the offering. In calculating the number of shares held by
management persons and their associates under this paragraph or the next
paragraph, shares held by any of our qualified or non-tax-qualified employee
plans that are attributable to such persons shall not be counted.
G. Notwithstanding any other provision of the stock issuance plan, no
person shall be entitled to purchase any common stock to the extent such
purchase would be illegal under any federal or state law or regulation or would
violate regulations or policies of the National Association of Securities
Dealers, Inc., particularly those regarding free riding and withholding. Mutual
Bancorp and/or its agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse to honor any
purchase order if such opinion is not timely furnished.
H. Our board of directors has the right, in its sole discretion, to
reject any order submitted by a person whose representations the board of
directors believes to be false or who it otherwise believes, either alone or
acting in concert with others, intends to violate, evade or circumvent the terms
and conditions of the stock issuance plan.
The term "associate" is used above to indicate any of the following
relationships with a person:
o any corporation or organization, other than Mutual MHC, Mutual
Bancorp or the Bank or any of their majority-owned
subsidiaries, of which a person is a senior officer or
partner, or beneficially owns, directly or indirectly, 10% or
more of any class of equity securities of the corporation or
organization;
o any trust or other estate if the person has a substantial
beneficial interest in the trust or estate or is a trustee or
fiduciary of the estate. For purposes of OTS regulations, a
person who has a substantial beneficial interest in a
qualified or non-qualified employee benefit plan, or who is a
trustee or fiduciary of the plan is not an associate of the
plan, and a qualified employee benefit plan is not an
associate of a person;
o any person who is related by blood or marriage to such person
and who (1) lives in the same house as the person; or (2) is a
director or senior officer of Mutual MHC, Mutual Bancorp or
the Bank or any of their subsidiaries; and
o any person in concert with the persons or entities specified
above.
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Under the stock issuance plan, the term "acting in concert" means:
o knowing participation in a joint activity or interdependent
action towards a common goal whether or not pursuant to an
express agreement; or
o a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement.
A person or company which acts in concert with another party will also
be deemed to be acting in concert with any person or company who is also acting
in concert with that other party. Persons or companies who file jointly a
Schedule 13-D or Schedule 13-G with any regulatory agency will be deemed to be
acting in concert. For purposes of the stock issuance plan, the members of the
board of directors will not be deemed to be acting in concert solely by reason
of their board membership.
DISCRETIONARY INCREASE IN MAXIMUM PURCHASE LIMITATIONS. Our board of
directors may, in its sole discretion, increase the maximum purchase limitation
in the subscription and in any community offering or syndicated community
offering up to 5% of the total shares being offered in the offering, or decrease
it to 0.1% of the shares offered in the offering. Requests to purchase shares
under this provision will be allocated by the board of directors in accordance
with the priority rights and allocation procedures set forth above. Depending
upon market and financial conditions, and subject to certain regulatory
limitations, the board of directors, with the approval of the OTS and without
further approval of the voting members, may increase or decrease any of the
above purchase limitations at any time.
TAX EFFECTS OF THE STOCK OFFERING
We have received an opinion from our special counsel, Vedder, Price,
Kaufman & Kammholz, P.C., as to the material federal income tax consequences of
the stock offering to Mutual MHC, Mutual Bancorp, the Bank, our account holders
and persons who purchase common stock in the stock offering. This opinion is
based, among other things, on factual representations made by us, on certain
assumptions stated in the opinion, and on the Internal Revenue Code, regulations
now in effect or proposed, current administrative rulings, practices and
judicial authority, all of which are subject to change (which change may be made
with retroactive effect). This opinion has been included as an exhibit to our
registration statement filed with the SEC, of which this prospectus is a part.
The opinion provides, among other things, that:
1. neither Mutual MHC nor Mutual Bancorp will recognize gain or loss
upon the exchange by Mutual MHC of the shares of common stock of the Bank that
Mutual MHC presently holds for the shares of common stock of Mutual Bancorp that
will be issued to it in connection with the stock offering;
2. no gain or loss or taxable income will be recognized by eligible
account holders or supplemental eligible account holders upon the distribution
to them or their exercise of nontransferable subscription rights to purchase our
common stock;
3. it is more likely than not that the tax "basis" of our common stock
to persons who purchase shares in the stock offering will be the purchase price
thereof, and that their holding period for the shares will commence upon the
acquisition of the stock during the offering; and
4. no gain or loss will be recognized by us on our receipt of cash in
exchange for our common stock sold in the stock offering.
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The tax opinions as to items 2 and 3 above are based on the position of
RP Financial that subscription rights to be received by eligible account holders
and supplemental eligible account holders do not have any economic value at the
time of distribution or at the time the subscription rights are exercised. In
this regard, Vedder, Price noted that the subscription rights will be granted at
no cost to the recipients, are legally non-transferable and of short duration,
and will provide the recipient with the right only to purchase shares of common
stock at the same price to be paid by members of the general public in any
community offering. The firm also noted that the IRS has not in the past
concluded that subscription rights have value. However, as stated in the
opinion, the issue of whether or not the nontransferable subscription rights
have value is based on all the facts and circumstances. If the nontransferable
subscription rights granted to eligible subscribers are subsequently found to
have an ascertainable value greater than zero, income may be recognized by
various recipients of the nontransferable subscription rights (in certain cases,
whether or not the rights are exercised) and we could recognize gain on the
distribution of the nontransferable subscription rights.
The opinion of Vedder, Price, unlike a private letter ruling issued by
the IRS, is not binding on the IRS and the conclusions expressed therein may be
challenged at a future date. The IRS has issued favorable rulings for
transactions substantially similar to the stock offering, but any such ruling
may not be cited as precedent by any taxpayer other than the taxpayer to whom
the ruling is addressed. We do not plan to apply for a private letter ruling
concerning the transactions described herein.
We also have received an opinion from Crowe Chizek and Company LLC that
the Illinois state income tax consequences of the proposed transaction are
consistent with the federal income tax consequences.
We also have received a letter from RP Financial, L.C., stating its
belief that the subscription rights do not have any ascertainable fair market
value and that the price at which the subscription rights are exercisable will
not be more or less than the fair market value of the shares on the date of the
exercise. This position is based on the fact that these rights are acquired by
the recipients without cost, are nontransferable and of short duration, and
afford the recipients the right only to purchase the common stock at the same
price as will be paid by members of the general public in any community
offering.
If the subscription rights granted to eligible account holders and
supplemental eligible account holders are deemed to have an ascertainable value,
receipt of these rights could result in taxable gain to those eligible account
holders and supplemental eligible account holders who exercise the subscription
rights in an amount equal to the ascertainable value, and we could recognize
gain on a distribution. Eligible account holders and supplemental eligible
account holders are encouraged to consult with their own tax advisors as to the
tax consequences in the event that subscription rights are deemed to have an
ascertainable value.
RESTRICTIONS ON TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Subscription rights are nontransferable, and we may reasonably
investigate to determine compliance with this restriction. Persons selling or
otherwise transferring their rights to subscribe for shares of common stock in
the subscription offering or subscribing for shares of common stock on behalf of
another person may forfeit those rights and may face possible further sanctions
and penalties imposed by the OTS or another agency of the United States
Government. We will pursue any and all legal and equitable remedies in the event
we become aware of the transfer of subscription rights and will not honor orders
known by us to involve the transfer of these rights. Each person exercising
subscription rights will be required to certify that he or she is purchasing
shares solely for his or her own account and that he or she has no agreement or
understanding with any other person for the sale or transfer of the shares of
common stock. In addition, joint stock registration will be allowed only if the
qualifying account is so
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registered. Once tendered, subscription orders cannot be revoked without the
consent of the Bank and Mutual Bancorp.
PLAN OF DISTRIBUTION AND MARKETING ARRANGEMENTS
Offering materials have been distributed initially to certain persons
by mail, with additional copies made available through our Stock Information
Center and Sandler O'Neill & Partners, L.P. All prospective purchasers must send
payment directly to the Bank, where such funds will be held in a segregated
savings account and not released until the offering is completed or terminated.
We have engaged Sandler O'Neill, a broker-dealer registered with the
NASD, as a financial and marketing agent in connection with the offering of our
common stock. In its role as financial and marketing agent, Sandler O'Neill will
assist us in the offering as follows:
o consulting as to the securities market implications of any
aspect of our stock issuance plan;
o reviewing with our board of directors the financial impact of
the offering;
o reviewing all offering documents (though we remain responsible
for the preparation and filing of the offering documents);
o assisting in the design and implementation of a marketing
strategy for the offering;
o assisting us in scheduling and preparing for meetings with
potential investors and broker-dealers; and
o providing other general advice and assistance as may be
requested to promote the successful completion of the
offering.
For these services, Sandler O'Neill will receive a fee of 1.35% of the
aggregate dollar amount of the common stock sold in the subscription and
community offerings, excluding shares sold to the employee stock ownership plan
and to our officers, employees and directors and their immediate families. We
have made an advance payment of $25,000 to Sandler O'Neill, which will be
credited against the fees and expenses of Sandler O'Neill. If there is a
syndicated community offering, Sandler O'Neill will receive a management fee of
1.0% of the aggregate dollar amount of the common stock sold in the syndicated
community offering. The total fees payable to Sandler O'Neill and other NASD
member firms in the syndicated community offering shall not exceed 7.0% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses associated with its marketing effort, including its attorney's fees, in
an amount not to exceed $45,000. We must reimburse Sandler O'Neill for these
expenses whether or not our stock offering is ultimately consummated. We have
agreed to indemnify Sandler O'Neill against certain liabilities and expenses
(including legal fees) incurred in connection with certain claims or liabilities
related to or arising out of the offering, including liabilities under the
Securities Act of 1933.
We have also engaged Sandler O'Neill to act as records management agent
in connection with the offering. In its role as records management agent,
Sandler O'Neill will assist us in the offering as follows:
o consolidation of accounts and development of a central file;
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o preparation of order forms;
o organization and supervision of the Stock Information Center;
and
o subscription services.
