1
EXHIBIT 99.2
================================================================================
OFFICE OF THRIFT SUPERVISION
WASHINGTON, D.C. 20552
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
OFFICE OF THRIFT SUPERVISION DOCKET NUMBER - 00321
MUTUAL SAVINGS BANK, F.S.B., A STOCK COMPANY
(Exact name of registrant as specified in its charter)
UNITED STATES OF AMERICA 38-0861665
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
623 WASHINGTON AVENUE 48708
BAY CITY, MICHIGAN (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number: (517) 892-3511
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock, par value $0.01
per share, were 4,292,414 at May 10, 1999.
================================================================================
2
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION ----
Item 1. Financial Statements................................................................................3
Consolidated Statements of Financial Condition as of March 31, 1999
and December 31, 1998 (Unaudited)...............................................................3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).............................................................4
Consolidated Statements of Comprehensive Income for the Three Months
Ended March 31, 1999 and 1998 (Unaudited).......................................................5
Consolidated Statement of Changes In Stockholders' Equity for the
Three Months Ended March 31, 1999 (Unaudited)...................................................5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).............................................................6
Notes to Unaudited Consolidated Financial Statements................................................7
Item 2. Management's Discussion and Analysis of Operating Results
and Financial Condition........................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................29
Item 2. Changes in Securities..............................................................................30
Item 3. Default Upon Senior Securities.....................................................................30
Item 4. Submission of Matters to a Vote of Security Holders................................................30
Item 5. Other Information..................................................................................30
Item 6. Exhibits and Reports on Form 8-K...................................................................31
Signatures.........................................................................................32
Exhibit Index......................................................................................33
Computation of Earnings Per Share.................................................................156
When used in this Form 10-Q or future filings by Mutual Savings Bank, f.s.b.
("MSB") with the Office of Thrift Supervision ("OTS"), in MSB's press releases
or other public or stockholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases "would
be," "will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
MSB wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect MSB's financial performance and could cause MSB's actual
results for future periods to differ materially from those anticipated or
projected.
MSB does not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1999 1998
-------------- -------------
(Unaudited)
ASSETS
Cash on hand and on deposit ......................................................... $ 10,366,545 $ 11,097,267
Interest-bearing deposits ........................................................... 6,543,391 3,666,821
-------------- -------------
Cash and cash equivalents ......................................................... 16,909,936 14,764,088
Investment securities available-for-sale ............................................ 5,031,553 166,84
Investment securities held-to-maturity (fair value of $13,967,000 in 1999
and $13,888,000 in 1998) .......................................................... 13,967,493 13,888,050
Mortgage-backed securities available-for-sale ....................................... 46,025,745 52,275,259
Mortgage-backed securities held-to-maturity (fair value of
$115,628,000 in 1999 and $129,027,000 in 1998) .................................... 116,191,218 129,063,968
Loans held for sale ................................................................. 4,653,216 5,957,504
Loans, not of allowance for loan losses of $1,891,000 in 1999
and $1,843,000 in 1998 ............................................................ 345,192,118 327,692,406
Real estate owned and other repossessed assets ...................................... 118,925 328,896
Federal Home Loan Bank stock, at cost ............................................... 7,022,900 7,022,900
Premises and equipment, net ......................................................... 8,140,461 8,017,347
Accrued interest receivable ......................................................... 2,593.299 2,542,370
Capitalized originated mortgage servicing rights .................................... 1,902,229 1,880,194
Prepaid expenses and other assets ................................................... 1,328,522 834,648
-------------- -------------
Total assets ........................................................................ $ 569,077,615 $ 564,434,114
============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................................. $ 424,377,363 $ 420,817,972
Securities sold under agreements to repurchase ...................................... 45,000,000 45,000,000
Federal Home Loan Bank advances ..................................................... 53,282,837 53,285,899
Advance payments by borrowers for taxes and insurance ............................... 4,899,336 4,451,737
Accrued interest payable ............................................................ 1,958,770 2,018,723
Accrued expenses and other liabilities .............................................. 2,873,740 2,723,507
-------------- -------------
Total liabilities ................................................................. $ 532,392,036 $ 528,297,838
============== =============
Stockholders' equity.
Preferred stock ($.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding in 1999 and 1998) ................................ - -
Common stock ($.01 par value, 20,000,000 shares authorized,
4,290,414 shares issued and outstanding in 1999 and 1998) ......................... 42,904 42,904
Additional paid-in capital .......................................................... 32,120,256 32,136,522
Retained earnings - substantially restricted ........................................ 5,432,813 4,655,084
Accumulated other comprehensive income (low) ........................................ (111,558) 100,602
Unearned Employee Stock Ownership Plan shares ....................................... (798,836) (798,836)
-------------- -------------
Total stockholders' equity ........................................................ 36,685,579 36,136,276
-------------- -------------
Total liabilities and stockholders' equity .......................................... $ 569,077,615 $ 564,434,114
============== =============
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
(Unaudited)
Interest income:
Interest and fees on loans .................................... $ 6,426,572 $ 6,288,713
Interest on mortgage-backed securities ........................ 2,301,007 3,882,704
Interest on investment securities ............................. 237,462 109,758
Other Interest income ......................................... 167,644 198,009
----------- -----------
Total interest income ......................................... 9,131,685 10,479,184
----------- -----------
Interest expense:
Interest on deposits .......................................... 4,331,098 4,498,531
Interest on securities sold under agreements
to repurchase ................................................ 654,160 1,311,375
Interest on Federal Home Loan Bank advances ................... 839,022 1,754,354
----------- -----------
Total interest expense ........................................ 5,824,280 7,564,260
----------- -----------
Net interest income ........................................... 3,307,405 2,914,924
Provision for loan losses ..................................... 141,000 110,000
----------- -----------
Net interest income after provision for loan losses ........... 3,166,405 2,804,924
----------- -----------
Other income (loss):
Gains and fees on loans sold .................................. 282,915 603,573
Loan servicing fees ........................................... 130,986 167,376
Other fees .................................................... 445,630 389,409
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets ............... 12,240 (5,853)
Securities and insurance commissions and fees ................. 169,722 130,496
Other, net .................................................... 15,927 9,807
----------- -----------
Total other income ............................................ 1,057,420 1,294,80
----------- -----------
General and administrative expenses:
Salaries and employee benefits ................................ 1,634,956 1,622,725
Occupancy, equipment and supplies ............................. 541,219 598,753
Data processing ............................................... 273,978 256,939
Federal deposit insurance premiums ............................ 334,288 324,468
Marketing and promotion........................................ 140,000 151,922
Professional fees ............................................. 81,500 117,276
Other ......................................................... 440,155 484,639
----------- -----------
Total general and administrative expenses ..................... 3,446,006 3,556,722
----------- -----------
Income before income tax expense .............................. 777,729 543,010
Income tax expense - -
----------- -----------
Net income .................................................... $ 777,729 $ 543,010
----------- -----------
- -------------------------------------------------------------------------------------------
Earnings per share:
Basic and diluted earnings per share .......................... $ 0.18 $ 0.13
----------- -----------
- -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
Net income........................................................................... $ 777,729 $ 543,010
Other comprehensive income (loss):
Changes in unrealized gain (loss) an available-for-sale securities ................. 212,160 (43,668)
------------ ------------
Comprehensive income ............................................................... $ 565,569 $ 499,342
============ ============
- ----------------------------------------------------------------------------------------------------------------------
MUTUAL SAVINGS BANK F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Retained Accumulated
Additional Earnings - Other Unearned
Common Paid-in Substantially Comprehensive ESOP
Stock capital Restricted Income (Loss) Shares Total
-------- ------------ -------------- ------------- ------------- ------------
Balance at December 31, 1998 .......... $ 42,904 $ 32,136,522 $ 4,655,084 $ 100,602 $ (798,836) $ 36,136,276
Net income for the period ............. - - 777,729 - - 777,729
Changes in unrealized gain (loss)
