Registration No. 333-87239
Filed Pursuant to Rule 424(b)(3)
PROSPECTUS
UP TO 5,951,250 SHARES OF COMMON STOCK
MFS FINANCIAL, INC.
(Proposed Holding Company for Mutual Federal Savings Bank)
================================================================================
Mutual Federal is converting from the mutual to the stock form of
organization. As part of the conversion, Mutual Federal will issue all of its
common stock to MFS Financial. MFS Financial has been formed to be the holding
company for Mutual Federal. The common stock of MFS Financial expects to be
listed for trading on the Nasdaq National Market under the symbol "MFSF."
================================================================================
TERMS OF THE OFFERING
<TABLE>
<CAPTION>
Maximum,
Minimum Maximum as adjusted
--------- --------- -----------
<S> <C> <C> <C>
Per Share Price........................ $10.00 $10.00 $10.00
Number of Shares....................... 3,825,000 5,175,000 5,951,250
Underwriting Commission and Other
Expenses.............................. $1,500,000 $1,500,000 $1,500,000
Net Proceeds to MFS Financial.......... $36,750,000 $50,250,000 $58,012,500
Net Proceeds Per Share, excluding the
shares issued to The Mutual Federal
Savings Bank Charitable Foundation.... $9.61 $9.71 $9.75
</TABLE>
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS DOCUMENT.
Charles Webb & Company will use its best efforts to assist MFS Financial
in selling at least the minimum number of shares but does not guarantee that
this number will be sold.
The offering to depositors and borrowers of Mutual Federal will end at
12:00 Noon, Muncie, Indiana time, on December 15, 1999. MFS Financial will hold
all funds of subscribers in an interest-bearing savings account at Mutual
Federal until the conversion is completed or terminated. Funds will be returned
promptly with interest if the conversion is terminated.
THESE SECURITIES ARE NOT DEPOSITS OR 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, NOR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES REGULATOR HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
For information on how to subscribe, call the Stock Information Center at
(765) 213-2963.
------------------------------------------------
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
------------------------------------------------
NOVEMBER 10, 1999
<PAGE>
[MAP of Registrant's market area to be produced here.]
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements.
THE COMPANIES:
MFS FINANCIAL, INC.
110 E. Charles Street
Muncie, Indiana 47305-2400
MFS Financial will be the holding company for Mutual Federal when our
conversion to stock form is complete. MFS Financial was formed in September 1999
and has not engaged in any business.
The following table shows our ownership structure after completing the
conversion and contributing shares to The Mutual Federal Savings Bank Charitable
Foundation, Inc.:
------------------------ ------------------------
THE MUTUAL FEDERAL
PUBLIC STOCKHOLDERS SAVINGS BANK
CHARITABLE
FOUNDATION, INC.
------------------------ ------------------------
/ 96.2% of the / 3.8% of the
/ common stock / common stock
--------------------------------------------------------------------
MFS FINANCIAL
--------------------------------------------------------------------
/
/ 100% of Mutual Federal's common stock
--------------------------------------------------------------------
MUTUAL FEDERAL SAVINGS BANK
--------------------------------------------------------------------
MUTUAL FEDERAL SAVINGS BANK
110 E. Charles Street
Muncie, Indiana 47305-2400
Mutual Federal is a federal mutual savings bank. At June 30, 1999, we had
total assets of $490.0 million, deposits of $384.6 million and total equity of
$45.6 million. We are changing our structure by becoming a stock savings bank.
We are a community-oriented savings bank serving primarily Delaware,
Randolph and Kosciusko Counties in Indiana through 13 full service banking
offices. We emphasize
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<PAGE>
residential mortgage lending, primarily originating one-to four-family mortgage
loans. We also originate a wide variety of consumer loans.
THE STOCK OFFERING
We are converting to stock form and offering common stock to the public
primarily to better allow us to grow through expanded operations, as well as
through increased branching and acquisitions. The stock form will also give us
more flexibility to increase our capital position and to offer stock-based
employee compensation. See "Mutual Federal's Conversion - Our Reasons for the
Corporate Change. "
We are offering between 3,825,000 and 5,175,000 shares of MFS Financial at
$10.00 per share. Because of changes in financial market conditions before we
complete the conversion, the number of shares we offer may increase to 5,951,250
shares with the approval of the Office of Thrift Supervision and without any
notice to you. If so, you will not have the chance to change or cancel your
stock order.
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc. will
assist us in selling the stock. For further information about Charles Webb &
Company's role in the offering, see "Mutual Federal's Conversion - Marketing
Arrangements."
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The independent appraisal by RP Financial, LC., dated as of October 25,
1999, established the offering range. This appraisal was based on our financial
condition and operations and the effect of the additional capital raised in the
conversion. The $10.00 price per share was determined by our board of directors
and is the price most commonly used in stock offerings involving conversions of
mutual savings institutions. RP Financial will update the appraisal before the
completion of the conversion.
TERMS OF THE OFFERING
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors who held at least $50 with us on July 31, 1998.
(2) The MFS Financial employee stock ownership plan.
(3) Depositors who held at least $50 with us on September 30, 1999.
(4) Borrowers as of April 1, 1984 who continue as borrowers as of October
31, 1999 and depositors as of October 31, 1999.
(5) Mutual Federal's directors, officers and employees.
4
<PAGE>
Shares of common stock not subscribed for in the subscription offering
will be offered to the general public in a direct community offering and, if
necessary, a public offering. See pages 55 to 56.
TERMINATION OF THE OFFERING
The subscription offering will end at 12:00 Noon, Muncie, Indiana time on
December 15, 1999. If fewer than the minimum number of shares are subscribed for
in the subscription offering and we do not get orders for at least the minimum
number of shares by January 31, 2000, we will either:
(1) promptly return any payment you made to us, with interest, or cancel
any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the extension
and of your rights to cancel or change your order. If we extend the
offering and you do not respond to the notice, then we will cancel
your order and return your payment, with interest, or cancel any
withdrawal authorization you gave us. We must complete or terminate
the offering by December 27, 2001.
HOW WE WILL USE THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
We intend to use the net proceeds received from the stock offering,
assuming completion of the offering at the maximum of the estimated offering
range, as follows:
$18,749,000 Retained by MFS Financial and initially placed
in short-term investments for general corporate
purposes
4,306,000 Employee stock ownership plan loan
2,070,000 Cash contribution to The Mutual Federal Savings
Bank Charitable Foundation, Inc.
25,125,000 Used to buy the stock of Mutual Federal
$50,250,000 Net proceeds from stock offering
We intend to use the proceeds at Mutual Federal for future lending and
investment, in addition to general corporate purposes.
WE CURRENTLY INTEND TO PAY A CASH DIVIDEND IN THE FUTURE
We currently plan to pay cash dividends in the future. However, the amount
and timing of any dividends has not yet been determined. Based on our earnings
history and the proceeds from the conversion, we believe we will have the
financial ability to pay dividends, but future dividends are not guaranteed and
will depend on our ability to pay them. We will not pay or take any steps to pay
a tax-free dividend which qualifies as a return of capital for at least one year
following the stock offering.
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<PAGE>
THE COMMON STOCK IS EXPECTED TO BE LISTED FOR TRADING ON THE NASDAQ NATIONAL
MARKET
We expect our common stock to be listed for trading on the Nasdaq National
Market under the symbol "MFSF." Our application to list our stock on the Nasdaq
National Market is currently pending. However, persons purchasing shares may not
be able to sell their shares when they want to, or at a price equal to or above
$10.00.
BENEFITS TO MANAGEMENT FROM THE OFFERING
We intend to establish the MFS Financial employee stock ownership plan
which will purchase 8% of the shares sold in this offering, including shares
issued to the foundation. A loan from MFS Financial to the plan, funded by a
portion of the proceeds from this offering, will be used to purchase these
shares. The employee stock ownership plan will provide a retirement benefit to
all employees eligible to participate in the plan.
We also intend to adopt a stock option plan and a restricted stock plan
for the benefit of directors, officers and employees, subject to shareholder
approval. If we adopt the restricted stock plan, some of these individuals will
be awarded stock at no cost to them. As a result, both the employee stock
ownership plan and the restricted stock plan will increase the voting control of
management without a cash outlay.
The following table presents the total value of the shares of common
stock, at the maximum of the offering range and including the shares issued to
the foundation, which would be acquired by the employee stock ownership plan and
the total value of all shares to be available for award and issuance under the
restricted stock plan. The table assumes that the value of the shares is $10.00
per share. The table does not include a value for the options because the price
paid for the option shares will be equal to the fair market value of the common
stock on the day that the options are granted. As a result, financial gains can
be realized under an option only if the market price of common stock increases.
Percentage of
Estimated Shares Issued
Value of Shares in the Offering
--------------- ---------------
Employee Stock Ownership Plan................ $4,306,000 8.0%
Restricted Stock Awards...................... 2,153,000 4.0
Stock Options................................ --- 10.0
----------------- ----
Total................................... $6,459,000 22.0%
In addition, upon completion of the conversion, we intend to enter into
employment agreements with R. Donn Roberts, President and Chief Executive
Officer and Timothy J. McArdle, Senior Vice President, Treasurer and Controller.
The employment agreements are designed to assist us in maintaining a stable and
competent management team after the conversion. The employment agreements will
have a term of three years and provide for an annual base salary in an amount
not less than such individual's current salary. Officers Roberts and McArdle
currently have a base salary of $238,000 and $101,500, respectively.
For a further discussion of benefits to management, see "Management."
6
<PAGE>
WE INTEND TO CONTRIBUTE A TOTAL OF UP TO $4.5 MILLION IN CASH AND STOCK TO
OUR CHARITABLE FOUNDATION
To continue our long-standing commitment to our local communities, upon
completion of this offering, we intend to contribute to The Mutual Federal
Savings Bank Charitable Foundation, a charitable foundation established by us in
1998, shares of our common stock and cash equal to a total of 8% of the value of
the shares sold in this offering, up to a maximum of $4.5 million. Based on the
maximum amount of shares offered, in addition to the shares sold in this
offering, we will also issue 207,000 shares to the foundation, worth $2.1
million, and make a cash contribution of $2.1 million to the foundation. We
expect the foundation to continue to support charitable causes in Mutual
Federal's primary market areas. Charitable contributions by Mutual Federal
totaled $63,000 in 1996, $69,000 in 1997 and $97,000 in 1998. If we make the
contribution to the foundation, the total number of shares we offer for sale
will be lower than if the offering were completed without the contribution to
the foundation. For a further discussion of the financial impact of the
foundation, see "Risk Factors - The contribution to the foundation will reduce
our earnings," "Pro Forma Data" and "Comparison of Valuation and Pro Forma
Information With No Foundation." If we do not make the contribution to the
foundation, the $2.1 million cash contribution will not be made and will become
additional capital for use in Mutual Federal's business.
HOW TO PURCHASE COMMON STOCK
NOTE: ONCE WE RECEIVE YOUR ORDER, YOU CANNOT CANCEL OR CHANGE IT WITHOUT
OUR CONSENT. IF MFS FINANCIAL INTENDS TO SELL FEWER THAN 3,825,000 SHARES OR
MORE THAN 5,951,250 SHARES, ALL SUBSCRIBERS WILL BE NOTIFIED AND GIVEN THE
OPPORTUNITY TO CHANGE OR CANCEL THEIR ORDERS. IF YOU DO NOT RESPOND TO THIS
NOTICE, WE WILL RETURN YOUR FUNDS PROMPTLY WITH INTEREST.
If you want to subscribe for shares you must complete an original stock
order form and send it, together with full payment or withdrawal authorization,
to Mutual Federal in the postage-paid envelope provided. You must sign the
certification that is part of the stock order form. We must receive your stock
order form before the end of the offering period.
You may pay for shares in any of the following ways:
o BY CASH, if delivered in person to a full-service banking office of
Mutual Federal.
o BY CHECK OR MONEY ORDER made payable to MFS Financial.
o BY AUTHORIZING A WITHDRAWAL FROM AN ACCOUNT AT MUTUAL FEDERAL. To use
funds in an Individual Retirement Account at Mutual Federal, you must
transfer your account to a self-directed account with Mutual Financial
Services or with an unaffiliated institution or broker. Please contact
the stock information center at least one week before the end of the
offering for assistance.
We will pay interest on your subscription funds at the rate Mutual Federal
pays on passbook accounts from the date it receives your funds until the
conversion is completed or terminated. All funds authorized for withdrawal from
deposit accounts with Mutual Federal will
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<PAGE>
earn interest at the applicable account rate until the conversion is completed.
There will be no early withdrawal penalty for withdrawals from certificates of
deposit used to pay for stock.
STOCK INFORMATION CENTER
If you have any questions regarding the offering or our conversion to
stock form, please call the Stock Information Center at (765) 213-2963.
Mutual Federal has a website (http://www.mfsbank.com). Upon completion of
the subscription offering on DECEMBER 15, 1999, the website will provide a
current update on the status of the offering.
SUBSCRIPTION RIGHTS
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not DO SO. We will not accept any stock orders that we
believe involve the transfer of subscription rights.
IMPORTANT RISKS IN OWNING MFS FINANCIAL'S COMMON STOCK
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 9 to 12 of this document.
8
<PAGE>
RISK FACTORS
You should consider these risk factors, in addition to the other
information in this prospectus, before deciding whether to make an investment in
this stock.
RISING INTEREST RATES MAY HURT OUR PROFITS.
To be profitable, we have to earn more money in interest we receive on
loans and investments we make than we pay to our depositors and lenders in
interest. If interest rates rise, our net interest income could be reduced if
interest paid on interest-bearing liabilities, such as deposits and borrowings,
increases more quickly than interest received on interest-earning assets, such
as loans, mortgage-related and investment securities. In addition, rising
interest rates may hurt our income because they may reduce the demand for loans
and the value of our mortgage-related and investment securities. For a further
discussion of how changes in interest rates could impact us, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management and Market Risk."
AFTER THIS OFFERING, OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER
COMPANIES AND OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD NEGATIVELY
IMPACT THE PRICE OF OUR STOCK.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use this
capital in our business operations. Our compensation expenses will also increase
because of the costs associated with the employee stock ownership and
stock-based incentive plans. Therefore, we expect our return on equity to be
below our historical level and less than our regional and national peers. This
low return on equity could hurt our stock price. We cannot guarantee when or if
we will achieve returns on equity that are comparable to industry peers. For
further information regarding pro forma income and expenses, see "Pro Forma
Data."
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO OUR SUBSTANTIAL NUMBER OF
CONSUMER, MULTI-FAMILY AND COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS.
Our consumer, multi-family and commercial real estate, and commercial
business loans accounted for approximately one-third of our total loan portfolio
as of June 30, 1999. Generally, we consider these types of loans to involve a
higher degree of risk compared to first mortgage loans on one- to four-family,
owner-occupied residential properties. In addition, we plan to increase our
emphasis on commercial real estate and commercial business lending. Because of
our planned increased emphasis on and increased investment in commercial real
estate and commercial business loans, we may determine it necessary to increase
the level of our provision for loan losses. Increased provisions for loan losses
would hurt our profits. For further information concerning the risks associated
with consumer, multi-family and commercial real estate and commercial business
loans, see "Business of Mutual Federal - Lending Activities" and "- Asset
Quality."
9
<PAGE>
THE CONTRIBUTION TO THE FOUNDATION WILL REDUCE OUR EARNINGS.
MFS Financial intends to contribute to The Mutual Federal Savings Bank
Charitable Foundation shares of its common stock equal to 4% of the shares sold
in the stock offering, worth $2.1 million, plus cash equal to the value of 4% of
the stock sold in the stock offering, or $2.1 million at the maximum of the
estimated offering range, and subject to a maximum total contribution of $4.5
million. This contribution will be a significant expense to MFS Financial and
will decrease our net income for the year ending December 31, 1999. For a
further discussion regarding the effect of the contribution to the foundation,
see "Pro Forma Data."
THE CONTRIBUTION TO THE FOUNDATION MEANS THAT YOUR TOTAL OWNERSHIP WILL BE 3.85%
LESS AFTER WE MAKE THE CONTRIBUTION.
If you purchase shares, then your voting interests in MFS Financial will
be reduced by 3.85% when we contribute our shares to the foundation. For a
further discussion regarding the effect of the contribution to the foundation,
see "Pro Forma Data," "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Mutual Federal's Conversion - The Mutual Federal Savings Bank
Charitable Foundation."
WE INTEND TO GRANT STOCK OPTIONS AND RESTRICTED STOCK TO THE BOARD AND
MANAGEMENT FOLLOWING THE CONVERSION WHICH COULD REDUCE YOUR OWNERSHIP INTEREST.
If approved by a vote of the shareholders, we intend to establish a stock
option plan with a number of shares equal to 10% of the shares issued in the
conversion and a restricted stock plan with a number of shares equal to 4% of
the shares issued in the conversion, worth $2.2 million at the purchase price ,
assuming the maximum of the estimated offering range, for the benefit of
directors, officers and employees of MFS Financial and Mutual Federal. Stock
options are paid for by the recipient in an amount equal to the fair market
value of the stock on the date of the grant. This payment is not made until the
option is actually exercised by the recipient. Restricted stock is a bonus paid
in the form of stock rather than cash, and is not paid for by the recipient.
Awards under these plans could reduce the ownership interest of all
stockholders. For further discussion regarding these plans, see "Pro Forma Data"
and "Management - Benefits -Other Stock Benefit Plans."
THE AMOUNT OF COMMON STOCK WE WILL CONTROL, OUR ARTICLES OF INCORPORATION AND
BYLAWS AND STATE AND FEDERAL STATUTORY PROVISIONS COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL.
Our board of directors, directors emeritus and executive officers intend
to purchase approximately 6.92% of our common stock at the maximum of the
offering range. These purchases, together with the purchase of 8% of the shares
by the employee stock ownership plan, as well as the potential acquisition of
common stock through the proposed stock option plan and restricted stock plan
will result in significant inside ownership of MFS Financial. This inside
ownership and provisions in our articles of incorporation and bylaws may have
the effect of discouraging attempts to acquire MFS Financial, a proxy contest
for control of MFS Financial, the assumption of control of MFS Financial by a
holder of a large block of common stock and the removal of MFS Financial's
management, all of which certain shareholders might think are in their best
interests. These provisions include, among other things:
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o the staggered terms of the members of the board of directors;
o an 80% shareholder vote requirement for the approval of any merger or
consolidation of MFS Financial into any entity that directly or
indirectly owns 5% or more of MFS Financial voting stock if the
transaction is not approved in advance by at least a majority of the
disinterested members of MFS Financial's board of directors;
o supermajority shareholder vote requirements for the approval of
certain amendments to MFS Financial's articles of incorporation and
bylaws;
o a prohibition on any holder of common stock voting more than 10% of
the outstanding common stock;
o elimination of cumulative voting by shareholders in the election of
directors;
o restrictions on the acquisition of our equity securities; and
o the authorization of 5,000,000 shares of preferred stock that could be
issued without shareholder approval on terms or in circumstances that
could deter a future takeover attempt.
In addition, the Maryland business corporation law, the state where MFS
Financial is incorporated, provides for certain restrictions on acquisition of
MFS Financial, and federal law contains restrictions on acquisitions of control
of savings and loan holding companies such as MFS Financial.
HOLDERS OF MFS FINANCIAL COMMON STOCK MAY NOT BE ABLE TO SELL THEIR SHARES WHEN
DESIRED IF A LIQUID TRADING MARKET DOES NOT DEVELOP OR FOR $10.00 OR MORE PER
SHARE EVEN IF A LIQUID TRADING MARKET DEVELOPS.
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. We expect our common stock to be listed
for trading on the Nasdaq National Market under the symbol "MFSF." We cannot
predict whether a liquid trading market in shares of MFS Financial's common
stock will develop or how liquid that market might become. Persons purchasing
shares may not be able to sell their shares when they desire if a liquid trading
market does not develop and may not be able to sell them at a price equal to or
above $10.00 per share even if a liquid trading market develops.
11
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IF OUR COMPUTER SYSTEMS DO NOT PROPERLY WORK ON JANUARY 1, 2000, OUR BUSINESS
OPERATIONS WILL BE DISRUPTED.
If our computer systems and the computer systems operated by our third
party vendors do not properly work on January 1, 2000, then we could experience
a disruption in our business operations. As a result, our financial condition
and results of operations could be weakened. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Year 2000 Issues."
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SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31 is derived from our audited financial statements.
Information at June 30, 1999 and for the six months ended June 30, 1999 and 1998
is unaudited but, in the opinion of management, includes all adjustments,
comprising only normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations as of and for these dates. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results of operations for the entire year. The following
information is only a summary and you should read it in conjunction with our
financial statements and notes beginning on page F-2.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ................................... $490,035 $469,515 $458,695 $434,389 $402,708 $381,070
Loans receivable, net .......................... 420,539 398,146 399,290 378,290 345,738 322,102
Investment securities:
Available-for-sale, at market value .......... 10,121 14,208 12,370 11,765 12,509 12,883
Held-to-maturity ............................. 12,826 11,004 10,167 8,997 13,470 14,092
Total deposits ................................. 384,562 365,999 344,860 330,235 312,218 300,854
Total borrowings ............................... 53,161 52,462 66,255 61,109 50,783 44,974
Total equity capital ........................... 45,619 43,846 39,660 35,479 32,864 29,090
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income ................................ $ 16,746 $ 17,540 $ 34,474 $ 34,085 $ 32,427 $ 29,915 $ 27,489
Total interest expense ............................... 9,251 9,973 19,690 19,082 17,851 16,429 14,068
-------- -------- -------- -------- -------- -------- --------
Net interest income ............................... 7,495 7,567 14,784 15,003 14,576 13,486 13,421
Provision for loan losses ............................ 380 382 1,265 700 570 650 725
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses ......................................... 7,115 7,185 13,519 14,303 14,006 12,836 12,696
-------- -------- -------- -------- -------- -------- --------
Fees and service charges ............................. 778 747 1,544 1,316 1,132 933 956
Gain (loss) on sales of loans,
mortgage-backed securities and
investment securities ............................... 32 218 807 188 12 23 (28)
Other non-interest income ............................ 460 548 1,077 579 763 875 892
-------- -------- -------- -------- -------- -------- --------
Total non-interest income ............................ 1,270 1,513 3,428 2,083 1,907 1,831 1,820
Total non-interest expense ........................... 5,528 5,304 10,759 10,091 11,947 9,697 9,002
-------- -------- -------- -------- -------- -------- --------
Income before taxes .................................. 2,857 3,394 6,188 6,295 3,966 4,970 5,514
Income tax provision ................................. 934 1,163 2,049 2,160 1,266 1,545 1,975
-------- -------- -------- -------- -------- -------- --------
Net income ........................................... $ 1,923 $ 2,231 $ 4,139 $ 4,135 $ 2,700 $ 3,425 $ 3,539
======== ======== ======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------ --------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Performance Ratios:
Return on average assets (ratio of net
income to average total assets)(1) ................ 0.80% 0.96% 0.89% 0.93% 0.64% 0.87% 0.93%
Return on average equity (ratio of
net income to average equity)(1) .................. 8.55 10.89 9.83 11.36 7.79 10.92 12.92
Interest rate spread (average during
period)(1) ......................................... 3.21 3.27 3.21 3.34 3.42 3.39 3.57
Net interest margin (1)(2) .......................... 3.39 3.48 3.42 3.58 3.66 3.63 3.76
Ratio of operating expense to average
total assets (1)................................... 2.31 2.28 2.31 2.28 2.84 2.46 2.38
Ratio of average interest-earning
assets to average interest-bearing
liabilities ....................................... 104.25 104.68 104.56 105.18 105.48 105.87 104.76
Efficiency ratio(3).................................. 63.07 58.41 59.08 59.06 72.48 63.31 59.06
Asset Quality Ratios:
Non-performing assets to total assets
at end of period ................................... 0.34 0.24 0.29 0.62 0.49 0.59 0.52
Non-performing loans to total
loans ............................................. 0.28 0.14 0.28 0.19 0.40 0.60 0.53
Allowance for loan losses to non-
performing loans ................................... 300.82 563.94 307.36 406.71 193.65 129.60 138.22
Allowance for loan losses to loans
receivable, net .................................... 0.86 0.80 0.85 0.77 0.78 0.79 0.75
Capital Ratios(4):
Equity to total assets at end of
period ............................................ 9.31 8.96 9.34 8.65 8.17 8.16 7.63
Average equity to average assets .................... 9.41 8.82 9.06 8.22 8.24 7.95 7.23
Other Data:
Number of full-service offices ...................... 13 12 12 12 11 11 11
</TABLE>
- ---------------------
(1) Ratios for the six month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) Total non-interest expense divided by net interest income plus total
non-interest income.
(4) For regulatory capital ratios, see "How We Are Regulated - Regulatory
Capital Requirements."
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RECENT DEVELOPMENTS
The selected financial and operating data presented below at September 30,
1999 and for the three and nine months ended September 30, 1999 and 1998 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation have been included.
The results of operations and other data for the three and nine months ended
September 30, 1999, are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1999.
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets ................................... $512,886 $469,515
Loans receivable, net .......................... 436,789 398,146
Investment securities:
Available-for-sale, at market value ........ 9,515 14,208
Held-to-maturity ........................... 12,992 11,004
Total deposits ................................. 379,676 365,999
Total borrowings ............................... 78,183 52,462
Total equity ................................... 46,527 43,846
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income .............................................. $ 8,570 $ 8,459 $25,316 $25,999
Total interest expense ............................................. 4,837 4,883 14,088 14,856
------- ------- ------- -------
Net interest income ........................................... 3,733 3,576 11,228 11,143
Provision for loan losses .......................................... 190 392 570 774
------- ------- ------- -------
Net interest income after provision for loan
losses ....................................................... 3,543 3,184 10,658 10,369
Fees and service charges ........................................... 444 385 1,222 1,132
Gain on sale of loans, mortgage-backed
securities and investment securities .............................. -- 594 32 812
Other non-interest income .......................................... 312 233 772 781
------- ------- ------- -------
Total non-interest income ..................................... 756 1,212 2,026 2,725
Total non-interest expense .................................... 2,901 2,802 8,429 8,106
------- ------- ------- -------
Income before taxes ........................................... 1,398 1,594 4,255 4,988
Income tax provision ............................................... 447 537 1,381 1,700
------- ------- ------- -------
Net income .................................................... $ 951 $ 1,057 $ 2,874 $ 3,288
======= ======= ======= =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
------- -------- -------- -------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(1) ........................................ 0.76% 0.92% 0.79% 0.95%
Return on average equity (ratio of net income to
average total assets)(1) ........................................ 8.21 9.88 8.44 10.54
Interest rate spread (average during the period)(1) .............. 3.07 3.15 3.17 3.23
Net interest margin(1)(2) ........................................ 3.23 3.36 3.34 3.44
Ratio of operating expense to average total assets (1)............ 2.31 2.44 2.31 2.33
Ratio of average interest-earning assets to average
interest-bearing liabilities ................................... 103.81 104.53 104.08 104.63
Efficiency ratio (3).............................................. 64.62 58.52 63.60 58.45
Asset Quality Ratios:
Non-performing assets to total assets at end of period ........... 0.32 0.25 0.32 0.25
Non-performing loans to total loans .............................. 0.28 0.20 0.28 0.20
Allowance for loan losses to non-performing loans ................ 298.71 448.98 298.71 448.98
Allowance for loan losses to loans receivable, net ............... 0.84 0.89 0.84 0.89
Capital Ratios (4):
Equity to total assets at end of period .......................... 9.07 9.25 9.07 9.25
Average equity to average assets ................................. 9.23 9.32 9.35 8.98
Other Data:
Number of full service offices ................................... 13 12 13 12
</TABLE>
(1) Ratios for the three and nine month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) Total non-interest expense divided by net interest income plus total
non-interest income.
(4) For regulatory capital ratios, see "How We Are Regulated -
Regulatory Capital Requirements. "
CAPITAL REQUIREMENTS
The following table sets forth Mutual Federal historical compliance with
its capital requirements at September 30, 1999. See "How We are Regulated -
Regulatory Capital Requirements".
AT SEPTEMBER 30, 1999
---------------------
AMOUNT PERCENT
-------- ---------
Tangible Capital
Actual................... $45,149 8.83%
Required................. 7,671 1.50%
Excess................... 37,478 7.33%
Core Capital
Actual................... $45,149 8.83%
Required................. 15,342 3.00%
Excess................... 29,807 5.83%
Risk-based Capital
Actual................... $48,584 14.84%
Required................. 26,188 8.00%
Excess................... 22,396 6.84%
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RECENT FINANCIAL INFORMATION
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets at September 30, 1999 were $512.9 million compared to $469.5
million at December 31, 1998, an increase of $43.4 million. The primary factors
in this increase were a $38.6 million increase in loans and a $5.5 million
increase in cash. The increase in loans was due primarily to the continued
strong loan demand in our markets. The increase in cash was in preparation for
calendar year end in response to year 2000 issues.
Total deposits of Mutual Federal increased $13.7 million from $366.0
million at December 31, 1998, to $379.7 million at September 30, 1999. The
increase was primarily due to an increase in public fund deposits, due to more
aggressive bidding. Additional Federal Home Loan Bank advances of $24.9 million
were used to fund the growth in our loan portfolio.
Total equity at September 30, 1999 was $46.5 million compared to $43.8
million at December 31, 1998. This was an increase of $2.7 million or 6.2%. Net
earnings of $2.9 million for the nine months ended September 30, 1999 were
partially offset by a $193,000 increase in unrealized loss in securities
available for sale, net of deferred income taxes.
COMPARISON OF RESULTS FOR THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. Mutual Federal reported net income of $951,000 for the three
month period ended September 30, 1999 compared to net income of $1.1 million for
the three month period ended September 30, 1998. The decrease was primarily due
to a 37.7% decrease in other income, due to $589,000 in gains on loan sales in
the 1998 period with no corresponding gain in the 1999 period.
NET INTEREST INCOME. Net interest income increased $157,000 or 4.4% to
$3.7 million for the 1999 period compared to the 1998 period, reflecting a
$111,000 or 1.3% increase in interest income and a $46,000 or 1.0% decrease in
interest expense. Mutual Federal's interest rate spread decreased to 3.07% for
the 1999 period compared to 3.15% for the 1998 period. In addition, the ratio of
average interest-earning assets to average interest-bearing liabilities
decreased to103.8% for the 1999 period compared to104.5% for the 1998 period.
INTEREST INCOME. The increase in interest income for the 1999 period was
primarily due to an increase in the average balance of Mutual Federal's
interest-earning assets, partially offset by a decrease in the yield on earning
assets. The average yield earned on Mutual Federal's loan portfolio decreased
from 8.10% in the 1998 period to 7.51% in the 1999 period. The lower yield in
1999 was primarily due to the effect of refinancing activity and loan sales
during 1998. In addition, the average yield earned on Mutual Federal's
mortgage-backed and investment securities and trading securities portfolios
decreased from 6.22% for the 1998 period to 5.91% for the 1999 period, primarily
due to a reduction in market rates of interest and the sale of available-
for-sale securities which had an above market rate of interest. The
average balance of Mutual Federal's mortgage-backed securities, investment
securities and trading securities
17
<PAGE>
portfolios increased $2.2 million or 9.9% to $24.7 million for the 1999 period
compared to the 1998 period primarily as a result of the purchase of additional
securities.
INTEREST EXPENSE. Interest expense for the three month period ended
September 30, 1999 was $4.8 million as compared to $4.9 million for the three
month period ended September 30, 1998. The decrease in interest expense was
primarily due to the reduction of the rate paid on average interest-bearing
liabilities for the three month period ended September 30, 1999 to 4.34%
compared to 4.80% for the same period in 1998. The decrease in interest expense
was partially offset by the increase in average outstanding interest-bearing
liabilities from the three month period ended September 30, 1998 to the three
month period ended September 30, 1999.