For these services, Sandler O'Neill will receive a fee of $10,000 and
reimbursement for its reasonable out-of-pocket expenses. We have made an advance
payment of $5,000 to Sandler O'Neill for these services.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to us or to persons who subscribe for common stock, nor
has it prepared an opinion as to the fairness to us of the purchase price or the
terms of the common stock to be sold. Sandler O'Neill expresses no opinion as to
the prices at which common stock to be issued may trade.
Our directors and executive officers may participate in the
solicitation of offers to purchase shares of common stock. Other trained
employees may participate in the offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives of Sandler O'Neill. We will
rely on Rule 3a4-1 of the Exchange Act, so as to permit officers, directors, and
employees to participate in the sale of shares of common stock. No officer,
director or employee will be compensated for his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
HOW WE DETERMINED STOCK PRICING AND THE NUMBER OF SHARES TO BE ISSUED
The stock issuance plan and federal regulations require that the
aggregate purchase price of the common stock sold in the offering be based on
the appraised pro forma market value of the common stock, as determined on the
basis of an independent valuation. We retained RP Financial, L.C. to make the
independent valuation. RP Financial will receive a fee of $35,000. We have
agreed to indemnify RP Financial and its employees and affiliates against
certain losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where RP
Financial's liability results from its negligence or bad faith.
The independent valuation was prepared by RP Financial in reliance upon
the information contained in this prospectus, including the financial
statements. RP Financial also considered the following factors, among others:
o the present and projected operating results and financial
condition of the Bank and the economic and demographic
conditions in our existing market area;
o historical, financial and other information relating to the
Bank;
o a comparative evaluation of the operating and financial
statistics of the Bank with those of other publicly traded
subsidiaries of holding companies;
o the aggregate size of the offering;
o the impact of the offering on our stockholders' equity and
earnings potential; and
o the trading market for securities of comparable institutions
and general conditions in the market for such securities.
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On the basis of the foregoing, RP Financial advised us that as of
November 4, 2005, the estimated pro forma market value of the common stock on a
fully converted basis ranged from a minimum of $23.4 million to a maximum of
$31.6 million, with a midpoint of $27.5 million (the estimated valuation range).
The board determined to offer the shares of common stock in the offering at the
purchase price of $10.00 per share and that 30% of the shares issued should be
held by purchasers in the offering and 70% should be held by Mutual MHC. Based
on the estimated valuation range and the purchase price of $10.00 per share, the
number of shares of common stock that Mutual Bancorp will issue to Mutual MHC,
our mutual holding company, will range from 1,636,250 shares to 2,213,750
shares, with a midpoint of 1,925,000 shares, and the number of shares sold in
the offering will range from 701,250 shares to 948,750 shares, with a midpoint
of 825,000 shares.
The board reviewed the independent valuation and, in particular,
considered (i) our financial condition and results of operations for the year
ended December 31, 2004 and for the nine months ended September 30, 2005, (ii)
financial comparisons to other financial institutions, and (iii) stock market
conditions generally and, in particular, for financial institutions, all of
which are set forth in the independent valuation. The board also reviewed the
methodology and the assumptions used by RP Financial in preparing the
independent valuation. The estimated valuation range may be amended with the
approval of the Office of Thrift Supervision, if necessitated by subsequent
developments in our financial condition or market conditions generally.
Following commencement of the subscription offering, the maximum of the
estimated valuation range may be increased by up to 15%, to up to $10,911,000,
and the maximum number of shares that will be outstanding immediately following
the offering may be increased up to 15% to 3,636,875 shares. Under such
circumstances the number of shares sold in the offering will be increased to
1,091,062 shares, and the number of shares held by Mutual MHC will be increased
to 2,545,813 shares. The increase in the valuation range may occur to reflect
changes in market and financial conditions, demand for the shares, or regulatory
considerations, without the resolicitation of subscribers. The minimum of the
estimated valuation range and the minimum of the offering range may not be
decreased without a resolicitation of subscribers. The purchase price of $10.00
per share will remain fixed. See "--Offering of Common Stock--Additional
Limitations on Purchase of Shares" as to the method of distribution and
allocation of additional shares of common stock that may be issued in the event
of an increase in the offering range to fill unfilled orders in the subscription
and community offerings.
The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing shares of
common stock. RP Financial did not independently verify the financial statements
and other information provided by us, nor did RP Financial value independently
the assets or liabilities of the bank. The independent valuation considers the
company as a going concern and should not be considered as an indication of its
liquidation value. Moreover, because the valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing
shares in the offering will thereafter be able to sell such shares at prices at
or above the purchase price.
The independent valuation will be updated at the time of the completion
of the offering. If the updated valuation results in an increase in the pro
forma market value of the common stock to more than $36,368,750 or a decrease to
less than $23,375,000, then we, after consulting with the OTS, may terminate the
stock issuance plan and return all funds promptly, with interest on payments
made by check, certified or teller's check, bank draft or money order, extend or
hold a new subscription offering, community offering, or both, establish a new
offering range, commence a resolicitation of subscribers or take such other
actions as may be permitted by the OTS in order to complete the offering. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period
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of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the subscription and
community offerings would not exceed 45 days unless further extended by the
Office of Thrift Supervision for periods of up to 90 days not to extend beyond
24 months following the date of the approval by the OTS of the stock issuance
plan, or ________ __, 2006.
An increase in the independent valuation and the number of shares to be
issued in the offering would decrease both a subscriber's ownership interest and
our pro forma earnings and stockholders' equity on a per share basis, while
increasing pro forma earnings and stockholders' equity on an aggregate basis. A
decrease in the independent valuation and the number of shares of common stock
to be issued in the offering would increase both a subscriber's ownership
interest and our pro forma earnings and stockholders' equity on a per share
basis, while decreasing pro forma net income and stockholders' equity on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data" on page 31.
Copies of RP Financial's appraisal report and the detailed memorandum
of the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at our offices and the other locations specified under
"Where You Can Find More Information" on page 102.
No sale of shares of common stock may occur unless, prior to such sale,
RP Financial confirms to us and the Office of Thrift Supervision that, to the
best of its knowledge, nothing of a material nature has occurred that, taking
into account all relevant factors, would cause RP Financial to conclude that the
independent valuation is incompatible with its estimate of the pro forma market
value of the common stock at the conclusion of the offering. Any change that
would result in an aggregate purchase price that is below the minimum or above
the maximum of the estimated valuation range would be subject to Office of
Thrift Supervision approval. If such confirmation is not received, we may extend
the offering, reopen the offering or commence a new offering, establish a new
estimated valuation range and commence a resolicitation of all purchasers with
the approval of the Office of Thrift Supervision or take such other actions as
permitted by the Office of Thrift Supervision in order to complete the offering.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
Prospectus Delivery. To ensure that each purchaser in the subscription
and community offering receives a prospectus at least 48 hours prior to the
expiration date of the subscription and community offering, in accordance with
Rule 15c2-8 under the Securities Exchange Act of 1934, no prospectus will be
mailed later than five days or hand delivered any later than two days prior to
the end of the offering. Execution of the order form will confirm receipt or
delivery of a prospectus in accordance with Rule 15c2-8. Order forms will be
distributed only with a prospectus. Neither we nor Sandler O'Neill is obligated
to deliver a prospectus and an order form by any means other than the U.S.
Postal Service.
Expiration Date. The offering will terminate at 12:00 noon, Central
time on ________ __, 2006, unless extended by us for up to 90 days after the
date of Office of Thrift Supervision approval of the use of this prospectus,
which is ________ __, 2006, or, if approved by the Office of Thrift Supervision,
for an additional period after ________ __, 2006 (as so extended, the
"expiration date"). We are not required to give purchasers notice of any
extension unless the expiration date is later than ________ __, 2006, in which
event purchasers will be given the right to increase, decrease, confirm, or
rescind their orders.
Use of Order Forms. In order to purchase shares of common stock, each
purchaser must complete an order form except for certain persons purchasing in
any syndicated community offering as more fully described below. Any person
receiving an order form who desires to purchase shares of common stock may do so
by delivering to the Bank's main office, a properly executed and completed order
form, together with full payment for the shares of common stock purchased. We
must receive the
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completed order form prior to 12:00 noon, Central Daylight time on ________ __,
2006. Each person ordering shares of common stock is required to represent that
they are purchasing such shares for their own account. We are not required to
accept copies of order forms.
To ensure that eligible account holders, supplemental eligible account
holders, and voting members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts on the order form giving
all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date. Failure to list all of your account
relationships, which will all be reviewed when taking into consideration
relevant account relationships in the event of an allocation of stock, could
result in a loss of all or part of your share allocation in the event of an
oversubscription. Should an oversubscription result in an allocation of shares,
the allocation of shares will be completed in accordance with the stock issuance
plan. Our interpretation of the terms and conditions of the stock issuance plan
and of the acceptability of the order form will be final. If a partial payment
for your shares is required, we will first take the funds from the cash or check
you paid with and secondly from any account you wanted funds withdrawn from.
WE ARE NOT OBLIGATED TO ACCEPT AN ORDER SUBMITTED ON PHOTOCOPIED OR
FAXED ORDER FORMS. ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION
OF THE CERTIFICATION APPEARING ON THE ORDER FORM. We are not required to notify
subscribers of incomplete or improperly executed order forms and we have the
right to waive or permit the correction of incomplete or improperly executed
order forms as long as it is performed before the expiration of the offering. We
do not represent, however, that we will do so and we have no affirmative duty to
notify any prospective subscriber of any such defects.
Payment for Shares. Full payment for all shares will be required to
accompany a completed order form for the purchase to be valid. Payment for
shares may be made by (1) cash, if delivered in person and exchanged for a bank
check from the Bank, (2) check or money order, or (3) authorization of
withdrawal from a deposit account maintained with the Bank. Third party checks
will not be accepted as payment for a subscriber's order. Appropriate means by
which such withdrawals may be authorized are provided in the order forms.