on available-for-sale securities ..... - - - (212,160) - (212,160)
ESOP valuation adjustment ............. - (16,266 - - - (16,266)
-------- ------------ -------------- ------------- ------------ ------------
Balance at March 31, 1999 ............. $ 42,904 $ 32,120,256 $ 5,432,813 $ (111,558) $ (798,836) $ 36,685,579
======== ============ ============== ============= ============ ============
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
(Unaudited)
Cash flows provided by (used in) operating activities:
Net Income ................................................................................... $ 777,720 $ 543,010
Adjustments to reconcile not income to net cash
provided by (used in) operating activities:
Stock compensation amortized to expense..................................................... 34,765 70,071
Depreciation ............................................................................... 239,032 290,302
Capitalized originated mortgage servicing rights, net ...................................... (22,035) (292,348)
(Gain) loss on sale of promises and equipment,
real estate owned and other repossessed assets ............................................ (12,240) 5,853
Accretion of discounts, amortization of premiums,
and other deferred yield items, net ....................................................... (193,965) (65,194)
Provision for loan LOSSES .................................................................. 141,000 110,000
Originations of loans held for sale ........................................................ (22,867,547) (63,437,721)
Principal amount of loans sold ............................................................. 24,191,835 55,485,925
(Increase) decrease in accrued interest receivable ......................................... (50,929) 115,053
(Increase) decrease in prepaid expenses and other assets ................................... (493,874) (423,019)
Increase (decrease) in accrued liability for settlement of
class action lawsuit ...................................................................... - 2,500,000
Increase (decrease) in accrued interest payable ............................................ (59,953) (31,208)
Increase (decrease) in accrued expenses and other liabilities .............................. 150,233 724,378
Increase (decrease) in other, net .......................................................... 161,779 (12,040)
------------- -------------
Net cash provided by (used in) operating activities .......................................... 1,975,830 (4,413,938)
------------- -------------
Cash flows provided by (used in) investing activities:
Proceeds from sales of:
Premises and equipment ...................................................................... 1,250 100
Real estate owned and other repossessed assets .............................................. 147,212 134,017
Purchases of
Investment securities available-for-sale .................................................... (4,901,703)
Investment securities held-to-maturity ...................................................... (128,848,876) (330,443,601)
Premises and equipment....................................................................... (363,559) (245,330)
(Increase) decrease in net loans receivable .................................................. (17,684,409) 6,753,023
Principal payments received on:
Investment securities ....................................................................... 128,810,090 330,443,601
Mortgage-backed securities .................................................................. 18,803,033 22,221,222
------------- -------------
Net cash provided by (used in) investing activities .......................................... (3,836,962) 28,863,032
------------- -------------
Cash flows provided by (used in) financing activities:
Increase (decrease) in deposits .............................................................. 3,559,381 4,957,760
Increase (decrease) in advance payments by borrowers for taxes and Insurance ................. 447,599 3,203,656
Issuance of common stock ..................................................................... - 40,500
------------- -------------
Net cash provided by (used in) financing activities ...........................I.............. 4,006,980 8,201,916
------------- -------------
Net increase (decrease) in cash and cash equivalents ........................................... 2,145,848 32,651,010
Cash and cash equivalents at beginning of period ............................................... 14,764,088 13,396,756
------------- -------------
Cash and cash equivalents at end of period ..................................................... $ 16,909,936 $ 48,047,766
============= =============
Cash paid during the period for interest ....................................................... $ 5,884,233 $ 7,595,468
============= =============
Supplemental disclosure of cash flow information;
Transfer of loans, at fair value, to real estate owned and other repossessed assets .......... $ 184,697 $ 60,633
============= =============
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
\
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include all
adjustments (consisting of only normal recurring accruals) necessary, in the
opinion of Management, for a fair presentation. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of results
that may be expected for the year ending December 31, 1999.
The unaudited consolidated financial statements include the accounts of Mutual
Savings Bank, f.s.b., A Stock Company ("MSB"), and its wholly-owned subsidiaries
MSB Service Corporation and MSB Investment and Insurance Services, Inc.
("MSBi"). All significant inter-company transactions and balances have been
eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in MSB's
Annual Report on Form 10-K filed with the Office of Thrift Supervision ("OTS")
for its fiscal year ended December 31, 1998.
2. ACCOUNTING FOR INCOME TAXES
MSB maintained a valuation allowance at both March 31, 1999 and December 31,
1998 which reduced its net deferred tax asset to zero. The valuation allowance
has been established because, in the opinion of Management, realization of the
benefit of the deferred tax assets is not more likely than not. The valuation
allowance considered the Bank's recent historical operating results, the
significant contribution of gains and fees from loan sales to earnings for 1998
and earnings for the three months ended March 31, 1999 and the uncertainty
related to the possible costs of a remaining securities related lawsuit. At
December 31, 1998 MSB had approximately $33.616 million of NOL carryforwards, of
which $7,688,000 will expire if not utilized against taxable income in the year
2004, $164,000 in the year 2007, $15.260 million in the year 2008, $81,000 in
the year 2009, $6,779,000 in the year 2010, $929,000 in the year 2011, $411,000
in the year 2012, and $2,304,000 in the year 2018. Future utilization of
$7,776,000 of the NOL's is limited to approximately $700,000 per year as a
result of converting to a federally chartered stock savings bank on July 16,
1992, which resulted in a change of control as defined in Section 382 of the
Internal Revenue Code.
3. EARNINGS PER SHARE
The following table are reconciliations of the numerators and denominators of
the basic and diluted Earnings Per Share ("EPS") computations for the three
months ended March 31, 1999 and 1998.
8
For the Three Months Ended March 31,
------------------------------------------------------------------------------------
1999 1998
---------------------------------------- -----------------------------------------
Average Per Average Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income available to
common stockholders $ 777,729 4,290,414 $ 543,010 4,286,358
Employee Stock Ownership
Plan ("ESOP") shares not
committed to be released -- (42,338) -- (56,213)
----------- ------------ ---------- -------------
777,729 4,248,076 $ 0.18 543,010 4,230,145 $ 0.13
====== =======
Effect of dilutive securities:
Options -- 88,964 -- 104,458
----------- ------------ ---------- -------------
Diluted EPS:
Income available to common
stockholders and assumed
conversions $ 777,729 4,337,040 $ 0.18 $ 543,010 4,334,603 $ 0.13
=========== ============ ====== ========== ============= =======
The following table summarizes granted options to purchase shares of common
stock that were outstanding at March 31, 1999 and 1998, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
For the Three Months Ended March 31,
------------------------------------------
1999 1998
------------------ -------------------
Weighted-average price of common stock $ 10.09 $ 12.88
Weighted-average exercise price of options 17.94 17.94
Range of exercise prices $ 13.25 - 19.25 $ 13.25 - 19.25
Number of shares 119,188 119,188
Weighted-average remaining contractual life (in years) 4.50 5.50
4. COMMITMENTS AND CONTINGENCIES
MSB is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. These financial instruments
include commitments to sell mortgage loans, commitments to extend credit, and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Statements of Financial Condition. MSB's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. MSB uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
9
Commitments to extend credit are agreements to lend to a customer based on
compliance with contractual conditions. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The total commitment amounts do not necessarily represent future cash
requirements since some of the commitments may expire without being drawn upon.
MSB evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of credit, is
based on Management's credit evaluation of the counter party.
At March 31, 1999 MSB had outstanding commitments to originate mortgage loans of
$6,411,000. These outstanding commitments have interest rates ranging from 6.50%
to 8.00%. At that same date, MSB had commitments to sell mortgage loans of
$7,938,000 to the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association, and of the loans committed to be sold, commitments had not
been issued to borrowers with respect to $1,796,000 of these loans. Any fees
associated with these commitments have not been recognized in income. MSB has
committed $10.106 million for construction loans on one- to four-family
dwellings of which $5,643,000 has not been funded at March 31, 1999. Also at
March 31, 1999, MSB had no outstanding commitments to purchase or sell
investment or mortgage-backed securities. At March 31, 1999 MSB had a commitment
for a $720,000 Federal Home Loan Bank ("FHLB") advance. MSB had commitments to
borrowers on undrawn home equity lines of credit of $12.461 million and
originated commercial loan commitments of $14.904 million. Standby letters of
credit are conditional commitments issued by MSB to guarantee the performance of
a customer to a third party. Those guarantees are issued to support private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to
customers. At March 31, 1999 unused lines of credit were $1,484,000 and standby
letters of credit were $350,000. MSB anticipates that it will have sufficient
funds available to meet its current commitments. Management believes that the
market risk associated with the commercial loan commitments, construction loan
commitments and commitments on undrawn home equity lines of credit is not
significant.