PROVISION FOR LOAN LOSSES. For the three month period ended September 30,
1999, the provision for loan losses amounted to $190,000 compared to a provision
for loan losses in the 1998 period of $392,000. During the three months ended
September 30, 1998, $200,000 was added to the provision for loan losses relating
to loans in litigation. See "Business of Mutual Federal - Asset Quality - Other
Loans of Concern." At September 30, 1999, Mutual Federal's allowance for loan
losses was $3.7 million or .84% of the total loan portfolio and approximately
298.7% of total non-performing loans.
OTHER INCOME. Other income amounted to $756,000 and $1.2 million for the
three months ended September 30, 1999 and 1998, respectively. The decrease was
primarily the result of a $589,000 gain on the sale of loans in the 1998 period
with no corresponding gain in the 1999 period.
OTHER EXPENSES. Non-interest expense was $2.9 million for the three months
ended September 30, 1999 compared to $2.8 million for the three month period
ended September 30, 1998. This was an increase of $99,000 or 3.5%. Compensation
and benefits expense increased to $1.7 million for the three month period ended
September 30, 1999 compared to $1.6 million for the three month period ended
September 30, 1998. This was an increase of $105,000 or 6.5%. The increase was
due to an addition of several staff relating to the opening of a new in-grocery
store full service office. Equipment expenses increased $69,000 or 56.2% from
$123,000 during the three month period ended September 30, 1998 to $192,000 for
the same period ended September 30, 1999. The increase was a result of increased
costs related to Year 2000 hardware and software purchases.
COMPARISON OF RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. Mutual Federal reported net income of $2.9 million for the nine
month period ended September 30, 1999 compared to net income of $3.3 million for
the nine month period ended September 30, 1998. The decrease was primarily due
to a 25.7% decrease in other income, due to a gain on loan sales in the 1998
period with no corresponding gain in the 1999 period.
NET INTEREST INCOME. Net interest income increased $85,000 or .8% to $11.2
million for the 1999 period compared to the 1998 period, reflecting a $683,000
or 2.6% decrease in interest income which was offset by a $768,000 or 5.2%
decrease in interest expense. Mutual Federal's interest rate spread decreased to
3.17% for the 1999 period compared to 3.23% for the
18
<PAGE>
1998 period. In addition, the ratio of average interest-earning assets to
average interest-bearing liabilities decreased to 104.1% for the 1999 period
compared to 104.6% for the 1998 period.
INTEREST INCOME. The decrease in interest income for the 1999 period was
primarily due to a decrease in the yield on earning assets, partially offset by
an increase in the average balance of Mutual Federal's interest-earning assets.
The average yield earned on Mutual Federal's loan portfolio decreased from 8.17%
in the 1998 period to 7.65% in the 1999 period. The lower yield in 1999 was
primarily due to the effect of refinancing activity and loan sales during 1998.
In addition, the average yield earned on Mutual Federal's mortgage-backed and
investment securities and trading securities portfolios decreased from 6.25% for
the 1998 period to 5.85% for the 1999 period, primarily due to a reduction in
market rates of interest and the sale of available-for-sale securities which had
an above market rate of interest. The average balance of Mutual Federal's
mortgage-backed securities, investment securities and trading securities
portfolios increased $3.9 million or 18.3% to $24.8 million for the 1999 period
compared to the 1998 period primarily as a result of the purchase of additional
securities.
INTEREST EXPENSE. The decrease in interest expense during the 1999 period
was primarily due to a decrease in the average rate paid on liabilities and the
average balance of borrowings, partially offset by an increase in the average
balance of deposits. The reduction in rates was primarily due to a general
reduction in market rates of interest. The reduction in the average balance of
borrowings was primarily due to the pay down of borrowings. The increase in
deposits was primarily due to aggressive marketing of our money market accounts
and public funds.
PROVISION FOR LOAN LOSSES. For the nine month period ended September 30,
1999, the provision for loan losses amounted to $570,000 compared to a provision
for loan losses in the 1998 period of $774,000. During the nine months ended
September 30, 1998, $200,000 was added to the provision for loan losses relating
to loans in litigation. See "Business of Mutual Federal - Asset Quality - Other
Loans of Concern."
OTHER INCOME. Other income was $2.0 million and $2.7 million for the nine
months ended September 30, 1999 and 1998, respectively. The decrease was
primarily the result of a $806,000 gain on the sale of loans in the 1998 period
with no corresponding gain in the 1999 period.
OTHER EXPENSES. Other expenses increased $323,000 or 4.0% to $8.4 million
for the nine months ended September 30, 1999, compared to the 1998 period. This
increase was primarily due to a $332,000 or 7.3% increase in personnel expenses
due to an increase in the number of employees in the consumer and commercial
loan departments due to increased originations and the addition of several staff
relating to the opening of a new in-grocery store full service office.
19
<PAGE>
MFS FINANCIAL, INC.
MFS Financial was incorporated under Maryland law to hold all of the stock
of Mutual Federal. Maryland was chosen as the state of incorporation because it
provides protections similar to Delaware with respect to takeover,
indemnification and limitations on liability, with reduced franchise taxes. MFS
Financial has received Office of Thrift Supervision approval to become a savings
and loan holding company and is subject to regulation by that agency. After we
complete the conversion, MFS Financial will be a unitary thrift holding company,
which means that it will own one thrift institution. Unitary thrift holding
companies historically were not limited in their activities by the Office of
Thrift Supervision. New legislation which has been enacted into law, however,
will limit MFS Financial to banking, securities, insurance and financial
services-related activities. See "How We Are Regulated - MFS Financial." MFS
Financial will have no significant assets other than all of the outstanding
shares of common stock of Mutual Federal, the net proceeds it keeps and its loan
to the MFS Financial employee stock ownership plan. MFS Financial will have no
significant liabilities. See "How We Intend to Use the Proceeds." Initially, the
management of MFS Financial and Mutual Federal will be substantially the same.
MFS Financial intends to utilize the support staff and offices of Mutual Federal
from time to time and will pay Mutual Federal for these services. If MFS
Financial expands or changes its business in the future, we may hire our own
employees.
We believe the proposed holding company structure will give us more
flexibility to change our business activities by forming new companies which we
own, or by buying other companies, including other financial institutions and
financial services companies. We do not have any current plans to do these
things. MFS Financial intends to pay for its business activities with the
proceeds it keeps from the conversion and the money we earn from investing the
proceeds, as well as from dividends from Mutual Federal. See "Our Policy
Regarding Dividends."
The principal executive offices of MFS Financial will be located at 110 E.
Charles Street, Muncie, Indiana 47305, and its telephone number will be (765)
747-2800.
MUTUAL FEDERAL SAVINGS BANK
Mutual Federal is a federally chartered and insured mutual savings bank
with 13 full service offices. At June 30, 1999, Mutual Federal had total assets
of $490.0 million, total deposits of $384.6 million and equity of $45.6 million.
For more information regarding the business and operations of Mutual Federal,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of Mutual Federal."
Mutual Federal is examined and regulated by the Office of Thrift
Supervision, its primary federal regulator. Mutual Federal is also regulated by
the FDIC. Mutual Federal is required to have certain reserves set by the Federal
Reserve Board and is a member of the Federal Home Loan Bank of Indianapolis,
which is one of the 12 regional banks in the Federal Home Loan Bank System.
20
<PAGE>
The executive offices of Mutual Federal are located at 110 E. Charles
Street, Muncie, Indiana 47305, and its telephone number is (765) 747-2800.
HOW WE INTEND TO USE THE PROCEEDS
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the conversion is completed, we presently
anticipate that the net proceeds from the sale of the shares of common stock
will be between $36.8 million and $50.3 million and up to $58.0 million assuming
an increase in the estimated value of the common stock sold in the conversion by
15%. See "Pro Forma Data" and "Mutual Federal's Conversion - How We Determined
Our Price and the Number of Shares to be Issued in the Stock Offering" as to the
assumptions used to arrive at such amounts.
We intend to use the net proceeds received from the stock offering,
assuming completion of the offering at the maximum of the estimated offering
range, as follows:
$18,749,000 Retained by MFS Financial and initially placed in
short-term investments for general corporate purposes
4,306,000 Employee stock ownership plan loan
2,070,000 Cash contribution to The Mutual Federal Savings Bank
Charitable Foundation, Inc.
25,125,000 Used to buy the stock of Mutual Federal
$50,250,000 Net proceeds from stock offering
MFS Financial will retain 50% of the net conversion proceeds, from which
it will fund the cash portion of the contribution to the foundation and the loan
to be made to the employee stock ownership plan, and will purchase all of the
capital stock of Mutual Federal to be issued in the conversion in exchange for
the remaining conversion proceeds. MFS Financial intends to use a portion of the
net proceeds to make a loan directly to the employee stock ownership plan to
enable the employee stock ownership plan to purchase up to 8.0% of the shares of
common stock issued in the conversion, including the shares contributed to the
foundation. Based upon the issuance of 3,825,000 shares of common stock and
5,175,000 shares of common stock at the minimum and maximum of the estimated
offering range, respectively, the loan to the employee stock ownership plan
would be $3.2 million and $4.3 million, respectively. See "Management -Benefits
- - Employee Stock Ownership Plan." The remaining net proceeds retained by MFS
Financial initially may be used to invest in U.S. Government and federal agency
securities of various maturities, mortgage-backed or other securities, deposits
in either Mutual Federal or other financial institutions, or a combination
thereof. The net proceeds may ultimately be used to:
o support Mutual Federal's lending activities;
o repay borrowings in the ordinary course of business; or
21
<PAGE>
o support the future expansion of operations through the establishment
of additional banking offices or other customer facilities or
through acquisitions of other financial institutions or branch
offices, although no such acquisition transactions are specifically
being considered at this time.
The net proceeds from the conversion may also be used for other business and
investment purposes, including the payment of regular or special cash dividends,
possible repurchases of the common stock or returns of capital. MFS Financial
and Mutual Federal have committed however, not to take any action to further the
payment of any return of capital on the common stock during the one-year period
subsequent to completion of the conversion. Management of MFS Financial may
consider expanding or diversifying its activities, as such opportunities become
available.
Following the six-month anniversary of the completion of the conversion,
to the extent permitted by the Office of Thrift Supervision and based upon then
existing facts and circumstances, MFS Financial's board of directors may
determine to repurchase shares of common stock, subject to any applicable
statutory and regulatory requirements. Such facts and circumstances may include
but not be limited to:
o market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and
risk involved in the investment, the ability to increase the book
value and/or earnings per share of the remaining outstanding shares,
and an improvement in MFS Financial's return on equity;
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
o any other circumstances in which repurchases would be in the best
interests of MFS Financial and its stockholders.
Any stock repurchases will be subject to the determination of MFS Financial's
board of directors that Mutual Federal will be capitalized in excess of all
applicable regulatory requirements after any such repurchases.
The portion of the net proceeds used by MFS Financial to purchase the
capital stock of Mutual Federal will be added to Mutual Federal's general funds
to be used for general corporate purposes, including increased lending
activities. While the amount of net proceeds received by Mutual Federal will
further strengthen Mutual Federal's capital position, which already
substantially exceeds all regulatory requirements, Mutual Federal is not
converting to stock form primarily to raise capital. After the conversion, based
upon the maximum of the estimated offering range, Mutual Federal's tangible
capital ratio will be approximately 12.28%. As a result, Mutual Federal will
continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the conversion may be
more or less than those estimated. The net proceeds will also vary if the number
of shares to be issued in the conversion is adjusted to reflect a change in the
estimated pro forma market value of Mutual
22
<PAGE>
Federal. Payments for shares made through withdrawals from existing deposit
accounts at Mutual Federal will not result in the receipt of new funds for
investment by Mutual Federal but will result in a reduction of Mutual Federal's
interest expense and liabilities as funds are transferred from interest-bearing
certificates or other deposit accounts.
MARKET FOR THE COMMON STOCK
MFS Financial and Mutual Federal have never issued capital stock, and,
consequently, there is no established market for the common stock at this time.
MFS Financial has applied to have its common stock quoted on the Nasdaq National
Market under the symbol "MFSF." The development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is
not within the control of MFS Financial, Mutual Federal or any market maker.
Accordingly, the number of active buyers and sellers of the common stock at any
particular time may be limited. MFS Financial intends to meet the requirements
for listing on the Nasdaq National Market. There can be no assurance, however,
that purchasers will be able to sell their shares at or above the purchase
price.
OUR POLICY REGARDING DIVIDENDS
The board of directors of MFS Financial currently intends to pay cash
dividends on the common stock in the future. However, the amount and timing of
any dividends has not yet been determined. The payment of dividends will depend
upon a number of factors, including capital requirements, MFS Financial's and
Mutual Federal's financial condition and results of operations, tax
considerations, statutory and regulatory limitations and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, will not be reduced or eliminated in future periods. Special cash
dividends, stock dividends or returns of capital may, to the extent permitted by
Office of Thrift Supervision policy and regulations, be paid in addition to, or
in lieu of, regular cash dividends. MFS Financial intends to file consolidated
tax returns with Mutual Federal. Accordingly, it is anticipated that any cash
distributions made by MFS Financial to its stockholders would be treated as cash
dividends and not as a non-taxable return of capital for federal and state tax
purposes.
Dividends from MFS Financial will depend, in large part, upon receipt of
dividends from Mutual Federal, because MFS Financial initially will have no
source of income other than dividends from Mutual Federal, earnings from the
investment of proceeds from the sale of shares of common stock retained by MFS
Financial, and interest payments with respect to MFS Financial's loan to the
employee stock ownership plan. A regulation of the Office of Thrift Supervision
imposes limitations on "capital distributions" by savings institutions. See "How
We Are Regulated - Limitations on Dividends and Other Capital Distributions."
Any payment of dividends by Mutual Federal to MFS Financial which would be
deemed to be drawn out of Mutual Federal's bad debt reserves would require a
payment of taxes at the then-current tax rate by Mutual Federal on the amount of
earnings deemed to be removed from the reserves for such distribution. Mutual
Federal does not intend to make any distribution to MFS Financial that would
create such a federal tax liability. See "Taxation."
23
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $36.8 million and $50.3 million, or $58.0
million in the event the estimated offering range is increased by 15%, based
upon the following assumptions:
o all shares of common stock will be sold through non-transferable
rights to subscribe for the common stock, in order of priority, to
Eligible Account Holders, the employee stock ownership plan,
Supplemental Eligible Account Holders, Other Members and Directors,
Officers and Employees;
o Charles Webb & Company will receive a fee of $725,000 upon
completion of the conversion;
o MFS Financial will contribute to the foundation an amount of cash
equal to the value of 4.0% of the common stock sold in the
conversion and an amount of common stock equal to 4.0% of the common
stock sold in the conversion, up to a maximum total of $4.5 million;
and
o total expenses, including the marketing fees paid to Charles Webb &
Company, are estimated to be approximately $1.5 million. Actual
expenses may vary from those estimated.
Pro forma consolidated net income and stockholders' equity of MFS
Financial have been calculated for the six months ended June 30, 1999 and for
the year ended December 31, 1998, as if the common stock to be issued in the
conversion had been sold at the beginning of the period and the net proceeds had
been invested at 5.09% and 4.52%, which represents the yield on one-year U.S.
Government securities at June 30, 1999 and December 31, 1998, respectively. In
light of changes in interest rates in recent periods, this yield is deemed by
MFS Financial and Mutual Federal to more accurately reflect available
reinvestment rates than the arithmetic average method. The effect of withdrawals
from deposit accounts for the purchase of common stock has not been reflected. A
tax rate of 40% has been assumed for periods resulting in an after-tax yield of
2.71% for the year ended December 31, 1998 and 3.05% for the six months ended
June 30, 1999. 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, as adjusted to give effect to the shares purchased by the
employee stock ownership plan and the effect of the issuance of shares to the
foundation. See Note 3 to the tables below. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. As discussed under "How We Intend to Use the Proceeds," MFS Financial
intends to make a loan to fund the purchase of 8.0% of the common stock by the
employee stock ownership plan and intends to retain up to 50% of the net
proceeds from the conversion.
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. See
"Management - Benefits -- Other Stock Benefit Plans." The table below gives
effect to the restricted stock plan, which is expected to be adopted by MFS
Financial following the conversion and presented along with the stock option
24
<PAGE>
plan to stockholders for approval at an annual or special meeting of
stockholders to be held at least six months following the completion of the
conversion. If the restricted stock plan is approved by stockholders, the
restricted stock plan intends to acquire an amount of common stock equal to 4.0%
of the shares of common stock issued in the conversion, either through open
market purchases or from authorized but unissued shares of common stock, if
permissible. The table below assumes that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the restricted stock plan are purchased in the open market at $10.00 per share.
No effect has been given to MFS Financial's results of operations after the
conversion, the market price of the common stock after the conversion or a less
than 4.0% purchase by the restricted stock plan.
The following tables give effect to the issuance of authorized but
unissued shares of the common stock to the foundation concurrently with the
completion of the conversion. The pro forma stockholders' equity is not intended
to represent the fair market value of the common stock and may be different than
amounts that would be available for distribution to stockholders in the event of
liquidation.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of MFS Financial computed in
accordance with generally accepted accounting principles ("GAAP").
25
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended
June 30, 1999
-----------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(1)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross Proceeds ........................................... $ 38,250 $ 45,000 $ 51,750 $ 59,513
Plus: Shares acquired by foundation ...................... 1,530 1,800 2,070 2,250
----------- ----------- ----------- -----------
Pro forma market capitalization .......................... $ 39,780 $ 46,800 $ 53,820 $ 61,763
=========== =========== =========== ===========
Gross proceeds ........................................... $ 38,250 $ 45,000 $ 51,750 $ 59,513
Less offering expenses and commissions ................... 1,500 1,500 1,500 1,500
----------- ----------- ----------- -----------
Estimated net proceeds .............................. 36,750 43,500 50,250 58,013
Less: Shares purchased by the employee stock
ownership plan .................................... (3,182) (3,744) (4,306) (4,941)
Shares purchased by the restricted stock plan ...... (1,591) (1,872) (2,153) (2,471)
Cash contribution to foundation .................... (1,530) (1,800) (2,070) (2,250)
----------- ----------- ----------- -----------
Total estimated net proceeds, as adjusted(2) ............. $ 30,447 $ 36,084 $ 41,721 $ 48,351
=========== =========== =========== ===========
Net income(3):
Historical .......................................... $ 1,923 $ 1,923 $ 1,923 $ 1,923
Pro forma income on net proceeds, as adjusted ....... 465 551 637 738
Pro forma employee stock ownership plan
adjustment(4) ..................................... (64) (75) (86) (99)
Pro forma restricted stock plan adjustment(5) ....... (95) (112) (129) (148)
----------- ----------- ----------- -----------
Pro forma net income ................................ $ 2,229 $ 2,287 $ 2,345 $ 2,414
Net income per share(3)(6):
Historical .......................................... $ 0.52 $ 0.45 $ 0.39 $ 0.34
Pro forma income on net proceeds, as adjusted ....... 0.13 0.13 0.13 0.13
Pro forma employee stock ownership plan
adjustment(4) ..................................... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(5) ....... (0.03) (0.03) (0.03) (0.03)
----------- ----------- ----------- -----------
Pro forma net income per share(5)(7) ................ $ 0.60 $ 0.53 $ 0.47 $ 0.42
=========== =========== =========== ===========
Number of shares outstanding for pro forma net
income per share calculations(6) ....................... 3,670,368 4,318,080 4,965,792 5,698,620
Offering price to pro forma net income per share(6) ...... 8.33x 9.43x 10.64x 11.90x
=========== =========== =========== ===========
</TABLE>
(FOOTNOTES ON THIRD PAGE FOLLOWING)
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended
June 30, 1999
----------------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(1)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Stockholders' equity:
Historical ........................................... $ 45,619 $ 45,619 $ 45,619 $ 45,619
Estimated net proceeds ............................... 36,750 43,500 50,250 58,013
Plus: Shares issued to foundation .................... 1,530 1,800 2,070 2,250
Less: Cash contributed to foundation ................. (1,530) (1,800) (2,070) (2,250)
Less: Shares contributed to foundation ............... (1,530) (1,800) (2,070) (2,250)
Plus: Tax benefit of the contribution to foundation .. 1,040 1,224 1,408 1,530
Less: Common stock acquired by the employee
stock ownership plan(4) ....................... (3,182) (3,744) (4,306) (4,941)
Less: Common stock to be acquired by the
restricted stock plan(5) ...................... (1,591) (1,872) (2,153) (2,471)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(4)(5)(7)(8) ........... $ 77,106 $ 82,927 $ 88,748 $ 95,500
=========== =========== =========== ===========
Stockholders' equity per share(6):
Historical ........................................... $ 11.47 $ 9.75 $ 8.48 $ 7.39
Estimated net proceeds ............................... 9.24 9.29 9.34 9.39
Plus: Shares issued to foundation .................... 0.38 0.38 0.38 0.36
Less: Cash contributed to foundation ................. (0.38) (0.38) (0.38) (0.36)
Less: Shares contributed to foundation ............... (0.38) (0.38) (0.38) (0.36)
Plus: Tax benefit of the contribution to foundation .. 0.26 0.26 0.26 0.25
Less: Common stock acquired by the employee
stock ownership plan(4) ....................... (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired by the
restricted stock plan(5) ...................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4)(5)(7)(8) . $ 19.39 $ 17.72 $ 16.50 $ 15.47
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share(6) ........................ 51.57% 56.43% 60.61% 64.64%
Number of shares outstanding for pro forma ................ 3,978,000 4,680,000 5,382,000 6,176,250
stockholders' equity per share calculations(6)
</TABLE>
- -----------------
(FOOTNOTES ON SECOND PAGE FOLLOWING)
27
<PAGE>
<TABLE>
<CAPTION>
At or For the Year ended
December 31, 1998
----------------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(1)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross Proceeds .......................................... $ 38,250 $ 45,000 $ 51,750 $ 59,513
Plus: Shares acquired by foundation ..................... 1,530 1,800 2,070 2,250
----------- ----------- ----------- -----------
Pro forma market capitalization ......................... $ 39,780 $ 46,800 $ 53,820 $ 61,763
Gross proceeds .......................................... $ 38,250 $ 45,000 $ 51,750 $ 59,513
Less offering expenses and commissions .................. 1,500 1,500 1,500 1,500
----------- ----------- ----------- -----------
Estimated net proceeds ............................. 36,750 43,500 50,250 58,013
Less: Shares purchased by the employee stock
ownership plan ................................... (3,182) (3,744) (4,306) (4,941)
Shares purchased by the restricted stock plan ..... (1,591) (1,872) (2,153) (2,471)
Cash contribution to foundation ................... (1,530) (1,800) (2,070) (2,250)
----------- ----------- ----------- -----------
Total estimated net proceeds, as adjusted(2) ............ $ 30,446 $ 36,084 $ 41,722 $ 48,351
=========== =========== =========== ===========
Net income(3):
Historical ......................................... $ 4,139 $ 4,139 $ 4,139 $ 4,139
Pro forma income on net proceeds, as adjusted ...... 826 979 1,131 1,311
Pro forma employee stock ownership plan
adjustment(4) .................................... (127) (150) (172) (198)
Pro forma restricted stock plan adjustment(5) ...... (191) (225) (258) (296)
----------- ----------- ----------- -----------
Pro forma net income ............................... $ 4,647 $ 4,743 $ 4,840 $ 4,956
=========== =========== =========== ===========
Net income per share(3)(6):
Historical ......................................... $ 1.12 $ 0.96 $ 0.83 $ 0.72
Pro forma income on net proceeds, as adjusted ...... 0.22 0.23 0.23 0.23
Pro forma employee stock ownership plan
adjustment(4) .................................... (0.03) (0.03) (0.03) (0.03)
Pro forma restricted stock plan adjustment(5) ...... (0.05) (0.05) (0.05) (0.05)
----------- ----------- ----------- -----------
Pro forma net income per share(5)(7) ............... $ 1.26 $ 1.11 $ 0.98 $ 0.87
=========== =========== =========== ===========
Number of shares outstanding for pro forma net
income per share calculations(6) ...................... 3,680,976 4,330,560 4,980,144 5,715,090
Offering price to pro forma net income per share(6) ..... 7.94x 9.01x 10.20x 11.49x
=========== =========== =========== ===========
</TABLE>
(FOOTNOTES ON NEXT PAGE)
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Year ended
December 31, 1998
----------------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(1)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Stockholders' equity:
Historical ............................................ $ 43,846 $ 43,846 $ 43,846 $ 43,846
Estimated net proceeds ................................ 36,750 43,500 50,250 58,013
Plus: Shares issued to foundation ..................... 1,530 1,800 2,070 2,250
Less: Cash contributed to foundation .................. (1,530) (1,800) (2,070) (2,250)
Less: Shares contributed to foundation ................ (1,530) (1,800) (2,070) (2,250)
Plus: Tax benefit of the contribution to foundation ... 1,040 1,224 1,408 1,530
Less: Common stock acquired by the employee
stock ownership plan(4) ........................ (3,182) (3,744) (4,306) (4,941)
Less: Common stock to be acquired by the
restricted stock plan(5) ....................... (1,591) (1,872) (2,153) (2,471)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(4)(5)(7)(8) ............ $ 75,333 $ 81,154 $ 86,975 $ 93,727
=========== =========== =========== ===========
Stockholders' equity per share(6):
Historical ............................................ $ 11.02 $ 9.37 $ 8.15 $ 7.10
Estimated net proceeds ................................ 9.24 9.29 9.34 9.39
Plus: Shares issued to foundation ..................... 0.38 0.38 0.38 0.36
Less: Cash contributed to foundation .................. (0.38) (0.38) (0.38) (0.36)
Less: Shares contributed to foundation ................ (0.38) (0.38) (0.38) (0.36)
Plus: Tax benefit of the contribution to foundation ... 0.26 0.26 0.26 0.25
Less: Common stock acquired by the employee
stock ownership plan(4) ........................ (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired by the
restricted stock plan(5) ....................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4)(5)(7)(8) .. $ 18.94 $ 17.34 $ 16.17 $ 15.18
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share(6) ......................... 52.80% 57.67% 61.84% 65.88%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(6) ............ 3,978,000 4,680,000 5,382,000 6,176,250
</TABLE>
- -----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the conversion.
(2) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the conversion minus (i) the proceeds attributable to the purchase by
the employee stock ownership plan , (ii) the value of the shares to be
purchased by the restricted stock plan, subject to stockholder approval,
after the conversion at an assumed purchase price of $10.00 per share and
(iii) the proposed cash contribution to the foundation.
(3) Does not give effect to the non-recurring expense that will be recognized
in fiscal 1999 as a result of the contribution to the foundation. MFS
Financial will recognize an after-tax expense for the amount of the cash
and shares contributed to the foundation which is expected to total $2.0
million, $2.4 million, $2.7 million and $3.0 million at the minimum,
midpoint, maximum and maximum, as adjusted, of the estimated offering
range, respectively. Assuming the contribution to the foundation was
expensed during the six months ended June 30, 1999 and the year ended
December 31, 1998, pro forma net income (loss) per share would be $0.06,
$(0.02), $(0.08) and $(0.10) and $0.71, $0.55, $0.42 and $0.35 at the
minimum, midpoint, maximum and maximum, as adjusted, respectively. Per
share net income data is based on 3,670,368 and 3,680,976 shares of common
stock outstanding at the
29
<PAGE>
minimum of the estimated offering range, 4,318,080 and 4,330,560 shares of
common stock outstanding at the midpoint of this range, 4,965,792 and
4,980,144 shares of common stock outstanding at the maximum of this range
and 5,698,620 and 5,715,090 shares of common stock outstanding at 15% above
the maximum of this range, during the six months ended June 30, 1999 and
the year ended December 31, 1998, respectively, which represents shares
sold in the conversion, shares contributed to the foundation and shares to
be allocated or distributed under the employee stock ownership plan and
restricted stock plan for the periods presented.
(4) It is assumed that 8.0% of the shares of common stock issued in the
conversion will be purchased by the employee stock ownership plan with
funds loaned by MFS Financial. MFS Financial and Mutual Federal intend to
make annual contributions to the employee stock ownership plan in an
amount at least equal to the principal and interest requirement of the
debt. The pro forma net earnings assumes (i) that the loan to the employee
stock ownership plan is payable over 15 years, with the employee stock
ownership plan shares having an average fair value of $10.00 per share in
accordance with SOP 93-6 of the AICPA, entitled "Employers' Accounting for
Employee Stock Ownership Plans," and (ii) the effective tax rate was 40.0%
for the period. See "Management - Benefits -- Employee Stock Ownership
Plan."
(5) It is assumed that the restricted stock plan will purchase, following
stockholder approval of such plan, a number of shares of common stock
equal to 4.0% of the shares of common stock issued in the conversion for
issuance to directors, officers and employees. Funds used by the
restricted stock plan to purchase the shares initially will be contributed
to the restricted stock plan by MFS Financial. It is further assumed that
the shares were acquired by the restricted stock plan at the beginning of
the periods presented in open market purchases at the $10.00 purchase
price and that 20% of the amount contributed, net of taxes, was an
amortized expense during the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively. The issuance of authorized but
unissued shares of common stock pursuant to the restricted stock plan
in the amount of 4.0% of the common stock sold in the offering would
dilute the voting interests of existing stockholders by approximately 3.8%
and under such circumstances pro forma net earnings per share for the six
months ended June 30, 1999 and year ended December 31, 1998 would be
$0.59, $0.52, $0.46 and $0.41, and $1.23, $1.07, $0.95 and $0.84 at the
minimum, midpoint, maximum and 15% above the maximum of the estimated
offering range, respectively, and pro forma stockholders' equity per
share at June 30, 1999 and December 31, 1998 would be $19.03, $17.42,
$16.24 and $15.26 and $18.60, $17.06, $15.92 and $14.99 at the minimum,
midpoint, maximum and 15% above the maximum of such range, respectively.
There can be no assurance that the actual purchase price of shares
purchased by or issued to the restricted stock plan will be $10.00 per
share. See "Management - Benefits -- Other Stock Benefit Plans."
(6) The per share calculations are determined by adding the number of shares
sold in the conversion as well as contributed to the foundation and for
purposes of calculating net income per share, in accordance with SOP 93-6,
subtracting 10,608 shares, 12,480 shares, 14,352 shares, and 16,470
shares, and 21,216 shares, 24,960 shares, 28,704 shares, and 32,940
shares, at the minimum, midpoint, maximum and 15% above the maximum of the
offering range, respectively, representing the employee stock ownership
plan shares which have not been committed for release during the six
months ended June 30, 1999 or the year ended December 31, 1998. See note 3
above. For purposes of calculating pro forma stockholders' equity per
share, it is assumed that shares outstanding total 3,978,000 shares at the
minimum of the estimated pro forma market value of Mutual Federal on a
fully converted basis, or the estimated valuation range, 4,680,000 shares
at the midpoint of the range, 5,382,000 shares at the maximum of the range
and 6,176,250 shares at 15% above the maximum of the range, respectively.
(7) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by MFS
Financial following the conversion and presented for approval by
stockholders at an annual or special meeting of stockholders of MFS
Financial held at least six months following the completion of the
conversion. If the stock option plan is approved by stockholders, an
amount equal to 10% of the common stock issued in the conversion, or
397,800 shares at the minimum of the estimated offering range, 468,000
shares at the midpoint of the range, 538,200 shares at the maximum of the
range and 617,625 shares at 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the
exercise of options to be granted under the stock option plan. The
issuance of common stock pursuant to the exercise of options under the
stock option plan will result in the dilution of existing stockholders'
voting interests by approximately 9.1%. Assuming stockholder approval of
the stock option plan, that all these options were exercised at the
beginning of the period at an exercise price of $10.00 per share and that
the shares to fund the restricted stock plan are acquired through open
30
<PAGE>
market purchases at the purchase price, pro forma net earnings per share
for the six months ended June 30, 1999 and for the year ended December 31,
1998 would be $0.56, $0.49, $0.44, and $0.39 and $1.16, $1.01, $0.90, and
$0.80 at the minimum, midpoint, maximum and 15% above the maximum of the
estimated offering range, respectively, and pro forma stockholders'
equity per share at June 30, 1999 and December 31, 1998 would be $18.54,
$17.02, $15.91 and $14.97 and $18.13, $16.68, $15.61, and $14.71 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. See "Management - Benefits -- Other Stock Benefit Plan."