Once a withdrawal amount has been authorized, a hold will be placed on
such funds, making them unavailable to the depositor until the offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from deposit accounts, all funds authorized for withdrawal will
continue to earn interest at the contract rate until the offering is completed
or terminated.
Interest penalties for early withdrawal applicable to certificate of
deposit accounts at the Bank will not apply to withdrawals authorized for the
purchase of shares of common stock. However, if a withdrawal results in a
certificate of deposit account with a balance less than the applicable minimum
balance requirement, the certificate of deposit shall be canceled at the time of
withdrawal without penalty, and the remaining balance will earn interest at our
passbook savings rate subsequent to the withdrawal.
Payments we receive will be placed in a segregated savings account and
will be paid interest at our passbook savings rate from the date payment is
received until the offering is completed or terminated. Interest will be paid by
check, on all funds held, including funds accepted as payment for shares of
common stock, promptly following completion or termination of the offering.
If the ESOP purchases shares, it will not be required to pay for such
shares until consummation of the offering, provided that there is a loan
commitment to lend to the ESOP the amount of funds necessary to purchase the
number of shares ordered.
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Once submitted, an order cannot be modified or revoked unless the
offering is terminated or extended beyond ________ __, 2006.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offering, provided that the IRA accounts
are not maintained at Mutual Federal. Persons with IRAs maintained with us must
have their accounts transferred to a self-directed IRA account with an
unaffiliated trustee in order to purchase shares of common stock in the
offering. In addition, the provisions of ERISA and IRS regulations require that
executive officers, trustees, and 10% stockholders who use self-directed IRA
funds and/or Keogh plan accounts to purchase shares of common stock in the
offering, make such purchase for the exclusive benefit of the IRA and/or Keogh
plan participant. The transfer of funds to a new trustee takes time, so please
make arrangements as soon as possible.
As discussed above, depending on market conditions, the common stock
may be offered for sale to the general public on a best efforts basis in a
syndicated community offering by a selling group of broker-dealers to be managed
by Sandler O'Neill. Sandler O'Neill, in its discretion, will instruct selected
broker-dealers as to the number of shares of common stock to be allocated to
each selected broker-dealer. Only upon allocation of shares to selected
broker-dealers may they take orders from their customers. Investors who desire
to purchase shares of common stock in the syndicated offering directly through a
selected broker-dealer, which may include Sandler O'Neill, will be advised that
the members of the selling group are required either (a) upon receipt of an
executed order form or direction to execute an order form on behalf of an
investor, to forward the appropriate purchase price to us for deposit in a
segregated account on or before 12:00 p.m., Central Daylight time, of the
business day next following such receipt or execution; or (b) upon receipt of
confirmation by the selling group member of an investor's interest in purchasing
shares, and following a mailing of an acknowledgment by the member to the
investor on the business day next following receipt of confirmation, to debit
the account of the investor on the third business day next following receipt of
confirmation and to forward the appropriate purchase price to us for deposit in
the segregated account on or before 12:00 noon, Central Daylight time, of the
business day next following the debiting of the investor's account. Payment in
full for any shares purchased pursuant to alternative (a) above must be made by
check. Payment for shares of common stock purchased pursuant to alternative (b)
above may be made by wire transfer.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the offering will be mailed to each purchaser at the
registration address noted on the order form, as soon as practicable following
consummation of the offering. Any certificates returned as undeliverable will be
held by us until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Purchasers may not be able to
sell their shares of common stock until certificates are available and
delivered.
RESTRICTIONS ON PURCHASE OR TRANSFER OF STOCK BY DIRECTORS AND OFFICERS
Shares purchased in the offering will be freely transferable, except
for shares purchased by our directors and officers, which may not be sold or
otherwise disposed of for value for a period of one year following the date of
purchase, except for any disposition of shares (1) following the death of the
original purchaser or (2) by reason of an exchange of securities in connection
with a merger or acquisition approved by the applicable regulatory authorities.
Sales of shares of our common stock by our directors and officers will also be
subject to certain insider trading and other transfer restrictions under the
federal securities laws. See "Supervision and Regulation--Federal Securities
Laws."
Purchases of outstanding shares of our common stock by our directors,
executive officers, or any person who was an executive officer or director of
the Bank after adoption of the stock issuance plan, and their associates during
the three-year period following the offering may be made only through a broker
or dealer registered with the SEC, except with the prior written approval of the
OTS. This restriction does
97
not apply, however, to negotiated transactions involving more than 1% of our
outstanding common stock or to the purchase of shares of common stock pursuant
to the exercise of stock options granted under the stock option plan.
We have filed with the SEC a registration statement under the
Securities Act of 1933 for the registration of the shares of common stock to be
issued in the offering. The registration under the Securities Act of shares of
the common stock to be issued in the offering does not cover the resale of the
shares of common stock. Shares of common stock purchased by persons who are not
affiliates of us may be resold without any further registration. Shares
purchased by an affiliate of us will have resale restrictions under Rule 144 of
the Securities Act. As long as we meet the current public information
requirements of Rule 144, each affiliate who complies with the other conditions
of Rule 144, including those that require the affiliate's sale to be aggregated
with those of certain other persons, would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of 1% of the outstanding shares of our common stock or the
average weekly volume of trading in the shares of our common stock during the
preceding four calendar weeks. Provision may be made in the future by us to
permit affiliates to have their shares of common stock registered for resale
under the Securities Act under certain circumstances.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the stock issuance plan by the board of
directors will be final, subject to the authority of the Office of Thrift
Supervision. The stock issuance plan provides that, if deemed necessary or
desirable by the board of directors of the Bank the stock issuance plan may be
substantially amended by a majority vote of the board of directors of the Bank
as a result of comments from regulatory authorities or otherwise, at any time
prior to the approval of the plan by the OTS and at any time thereafter with
concurrence of the OTS. The stock issuance plan may be terminated by a majority
vote of the board of directors of the Bank at any time prior to approval of the
plan by the Office of Thrift Supervision and may be terminated at any time
thereafter with the concurrence of the Office of Thrift Supervision.
STOCK INFORMATION CENTER
If you have any questions regarding the offering, please call the Stock
Information Center at (___) ___-____, Monday through Friday between 9:00 a.m.
and 5:00 p.m., Central Daylight time, and Saturday between 9:00 a.m. and 1:00
p.m.
RESTRICTIONS ON THE ACQUISITION OF
MUTUAL FEDERAL BANCORP, INC. AND THE BANK
The principal federal regulatory restrictions that affect the ability
of any person, firm or entity to acquire control of us are described below. Also
discussed are certain provisions in our charter and bylaws which may have
anti-takeover effects.
FEDERAL LAW
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days' prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision.
98
Pursuant to federal regulations, control of a savings institution is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock of a savings institution, where certain
enumerated "control factors" are also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or
o the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of
control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire the beneficial ownership of more than
10% of our voting stock or the voting stock of the Bank without the prior
approval of the Office of Thrift Supervision.
CORPORATE GOVERNANCE PROVISIONS IN THE CHARTER AND BYLAWS OF MUTUAL FEDERAL
BANCORP, INC.
The following discussion is a summary of provisions of the proposed
charter and bylaws of Mutual Bancorp that relate to corporate governance. The
description is necessarily general and qualified by reference to the charter and
bylaws.
Classified Board of Directors. The board of directors will be required
by the bylaws to be divided into three staggered classes which are as equal in
size as is possible. Each year one class will be elected by our stockholders for
a three-year term. A classified board promotes continuity and stability of our
management but makes it more difficult for stockholders to change a majority of
the directors because it generally takes at least two annual elections of
directors for this to occur.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, we will have authorized but unissued shares of preferred stock and
common stock. See "Description of Capital Stock of Mutual Federal Bancorp, Inc."
Although these shares could be used by the board of directors to make it more
difficult or to discourage an attempt to obtain our control through a merger,
tender offer, proxy contest or otherwise, it is unlikely that we would use or
need to use shares for these purposes since Mutual MHC must own a majority of
our common stock.
No Cumulative Voting. Our charter will provide that there will not be
cumulative voting by stockholders for the election of our directors. No
cumulative voting rights means that Mutual MHC, as the holder of a majority of
the shares eligible to be voted at a meeting of stockholders, may elect all of
the directors to be elected at that meeting. This could prevent minority
stockholder representation on our board of directors.
99
Advance Notice Procedures for Stockholder Nominations and Proposals.
Our bylaws will provide that any stockholder wanting to make a nomination for
the election of directors or a proposal for new business at a meeting of
stockholders must send written notice at least five days before the date of the
annual meeting. The bylaws further will provide that if a stockholder wanting to
make a nomination or a proposal for new business does not follow the prescribed
procedures, the proposal will not be considered until an adjourned, special, or
annual meeting of the shareholders taking place 30 days or more thereafter. This
advance notice requirement may also give management time to solicit its own
proxies in an attempt to defeat any dissident slate of nominations if management
thinks it is in the best interest of stockholders generally. Similarly, adequate
advance notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted.
BENEFIT PLANS
In addition to the provisions of our charter and bylaws described
above, certain benefit plans that we may adopt in connection with or following
the stock offering contain provisions which also may discourage hostile takeover
attempts which our board of directors might conclude are not in our best
interests or the best interests of the Bank or our stockholders.
DESCRIPTION OF CAPITAL STOCK OF
MUTUAL FEDERAL BANCORP, INC.
GENERAL
Mutual Bancorp will be authorized to issue 12,000,000 shares of common
stock having a par value of $0.01 per share and 1,000,000 shares of preferred
stock. Each share of our common stock will have the same relative rights as, and
will be identical in all respects with, each other share of common stock. Upon
payment of the purchase price for the common stock in accordance with the stock
issuance plan, all of the stock will be duly authorized, fully paid and
nonassessable. Presented below is a description of our capital stock, which is
deemed material to an investment decision with respect to the offering. Our
common stock will represent nonwithdrawable capital, will not be an account of
an insurable type, and will not be insured by the Federal Deposit Insurance
Corporation.