For a discussion of pending legal proceedings, refer to "Part II -- Other
Information, Item 1 -- Legal Proceedings" of this document.
5. REGULATORY MATTERS
MSB is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on MSB's
financial statements. Regulations of the OTS set forth minimum capital standards
applicable to all savings institutions. These standards include a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. Savings institutions must meet or exceed all three requirements at
all times to be considered in capital compliance. The following table presents
MSB's capital position with respect to the three requirements at March 31, 1999:
10
As a % of Required As a % of Excess Excess
Amount Assets (1) Capital Assets (1) Capital Capital %
------------- ---------- ------------- ---------- -------------- ---------
Stockholders' equity $ 36,685,579
Unrealized loss on available-
for-sale securities 111,558
-------------
Total tangible capital $ 36,797,137 6.46% $ 8,537,838 1.50% $28,259,299 4.96%
=============
Total core capital $ 36,797,137 6.46% $ 22,767,567 4.00% $14,029,570 2.46%
General valuation allowances 1,840,917
-------------
Total risk-based capital $ 38,638,054 13.13% $ 23,535,680 8.00% $15,102,374 5.13%
=============
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
As indicated in the table, MSB exceeded all three of these regulatory capital
requirements at March 31, 1999.
In addition, under capital adequacy guidelines and the regulatory framework for
prompt corrective action, MSB must meet specific capital guidelines that involve
quantitative measures of MSB's liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. MSB's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Quantitative measures established
by regulation to ensure capital adequacy require MSB to maintain minimum amounts
and ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to assets (as defined). Management believes, as of March
31, 1999, that MSB meets all capital adequacy requirements to which it is
subject. To be categorized as well-capitalized, MSB must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table.
MSB's actual capital amounts and ratios are also presented in the following
table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1999:
Total capital (to risk-weighted assets) $38,638,054 13.13% $23,535,680 8.00% $29,419,600 10.00%
Tier 1 capital (to risk-weighted assets) $36,797,137 12.51% $11,767,840 4.00% $17,651,760 6.00%
Tier 1 capital (to total assets) $36,797,137 6.46% $22,767,567 4.00% $28,459,459 5.00%
As of December 31, 1998:
Total capital (to risk-weighted assets) $37,795,223 13.17% $22,964,880 8.00% $28,706,100 10.00%
Tier 1 capital (to risk-weighted assets) $36,035,674 12.55% $11,482,440 4.00% $17,223,660 6.00%
Tier 1 capital (to total assets) $36,035,674 6.39% $22,573,340 4.00% $28,216,676 5.00%
11
As of March 31, 1999, the most recent notification of the OTS categorized MSB as
well capitalized under the regulatory framework for prompt corrective action.
6. CONSOLIDATED DISCLOSURE OF FAIR VALUE
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by MSB using available market information and
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts MSB
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following table presents the disclosure of estimated fair values as of March
31, 1999 and December 31, 1998:
March 31, 1999 December 31, 1998
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Assets:
Cash on hand and on deposit $ 10,367 $ 10,367 $ 11,097 $ 11,097
Interest-bearing deposits 6,543 6,543 3,667 3,667
--------- -------- -------- ---------
Cash and cash equivalents 16,910 16,910 14,764 14,764
Investment securities 18,999 18,999 14,055 14,055
Mortgage-backed securities 162,217 161,654 181,339 181,302
Loans receivable, net 349,845 353,470 333,650 333,728
FHLB stock, at cost 7,023 7,023 7,023 7,023
Accrued interest receivable 2,593 2,593 2,542 2,542
Liabilities:
Deposits 424,377 426,012 420,818 423,108
Repurchase Agreements 45,000 45,639 45,000 46,069
FHLB advances 53,283 54,142 53,286 55,169
Advance payments by borrowers for taxes
and insurance 4,899 4,899 4,452 4,452
Accrued interest payable 1,959 1,959 2,019 2,019
Cash and Cash Equivalents
For cash and cash equivalents, the carrying value approximates the fair value.
Investment Securities
For investment securities (other than mortgage-backed securities) and marketable
equity securities, fair values are based on quoted market prices or dealer
quotes, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. The estimated fair
value of the collateralized mortgage obligation ("CMO") residual included in
investment securities is based on future expected cash flows.
12
Mortgage-Backed Securities
Estimated fair value for mortgage-backed securities is based on quoted market
prices.
Loans Receivable
For certain homogeneous categories of loans, such as certain residential
mortgages and consumer loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for similar remaining
maturities. The carrying value and fair value of loan commitments is not
significant.
Federal Home Loan Bank Stock
The carrying value of the FHLB stock approximates the fair value.
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates the fair value.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair value of
fixed-maturity certificates of deposit ("CD's") is estimated using the rates
currently offered for CD's of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
generally provided by retail deposits compared to the cost of alternative
borrowing sources.
Securities Sold under Agreements to Repurchase
Rates currently available to MSB for securities sold under agreements to
repurchase ("Repurchase Agreements") with similar terms and remaining maturities
are used to estimate the fair value of the existing Repurchase Agreements.
Federal Home Loan Bank Advances
Rates currently available to MSB for FHLB advances with similar terms and
remaining maturities are used to estimate the fair value of the existing
advances.
Advance Payments by Borrowers for Taxes and Insurance
The carrying value of advance payments by borrowers for taxes and insurance
approximates the fair value.
Accrued Interest Payable
The carrying value of accrued interest payable approximates the fair value.
7. RECLASSIFICATIONS
Certain reclassifications were made to prior period financial statements to
conform to the 1999 presentation.
13
MUTUAL SAVINGS BANK, F.S.B. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND
FINANCIAL CONDITION
GENERAL
Mutual Savings Bank, f.s.b., A Stock Company ("MSB") is a federal stock savings
bank headquartered in Bay City, Michigan, and operates 22 retail banking offices
located primarily in central and southern Michigan. MSB also operates two
wholly-owned subsidiaries, MSB Service Corporation and MSB Investment and
Insurance Services, Inc. ("MSBi"). MSB's two subsidiaries have contracted with
unaffiliated third parties to provide various investment services including the
sale of mutual fund and annuity products. MSBi also sells life insurance,
long-term care insurance and group health and disability insurance. MSB is
subject to competition from other financial services providers with respect to
these services. MSB is regulated by certain federal agencies and is periodically
examined by certain regulatory authorities. MSB, in the course of normal
operations, is exposed to interest rate risk. The level of MSB's interest rate
risk is such that, in a rising interest rate environment, MSB's net interest
income and net portfolio value would be expected to decrease.
Management's Discussion and Analysis is designed to provide a more thorough
discussion of MSB's operating results and financial condition as well as to
provide additional information on MSB's asset/liability management strategies,
sources of liquidity and capital resources. Management's Discussion and Analysis
should be read in conjunction with the unaudited consolidated financial
statements and notes thereto and other financial data contained elsewhere in
this report. The operations of MSB, and the financial services industry
generally, are influenced by many factors, including the interest rate
environment, competition in the financial services industry, legislative and
regulatory developments and general economic conditions.
OPERATING RESULTS
MSB's net income for the first quarter of 1999 was $778,000, or $0.18 per
diluted share, compared to net income of $543,000, or $0.13 per diluted share,
for the comparable quarter one year earlier.