(8) The equity capital of Mutual Federal will be substantially restricted
because of the liquidation account set up in connection with this offering
and certain distributions from Mutual Federal's equity capital may be
treated as being from its accumulated bad debt reserve for tax purposes,
which would cause Mutual Federal to have additional taxable income. See
"Taxation - Federal Taxation." Pro forma stockholders' equity and pro forma
stockholders' equity per share do not give effect to the bad debt reserves
established by Mutual Federal for federal income tax purposes in the event
of a liquidation of Mutual Federal.
31
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION
In the event that the foundation contribution was not made as part of the
conversion, RP Financial, LC., MFS Financial's independent appraiser, has
estimated that the pro forma aggregate market capitalization of MFS Financial
would be approximately $49.5 million at the midpoint, which is approximately
$2.7 million greater than the pro forma aggregate market capitalization of MFS
Financial if the foundation contribution is included, and would result in an
approximately $4.5 million increase in the amount of common stock offered for
sale in the conversion. At the mid-point, the pro forma price to book ratio and
pro forma price to earnings ratio without the foundation contribution would be
56.43% and 9.80x, respectively, compared to 56.43% and 9.43x, respectively, with
the foundation contribution. Further, assuming the midpoint of the estimated
offering range, pro forma stockholders' equity per share and pro forma earnings
per share without the foundation contribution would be $17.72 and $0.51,
respectively, compared to $17.72 and $0.53, respectively, with the foundation
contribution. There is no assurance that in the event the foundation
contribution was not made that the appraisal prepared at the time would have
concluded that the pro forma market value of MFS Financial would be the same as
that estimated herein. Any appraisals prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the estimated offering range, assuming the conversion was completed
at June 30, 1999 with and without the contribution to the foundation.
32
<PAGE>
<TABLE>
<CAPTION>
At the Maximum,
At the Minimum At the Midpoint At the Maximum as Adjusted
--------------------- --------------------- --------------------- ---------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount ................. $ 38,250 $ 42,075 $ 45,000 $ 49,500 $ 51,750 $ 56,925 $ 59,513 $ 65,464
Pro forma market capitalization ........... 39,780 42,075 46,800 49,500 53,820 56,925 61,763 65,464
Total assets .............................. 521,522 525,561 527,343 532,095 533,164 538,629 539,916 546,143
Total liabilities ......................... 444,416 444,416 444,416 444,416 444,416 444,416 444,416 444,416
Pro forma stockholders' equity ............ 77,106 81,145 82,927 87,679 88,748 94,213 95,500 101,727
Pro forma consolidated net earnings ....... 2,229 2,297 2,287 2,367 2,345 2,437 2,414 2,518
Pro forma stockholders' equity per share .. 19.39 19.28 17.72 17.72 16.50 16.55 15.47 15.54
Pro forma consolidated net earnings
per share ................................ 0.60 0.59 0.53 0.51 0.47 0.46 0.42 0.41
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per share ... 51.57% 51.87% 56.43% 56.43% 60.61% 60.42% 64.64% 64.35%
Offering price to pro forma net
earnings per share(1) .................. 8.33x 8.47x 9.43x 9.80x 10.64x 10.87x 11.90x 12.20x
Pro forma market capitalization to assets 7.63% 8.01% 8.87% 9.30% 10.09% 10.57% 11.44% 11.99%
Pro forma financial ratios:
Return on assets(1) ..................... 0.85% 0.87% 0.87% 0.89% 0.88% 0.90% 0.89% 0.92%
Return on stockholders' equity(1) ....... 5.78% 5.66% 5.52% 5.40% 5.28% 5.17% 5.06% 4.95%
Stockholders' equity to assets .......... 14.78% 15.44% 15.73% 16.48% 16.65% 17.49% 17.69% 18.63%
Foundation shares ......................... 153,000 180,000 207,000 225,000
Voting share .............................. 3.85% 3.85% 3.85% 3.64%
</TABLE>
- ----------------
(1) Based on annualized results for the six months ended June 30, 1999.
33
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Mutual
Federal at June 30, 1999, and the pro forma consolidated capitalization of MFS
Financial after giving effect to the conversion, based upon the sale of the
number of shares shown below and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
Mfs Financial - Pro Forma
Based Upon Sale At $10.00 Per Share
-------------------------------------------------------------------------
5,951,250
Mutual Federal 3,825,000 $4,500,000 5,175,00 Shares(1)
Savings - Shares Shares Shares (Maximum of
Historical (Minimum of (Midpoint of (Maximum of Range, as
Capitalization Range) Range) Range) Adjusted)
-------------- ----------- ------------ ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) ............................................. $ 384,562 $ 384,562 $ 384,562 $ 384,562 $ 384,562
Borrowings:
Federal Home Loan Bank advances .................... 51,362 51,362 51,362 51,362 51,362
Other borrowings ................................... 1,799 1,799 1,799 1,799 1,799
--------- --------- --------- --------- ---------
Total deposits and borrowings ........................... $ 437,723 $ 437,723 $ 437,723 $ 437,723 $ 437,723
========= ========= ========= ========= =========
Stockholders' equity
Preferred stock, $0.01 par value, 5,000,000
shares authorized, none issued .................... $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value, 20,000,000
shares authorized; shares to be issued
as reflected(3) .................................. -- 40 47 54 62
Additional paid-in capital ......................... -- 36,710 43,453 50,196 57,951
Shares issued to foundation(4) ..................... -- 1,530 1,800 2,070 2,250
Less: Shares contributed to foundation ............. -- (1,530) (1,800) (2,070) (2,250)
Less: Cash contributed to foundation ............... -- (1,530) (1,800) (2,070) (2,250)
Retained earnings .................................. 45,725 45,725 45,725 45,725 45,725
Net unrealized gain (loss).......................... (106) (106) (106) (106) (106)
Plus: Tax benefit of contribution to
Foundation(5) .......................................... -- 1,040 1,224 1,408 1,530
Less:
Common stock to be acquired by the
employee stock ownership plan(6) .................. -- (3,182) (3,744) (4,306) (4,941)
Common stock to be acquired by the
restricted stock plan(7) .......................... -- (1,591) (1,872) (2,153) (2,471)
--------- --------- --------- --------- ---------
Total stockholders' equity .............................. $ 45,619 $ 77,106 $ 82,927 $ 88,748 $ 95,500
========= ========= ========= ========= =========
</TABLE>
- ----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to
15% to reflect changes in market and financial conditions following the
commencement of the conversion.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(3) Reflects the issuance of the shares of common stock to be sold in the
conversion including the issuance of additional shares of common stock to
the foundation. No effect has been given to the issuance of additional
34
<PAGE>
shares of common stock pursuant to the proposed stock option plan. See
"Pro Forma Data" and "Management Benefits - Other Stock Benefit Plans."
(4) Reflects shares to be contributed to the foundation at an assumed value of
$10.00 per share.
(5) Net of the tax effect of the contribution of common stock and cash to the
foundation based upon an assumed 34.0% tax rate. The realization of the
deferred tax benefit is limited annually to 10% of MFS Financial's annual
taxable income, subject to the ability of MFS Financial to carry forward
any unused portion of the deduction for five years following the year in
which the contribution is made.
(6) Assumes that 8.0% of the common stock issued in the conversion will be
purchased by the employee stock ownership plan, which is reflected as a
reduction from stockholders' equity. The employee stock ownership plan
shares will be purchased with funds loaned to the employee stock ownership
plan by MFS Financial. See "Pro Forma Data" and "Management - Benefits --
Employee Stock Ownership Plan."
(7) MFS Financial intends to adopt the restricted stock plan and to submit
such plan to stockholders at an annual or special meeting of stockholders
held at least six months following the completion of the conversion. If
the plan is approved by stockholders, MFS Financial intends to contribute
sufficient funds to the restricted stock plan to enable the plan to
purchase a number of shares of common stock equal to 4.0% of the common
stock issued in the conversion. Assumes that stockholder approval has been
obtained and that the shares have been purchased in the open market at the
purchase price. However, in the event MFS Financial issues authorized but
unissued shares of common stock to the restricted stock plan in the amount
of 4.0% of the common stock issued in the conversion, the voting interests
of existing stockholders would be diluted approximately 3.8%. The shares
are reflected as a reduction of stockholders' equity. See "Pro Forma Data"
and "Management - Benefits -- Other Stock Benefit Plans."
MUTUAL FEDERAL
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At June 30, 1999, Mutual Federal exceeded all of the regulatory capital
requirements applicable to it. The table on the following page sets forth the
historical regulatory capital of Mutual Federal at June 30, 1999 and the pro
forma regulatory capital of Mutual Federal after giving effect to the
conversion, based upon the sale of the number of shares shown in the table. The
pro forma regulatory capital amounts reflect the receipt by Mutual Federal of
50% of the net stock proceeds, minus the amounts to be loaned to the employee
stock ownership plan and the amounts contributed to the restricted stock plan.
The pro forma risk-based capital amounts assume the investment of the net
proceeds received by Mutual Federal in assets which have a risk-weight of 20%
under applicable regulations, as if such net proceeds had been received and so
applied at June 30, 1999.
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<TABLE>
<CAPTION>
Pro Forma at June 30, 1999
------------------------------------------------------------------------
3,285,000 Shares 4,500,000 Shares 5,175,000 Shares 5,951,250 Shares
Historical At Sold At $10.00 Sold At $10.00 Sold at $10.00 Sold at $10.00
June 30, 1999 Per Share Per Share Per Share per Share
------------------ ----------------- ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets Amount Assets Amount Assets Amount Assets
------ --------- ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity capital under GAAP ........ $45,619 9.31% $59,220 11.68% $61,753 12.11% $64,286 12.53% $67,214 13.01%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible capital:
Actual ...................... $44,139 9.04% $57,740 11.43% $60,273 11.86% $62,806 12.28% $65,734 12.76%
Requirement ................. 7,327 1.50 7,578 1.50 7,625 1.50 7,671 1.50 7,725 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $36,812 7.54% $50,162 9.93% $52,648 10.36% $55,135 10.78% $58,009 11.26%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
Actual ...................... $44,139 9.04% $57,740 11.43% $60,273 11.86% $62,806 12.28% $65,734 12.76%
Requirement ................. 14,653 3.00 15,157 3.00 15,250 3.00 15,343 3.00 15,450 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $29,486 6.04% $42,583 8.43% $45,023 8.86% $47,463 9.28% $50,284 9.76%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-based capital
Actual ...................... $47,529 15.19% $61,130 19.33% $63,633 20.09% $66,196 20.85% $69,124 21.72%
Requirement ................. 25,035 8.00 25,304 8.00 25,353 8.00 25,403 8.00 25,460 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $22,494 7.19% $35,826 11.33% $38,310 12.09% $40,793 12.85% $43,664 13.72%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
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<PAGE>
MUTUAL FEDERAL'S CONVERSION
THE BOARD OF DIRECTORS OF MUTUAL FEDERAL AND THE OFFICE OF THRIFT
SUPERVISION HAVE APPROVED THE PLAN OF CONVERSION. OFFICE OF THRIFT SUPERVISION
APPROVAL IS SUBJECT TO APPROVAL OF THE PLAN OF CONVERSION BY OUR MEMBERS AND TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OFFICE OF THRIFT
SUPERVISION. OFFICE OF THRIFT SUPERVISION APPROVAL DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On August 25, 1999, we adopted a plan of conversion, which we subsequently
amended to provide for a contribution to the foundation, pursuant to which we
will convert from a federally chartered mutual savings institution to a
federally chartered stock savings institution and at the same time become a
wholly owned subsidiary of MFS Financial. The conversion will include adoption
of the proposed federal stock charter and bylaws, which will authorize us to
issue capital stock. Under the plan, Mutual Federal common stock is being sold
to MFS Financial and MFS Financial common stock is being offered to our eligible
depositors and borrowers, the employee stock ownership plan, directors, officers
and employees, other members, and then to the public. The conversion will be
accounted for at historical cost in a manner similar to a pooling of interests.
The Office of Thrift Supervision has approved MFS Financial's application to
become a savings and loan holding company and to acquire all of the Mutual
Federal's common stock to be issued in the conversion.
The shares of MFS Financial common stock are first being offered in a
subscription offering to holders of subscription rights. To the extent shares of
common stock remain available after the subscription offering, shares may be
offered in a direct community offering on a best efforts basis through Charles
Webb & Company in such a manner as to promote a wide distribution of the shares.
The direct community offering, if any, may commence with, at any time during, or
as soon as practicable after the commencement of the subscription offering.
Shares not subscribed for in the subscription offering and direct community
offering may be offered for sale on a best efforts basis in a public offering
conducted by Charles Webb & Company. We have the right, in our sole discretion,
to accept or reject, in whole or in part, any orders to purchase shares of
common stock received in the direct community offering and the public offering.
See "- Direct Community Offering " and "- Public Offering."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of conversion. See "- Limitations on
Stock Purchases."
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
following approval of the plan at the meeting of our members that will be
required to complete the sale of shares being offered in the conversion. If
delays are experienced, significant changes may occur in the estimated offering
range with corresponding changes in the offering price and the net proceeds to
be realized by us from the sale of the shares. In the event the conversion is
terminated, we will charge all conversion expenses against current income and
any funds collected by us in the offering will be promptly returned, with
interest, to each subscriber.
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<PAGE>
OUR REASONS FOR THE CORPORATE CHANGE
As a mutual institution, Mutual Federal has no authority to issue shares
of capital stock and consequently has no access to market sources of equity
capital. Only by generating and retaining earnings from year to year is Mutual
Federal able to increase its capital position.
As a stock corporation upon completion of the conversion, Mutual Federal
will be organized in the form used by commercial banks, most major corporations
and a majority of savings institutions. The ability to raise new equity capital
through the issuance and sale of Mutual Federal's or MFS Financial's capital
stock will allow Mutual Federal the flexibility to increase its capital position
more rapidly than by accumulating earnings and at times deemed advantageous by
the board of directors of Mutual Federal. It will also support future growth and
expanded operations, including increased lending and investment activities, as
business and regulatory needs require. The ability to attract new capital also
will help Mutual Federal address the needs of the communities it serves and
enhance its ability to make acquisitions or expand into new businesses. The
acquisition alternatives available to Mutual Federal are quite limited as a
mutual institution, because of a requirement in Office of Thrift Supervision
regulations that the surviving institution in a merger involving a mutual
institution generally must be in mutual form. After the conversion, Mutual
Federal will have increased ability to merge with other institutions and MFS
Financial may acquire control of other stock savings associations and retain the
acquired institution as a separate subsidiary of MFS Financial. Finally, the
ability to issue capital stock will enable Mutual Federal to establish stock
compensation plans for directors, officers and employees, giving them equity
interests in MFS Financial and greater incentive to improve its performance. For
a description of the stock compensation plans which will be adopted by us in
connection with the conversion, see "Management."
After considering the advantages and disadvantages of the conversion, as
well as applicable fiduciary duties and alternative transactions, the board of
directors of Mutual Federal approved the conversion as being in the best
interests of Mutual Federal and equitable to its account holders.
EFFECTS OF THE CONVERSION
GENERAL. The conversion will have no effect on Mutual Federal's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The conversion will not result in any change in
the existing services provided to depositors and borrowers, or in existing
offices, management and staff. Mutual Federal will continue to be subject to
regulation, supervision and examination by the Office of Thrift Supervision and
the FDIC.
DEPOSITS AND LOANS. Each holder of a deposit account in Mutual Federal at
the time of the conversion will continue as an account holder in Mutual Federal
after the conversion, and the conversion will not affect the deposit balance,
interest rate or other terms of such accounts. Each account will be insured by
the FDIC to the same extent as before the conversion. Depositors in Mutual
Federal will continue to hold their existing certificates, passbooks and other
evidence of their accounts. The conversion will not affect the loan terms of any
borrower from Mutual Federal. The amount, interest rate, maturity, security for
and obligations under each loan will
38
<PAGE>
remain as they existed prior to the conversion. See "-- Voting Rights" and "--
Depositors' Rights if We Liquidate" below for a discussion of the effects of the
conversion on the voting and liquidation rights of the depositors of Mutual
Federal.
CONTINUITY. During the conversion process, the normal business of Mutual
Federal of accepting deposits and making loans will continue without
interruption. Following completion of the conversion, Mutual Federal will
continue to be subject to regulation by the Office of Thrift Supervision, and
FDIC insurance of accounts will continue without interruption. After the
conversion, Mutual Federal will continue to provide services for depositors and
borrowers under current policies and by its present management and staff.
The board of directors presently serving Mutual Federal will serve as the
board of directors of Mutual Federal after the conversion. The initial members
of the board of directors of MFS Financial will consist of the individuals
currently serving on the board of directors of Mutual Federal. After the
conversion, the voting stockholders of MFS Financial will elect approximately
one-third of MFS Financial's directors annually. All current officers of Mutual
Federal will retain their positions with Mutual Federal after the conversion.
VOTING RIGHTS. After completion of the conversion, depositor and borrower
members will have no voting rights in Mutual Federal or MFS Financial and,
therefore, will not be able to elect directors of Mutual Federal or MFS
Financial or to control their affairs. Currently these rights are held by
depositors and certain borrowers of Mutual Federal. After the conversion, voting
rights in MFS Financial will be vested exclusively in the stockholders of MFS
Financial, which will own all of the stock of Mutual Federal. Each holder of
common stock will be entitled to vote on any matter to be considered by the
stockholders of MFS Financial, subject to the provisions of MFS Financial's
articles of incorporation.
DEPOSITOR'S RIGHTS IF WE LIQUIDATE. We have no plans to liquidate, either
before or after the completion of the conversion. However, if there should ever
be a complete liquidation of Mutual Federal, either before or after conversion,
deposit account holders would receive the protection of insurance by the FDIC up
to applicable limits. In addition, liquidation rights before and after the
conversion would be as follows:
LIQUIDATION RIGHTS IN PRESENT MUTUAL INSTITUTION. In addition to the
protection of FDIC insurance up to applicable limits, in the event of the
complete liquidation of Mutual Federal, each holder of a deposit account
would receive his or her pro rata share of any assets of Mutual Federal
remaining after payment of claims of all creditors (including the claims
of all depositors in the amount of the withdrawal value of their
accounts). Each holder's pro rata share of the remaining assets, if any,
would be in the same proportion of the assets as the balance in his or her
deposit account was to the aggregate balance in all our deposit accounts
at the time of liquidation.
LIQUIDATION RIGHTS IN PROPOSED CONVERTED INSTITUTION. After conversion,
each deposit account holder, in the event of the complete liquidation of
Mutual Federal, would have a claim of the same general priority as the
claims of all our other general creditors in addition to the protection of
FDIC insurance up to applicable
39
<PAGE>
limits. Therefore, except as described below, the deposit account holder's
claim would be solely in the amount of the balance in his or her deposit
account plus accrued interest. A deposit account holder would have no
interest in the assets of Mutual Federal above that amount, if any.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
eligible account holders (I.E., eligible depositors at July 31, 1998) and
supplemental account holders (I.E., eligible depositors at September 30,
1999). Each eligible account holder and supplemental eligible account
holder, if he or she continues to maintain his or her deposit account with
Mutual Federal, would be entitled upon the complete liquidation of Mutual
Federal after conversion, to an interest in the liquidation account prior
to any payment to stockholders. Each eligible account holder would have an
initial interest in the liquidation account for each deposit account held
with Mutual Federal on the qualifying date, July 31, 1998. Each
supplemental eligible account holder would have a similar interest as of
that qualifying date, September 30, 1999. The interest as to each deposit
account would be in the same proportion of the total liquidation account
as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of eligible account holders
and supplemental eligible account holders on the qualifying dates.
However, if the amount in the deposit account on any annual closing date
(December 31) is less than the amount in the account on the respective
qualifying dates, then the interest in this special liquidation account
would be reduced at that time by an amount proportionate to any reduction,
and the interest would cease to exist if the deposit account was closed.
The interest in the special liquidation account will never be increased
despite any increase in the related deposit account after the respective
qualifying dates.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were satisfied
would be distributed to MFS Financial as the sole stockholder of Mutual
Federal.
TAX EFFECTS OF THE CONVERSION. Mutual Federal has received an opinion from
its special counsel, Silver, Freedman & Taff, L.L.P., Washington, D.C., as to
the material federal income tax consequences of the conversion to Mutual Federal
and MFS Financial, and as to the generally applicable material federal income
tax consequences of the conversion on Mutual Federal's account holders and to
persons who purchase common stock in the offering.
The opinion provides that, among other things:
o Mutual Federal's adoption of a charter in stock form will qualify as a
tax-free reorganization under Internal Revenue Code of 1986, as
amended, Section 368(a)(1)(F);
o no gain or loss will be recognized by Mutual Federal solely as a
result of the conversion to stock form;
40
<PAGE>
o no gain or loss will be recognized by Mutual Federal's account
holders upon the issuance to them of accounts in Mutual Federal, in
stock form, immediately after the conversion, in the same dollar
amounts and on the same terms and conditions as their accounts at
Mutual Federal immediately prior to the conversion;
o the tax basis of each account holder's interest in the liquidation
account received in the conversion will be equal to the value, if
any, of that interest on the date and at the time of the conversion;
o the tax basis of the common stock purchased in the conversion will
be equal to the amount paid therefor; increased, in the case of
common stock acquired pursuant to the exercise of subscription
rights, by the fair market value, if any, of such subscription
rights;
o the holding period of the common stock purchased pursuant to the
exercise of subscription rights will commence upon the exercise of
such holder's subscription rights and, in all other cases, the
holding period of purchased common stock will commence on the date
following the date of such purchase; and
o gain or loss will be recognized by account holders upon the receipt
or exercise of subscription rights in the conversion, but only to
the extent the subscription rights are deemed to have value, as
discussed below.
The opinion of Silver, Freedman & Taff, L.L.P. is based in part upon, and
subject to the continuing validity in all material respects through the date of
the conversion of various representations of Mutual Federal and upon certain
assumptions and qualifications, including that the conversion is completed in
the manner and according to the terms provided in the plan of conversion. This
opinion is also based upon the Internal Revenue Code, regulations now in effect
or proposed, current administrative rulings and practice and judicial authority,
all of which are subject to change and any change may be made with retroactive
effect. Unlike private letter rulings received from the IRS, an opinion is not
binding upon the IRS and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in this opinion, or that this
opinion will be upheld by the courts if challenged by the IRS.
Mutual Federal has also obtained an opinion from outside tax advisors that
the income tax effects of the conversion under Indiana tax laws will be
substantially the same as described above with respect to federal income tax
laws.
MFS Financial and Mutual Federal have received a letter from RP Financial,
stating its belief that the subscription rights do not have any value, based on
the fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and give the recipients the right only to
purchase the common stock at a price equal to its estimated fair market value,
which will be the same price as the purchase price for the unsubscribed shares
of common stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of these rights would be taxable
probably only to those eligible subscribers who exercise the subscription
rights, either as a capital gain or ordinary income, in an amount equal to such
value, and MFS Financial and Mutual Federal could recognize gain on any
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<PAGE>
distribution. Eligible subscribers are encouraged to consult with their own tax
advisor as to the tax consequences in the event that subscription rights are
deemed to have an ascertainable value. Unlike private rulings, the letter of RP
Financial is not binding on the IRS, and the IRS could disagree with conclusions
reached in the letter. In the event of any disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
THE MUTUAL FEDERAL SAVINGS BANK CHARITABLE FOUNDATION
GENERAL. Continuing Mutual Federal's commitment to the communities that it
serves, Mutual Federal established The Mutual Federal Savings Bank Charitable
Foundation in 1998 with a minimal contribution. The foundation is incorporated
under Indiana law as a non-stock corporation. In connection with the conversion,
MFS Financial intends to contribute to the foundation cash and common stock in
an amount up to 8.0% of the total value of shares of common stock sold in the
conversion up to a maximum contribution of $4.5 million. By increasing Mutual
Federal's visibility and reputation in the communities that it serves, Mutual
Federal believes that the foundation will improve the long-term value of Mutual
Federal's community banking franchise.
PURPOSE OF THE FOUNDATION. The purpose of the foundation is to provide
funding to support charitable purposes. Traditionally, Mutual Federal has
emphasized community lending and community development activities within the
communities that it serves. The foundation was formed to complement Mutual
Federal's existing community activities. Mutual Federal believes that the
foundation will enable MFS Financial and Mutual Federal to assist their local
communities in areas beyond community development and lending.
The board of directors also believes that the funding of the foundation
with common stock of MFS Financial is a means of enabling the communities served
by Mutual Federal to share in the growth and success of MFS Financial long after
completion of the conversion. The foundation will accomplish that goal by
providing for continued ties between the foundation and Mutual Federal, forming
a partnership with Mutual Federal's communities. The contribution to the
foundation will also enable MFS Financial and Mutual Federal to develop a
unified charitable donation strategy. Mutual Federal, however, does not expect
the contribution to the foundation to take the place of its traditional
community charitable activities. In this respect, subsequent to the conversion,
Mutual Federal may continue to make relatively small contributions to other
charitable organizations and/or it may make additional contributions to the
foundation.
STRUCTURE OF THE FOUNDATION. Pursuant to the foundation's bylaws, the
foundation's board of directors is comprised of two members of MFS Financial and
Mutual Federal's Boards of Directors (Messrs. R. Donn Roberts and Linn Crull),
Mr. G. Richard Benson, the former chairman of the board of Mutual Federal, and
one other individual to be chosen in light of his or her commitment and service
to charitable and community purposes. The other person serving as a director of
the foundation is Earl R. Williams. There are no plans to change the size of
the foundation's board of directors during the one-year period after completion
of the conversion. We currently intend that less than a majority of Mutual
Federal's directors will also serve as directors of the foundation.
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<PAGE>
A nominating committee of the foundation's board nominates individuals
eligible for election to the board of directors. The full board elects the
directors at the annual meeting of the foundation from those nominated by the
nominating committee. Directors are divided into three classes with each class
appointed for three-year terms. For a period of five years, one director will be
chosen from the communities served by the foundation, be independent and have
experience with local community foundations and making grants; and at least one
director will be chosen from the directors of Mutual Federal. Foundation
directors will serve without compensation, except for Mr. Williams. The articles
of incorporation of the foundation provide that the corporation is organized
exclusively for charitable purposes, as set forth in Section 501(c)(3) of the
Internal Revenue Code. The foundation's articles of incorporation also provide
that no part of the net earnings of the foundation will inure to the benefit of,
or be distributable to its directors or officers. No award, grant or
distribution will be made by the foundation to any director, officer or employee
of MFS Financial or Mutual Federal or any affiliate thereof. In addition, any of
these persons, to the extent that they serve as an officer, director or employee
of the foundation, will be subject to the conflict of interest regulations of
the Office of Thrift Supervision.
The authority for the affairs of the foundation is vested in the board of
directors of the foundation. The directors of the foundation are responsible for
establishing the policies of the foundation with respect to grants or donations
by the foundation, consistent with the purposes for which the foundation was
established. As directors of a nonprofit corporation, directors of the
foundation are at all times bound by their fiduciary duty to advance the
foundation's charitable goals, to protect the assets of the foundation and to
act in a manner consistent with the charitable purposes for which the foundation
was established. The directors of the foundation are also responsible for
directing the activities of the foundation, including the management of the
common stock of MFS Financial held by the foundation. However, as a condition to
receiving the approval of the Office of Thrift Supervision to Mutual Federal's
conversion, the foundation will be required to commit to the Office of Thrift
Supervision that all shares of common stock held by the foundation will be voted
in the same ratio as all other shares of MFS Financial's common stock on all
proposals considered by stockholders of MFS Financial; provided, however, that
consistent with this condition, the Office of Thrift Supervision would waive
this voting restriction under certain circumstances if compliance with the
voting restriction would:
o cause a violation of the law of the State of Indiana and the Office
of Thrift Supervision determines that federal law would not preempt
the application of the laws of Indiana to the foundation;
o would cause the foundation to lose its tax-exempt status, or cause
the IRS to deny the foundation's request for a determination that it
is an exempt organization or otherwise have a material and adverse
tax consequence on the foundation; or
o would cause the foundation to be subject to an excise tax under
Section 4941 of the Internal Revenue Code.
In order for the Office of Thrift Supervision to waive this voting restriction,
MFS Financial's or the foundation's legal counsel would be required to render an
opinion satisfactory to the Office of Thrift Supervision that compliance with
the voting requirement would have the effect described
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<PAGE>
above. Under those circumstances, the Office of Thrift Supervision would grant a
waiver of the voting restriction upon submission of such legal opinions(s) by
MFS Financial or the foundation that are satisfactory to the Office of Thrift
Supervision, but could impose additional conditions. In the event that the
Office of Thrift Supervision was to waive the voting requirement, the directors
would direct the voting of the common stock of MFS Financial held by the
foundation.
The foundation's place of business is located at Mutual Federal's
executive offices and currently the foundation has no separate employees but
utilizes the staff of Mutual Federal and pays Mutual Federal for the value of
these services. The board of directors of the foundation has appointed officers
of Mutual Federal to manage the operations of the foundation. In this regard, it
is expected that Mutual Federal will be required to provide the Office of Thrift
Supervision with a commitment that, to the extent applicable, Mutual Federal
will comply with the affiliate restrictions set forth in Sections 23A and 23B of
the Federal Reserve Act with respect to any transactions between Mutual Federal
and the foundation.
MFS Financial intends to contribute to the foundation an amount equal to
8.0% of the value of shares of common stock sold in the conversion, 50% in
common stock and 50% in cash, which would have a total market value of $3.1
million to $4.1 million ($4.5 million at the maximum, as adjusted, based on the
maximum contribution expected to be made), based on the purchase price of $10.00
per share. Messrs. Roberts, Crull, Benson and Williams, who serve as directors
of the foundation, expect to purchase shares of common stock as follows: Roberts
- -43,000 shares; Crull - 40,000 shares; Benson - 20,000 shares; and Williams -
500 shares. The shares of common stock to be acquired by the foundation, when
combined with the proposed purchases of shares of common stock by all foundation
directors, will total 103,500 shares or 2.0% of the total number of shares of
common stock to be issued and outstanding (assuming the sale of 5.2 million
shares of common stock).
The foundation will receive working capital from any dividends that may be
paid on the common stock in the future, and subject to applicable federal and
state laws, loans collateralized by the common stock or from the proceeds of the
sale of any of the common stock in the open market from time to time as may be
permitted to provide the foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Internal Revenue Code, the foundation
is required to distribute annually in grants or donations, a minimum of 5% of
the average fair market value of its net investment assets. Failure to
distribute this minimum return will require substantial federal taxes to be
paid. Upon completion of the conversion and the contribution of shares of common
stock to the foundation, MFS Financial would have 3,978,000 shares, 4,680,000
shares, 5,382,000 shares and 6,176,250 shares issued and outstanding based on
the minimum, midpoint, maximum and maximum, as adjusted, of the estimated
offering range. Because MFS Financial will have an increased number of shares
outstanding, the voting and ownership interests of stockholders in MFS
Financial's common stock will be diluted by 3.85% as a result of the
contribution of common stock to the foundation. For additional discussion of the
dilutive effect, see "Pro Forma Data."
TAX CONSIDERATIONS. MFS Financial and Mutual Federal have been advised by
their outside tax advisors that an organization created and operated for the
above charitable purposes would generally qualify as a Section 501(c)(3) exempt
organization under the Internal Revenue Code, and further that such an
organization should be classified as a private foundation as
44
<PAGE>
defined in Section 509 of the Internal Revenue Code. The foundation has
submitted a timely request to the IRS to be recognized as an exempt
organization. The IRS approved the application, so the effective date of the
foundation's status as a Section 501(c)(3) organization is the date of its
organization.