We currently expect that we will have a maximum of up to 3,162,500
shares of common stock outstanding after the stock offering, of which 948,750
shares will be held by persons other than Mutual MHC. The board of directors
can, without stockholder approval, issue additional shares of common stock,
although Mutual MHC, so long as it is in existence, must own a majority of our
outstanding shares of common stock. Our issuance of additional shares of common
stock could dilute the voting strength of the holders of the common stock and
may assist management in impeding an unfriendly takeover or attempted change in
control. We have no present plans to issue additional shares of common stock
other than pursuant to the stock benefit plans previously discussed.
COMMON STOCK
Distributions. We can pay dividends if, as and when declared by our
board of directors, subject to compliance with limitations which are imposed by
law. The holders of our common stock will be entitled to receive and share
equally in such dividends as may be declared by the board of directors out of
funds legally available therefor. If we issue preferred stock, the holders
thereof may have a priority over the holders of the common stock with respect to
dividends. We have no plans at present to issue dividends to public holders of
our common stock.
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Voting Rights. Upon the effective date of the stock offering, the
holders of our common stock will possess exclusive voting rights in us. Each
holder of common stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. Under certain
circumstances, shares in excess of 10% of the issued and outstanding common
stock held by a person other than Mutual MHC may be considered "Excess Shares"
and, accordingly, will not be entitled to vote. See "Restrictions on the
Acquisition of Mutual Bancorp and the Bank." If Mutual Bancorp issues preferred
stock, holders of the preferred stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, Mutual Bancorp, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank, including all deposit accounts and accrued interest
thereon, all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of Mutual Bancorp, the holders of its
common stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of Mutual Bancorp
available for distribution. If preferred stock is issued, the holders thereof
may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Holders of our common stock will not be
entitled to preemptive rights with respect to any shares that may be issued.
Preemptive rights are the priority right to buy additional shares if we issue
more shares in the future. The common stock is not subject to redemption.
PREFERRED STOCK
None of our shares of authorized preferred stock will be issued in the
offering. Such stock may be issued with such rights, preferences and
designations as the board of directors may from time to time determine. The
board of directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control. We have no
present plans to issue preferred stock.
TRANSFER AGENT AND REGISTRAR
[______________] will act as the transfer agent and registrar for the
common stock.
LEGAL AND TAX MATTERS
The legality of our common stock and the federal income tax
consequences of the offering have been passed upon for us by Vedder, Price,
Kaufman & Kammholz, P.C., Chicago, Illinois. The Illinois state income tax
consequences of the offering have been passed upon for us by Crowe Chizek and
Company LLC. Vedder, Price, Kaufman & Kammholz, P.C. and Crowe Chizek and
Company LLC have consented to the references in this prospectus to their
opinions. Certain legal matters regarding the offering will be passed upon for
Sandler O'Neill & Partners, L.P. by Luse Gorman Pomerenk & Schick, P.C.
EXPERTS
Our consolidated financial statements at December 31, 2004 and 2003 and
for the years then ended, appearing in this prospectus and registration
statement have been audited by Crowe Chizek and
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Company LLC, an independent registered public accounting firm, as set forth in
its report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as an expert in accounting and
auditing.
RP Financial, L.C. has consented to the publication in this prospectus
of the summary of its report to us setting forth its opinion as to the estimated
pro forma market value of the common stock upon the completion of the offering
and its letter with respect to subscription rights.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, that
registers the common stock sold in the stock offering. The registration
statement, including the exhibits, contains additional relevant information
about us and our common stock. The rules and regulations of the SEC allow us to
omit certain information included in the registration statement from this
prospectus. You may read and copy the registration statement at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. Please call the SEC
at 1-800-SEC-0330 for further information on the SEC's public reference rooms.
The registration statement also is available to the public on the SEC's website
at http://www.sec.gov.
The Bank has filed an Application MHC-2 with the OTS with respect to
the offering. Pursuant to the rules and regulations of the OTS, this prospectus
omits certain information contained in that Application. The Application may be
examined at the principal offices of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Southeast Regional Office of the OTS located at 1475
Peachtree Street, N.E., Atlanta, Georgia 30309.
REGISTRATION REQUIREMENTS
In connection with the offering, we will register the common stock with
the SEC under Section 12(g) of the Securities Exchange Act of 1934; requests for
this information should be directed to Mutual Federal Bancorp, Inc., 2212 West
Cermak Road, Chicago, Illinois, 60608, Attn: Corporate Secretary. Pursuant to
the stock issuance plan, we will not terminate this registration for a period of
at least three years following the offering.
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MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm......................F-2
Financial Statements
Consolidated Statements of Financial Condition.............................F-3
Consolidated Statements of Income..........................................F-4
Consolidated Statements of Stockholder's Equity............................F-5
Consolidated Statements of Cash Flows......................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
[LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Mutual Federal Savings and Loan
Association of Chicago
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of the Mutual Federal Savings and Loan Association of Chicago (a wholly owned
subsidiary of Mutual Federal Bancorp, MHC) as of December 31, 2004 and 2003, and
the related statements of income, stockholder's equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Association as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Crowe Chizek and Company LLC
Oak Brook, Illinois
November 1, 2005
F-2
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
-----------------------
2005 2004 2003
------------- ---------- ---------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................. $ 4,812 $ 3,684 $ 4,243
Securities available-for-sale............................. 25,270 31,596 31,714
Loans, net of allowance for loan losses of $150 at
September 30, 2005 (unaudited); $150 at December 31,
2004; $150 at December 31, 2003........................ 34,127 28,326 30,396
Federal Home Loan Bank stock, at cost..................... 496 477 449
Premises and equipment, net............................... 321 357 421
Accrued interest receivable .............................. 250 255 246
Other assets.............................................. 48 50 39
------- ------- -------
Total assets........................................... $65,324 $64,745 $67,508
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Non-interest-bearing deposits.......................... $ 410 $ 83 $ 128
Interest-bearing deposits.............................. 44,963 44,488 46,898
------- ------- -------
Total deposits 45,373 44,571 47,026
Advance payments by borrowers for taxes and insurance.. 534 258 261
Accrued interest payable and other liabilities......... 1,193 1,376 1,385
------- ------- -------
Total liabilities................................... 47,100 46,205 48,672
Commitments and contingencies
Stockholder's equity
Preferred stock, no par value, 1,000,000 shares
authorized.......................................... -- -- --
Common stock, $0.10 par value, 5,000,000 shares
authorized, 10,000 shares issued and outstanding.... 1 1 1
Retained earnings...................................... 18,165 17,809 17,283
Accumulated other comprehensive income................. 58 730 1,552
------- ------- -------
Total stockholder's equity.......................... 18,224 18,540 18,836
------- ------- -------
Total liabilities and stockholder's equity........ $65,324 $64,745 $67,508
======= ======= =======
See accompanying notes to consolidated financial statements.
F-3
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
Interest and dividend income
Loans, including fees........................... $1,536 $1,490 $ 1,963 $2,136
Securities...................................... 791 853 1,136 1,304
Interest earning deposits....................... 60 45 66 38
Federal Home Loan Bank stock dividends.......... 19 21 28 33
------ ------ ------- ------
Total interest and dividend income........... 2,406 2,409 3,193 3,511
Interest expense
Deposits........................................ 566 552 728 948
------ ------ ------- ------
Net interest income................................ 1,840 1,857 2,465 2,563
Provision for loan losses.......................... -- -- -- --
------ ------ ------- ------
Net interest income after provision for loan losses 1,840 1,857 2,465 2,563
Noninterest income.................................
Insurance commissions and fees.................. 3 3 4 7
Gain on sale of securities...................... 483 609 1,577 271
Other income.................................... 27 22 28 30
------ ------ ------- ------
Total noninterest income..................... 513 634 1,609 308
Noninterest expense
Compensation and benefits....................... 772 697 940 974
Occupancy and equipment......................... 147 171 209 216
Data processing................................. 81 73 97 99
Professional fees............................... 101 97 125 91
Other expense................................... 204 177 256 250
------ ------ ------- ------
Total noninterest expense.................... 1,305 1,215 1,627 1,630
------ ------ ------- ------
Income before income taxes......................... 1,048 1,276 2,447 1,241
Income tax expense................................. 392 476 921 448
------ ------ ------- ------
Net income......................................... $ 656 $ 800 $ 1,526 $ 793
====== ====== ======= ======
Earnings per share (basic and diluted)............. $65.60 $80.00 $152.60 $79.30
====== ====== ======= ======
See accompanying notes to consolidated financial statements.
F-4
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
-------- ---------- ------------- -------
Balance at December 31, 2002............. $ 1 $16,490 $2,153 $18,644
Comprehensive income:
Net income............................ -- 793 -- 793
Change in net unrealized gain (loss)
on securities available-for-sale,
net of taxes and reclassification
adjustments........................ -- -- (601) (601)
-------
Total comprehensive income......... -- -- -- 192
--- ------- ------ -------
Balance at December 31, 2003............. 1 17,283 1,552 18,836
Comprehensive income:
Net income............................ -- 1,526 -- 1,526
Change in net unrealized gain (loss)
on securities available-for-sale,
net of taxes and reclassification
adjustments........................ -- -- (822) (822)
-------
Total comprehensive income......... 704
Cash dividends ($100 per share).......... -- (1,000) -- (1,000)
--- ------- ------ -------
Balance at December 31, 2004............. 1 17,809 730 18,540
Comprehensive income:
Net income............................ -- 656 -- 656
Change in net unrealized gain (loss)
on securities available-for-sale,
net of taxes and reclassification
adjustments........................ -- -- (672) (672)
-------
Total comprehensive income......... (16)
Cash dividends ($30 per share)........... -- (300) -- (300)
--- ------- ------ -------
Balance at September 30, 2005 (unaudited) $ 1 $18,165 $ 58 $18,224
=== ======= ====== =======
See accompanying notes to consolidated financial statements.