NET INTEREST INCOME
Net interest income is a function of an institution's interest rate spread, the
difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities and the relative amount of
interest-earning assets and interest-bearing liabilities. Net interest income
was $3,307,000 in the first quarter of 1999, a 13.45% increase from the
$2,915,000 recorded in the first quarter of 1998. MSB"'s net interest margin
increased from 1.86% for the first quarter of 1998 to 2.43% for the first
quarter of 1999.
Average interest-earning assets were $545.500 million in the first quarter of
1999 as compared to $625.673 million in the first quarter of 1998 reflecting a
decline in mortgage-backed securities partially offset by increases in loans
receivable and short-term investment securities. MSB has reduced total average
interest-earning assets through a reduction of mortgage-backed securities in
14
an effort to increase MSB's capital ratios and moderate its level of interest
rate risk. (See "Financial Condition -- Asset and Liability Mix.") Average
mortgage-backed securities declined $112.086 million and average loans
receivable increased $21.659 million in the first quarter of 1999 compared to
the first quarter of 1998. Average loans receivable represented 62.74% of
average interest-earning assets during the first quarter of 1999 compared to
51.24% in the year earlier period. The weighted average yield on loans
receivable declined from 7.88% in the first quarter of 1998 to 7.55% in the
first quarter of 1999 due primarily to lower interest rates on loans originated
during the past year and the prepayment of higher yielding loans. Due primarily
to the reduction of the lower yielding mortgage-backed securities, the average
yield on interest-earning assets was unchanged at 6.72% in the first quarter of
1999 compared to the year earlier period.
The cost of interest-bearing liabilities declined from 5.25% for the three
months ended March 31, 1998 to 4.61% for the three months ended March 31, 1999.
This decline is primarily due to the repricing of interest-bearing deposits in
the lower interest rate environment and the payoff of higher costing borrowings
in 1998. Average interest-bearing deposits increased $12.945 million and the
average cost of deposits decreased 0.31% to 4.26% in the first quarter of 1999
as compared to the first quarter of 1998. Average borrowings declined $87.028
million in the first quarter of 1999 as compared to the first quarter of 1998.
Borrowing costs declined 0.63% to 6.07% in the first quarter of 1999 as compared
to the first quarter of 1998. Borrowings were reduced to 17.27% of total assets
at March 31, 1999 as compared to 28.26% of total assets at March 31, 1998.
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected MSB's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) changes attributable to changes in both volume and
rate (changes in rate multiplied by changes in volume). The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
15
Three Months Ended March 31, 1999
Compared to
Three Months Ended March 31, 1998
Increase (Decrease) Due to:
----------------------------------------
Volume Rate Total
------ ---- -----
(In thousands)
Interest-earning assets:
Loans receivable $ 431 $(294) $ 137
Mortgage-backed securities (1,505) (77) (1,582)
Investment securities 155 (27) 128
Other investments (28) (3) (31)
------- ----- -------
Total interest-earning assets (947) (401) (1,348)
------- ----- -------
Interest-bearing liabilities:
Deposits 143 (311) (168)
------- ----- -------
Repurchase Agreements (565) (92) (657)
FHLB advances (745) (170) (915)
------- ----- -------
Total borrowed money (1,310) (262) (1,572)
------- ----- -------
Total interest-bearing liabilities (1,167) (573) (1,740)
------- ----- -------
Net increase in net interest income $ 220 $ 172 $ 392
======= ===== =======
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income from MSB's
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest income; (iv) interest rate spread; (v) net
interest margin; and (vi) gross balances. Average balances are derived from
average daily balances. The yields and costs include only those fees that are
considered adjustments to yields. Yields on investments and mortgage-backed
securities available-for-sale are determined using amortized costs. Interest on
non-accruing loans has only been included if actually collected.
16
Average Consolidated Statements of Financial Condition
Consolidated Statement For the Three Months Ended March 31,
of Financial Condition ---------------------------------------------------------------------------
At March 31, 1999 1999 1998
------------------------- ------------------------------------ -------------------------------------
Average Average
Yield/ Yield/ Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------------- -------- ------------ ---------- -------- ------------- -------- --------
Interest-earning assets:
Loans receivable $ 351,736,296 7.49% $ 342,225,411 $ 6,425,572 7.55% $ 320,565,765 $ 6,288,713 7.88%
Mortgage-backed
securities (1) 162,328,521 5.53 171,584,157 2,301,007 5.36 283,670,485 3,882,704 5.47
Investment securities (1) 18,999,046 5.06 19,185,947 237,462 5.02 6,897,370 109,758 6.37
Other investments 13,566,291 6.13 12,504,824 167,644 5.44 14,539,178 198,009 5.52
------------- ------------- ----------- ------------- -----------
Total interest-earning
assets 546,630,154 6.79 545,500,339 9,131,685 6.72 625,672,798 10,479,184 6.72
----------- -----------
Loan loss reserves (1,890,962) (1,845,286) (1,972,538)
Non-interest-earning
assets 24,338,423 26,198,808 27,690,238
------------- ------------- -------------
Total assets $ 569,077,615 $ 569,853,861 $ 651,390,498
============= ============= =============
Interest-bearing
liabilities:
Deposits $ 413,863,260 4.20 $ 412,364,031 4,331,098 4.26 $ 399,418,703 4,498,531 4.57
------------- ------------- ----------- ------------- -----------
Repurchase Agreements 45,000,000 5.79 45,250,000 654,160 5.78 85,000,000 1,311,375 6.26
FHLB advances 53,282,837 6.32 53,284,407 839,022 6.32 100,562,620 1,754,354 7.08
------------- ------------- ----------- ------------- -----------
Total borrowed money 98,282,837 6.08 98,534,407 1,493,182 6.07 185,562,620 3,065,729 6.70
------------- ------------- ----------- ------------- -----------
Total interest-bearing
liabilities 512,146,097 4.56 510,898,438 5,824,280 4.61 584,981,323 7,564,260 5.25
----------- -----------
Non-interest-bearing
deposits 10,514,093 12,096,849 10,728,809
Other non-interest-
bearing liabilities 9,731,846 10,504,178 22,677,950
------------- ------------- -------------
Total liabilities 532,392,036 533,499,465 618,388,082
Stockholders' equity 36,685,579 36,354,396 33,002,416
------------- ------------- -------------
Total liabilities and
stockholders' equity $ 569,077,615 $ 569,853,861 $ 651,390,498
============= ============= =============
Net interest income $ 3,307,405 $ 2,914,924
=========== ============
Interest rate spread 2.23% 2.11% 1.47%
======== ======= ========
Net interest margin 2.52% 2.43% 1.86%
======== ======= ========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 106.73% 106.77% 106.96%
======== ======= ========
(1) Average yield calculations are based on average balance exclusive of
average net unrealized gain (loss) on available-for-sale securities.
17
PROVISION FOR LOAN LOSSES
Management provides for and determines the adequacy of the allowance for loan
losses based on MSB's past loan loss experience, review of individual problem
loans, inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of the underlying collateral
and current economic conditions. In the opinion of Management, the allowance,
when taken as a whole, is adequate to absorb losses in the portfolio. While
Management uses the best information available to make evaluations, the ultimate
repayment of all loans is susceptible to future market factors and events beyond
MSB's control. These factors and events may result in losses or recoveries
differing from those provided for in the consolidated financial statements.
These reviews resulted in a provision of $141,000 and $110,000 for the three
months ended March 31, 1999 and 1998, respectively.
MSB's net loans receivable were $345.192 million at March 31, 1999, an increase
of $36.900 million, or 11.97%, from March 31, 1998. This increase is comprised
of a $30.317 million increase in mortgage loans, a $16.544 million increase in
commercial loans partially offset by a $9,961,000 decline in consumer loans.
MSB's allowance for loan losses to total loans was 0.54% at March 31, 1999
compared to 0.56% at December 31, 1998. At March 31, 1999 and December 31, 1998
the allowance for loan losses included $50,000 and $84,000, respectively, of
specific allowances.