Under the Internal Revenue Code, MFS Financial is generally allowed a
deduction for charitable contributions made to qualifying donees within the
taxable year of up to 10% of the combined taxable income of the consolidated
groups of corporations (with certain modifications) for such year. Charitable
contributions made by MFS Financial in excess of the annual deductible amount
will be deductible over each of the five succeeding taxable years, subject to
certain limitations. MFS Financial and Mutual Federal believe that the
conversion presents a unique opportunity to increase the funding of the
foundation, given the substantial amount of additional capital being raised in
the conversion. In making this determination, MFS Financial and Mutual Federal
considered the dilutive impact of the contribution of common stock to the
foundation on the amount of common stock to be offered for sale in the
conversion. Based on this consideration, MFS Financial and Mutual Federal
believe that the contribution to the foundation in excess of the 10% annual
deduction limitation is justified given Mutual Federal's capital position and
its earnings, the substantial additional capital being raised in the stock
issuance and the potential benefits of the foundation to the communities served
by Mutual Federal. In this regard, assuming the sale of shares at the maximum of
the estimated offering range, MFS Financial would have pro forma stockholders'
equity of $88.7 million or 16.65% of pro forma consolidated assets and Mutual
Federal's pro forma tangible, core and total risk-based capital ratios would be
12.28%, 12.28% and 20.85%, respectively. See "Mutual Federal Exceeds All
Regulatory Capital Requirements," "Capitalization," "Pro Forma Data," and
"Comparison of Valuation and Pro Forma Information With No Foundation." MFS
Financial and Mutual Federal believe that the amount of the charitable
contribution is reasonable given MFS Financial's and Mutual Federal's pro forma
capital positions. MFS Financial and Mutual Federal believe that the
contribution does not raise safety and soundness concerns.
MFS Financial and Mutual Federal have received an opinion from their
outside tax advisor that MFS Financial's contribution of its own stock to the
foundation should not constitute an act of self-dealing. MFS Financial should
also be entitled to a deduction in the amount of the cash and, more likely than
not, a deduction for the fair market value of the stock contributions to the
foundation less any nominal par value that the foundation may be required to pay
to MFS Financial for the stock, subject to the annual deduction limitation
described above. MFS Financial, however, would be able to carryforward any
unused portion of the deduction for five years following the contribution,
subject to certain limitations. MFS Financial's and Mutual Federal's outside tax
advisor, however, has not rendered advice as to fair market value for purposes
of determining the amount of the tax deduction. If the contribution had been
made in 1998, MFS Financial would have received tax benefits of approximately
$1.4 million based on Mutual Federal's pre-tax income for 1998, an assumed tax
rate of 34.0% and a deduction for the contribution of cash and common stock
equal to $4.1 million. Assuming the close of the conversion at the maximum of
the estimated offering range, MFS Financial estimates that all of the
contribution should be deductible over the six-year period. MFS Financial and/or
Mutual Federal may make further contributions to the foundation following this
contribution. In addition, Mutual Federal and MFS Financial also may continue to
make relatively small charitable contributions to other qualifying
organizations. Any such decisions would be based on
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an assessment of, among other factors, the tax deductibility of any further
contribution, the financial condition of MFS Financial and Mutual Federal at
that time, the interests of stockholders and depositors of MFS Financial and
Mutual Federal, and the financial condition and operations of the foundation.
MFS Financial's and Mutual Federal's outside tax advisor, however, has not
rendered any advice on the regulatory condition to the contribution which is
expected to require that all shares of common stock of MFS Financial held by the
foundation must be voted in the same ratio as all other outstanding shares of
common stock of MFS Financial on all proposals considered by stockholders of MFS
Financial.
Although MFS Financial and Mutual Federal have received an opinion of
their outside tax advisors that MFS Financial will more likely than not be
entitled to an income tax deduction for the stock portion of the charitable
contribution, there can be no assurances that a deduction for the charitable
contribution will be allowed. See "Risk Factors - The contribution to the
foundation will reduce our earnings."
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The foundation is required to make an annual
filing with the IRS within four and one-half months after the close of its
fiscal year. The foundation is also required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the foundation's managers and a concise statement
of the purpose of each grant. Numerous other restrictions exist in the operation
of the foundation including transactions with related entities, level of
investments and distributions for charitable purposes.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. The foundation will be
subject to the following conditions as a condition to receiving the Office of
Thrift Supervision's approval of the conversion:
(1) the foundation will be subject to examination by the Office of
Thrift Supervision;
(2) the foundation must comply with supervisory directives imposed by
the Office of Thrift Supervision;
(3) the foundation will operate in accordance with written policies
adopted by its board of directors, including a conflict of interest
policy;
(4) any shares of common stock held by the foundation must be voted in
the same ratio as all other shares of common stock voting on all
proposals considered by stockholders of MFS Financial; provided,
however, that, consistent with the condition, the Office of Thrift
Supervision would waive this voting restriction under certain
circumstances if compliance with the voting restriction would:
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o cause a violation of the law of the State of Indiana, and the
Office of Thrift Supervision determines that federal law would
not preempt the application of the laws of Indiana to the
foundation;
o cause the foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the
foundation; or
o cause the foundation to be subject to an excise tax under
Section 4941 of the Internal Revenue Code; and
(5) any shares of common stock subsequently purchased by the foundation
will be aggregated with any shares repurchased by MFS Financial or
Mutual Federal for purposes of calculating the number of shares
which may be repurchased during the three-year period subsequent to
conversion.
In order for the Office of Thrift Supervision to waive the voting restriction,
MFS Financial's or the foundation's legal counsel would be required to give an
opinion satisfactory to the Office of Thrift Supervision. While there is no
current intention for MFS Financial or the foundation to seek a waiver from the
Office of Thrift Supervision from these restrictions, there can be no assurances
that a legal opinion addressing these issues could be given, or if given, that
the Office of Thrift Supervision would grant an unconditional waiver of the
voting restriction. If the voting restriction is waived or becomes
unenforceable, the Office of Thrift Supervision may either impose a condition
that provides a certain portion of the members of the foundation's board of
directors shall be persons who are not directors, officers or employees of MFS
Financial, Mutual Federal or any affiliate or impose other conditions relating
to control of the foundation as are determined by the Office of Thrift
Supervision to be appropriate at the time. In no event would the voting
restriction survive the sale of shares of the common stock held by the
foundation.
Various Office of Thrift Supervision regulations may be deemed to apply to
the foundation including regulations regarding:
o transactions with affiliates;
o conflicts of interest;
o capital distributions; and
o repurchases of capital stock within the three-year period
subsequent to the stock issuance.
Because only two of the directors of MFS Financial and Mutual Federal are
expected to serve as directors of the foundation, MFS Financial and Mutual
Federal do not believe that the foundation should be considered an affiliate of
MFS Financial or Mutual Federal. MFS Financial and Mutual Federal anticipate
that the foundation's affairs will be conducted in a manner consistent with the
Office of Thrift Supervision's conflict of interest regulations. Mutual Federal
has provided information to the Office of Thrift Supervision demonstrating that
the contribution to the foundation would be within the amount which Mutual
Federal would be permitted to make as
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a capital distribution assuming such contribution is deemed to have been made by
Mutual Federal.
HOW WE DETERMINED OUR PRICE AND THE NUMBER OF SHARES TO BE ISSUED IN THE STOCK
OFFERING
The plan of conversion requires that the purchase price of the common
stock must be based on the appraised pro forma market value of MFS Financial and
Mutual Federal, as determined on the basis of an independent valuation. Mutual
Federal has retained RP Financial to make this valuation. For its services in
making this appraisal, RP Financial's fees and out-of-pocket expenses are
estimated to be $27,500. Mutual Federal has agreed to indemnify RP Financial and
any employees of RP Financial who act for or on behalf of RP Financial in
connection with the appraisal against any and all loss, cost, damage, claim,
liability or expense of any kind, including claims under federal and state
securities laws, arising out of any misstatement or untrue statement of a
material fact or an omission to state a material fact in the information
supplied by Mutual Federal to RP Financial, unless RP Financial is determined to
be negligent or otherwise at fault.
An appraisal has been made 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 MFS Financial and Mutual Federal and the economic and demographic
conditions in Mutual Federal's existing marketing areas;
o certain historical, financial and other information relating to
Mutual Federal;
o a comparative evaluation of the operating and financial statistics
of Mutual Federal with those of other similarly situated publicly
traded thrift holding companies; the aggregate size of the offering
of the common stock;
o the impact of the conversion on Mutual Federal's net worth and
earnings potential;
o the proposed dividend policy of MFS Financial and Mutual Federal;
and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
In its review of the appraisal provided by RP Financial, the board of directors
reviewed the methodologies and the appropriateness of the assumptions used by RP
Financial in addition to the factors listed above, and the board of directors
believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised MFS Financial and
Mutual Federal that in its opinion, dated October 25, 1999, the estimated pro
forma market value of the common stock, assuming a contribution to a foundation
in an amount equal to the value of 8.0%
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of the shares sold, ranged from a minimum of $38.3 million to a maximum of $51.8
million with a midpoint of $45.0 million. The board of directors of Mutual
Federal determined that the common stock should be sold at $10.00 per share.
Based on the estimated offering range and the purchase price, the number of
shares of common stock that MFS Financial will issue including shares
contributed to the foundation will range from between 3,978,200 shares and
5,382,000 shares, with a midpoint of 4,680,000 shares. The estimated offering
range may be amended with the approval of the Office of Thrift Supervision, if
required, or if necessitated by subsequent developments in the financial
condition of MFS Financial and Mutual Federal or market conditions generally. In
the event the estimated offering range is updated to amend the value of the
common stock below $38.3 million or above $59.5 million, which is the maximum of
the estimated offering range, as adjusted by 15%, a new appraisal will be filed
with the SEC.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, in the event MFS Financial
receives orders for common stock in excess of $51.8 million (the maximum of the
estimated offering range) and up to $59.5 million (the maximum of the estimated
offering range, as adjusted by 15%), MFS Financial may be required by the Office
of Thrift Supervision to accept all such orders. No assurances, however, can be
made that MFS Financial will receive orders for common stock in excess of the
maximum of the estimated offering range or that, if such orders are received,
that all such orders will be accepted because MFS Financial's final valuation
and number of shares to be issued are subject to the receipt of an updated
appraisal from RP Financial which reflects such an increase in the valuation and
the approval of such increase by the Office of Thrift Supervision. In addition,
an increase in the number of shares above 5,382,000 shares, including the shares
contributed to the foundation, will first be used, if necessary, to fill the
order of the employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the conversion.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THESE SHARES. RP
FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY MUTUAL FEDERAL, NOR DID RP FINANCIAL VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF MUTUAL FEDERAL. THE VALUATION
CONSIDERS MUTUAL FEDERAL AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF MUTUAL FEDERAL. MOREOVER, BECAUSE THIS
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 COMMON STOCK IN THE OFFERINGS WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE VALUATION DESCRIBED ABOVE.
Prior to completion of the conversion, the maximum of the estimated
offering range may be increased up to 15% and the number of shares of common
stock may be increased to 5,951,250 shares, before the contribution of shares of
the foundation, to reflect changes in market and financial conditions or to fill
the order of the employee stock ownership plan, without the resolicitation of
subscribers. See "- Limitations on Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the estimated offering range to fill unfilled orders in the
subscription offering.
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No sale of shares of common stock in the conversion may be completed
unless prior to such completion RP Financial confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the aggregate value of the common stock to be issued is
materially incompatible with the estimate of the aggregate consolidated pro
forma market value of MFS Financial and Mutual Federal. If this confirmation is
not received, MFS Financial may cancel the conversion, extend the offering
period and establish a new estimated offering range and/or estimated price
range, extend, reopen or hold a new offering or take any other action the Office
of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of the
subscription offering, the total number of shares of common stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated offering range.
In the event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated offering
range or more than 15% above the maximum of such range, purchasers will be
resolicited and be permitted to continue their orders, in which case they will
need to reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at Mutual Federal's passbook rate of interest, or be permitted to
modify or rescind their subscriptions. Any change in the estimated offering
range must be approved by the Office of Thrift Supervision.
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and MFS Financial's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of common stock would increase both a subscriber's ownership interest and
MFS Financial's pro forma net income and stockholders' equity on a per share
basis while decreasing pro forma net income and stockholders' equity on an
aggregate basis. See "Risk Factors - We intend to grant stock options and
restricted stock to the board and management following the conversion which
could reduce your ownership interest" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any amendments,
and the detailed report of the appraiser setting forth the method and
assumptions for the appraisal are available for inspection at the main office of
Mutual Federal and the other locations specified under "Additional Information."
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SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
Under the plan of conversion, rights to subscribe for the purchase of
common stock have been granted to the following persons in the following order
of descending priority:
o depositors of Mutual Federal with account balances of at least
$50.00 as of the close of business on July 31, 1998 ("Eligible
Account Holders"),
o tax-qualified employee plans, ("Tax-Qualified Employee Plans"),
o depositors of Mutual Federal with account balances of at least
$50.00 as of the close of business on September 30, 1999
("Supplemental Eligible Account Holders"),
o borrowers as of April 1, 1984 who continue as borrowers, and
depositors of Mutual Federal, as of the close of business on October
31, 1999, other than Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members") and
o Directors, Officers and Employees of Mutual Federal.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of conversion and as described below under "- Limitations
on Stock Purchases."
PREFERENCE CATEGORY NO.1: Eligible Account Holders. Each Eligible Account
Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $200,000 or 20,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of common
stock; or
(3) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock
to be issued by a fraction, of which the numerator 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 in Mutual Federal in each case as of
the close of business on July 31, 1998 (the "Eligibility Record
Date"), subject to the overall purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his total allocation equal to the lesser
of the number of shares subscribed for or 100 shares. Thereafter, any shares
remaining will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unfilled pro rata in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Eligible Account Holders whose subscriptions remain
unfilled. For example, if an Eligible Account Holder with an unfilled
subscription has qualifying deposits totalling $100, and the total amount of
qualifying deposits for Eligible Account Holders with unfilled subscriptions was
$1,000, then the number of shares that may be allocated to fill this Eligible
Account Holder's subscription would be 10% of the shares remaining available, up
to the amount subscribed for. Subscription Rights of Eligible Account Holders
will be subordinated to the priority rights of
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Tax-Qualified Employee Plans to purchase shares in excess of the maximum of the
estimated offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of Mutual Federal or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in the
year preceding July 31, 1998.
PREFERENCE CATEGORY NO. 2: Tax-Qualified Employee Plans. Each
Tax-Qualified Employee Plan, including the employee stock ownership plan shall
be entitled to receive, without payment therefor, second priority,
nontransferable subscription rights to purchase up to 10% of the common stock,
including the shares issued to the foundation, provided that individually or in
the aggregate such plans (other than that portion of such plans which is
self-directed) shall not purchase more than 10% of the shares of common stock,
including any increase in the number of shares of common stock after the date
hereof as a result of an increase of up to 15% in the maximum of the estimated
offering range. The employee stock ownership plan intends to purchase 8.0% of
the shares of common stock issued in the conversion, or 318,240 shares and
430,560 shares based on the minimum and maximum of the estimated offering range,
respectively. Subscriptions by any of the Tax-Qualified Employee Plans will not
be aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the subscription and direct
community offerings, including subscriptions of any of Mutual Federal's
directors, officers, employees or associates thereof. Subscription rights
received pursuant to this category shall be subordinated to all rights received
by Eligible Account Holders to purchase shares pursuant to category No.1;
provided, however, that notwithstanding any other provision of the plan of
conversion to the contrary, the Tax-Qualified Employee Plans shall have a first
priority subscription right to the extent that the total number of shares of
common stock sold in the conversion exceeds the maximum of the estimated
offering. In the event that the total number of shares offered in the conversion
is increased to an amount greater than the number of shares representing the
maximum of the estimated offering range, each Tax-Qualified Employee Plan will
have a priority right to purchase any such shares exceeding the maximum of the
estimated offering range up to an aggregate of 10% of the common stock sold in
the conversion. See "Management - Benefits -- Employee Stock Ownership Plan."
PREFERENCE CATEGORY NO. 3: Supplemental Eligible Account Holders. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Plans,
each Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $200,000 or 20,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of common
stock; or
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(3) 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock to be
issued by a fraction, of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and
the denominator of which is the total amount of qualifying deposits
of all Supplemental Eligible Account Holders in Mutual Federal in
each case on the close of business on September 30, 1999 (the
"Supplemental Eligibility Record Date"), subject to the overall
purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of all Supplemental Eligible Account Holders, available shares first will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each such Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No.1) equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled pro
rata in the proportion that the amounts of their respective qualifying deposits
bear to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
PREFERENCE CATEGORY NO. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Other Member shall receive, without payment therefor,
fourth priority, nontransferable subscription rights to subscribe for shares of
MFS Financial common stock, up to the greater of $200,000 or 20,000 shares of
common stock or one-tenth of one percent of the total offering of shares of
common stock in the offerings, subject to the overall purchase limitations. See
"- Limitations on Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of common stock offered in the conversion,
available shares will be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the close of business on
October 31, 1999, the date for determining voting members entitled to vote at
the special meeting, which we call the Voting Record Date, bears to the total
number of votes on the Voting Record Date of all subscribing Other Members on
such date. Such number of votes shall be determined based on Mutual Federal's
mutual charter and bylaws in effect on the date of approval by members of the
plan of conversion.
PREFERENCE CATEGORY NO. 5: Directors, officers and employees. To the
extent that there are sufficient shares remaining after satisfaction of all
subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members, then directors,
officers and employees of Mutual Federal as of the date of the commencement of
the subscription offering shall be entitled to receive, without payment, fifth
priority, nontransferable subscription rights to purchase in this category an
aggregate of up to 16% of the
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common stock being offered. The maximum amount of shares which may be purchased
under this category by any person is $200,000 of common stock. The ability of
directors, officers and employees to purchase common stock under this category
is in addition to rights which are otherwise available to them under the plan of
conversion as they may fall within higher priority categories, and the plan of
conversion generally allows such persons to purchase in the aggregate up to 26%
of common stock sold in the offerings. See "- Limitations on Stock Purchases."
In the event of an oversubscription in this category, the shares available
shall be allocated pro rata among all of the subscribing directors, officers and
employees in this category.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription offering
will expire at 12:00 Noon, Muncie, Indiana time, on December 15, 1999 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by MFS Financial and Mutual Federal as may be approved by the
Office of Thrift Supervision. The subscription offering may not be extended
beyond December 27, 2001. Subscription rights which have not been exercised
prior to the Subscription Expiration Date (unless extended) will become void.
MFS Financial and Mutual Federal will not execute orders until at least
the minimum number of shares of common stock, 3,825,000 shares, have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless this period
is extended with the consent of the Office of Thrift Supervision, all funds
delivered to Mutual Federal pursuant to the subscription offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the Subscription Expiration Date is granted, MFS Financial and Mutual
Federal will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and directors,
officers and employees of Mutual Federal, we anticipate we will offer shares
pursuant to the plan of conversion to members of the general public who receive
a prospectus, with a preference given to natural persons residing in the
counties in which Mutual Federal has offices. These natural persons are referred
to as preferred subscribers. Persons, together with an associate or group of
persons acting in concert with such persons, may not subscribe for or purchase
more than $200,000 of common stock in the direct community offering, if any. MFS
Financial and Mutual Federal may limit total subscriptions in the direct
community offering so as to assure that the number of shares available for the
public offering may be up to a specified percentage of the number of shares of
common stock. Finally, MFS Financial and Mutual Federal may reserve shares
offered in the direct community offering for sales to institutional investors.
The opportunity to subscribe for shares of common stock in any direct community
offering will be subject to the right of MFS Financial and Mutual Federal, in
their sole discretion, to accept or reject any such orders in whole or in part
from any person either at the time of receipt of an order or as soon as
practicable following the Subscription Expiration Date. The direct community
offering, if any, shall be for a period of not
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less than 20 days nor more than 45 days unless extended by MFS Financial and
Mutual Federal, and shall commence concurrently with, during or promptly after
the subscription offering.
In the event of an oversubscription for shares in the direct community
offering, shares may be allocated, to the extent shares remain available, first
to each preferred subscriber whose order is accepted by MFS Financial.
Thereafter, shares may be allocated to cover the orders of any other person
subscribing for shares in the direct community offering so that each such person
subscribing for shares may receive 1,000 shares, if available, and thereafter on
a pro rata basis to such person based on the amount of their respective
subscriptions.
PUBLIC OFFERING
As a final step in the conversion, the plan of conversion provides that,
if feasible, all shares of common stock not purchased in the subscription
offering and direct community offerings may be offered for sale to selected
members of the general public in a public offering through the underwriter. We
call this the public offering. It is expected that the public offering will
commence as soon as practicable after termination of the subscription offering
and the direct community offering, if any. MFS Financial and Mutual Federal, in
their sole discretion, have the right to reject orders in whole or in part
received in the public offering. Neither Charles Webb & Company nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of common stock in the public offering; however, Charles Webb & Company
has agreed to use its best efforts in the sale of shares in the public offering.
The price at which common stock is sold in the public offering will be the
same price at which shares are offered and sold in the subscription offering and
direct community offering. No person, by himself or herself, or with an
Associate or group of persons acting in concert, may purchase more than $200,000
of common stock in the public offering, subject to the maximum purchase
limitations. See "- Limitations on Stock Purchases."
Charles Webb & Company may enter into agreements with broker-dealers to
assist in the sale of the shares in the public offering, although no such
agreements exist as of the date of this prospectus. No orders may be placed or
filled by or for a selected dealer during the subscription offering. After the
close of the subscription offering, Charles Webb & Company will instruct
selected dealers as to the number of shares to be allocated to each selected
dealer. Only after the close of the subscription offering and upon allocation of
shares to selected dealers may selected dealers take orders from their
customers. During the subscription offering and direct community offering,
selected dealers may only solicit indications of interest from their customers
to place orders with MFS Financial as of a certain order date for the purchase
of shares of MFS Financial common stock. When, and if, Charles Webb & Company
and Mutual Federal believe that enough indications of interest and orders have
not been received in the subscription offering and direct community offering to
consummate the conversion, Charles Webb & Company will request, as of the order
date, selected dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
dealers will send confirmations of the orders to such customers on the next
business day after the order date. Selected dealers will debit the accounts of
their customers on the settlement date, which date will be three business days
from the order date. Customers who authorize selected dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not
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before the settlement date. On the settlement date, selected dealers will
deposit funds to the account established by Mutual Federal for each selected
dealer. Each customer's funds forwarded to Mutual Federal, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
Mutual Federal from selected dealers, funds will earn interest at Mutual
Federal's passbook rate until the completion or termination of the conversion.
Funds will be promptly returned, with interest, in the event the conversion is
not consummated as described above.
The public offering will be completed within 90 days after the termination
of the subscription offering, unless extended by Mutual Federal with the
approval of the Office of Thrift Supervision. See "- How We Determined Our Price
and the Number of Shares to be Issued in the Stock Offering" above for a
discussion of rights of subscribers, if any, in the event an extension is
granted.
PERSONS WHO ARE NOT PERMITTED TO PARTICIPATE IN THE STOCK OFFERING
Mutual Federal will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the plan of conversion reside. However, Mutual Federal is
not required to offer stock in the subscription offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which:
o the number of persons otherwise eligible to subscribe for shares
under the plan of conversion who reside in such jurisdiction is
small;
o the granting of subscription rights or the offer or sale of shares
of common stock to such persons would require any of MFS Financial
and Mutual Federal or their officers, directors or employees, under
the laws of such jurisdiction, to register as a broker, dealer,
salesman or selling agent or to register or otherwise qualify its
securities for sale in such jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in such
jurisdiction; or
o such registration, qualification or filing in the judgment of Mutual
Federal would be impracticable or unduly burdensome for reasons of
cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, Mutual Federal will base its decision as to whether or not to offer the
common stock in that state on a number of factors, including but not limited to
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register Mutual Federal, its
officers, directors or employees as brokers, dealers or salesmen.
LIMITATIONS ON STOCK PURCHASES
The plan of conversion includes the following limitations on the number of
shares of MFS Financial common stock which may be purchased in the conversion:
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<PAGE>
(1) No fewer than 25 shares of common stock may be purchased, to the
extent shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in the
subscription offering up to the greater of:
(a) $200,000 or 20,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator 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 in Mutual Federal in
each case as of the close of business on the Eligibility
Record Date, subject to the overall limitation in clause (7)
below;
(3) The Tax-Qualified Employee Plans, including an employee stock
ownership plan, may purchase in the aggregate up to 10% of the
shares of common stock issued in the conversion, including the
shares contributed to the foundation, and including any additional
shares issued in the event of an increase in the estimated offering
range; although at this time the employee stock ownership plan
intends to purchase only 8.0% of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the subscription offering up to the greater of:
(a) $200,000 or 20,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is
the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible
Account Holders in Mutual Federal in each case as of the close
of business on the Supplemental Eligibility Record Date,
subject to the overall limitation in clause (7) below;
(5) Each Other Member may subscribe for and purchase in the subscription
offering up to the greater of $200,000 or 20,000 shares of common
stock or one-tenth of one percent of the total offering of shares of
common stock, subject to the overall limitation in clause (7) below;
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<PAGE>
(6) Persons purchasing shares of common stock in the direct community
offering or public offering may purchase in the direct community
offering or public offering up to $200,000 or 20,000 shares of
common stock, subject to the overall limitation in clause (7) below;
(7) Except for the Tax-Qualified Employee Plans, and the Eligible
Account Holders and Supplemental Eligible Account Holders whose
subscription rights are based upon the amount of their deposits, as
a result of (2)(c) and (4)(c) above the maximum number of shares of
MFS Financial common stock subscribed for or purchased in all
categories of the offerings by any person, together with associates
of and group of persons acting in concert with such persons, shall
not exceed $700,000 or 70,000 shares of common stock; and
(8) No more than 16% of the total number of shares offered for sale in
the subscription offering may be purchased by directors, officers
and employees of Mutual Federal in the fifth priority category in
the subscription offering. No more than 26% of the total number of
shares offered for sale in the conversion may be purchased by
directors and officers of Mutual Federal and their associates in the
aggregate, excluding purchases by the Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
Mutual Federal, the boards of directors of MFS Financial and Mutual Federal may,
in their sole discretion, increase the individual amount permitted to be
subscribed for to a maximum of 9.99% of the number of shares sold in the
conversion, provided that orders for shares exceeding 5% of the shares being
offered in the conversion shall not exceed, in the aggregate, 10% of the shares
being offered in the conversion. Requests to purchase additional shares of
common stock will be allocated by the boards of directors on a pro rata basis
giving priority in accordance with the preference categories set forth in this
prospectus.
The term "associate" when used to indicate a relationship with any person
means:
o any corporation or organization (other than Mutual Federal, MFS
Financial, or a majority-owned subsidiary of any of them) of which
such person is a director, officer or partner or is directly or
indirectly the beneficial owner of 10% or more of any class of
equity securities;
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity;
o any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of Mutual Federal, MFS Financial or any subsidiary of Mutual
Federal or MFS Financial or any affiliate thereof; and
o any person acting in concert with any of the persons or entities
specified above;
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<PAGE>
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans shall
not be deemed to be an associate of any director or officer of Mutual Federal or
MFS Financial, to the extent provided in the plan of conversion. When used to
refer to a person other than an officer or director of Mutual Federal, the board
of directors of Mutual Federal or officers delegated by the board of directors
in their sole discretion may determine the persons that are associates of other
persons.
The term "acting in concert" is defined to mean knowing participation in a
joint activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or 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, whether written or otherwise. A person or company which acts in
concert with another person or company shall also be deemed to be acting in
concert with any person or company who is also acting in concert with that other
party, except that the Tax-Qualified Employee Plans will not be deemed to be
acting in concert with their trustees or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by each plan will be aggregated. The determination of whether a
group is acting in concert shall be made solely by the board of directors of
Mutual Federal or officers delegated by such board of directors and may be based
on any evidence upon which such board or delegatee chooses to rely.
MARKETING ARRANGEMENTS
MFS Financial and Mutual Federal have retained Charles Webb & Company to
consult with and to advise Mutual Federal, and to assist MFS Financial, on a
best efforts basis, in the distribution of the shares of common stock in the
subscription offering and direct community offering. The services that Charles
Webb & Company will provide include, but are not limited to:
o training the employees of Mutual Federal who will perform certain
ministerial functions in the subscription offering and direct
community offering regarding the mechanics and regulatory
requirements of the stock offering process;
o managing the stock information centers by assisting interested stock
subscribers and by keeping records of all stock orders;
o preparing marketing materials; and
o assisting in the solicitation of proxies from Mutual Federal's
members for use at the special meeting.
For its services, Charles Webb & Company will receive a management fee of
$40,000 and a success fee of $725,000. The success fee paid to Charles Webb &
Company will be reduced by the amount of the management fee. In the event that
selected dealers are used to assist in the sale of shares of MFS Financial
common stock in the direct community offering, these dealers will be paid a fee
of up to 5.5% of the total purchase price of the shares sold by such dealers.
Mutual Federal has agreed to indemnify Charles Webb & Company against certain
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<PAGE>
claims or liabilities, including certain liabilities under the Securities Act of
1933, as amended, and will contribute to payments Charles Webb & Company may be
required to make in connection with any such claims or liabilities.
Sales of shares of MFS Financial common stock will be made by registered
representatives affiliated with Charles Webb & Company or by the broker-dealers
managed by Charles Webb & Company. Charles Webb & Company has undertaken that
the shares of MFS Financial common stock will be sold in a manner which will
ensure that the distribution standards of the Nasdaq Stock Market will be met. A
stock information center will be established at the main office of Mutual
Federal in Muncie, Indiana. MFS Financial will rely on Rule 3a4-1 of the
Securities Exchange Act of 1934 and sales of MFS Financial common stock will be
conducted within the requirements of this rule, so as to permit officers,
directors and employees to participate in the sale of MFS Financial common stock
in those states where the law permits. No officer, director or employee of MFS
Financial or Mutual Federal will be compensated directly or indirectly by the
payment of commissions or other remuneration in connection with his or her
participation in the sale of common stock.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date, unless extended, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to such date or hand delivered any later than two
days prior to such date. Execution of the order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Mutual Federal, which may
be given by completing the appropriate blanks in the order form, must be
received by Mutual Federal by 12:00 Noon, Muncie, Indiana time, on the
Subscription Expiration Date, unless extended. In addition, MFS Financial and
Mutual Federal will require a prospective purchaser to execute a certification
in the form required by applicable Office of Thrift Supervision regulations in
connection with any sale of common stock. Order forms which are not received by
this time or are executed defectively or are received without full payment, or
appropriate withdrawal instructions, are not required to be accepted. In
addition, Mutual Federal will not accept orders submitted on photocopied or
facsimiled order forms nor order forms unaccompanied by an executed
certification form. Mutual Federal has the right to waive or permit the
correction of incomplete or improperly executed forms, but does not represent
that it will do so. Once received, an executed order form may not be modified,
amended or rescinded without the consent of Mutual Federal, unless the
conversion has not been completed within 45 days after the end of the
subscription offering, or this period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and directors,
officers and employees are properly identified as to their stock purchase
priority, depositors as of the close of business on the Eligibility Record Date,
July 31, 1998, or the Supplemental Eligibility Record Date,
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<PAGE>
September 30, 1999, and depositors and certain borrowers as of the close of
business on the Voting Record Date, October 31, 1999, must list all accounts on
the stock order form giving all names in each account and the account numbers.
Payment for subscriptions may be made:
o by check or money order;
o by authorization of withdrawal from deposit accounts maintained
with Mutual Federal (including a certificate of deposit); or
o in cash, if delivered in person at any full-service banking office
of Mutual Federal, although we request that you exchange cash for a
check with any of our tellers.
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at our then-current passbook rate from the date
payment is received until completion of the conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rate, but may not be used by the subscriber until all of MFS
Financial common stock has been sold or the plan of conversion is terminated,
whichever is earlier.
If a subscriber authorizes Mutual Federal to withdraw the amount of the
purchase price from his deposit account, Mutual Federal will do so as of the
effective date of the conversion. Mutual Federal will waive any applicable
penalties for early withdrawal from certificate accounts.