F-5
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 656 $ 800 $ 1,526 $ 793
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation............................. 68 76 101 99
Gain on sale of securities............... (483) (609) (1,577) (271)
Net amortization of securities........... 62 69 91 62
Federal Home Loan Bank stock dividends... (19) (21) (28) (33)
Dividends reinvested on securities....... (63) (48) (67) (60)
Provision for deferred income taxes...... 18 45 14 30
(Increase) decrease in accrued interest
receivable and other assets............ 7 (15) (20) (3)
Increase (decrease) in accrued interest
payable and other liabilities.......... 61 185 503 (214)
------ ------ ------- -------
Net cash provided by operating activities 307 482 543 403
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities available-for-sale:
Proceeds from maturities, calls, and
principal repayments................... 7,235 9,094 11,837 15,697
Proceeds from sales...................... 484 619 1,601 275
Purchases................................ (1,843) (9,228) (13,115) (16,684)
Loan originations and payments, net......... (5,801) 1,089 2,070 650
Additions to premises and equipment......... (32) (32) (37) (102)
------ ------ ------- -------
Net cash provided by (used in)
investing activities................ 43 1,542 2,356 (164)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits......... 802 (676) (2,455) (507)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance..... 276 237 (3) (3)
Cash dividends paid......................... (300) (250) (1,000) --
------ ------ ------- -------
Net cash provided by (used in)
financing activities................ 778 (689) (3,458) (510)
------ ------ ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 1,128 1,335 (559) (271)
Cash and cash equivalents at beginning of
period...................................... 3,684 4,243 4,243 4,514
------ ------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..... $4,812 $5,578 $ 3,684 $ 4,243
====== ====== ======= =======
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Interest................................. $ 559 $ 556 $ 731 $ 986
Income taxes............................. 705 343 472 445
F-6
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Mutual Federal Savings and Loan Association of Chicago and
its wholly owned subsidiary, EMEFES Service Corporation, together referred to as
the "Association." Intercompany transactions and balances are eliminated in
consolidation. The Association is a wholly owned subsidiary of Mutual Federal
Bancorp, MHC (the "MHC"). The MHC is owned by the depositors of the Association.
The Association provides financial services through its office in Chicago. Its
primary deposit products are checking, savings, and term certificate accounts,
and its primary lending products are residential mortgage loans and loans on
deposit accounts. Substantially all loans are secured by specific items of
collateral, including one- to four-family and multifamily residential real
estate, and deposit accounts. There are no significant concentrations of loans
to any one customer. However, the customers' ability to repay their loans is
dependent on the real estate and general economic conditions in the Chicagoland
area.
Use of Estimates: To prepare financial statements in conformity with U.S.
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and actual results could differ. The allowance for loan loss and the
fair values of securities and other financial instruments are particularly
subject to change.
Cash Flows: Cash and cash equivalents include cash and deposits with other
financial institutions available in less than 90 days. Net cash flows are
reported for customer loan and deposit transactions.
Securities: Debt securities are classified as available-for-sale when they might
be sold before maturity. Equity securities with readily determinable fair values
are classified as available-for-sale. Securities available-for-sale are carried
at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are recorded on the trade date and determined using the specific
identification method.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Association to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of undisbursed loan proceeds, deferred loan fees and
costs, and an allowance for loan losses. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using the
level yield method.
F-7
Interest income on mortgage loans is discontinued at the time the loan becomes
90 days delinquent. Past-due status is based on the contractual terms of the
loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes that the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected. Large
multifamily residential real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as one- to four-family and small multifamily
residential real estate loans, are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosures.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight line method, with useful lives ranging from 5
to 33 years. Furniture, fixtures, and equipment are depreciated using the
straight line method with useful lives ranging from 3 to 7 years.
Foreclosed Assets: Assets acquired through or instead of loan foreclosures are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. There were no
foreclosed assets at September 30, 2005 (unaudited), December 31, 2004 and 2003.
Long-Term Assets: Premises and equipment and other long term assets are reviewed
for impairment when events indicate that their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at fair value.
Loan Commitments and Related Financial Instruments: Financial instruments
include off balance-sheet credit instruments, such as commitments to make loans
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
F-8
Advertising Expense: The Association expenses all advertising costs as they are
incurred. Total advertising costs for the nine months ended September 30, 2005
(unaudited) and 2004 (unaudited) and for the years ended December 31, 2004 and
2003 were $17, $12, $23 and $23, respectively.
Income Taxes: Income tax expense is the total of the current-year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale that are also recognized as separate
components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe that there now are such matters that will
have a material effect on the consolidated financial statements.
Earnings Per Common Share: Basic and diluted earnings per common share is net
income divided by the weighted average number of common shares outstanding
during the period. There are no instruments issued that would cause the dilution
to the weighted average number of shares.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
New Accounting Standards: In December 2004, the FASB issued Statement 123R,
Share-Based Payment. As a result of the conversion discussed in Note 15, this
statement would be effective for all employee awards granted, modified, or
settled after June 30, 2006. As of the effective date, compensation expense
related to the nonvested portion of awards outstanding as of that date would be
based on the grant-date fair value as calculated under the original provisions
of Statement 123. Adoption of this standard could materially impact the amount
of salary expense incurred for future financial statements reporting if the Bank
has a stock award program in place after the proposed statement becomes
effective.
Operating Segments: Internal financial information is primarily reported and
aggregated in one line of business, banking. While the chief decision-makers
monitor the revenue streams of the various products and services, the
identifiable segments are not material and operations are managed and financial
performance is evaluated on a company-wide basis. Accordingly, all of the
financial service operations are considered by management to be aggregated in
one reportable operating segment.
NOTE 2--CASH AND CASH EQUIVALENTS
At September 30, 2005 (unaudited) and December 31, 2004 and 2003, the
Association had approximately $3,160, $2,554, and $2,787 in an interest-bearing
deposit account at the Federal Home Loan Bank of Chicago.
F-9
NOTE 3--SECURITIES
The amortized cost and fair value of securities available-for-sale and the
related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
September 30, 2005 (unaudited)
- -----------------------------
U.S. agency and government-sponsored
entity bonds.......................... $ 9,194 $ 3 $(115) $ 9,082
GNMA certificates........................ 2,373 14 (31) 2,356
FNMA certificates........................ 6,094 25 (110) 6,009
FHLMC certificates....................... 4,009 20 (82) 3,947
Collateralized mortgage obligations...... 771 -- (12) 759
FHLMC common stock....................... 8 444 -- 452
FHLMC preferred stock.................... 500 -- (16) 484
Mutual funds............................. 2,227 -- (46) 2,181
-------- ------ ----- -------
Total available-for-sale.............. $ 25,176 $ 506 $(412) $25,270
======== ====== ===== =======
December 31, 2004
- -----------------
U.S. agency and government-sponsored
entity bonds.......................... $ 13,186 $ 49 $ (83) $13,152
GNMA certificates........................ 2,931 23 (15) 2,939
FNMA certificates........................ 6,388 81 (42) 6,427
FHLMC certificates....................... 4,222 38 (52) 4,208
Collateralized mortgage obligations...... 996 37 -- 1,033
FHLMC common stock....................... 15 1,125 -- 1,140
FHLMC preferred stock.................... 500 46 -- 546
Mutual funds............................. 2,165 -- (14) 2,151
-------- ------ ----- -------
Total available-for-sale.............. $ 30,403 $1,399 $(206) $31,596
======== ====== ===== =======
December 31, 2003
- -----------------
U.S. agency and government-sponsored
entity bonds.......................... $ 15,971 $196 $(90) $16,077
GNMA certificates........................ 945 42 (1) 986
FNMA certificates........................ 5,476 108 (65) 5,519
FHLMC certificates....................... 3,133 51 (51) 3,133
Collateralized mortgage obligations...... 1,011 7 -- 1,018
FHLMC common stock....................... 39 2,321 -- 2,360
FHLMC preferred stock.................... 500 18 -- 518
Mutual funds............................. 2,098 10 (5) 2,103
-------- ------ ----- -------
Total available-for-sale $ 29,173 $2,753 $(212) $31,714
======== ====== ===== =======
At September 30, 2005 (unaudited) and December 31, 2004 and 2003, there were no
holdings of securities of any one issuer, other than U.S. agency and U.S.
government-sponsored entities, in an amount greater than 10% of equity, except
for mutual fund securities. Mutual fund securities at September 30, 2005
(unaudited) and December 31, 2004 and 2003 include $2,181, $2,151, and $2,103 in
mutual funds managed by a single issuer and invested primarily in short-term
government obligations and pools of adjustable rate mortgage loans.
There were no securities pledged at September 30, 2005 (unaudited) and December
31, 2004 and 2003.
During the periods ended September 30, 2005 and 2004 (unaudited) and December
31, 2004 and 2003, the Association sold shares of FHLMC common stock. A summary
of those transactions is as follows:
F-10
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
Proceeds................... $484 $619 $1,601 $275
Gross gains................ 483 609 1,577 271
Gross losses............... -- -- -- --
The amortized cost and fair values of debt securities available-for-sale at
September 30, 2005 (unaudited) and December 31, 2004 by contractual maturity
were as follows.