The level of non-performing loans increased by $189,000 to $385,000 at March 31,
1999 from $196,000 at December 31, 1998 which increased the ratio of
non-performing loans to net loans to 0.11% at March 31, 1999 from 0.06% at
December 31, 1998. Net loan charge-offs increased to $93,000 for the three
months ended March 31, 1999 as compared to $75,000 for the same period one year
earlier. The majority of this increase is due to charge-offs on indirect
automobile loans. MSB phased out its indirect automobile lending operations
beginning on October 1, 1998. At March 31, 1999 the outstanding balance of
indirect consumer loans totaled $12.650 million compared to $18.444 million at
March 31, 1998. The ratio of non-performing assets to total assets was 0.09% at
March 31, 1999 and December 31, 1998. Loan loss reserves at March 31, 1999 and
December 31, 1998 equaled 375.31% and 351.11%, respectively, of non-performing
assets.
Consumer loans, in particular indirect consumer loans, and commercial real
estate loans are generally considered to involve greater credit risk than
residential mortgage loans. The increase in MSB's provision for loan losses
reflects the potential greater credit risk in the portfolio, the increase in the
level of net loan charge-offs, as well as the overall increase in the size of
the total loan portfolio.
OTHER INCOME (LOSS)
The following table summarizes the components of other income (loss) including
one-time income or loss items, such as sales of premises and equipment, real
estate owned and other repossessed assets:
18
For the Three Months
Ended March 31,
-------------------------------
1999 1998
---------- -----------
Gains and fees on loans sold $ 282,915 $ 603,573
Loan servicing fees 130,986 167,376
Other fees 445,630 389,409
Securities and insurance commissions and fees 169,722 130,496
Other, net 15,927 9,807
---------- -----------
Other income, exclusive of items below 1,045,180 1,300,661
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets 12,240 (5,853)
---------- -----------
Total other income $1,057,420 $ 1,294,808
========== ===========
Gains and fees on loans sold declined from $604,000 in the first quarter of 1998
to $283,000 in the first quarter of 1999. The decline is primarily the result of
a decline in the volume of loan sales to $24.192 million in the first quarter of
1999 from $55.486 million in the first quarter of 1998. Residential mortgage
loan origination volume declined in the first quarter of 1999 to $51.615 million
from $72.646 million for the first quarter of 1998. Mortgage loan refinance
originations declined from $60.351 million in the first quarter of 1998 to
$37.752 million in the first quarter of 1999. Changes in the level of interest
rates and the condition of the local and national economies affect the amount of
mortgage loans originated by MSB and the volume of loan sales. Generally, MSB's
mortgage loan origination and sales activity and, therefore, the level of gains
and fees on loans sold, may be adversely affected by, among other things, an
increasing interest rate environment to the extent such environment results in
decreased loan demand by borrowers. Accordingly, the volume of loan originations
and sales and the profitability of this activity can vary significantly from
period to period, which can have significant effects on MSB's results of
operations from period to period.
For the three months ended March 31, 1999, loan servicing fees were $131,000
compared to $167,000 for the comparable period one year earlier. Loan servicing
fees were reduced in the first quarter of 1999 as compared to the first quarter
of 1998 by an additional $38,000 for the amortization of originated mortgage
servicing rights. The increase in amortization is primarily due to an increase
in the balance of capitalized originated mortgage servicing rights. MSB's
average balance of loans serviced for others increased from $503.502 million for
the first quarter of 1998 to $511.645 million for the first quarter of 1999.
Loans serviced for others totaled $506.732 million at March 31, 1999. At March
31, 1999 and December 31, 1998 capitalized originated mortgage servicing rights
had carrying amounts of $1,902,000 and $1,880,000, respectively, and estimated
fair values of approximately $2,300,000 and $2,500,000, respectively. The amount
of mortgage loans serviced for others related to capitalized originated mortgage
servicing rights was $292.489 million and $284.045 million at March 31, 1999 and
December 31, 1998, respectively. Lower mortgage interest rates and an increase
in the rate of prepayments may adversely affect the level of mortgage loan
servicing income in the future.
Other fees, which consist mainly of deposit and customer service related
charges, increased to $446,000 for the three months ended March 31, 1999 from
$389,000 recorded for the same
19
period one year earlier. This increase is primarily due to an increase in
service charges on checking accounts and an increase in ATM fee income. Average
checking accounts have increased $7,428,000, or 23%, in the first quarter of
1999 compared to the year earlier period. Securities and insurance commissions
and fees increased to $170,000 in the current quarter from $131,000 in prior
year comparable period due to an increase in the sale of investment and
insurance products.
MSB had no sales of investment or mortgage-backed securities for the three
months ended March 31, 1999 and 1998. (See "Financial Condition -- Asset and
Liability Mix.")
GENERAL AND ADMINISTRATIVE EXPENSES
The following table summarizes general and administrative expenses:
For the Three Months
Ended March 31,
------------------------------
1999 1998
---------- ----------
Salaries and employee benefits $1,634,956 $1,622,725
Occupancy, equipment and supplies 541,219 598,753
Data processing 273,978 256,939
Federal deposit insurance premiums 334,288 324,468
Marketing and promotion 140,000 151,922
Professional fees 81,500 117,276
Other 440,155 484,639
---------- ----------
Total general and administrative expenses $3,446,096 $3,556,722
========== ==========
General and administrative expenses declined $111,000, or 3.11%, in the first
quarter of 1999 compared to the first quarter of 1998.
Salaries and employee benefits expense increased $12,000, or 0.75%, in the first
quarter of 1999 as compared to the year earlier period. The number of average
full-time equivalent employees increased to 240 in the first quarter of 1999
compared to 239 in the first quarter of 1998. Occupancy, equipment and supplies
expenses decreased $58,000 for the three months ended March 31, 1999 compared to
the year earlier period primarily due to certain computer equipment that was
fully depreciated in 1998 resulting in a decline in depreciation expense.
The increase of $10,000 in federal deposit insurance premiums in the first
quarter of 1999 compared to the previous year period was primarily a result of
an increase in the deposit base. The assessment rate was 32.10 basis points in
the first quarter of 1999 as compared to 32.28 basis points in the first quarter
of 1998. MSB anticipates a deposit insurance rate of 31.88 basis points for the
second quarter of 1999. Federal deposit insurance premium rates are primarily
based on a financial institution's capital ratios and supervisory rating. Based
upon MSB's current capital ratios and supervisory rating, its federal deposit
insurance premium rate is expected to decline by approximately three basis
points effective July 1, 1999 and by approximately an additional 23 basis points
effective January 1, 2000.
20
The expected changes in MSB's federal deposit insurance premium rate are based
on the current FDIC rate schedule. MSB is currently paying an additional 23
basis points, or approximately $242,000 per quarter, through December 31, 1999
for an FDIC special assessment. On October 21, 1996, MSB applied to the Federal
Deposit Insurance Corporation ("FDIC") for an exemption from a special
assessment (in the amount of $3,041,000) mandated by the Deposit Insurance Funds
Act of 1996 (the "Funds Act"). The Funds Act required the FDIC to impose a
special assessment on institutions holding deposits subject to assessment by the
Savings Association Insurance Fund ("SAIF"). The FDIC granted the exemption.
Therefore, MSB did not pay the special assessment, but instead pays quarterly
assessments to the SAIF according to the rate schedule that was in effect for
SAIF assessments on June 30, 1995 for a period from January 1, 1997 through
December 31, 1999.
Professional fees decreased $36,000 for the three months ended March 31, 1999
compared to the year earlier period due primarily to a $39,000 reduction in
legal fees related to defending various securities suits.
Overall, the other components of general and administrative expenses in the
first quarter of 1999 were relatively comparable to the prior year period.
INCOME TAXES
No federal income tax provision or benefit was recorded for the first quarter of
1999 or 1998. (See "Notes to Unaudited Consolidated Financial Statements, Note 2
- -- Accounting for Income Taxes.")
FINANCIAL CONDITION
ASSET AND LIABILITY MIX
An aspect of asset and liability management is the level and composition of
interest-earning assets and interest-bearing liabilities. The reduction and
change in composition of assets reflects MSB's objective of reducing its level
of mortgage-backed securities while increasing its loan portfolio in order to
attempt to manage its interest rate risk, increase its net interest income and
improve its capital ratios. At March 31, 1999 interest-earning assets were
$546.630 million while interest-bearing liabilities were $512.146 million. This
compares to interest-earning assets of $630.896 million and interest-bearing
liabilities of $587.897 million at March 31, 1998.