In the event of an unfilled amount of any subscription order, Mutual
Federal will make an appropriate refund or cancel an appropriate portion of the
related withdrawal authorization, after completion of the conversion. If for any
reason the conversion is not consummated, purchasers will have refunded to them
all payments made, with interest, and all withdrawal authorizations will be
canceled in the case of subscription payments authorized from accounts at Mutual
Federal.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering and direct community offering, if
all shares are sold, or upon completion of the public offering if shares remain
to be sold in such offering. In the event that, after the completion of the
subscription offering, the amount of shares to be issued is increased above the
maximum of the estimated valuation range included in this prospectus, the
Tax-Qualified and Non-Tax-Qualified Employee Plans will be entitled to increase
their subscriptions by a percentage equal to the percentage increase in the
amount of shares to be issued above the maximum of the estimated valuation
range, provided that such subscription will continue to be subject to applicable
purchase limits and stock allocation procedures.
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<PAGE>
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of MFS Financial common stock in the subscription offering and direct
community offering. ERISA provisions and IRS regulations require that officers,
directors and 10% stockholders who use self-directed IRA funds to purchase
shares of common stock in the offerings make such purchases for the exclusive
benefit of the IRAs. IRAs maintained at Mutual Federal are not self-directed
IRAs and any interested parties wishing to use IRA funds for stock purchases may
do so, but are advised to contact the stock information center at (765) 213-2963
for additional information.
The records of Mutual Federal will be deemed to control with respect to
all matters related to the existence of subscription rights and/or one's ability
to purchase shares of common stock in the subscription offering.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the Office of Thrift Supervision,
no person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the plan of conversion or the shares of common stock to be
issued upon their exercise. Such rights may be exercised only by the person to
whom they are granted and only for such person's account. Each person exercising
such subscription rights will be required to certify that the person is
purchasing shares solely for the person's own account and that such person has
no agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
conversion.
Mutual Federal will refer to the Office of Thrift Supervision any
situations that it believes may involve a transfer of subscription rights and
will not honor orders believed by it to involve the transfer of such rights.
DELIVERY OF CERTIFICATES
Certificates representing common stock issued in the conversion will be
mailed by MFS Financial's transfer agent to the persons entitled thereto at the
addresses of such persons appearing on the stock order form as soon as
practicable following completion of the conversion. Any certificates returned as
undeliverable will be held by MFS Financial until claimed by persons legally
entitled to them or otherwise disposed of in accordance with applicable law.
Until certificates for common stock are available and delivered to subscribers,
they may not be able to sell the shares of common stock for which they have
subscribed, even though trading of the common stock may have commenced.
REQUIRED APPROVALS
Various approvals of the Office of Thrift Supervision are required in
order to consummate the conversion. The Office of Thrift Supervision has
approved the plan of conversion, subject to approval by Mutual Federal's members
and other standard conditions. MFS Financial's holding company application has
been approved.
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MFS Financial is required to make certain filings with state securities
regulatory authorities in connection with the issuance of MFS Financial common
stock in the offerings.
JUDICIAL REVIEW
Any person hurt by a final action of the Office of Thrift Supervision
which approves, with or without conditions, or disapproves a plan of conversion
may obtain review of this action by filing in the court of appeals of the United
States for the circuit in which the principal office or residence of the person
is located, or in the United States Court of Appeals for the District of
Columbia, a written petition asking that the final action of the Office of
Thrift Supervision be modified, terminated or set aside. This petition must be
filed within 30 days after the publication of notice of final action in the
Federal Register, or 30 days after the mailing by the applicant of the notice to
members as provided for in 12 C.F.R. ss.563b.6(c), whichever is later. The
further procedure for review is as follows: A copy of the petition is promptly
transmitted to the Office of Thrift Supervision by the clerk of the court and
then the Office of Thrift Supervision files in the court the record in the
proceeding, as provided in Section 2112 of Title 28 of the United States Code.
Upon the filing of the petition, the court has jurisdiction, which upon the
filing of the record is exclusive, to affirm, modify, terminate, or set aside in
whole or in part, the final action of the Office of Thrift Supervision. Review
of these proceedings is as provided in Chapter 7 of Title 5 of the United States
Code. The judgment and decree of the court is final, except that they are
subject to review by the Supreme Court upon certiorari as provided in Section
1254 of Title 28 of the United States Code.
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of common stock purchased in connection with the conversion by
a director or an executive officer of MFS Financial and Mutual Federal will be
subject to a restriction that the shares not be sold for a period of one year
following the conversion except in the event of the death of the director or
officer or pursuant to a merger or similar transaction approved by the Office of
Thrift Supervision. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be issued
to the effect that any transfer within such time period of any certificate or
record ownership of the shares other than as provided above is a violation of
the restriction. Any shares of common stock issued at a later date within this
one year period as a stock dividend, stock split or otherwise with respect to
the restricted stock will be subject to the same restrictions.
Purchases of common stock of MFS Financial by directors, executive
officers and their associates during the three-year period following completion
of the conversion may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the Office of Thrift
Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of MFS Financial's outstanding common stock
or to certain purchases of stock pursuant to an employee stock benefit plan.
Pursuant to Office of Thrift Supervision regulations, MFS Financial will
generally be prohibited from repurchasing any shares of the common stock for a
period of three years following the conversion other than pursuant to (a) an
offer to all stockholders on a pro rata basis
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which is approved by the Office of Thrift Supervision or (b) the repurchase of
qualifying shares of a director, if any.
The above limitations are subject to Office of Thrift Supervision policies
which generally provide that MFS Financial may repurchase its capital stock
provided:
o no repurchases occur within the first six months following the
conversion;
o repurchases during the second six months following the conversion do
not exceed 5% of its outstanding capital stock (subject to certain
exceptions) and repurchases prior to the third anniversary of the
conversion do not exceed 25% of its outstanding capital stock;
o repurchases prior to the third anniversary of the conversion are
part of an open-market stock repurchase program;
o the repurchases do not cause Mutual Federal to become
undercapitalized; and
o Mutual Federal provides to the Regional Director of the Office of
Thrift Supervision no later than 10 days prior to the commencement
of a repurchase program written notice containing a full description
of the program to be undertaken and such program is not disapproved
by the Regional Director.
The Office of Thrift Supervision may permit stock repurchases in excess of such
amounts prior to the third anniversary of the conversion if exceptional
circumstances are shown to exist.
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PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Mutual Federal's directors,
directors emeritus and executive officers and for all of the directors,
directors emeritus and executive officers as a group, the proposed purchases of
common stock, assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates.
<TABLE>
<CAPTION>
At the Minimum of the At the Maximum of
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ---------------------------------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Directors:
- ---------
Linn A. Crull $ 400,000 40,000 1.05% 40,000 0.77%
Wilbur R. Davis 400,000 40,000 1.05 40,000 0.77
Edward Dobrow 400,000 40,000 1.05 40,000 0.77
William V. Hughes 200,000 20,000 0.52 20,000 0.39
R. Donn Roberts 430,000 43,000 1.12 43,000 0.83
James D. Rosema 400,000 40,000 1.05 40,000 0.77
Julie Skinner 400,000 40,000 1.05 40,000 0.77
Directors Emeritus:
- ------------------
G. Richard Benson 200,000 20,000 0.52 20,000 0.39
Jack E. Buckles 100,000 10,000 0.26 10,000 0.19
Gene B. Kern 50,000 5,000 0.13 5,000 0.10
Charles R. McCormick 20,000 2,000 0.05 2,000 0.04
Executive Officers:
- ------------------
Timothy J. McArdle 430,000 43,000 1.12 43,000 0.83
Steven R. Campbell 50,000 5,000 0.13 5,000 0.10
Stephen C. Selby 50,000 5,000 0.13 5,000 0.10
David W. Heeter 50,000 5,000 0.13 5,000 0.10
---------- ------- ---- ------- ----
All directors, directors emeritus
and executive officers as a
group (15 persons) $3,580,000 358,000 9.36 358,000 6.92
========== ======= ==== ======= ====
</TABLE>
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<TABLE>
<CAPTION>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Income
Six Months Ended
June 30 Year Ended December 31
-------------------------------------------------------------------------------
1999 1998 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest Income
Loans receivable, including fees $15,766,994 $16,651,091 $32,488,310 $32,241,792 $30,676,153
Trading account securities 24,441 16,965 19,983 39,203 67,255
Investment securities
Mortgage-backed securities 158,332 147,664 329,093 334,605 372,072
Federal Home Loan Bank stock 143,308 131,808 277,765 288,838 242,985
Other investment securities 543,361 471,792 999,945 964,289 874,079
Deposits with financial institutions 109,777 120,556 358,346 216,646 194,440
-------------------------------------------------------------------------------
Total interest income 16,746,213 17,539,876 34,473,442 34,085,373 32,426,984
-------------------------------------------------------------------------------
Interest Expense
Deposits 7,916,065 8,177,932 16,442,842 15,403,164 14,382,071
Federal Home Loan Bank advances 1,325,858 1,782,261 3,223,168 3,647,970 3,282,285
Other interest expense 9,576 12,594 23,685 31,421 186,343
-------------------------------------------------------------------------------
Total interest expense 9,251,499 9,972,787 19,689,695 19,082,555 17,850,699
-------------------------------------------------------------------------------
Net Interest Income 7,494,714 7,567,089 14,783,747 15,002,818 14,576,285
Provision for loan losses 380,000 382,500 1,265,000 700,000 570,000
-------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 7,114,714 7,184,589 13,518,747 14,302,818 14,006,285
-------------------------------------------------------------------------------
Other Income
Service fee income 777,508 747,311 1,544,398 1,315,902 1,132,128
Net realized gains on sales of
available-for-sale securities 32,326 1,000 1,000 3,000
Net trading account profit (loss) (74,703) 14,375 24,922 31,173 (45,704)
Equity in income (losses) of limited
partnerships (10,327) 12,580 (14,435) (311,874) (6,902)
Commissions 183,574 216,587 420,414 504,193 441,742
Net gains on loan sales 217,054 805,676 184,828 11,946
Increase in cash surrender value of
life insurance 210,000 138,000 383,856 240,000 161,365
Other income 152,766 165,940 262,302 115,701 212,220
-------------------------------------------------------------------------------
Total other income 1,271,144 1,512,847 3,428,133 2,082,923 1,906,795
-------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 3,162,038 2,934,854 6,115,471 5,548,356 5,257,585
Net occupancy expenses 326,260 323,307 636,396 609,199 528,486
Equipment expenses 340,240 304,290 613,329 680,395 685,118
Data processing fees 249,908 227,769 479,001 477,643 474,156
Deposit insurance expense 99,181 106,296 212,032 209,758 2,671,567
Advertising and promotion 234,002 224,315 462,632 401,419 385,156
Other expenses 1,116,785 1,182,673 2,239,799 2,163,995 1,945,486
-------------------------------------------------------------------------------
Total other expenses 5,528,414 5,303,504 10,758,660 10,090,765 11,947,554
-------------------------------------------------------------------------------
Income Before Income Tax 2,857,444 3,393,932 6,188,220 6,294,976 3,965,526
Income tax expense 934,000 1,163,000 2,049,000 2,160,000 1,266,000
-------------------------------------------------------------------------------
Net Income $ 1,923,444 $ 2,230,932 $ 4,139,220 $ 4,134,976 $ 2,699,526
===============================================================================
</TABLE>
See notes to consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to assist in understanding the
financial condition and results of operations of Mutual Federal. The discussion
and analysis does not include any comments relating to MFS Financial since MFS
Financial has no significant operations. The information contained in this
section should be read in conjunction with the consolidated financial statements
and the accompanying notes to consolidated financial statements and the other
sections contained in the prospectus.
Mutual Federal's results of operations depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, which principally consist of loans and mortgage-backed
and investment securities, and interest expense on interest-bearing liabilities,
which principally consist of deposits and borrowings. Mutual Federal's results
of operations also are affected by the level of its noninterest income and
expenses and income tax expense.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of MFS
Financial and Mutual Federal. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar words. Our ability to predict results or the
actual effect of future plans or strategies is uncertain. Factors which could
have a material adverse effect on our operations include, but are not limited
to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market areas and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
you should not rely too much on these statements.
MANAGEMENT STRATEGY
Our strategy is to operate as an independent, retail oriented financial
institution dedicated to serving the needs of customers in our market areas. Our
commitment is to provide a broad range of products and services to meet the
needs of our customers. As part of this commitment, we are looking to increase
our emphasis on commercial business products and services. We are also in the
process of creating a fully interactive transactional website. In addition, we
are continually looking at cost-effective ways to expand our market area.
Financial highlights of our strategy include:
o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in
diversifying our loan portfolio to reduce our reliance on any one type
of loan. Since 1994, approximately 32% of our loan portfolio has
consisted of consumer, multi-family
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and commercial real estate and commercial business loans. This
diversification, however, increases the potential credit risk of our
loan portfolio. See "Risk Factors - Our loan portfolio possesses
increased risk due to our substantial number of consumer,
multi-family and commercial real estate and commercial business
loans."
o CONTINUING AS A LEADING ONE- TO FOUR-FAMILY LENDER. We are one of
the largest originators of one- to four-family residential loans in
our three county market area. During 1998, we originated $116.5
million of one- to four-family loans, and during the first six
months of 1999 we originated $40.4 million of these loans.
o CONTINUING OUR STRONG ASSET QUALITY. Since 1994, our ratio of non-
performing assets to total assets has not exceeded .62% and at June
30, 1999 this ratio was .34%.
o CONTINUING OUR STRONG CAPITAL POSITION. As a result of our
conservative risk management and consistent profitability, we have
historically maintained a strong capital position. At June 30,
1999, our ratio of equity to total assets was 9.3%.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Accordingly, our results
of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is our most
significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we adopted
asset and liability management policies to better match the maturities and
repricing terms of our interest-earning assets and interest-bearing liabilities.
The board of directors sets and recommends the asset and liability policies of
Mutual Federal which are implemented by the asset and liability management
committee. The asset and liability management committee is chaired by the chief
financial officer and is comprised of members of our senior management. The
purpose of the asset and liability management committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The asset and liability management committee
establishes and monitors the volume and mix of assets and funding sources taking
into account relative costs and spreads, interest rate sensitivity and liquidity
needs. The objectives are to manage assets and funding sources to produce
results that
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are consistent with liquidity, capital adequacy, growth, risk and profitability
goals. The asset and liability management committee generally meets on a monthly
basis to review, among other things, economic conditions and interest rate
outlook, current and projected liquidity needs and capital position, anticipated
changes in the volume and mix of assets and liabilities and interest rate risk
exposure limits versus current projections pursuant to net present value of
portfolio equity analysis and income simulations. At each meeting, the asset and
liability management committee recommends appropriate strategy changes based on
this review. The chief financial officer or his designee is responsible for
reviewing and reporting on the effects of the policy implementations and
strategies to the board of directors, at least quarterly.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
o originating and purchasing adjustable rate mortgage loans and
commercial business loans,
o originating shorter-term consumer loans,
o managing our deposits to establish stable deposit relationships,
o acquiring longer-term borrowings at fixed interest rates, when
appropriate, to offset the negative impact of longer-term fixed rate
loans in our loan portfolio, and
o attempting to limit the percentage of fixed-rate loans in our
portfolio.
At times, depending on the level of general interest rates, the relationship
between long- and short-term interest rates, market conditions and competitive
factors, the asset and liability management committee may determine to increase
Mutual Federal's interest rate risk position somewhat in order to maintain its
net interest margin. In the future, we intend to increase our emphasis on the
origination of relatively short-term and/or adjustable rate loans. In addition,
in an effort to maintain our limit on the percentage of fixed-rate loans, in
1998, we sold $35.1 million of fixed-rate, one- to four-family mortgage loans in
the secondary market.
The asset and liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by the board of directors of Mutual Federal.
The Office of Thrift Supervision provides Mutual Federal with the
information presented in the following table. It presents the change in Mutual
Federal's net portfolio value at June 30, 1999, that would occur upon an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, but without effect to any steps that management might take to
counteract that change.
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Change in
Interest Rates in Net Portfolio Value
Basis Points ("bp") Net Portfolio Value As % of PV of Assets
(Rate Shock ---------------------------------- ---------------------
in Rates)(1) $ Amount $ Change % Change NPV Ratio Change
- ------------------ ----------- ---------- ----------- --------- --------
+300 bp 21,591 (24,027) (53) 4.75 (460)bp
+200 bp 30,255 (15,363) (34) 6.49 (286)bp
+100 bp 38,555 (7,063) (15) 8.07 (128)bp
0 bp 45,618 --- --- 9.35 ---
-100 bp 50,475 4,858 11 10.18 83 bp
-200 bp 53,776 8,158 18 10.69 135 bp
-300 bp 56,963 11,345 25 11.18 183 bp
- -----------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1998 TO JUNE 30, 1999
GENERAL. Mutual Federal's total assets increased by $20.5 million or 4.4%
to $490.0 million at June 30, 1999 compared to $469.5 million at December 31,
1998. The increase was primarily due to a $22.4 million or 5.6% increase in
loans, which totaled $420.5 million at June 30, 1999 compared to $398.1 million
at December 31, 1998.
LOANS. Mutual Federal's net loan portfolio increased from $398.1 million
at December 31, 1998 to $420.5 million at June 30, 1999. The increase in the
loan portfolio over this time period was due to increased loan demand caused
both by low interest rates and significant
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<PAGE>
increases in home-building activities in some of our markets. The laon
portfolio increased in most categories, with the largest increase occurring in
the one- to four-family category, from $264.5 million at December 31, 1998 to
$277.9 million at June 30, 1999.
SECURITIES. Investment securities amounted to $25.2 million at December
31, 1998, and $23.0 million at June 30, 1999. The decrease of $2.2 million or
8.9% was primarily due to the sale of certain securities available for sale to
fund loan growth.
LIABILITIES. Mutual Federal's total liabilities increased $18.7 million or
4.4% to $444.4 million at June 30, 1999 compared to $425.7 million at December
31, 1998. This increase was due primarily to an increase in deposits of $18.6
million, principally through more aggressive bidding on public funds.
EQUITY. Total equity amounted to $45.6 million at June 30, 1999 and $43.9
million at December 31, 1998, or 9.3% of total assets at both dates. The
increase in equity over the period was due to continued profitable operations.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1997 TO DECEMBER 31, 1998
GENERAL. Mutual Federal's total assets increased by $10.8 million or 2.4%
to $469.5 million at December 31, 1998 compared to $458.7 million at December
31, 1997, despite the sale of $35.1 million of loans during 1998, and the use of
a portion of the proceeds from this sale to pay down Federal Home Loan Bank
advances.
LOANS. Mutual Federal's net loan portfolio decreased from $399.3 million
at December 31, 1997 to $398.1 million at December 31, 1998. The decrease in the
loan portfolio over this time period was due to the sale of $35.1 million of
one- to four-family fixed-rate long term loans during the year for
asset/liability management purposes. Loan origination volume for 1998 exceeded
1997 by $47.3 million.
SECURITIES. Investment securities amounted to $22.5 million at December
31, 1997, and $25.2 million at December 31, 1998. The increase of $2.7 million
or 11.9% was primarily a result of the reinvestment of some of the proceeds from
the loan sales discussed above.
LIABILITIES. Mutual Federal's total liabilities increased $6.7 million or
1.6% to $425.7 million at December 31, 1998 compared to $419.0 million at
December 31, 1997. This increase was due primarily to an increase in deposits of
$21.1 million, partially due to aggressively marketing our money market
accounts. In November 1997, Mutual Federal acquired $14.1 million in deposits
and an insignificant amount of loans and other assets as part of an acquisition
of a branch facility of another bank in Albany, Indiana. This increase was
partially offset by a $13.8 million decrease in borrowed funds, which were paid
off through the proceeds from the loan sales.
EQUITY. Total equity amounted to $43.8 million at December 31, 1998 and
$39.7 million at December 31, 1997, or 9.3%, and 8.7% of total assets at such
dates. The increase in equity over the period was due to continued profitable
operations.
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AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-bearing deposits ..................... $ 4,882 $ 110 4.51% $ 5,231 $ 121 4.63%
Trading account securities .................... 872 24 5.50 570 17 5.96
Mortgage-backed securities:
Available-for-sale ......................... 4,652 158 6.79 3,958 148 7.48
Investment securities
Available-for-sale ......................... 8,244 214 5.19 6,617 197 5.95
Held-to-maturity ........................... 11,310 330 5.84 9,140 274 6.00
Loans receivable .............................. 408,095 15,767 7.73 405,683 16,651 8.21
Stock in FHLB of Indianapolis ................. 3,612 143 7.92 3,612 132 7.31
------- ------- ------- -------
Total interest-earning assets(1) .............. 441,667 16,746 7.58 434,811 17,540 8.07
------- -------
Non-interest earning assets, net of allowance for
loan losses and unrealized gain/loss ........... 36,509 30,109
------- -------
Total assets .................................. $478,176 $464,920
======= =======
Interest-Bearing Liabilities:
Demand and NOW accounts ........................ $ 53,743 324 1.21 $ 48,950 379 1.55
Savings deposits ............................... 43,182 388 1.80 40,962 527 2.57
Money market accounts .......................... 26,819 468 3.49 13,055 206 3.16
Certificate accounts............................ 252,263 6,736 5.34 251,484 7,066 5.62
------- ------- ------- -------
Total deposits ................................. 376,007 7,916 4.21 354,451 8,178 4.61
Borrowings ..................................... 47,667 1,335 5.61 60,919 1,795 5.89
------- ------- ------- -------
Total interest-bearing liabilities ............ 423,674 9,251 4.37 415,370 9,973 4.80
------- -------
Other liabilities .............................. 9,494 8,565
------- -------
Total liabilities ............................. 433,168 423,935
Equity capital ................................. 45,008 40,985
------- -------
Total liabilities and equity capital ......... $478,176 $464,920
======== ========
Net earning assets .............................. $ 17,993 $ 19,441
======== ========
Net interest income ............................. $ 7,495 $ 7,567
======= =======
Net interest rate spread ........................ 3.21% 3.27%
==== ====
Net yield on average interest-earning assets .... 3.39% 3.48%
==== ====
Average interest-earning assets to
average interest-bearing liabilities ........... 104.25% 104.68%
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- -----------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-bearing deposits ............ $ 7,330 $ 358 4.88% $ 3,908 $ 217 5.55% $ 3,714 $ 194 5.22%
Trading account securities ........... 337 20 5.93 603 39 6.47 1,008 67 6.65
Mortgage-backed securities:
Available-for-sale ................ 4,575 329 7.19 4,498 334 7.43 5,060 372 7.35
Investment securities
Available-for-sale ................ 7,001 416 5.94 8,164 486 5.95 5,345 305 5.71
Held-to-maturity .................. 9,642 584 6.06 8,995 478 5.31 10,996 570 5.18
Loans receivable ..................... 399,982 32,488 8.12 389,731 32,242 8.27 368,688 30,676 8.32
Stock in FHLB of Indianapolis ........ 3,612 279 7.72 3,470 289 8.33 3,108 243 7.82
------- ------- ------- ------- ------- --------
Total interest-earning assets(1) ..... 432,479 34,474 7.97 419,369 34,085 8.13 397,919 32,427 8.15
------- ------- --------
Non-interest earning assets, net of
allowance for loan losses and
unrealized gain/loss .................. 32,362 23,849 22,594
------- ------- -------
Total assets ......................... $464,841 $443,218 $420,513
======= ======= =======
Interest-Bearing Liabilities:
Demand and NOW accounts ............... $ 49,646 745 1.50 $ 44,803 719 1.60 $ 42,423 696 1.64
Savings deposits ...................... 41,332 1,038 2.51 40,224 1,114 2.77 40,761 1,135 2.78
Money market accounts ................. 16,442 560 3.41 12,888 391 3.03 13,945 426 3.05
Certificate accounts .................. 250,953 14,100 5.62 239,311 13,179 5.51 220,469 12,125 5.50
------- ------- ------- ------ ------- --------
Total deposits ........................ 358,373 16,443 4.59 337,226 15,403 4.57 317,598 14,382 4.53
Borrowings ............................ 55,234 3,247 5.88 61,491 3,679 5.98 59,646 3,469 5.82
------- ------- ------- ------- -------- --------
Total interest-bearing liabilities ... 413,607 19,690 4.76 398,717 19,082 4.79 377,244 17,851 4.73
------- ------- --------
Other liabilities ..................... 9,115 8,086 8,625
------- ------- --------
Total liabilities .................... 422,722 406,803 385,869
Equity capital ........................ 42,119 36,415 34,644
------- ------- --------
Total liabilities and equity capital $464,841 $443,218 $420,513
======== ======== ========
Net earning assets ..................... $ 18,872 $ 20,652 $ 20,675
======== ======== ========
Net interest income .................... $14,784 $15,003 $ 14,576
======= ======= ========
Net interest rate spread ............... 3.21% 3.34% 3.42%
==== ==== ====
Net yield on average interest-
earning assets ....................... 3.42% 3.58% 3.66%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities .. 104.56% 105.18% 105.48%
======== ======== ========
</TABLE>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
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<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
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.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------------- -------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
---------------------------- -------------------------- ----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
--------------- Increase -------------- Increase --------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits ............... $ (8) $ (3) $ (11) $ 170 $ (29) $ 141 $ 10 $ 13 $ 23
Trading accounting securities ........... 8 (1) 7 (16) (3) (19) (26) (2) (28)
Mortgage-backed securities .............. 24 (14) 10 6 (11) (5) (42) 4 (38)
Investment securities:
Available-for-sale .................... 44 (27) 17 (69) (1) (70) 167 14 181
Held-to-maturity ...................... 63 (7) 56 36 70 106 (106) 14 (92)
Loans receivable ........................ 98 (982) (884) 839 (593) 246 1,742 (176) 1,566
Stock in FHLB of Indianapolis ........... -- 11 11 12 (22) (10) 29 17 46
----- ------- ----- ----- ----- ----- ------- ----- -------
Total interest-earning assets ......... $ 229 $(1,023) (794) $ 978 $(589) 389 $ 1,774 $(116) 1,658
===== ======= ----- ===== ===== ----- ======= ===== -------
Interest-bearing liabilities:
Demand and NOW accounts ................. $ 35 $ (90) (55) $ 75 $ (49) 26 $ 38 $ (15) 23
Savings deposits ........................ 27 (166) (139) 30 (106) (76) (15) (6) (21)
Money market accounts ................... 238 24 262 117 52 169 (32) (3) (35)
Certificate accounts .................... 22 (352) (330) 650 271 921 1,038 16 1,054
Borrowings .............................. (375) (85) (460) (369) (63) (432) 109 101 210
----- ------- ----- ----- ----- ----- ------- ----- -------
Total interest-bearing liabilities .... $ (53) $ (669) (722) $ 503 $ 105 608 $ 1,138 $ 93 1,231
===== ======= ----- ===== ===== ----- ======= ===== -------
Net interest income....................... $ (72) $(219) $ 427
===== ===== =======
</TABLE>
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<PAGE>
The following table presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on savings deposits and borrowings and the resultant interest rate spreads
at June 30, 1999.
At
June 30,
1999
----------
Weighted average yield on:
Interest earning deposits .............. 4.50%
Trading account securities ............. 5.50%
Mortgage-backed securities ............. 6.12%
Investment securities:
Available-for-sale .................... 5.86%
Held-to-maturity ...................... 6.24%
Loans receivable ....................... 7.81%
FHLB stock ............................. 8.00%
Combined weighted average yield on
interest-earning assets ........... 7.71%
Weighted average rate paid on:
Demand and NOW accounts ................ 0.96%
Savings deposits ....................... 1.95%
Money market accounts .................. 3.57%
Certificate accounts ................... 5.21%
Borrowings ............................. 5.36%
Combined weighted average rate paid on
interest-bearing liabilities ...... 4.29%
Spread .................................. 3.42%
COMPARISON OF RESULTS FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL. Mutual Federal reported net income of $1.9 million for the six
month period ended June 30, 1999 compared to net income of $2.2 million for the
six month period ended June 30, 1998. The decrease was primarily due to a 16.0%
decrease in other income, due to a gain on loan sales in the 1998 period with no
corresponding gain in the 1999 period, and a 4.2% increase in other expenses,
due to an increase in compensation expense.
NET INTEREST INCOME. Net interest income decreased $72,000 or 1.0% to $7.5
million for the 1999 period compared to the 1998 period, reflecting a $794,000
or 4.5% decrease in interest income which was offset by a $722,000 or 7.2%
decrease in interest expense. Mutual Federal's interest rate spread decreased to
3.21% for the 1999 period compared to 3.27% for the 1998 period. In addition,
the ratio of average interest-earning assets to average interest-bearing
liabilities decreased to 104.3% for the 1999 period compared to 104.7% for the
1998 period.
INTEREST INCOME. The decrease in interest income for the 1999 period was
primarily due to a decrease in earning assets yield partially offset by an
increase in the average balance of Mutual Federal's interest-earning assets. The
average yield earned on Mutual Federal's loan
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<PAGE>
portfolio decreased from 8.21% in the 1998 period to 7.73% in the 1999 period,
primarily due to the effect of refinancing activity and loan sales in the last
half of 1998. In addition, the average yield earned on Mutual Federal's
mortgage-backed and investment securities and trading securities portfolios
decreased from 6.28% for the 1998 period to 5.79% for the 1999 period, primarily
due to a reduction in market rates of interest. The average balance of Mutual
Federal's mortgage-backed securities, investment securities and trading
securities portfolios increased $4.8 million or 23.6% to $25.1 million for the
1999 period compared to the 1998 period primarily as a result of the purchase
of additional securities.
INTEREST EXPENSE. The decrease in interest expense during the 1999 period
was primarily due to the decrease in the average rate paid on liabilities and
the average balance of borrowings, partially offset by an increase in the
average balance of deposits. The reduction in rates was primarily due to a
general reduction in market rates of interest. The reduction in the average
balance of borrowings was primarily due to the pay down of borrowings. The
increase in deposits was primarily due to aggressive marketing of our money
market accounts.
PROVISION FOR LOAN LOSSES. For the six month period ended June 30, 1999,
the provision for loan losses amounted to $380,000 compared to a provision for
loan losses in the 1998 period of $382,000. At June 30, 1999, Mutual Federal's
allowance for loan losses was $3.7 million or .86% of the total loan portfolio
and approximately 300.82% of total nonperforming loans. This compares with an
allowance for loan loses of $3.2 million or .80% of the total loan portfolio and
approximately 563.94% of the total non-performing loans as of June 30, 1998. See
"Business of Mutual Federal - Asset Quality - Allowance for Loan Losses."
OTHER INCOME. Other income amounted to $1.3 million and $1.5 million for
the six months ended June 30, 1999 and 1998, respectively. The decrease was
primarily the result of a $217,000 gain on the sale of loans in the 1998 period
with no corresponding gain in the 1999 period.
OTHER EXPENSES. Other expenses increased $225,000 or 4.2% to $5.5 million
for the six months ended June 30, 1999, compared to the 1998 period. This
increase was primarily due to a $227,000 or 7.7% increase in personnel expenses
due to merit increases and additions to staff in the consumer and commercial
loan areas and the new branch.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
GENERAL. Mutual Federal reported net income of $4.1 million for the years
ended December 31, 1998 and 1997.
NET INTEREST INCOME. Net interest income decreased $219,000 or 1.5% to
$14.8 million for 1998 compared to 1997, reflecting a $608,000 or 3.2% increase
in interest expense, partially offset by a $389,000 or 1.1% increase in interest
income. Mutual Federal's interest rate spread decreased to 3.21% for 1998
compared to 3.34% for 1997. In addition, the ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 104.6% for 1998
compared to 105.2% for 1997.
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<PAGE>
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1998 was primarily due to an increase in the average balance of
interest-earning assets offset by a lower yield. The average balance of the loan
portfolio increased $10.3 million or 2.6% to $400.0 million for 1998 compared to
1997 due to increased loan demand. The average yield earned on Mutual Federal's
loan portfolio decreased from 8.27% in 1997 to 8.12% in 1998, primarily due to
refinancing activity resulting from a general decrease in market rates of
interest.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 1998 was primarily due to the increase of $21.1 million or 6.3% in
the average balance of deposits, primarily due to the acquisition of $14.0
million in deposits at the end of 1997. This was partially offset by a decrease
in the average balance of borrowings. The average rate paid on deposits
increased slightly from 4.57% in 1997 to 4.59% in 1998, due to an increase in
the average rate paid on certificate accounts. The average rate paid on
borrowings decreased from 5.98% in 1997 to 5.88% in 1998.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1998, the
provision for loan losses amounted to $1.3 million compared to a provision for
loan losses in 1997 of $700,000. The increase was primarily due to a $500,000
provision for loans in litigation. See "Business of Mutual Federal - Asset
Quality -- Allowance for Loan Losses."