SEPTEMBER 30, 2005 DECEMBER 31, 2004
----------------------------------- -----------------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
---------------- ------------ ---------------- -------------
(UNAUDITED)
Due in one year or less........ $ 500 $ 500 $ 1,499 $ 1,524
Due from one to five years..... 5,700 5,633 4,699 4,697
Due from five to ten years..... 2,994 2,949 6,988 6,931
CMO's and mortgage backed
securities.................. 13,247 13,071 14,537 14,607
------- ------- ------- -------
Total....................... $22,441 $22,153 $27,723 $27,759
======= ======= ======= =======
Securities with unrealized losses aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position are as follows:
SEPTEMBER 30, 2005
------------------------------------------------------------------------------
(UNAUDITED)
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ----------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSS VALUE LOSS VALUE LOSS
- ---------------------------------- ---------- ---------- ------- ---------- ------- ----------
U.S. agency obligations........... $ 2,179 $ (14) $ 5,899 $(101) $ 8,078 $(115)
GNMA certificates................. 1,722 (27) 62 (4) 1,784 (31)
FNMA certificates................. 2,906 (39) 2,196 (71) 5,102 (110)
FHLMC certificates................ 1,258 (14) 2,287 (68) 3,545 (82)
Collateralized mortgage
obligations.................... 753 (12) -- -- 753 (12)
FHLMC preferred stock............. 484 (16) -- -- 484 (16)
Mutual funds...................... 1,444 (38) 737 (8) 2,181 (46)
------- ----- ------- ----- ------- -----
Total temporarily impaired..... $10,746 $(160) $11,181 $(252) $21,927 $(412)
======= ===== ======= ===== ======= =====
DECEMBER 31, 2004
------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ----------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSS VALUE LOSS VALUE LOSS
- ---------------------------------- ---------- ---------- ------- ---------- ------- ----------
U.S. agency obligations........... $5,657 $(43) $2,961 $ (40) $ 8,618 $ (83)
GNMA certificates................. 1,772 (15) 25 -- 1,797 (15)
FNMA certificates................. 498 (3) 2,629 (39) 3,127 (42)
FHLMC certificates................ 1,378 (14) 1,859 (38) 3,237 (52)
Mutual funds...................... -- -- 1,425 (14) 1,425 (14)
------ ----- ------ ----- ------- -----
Total temporarily impaired..... $9,305 $(75) $8,899 $(131) $18,204 $(206)
====== ==== ====== ===== ======= =====
DECEMBER 31, 2003
------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ----------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSS VALUE LOSS VALUE LOSS
- ---------------------------------- ---------- ---------- ------- ---------- ------- ----------
U.S. agency obligations........... $ 4,406 $ (90) $ -- $ -- $ 4,406 $ (90)
GNMA certificates................. 41 -- 228 (1) 269 (1)
F-11
DECEMBER 31, 2003
------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ----------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSS VALUE LOSS VALUE LOSS
- ---------------------------------- ---------- ---------- ------- ---------- ------- ----------
FNMA certificates................. 3,544 (65) -- -- 3,544 (65)
FHLMC certificates................ 1,887 (40) 543 (11) 2,430 (51)
Mutual funds...................... 1,387 (5) -- -- 1,387 (5)
------- ----- ---- ---- ------- -----
Total temporarily impaired..... $11,265 $(200) $771 $(12) $12,036 $(212)
======= ===== ==== ==== ======= =====
At September 30, 2005 (unaudited), the 53 debt securities with unrealized losses
have depreciated 1.8% from the Association's amortized cost basis. At December
31, 2004, the 42 debt securities with unrealized losses have depreciated 1.1%
from the Association's amortized cost basis. At December 31, 2003, there were 28
debt securities with unrealized losses that have depreciated 1.7% from the
Association's amortized cost basis. These unrealized losses related principally
to current interest rates for similar types of securities. In analyzing an
issuer's financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred, and what the results are of reviews of the
issuer's financial condition. The fair value is expected to recover as
securities approach their maturity date. As management has the ability to hold
debt securities until maturity or for the foreseeable future, no declines are
deemed to be other than temporary.
The Association has investments in various mutual funds including an adjustable
rate mortgage fund, a U.S. government mortgage fund, and a short-term government
fund. The Net Asset Value ("NAV") of the adjustable rate and U.S. government
mortgage funds have declined in the current interest rate environment. The funds
are historically stable or, as rates decline, the funds recover their value
(that is, the degree of impairment reverses) through increases in their market
net asset value. Management expects the funds to recover once rates stabilize
and/or the underlying adjustable rate mortgages re-price to market. The
Association has the ability and intent to hold the investments for a sufficient
period of time for any anticipated recovery in fair value.
NOTE 4--LOANS
Loans are as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- -------
(UNAUDITED)
First mortgage loans
Principal balances
Secured by one- to four-family residences.............. $21,227 $19,772 $22,174
Secured by multi-family properties..................... 13,084 8,772 8,459
------- ------- -------
34,311 28,544 30,633
Less:
Loans in process....................................... 19 3 3
Net deferred loan origination fees..................... 89 89 89
------- ------- -------
Total first mortgage loans........................... 34,203 28,452 30,541
Loans on savings accounts.................................... 74 24 5
------- ------- -------
34,277 28,476 30,546
Less allowance for loan losses............................... 150 150 150
------- ------- -------
$34,127 $28,326 $30,396
======= ======= =======
Activity in the allowance for loan losses is summarized as follows:
F-12
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
Balance at beginning of year...... $150 $150 $150 $150
Loans charged off................. -- -- -- --
Recoveries........................ -- -- -- --
Provision charged to income....... -- -- -- --
---- ---- ---- ----
Balance at end of year............ $150 $150 $150 $150
==== ==== ==== ====
As of September 30, 2005 (unaudited) and December 31, 2004 and 2003, there were
no loans that were considered impaired. Nonaccrual loans, which include all
loans past due 90 days and over at September 30, 2005 (unaudited) and December
31, 2004 and 2003 were $188, $306, and $201.
Loans to principal officers, directors, and their affiliates in 2004 and through
September 30, 2005 (unaudited) were as follows.
Balance at January 1, 2004................................ $387
New loans................................................. 150
Repayments................................................ (269)
----
Balance at December 31, 2004.............................. 268
Repayments................................................ (11)
----
Balance at September 30, 2005 (unaudited)................. $257
====
NOTE 5--PREMISES AND EQUIPMENT
Year end premises and equipment were as follows.
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- -------
(UNAUDITED)
Land............................................... $ 97 $ 97 $ 97
Building........................................... 355 355 355
Building improvements.............................. 144 144 213
Parking lot improvements........................... 44 44 44
Furniture and equipment............................ 609 576 551
------ ------ ------
Total cost...................................... 1,249 1,216 1,260
Accumulated depreciation........................... (928) (859) (839)
------ ------ ------
$ 321 $ 357 $ 421
====== ====== ======
Depreciation expense was $68 and $76 for the nine months ended September 30,
2005 (unaudited) and September 30, 2004 (unaudited) and $101 and $99 for the
years ended December 31, 2004 and 2003.
NOTE 6--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- ------
(UNAUDITED)
Securities................. $135 $180 $194
Loans...................... 115 75 52
---- ---- ----
$250 $255 $246
==== ==== ====
F-13
NOTE 7--DEPOSITS
Deposits, by major category, are as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- -------
(UNAUDITED)
Non-interest-bearing checking................ $ 410 $ 83 $ 128
Savings...................................... 23,333 22,552 24,496
Certificates of deposit...................... 21,630 21,936 22,402
------- ------- -------
$45,373 $44,571 $47,026
======= ======= =======
The aggregate amount of certificates of deposit with a minimum denomination of
$100 was approximately $6,191 at September 30, 2005 (unaudited) and $5,054 and
$5,368 at December 31, 2004 and 2003, respectively. Deposit balances over $100
are not federally insured.
Scheduled maturities of certificates of deposit for the periods ended September
30, 2005 and December 31, 2004 are as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(UNAUDITED)
2006 $18,761 2005 $19,667
2007 1,113 2006 1,252
2008 1,208 2007 293
2009 88 2008 669
2010 460 2009 55
------- -------
$21,630 $21,936
======= =======
Deposits of related parties totaled approximately $1,268 at September 30, 2005
(unaudited) and $1,716 and $1,882 at December 31, 2004 and 2003, respectively.
Interest expense on deposit accounts is summarized as follows:
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
Savings.......................... $199 $201 $265 $342
Certificates of deposit.......... 367 351 463 606
---- ---- ---- ----
$566 $552 $728 $948
==== ==== ==== ====
NOTE 8--FEDERAL HOME LOAN BANK ADVANCES
The Association had no outstanding advances from the Federal Home Loan Bank at
September 30, 2005 (unaudited) and December 31, 2004 and 2003. A blanket lien on
all one- to four-family first mortgages was pledged as collateral in the event
that the Association requests future advances. At September 30, 2005
(unaudited), the Association could borrow up to $9.9 million from the Federal
Home Loan Bank.
NOTE 9--BENEFIT PLANS
The amount of the Association's profit sharing contribution is discretionary and
is determined annually by the Board of Directors. The Association has a 401(k)
profit sharing plan covering substantially all
F-14
employees who have attained the age of 21 and have completed three months of
service. Employee contributions are matched at 100% up to 3% of compensation and
50% of contributions over 3%, but do not exceed 5% of compensation. The
contribution expense was $41 and $39 for the nine months ended September 30,
2005 (unaudited) and 2004 (unaudited) and $44 and $50 for the years ended
December 31, 2004 and 2003.
The Association has nonqualified deferred compensation agreements with officers
and directors. Under the terms of these agreements, the officers and directors
may defer compensation and directors' fees and earn interest on the balance.
Interest is computed at the Association's interest rate for one-year
certificates of deposit. Interest expense was $6 for the nine months ended
September 30, 2005 (unaudited) and 2004 (unaudited) and for the years ended
December 31, 2004 and 2003 approximated $8 and $11. In addition, for the nine
months ended September 30, 2005 (unaudited) and 2004 (unaudited), approximately
$24 and $26 was distributed, and for the years ended December 31, 2004 and 2003,
approximately $26 and $29 was distributed. Approximately $7 and $6 was deferred
for the nine months ended September 30, 2005 (unaudited) and 2004 (unaudited).
Approximately $8 and $7 was deferred at December 31, 2004 and 2003. At September
30, 2005 (unaudited) $410 is included in accrued expenses and other liabilities
on the statements of financial condition. At December 31, 2004 and 2003, $421
and $431 was included in accrued expenses and other liabilities on the
statements of financial condition.