Net loans (excluding loans held for sale) were $345.192 million at March 31,
1999, an increase of $36.900 million, or 11.97%, from the March 31, 1998 level
of $308.292 million. The increase reflects MSB's efforts to increase loans as a
percentage of assets, which increased to 60.66% at March 31, 1999 from 46.95% at
March 31, 1998. This increase was comprised of net increases of $30.317 million
in residential mortgage loans and $16.544 million in commercial loans (including
commercial real estate) partially offset by a decline of $9,961,000 in consumer
loans (primarily home equity loans and indirect automobile loans).
Commercial real estate loans generally entail significant additional risks as
compared to one- to four-family residential mortgage loans and typically involve
larger loan balances. The increased credit risk is a result of several factors,
including the concentration of principal in a smaller
21
number of loans and borrowers, the effects of general economic conditions on
income producing properties and the increased difficulty in evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of
the related property. If the cash flow from the property is reduced, the
borrower's ability to repay the loan may be impaired. Loans secured by
commercial real estate also may involve a greater degree of environmental risk.
Also, consumer lending is generally considered to involve greater risk than
residential mortgage lending, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such as automobiles.
In the latter case, repossessed collateral for a defaulted consumer loan may not
be sufficient for repayment of the outstanding loan, and the remaining
deficiency may not be collectible. To the extent MSB continues to increase its
originations of these types of loans, the overall credit risk in its total loan
portfolio may also increase.
Overall loan origination volume totaled $63.321 million for the first quarter of
1999 compared to $87.848 million for the same period one year earlier.
Residential real estate refinance loan originations declined to $37.752 million
in the first quarter of 1999 compared to $60.351 million for the first quarter
of 1998. This decline in mortgage loan refinance volume was partially offset by
an increase of $1,568,000, or 12.75%, in residential real estate loan
originations for purchases and construction. Commercial and consumer loan
origination volume declined to $11.706 million in the first quarter of 1999 from
$15.202 million for the comparable quarter one year earlier. MSB will attempt to
increase its loans-to-total assets ratio further in 1999 through continued loan
growth. However, there can be no assurance that MSB will be successful in
further increasing the size of its loan portfolio.
The following table sets forth information regarding the contractual maturities
of MSB's mortgage-backed securities portfolio at March 31, 1999:
Held-to-Maturity Available-for-Sale Total
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
For the Twelve Months Amortized Average Amortized Average Amortized Average
Ending March 31, Cost Yield Cost Yield (2) Cost Yield (2)
- ------------------------------------ ----------- ------- ---------- --------- ----------- ---------
(Dollars in thousands)
2000 $ 9,400 5.90% $ 8,570 6.02% $ 17,970 5.96%
2001 102,562 5.37 10,168 5.36 112,730 5.37
2002-2004 4,229 5.99 -- -- 4,229 5.99
2009 -- -- 18,289 5.87 18,289 5.87
After 2017 (1) -- -- 9,110 5.70 9,110 5.70
----------- ---------- -----------
Total $ 116,191 5.44% $ 46,137 5.75% $ 162,328 5.53%
=========== ========== ===========
(1) Adjustable rate mortgage-backed securities.
(2) Average yield calculations are based on balance exclusive of net unrealized
gain (loss) on available-for-sale securities.
Deposits at March 31, 1999 totaled $424.377 million, an increase of $12.032
million from March 31, 1998. Deposits have increased 0.85%, or $3,559,000, from
December 31, 1998. The increase in overall deposit levels from December 31, 1998
is comprised of a $4,261,000 increase
22
in money market accounts, a $1,004,000 increase in savings accounts, a
$1,027,000 decline in certificates of deposit and a $679,000 decline in checking
accounts.
At March 31, 1999, the contractual maturities of MSB's FHLB advances and
Repurchase Agreements (all of which were fixed rate) consisted of the following:
Weighted
Average
Interest
For the Twelve Months Ending March 31, Amount Rate
- -------------------------------------- ------------- --------
2000 (1) (2) $ 45,000,000 6.26%
2001 35,000,000 5.90
2004 5,000,000 5.05
Thereafter (3) 13,287,324 6.30
-------------
FHLB advances and Repurchase Agreements 98,287,324
Unamortized commitment fees (4,487)
-------------
Net FHLB advances and Repurchase Agreements $ 98,282,837 6.08%
=============
(1) Includes a $20 million Repurchase Agreement with a stated maturity of June
12, 2002. This Repurchase Agreement has a fixed interest rate of 5.685% and
included an initial call option for the other party on June 12, 1998
followed by quarterly call options thereafter.
(2) Includes a $10 million FHLB advance with a stated maturity of October 15,
2002. This FHLB advance has a fixed interest rate of 5.65% through January
17, 2000. On that date (and quarterly thereafter), the FHLB has the option
to convert the advance to an adjustable rate at the three month London
Interbank Offering Rate, adjusted quarterly. MSB has the option to prepay
this advance, without penalty, if the FHLB converts the advance to an
adjustable rate.
(3) These FHLB advances have a 30 year amortization with either a 15 or 20 year
balloon. The maturity dates range from February 15, 2012 to August 15,
2018.
INTEREST SENSITIVITY GAP AT MARCH 31, 1999
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to result in an increase in net interest income. During a period of
declining interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income.
23
At March 31, 1999 total rate sensitive liabilities maturing or repricing within
one year exceeded total rate sensitive assets maturing or repricing in the same
time period by $93.659 million, representing a negative cumulative one year gap
ratio of 16.46% of total assets. This negative one year gap was $123.802
million, or 18.85% of total assets, at March 31, 1998. The cumulative three year
gap is a negative $12.091 million, or 2.12% of total assets, at March 31, 1999
compared to a negative cumulative three year gap of $7,319,000, or 1.11% of
total assets, at March 31, 1998. MSB's cumulative one year negative gap position
is such that, in a rising interest rate environment, MSB's net interest income
and MSB's net portfolio value would be expected to decline. Future interest rate
risk management strategies will attempt to balance MSB's level of interest rate
risk with its efforts to improve net interest income.