OTHER INCOME. Other income amounted to $3.4 million and $2.1 million for
the years ended December 31, 1998 and 1997, respectively. The increase consisted
primarily of a $806,000 gain from the sale of mortgage loans in 1998 compared to
a $184,000 gain in 1997, as well as a growth in transaction accounts.
OTHER EXPENSES. Other expenses increased $668,000 or 6.6% to $10.8 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase was primarily due to a $567,000 or 10.2% increase in
personnel expenses and a $27,000 or 4.5% increase in occupancy costs resulting
from the purchase of a full service branch office late in 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
GENERAL. Mutual Federal reported net income of $4.1 million for the year
ended December 31, 1997 compared to net income of $2.7 million for the year
ended December 31, 1996. The increase in 1997 was primarily due to a reduction
in Savings Association Insurance Fund premium expenses of $2.5 million.
NET INTEREST INCOME. Net interest income increased $427,000 or 2.9% to
$15.0 million for 1997 compared to 1996, reflecting a $1.7 million or 5.1%
increase in interest income which was partially offset by a $1.2 million or 6.9%
increase in interest expense. Mutual Federal's interest rate spread decreased to
3.34% for 1997 compared to 3.42% for 1996. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
105.2% for 1997 compared to 105.5% for 1996.
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<PAGE>
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1997 was primarily due to an increase in the average balance of
interest-earning assets. The average balance of the loan portfolio increased
$21.0 million or 5.7% to $389.73 million for 1997 compared to 1996 due to loan
originations exceeding repayments. The average yield earned on our loan
portfolio decreased from 8.32% in 1996 to 8.27% in 1997, due to a decrease in
general market rates of interest.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 1997 was primarily due to the increase of $19.6 million or 6.2% in
the average balance of deposits, partially as a result of the branch purchase in
1997 and partially due to customer demand for certificate products.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1997, the
provision for loan losses amounted to $700,000 compared to a provision for loan
losses in 1996 of $570,000, primarily as a result of an increase in the consumer
and commercial loan portfolios. See "Business of Mutual Federal - Lending
Activities -- Consumer and Other Lending," "-- Commercial Business Lending" and
"- Asset Quality -- Allowance for Loan Losses."
OTHER INCOME. Other income amounted to $2.1 million and $1.9 million for
the years ended December 31, 1997 and 1996, respectively. The increase consisted
primarily of a $184,000 gain from sale of mortgage loans in 1997 compared to a
$12,000 gain in 1996 and an increase in service fee income of $183,000,
partially offset by an increase in equity in losses of limited partnerships of
$305,000.
OTHER EXPENSES. Other expenses decreased $1.9 million or 15.5% to $10.1
million for the year ended December 31, 1997 compared to $12.0 million for the
year ended December 31, 1996. This decrease was primarily due to the special
Savings Association Insurance Fund insurance assessment of $2.0 million in 1996.
LIQUIDITY AND COMMITMENTS
We are required to maintain minimum levels of investments that qualify as
liquid assets under Office of Thrift Supervision regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically, we have
maintained liquid assets at levels above the minimum requirements imposed by
Office of Thrift Supervision regulations and above levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained. At June 30, 1999, our regulatory
liquidity ratio, which is our liquid assets as a percentage of net withdrawable
savings deposits with a maturity of one year or less and current borrowings, was
7.31%.
Mutual Federal's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. Mutual Federal's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds
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provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, Mutual Federal invests excess
funds in short-term interest-earning assets, which provide liquidity to meet
lending requirements. Mutual Federal also generates cash through borrowings.
Mutual Federal utilizes Federal Home Loan Bank advances to leverage its capital
base and provide funds for its lending and investment activities, and to enhance
its interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer term basis,
Mutual Federal maintains a strategy of investing in various lending products as
described in greater detail under "Business of Mutual Federal -Lending
Activities." Mutual Federal uses its sources of funds primarily to meet its
ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, to fund loan commitments and to maintain its portfolio of
mortgage-backed securities and investment securities. At June 30, 1999, the
total approved loan origination commitments outstanding amounted to $40.7
million. At the same date, the unadvanced portion of construction loans was $4.1
million. Unused home equity lines of credit were $16.9 million as of June 30,
1999 and outstanding letters of credit totaled $2.5 million. Certificates of
deposit scheduled to mature in one year or less at June 30, 1999, totaled $192.8
million. Investment and mortgage-backed securities scheduled to mature in one
year or less at June 30, 1999 totaled $1.6 million. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with Mutual Federal. Mutual Federal anticipates that it will
continue to have sufficient funds, through deposits and borrowings, to meet its
current commitments.
CAPITAL
Consistent with its goals to operate a sound and profitable financial
organization, Mutual Federal actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $45.6
million at June 30, 1999, or 9.3% of total assets on that date. As of June 30,
1999, Mutual Federal exceeded all capital requirements of the Office of Thrift
Supervision. Mutual Federal's regulatory capital ratios at June 30, 1999 were as
follows: core capital 9.0%; Tier I risk-based capital, 14.1%; and total
risk-based capital, 15.2%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0% and 10.0%, respectively.
IMPACT OF INFLATION
The consolidated financial statements presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same
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magnitude as the price of goods and services, since such prices are affected by
inflation. In a period of rapidly rising interest rates, the liquidity and
maturities structures of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if
any, to which properties securing our loans have appreciated in dollar value
due to inflation.
YEAR 2000 ISSUES
GENERAL. The Year 2000 ("Y2K") issue confronting Mutual Federal, its
suppliers and customers centers on the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems originally
were programmed with six digit dates that provided only two digits to identify
the calendar year in the date field. With the impending new millennium, these
programs and computers may recognize "00" as the year 1900 rather than the year
2000.
Financial institution regulators have increased their focus upon Y2K
compliance issues and have issued guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institution Examination
Council has issued several interagency statements on Y2K project management
awareness. These statements require financial institutions to, among other
things, examine the Y2K implications of their reliance on vendors with respect
to data exchange and the potential impact of the Y2K issue on their customers,
suppliers and borrowers. These statements also require each federally regulated
financial institution to survey its exposure, measure its risk and prepare a
plan to address the Y2K issue. In addition, the federal banking regulators have
issued safety and soundness guidelines to be followed by insured depository
institutions to assure resolution of any Y2K problems. The federal banking
agencies have assured that Y2K testing and certification is a key safety and
soundness issue in conjunction with regulatory exams. Therefore, an
institution's failure to address appropriately the Y2K issue could result in
supervisory action, including the reduction of the institution's supervisory
ratings, the denial of applications for approval of mergers or acquisitions or
the imposition of civil money penalties.
RISK. Like most financial service providers, Mutual Federal and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software, hardware and other
equipment, both within and outside Mutual Federal's direct control and third
parties with whom Mutual Federal electronically or operationally interfaces are
likely to be affected. If computer systems are not modified in order to be able
to identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated.
Consequently, Mutual Federal could experience an inability to process
transactions, prepare statements or engage in similar normal business
activities. Likewise, under certain
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circumstances a failure to adequately address the Y2K issue could adversely
affect the viability of Mutual Federal's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on Mutual Federal's
operations and, in turn, its financial condition and results of operations.
STATE OF READINESS. During April 1997, Mutual Federal formulated its plan
to address the Y2K issue. Since that time, Mutual Federal has taken the
following steps:
o established senior management advisory and review responsibilities;
o completed a company-wide inventory of application and system software;
o completed a review of mechanical systems, i.e.: HVAC, elevators, and
security systems for potential impact to operational readiness;
o built an internal tracking database for application and vendor
software;
o developed compliance plans and schedules for all mission critical
systems;
o installed upgrades or replacements of all non-compliant system
components;
o initiated vendor and customer compliance verification;
o began awareness and education activities for employees through
existing internal communication channels; and
o developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of Mutual Federal's Y2K
plan:
AWARENESS PHASE. Mutual Federal's senior management formally
established a Y2K plan, and a project team was assembled for management of
the Y2K project. The project team created a plan of action that includes
milestones, budget estimates, strategies, and methodologies to track and
report the status of the project. Leaders of the project team also
attended conferences and information sharing sessions to gain more insight
into the Y2K issue and potential strategies for addressing it. This stage
is substantially complete.
ASSESSMENT PHASE. Mutual Federal's strategies were further developed
with respect to how the objectives of the Y2K plan would be achieved, and
a Y2K business risk assessment was made to quantify the extent of Mutual
Federal's Y2K exposure. An inventory, which is periodically updated as new
technology is acquired and as systems progress through subsequent phases,
was developed to identify and monitor Y2K readiness for information
systems, including hardware, software, utilities and vendors, as well as
environmental systems, including security systems and facilities. Systems
were
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prioritized based on business impact and available alternatives. As
part of this process, mission critical systems were reviewed to determine
Y2K readiness. All of Mutual Federal's mission critical systems involve in
part an interface with outside vendors. This assessment phase included an
evaluation of the components of each system including hardware and
software. Determinations were made that identified viable upgrades to
systems as well as these components needing outright replacement. A plan
was then developed to install the necessary changes and to prioritize the
project for completion. This phase is substantially complete.
Mechanical systems such as those that provide heating,
air-conditioning and environmentally related services were also evaluated.
The HVAC management software was replaced and the keyless entry system was
upgraded. Other mechanical systems, including elevator and fire protection
were found to be compliant.
Mutual Federal's larger borrowers were also evaluated for Y2K
exposure. Communication was initiated with commercial customers to
determine their level of readiness. As part of the current credit approval
process, all new and renewed loans are evaluated for Y2K risk. Mutual
Federal's loan policy clearly states that all loans, especially commercial
loans, require an analysis of the impact of Y2K issues on the
creditworthiness of the borrower prior to approval. Commercial loans
represent 5.31% of total loans. No commercial borrower was identified as
problematic during the assessment process due to the size, nature, and
collateral of commercial loans at Mutual Federal. Mutual Federal continues
to monitor the progress being made by its larger borrowers in addressing
their own Y2K issue, to date Mutual Federal is generally satisfied with
these customers' responses to our inquiries.
RENOVATION PHASE. Mutual Federal's project team identified the
hardware and software upgrades or replacements needed and embarked upon an
aggressive plan to meet the compliance requirements. Y2K-ready versions
have been delivered, installed and were scheduled to be tested as part of
the validation phase. Mutual Federal has completed the installation of
these upgrades and replacements to all mission critical systems. This
phase is substantially complete.
VALIDATION PHASE. The validation phase is designed to test the
ability of hardware and software to accurately process date sensitive
data. Mutual Federal has essentially completed the validation testing of
each mission critical system. Mutual Federal conducted multiple scheduled
tests of the core processing system with our primary service provider.
Additionally, tests were scheduled to validate the changes made to the
imaging system, electronic delivery systems and the communication system
with the Federal Reserve to which we subscribe. Testing was completed in
June 1999 with all systems successful in processing activity on selected
dates in the new millennium. No significant problems have been identified
relating to any of the changes to these mission critical systems.
IMPLEMENTATION PHASE. With the completion of successful testing,
Mutual Federal continues to promote customer awareness of these issues and
is striving to help
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borrowers, customers and the general public to be knowledgeable regarding
their business affairs. We continue to monitor our vendors and any
significant changes in the expectations at year end.
BANK RESOURCES INVESTED. Mutual Federal's Y2K project team has been
assigned the task of ensuring that all of Mutual Federal's mission
critical systems are identified, analyzed for Y2K compliance, corrected if
necessary, tested, and have changes put into service. The Y2K project team
members represent the functional areas of Mutual Federal, including data
processing, deposit and loan administration, item processing and internal
operations, which have been reviewed. Internal audit personnel have
provided an independent review of our plan. The team is headed by a Senior
Vice President who reports directly to the President. Mutual Federal's
board of directors oversees the Y2K plan and provides guidance and
resources to and receives regular updates from the Y2K project team
leader.
The total cost of the Y2K conversion project for Mutual Federal was
budgeted to be $1.0 million. Expenditures in 1998 totaled approximately
$800,000, and $25,000 has been budgeted for 1999. Y2K expenses are not
expected to exceed the budget, and Mutual Federal does not expect
significant increases in future data processing costs relating to Y2K
compliance.
CONTINGENCY PLANS. Mutual Federal has developed back-up or
contingency plans for each of its mission critical systems. Most of Mutual
Federal's mission critical systems are dependent upon third party vendors
or service providers, therefore, contingency plans include alternate
methods of providing services associated with each system. As successful
validation of each of these systems has been achieved, contingency
planning is now focused on a cash readiness plan. For some scenarios,
contingency plans consist of using or reverting to manual systems until
system problems can be corrected. Various contingency plans require
training and education of bank personnel. The remaining preparation time
is being spent by developing these training plans to ensure that services
can be provided in the event of unplanned failures.
Contingency planning is an integral part of Mutual Federal's Y2K
readiness plan. Key operating personnel are actively analyzing services
that will be supported during extended outages and preparing written plans
and procedures to train bank personnel. The contingency plans are tested
when practical to validate the effectiveness of contingent procedures.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share ". The Statement establishes standards for
computing and presenting earnings per share. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. The
Statement is effective for Mutual Federal's financial statements
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as of December 31, 1999. Mutual Federal will compute earnings per share under
the new standard upon completion of the conversion.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure ." The Statement establishes standards for disclosing
information about an entity's capital structure. The Statement is effective for
Mutual Federal's financial statements as of December 31, 1999. Mutual Federal is
prepared to comply with the additional reporting requirements of this Statement,
and does not anticipate that the implementation of this Statement will have a
material impact on Mutual Federal's consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about segments of an
Enterprise and Related Information." The Statement establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Statement is effective for Mutual Federal's financial statements for the
fiscal year ending December 31, 1999. Mutual Federal is prepared to comply with
the additional reporting requirements of this Statement and does not anticipate
that the implementation of this Statement will have a material impact on Mutual
Federal's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post-Retirement Benefits." The Statement revises
employers' disclosures about pensions and other post-retirement benefit plans.
The Statement does not change the measurement or recognition of those plans. The
Statement is effective for Mutual Federal's financial statements for the year
ending December 31, 1999. Mutual Federal is prepared to comply with the
additional reporting requirements of this Statement and does not anticipate that
the implementation of this Statement will have a material impact on Mutual
Federal's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. The Statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Statement is
effective for Mutual Federal's financial statements for all fiscal quarters for
the fiscal year ending December 31, 2001. The adoption of this Statement is not
expected to have a material impact on Mutual Federal's consolidated financial
statements.
In October 1998, 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." The Statement changes the way mortgage banking
firms account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. The Statement became
effective for Mutual Federal's financial statements as of January 1,
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1999. The implementation of this Statement did not have a material impact on
Mutual Federal's financial statements.
BUSINESS OF MFS FINANCIAL, INC.
Mutual Federal is converting to the stock form of organization and will
become a wholly owned subsidiary of MFS Financial. MFS Financial initially will
not be an operating company and, after the conversion, is not expected to engage
in any significant business activity other than to hold the common stock of
Mutual Federal and the employee stock ownership plan loan, and to invest the
funds retained by it.
MFS Financial is not expected to own or lease real or personal property
initially, but will instead use the facilities of Mutual Federal. At the present
time, MFS Financial does not intend to employ any persons other than certain
officers of Mutual Federal, but will utilize the support staff of Mutual Federal
from time to time.
BUSINESS OF MUTUAL FEDERAL
GENERAL
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and a variety
of consumer loans. We also originate loans secured by commercial and
multi-family real estate, commercial business loans and construction loans
secured primarily by residential real estate.
Our revenues are derived principally from interest on loans and interest
on investment and mortgage-backed securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and non-interest bearing checking
accounts and certificates of deposit with varied terms ranging from seven days
to 71 months. We solicit deposits in our market areas and we have not accepted
brokered deposits.
MARKET AREAS
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We are headquartered in Muncie, Indiana and have thirteen retail offices
primarily serving Delaware, Randolph and Kosciusko counties in Indiana. We also
originate mortgage loans in contiguous counties and we originate indirect
consumer loans throughout Indiana and western Ohio. See "- Lending Activities --
Consumer and Other Lending."
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LENDING ACTIVITIES
GENERAL. Our mortgage loans carry either a fixed or an adjustable rate of
interest. Mortgage loans are generally long-term and amortize on a monthly basis
with principal and interest due each month. At June 30, 1999, our net loan
portfolio totaled $420.5 million, which constituted 85.8% of our total assets.
Mortgage loans up to $240,000 may be approved by individual officers. Any
mortgage loan over the individual approval limits, up to $300,000, must be
approved by the local market area committee (i.e., Muncie, Winchester or Warsaw
markets comprising Delaware, Randolph and Kosciusko counties). Individual loan
officers may approve multi-family and commercial real estate loans up to
$250,000, with authority up to $500,000 with the approval of two senior
officers. Loans over $300,000 for mortgage loans or $500,000 for multi-family
and commercial real estate, or outside our general underwriting guidelines, must
be approved by the board of directors.
At June 30, 1999, the maximum amount which we could have loaned to any one
borrower and the borrower's related entities was approximately $6.8 million. Our
largest lending relationship to a single borrower or a group of related
borrowers consisted of ten loans to a local developer/entrepreneur and related
entities totaling $3.8 million at June 30, 1999. Although the relationship dates
back to 1980, 87.4% of the outstanding debt has been originated since June 30,
1998, and consists of refinancing existing debt. The loans are diverse and are
secured by apartment complexes, medical facilities and a bank branch, each with
independent income streams to support debt service requirements. Each of the
loans to this group of borrowers was current and performing in accordance with
its terms at June 30, 1999.
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The following table presents information concerning the composition of
Mutual Federal's loan portfolio in dollar amounts and in percentages as of the
dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------------------------------------
1999 1998 1997 1996
------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family ......... $277,852 64.94% $264,461 65.42% $266,971 65.77% $244,518 63.17%
Multi-family ................ 5,702 1.33 6,282 1.56 7,694 1.90 9,598 2.48
Commercial .................. 13,136 3.07 10,293 2.54 8,131 2.00 7,878 2.03
Construction and development 8,874 2.08 11,805 2.92 10,385 2.56 22,040 5.69
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans . 305,564 71.42 292,841 72.44 293,181 72.23 284,034 73.37
-------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
- ------------
Consumer Loans:
Automobile ................. 17,644 4.12 17,820 4.41 19,977 4.92 20,164 5.21
Home equity ................ 10,047 2.36 10,253 2.54 11,366 2.80 10,885 2.81
Home improvement ........... 12,134 2.84 12,108 2.99 14,485 3.57 12,066 3.12
Manufactured housing........ 13,708 3.20 15,466 3.83 20,017 4.93 24,933 6.44
R.V ........................ 22,418 5.24 19,100 4.72 14,564 3.59 11,503 2.97
Boat ....................... 32,275 7.54 23,608 5.84 21,553 5.31 17,244 4.45
Other ...................... 4,446 1.04 5,753 1.42 5,585 1.38 5,676 1.47
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans .... 112,672 26.34 104,108 25.75 107,547 26.50 102,471 26.47
Commercial business loans ... 9,600 2.24 7,285 1.81 5,211 1.27 596 0.16
-------- ------ -------- ------ -------- ------ -------- ------
Total other loans ....... 122,272 28.58 111,393 27.56 112,758 27.77 103,067 26.63
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable, gross 427,836 100.00% 404,234 100.00% 405,939 100.00% 387,101 100.00%
======= ====== ====== ======
Less:
- -----
Undisbursed portion of loans. 4,647 3,353 3,998 6,073
Deferred loan fees and costs. (1,014) (689) (440) (252)
Allowance for losses......... 3,664 3,424 3,091 2,990
------ --------- -------- --------
Total loans receivable, net.. $420,539 $398,146 $399,290 $378,290
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1994
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family ......... $224,526 63.02% $206,926 62.75%
Multi-family ................ 6,544 1.84 6,613 2.01
Commercial .................. 10,090 2.83 11,621 3.53
Construction and development 17,201 4.83 12,181 3.69
-------- ------ -------- ------
Total real estate loans . 258,361 72.52 237,341 71.98
-------- ------ -------- ------
Other Loans:
- ------------
Consumer Loans:
Automobile ................. 19,297 5.42 17,784 5.39
Home equity ................ 9,246 2.59 8,549 2.59
Home improvement ........... 10,994 3.08 10,012 3.04
Manufactured housing........ 29,768 8.36 35,061 10.63
R.V ........................ 10,528 2.96 8,036 2.44
Boat ....................... 11,721 3.29 6,101 1.85
Other ...................... 6,340 1.78 6,371 1.93
-------- ------ -------- ------
Total consumer loans .... 97,894 27.48 91,914 27.87
Commercial business loans ... -- -- 490 0.15
-------- ------ -------- ------
Total other loans ....... 97,894 27.48 92,404 28.02
-------- ------ -------- ------
Total loans receivable, gross 356,255 100.00% 329,745 100.00%
====== ======
Less:
- -----
Undisbursed portion of loans. 7,951 5,088
Deferred loan fees and costs. (188) 125
Allowance for losses......... 2,754 2,430
-------- --------
Total loans receivable, net.. $345,738 $322,102
======== ========
</TABLE>
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The following table shows the composition of Mutual Federal's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------------
1999 1998 1997 1996
----------------- ---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family .......... $179,172 41.88% $163,262 40.39% $141,024 34.74% $132,095 34.12%
Multi-family ................. 2,289 0.53 2,656 0.66 2,485 0.61 3,161 0.82
Commercial ................... 4,285 1.00 2,398 0.59 1,447 0.36 1,280 0.33
Construction and development . 4,348 1.02 8,076 2.00 4,108 1.01 11,271 2.91
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans ... 190,094 44.43 176,392 43.64 149,064 36.72 147,807 38.18
Consumer ...................... 102,625 23.99 93,855 23.22 96,181 23.70 91,586 23.66
Commercial business ........... 3,262 0.76 1,972 0.49 4,454 1.09 596 0.16
-------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans .... 295,981 69.18 272,219 67.35 249,699 61.51 239,989 62.00
-------- ------ -------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family .......... 98,680 23.06 101,199 25.03 125,947 31.03 112,423 29.05
Multi-family ................. 3,413 0.80 3,626 0.90 5,209 1.29 6,437 1.66
Commercial ................... 8,851 2.07 7,895 1.95 6,684 1.64 6,598 1.70
Construction and development . 4,526 1.06 3,729 0.92 6,277 1.55 10,769 2.78
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans ... 115,470 26.99 116,449 28.80 144,117 35.51 136,227 35.19
Consumer ...................... 10,047 2.35 10,253 2.53 11,366 2.80 10,885 2.81
Commercial business ........... 6,338 1.48 5,313 1.32 757 0.18 -- --
-------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate loans 131,855 30.82 132,015 32.65 156,240 38.49 147,112 38.00
-------- ------ -------- ------ -------- ------ -------- ------
Total loans ............... 427,836 100.00% 404,234 100.00% 405,939 100.00% 387,101 100.00%
====== ====== ====== ======
Less:
- -----
Undisbursed portion of loans . 4,647 3,353 3,998 6,073
Deferred loan fees and costs . (1,014) (689) (440) (252)
Allowance for loan losses .... 3,664 3,424 3,091 2,990
--------- --------- --------- ---------
Total loans receivable, net $ 420,539 $ 398,146 $ 399,290 $ 378,290
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family .......... $118,381 33.23% $102,114 30.97%
Multi-family ................. 734 0.21 793 0.24
Commercial ................... 2,030 0.57 2,307 0.70
Construction and development . 6,710 1.88 4,232 1.28
-------- ------ -------- ------
Total real estate loans ... 127,855 35.89 109,446 33.19
Consumer ...................... 88,648 24.88 83,365 25.28
Commercial business ........... -- -- 490 0.15
-------- ------ -------- ------
Total fixed-rate loans .... 216,503 60.77 193,301 58.62
-------- ------ -------- ------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family .......... 106,145 29.79 104,812 31.78
Multi-family ................. 5,810 1.63 5,820 1.77
Commercial ................... 8,060 2.26 9,314 2.83
Construction and development . 10,491 2.95 7,949 2.41
-------- ------ -------- ------
Total real estate loans ... 130,506 36.63 127,895 38.79
Consumer ...................... 9,246 2.60 8,549 2.59
Commercial business ........... -- -- -- --
-------- ------ -------- ------
Total adjustable-rate loans 139,752 39.23 136,444 41.38
-------- ------ -------- ------
Total loans ............... 356,255 100.00% 329,745 100.00%
====== ======
Less:
- -----
Undisbursed portion of loans . 7,951 5,088
Deferred loan fees and costs . (188) 125
Allowance for loan losses .... 2,754 2,430
---------- ---------
Total loans receivable, net $ 345,738 $ 322,102
========== =========
</TABLE>
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<PAGE>
The following schedule illustrates the contractual maturity of Mutual
Federal's loan portfolio at June 30, 1999. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------------------------------
Multi-family and Construction
One- to Four-Family Commercial and Development(1)
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
December 31,
- --------------------
<S> <C> <C> <C> <C> <C> <C>
1999(2) ............ $ 181 8.59% $ 106 8.75% $ --- 0.00%
2000 ............... 1,171 7.24 584 8.30 -- 0.00
2001 ............... 1,183 7.47 54 8.88 3 9.38
2002 and 2003 ...... 4,696 7.44 1,195 8.56 -- ---
2004 to 2005 ....... 5,463 7.67 935 7.62 80 8.13
2006 to 2020 ....... 137,949 7.16 15,898 8.37 3,331 7.19
2021 and following.. 127,209 7.31 66 7.25 5,460 7.02
</TABLE>
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
December 31,
- --------------------
<S> <C> <C> <C> <C> <C> <C>
1999(2) ............ $ 5,102 10.46% $2,102 6.86% $ 7,491 9.38%
2000 ............... 2,091 9.52 2,295 9.11 6,141 8.82
2001 ............... 4,880 9.18 150 8.91 6,270 8.85
2002 and 2003 ...... 18,176 8.95 2,689 8.48 26,756 8.62
2004 to 2005 ....... 14,929 9.40 1,452 8.60 22,859 8.86
2006 to 2020 ....... 67,346(3) 8.95 912 8.36 225,436 7.79
2021 and following.. 148 10.15 --- --- 132,883 7.30
</TABLE>
- -----------------
(1) Includes construction loans that automatically convert to permanent
financing.
(2) Includes demand loans, loans having no stated maturity and overdraft
loans.
(3) Includes home equity, mobile home and recreational vehicle loans that
generally have maturities in excess of 10 years.
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<PAGE>
The total amount of loans due after December 31, 2000 which have
predetermined interest rates is $ 289.4 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $124.8
million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. We focus our lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied, one- to four-family residences in our market areas. At June 30,
1999, one- to four-family residential mortgage loans totaled $277.9 million, or
64.9% of our gross loan portfolio.
We generally underwrite our one- to four-family loans based on the
applicant's employment and credit history and the appraised value of the subject
property. Presently, we lend up to 100% of the lesser of the appraised value or
purchase price for one- to four-family residential loans. For loans with a
loan-to-value ratio in excess of 80%, we generally require private mortgage
insurance in order to reduce our exposure below 80%. Properties securing our
one- to four-family loans are appraised by independent fee appraisers approved
by the board of directors. We require our borrowers to obtain title and hazard
insurance, and flood insurance, if necessary, in an amount not less than the
value of the property improvements.
We currently originate one- to four-family mortgage loans on either a
fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with Freddie Mac and other local financial institutions, and consistent with our
internal needs. Adjustable-rate mortgage, or ARM loans, are offered with either
a six-month, one-year, three-year, five-year or seven-year term to the initial
repricing date. After the initial period, the interest rate for each ARM loan
adjusts consistently with the initial term for the six-month, one-year and
three-year terms, respectively, and annually for the five-year and seven-year
terms, for the remainder of the term of the loan. We use the weekly average of
the appropriate term Treasury Bill Constant Maturity to reprice our ARM loans.
During the six months ended June 30, 1999, we originated $8.6 million of one- to
four-family ARM loans and $31.8 million of one- to four-family fixed rate
mortgage loans. During the year ended December 31, 1998, we originated $19.8
million of one- to four-family ARM loans, and $96.7 million of one- to
four-family fixed-rate mortgage loans.
Fixed-rate loans secured by one- to four-family residences have
contractual maturities of up to 30 years, and are generally fully amortizing,
with payments due monthly. These loans normally remain outstanding, however, for
a substantially shorter period of time because of refinancing and other
prepayments. A significant change in the current level of interest rates could
alter the average life of a residential loan in our portfolio considerably. Our
one- to four-family loans are generally not assumable, do not contain prepayment
penalties and do not permit negative amortization of principal. Most are written
using underwriting guidelines which make them saleable in the secondary market.
Our real estate loans generally contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property.
Our one- to four-family residential ARM loans are fully amortizing loans
with contractual maturities of up to 30 years, with payments due monthly. Our
ARM loans generally provide for specified minimum and maximum interest rates,
with a lifetime cap and floor, and a periodic adjustment on the interest rate
over the rate in effect on the date of origination. As a
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<PAGE>
consequence of using caps, the interest rates on these loans may not be as rate
sensitive as is our cost of funds. We offer a one-year ARM loan that is
convertible into a fixed-rate loan. When these loans convert, they are usually
sold in the secondary market.
In order to remain competitive in our market areas, we originate ARM loans
at initial rates below the fully indexed rate.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality --Non- performing
Assets" and "-- Classified Assets." At June 30, 1999, our one- to four-family
ARM loan portfolio totaled $98.7 million, or 23.1% of our gross loan portfolio.
At that date the fixed-rate one- to four-family mortgage loan portfolio totaled
$179.2 million, or 41.9% of our gross loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. We offer a variety of
multi-family and commercial real estate loans. These loans are secured primarily
by multi-family dwellings, small retail establishments, churches and small
office buildings located in our market areas. At June 30, 1999, multi-family and
commercial real estate loans totaled $18.8 million or 4.4% of our gross loan
portfolio.
Our loans secured by multi-family and commercial real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indices, generally determined
through negotiation with the borrower. Loan-to-value ratios on our multi-family
and commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments, may not be fully amortizing and have maximum maturities of 20 years.
Loans secured by multi-family and commercial real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We generally
require personal guarantees of the borrowers in addition to the security
property as collateral for such loans. We generally require an assignment of
rents or leases in order to be assured that the cash flow from the project will
be used to repay the debt. Appraisals on properties securing multi-family and
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
We do not generally maintain a tax or insurance escrow account for loans
secured by multi-family and commercial real estate. In order to monitor the
adequacy of cash flows on income-producing properties, the borrower is requested
or required to provide periodic financial information.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers.
90
<PAGE>
Because payments on loans secured by multi-family and commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in
the real estate market or the economy. If the cash flow from the project is
reduced, or if leases are not obtained or renewed, the borrower's ability to
repay the loan may be impaired. See "- Asset Quality -- Non-performing Loans."
CONSTRUCTION AND DEVELOPMENT LENDING. We originate construction loans
primarily secured by existing residential building lots. We make construction
loans to builders and to individuals for the construction of their residences.
Substantially all of these loans are secured by property located within our
market areas. At June 30, 1999, we had $8.9 million in construction and
development loans outstanding, representing 2.1% of our gross loan portfolio.
Construction and development loans are obtained through continued business
with builders who have previously borrowed from us, from walk-in customers and
through referrals from realtors and architects. The application process includes
submission of accurate plans, specifications and costs of the project to be
constructed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value
and/or the cost of construction, including the land and the building. We
generally conduct regular inspections of the construction project being
financed.