The Association provides supplemental health care benefits to cover the Medicare
costs for employees who reach the age of 65 and have at least 10 years of
service with the Association. At September 30, 2005 (unaudited) and December 31,
2004 and 2003, a liability of $72, $72, and $82 is included in accrued expenses
and other liabilities in the statements of financial condition. The Association
recorded expense of $11 and $1 for the nine months ended September 30, 2005
(unaudited) and 2004 (unaudited) and $1 and $0 for the years ended December 31,
2004 and 2003. During 2005, the Association capped the maximum rate amount that
they would reimburse at $210. The other related disclosures are not considered
significant to the consolidated financial statements.
NOTE 10--INCOME TAXES
Income tax expense was as follows.
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
-------- -------- -------- --------
(UNAUDITED)
Federal
Current.................... $323 $371 $770 $382
Deferred................... 15 41 17 27
---- ---- ---- ----
338 412 787 409
State
Current.................... 51 60 137 36
Deferred................... 3 4 (3) 3
---- ---- ---- ----
54 64 134 39
---- ---- ---- ----
$392 $476 $921 $448
==== ==== ==== ====
Effective tax rates differ from federal statutory rate of 34% applied to income
before income taxes due to the following.
F-15
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
----------- -------- -------- --------
(UNAUDITED)
Provision calculated at statutory federal rate. $356 $434 $832 $422
Effect of:
State taxes, net of federal benefit......... 36 41 92 26
Other, net.................................. -- 1 (3) --
---- ---- ---- ----
Total.................................... $392 $476 $921 $448
==== ==== ==== ====
Year-end deferred tax assets and liabilities were due to the following.
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- -------
(UNAUDITED)
Deferred tax assets:
Allowance for loan losses............................. $ 56 $ 56 $ 56
Deferred compensation................................. 159 164 167
Accrued post retirement benefit....................... 28 28 32
Other................................................. -- 2 4
----- ----- -------
243 250 259
----- ----- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends................ (59) (51) (41)
Depreciation.......................................... (13) (15) (20)
Net unrealized gain on securities available-for-sale.. (37) (463) (989)
Other................................................. (5) -- --
----- ----- -------
(114) (529) (1,050)
----- ----- -------
Net deferred tax asset (liability)................. $ 129 $(279) $ (791)
===== ===== =======
Federal income tax laws provided additional bad debt deductions through 1987,
totaling $2,552. Accounting standards do not require a deferred tax liability to
be recorded on this amount, which otherwise would total $991 at September 30,
2005 (unaudited) and year end 2004. If the Association were liquidated or
otherwise ceases to be a bank or if tax laws were to change, this amount would
be expensed. Management has not recorded a valuation allowance based on taxes
paid in prior years.
NOTE 11--LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, are issued to meet
customer financing needs. These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are met,
and usually have expiration dates. Commitments may expire without being used.
Off balance sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
The contractual amount of fixed rate loan commitments at September 30, 2005
(unaudited) and December 31, 2004 and 2003 were $224, $1,073, and $782.
Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitments at September 31, 2005 (unaudited) have interest
rates ranging from 5.85% to 6.90% and maturities ranging from 15 years to 30
years. The fixed-rate loan commitments at December 31, 2004 have interest rates
ranging from 5.75% to 6.75% and maturities ranging from 10 years to 30 years.
F-16
NOTE 12--CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Association is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate
regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At September 30, 2005
(unaudited) and at year end 2004 and 2003, the most recent regulatory
notifications categorized the Association as well capitalized under the
regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category. Actual and required capital
amounts and ratios are presented below:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- -------- -------- -------- -------- --------
September 30, 2005
(unaudited)
Total capital to
risk-weighted assets..... $18,509 76.62% $1,932 8.0% $2,416 10.0%
Tier 1 (core) capital to
risk-weighted assets..... 18,166 75.20 966 4.0 1,449 6.0
Tier 1 (core) capital to
adjusted total assets.... 18,166 27.80 2,614 4.0 3,267 5.0
Tangible capital (to
adjusted total assets)... 18,166 27.80 980 1.5 -- --
December 31, 2004
Total capital to
risk-weighted assets..... $18,487 79.83% $1,853 8.0% $2,316 10.0%
Tier 1 (core) capital to
risk-weighted assets..... 17,810 76.91 926 4.0 1,389 6.0
Tier 1 (core) capital to
adjusted total assets.... 17,810 28.02 2,542 4.0 3,178 5.0
Tangible capital (to
adjusted total assets)... 17,810 28.02 953 1.5 -- --
December 31, 2003
Total capital to
risk-weighted assets..... $18,487 72.31% $2,045 8.0% $2,557 10.0%
Tier 1 (core) capital to
risk-weighted assets..... 17,283 67.60 1,023 4.0 1,534 6.0
Tier 1 (core) capital to
adjusted total assets.... 17,283 26.60 2,599 4.0 3,248 5.0
Tangible capital (to
adjusted total assets)... 17,283 26.60 975 1.5 -- --
F-17
The following is a reconciliation of the Association's equity under accounting
principles generally accepted in the United States of America ("GAAP") to
regulatory capital.
SEPTEMBER 30, DECEMBER 31,
------------------------
2005 2004 2003
------------- ------- -------
(UNAUDITED)
GAAP equity........................................... $18,224 $18,540 $18,836
Unrealized gain on securities available-for-sale...... (58) (730) (1,552)
------- ------- -------
Tier I capital........................................... 18,166 17,810 17,284
General allowance for loan losses..................... 150 150 150
Allowable portion (45%) of unrealized gains on
equity securities available-for-sale............... 193 527 1,053
------- ------- -------
Total regulatory capital........................... $18,509 $18,487 $18,847
======= ======= =======
Federal regulations require the Association to comply with a Qualified Thrift
Lender ("QTL") test, which requires that 65% of assets be maintained in
housing-related finance and other specified assets. If the QTL test is not met,
limits are placed on growth, branching, new investment, FHLB advances, and
dividends or the institution must convert to a commercial bank charter.
Management considers the QTL test to have been met.
Banking regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies. Under these regulations, the amount of
dividends that may be paid in any calendar year is limited to the current year's
net profits, combined with the retained net profits of the preceding two years,
subject to the capital requirements described above. At October 1, 2005
(unaudited) and January 1, 2005, the Association could, without prior approval,
declare dividends of approximately $1,700 and $2,150, respectively.
NOTE 13--OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related tax effects were as
follows:
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
----------- -------- -------- --------
(UNAUDITED)
Unrealized holding gains (losses) on
securities available-for-sale......... $ (616) $ 142 $ 229 $(711)
Reclassification adjustment for gains
realized in income.................... (483) (609) (1,577) (271)
------- ----- ------ -----
Net unrealized losses................. (1,099) (467) (1,348) (982)
Tax effect............................... 427 183 526 381
------- ----- ------ -----
Other comprehensive loss.............. $ (672) $(284) $ (822) $(601)
======= ===== ====== =====
NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- --------------------- ----------------------
(UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
Financial assets
Cash and cash
equivalents.......... $ 4,812 $ 4,812 $ 3,684 $ 3,684 $ 4,243 $ 4,243
F-18
SEPTEMBER 30, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- --------------------- ----------------------
(UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
Securities
available-for-sale... 25,270 25,270 31,596 31,596 31,714 31,714
Loans, net.............. 34,127 34,787 28,326 29,197 30,396 32,287
Federal Home Loan Bank
stock................ 496 496 477 477 449 449
Accrued interest
receivable........... 250 250 255 255 246 246
Financial liabilities......
Deposits................ 45,373 45,342 44,571 44,130 47,026 47,137
Accrued interest payable 42 42 35 35 38 38
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits, and variable-rate loans or deposits that reprice frequently and fully.
Security fair values are based on market prices or dealer quotes and, if no such
information is available, on the rate and term of the security and information
about the issuer. For fixed-rate loans or deposits and for variable-rate loans
or deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk. The fair value of off balance sheet items is not material.
NOTE 15--EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------ -----------------------------
2005 2004 2004 2003
----------- -------- -------- --------
(UNAUDITED)
Basic
Net income.................................. $ 656 $ 800 $ 1,526 $ 793
======= ======= ======= =======
Weighted average common shares outstanding.. 10,000 10,000 10,000 10,000
======= ======= ======= =======
Basic and diluted earnings per common share. $ 65.60 $ 80.00 $152.60 $ 79.30
======= ======= ======= =======
NOTE 16--ADOPTION OF PLAN OF CONVERSION AND REORGANIZATION
The Board of Directors of MHC, the sole stockholder of the Association, has
adopted a Stock Issuance Plan (the "Plan") pursuant to which (i) the MHC will
establish a subsidiary holding company, Mutual Federal Bancorp, Inc., a federal
corporation (the "Holding Company"), as a direct subsidiary to hold 100% of the
stock of the Association, and (ii) the Holding Company will offer and sell
shares of its common stock in a public offering representing up to 30% of its
shares that will be outstanding after the offering. The common stock will be
offered on a priority basis to eligible depositors, qualified tax-exempt
employee plans, other depositors and other voting members of the Association,
with any remaining shares offered to the public in a community offering or a
syndicated community offering, or a combination thereof. Upon completion of the
stock offering, the MHC will continue to own at least a majority of the common
stock.
F-19
The Plan must be approved by the Office of Thrift Supervision.
The Holding Company plans to offer to the public shares of common stock
representing a minority ownership of the estimated pro forma market value of the
Association as determined by an independent appraisal. The Association may not
pay dividends to the Stock Holding Company if the dividends would cause the
Association to fall below the "well capitalized" capital threshold.
Offering costs have been deferred and will be deducted from the proceeds of the
shares sold in the offering. If the offering is not completed, all costs will be
charged to expense. At September 30, 2005 (unaudited), $87 of offering costs had
been incurred and deferred. No offering costs had been incurred as of December
31, 2004.
F-20
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information that is different.
This prospectus does not constitute an offer to sell, or the solicitation of an
offer to buy, any of the securities offered hereby to any person in any
jurisdiction in which such offer or solicitation would be unlawful. The affairs
of Mutual Federal Savings and Loan Association of Chicago or Mutual Federal
Bancorp, Inc. may change after the date of this prospectus. The information in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of common stock.
MUTUAL FEDERAL BANCORP, INC.