24
Interest Sensitivity Gap at March 31, 1999
-----------------------------------------------------------------------------------------------
Non-
Earning
Yield/ Within 6 Months Over or Non-
Cost 6 Months to 1 Year 1-3 Years 3-5 Years 5 Years Costing Total
------- ----------- ----------- ----------- --------- -------- --------- -----
(In thousands)
Interest-earning assets:
Mortgage loans 7.15% $ 40,822 $ 33,246 $ 78,708 $ 42,465 $ 57,036 $ -- $ 252,277
Commercial loans 8.71 10,005 10,053 13,218 5,202 3,677 -- 42,155
Consumer loans 8.12 21,614 6,145 19,015 10,379 151 -- 57,304
Mortgage-backed securities 5.53 28,041 21,821 100,638 5,359 6,470 -- 162,329
Investment securities 5.06 18,880 32 87 -- -- -- 18,999
Other investments 6.13 13,566 -- -- -- -- -- 13,566
---------- ---------- --------- ---------- ---------- --------- ---------
Total interest-earning assets 6.79% 132,928 71,297 211,666 63,405 67,334 -- 546,630
Loan loss reserves -- -- -- -- -- (1,891) (1,891)
Non-interest-earning assets -- -- -- -- -- 24,339 24,339
---------- ---------- --------- ---------- ---------- --------- ---------
Total assets $ 132,928 $ 71,297 $ 211,666 $ 63,405 $ 67,334 $ 22,448 $ 569,078
========== ========== ========= ========== ========== ========= =========
Interest-bearing liabilities:
Interest checking and savings
accounts 1.78% $ 9,174 $ 9,174 $ 17,214 $ 5,512 $ 35,544 $ -- $ 76,618
Money market accounts 3.88 18,492 18,492 18,492 18,493 -- -- 73,969
Certificates of deposit 4.99 142,736 54,696 59,111 6,733 -- -- 263,276
---------- --------- --------- ---------- ---------- --------- ---------
Total deposits 4.20 170,402 82,362 94,817 30,738 35,544 -- 413,863
---------- --------- --------- ---------- ---------- --------- ---------
Repurchase Agreements 5.79 20,000 -- 25,000 -- -- -- 45,000
FHLB advances 6.32 5,084 20,036 10,281 5,328 12,554 -- 53,283
---------- --------- --------- ---------- ---------- --------- ---------
Total borrowed money 6.08 25,084 20,036 35,281 5,328 12,554 -- 98,283
---------- --------- --------- ---------- ---------- --------- ---------
Total interest-bearing liabilities 4.56% 195,486 102,398 130,098 36,066 48,098 -- 512,146
Non-interest-bearing deposits -- -- -- -- -- 10,514 10,514
Other non-interest-bearing liabilities -- -- -- -- -- 9,732 9,732
---------- --------- --------- ---------- ---------- --------- ---------
Total liabilities 195,486 102,398 130,098 36,066 48,098 20,246 532,392
Stockholders' equity -- -- -- -- -- 36,686 36,686
---------- --------- --------- ---------- ---------- --------- ---------
Total liabilities and
stockholders' equity $ 195,486 $ 102,398 $ 130,098 $ 36,066 $ 48,098 $ 56,932 $ 569,078
========== ========== ========= ========== ========== ========= =========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (62,558) $ (31,101) $ 81,568 $ 27,339 $ 19,236
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (62,558) (93,659) (12,091) 15,248 34,484
Interest sensitivity gap to total assets -10.99% -5.47% 14.34% 4.80% 3.38%
Cumulative interest sensitivity gap
to total assets -10.99% -16.46% -2.12% 2.68% 6.06%
25
The previous table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1999 that are expected to
reprice, prepay or mature in each of the future time periods shown, based on
certain assumptions. Fixed rate loans and mortgage-backed securities are shown
on the basis of contractual amortization adjusted for prepayment at rates
derived from available industry sources. The prepayment rates range from 9% to
51% and are based on the instrument's interest rate. Adjustable rate loans,
investments and mortgage-backed securities are shown to reprice at the earlier
of the next contractual repricing date, call date or maturity. Repurchase
Agreements and FHLB advances are shown to reprice at the earliest call date. The
maturity or repricing of money market, interest checking and savings accounts
are based on forecasted decay rates. Asset prepayment and liability decay rates
are selected after considering the current interest rate environment, industry
prepayment and decay rates, and MSB's historical experience. Management believes
these assumptions are reasonable.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. While gap analysis is one of the most commonly used indicators
of interest rate risk in the thrift industry, there is no single interest rate
risk measurement system that takes into consideration all of the factors that
influence the net interest margin. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market interest rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
MSB is subject to net interest income fluctuations to the degree that its
interest-bearing liabilities mature or reprice more rapidly, or on a different
basis, than its interest-earning assets. While having liabilities that mature or
reprice more frequently than assets may be beneficial in times of declining
interest rates, such an asset and liability structure will likely reduce net
interest income during periods of rising interest rates. The level of
prepayments on mortgages and mortgage-backed securities is a major assumption
affecting the repricing period of these assets. In addition to the level of
prepayments, the trend in net interest income will also be dependent upon the
shape of the U.S. Treasury yield curve, the volume and composition of loan
originations, MSB's balance sheet profile, including asset size, composition of
assets, composition of liabilities and maturity/repricing activity, as
influenced by changes in, and levels of, interest rates.
LIQUIDITY AND CAPITAL RESOURCES
MSB's primary sources of funds are deposits, Repurchase Agreements, FHLB
advances, and proceeds from principal and interest payments and prepayments on
loans and mortgage-backed and investment securities. While maturities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
26
Liquidity represents the amount of an institution's assets that can be quickly
and easily converted into cash without significant loss. The most liquid assets
are cash, short-term U.S. Government securities, U.S. Government agency
guaranteed securities and CD's. MSB is required to maintain specific minimum
levels of liquid investments as defined by the OTS regulations. This requirement
may be varied at the direction of the OTS. Regulations currently in effect
require MSB to maintain liquid assets at least equal to 4.0% of the sum of its
average daily balance of net withdrawable accounts and borrowed funds due in one
year or less. At March 31, 1999, MSB's liquidity ratio was 21.55%, compared to
20.14% at March 31, 1998. At March 31, 1999, liquid assets totaled $94.891
million. The levels of these assets are dependent on MSB's operating, financing,
lending and investing activities during any given period. At March 31, 1999,
$60.183 million in liquid assets were classified as held-to-maturity and, thus,
could not be sold to meet unexpected cash outflows without significant financial
statement ramifications.
MSB intends to retain for the portfolio certain originated residential mortgage
loans (primarily adjustable rate, balloon mortgage loans and fifteen year fixed
rate mortgage loans) and to generally sell the remainder in the secondary
market. MSB will from time to time participate in or originate commercial real
estate loans, including real estate development loans. During the three months
ended March 31, 1999 MSB originated $51.615 million in residential mortgage
loans, of which $33.870 million were retained in MSB's portfolio while the
remainder were sold in the secondary market. This compares to $72.646 million in
originations during the first three months of 1998 of which $15.318 million were
retained in MSB's portfolio. MSB also originated $4,075,000 of commercial loans
and $7,631,000 of consumer loans in the first quarter of 1999. See "Notes to
Unaudited Consolidated Financial Statements, Note 4 - Commitments and
Contingencies" for information regarding MSB's commitments and contingencies at
March 31, 1999.
Deposits are a primary source of MSB';s funds for use in lending and for other
general business purposes. At March 31, 1999 deposits constituted 74.57% of
MSB's total assets compared to 74.56% at December 31, 1998. Deposits that are
scheduled to mature or reprice in one year or less at March 31, 1999 totaled
$252.764 million. Management believes that a significant portion of such
deposits will remain with MSB. Borrowings may be used to compensate for seasonal
or other reductions in normal sources of funds or for deposit outflows at more
than projected levels. Borrowings may also be used on a longer-term basis to
support increased lending or investment activities. At March 31, 1999 MSB had
$45.000 million in Repurchase Agreements and $53.283 million in FHLB advances.
Total borrowings as a percentage of total assets were 17.27% at March 31, 1999
as compared to 17.41% at December 31, 1998. MSB has sufficient available
collateral to obtain additional advances from the FHLB and, based upon current
FHLB stock ownership, could obtain up to a total of approximately $140 million
in such advances.
Stockholders' equity at March 31, 1999 was $36.686 million, or 6.45% of total
assets, compared to $36.136 million, or 6.40% of total assets, at December 31,
1998. (See "Consolidated Statement of Changes in Stockholders' Equity.") MSB
exceeded all regulatory capital requirements at March 31, 1999. (See "Notes to
Unaudited Consolidated Financial Statements, Note 5 -- Regulatory Matters.")
OTS regulations do not permit MSB to pay dividends on its common stock if its
regulatory capital would be reduced below the level required by OTS regulations
or the amount required for
27
the liquidation account established in connection with its conversion from the
mutual to stock form of ownership in 1992. In addition, capital distribution
regulations limit MSB's ability, based on its capital level and supervisory
rating, to make certain capital distributions such as dividends and stock
redemptions or repurchases.
OTHER MATTERS
PROPOSED MERGER
On March 24, 1999, MSB announced that it had signed a definitive agreement to be
acquired by Independent Bank Corporation ("IBC"). In the merger, each
outstanding share of MSB common stock will be converted into 0.80 of IBC common
stock, subject to certain conditions and criteria. The merger is subject to
certain conditions, including approvals by regulators and the shareholders of
MSB and IBC. The merger is intended to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended, and to be
reported as a pooling-of-interests for accounting and financial reporting
purposes. (See "Part II -- Other Information, Item 6(b) -- Reports on Form
8-K.") At April 30, 1999, MSB has included in prepaid expenses and other assets
$252,000 of costs incurred to date related to the proposed merger. These costs
and any additional capitalized merger costs will be expensed by IBC upon
completion of the proposed merger or by MSB if the proposed merger is not
completed.