Loans secured by building lots are generally granted with terms of up to
one year and are available with either fixed or adjustable interest rates and on
individually negotiated terms. During the construction phase, the borrower
generally pays interest only on a monthly basis. Loans to individuals for the
construction of their residences may be either short term construction financing
or a construction/permanent loan which automatically converts to a long term
mortgage consistent with our one- to four-family residential loan products.
Loan-to-value ratios on our construction and development loans typically do not
exceed 80% of the appraised value of the project on an as completed basis.
Single family construction loans with a loan-to-value ratio over 80% require
private mortgage insurance.
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans. In addition, payment of interest from loan proceeds can make it difficult
to monitor the progress of a project.
CONSUMER AND OTHER LENDING. Consumer loans generally have shorter terms to
maturity, which reduces our exposure to changes in interest rates, and carry
higher rates of interest than do one- to four-family residential mortgage loans.
In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities. At
June 30, 1999, our consumer loan portfolio totaled $112.7 million, or 26.3% of
our gross loan portfolio. We offer a variety of secured consumer loans,
including home equity loans and lines of credit, home improvement loans, auto
loans, boat and recreational vehicle loans, manufactured housing loans and loans
secured by savings deposits. We also offer a limited
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<PAGE>
amount of unsecured loans. We originate our consumer loans both in our market
areas and throughout Indiana and western Ohio.
Our home equity loans, including lines of credit, and home improvement
loans totaled $22.2 million, and comprised 5.2% of our gross loan portfolio at
June 30, 1999. These loans may be originated in amounts, together with the
amount of the existing first mortgage, of up to 100% of the value of the
property securing the loan. The term to maturity on our home equity and home
improvement loans may be up to 10 years. Home equity lines of credit have a
maximum term to maturity of 20 years and require the payment of 2% of the
outstanding loan balance per month, which amount may be reborrowed at any time.
Other consumer loan terms vary according to the type of collateral, length of
contract and creditworthiness of the borrower.
We originate auto loans, boat and recreational vehicle loans and
manufactured housing loans on both a direct and an indirect basis. We generally
buy indirect auto loans on a rate basis, paying the dealer a cash payment for
loans with an interest rate in excess of the rate we require. This premium is
amortized over the remaining life of the loan. Any prepayments or delinquencies
are charged to future amounts owed to that dealer, with no dealer reserve or
other guarantee of payment if the dealer stops doing business with us.
We underwrite indirect auto loans using the Fair-Isaacs credit scoring
system. We have experienced some difficulty in building the volume of our
indirect auto loan portfolio due to our willingness to accept only the more
qualified buyers based on our scoring. We also directly originate auto loans
through bank personnel. These loans are underwritten more traditionally, with a
review of the borrower's employment and credit history and an assessment of the
borrower's financial ability to repay the loan.
Auto loans totaled $17.6 million at June 30, 1999, or 4.1% of our gross
loan portfolio. Auto loans may be written for up to six years and usually have
fixed rates of interest. Loan to value ratios are up to 100% of the sales price
for new autos and 110% of value on used cars, based on valuation from official
used car guides.
Our boat and recreational vehicle loans are generally originated on an
indirect basis. We utilize an independent company to market our loan products
and help service and collect our boat and RV loans, keeping our marketing,
collection and related personnel costs down. We pay a fee based on a percentage
of the loan amounts originated through this company as well as monthly service
fees, for these services. We pay dealers a premium for each loan based on the
interest rate charged on each loan. We amortize this premium, which is usually
significantly smaller than the premium we pay dealers for our indirect auto
loans, over six months. After this six month period, the dealer has no further
liability for any prepayments or delinquencies.
For our two largest boat and RV dealers, we pay for each loan on a rate
basis, just as with our indirect auto loans. With these two dealers, however, we
pay only a portion of the cash payment due, holding back a reserve in a Mutual
Federal savings account. This dealer holdback is released to the dealer pro-rata
over the life of the loan.
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<PAGE>
We underwrite indirect boat and RV loans using the Fair-Isaacs credit
scoring system and, as with our indirect auto loans, tend to accept only the
more qualified buyers based on our scoring.
Loans for boats and recreational vehicles totaled $54.7 million at June
30, 1999, or 12.8% of our gross loan portfolio. This has been the fastest
growing portion of our consumer loan portfolio over the past five years. We will
finance up to 100% of the purchase price for a new recreational vehicle and 95%
for a new boat. The maximum loan to value ratio for used recreational vehicles
and boats is 100% of value and 95% of value, respectively, based on the
applicable official used vehicle guides. The term to maturity for these types of
loans is up to 10 years for used vehicles and up to 15 years for new vehicles.
These loans are generally written with fixed rates of interest.
Manufactured housing loans totaled $13.7 million at June 30, 1999, or 3.2%
of our gross loan portfolio. This amount is down significantly over the last
five years, due to increased competition and regulatory restrictions.
Manufactured housing loans are offered at fixed or adjustable rates of interest
for terms up to 25 years, and at a maximum loan to value ratio of 95%.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles, boats and
recreational vehicles. In these cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance. As a result, consumer loan collections are dependent
on the borrower's continuing financial stability and, thus, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy. See
"Risk Factors - Our loan portfolio possesses increased risk due to our
substantial number of consumer, multi-family and commercial real estate and
commercial business loans."
COMMERCIAL BUSINESS LENDING
At June 30, 1999, commercial business loans comprised $9.6 million, or
2.2% of Mutual Federal's gross loan portfolio. Most of our commercial business
loans have been extended to finance local businesses and include short term
loans to finance machinery and equipment purchases, inventory and accounts
receivable. Commercial business loans also involve the extension of revolving
credit for a combination of equipment acquisitions and working capital needs and
agricultural purposes such as seed, farm equipment and livestock.
The terms of loans extended on the security of machinery and equipment are
based on the projected useful life of the machinery and equipment, generally not
to exceed seven years. Lines of credit generally are available to borrowers for
up to 13 months, and may be renewed by Mutual Federal. We issue a few standby
letters of credit which are offered at competitive rates and terms and are
generally on a secured basis. We are attempting to expand our volume of
commercial business loans.
Our commercial business lending policy includes credit file documentation
and analysis of the borrower's background, capacity to repay the loan, the
adequacy of the borrower's capital and collateral as well as an evaluation of
other conditions affecting the borrower. Analysis of the
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<PAGE>
borrower's past, present and future cash flows is also an important aspect of
our credit analysis. We generally obtain personal guarantees on our commercial
business loans. Nonetheless, these loans are believed to carry higher credit
risk than more traditional single family loans.
Unlike residential mortgage loans, commercial business loans are typically
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business.
As a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself
(which, in turn, is often dependent in part upon general economic conditions).
Our commercial business loans are usually, but not always, secured by business
assets. However, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the
business.
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through referrals from real estate brokers and
builders, our marketing efforts, and our existing and walk-in customers. We also
originate many of our consumer loans through relationships with dealerships.
While we originate both adjustable-rate and fixed-rate loans, our ability to
originate loans is dependent upon customer demand for loans in our market areas.
Demand is affected by local competition and the interest rate environment.
During the last several years, due to low market interest rates, our dollar
volume of fixed-rate, one- to four-family loans has exceeded the dollar volume
of the same type of adjustable-rate loans. From time to time, we sell fixed
rate, one- to four-family residential loans. We have also, on a very limited
basis, purchased commercial real estate loans. Furthermore, during the past few
years, we, like many other financial institutions, have experienced significant
prepayments on loans due to the low interest rate environment prevailing in the
United States.
In periods of economic uncertainty, the ability of financial institutions,
including us, to originate or purchase large dollar volumes of real estate loans
may be substantially reduced or restricted, with a resultant decrease in
interest income.
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<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of Mutual Federal for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------- ------------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one- to four-family ....... $ 8,590 $ 11,417 $ 19,835 $ 29,502 $ 27,625
- multi-family .............. -- 380 1,051 29 618
- commercial ................ 1,486 1,550 2,701 657 430
- construction or development 3,504 2,064 4,160 7,389 15,922
Non-real estate - consumer .............. -- -- -- -- --
- commercial business ... 611 1,724 3,003 1,106 --
--------- --------- --------- --------- ---------
Total adjustable-rate ............ 14,191 17,135 30,750 38,683 44,595
--------- --------- --------- --------- ---------
Fixed rate:
Real estate - one- to four-family ....... 31,819 47,020 96,672 39,223 40,110
- multi-family .............. -- 274 514 -- --
- commercial ................ 1,982 -- 1,240 -- --
- construction or development 3,696 3,478 7,297 6,857 6,350
Non-real estate - consumer .............. 27,255 18,492 32,492 34,730 32,556
- commercial business ... 491 219 810 2,992 426
--------- --------- --------- --------- ---------
Total fixed-rate ................. 65,243 69,483 139,025 83,802 79,442
--------- --------- --------- --------- ---------
Total loans originated ........... 79,434 86,618 169,775 122,485 124,037
--------- --------- --------- --------- ---------
Purchases:
- ----------
Real estate - one- to four-family ....... -- -- -- -- --
- multi-family .............. -- -- -- -- --
- commercial ................ -- 325 325 334 500
- construction or development -- -- -- -- --
Non-real estate - consumer .............. -- -- -- -- --
- commercial business ... -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans purchased ............ -- 325 325 334 500
Sales and Repayments:
- ---------------------
Sales:
Real estate - one- to four-family ....... -- 16,520 35,123 5,753 5,825
- multi-family .............. -- -- -- -- --
- commercial ................ -- -- -- -- --
- construction or development -- -- -- -- --
Non-real estate - consumer ............... -- -- -- -- --
- commercial business .... -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans sold ................. -- 16,520 35,123 5,753 5,825
Principal repayments ...................... 55,661 67,865 135,909 102,867 90,365
--------- --------- --------- --------- ---------
Total reductions ................. 55,661 84,385 171,032 108,620 96,190
Increase (decrease) in other items, net ... (171) 587 (773) 4,639 2,499
--------- --------- --------- --------- ---------
Net increase (decrease) .......... $ 23,602 $ 3,145 $ (1,705) $ 18,838 $ 30,846
========= ========= ========= ========= =========
</TABLE>
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<PAGE>
ASSET QUALITY
When a borrower fails to make a payment on a mortgage loan on or before
the default date, a late charge notice is mailed 16 days after the due date.
When the loan is 31 days past due (16 days for an ARM), we mail a delinquent
notice to the borrower. All delinquent accounts are reviewed by a collector, who
attempts to cure the delinquency by contacting the borrower once the loan is 30
days past due. If the loan becomes 60 days delinquent, the collector will
generally contact by phone or send a personal letter to the borrower in order to
identify the reason for the delinquency. Once the loan becomes 90 days
delinquent, contact with the borrower is made requesting payment of the
delinquent amount in full, or the establishment of an acceptable repayment plan
to bring the loan current. Between 100 and 120 days delinquent a drive-by
inspection is made. If the account becomes 120 days delinquent, and an
acceptable repayment plan has not been agreed upon, a collection officer will
generally refer the account to legal counsel, with instructions to prepare a
notice of intent to foreclose. The notice of intent to foreclose allows the
borrower up to 30 days to bring the account current. During this 30 day period,
the collector may accept a written repayment plan from the borrower which would
bring the account current within the next 90 days. Once the loan becomes 150
days delinquent, and an acceptable repayment plan has not been agreed upon, the
collection officer will turn over the account to our legal counsel with
instructions to initiate foreclosure.
For consumer loans a similar process is followed, with the initial written
contact being made once the loan is 16 days past due. Follow-up contacts are
generally on an accelerated basis compared to the mortgage loan procedure.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60 -
89 days by type, number, amount and percentage of type at June 30, 1999.
Loans Delinquent For:
----------------------------------
60-89 Days
----------------------------------
Percent
of Loan
Number Amount Category
(Dollars in Thousands)
Real Estate:
One- to four-family ............... 11 $271 0.10%
Multi-family ...................... -- -- --
Commercial ........................ 1 4 0.03
Construction and development ...... -- -- --
Consumer ............................ 74 585 0.52
Commercial business ................. -- -- --
---- ----
Total .......................... 86 $860 0.20%
== ====
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NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the loan becomes more than 90 days delinquent. At all
dates presented, we had no troubled debt restructurings which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates. Foreclosed assets owned include
assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family .................... $ 290 $ 500 $ 243 $ 558 $ 625 $ 220
Multi-family ........................... -- -- -- -- 19 --
Commercial real estate ................. 31 31 108 471 943 990
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 321 485 331 -- -- --
Commercial business .................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ............................... 642 1,016 682 1,029 1,587 1,210
------ ------ ------ ------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family .................... 27 88 27 8 13 51
Multi-family ........................... -- -- -- -- -- --
Commercial real estate ................. 504 -- -- -- -- --
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 45 10 51 507 525 497
Commercial business .................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ............................... 576 98 78 515 538 548
------ ------ ------ ------ ------ ------
Total nonperfoming loans ............ 1,218 1,114 760 1,544 2,125 1,758
------ ------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family .................... 210 46 83 20 28 103
Multi-family ........................... -- -- -- -- -- --
Commercial real estate ................. -- -- 1,498 -- -- --
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 257 223 486 561 232 115
Commercial business .................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ............................... 467 269 2,067 581 260 218
------ ------ ------ ------ ------ ------
Total non-performing assets .............. $1,685 $1,383 $2,827 $2,125 $2,385 $1,976
====== ====== ====== ====== ====== ======
Total as a percentage of total assets .... 0.34% 0.29% 0.62% 0.49% 0.59% 0.52%
====== ====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1998 and the six months ended June 30,
1999, gross interest income which would have been recorded had the non-accruing
loans been current in accordance with their original terms amounted to $39,000
and $34,000, respectively. No amount was included in interest income on these
loans for these periods.
At December 31, 1997, foreclosed commercial real estate consisted of two
properties acquired during 1997 from a troubled debtor. The properties,
comprised of a 50 unit apartment building and a food pantry, were subsequently
sold in 1998.
97
<PAGE>
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of June 30, 1999, there was also an aggregate of $3.3
million of loans with respect to which known information about the possible
credit problems of the borrowers have caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories. These loans have been considered in management's determination of
the adequacy of our allowance for loan losses.
Included in the $3.3 million above are several residential mortgage loans
which were obtained from a mortgage broker in 1998. In July 1998, the broker
filed for bankruptcy protection. Shortly before that, we had become aware that
there were documentation problems with these loans.
On four of these loans, totaling approximately $770,000, the broker failed
to pay off and secure a release of the original mortgage loans we refinanced. As
a result, none of these loans was fully performing because the borrowers refused
to make double loan payments to satisfy both our loan and the loan they thought
they had refinanced. We have since bought out the first lien position for two of
these loans.
A fifth loan, totaling approximately $160,000, had a similar issue, but we
have been informed that the broker subsequently paid sufficient funds to satisfy
the prior lienholder's balance, although the prior lien has not yet been
released. This loan is current.
The two other loans at issue, totaling approximately $875,000, are both
current. On one, our lien position is currently behind that of three other
financial institutions. On the other, the mortgage broker failed to assign the
mortgage to us.
We are working with two other lenders, in similar situations with the
mortgage broker, in order to obtain a release of assets from the bankruptcy
trustee. In addition, we have filed a claim with our insurance carrier, although
to date the carrier has denied coverage.
This situation has been considered in determining our allowance for loan
losses. A portion of the provision in 1998 was attributable to these loans, and
two loans, totaling $346,000, were charged-off during 1998. Based on the
information available, significant additional losses are not anticipated at this
time. There can be no assurances, however, that changes in circumstances or
adverse actions by the bankruptcy court will not result in additional losses in
the future.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision to be of lesser quality, as "substandard,"
"doubtful" or "loss." 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 insured 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
98
<PAGE>
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.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk 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
that portion 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 and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of our assets, at June 30, 1999, we had classified
$4.0 million of our assets as substandard, $755,000 as doubtful and $216,000 as
loss. The total amount classified represented 10.9% of our equity capital and
1.0% of our assets at June 30, 1999.
PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses during
the six months ended June 30, 1999 of $380,000, compared to $382,000 during the
six months ended June 30, 1998, $1.3 million for the year ended December 31,
1998 and $700,000 for the year ended December 31, 1997. The provision for loan
losses is charged to income to bring our allowance for loan losses to a level
deemed appropriate by management based on the factors discussed below under "--
Allowance for Loan Losses." The provision for loan losses during the six months
ended June 30, 1999 was based on management's review of such factors which
indicated that the allowance for loan losses was adequate to cover losses
inherent in the loan portfolio as of June 30, 1999.
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans and portfolio segments and the unallocated
allowance. In addition, the allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of such loans or pools
of loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss
99
<PAGE>
factors are based both on our historical loss experience as well as on
significant factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date.
The appropriateness of the allowance is reviewed by management based upon
its evaluation of then-existing economic and business conditions affecting our
key lending areas and other conditions, such as credit quality trends (including
trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the loan. Senior
management reviews these conditions quarterly in discussions with our senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the unallocated allowance. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in
the loan portfolio. Actual losses can vary significantly from the estimated
amounts. Our methodology as described permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. Due to the loss of more than
1,800 manufacturing jobs in the local community during recent years and the
increase in higher risk loans, like consumer and commercial loans, as a
percentage of total loans, management has concluded that our allowance for loan
losses should be greater than historical loss experience would otherwise
indicate.
At June 30, 1999, our allowance for loan losses was $3.7 million or .86%
of the total loan portfolio and approximately 301% of total non-performing
loans. Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in our loan portfolios.
100
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, ---------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ........... $3,424 $3,091 $2,990 $2,754 $2,430 $2,293
------ ------ ------ ------ ------ ------
Charge-offs:
One- to four-family .................... 61 446 3 30 67 94
Multi-family ........................... -- 38 -- -- -- 341
Commercial real estate ................. -- 43 237 -- 180 --
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 184 511 450 353 242 307
Commercial business .................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
245 1,038 690 383 489 742
------ ------ ------ ------ ------ ------
Recoveries:
One- to four-family .................... 79 40 47 6 32 58
Multi-family ........................... -- -- -- -- -- 57
Commercial real estate ................. -- -- -- -- 96 --
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 26 66 44 43 35 39
Commercial business .................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
105 106 91 49 163 154
------ ------ ------ ------ ------ ------
Net charge-offs .......................... 140 932 599 334 326 588
Provisions charged to operations ......... 380 1,265 700 570 650 725
------ ------ ------ ------ ------ ------
Balance at end of period ................. $3,664 $3,424 $3,091 $2,990 $2,754 $2,430
====== ====== ====== ====== ====== ======
Ratio of net charge-offs during the period
to average loans outstanding during the
period .................................. 0.03% 0.23% 0.15% 0.09% 0.10% 0.18%
====== ====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans .................... 300.82% 307.36% 406.71% 193.65% 129.60% 138.22%
====== ====== ====== ====== ====== ======
Allowance as a percentage of total loans
(end of period) ......................... 0.86% 0.85% 0.77% 0.78% 0.79% 0.75%
====== ====== ====== ====== ====== ======
</TABLE>
101
<PAGE>
The distribution of our allowance for loan losses at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------------------------------------------------
1999 1998 1997
---------------------------------- -------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
----------- ---------- --------- --------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 1,291 $277,852 64.94% $ 1,181 $264,461 65.42% $ 583 $266,971 65.77%
Multi-family ......... 57 5,702 1.33 57 6,282 1.56 275 7,694 1.90
Commercial real estate 195 13,136 3.07 174 10,293 2.54 234 8,131 2.00
Construction or
development ........ 44 8,874 2.08 59 11,805 2.92 52 10,385 2.56
Consumer ............. 1,632 112,672 26.34 1,535 104,108 25.75 1,480 107,547 26.50
Commercial business .. 192 9,600 2.24 146 7,285 1.81 104 5,211 1.27
Unallocated .......... 253 -- -- 272 -- -- 363 -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ........... $ 3,664 $427,836 100.00% $ 3,424 $404,234 100.00% $ 3,091 $405,939 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
----------- ---------- --------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 683 $244,518 63.17% $ 674 $224,526 63.02% $ 712 $206,926 62.75%
Multi-family ......... 363 9,598 2.48 253 6,544 1.84 245 6,613 2.01
Commercial real estate 282 7,878 2.03 558 10,090 2.83 560 11,621 3.53
Construction or
development ........ 110 22,040 5.69 86 17,201 4.83 61 12,181 3.69
Consumer ............. 1,367 102,471 26.47 1,094 97,894 27.48 833 91,914 27.87
Commercial business .. 12 596 0.16 -- -- -- 10 490 0.15
Unallocated .......... 173 -- -- 89 -- -- 9 -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ........... $ 2,990 $387,101 100.00% $ 2,754 $356,255 100.00% $ 2,430 $329,745 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
102
<PAGE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, including callable agency securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest their assets in investment grade commercial paper and corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. See "How We Are Regulated - Mutual Federal " and "- Qualified Thrift
Lender Test" for a discussion of additional restrictions on our investment
activities.
The Chief Financial Officer has the basic responsibility for the
management of our investment portfolio, subject to the direction and guidance of
the asset and liability management committee. The Chief Financial Officer
considers various factors when making decisions, including the marketability,
maturity and tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The general objectives of our investment portfolio are to provide
liquidity when loan demand is high, to assist in maintaining earnings when loan
demand is low and to maximize earnings while satisfactorily managing risk,
including credit risk, reinvestment risk, liquidity risk and interest rate risk.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk."
Our investment securities currently consist of U.S. Government and Agency
securities, mortgage-backed securities, marketable equity securities (which
consist of shares in mutual funds that invest in government obligations,
corporate obligations and mortgage-backed securities) and corporate obligations.
See Note 3 of the Notes to Consolidated Financial Statements. Our
mortgage-backed securities portfolio currently consists of securities issued
under government-sponsored agency programs.
While mortgage-backed securities carry a reduced credit risk as compared
to whole loans, these securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors like the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
the mortgage loans and so affect both the prepayment speed and value of the
securities.
At times over the past several years, we have also maintained a trading
portfolio of U.S. Government securities. Our trading portfolio totaled $1.4
million at June 30, 1999. We are permitted by the board of directors to have a
portfolio of up to $5.0 million, and to trade up to $2.0 million in these
securities at any one time. See Note 3 of the Notes to Consolidated Financial
Statements.
103
<PAGE>
Mutual Federal has investments in four separate Indiana limited
partnerships that were organized to construct, own and operate three multi-unit
apartment complexes in the Indianapolis area and one in Findley, Ohio (the
Pedcor Projects). The general partner in each of these Pedcor Projects is Pedcor
Investments. We have no financial or other relationships with Pedcor
Investments. The three Indianapolis area Pedcor Projects, which are operated as
multi-family, low and moderate-income housing projects have been completed and
have been performing as planned for several years. The Findley, Ohio Pedcor
Project, which will also be operated as a multi-family, low and moderate-income
housing project is expected to be completed by year-end 1999. At the inception
of the Findley, Ohio Pedcor Project in February 1998, we invested $2.1 million
and committed to invest an additional $1.9 million, of which $1.8 million
remains payable over the next ten years.
A low and moderate-income housing project qualifies for certain federal
income tax credits if (1) it is a residential rental property, (2) the units are
used on a non-transient basis, and (3) 20% or more of the units in the project
are occupied by tenants whose incomes are 50% or less of the area median gross
income, adjusted for family size, or alternatively, at least 40% of the units in
the project are occupied by tenants whose incomes are 60% or less of the area
median gross income. Qualified low-income housing projects generally must comply
with these and other rules for 15 years, beginning with the first year the
project qualified for the tax credit, or some or all of the tax credit together
with interest may be recaptured. The tax credit is subject to the limitation as
the use of general business credit, but no basis reduction is required for any
portion of the tax credit claimed. As of June 30, 1999, at least 90% of the
units in the Indianapolis area Pedcor Projects were occupied, and all the
tenants met the income test required for the tax credits.
We have received tax credits of $131,000 and $262,000 from the
Indianapolis Pedcor Projects for the six months ended June 30, 1999 and for the
year ended December 31, 1998, respectively. Additionally, the Pedcor Projects
have incurred operating losses in the early years of their operations primarily
due to accelerated depreciation of assets. Mutual Federal has accounted for its
investment in three of the four Pedcor Projects on the equity method.
Accordingly, Mutual Federal has recorded its share of these losses as reductions
to its investment in the Pedcor Projects. Mutual Federal has less than a 20%
ownership interest in the remaining Pedcor Project, and has recorded its
investment in this project at amortized cost.
104
<PAGE>
The following summarizes Mutual Federal's equity in the Pedcor Projects'
losses and tax credits recognized in our consolidated financial statements.
Six Months
Ended For the Year Ended
June 30, December 31,
---------- -----------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In Thousands)
Investments in Pedcor low
income housing projects ........... $ 5,282 $ 5,266 $ 1,407 $ 1,865
====== ====== ====== ======
Equity in losses, net of income
tax effect ....................... $ (6) $ (9) $ (187) $ (4)
Tax credit ......................... 131 262 262 262
-------- -------- -------- --------
Increase in after tax income
from Pedcor Investments ........... $ 125 $ 253 $ 75 $ 258
======= ======= ======== =======
See Note 6 of the Notes to Consolidated Financial Statements for
additional information regarding our limited partnership investments.
105
<PAGE>
The following table sets forth the composition of our investment and
mortgage-related securities portfolio and other investments at the dates
indicated. Our investment securities portfolio at June 30, 1999, did not contain
securities of any issuer with an aggregate book value in excess of 10% of our
equity capital, excluding those issued by the United States Government or its
agencies.
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------------------------------------
1999 1998 1997 1996
------------------ ------------------- ------------------- ------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held-to-maturity:
Federal agency obligations ....................... $10,551 $10,346 $ 6,220 $ 6,220 8,381 8,371 7,835 7,675
Corporate obligations ............................ 2,125 2,125 4,634 4,651 1,636 1,646 1,011 1,031
Municipal obligations ............................ 150 150 150 150 150 150 151 151
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities held to maturity .. 12,826 12,621 11,004 11,021 10,167 10,167 8,997 8,857
------- ------- ------- ------- ------- ------- ------- -------
Investment securities available-for-sale:
Mutual funds ..................................... $ 5,983 $ 5,844 $ 7,761 $ 7,625 $ 6,843 $ 6,704 $ 5,434 $ 5,274
Federal agency obligations ....................... 798 828 1,244 1,286 1,406 1,426 1,620 1,747
Mortgage-backed securities ....................... 3,515 3,449 5,129 5,297 4,125 4,240 4,791 4,744
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities held for sale ..... 10,296 10,121 14,134 14,208 12,374 12,370 11,845 11,765
------- ------- ------- ------- ------- ------- ------- -------
Trading account securities:
U.S. Treasury obligations ........................ $ 1,447 $ 1,358 $ -- $ -- $ -- $ -- $ 479 $ 455
------- ------- ------- ------- ------- ------- ------- -------
Total trading account securities .............. 1,447 1,358 -- -- -- -- 479 455
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities ........................ 24,569 24,100 25,138 25,229 22,541 22,537 21,321 21,077
Investment in limited partnerships ................. 5,282 N/A 5,266 N/A 1,407 N/A 1,865 N/A
Investment in insurance company .................... 590 N/A 590 N/A 590 N/A 590 N/A
Federal Home Loan Bank stock ....................... 3,612 N/A 3,612 N/A 3,612 N/A 3,371 N/A
------- ------- ------- -------
Total investments .................................. $34,053 $34,606 $28,150 $27,147
======= ======= ======= =======
</TABLE>
106
<PAGE>
The composition and maturities of the investment securities and
mortgage-backed securities portfolio, excluding Federal Home Loan Bank stock and
our trading portfolio as of June 30, 1999 are indicated in the following table.
<TABLE>
<CAPTION>
Due in
-----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Years Years 10 Years Investment Securities
--------- --------- --------- --------- -----------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
--------- --------- --------- --------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Corporate obligations ..... $ 505 $ 1,620 $ -- $ -- $ 2,125 $ 2,125
Federal agency obligations 1,048 4,508 4,495 1,298 11,349 11,174
Municipal obligations ..... -- -- -- 150 150 150
Mutual funds .............. 5,983 -- -- -- 5,983 5,844
Mortgage-backed securities:
Freddie Mac ............. 10 621 -- 489 1,120 1,130
Fannie Mae .............. -- 894 120 1,381 2,395 2,319
------- ------- ------- ------- ------- -------
$ 7,546 $ 7,643 $ 4,615 $ 3,318 $23,122 $22,742
======= ======= ======= ======= ======= =======
Weighted average yield .... 5.61% 6.10% 6.41% 6.46% 6.05%
</TABLE>
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to both consumer and
businesses having a wide range of interest rates and terms. Our deposits consist
of passbook accounts, money market deposit accounts, NOW and demand accounts and
certificates of deposit. We solicit deposits in our market areas and have not
accepted brokered deposits. We primarily rely on competitive pricing policies,
marketing and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We try to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively
stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.
107
<PAGE>
The following table sets forth our deposit flows during the periods
indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------------- ----------------------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Opening balance .... $ 365,999 $ 344,860 $ 344,860 $ 330,235 $ 312,218
Deposits ........... 559,844 498,510 1,010,169 1,027,102 993,088
Withdrawals ........ (548,529) (491,490) (1,003,062) (1,025,662) (987,244)
Interest credited... 7,248 7,438 14,032 13,185 12,173
----------- ----------- ----------- ----------- -----------
Ending balance ..... $ 384,562 $ 359,318 $ 365,999 $ 344,860 $ 330,235
=========== =========== =========== =========== ===========
Net increase ....... $ 18,563 $ 14,458 $ 21,139 $ 14,625 $ 18,017
=========== =========== =========== =========== ===========
Percent increase.... 5.07% 4.19% 6.13% 4.43% 5.77%
=========== =========== =========== =========== ===========
</TABLE>
108
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ----------------------------------------------------------
1999 1998 1997 1996
----------------- ----------------- ------------------ ----------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
- ----------------------------------
Passbook accounts................... $ 42,896 11.16% $ 42,242 11.54% $ 42,359 12.28% $ 42,019 12.72%
NOW and demand accounts............. 52,186 13.57 57,239 15.64 46,703 13.54 44,402 13.45
Money market accounts............... 39,035 10.15 33,686 9.20 26,236 7.61 24,063 7.29
-------- ------ -------- ------ -------- ------ -------- ------
Total non-certificates ............. 134,117 34.88 133,167 36.38 115,298 33.43 110,484 33.46
-------- ------ -------- ------ -------- ------ -------- ------
Certificates:
- -------------
0.00 - 1.99% ...................... -- -- -- -- -- -- -- --
2.00 - 3.99% ...................... 8,704 2.26 8,691 2.38 -- -- 373 0.11
4.00 - 5.99% ...................... 196,300 51.05 171,455 46.85 166,424 48.26 149,256 45.20
6.00 - 7.99% ...................... 43,768 11.38 50,928 13.91 61,398 17.80 68,463 20.73
8.00 - 9.99% ...................... 1,673 0.43 1,758 0.48 1,740 0.51 1,629 0.49
10.00% and over .................... -- -- -- -- -- -- 30 0.01
-------- ------ -------- ------ -------- ------ -------- ------
Total certificates ................. 250,445 65.12 232,832 63.62 229,562 66.57 219,751 66.54
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits ..................... $384,562 100.00% $365,999 100.00% $344,860 100.00% $330,235 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
109
<PAGE>
The following table shows rate and maturity information for Mutual
Federal's certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
----- ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
September 30, 1999........................ $8,704 $ 63,848 $ 4,348 $ --- $ 76,900 30.71%
December 31, 1999......................... --- 35,785 5,226 --- 41,011 16.38
March 31, 2000............................ --- 17,246 11,406 --- 28,652 11.44
June 30, 2000............................. --- 34,168 12,069 --- 46,237 18.46
September 30, 2000........................ --- 10,200 3,926 --- 14,126 5.64
December 31, 2000......................... --- 9,970 1,105 --- 11,075 4.42
March 31, 2001............................ --- 9,834 269 --- 10,103 4.03
June 30, 2001............................. --- 4,039 438 --- 4,477 1.79
September 30, 2001........................ --- 2,107 39 --- 2,146 0.86
December 31, 2001......................... --- 1,424 --- --- 1,424 0.57
March 31, 2002............................ --- 969 1,172 --- 2,141 0.85
June 30, 2002............................ --- 553 1,369 36 1,958 0.78
Thereafter................................ --- 6,157 2,401 1,637 10,195 4.07
------ -------- ------- ------ -------- ------
Total.................................. $8,704 $196,300 $43,768 $1,673 $250,445 100.00%
====== ======== ======= ====== ======== ======
Percent of total....................... 3.47% 78.38% 17.48% 0.67%
==== ===== ===== ====
</TABLE>
The following table indicates the amount of Mutual Federal's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1999.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.............. $46,366 $31,876 $61,054 $47,364 $186,660
Certificates of deposit of $100,000 or more............. 8,353 6,535 12,660 9,381 36,929
Public funds (1)........................................ 22,181 2,600 1,175 900 26,856
-------- --------- --------- ---------- ----------
Total certificates of deposit........................... $76,900 $41,011 $74,889 $57,645 $250,445
======= ======= ======= ======= ========
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. Our
borrowings historically have consisted of advances from the Federal Home Loan
Bank of Indianapolis and securities sold under agreement to repurchase. See
Notes 8 and 9 of the Notes to Consolidated Financial Statements.