PROPOSED HOLDING COMPANY FOR
MUTUAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO
UP TO 948,750 SHARES OF COMMON STOCK
(ANTICIPATED MAXIMUM SUBJECT TO INCREASE)
----------------
PROSPECTUS
----------------
Sandler O'Neill & Partners, L.P.
___________, 2006
UNTIL THE LATER OF ____________, 2006, OR 90 DAYS AFTER THE
COMMENCEMENT OF THE OFFERING, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Provisions in the Registrant's bylaws provide for indemnification of
the Registrant's directors and officers up to the fullest extent authorized by
applicable law and regulations of the Office of Thrift Supervision (OTS).
Section 545.121 of the OTS regulations is described below.
Generally, federal regulations define areas for indemnity coverage for
federal savings associations as follows:
(a) Any person against whom any action is brought or threatened
because that person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Any amount for which that person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by that person in defending
or settling such action, or in enforcing his or her rights under this
section if he or she attains a favorable judgment in such enforcement
action.
(b) Indemnification shall be made to such person under paragraph (b)
of this Section only if:
(i) Final judgment on the merits is in his or her favor; or
(ii) In case of:
a. Settlement,
b. Final judgment against him or her, or
c. Final judgment in his or her favor, other
than on the merits, if a majority of the
disinterested directors of the savings
association determine that he or she was acting
in good faith within the scope of his or her
employment or authority as he or she could
reasonably have perceived it under the
circumstances and for a purpose he or she could
reasonably have believed under the circumstances
was in the best interest of the savings
association or its members. However, no
indemnification shall be made unless the
association gives the Office at least 60 days
notice of its intention to make such
indemnification. Such notice shall state the
facts on which the action arose, the terms of
any settlement, and any disposition of the
action by a court. Such notice, a copy thereof,
and a certified copy of the resolution
containing the required determination by the
board of directors shall be sent to the Regional
Director, who shall promptly acknowledge receipt
thereof. The notice period shall run from the
date of such receipt. No such indemnification
shall be made if the OTS advises the association
in writing, within such notice period, of its
objection thereto.
II-1
(c) As used in this paragraph:
(i) "Action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for review;
(ii) "Court" includes, without limitation, any court to which
or in which any appeal or any proceeding for review is brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is not appealable or as to which the period for appeal has
expired with no appeal taken;
(iv) "Settlement" includes the entry of a judgment by consent
or confession or a plea of guilty or of NOLO CONTENDERE.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
AMOUNT
----------
SEC filing fee.................................................. 1,285
OTS filing fee.................................................. 8,400
NASD fee........................................................ 1,592
* Legal fees and expenses......................................... 225,000
* Auditing and accounting fees and expenses....................... 170,000
* Selling agent fees and expenses, including attorney's fees(1)... 145,000
* Appraisal and business plan fees and expenses................... 52,500
* Printing, postage, mailing and EDGAR............................ 60,000
* Transfer agent and registration fees and expenses............... 10,000
* State "Blue Sky" filing fees and expenses....................... 10,000
* Other........................................................... 16,223
--------
* Total........................................................... $700,000
========
<FN>
- ---------------------
* Estimated
(1) Mutual Federal Bancorp, Inc. has retained Sandler O'Neill & Partners,
L.P. to assist in the sale of common stock on a best efforts basis in
the offerings. Fees are estimated at the midpoint of the offering range.
</FN>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 27. EXHIBITS:
The exhibits filed as part of this registration statement are as
follows:
(A) LIST OF EXHIBITS
1.1 Engagement Letter between Mutual Federal Bancorp,
MHC, Mutual Federal Savings and Loan Association of
Chicago and Sandler O'Neill & Partners, L.P.(1)
1.2 Agreement for Records Management Services with
Sandler O'Neill & Partners, L.P.(1)
1.3 Form of Agency Agreement between Mutual Federal
Bancorp, Inc. and Sandler O'Neill & Partners, L.P.(2)
2.1 Stock Issuance Plan(1)
3.1 Charter of Mutual Federal Bancorp, Inc.(1)
3.2 Bylaws of Mutual Federal Bancorp, Inc.(1)
4.1 Specimen Common Stock Certificate of Mutual Federal
Bancorp, Inc.(1)
II-2
5.1 Opinion of Vedder, Price, Kaufman & Kammholz, P.C.
re: legality(2)
8.1 Federal Tax Opinion of Vedder, Price, Kaufman &
Kammholz, P.C.(2)
8.2 Opinion of Crowe Chizek and Company LLC re: Illinois
tax matters(2)
8.3 Letter of RP Financial, L.C. re: Subscription
Rights(1)
10.1 Form of Employee Stock Ownership Plan(2)
10.2 Form of Employment Agreement to be entered into
between the Registrant and Stephen M. Oksas(2)
10.3 Form of Employment Agreement to be entered into
between the Registrant and each of John L. Garlanger
and Julie H. Oksas(2)
21.1 Subsidiaries of Registrant(2)
23.1 Consent of Vedder, Price, Kaufman & Kammholz, P.C.
(contained in opinions included as Exhibits 5.1 and
8.1)(2)
23.2 Consent of Crowe Chizek and Company LLC(1)
23.3 Consent of RP Financial, L.C.(1)
24.1 Power of Attorney (set forth on signature page)(1)
99.1 Appraisal Agreement between Mutual Federal Savings
and Loan Association of Chicago and RP Financial,
L.C.(1) 99.2 Appraisal Report of RP Financial,
L.C.***(2)
99.3 Marketing Materials(2)
99.4 Subscription Order and Acknowledgment Form(2)
- --------------------------------
(1) Filed herewith.
(2) To be filed by amendment.
*** Supporting financial schedules filed in paper format only, pursuant to
Rule 202 of Regulation S-T. Available for inspection, during business
hours, at the principal offices of the SEC in Washington, DC.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any additional or changed material
information as the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement as
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering thereof.
II-3
(3) To file a post-effective amendment to remove from registration
any of the securities being registered that remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Chicago,
State of Illinois on November 15, 2005.
MUTUAL FEDERAL BANCORP, INC.
(IN FORMATION)
By: /s/ Stephen M. Oksas
------------------------------------
Stephen M. Oksas
President and Chief Executive
Officer
POWER OF ATTORNEY
The undersigned hereby severally constitute and appoint Stephen M.
Oksas, John L. Garlanger and Julie H. Oksas and each of them as our true and
lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said persons may deem necessary or advisable to
enable Mutual Federal Bancorp, Inc. to comply with the Securities Act of 1933,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form SB-2 relating
to the offering of Mutual Federal Bancorp, Inc.'s common stock, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the registration statement and any and
all amendments (including post-effective amendments) thereto; and we hereby
approve, ratify and confirm all that said persons shall do or cause to be done
by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
- --------------------------------------- -------------------------------------------------- ------------------
/s/ Stephen M. Oksas Chairman, President, Chief Executive Officer November 15, 2005
- --------------------------------------- and Director
Stephen M. Oksas (Principal Executive Officer)
/s/ John L. Garlanger Executive Vice President and Chief Financial November 15, 2005
- --------------------------------------- Officer
John L. Garlanger (Principal Financial and Accounting Officer)
/s/ Stanley Balzekas III Director November 15, 2005
- ---------------------------------------
Stanley Balzekas III
/s/ Robert P. Kazan Director November 15, 2005
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Robert P. Kazan
/s/ Leonard F. Kosacz Director November 15, 2005
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Leonard F. Kosacz
S-1
SIGNATURES TITLE DATE
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/s/ Julie H. Oksas Executive Vice President and Director November 15, 2005
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Julie H. Oksas
/s/ Stephanie Simonaitis Director November 15, 2005
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Stephanie Simonaitis
S-2
EXHIBIT INDEX
1.1 Engagement Letter between Mutual Federal Bancorp, MHC, Mutual
Federal Savings and Loan Association of Chicago and Sandler O'Neill &
Partners, L.P.(1)
1.2 Agreement for Records Management Services with Sandler O'Neill &
Partners, L.P.(1)
1.3 Form of Agency Agreement between Mutual Federal Bancorp, Inc. and
Sandler O'Neill & Partners, L.P.(2)
2.1 Stock Issuance Plan(1)
3.1 Charter of Mutual Federal Bancorp, Inc.(1)
3.2 Bylaws of Mutual Federal Bancorp, Inc.(1)
4.1 Specimen Common Stock Certificate of Mutual Federal Bancorp, Inc.(1)
5.1 Opinion of Vedder, Price, Kaufman & Kammholz, P.C. re: legality(2)
8.1 Federal Tax Opinion of Vedder, Price, Kaufman & Kammholz, P.C.(2)
8.2 Opinion of Crowe Chizek and Company LLC re: Illinois tax matters(2)
8.3 Letter of RP Financial, L.C. re: Subscription Rights(1)
10.1 Form of Employee Stock Ownership Plan(2)
10.2 Form of Employment Agreement to be entered into between the Registrant
and Stephen M. Oksas(2)
10.3 Form of Employment Agreement to be entered into between the Registrant
and each of John L. Garlanger and Julie H. Oksas(2)
21.1 Subsidiaries of Registrant(2)
23.1 Consent of Vedder, Price, Kaufman & Kammholz, P.C. (contained in
opinions included as Exhibits 5.1 and 8.1)(2)
23.2 Consent of Crowe Chizek and Company LLC(1)
23.3 Consent of RP Financial, L.C.(1)
24.1 Power of Attorney (set forth on signature page)(1)
99.1 Appraisal Agreement between Mutual Federal Savings and Loan Association
of Chicago and RP Financial, L.C.(1) 99.2 Appraisal Report of RP
Financial, L.C.***(2)
99.3 Marketing Materials(2)
99.4 Subscription Order and Acknowledgment Form(2)
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(1) Filed herewith.
(2) To be filed by amendment.
*** Supporting financial schedules filed in paper format only, pursuant to
Rule 202 of Regulation S-T. Available for inspection, during business
hours, at the principal offices of the SEC in Washington, DC.