REGULATION
On April 15, 1999, MSB announced that the OTS had terminated the Supervisory
Agreement with the Bank. The May 1992 Supervisory Agreement, as subsequently
amended, had required MSB to: (i) comply with the business plan filed by
Management and approved by the OTS; (ii) file additional three-year business
plans with the OTS on an annual basis, which are subject to OTS approval; (iii)
maintain its board of directors at a minimum of five directors with a majority
of outside directors; and (iv) fulfill certain reporting requirements.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("Statement 133"). Statement 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Statement 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Statement 133 is effective for all fiscal years beginning
after June 15, 1999. Upon initial application, hedging relationships must be
designated anew and documented pursuant to the provisions of Statement 133.
Statement 133 may not be applied retroactively to financial statements of prior
periods. Management does not expect the implementation of this statement to have
a material impact on its financial statements.
In November 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("Statement 134"). Statement 134 changes the way
mortgage banking firms account for certain securities and other interests
retained after securitizing mortgage loans.
28
Statement 134 is effective for the first fiscal quarter beginning after December
15, 1998. MSB generally does not securitize mortgage loans prior to sale to the
secondary mortgage market and, therefore, Statement 134 had no impact on MSB's
financial statements upon adoption in the first quarter of 1999.
YEAR 2000 COMPLIANCE
A significant issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. The Year 2000 issue is
pervasive and presents both technical and business risks affecting MSB. Many
existing computer programs use only two digits to identify a year in the date
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies to varying degrees.
MSB's material risk in this area arises principally from its purchase of data
processing services from outside vendors. MSB has contacted its major computer
service vendors and has received assurances that those computer services will
properly function on January 1, 2000. However, in the event a major vendor of
MSB is unable to fulfill its contractual obligation, MSB could experience
material costs.
Management of MSB is undertaking an ongoing evaluation of the Year 2000 issue,
including a review of both internal and external risks presented by providers of
data processing products and services, business partners, counter-parties and
major loan customers. MSB began to address the Year 2000 issue in July 1997 and
formally established the Year 2000 Steering Committee (the "Committee") in
January 1998 to monitor MSB's activities. This Committee is responsible for
communicating with MSB's service providers and software vendors in order to
determine the extent to which MSB can rely on their services and products to
perform effectively with respect to Year 2000. The Committee periodically
reports to MSB's Board of Directors. The Committee has completed its assessment
of MSB's data processing systems. Individual system analysis includes target
dates for completion of the renovation phase, validation phase and
implementation phase. The Committee has developed contingency plans in the event
that efforts to remediate individual systems are not completely successful. The
target dates established are in compliance with regulatory guidelines
established by the Federal Financial Institutions Examination Council.
MSB's Year 2000 project costs are embedded in most continuing data processing
expenditures such as monthly service bureau processing costs and computer
equipment replacement costs. The following table summarizes certain data
processing expenses:
For the Three Months Ended March 31,
------------------------------------
1999 1998
--------- ---------
Data processing $ 274,000 $ 257,000
Computer equipment depreciation 112,000 172,000
Information Technology Department
salaries and employee benefits 29,000 27,000
29
Data processing costs consisting primarily of service bureau expense for 1999
and 1998 were relatively similar. Computer equipment net book value at March 31,
1999 was $1,146,000 compared to $1,228,000 at December 31, 1998. During the
first quarter of 1999, MSB purchased $32,000 of computer equipment. Prior to
purchase, the vendor certified the computer equipment as Year 2000 compliant.
Because internal staff is primarily completing the Year 2000 project, MSB does
not expect to incur any significant costs with outside contractors relative to
this project. Other than the Information Technology Department total
compensation costs, management and staff costs have not been delineated for Year
2000 projects. Anticipated future data processing expenses are not expected to
materially differ from current expense.
Management will continue to monitor the progress of its outside vendors in
addressing Year 2000 issues. Applications and systems are now in place at nearly
all of these outside vendors to address Year 2000 issues. Significant testing of
such applications and systems will be conducted to insure that they are adequate
to meet the needs of MSB at January 1, 2000. The testing of all data processing
systems that have been identified by MSB as "mission critical" has been
completed and the results of such testing have been satisfactory.
The discussion above incorporates MSB's best estimates of the costs and
completion date of the Year 2000 project. MSB derived these estimates using
numerous assumptions of future events, including the continued availability of
certain resources and other factors. There can be no guarantee that MSB will
achieve these estimates. Therefore, actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the market risks faced by MSB since
December 31, 1998. For information regarding MSB's market risk, refer to its
Annual Report on Form 10-K for the year ended December 31, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSB, together with four present and former officers, is a defendant in
a lawsuit that was filed in 1995 on behalf of fourteen plaintiffs who
allegedly purchased MSB's common stock during 1992, 1993 and 1994.
This lawsuit alleges that some of MSB's disclosures during that period
concerning its business plan and exposure to interest rate risk were
false and misleading in violation of state and federal securities laws
and common law. Plaintiffs in this lawsuit seek damages of
approximately $3,000,000. This action is pending in the United States
District Court for the Northern District of Illinois.
MSB believes there are meritorious defenses to this lawsuit, has filed
answers denying the material allegations of all of the claims, and
intends to continue to pursue a
30
vigorous defense. The ultimate outcome of this lawsuit and the results
of the legal process cannot be predicted with certainty. No provision
has been recorded for any potential loss for this lawsuit at the
present time because MSB does not believe it is reasonably probable
that any material loss will be incurred as a result of the final
disposition of this lawsuit and/or is unable to reasonably estimate
the amount of any potential loss.
Other pending legal proceedings and regulatory matters have occurred
in the ordinary course of business and do not involve amounts in the
aggregate that are believed by Management to be material to the
financial condition of MSB.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
(2) Agreement and Plan of Reorganization Between Independent
Bank Corporation and Mutual Savings Bank, f.s.b., dated
March 24, 1999
(10) Warrant Purchase Agreement and Warrant between Independent
Bank Corporation and Mutual Savings Bank, f.s.b., dated
March 24, 1999
(11) Computation of Earnings Per Share
B. REPORTS ON FORM 8-K
MSB filed a report on Form 8-K on March 26, 1999 stating that it
had entered into a definitive agreement with Independent Bank
Corporation providing for the acquisition of MSB by Independent
Bank Corporation.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUTUAL SAVINGS BANK, F.S.B.
May 13, 1999 /s/ Robert N. Shuster
- ------------------------------ --------------------------------------
Date Robert N. Shuster
Chief Executive Officer
(Duly Authorized Officer)
May 13, 1999 /s/ Bernard D. Williams
- ------------------------------ --------------------------------------
Date Bernard D. Williams
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
33
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
2 Agreement and Plan of Reorganization Between Independent Bank
Corporation and Mutual Savings Bank, f.s.b., dated March 24, 1999 .............................34
10 Warrant Purchase Agreement and Warrant between Independent Bank
Corporation and Mutual Savings Bank, f.s.b., dated March 24, 1999 ............................137
11 Computation of Earnings Per Share ............................................................156
34
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------
Average Per Average Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
- ---------
Income available to
common stockholders $ 777,729 4,290,414 $ 543,010 4,286,358
Employee Stock Ownership
Plan ("ESOP") shares not
committed to be released -- (42,338) -- (56,213)
----------- ------------- ----------- -------------
777,729 4,248,076 $ 0.18 543,010 4,230,145 $ 0.13
====== ======
Effect of dilutive securities
- -----------------------------
Options -- 88,964 -- 104,458
----------- ------------- ----------- -------------
Diluted EPS
- -----------
Income available to common
stockholders and assumed
conversions $ 777,729 4,337,040 $ 0.18 $ 543,010 4,334,603 $ 0.13
=========== ============= ====== =========== ============= ======