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We may obtain advances from the Federal Home Loan Bank of Indianapolis
upon the security of certain of our mortgage loans and mortgage-backed
securities. These advances may be made pursuant to several different credit
programs, each of which has its own interest rate, range of maturities and call
features. At June 30, 1999, we had $51.4 million in Federal Home Loan Bank
advances outstanding.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances, securities sold under agreement to
repurchase and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- -----------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
- ----------------
FHLB advances............................................ $51,362 $63,754 $63,754 $70,254 $64,522
Securities sold under agreements to repurchase........... --- --- --- 875 3,914
Other borrowings......................................... 1,799 1,855 1,830 --- ---
Average Balance:
- ----------------
FHLB advances............................................ $47,667 $60,914 $55,232 $61,471 $56,929
Securities sold under agreements to repurchase........... --- --- --- 73 2,717
Other borrowings......................................... 1,799 1,546 1,685 --- ---
</TABLE>
The following table sets forth certain information as to our borrowings at
the dates indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, December 31,
--------------------- --------------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances................................. $51,362 $58,135 $50,632 $66,255 $59,709
Securities sold under agreements to
repurchase................................... --- --- --- --- 1,400
Other borrowings.............................. 1,799 1,856 1,830 --- ---
------- ------- ------- ------- -------
Total borrowings......................... $53,161 $59,991 $52,462 $66,255 $61,109
======= ======= ======= ======= =======
Weighted average interest rate of FHLB
advances..................................... 5.36% 5.78% 5.50% 5.89% 5.75%
Weighted average interest rate of securities
sold under agreements to repurchase.......... ---% ---% ---% ---% 5.51%
Weighted average interest rate of other
borrowings................................... ---% ---% ---% ---% ---%
</TABLE>
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<PAGE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, we are permitted by Office of
Thrift Supervision regulations to invest up to 2% of our assets, or $9.8 million
at June 30, 1999, in the stock of, or unsecured loans to, service corporation
subsidiaries. We may invest an additional 1% of our assets in service
corporations where such additional funds are used for inner-city or community
development purposes.
At June 30, 1999, we had two active subsidiaries, First M.F.S.B.
Corporation and Third M.F.S.B. Corporation. First M.F.S.B. owns stock in Family
Financial Life Insurance Company, a life and accident and health insurance
company chartered in Indiana. Family Financial Life primarily sells mortgage and
credit life insurance, as well as accident and disability insurance. It also
issues and services annuity contracts. As of June 30, 1999, our total investment
in this subsidiary was $665,000. For the six months ended June 30, 1999, First
M.F.S.B. reported net income of $30,000, which consisted of dividends from
Family Financial Life.
Third M.F.S.B., which does business as Mutual Financial Services, offers
tax-deferred annuities, long-term health and life insurance products. All
securities related products and services made available through Mutual Financial
Services are offered by a third party independent broker-dealer. As of June 30,
1999, our total investment in this subsidiary was $190,000. For the six months
ended June 30, 1999, Third M.F.S.B. reported net income of $32,000, which
consisted of commissions less expenses.
COMPETITION
We face strong competition in originating real estate and other loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our branch office system.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates.
EMPLOYEES
At June 30, 1999, we had a total of 201 employees, including 49 part-time
employees. Our employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
PROPERTIES
At June 30, 1999, we had 13 full service offices. We own the office
building in which our home office and executive offices are located. At June 30,
1999, we owned all but one of our other branch offices. The net book value of
our investment in premises, equipment and leaseholds, excluding computer
equipment, was approximately $6.7 million at June 30, 1999.
We believe that our current facilities are adequate to meet the present
and immediately foreseeable needs of Mutual Federal and MFS Financial.
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<PAGE>
We utilize a third party service provider to maintain our data base of
depositor and borrower customer information. The net book value of the data
processing and computer equipment utilized by us at June 30, 1999 was $1.2
million.
LEGAL PROCEEDINGS
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of such litigation.
MANAGEMENT
MANAGEMENT OF MFS FINANCIAL, INC.
The board of directors of MFS Financial consists of the same individuals
who serve as directors of Mutual Federal. The board of directors of MFS
Financial is divided into three classes, each of which contains approximately
one-third of the board. The directors shall be elected by the stockholders of
MFS Financial for three year terms, or until their successors are elected. One
class of directors, consisting of William V. Hughes, R. Donn Roberts and James
D. Rosema, has a term of office expiring at the first annual meeting of
stockholders. A second class, consisting of Edward Dobrow and Julie Skinner, has
a term of office expiring at the second annual meeting of stockholders. The
third class, consisting of Linn A. Crull and Wilbur R. Davis, has a term of
office expiring at the third annual meeting of stockholders.
The following individuals are executive officers of MFS Financial and hold
the offices set forth below opposite their names.
EXECUTIVE POSITION HELD WITH MFS FINANCIAL
- ----------------------- ------------------------------------------------
R. Donn Roberts President and Chief Executive Officer
Timothy J. McArdle Senior Vice President, Treasurer and Controller
The executive officers of MFS Financial are elected annually and hold
office until their respective successors have been elected or until death,
resignation or removal by the board of directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of MFS Financial is set
forth under "- Management of Mutual
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<PAGE>
Federal" and "- Executive Officers Who Are Not Directors." Directors of MFS
Financial initially will not be compensated by MFS Financial but will serve and
be compensated by Mutual Federal. It is not anticipated that separate
compensation will be paid to directors of MFS Financial until such time as these
persons devote significant time to the separate management of MFS Financial's
affairs, which is not expected to occur until MFS Financial becomes actively
engaged in additional businesses other than holding the stock of Mutual Federal.
MFS Financial may determine that such compensation is appropriate in the future.
MANAGEMENT OF MUTUAL FEDERAL
Because Mutual Federal is a mutual savings bank, its members have elected
its board of directors. Upon completion of the conversion, the directors of
Mutual Federal immediately prior to the conversion will continue to serve as
directors of Mutual Federal in stock form. The board of directors of Mutual
Federal in stock form will consist of seven directors divided into three
classes, with approximately one-third of the directors elected at each annual
meeting of stockholders. Because MFS Financial will own all the issued and
outstanding capital stock of Mutual Federal following the conversion, the board
of directors of MFS Financial will elect the directors of Mutual Federal.
The following table sets forth certain information regarding the board of
directors of Mutual Federal.
The following table sets forth certain information regarding the board of
directors of Mutual Federal.
<TABLE>
<CAPTION>
Term of
Director Office
Name Age(1) Positions Held With Mutual Federal Since Expires
- ------------------ ------ ----------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
William V. Hughes 51 Director 1999 2000
R. Donn Roberts 60 President, Chief Executive Officer and Director 1985 2000
James D. Rosema 52 Director 1998 2000
Edward J. Dobrow 52 Director 1988 2001
Julie A. Skinner 58 Director and Vice Chairman of the Board 1986 2001
Linn A. Crull 43 Director 1997 2002
Wilbur R. Davis 44 Director and Chairman of the Board 1991 2002
</TABLE>
- -----------------
(1) As of June 30, 1999.
The business experience of each director for at least the past five years
is set forth below.
WILLIAM V. HUGHES. Mr. Hughes is a partner in the law firm of Beasley &
Gilkison L.L.P., located in Muncie, Indiana. The firm serves as general counsel
to Mutual Federal.
R. DONN ROBERTS. Mr. Roberts is President, Chief Executive Officer and a
Director of Mutual Federal, positions he has held since1985. He has been
employed with Mutual Federal in various other capacities since 1965.
JAMES D. ROSEMA. Since 1972, Mr. Rosema has served as President of Rosema
Corporation, an interior finishing company located in Muncie and Fort Wayne,
Indiana.
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<PAGE>
EDWARD J. DOBROW. Mr. Dobrow is President of Dobrow Industries, a scrap
metal processing company located in Muncie, Indiana. He has served in this
capacity since 1981.
JULIE A. SKINNER. Ms. Skinner is a civic leader. She is a co-founder of
the Muncie Children's Museum and a member of the Delaware Advancement Committee
and the Community Foundation Board. Ms. Skinner is also actively involved in
many other civic organizations.
LINN A. CRULL. Mr. Crull is a certified public accountant and, since 1979,
has been a member of Whitinger & Company, L.L.C., an accounting firm located in
Muncie, Indiana.
WILBUR R. DAVIS. Mr. Davis is President and co-founder of Ontario Systems
Corporation, a computer software company located in Muncie, Indiana. He has
served in this capacity since 1980.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Each of the executive officers of Mutual Federal will retain his office
following the conversion. Officers are elected annually by the board of
directors of Mutual Federal. The business experience for at least the past five
years for each of the four executive officers of Mutual Federal who do not serve
as directors is set forth below.
STEVEN R. CAMPBELL. Age 55 years. Mr. Campbell serves as Senior Vice
President of the Retail Banking Division for Mutual Federal, a position he has
held since 1991. He has been employed by Mutual Federal since 1984.
DAVID W. HEETER. Age 38 years. Mr. Heeter is a Vice President of Human
Resources, Marketing and Administration at Mutual Federal. He has served in
these positions since 1993, and started with Mutual Federal in 1986.
TIMOTHY J. MCARDLE. Age 48 years. Mr. McArdle, a certified public
accountant, has served as Senior Vice President since 1995, and Treasurer and
Controller of Mutual Federal since 1986. He has been employed by Mutual Federal
since 1981.
STEPHEN C. SELBY. Age 53 years. Mr. Selby is a Senior Vice President of
the Operations Division at Mutual Federal. He has served in this capacity since
1995. Prior to that, he served as Vice President of the Operations Division for
nine years. Mr. Selby has served in various other capacities at Mutual Federal
since 1964.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors meets twice monthly. During the year ended December
31, 1998, the board of directors held 23 meetings. No director attended fewer
than 75% of the total meetings of the board of directors and committees on which
such board member served during this period.
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<PAGE>
We currently have standing Audit/Compliance, Finance and Marketing and
Advertising Committees. We do not have a standing Executive or Nominating
Committee; rather, the entire board of directors performs these functions.
The Audit/Compliance Committee is comprised of Director Crull (Chairman)
and Directors Davis, Dobrow, Hughes, Rosema and Skinner. The Audit/Compliance
Committee meets quarterly or on an as needed basis. The Audit/Compliance
Committee recommends the independent auditors and reviews the audit report
prepared by the independent auditors. This committee met six times in 1998.
The Finance Committee is comprised of the full board of directors with
Director Dobrow as Chairman. The Finance Committee meets quarterly or on an as
needed basis. The Finance Committee deals with large financial transactions such
as mergers, acquisitions and conversions. The committee also reviews and
approves compensation and benefit program issues. This committee met six times
in 1998.
The Marketing and Advertising Committee is comprised of Director Skinner
(Chairman) and Directors Dobrow, Roberts and Vice President Heeter. The
Marketing and Advertising Committee meets on an as needed basis. This committee
reviews major marketing and advertising programs and marketing research. This
committee did not meet in 1998.
DIRECTORS' COMPENSATION
Members of Mutual Federal's board of directors receive an annual fee of
$22,200. The Chairman of the board receives an additional $5,000 per year.
In addition, Mutual Federal maintains deferred compensation arrangements
with some directors which allows them the opportunity to defer all or a portion
of their board fees and to receive income when they are no longer active
directors. See Note 16 of the Notes to Consolidated Financial Statements.
Deferred amounts earn interest at the rate of 10% per year.
Mr. Hughes, a director of Mutual Federal, is a partner in the law firm of
Beasley & Gilkison L.L.P. The firm receives a retainer fee to serve as general
counsel for Mutual Federal regarding real estate and litigation issues. The
legal fees received by the law firm for professional services rendered to Mutual
Federal during the year ending December 31, 1998 were $66,113.
EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information concerning
the compensation paid by Mutual Federal, including amounts deferred to future
periods by the officers, for services rendered in all capacities during the year
ended December 31, 1998 to the President and Chief Executive Officer of Mutual
Federal and the three other highest compensated executive officers of Mutual
Federal whose salary and bonus exceeded $100,000.
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
----------------------------------- -----------------------
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) (#)(2) sation(3)
- ------------------------------------- ------ -------- ------- ------------ ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Donn Roberts, President, Chief 1998 $220,000 $37,092 --- --- --- $67,680(3)
Executive Officer, Chief Operating
Officer and Director
Steven R. Campbell, Senior Vice 1998 102,000 11,353 --- --- --- 36,954(3)
President of the Retail Banking
Division
Timothy J. McArdle, Senior Vice 1998 96,500 11,754 --- --- --- 27,303(3)
President, Treasurer and Controller
Stephen C. Selby, Senior Vice 1998 92,000 14,048 --- --- --- 21,721(3)
President of the Operations Division
</TABLE>
- -------------
(1) Mutual Federal provides certain senior officers with automobile expenses
and club membership dues. This amount does not include personal benefits or
perquisites which did not exceed the lesser of $50,000 or 10% of the named
individuals' salary and bonus.
(2) As a mutual institution, Mutual Federal does not have any stock option or
restricted stock plans. Mutual Federal does, however, intend to adopt such
plans following the conversion. See "- Benefits -- Other Stock Benefit
Plans."
(3) Amounts represent contributions under Mutual Federal's Supplemental
Executive Retirement Plan and the Executive Deferral Program. These
amounts, respectively include $49,260 and $6,920 for Mr. Roberts; $20,911
and $7,132 for Mr. Campbell; $8,091 and $10,818 for Mr. McArdle; and $7,130
and $6,593 for Mr. Selby. This amount also represents Mutual Federal's
contribution to its 401(k) plan on behalf of Mr. Roberts for $11,500; Mr.
Campbell for $8,911; Mr. McArdle for $8,394; and Mr. Selby for $7,998,
respectively.
BENEFITS
GENERAL. Mutual Federal currently provides health and welfare benefits to
its employees, including hospitalization, comprehensive medical insurance,
dental, life, short term and long-term disability insurance, subject to certain
deductibles and copayments by employees. Mutual Federal also provides certain
retirements benefits. See Note 16 of the Notes to Consolidated Financial
Statements.
SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM. Mutual Federal maintains a
non-qualified supplemental executive retirement program for the benefit of
certain senior executives that have been designated to participate in the
program. The payments under this program are funded by life insurance contracts
which have been purchased by Mutual Federal.
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<PAGE>
Mutual Federal provides for monthly accruals of specified amounts necessary to
meet future benefit obligations for each executive, as set forth in the "Summary
Compensation Table" above. These retirement amounts are payable in monthly
installments for a stated period of time as set forth under the program upon the
executive's retirement, death, voluntary resignation, or termination by Mutual
Federal without cause. In the event the employment of a participant in the
program is terminated as a result of a change in control of Mutual Federal, we
must pay the present value amount of all remaining contributions required to
have been made if the participant continued with Mutual Federal until retirement
age. If the named officers had been terminated as a result of a change in
control of Mutual Federal as of December 31, 1998, we would have been required
to pay $403,000, $295,000, $214,000 and $127,000 to Messrs. Roberts, Campbell,
McArdle and Selby, respectively.
EXECUTIVE DEFERRAL PROGRAM. Mutual Federal also maintains an executive
deferral program for the benefit of certain senior executives that have been
designated to participate in the program. The program allows an additional
opportunity for key executives to defer a portion of their income into a
non-qualified deferral program to supplement their retirement earnings. Under
this program, Mutual Federal matches $.50 for every dollar, up to a specified
amount providing for an additional 10% of pre-retirement earnings for each
participant other than Mr. Roberts. The amounts paid by Mutual Federal under
this program for the named officers, which include matched funds, as applicable,
and earnings on any funds in the program at the rate of 10%, are set forth in
the "Summary Compensation Table" above.
EMPLOYEES' INCENTIVE PLAN. Effective January 1, 1999, Mutual Federal
established an incentive plan that will provide payment to employees of a
percentage of their salaries based upon certain performance criteria. Under the
plan, all employees are paid a certain percentage based upon the participant's
employment status.
Participants who are employed with Mutual Federal at the end of the year
are eligible to participate in the plan. Any participant, however, who is
terminated for cause or resigns for cause before payment under the incentive
plan will be ineligible. In addition, a participant with a performance rating
that is "below expectations" for a period of more than 60 consecutive days will
not qualify for payment under the incentive plan for those days.
EMPLOYEE STOCK OWNERSHIP PLAN. MFS Financial intends to adopt an employee
stock ownership plan for employees of MFS Financial and Mutual Federal to become
effective upon the conversion. Employees of MFS Financial and Mutual Federal who
have been credited with at least 1,000 hours of service during a twelve month
period are eligible to participate in the employee stock ownership plan.
As part of the conversion, it is anticipated that the employee stock
ownership plan will borrow funds from MFS Financial. The employee stock
ownership plan will use these funds to purchase up to 8.0% of the common stock
issued in the conversion. It is anticipated that this loan will equal 100% of
the aggregate purchase price of the common stock acquired by the employee stock
ownership plan. The loan to the employee stock ownership plan will be repaid
principally from Mutual Federal's contributions to the employee stock ownership
plan over a period of 15 years, and the collateral for the loan will be the
common stock purchased by the employee stock ownership plan. The interest rate
for the loan is expected to be the minimum rate prescribed by
118
<PAGE>
the Internal Revenue Code. MFS Financial may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares by MFS Financial or upon the sale of
treasury shares by MFS Financial. These purchases, if made, would be funded
through additional borrowings by the employee stock ownership plan or additional
contributions from MFS Financial. The timing, amount and manner of future
contributions to the employee stock ownership plan will be affected by various
factors, including prevailing regulatory policies, the requirements of
applicable laws and regulations and market conditions.
Shares purchased by the employee stock ownership plan with the proceeds of
the loan will be held in a suspense account and released to participants'
accounts as debt service payments are made. Shares released from the employee
stock ownership plan will be allocated to each eligible participant's employee
stock ownership plan account based on the ratio of each such participant's
compensation to the total compensation of all eligible employee stock ownership
plan participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount MFS Financial might otherwise have
contributed to the employee stock ownership plan. The account balances of
participants within the employee stock ownership plan will become 100% vested
after five years of service. Credit for eligibility and vesting is given for
years of service with Mutual Federal prior to adoption of the employee stock
ownership plan. In the case of a "change in control," as defined in the employee
stock ownership plan, which triggers a termination of the employee stock
ownership plan, participants will become immediately fully vested in their
account balances. Benefits are payable upon retirement or other separation from
service. MFS Financial's contributions to the employee stock ownership plan are
not fixed, so benefits payable under the employee stock ownership plan cannot be
estimated.
First Bankers Trust, Quincy, Illinois will serve as trustee of the
employee stock ownership plan. Under the employee stock ownership plan, the
trustee must vote all allocated shares held in the employee stock ownership plan
in accordance with the instructions of the participating employees, and
unallocated shares will be voted in the same ratio on any matter as those
allocated shares for which instructions are given.
GAAP requires that any third party borrowing by the employee stock
ownership plan be reflected as a liability on MFS Financial's statement of
financial condition. Since the employee stock ownership plan is borrowing from
MFS Financial, such obligation is not treated as a liability, but will be
excluded from stockholders' equity. If the employee stock ownership plan
purchases newly issued shares from MFS Financial, 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 employee stock ownership plan participants.
The employee stock ownership plan will be subject to the requirements of
ERISA, and the regulations of the IRS and the Department of Labor thereunder.
OTHER STOCK BENEFIT PLANS. In the future, we intend to adopt a stock
option plan and a restricted stock plan for the benefit of selected directors,
officers and employees. We anticipate that the stock option plan and restricted
stock plan will have reserved a number of shares equal to
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<PAGE>
10% and 4%, respectively, of the MFS Financial common stock sold in the
conversion. Grants of common stock pursuant to the restricted stock plan will be
issued without cost to the recipient. If a determination is made to implement a
stock option plan or restricted stock plan, it is anticipated that any such
plans will be submitted to stockholders for their consideration at which time
stockholders would be provided with detailed information regarding such plan. If
such plans are approved, and effected, they will have a dilutive effect on MFS
Financial's stockholders as well as affect MFS Financial's net income and
stockholders' equity, although the actual results cannot be determined until
such plans are implemented. Any such stock option plan or restricted stock plan
will not be implemented less than six months after the date of the completion of
the conversion, subject to continuing Office of Thrift Supervision jurisdiction.
EMPLOYMENT AGREEMENTS FOR EXECUTIVE OFFICERS. In connection with the
conversion, Mutual Federal intends to enter into three-year employment
agreements with Messrs. Roberts and McArdle. Under the employment agreements,
the initial salary levels will be $238,000 and $101,500, respectively, and the
agreements also provide for equitable participation by the executive's in Mutual
Federal's employee benefit plans. Salaries may be increased at the discretion of
the board of directors. The agreements may be terminated by Mutual Federal at
any time, by the executive if he is assigned duties inconsistent with his
initial position, duties, responsibilities and status, or upon the occurrence of
certain events specified by federal regulations. In the event that the
executive's employment is terminated without cause or upon the executives
voluntary termination following the occurrence of an event described in the
preceding sentence, Mutual Federal would be required to honor the terms of the
agreement through the expiration of the contract, including payment of then
current cash compensation and continuation of employee benefits.
The employment agreements also provide for a severance payment and other
benefits if the executive is involuntarily terminated because of a change in
control of MFS Financial or Mutual Federal. The agreements authorize severance
payments on a similar basis if the executive involuntarily terminates his
employment following a change in control because he is assigned duties
inconsistent with his position, duties, responsibilities and status immediately
prior to the change in control.
The maximum value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual W-2 compensation during
the five calendar year period prior to the effective date of the change in
control (base amount). Assuming that a change in control had occurred at June
30, 1999 Messrs. Roberts and McArdle would be entitled to a payment of
approximately $702,000 and $304,000, respectively. Section 280G of the Internal
Revenue Code provides that severance payments that equal or exceed three times
the individual's base amount are deemed to be "excess parachute payments" if
they are conditioned upon a change in control. Individuals receiving parachute
payments in excess of three times of their base amount are subject to a 20%
excise tax on the amount of the excess payments. If excess parachute payments
are made, MFS Financial and Mutual Federal would not be entitled to deduct the
amount of the excess payments. The employment agreements provide that severance
and other payments that are subject to a change in control will be reduced as
much as necessary to ensure that no amounts payable to the executive will be
considered excess parachute payments.
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<PAGE>
LOANS AND OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
Mutual Federal has followed a policy of granting loans to officers and
directors, which fully complies with all applicable federal regulations. Loans
to directors and executive officers are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions with
non-insider employees prevailing at the time, in accordance with our
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject to
Office of Thrift Supervision regulations restricting loans and other
transactions with affiliated persons of Mutual Federal. Loans to all directors
and executive officers and their associates totaled approximately $1.2 million
at December 31, 1998, which was 2.6% of our equity at that date. All loans to
directors and executive officers were performing in accordance with their terms
at December 31, 1998.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to MFS Financial and Mutual Federal. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect the operations of MFS Financial and Mutual Federal. In addition,
the regulations governing MFS Financial and Mutual Federal may be amended from
time to time by the Office of Thrift Supervision. Any such legislation or
regulatory changes in the future could adversely affect MFS Financial or Mutual
Federal. No assurance can be given as to whether or in what form any such
changes may occur.
GENERAL
Mutual Federal, as a federally chartered savings institution, is subject
to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Mutual Federal also is subject to
regulation and examination by the FDIC, which insures the deposits of Mutual
Federal to the maximum extent permitted by law, and requirements established by
the Federal Reserve Board. Federally chartered savings institutions are required
to file periodic reports with the Office of Thrift Supervision and are subject
to periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting shareholders. This regulatory oversight will
continue to apply to Mutual Federal following the reorganization.
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The Office of Thrift Supervision regularly examines Mutual Federal and
prepares reports for the consideration of Mutual Federal's board of directors on
any deficiencies that it may find in Mutual Federal's operations. The FDIC also
has the authority to examine Mutual Federal in its role as the administrator of
the Savings Association Insurance Fund. Mutual Federal's relationship with its
depositors and borrowers also is regulated to a great extent by both Federal and
state laws, especially in such matters as the ownership of savings accounts and
the form and content of Mutual Federal's mortgage requirements. Any change in
such regulations, whether by the FDIC, the Office of Thrift Supervision or
Congress, could have a material adverse impact on MFS Financial and Mutual
Federal and their operations.
MFS FINANCIAL
Pursuant to regulations of the Office of Thrift Supervision and the terms
of MFS Financial's Maryland articles of incorporation, the purpose and powers of
MFS Financial are to pursue any or all of the lawful objectives of a thrift
holding company and to exercise any of the powers accorded to a thrift holding
company.
If Mutual Federal fails the qualified thrift lender test, MFS Financial
must obtain the approval of the Office of Thrift Supervision prior to continuing
after such failure, directly or through other subsidiaries, any business
activity other than those approved for multiple thrift companies or their
subsidiaries. In addition, within one year of such failure MFS Financial must
register as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or multiple thrift
holding company. See "- Qualified Thrift Lender Test."
MUTUAL FEDERAL
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Mutual Federal is
required to file periodic reports with the Office of Thrift Supervision and is
subject to periodic examinations by the Office of Thrift Supervision and the
FDIC. The last regular Office of Thrift Supervision examination of Mutual
Federal was as of June 30, 1998. Under agency scheduling guidelines, it is
likely that another examination will be initiated in the fourth quarter of 1999.
When these examinations are conducted by the Office of Thrift Supervision and
the FDIC, the examiners may require Mutual Federal to provide for higher general
or specific loan loss reserves. All savings institutions are subject to a
semi-annual assessment, based upon the savings institution's total assets, to
fund the operations of the Office of Thrift Supervision. Mutual Federal's Office
of Thrift Supervision assessment for the year ended December 31, 1998 was
$107,000.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Mutual
Federal and MFS Financial. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision.
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Except under certain circumstances, public disclosure of final enforcement
actions by the Office of Thrift Supervision is required.
In addition, the investment, lending and branching authority of Mutual
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the Office of Thrift Supervision. Federal savings institutions are
also generally authorized to branch nationwide. Mutual Federal is in compliance
with the noted restrictions.
Mutual Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1999, Mutual Federal's lending
limit under this restriction was $6.8 million. Mutual Federal is in compliance
with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Mutual Federal is a member of the Savings Association Insurance Fund,
which is administered by the FDIC. Deposits are insured up to the applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Savings Association Insurance Fund or the Bank Insurance
Fund. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
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supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for an explanation
on the special Savings Association Insurance Fund assessment amount paid by
Mutual Federal in 1996.
Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
are required to pay a Financing Corporation assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s, equal to
approximately 6 basis points for each $100 in domestic deposits, while Bank
Insurance Fund insured institutions pay an assessment equal to approximately 1
basis point for each $100 in domestic deposits. The Savings Association
Insurance Fund assessment is expected to be reduced to about 2 basis points no
later than January 1, 2000, when Bank Insurance Fund insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as Mutual Federal, are
required to maintain a minimum level of regulatory capital. The Office of Thrift
Supervision has established capital standards, including a tangible capital
requirement, a leverage ratio or core capital requirement and a risk-based
capital requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1999, Mutual Federal had $1.6 million of intangible
assets.
At June 30, 1999, Mutual Federal had tangible capital of $44.1 million, or
9.04% of adjusted total assets, which is approximately $36.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3.0% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4.0% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3.0% ratio. At June 30, 1999, Mutual
Federal had $1.6 million of intangibles which were subject to these tests.
At June 30, 1999, Mutual Federal had core capital equal to $44.1 million,
or 9.04% of adjusted total assets, which is $29.5 million above the minimum
requirement of 3.0% in effect on that date.
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The Office of Thrift Supervision also requires savings institutions to
have total capital of at least 8.0% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The Office of Thrift Supervision is also authorized
to require a savings institution to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
non-traditional activities. At June 30, 1999, Mutual Federal had $3.5 million of
general loan loss reserves, which was less than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On June 30, 1999, Mutual Federal had total risk-based capital of $47.5
million and risk-weighted assets of $312.9 million; or total capital of 15.2% of
risk-weighted assets. This amount was $22.5 million above the 8.0% requirement
in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until such plan is approved by the Office of Thrift Supervision may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
Office of Thrift Supervision is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
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As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" must be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on Mutual Federal may have a substantial adverse effect on its
operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Mutual Federal, that before and
after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Mutual Federal may pay dividends
in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."
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LIQUIDITY
All savings institutions, including Mutual Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. This liquid asset ratio requirement may vary from time to
time between 4% and 10% depending upon economic conditions and savings flows of
all savings institutions. At the present time, the minimum liquid asset ratio is
4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At June 30, 1999, Mutual Federal was in compliance with
the requirement, with an overall liquid asset ratio of 7.31%.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including Mutual Federal, are required to meet a
qualified thrift lender test to avoid certain restrictions on their operations.
This test requires a savings institution to have at least 65% of its portfolio
assets, as defined by regulation, in qualified thrift investments on a monthly
average for nine out of every 12 months on a rolling basis. As an alternative,
the savings institution may maintain 60% of its assets in those assets specified
in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such
assets primarily consist of residential housing related loans and investments.
At June 30, 1999, Mutual Federal met the test and has always met the test since
its effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund-insured until the FDIC permits it to
transfer to the Bank Insurance Fund. If such an institution has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings institution and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the institution is immediately ineligible to receive any new Federal
Home Loan Bank borrowings and is subject to national bank limits for payment of
dividends. If such an institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding Federal Home Loan Bank borrowings, which may
result in prepayment penalties. If any institution that fails the qualified
thrift lender test is controlled by a holding company, then within one year
after the failure, the holding company must register as a bank holding company
and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices 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
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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 Office of Thrift Supervision, in
connection with the examination of Mutual Federal, 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, such as a merger or the
establishment of a branch, by Mutual Federal. An unsatisfactory rating may be
used as the basis for the denial of an application by the Office of Thrift
Supervision. Due to the heightened attention being given to the Community
Reinvestment Act in the past few years, Mutual Federal may be required to devote
additional funds for investment and lending in its local community. Mutual
Federal was examined for Community Reinvestment Act compliance in May 1997, and
received a rating of satisfactory.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of Mutual Federal include MFS Financial and
any company which is under common control with Mutual Federal. In addition, a
savings institution may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Office of Thrift Supervision has the discretion to treat
subsidiaries of savings institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The stock of MFS Financial is registered with the SEC under the Securities
Exchange Act of 1934, as amended. MFS Financial will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
MFS Financial stock held by persons who are affiliates of MFS Financial
may not be resold without registration unless sold in accordance with certain
resale restrictions. Affiliates are generally considered to be officers,
directors and principal stockholders. If MFS Financial meets specified current
public information requirements, each affiliate of MFS Financial will be able to
sell in the public market, without registration, a limited number of shares in
any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW
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checking accounts. At June 30, 1999, Mutual Federal was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the Office of Thrift Supervision.
See "- Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM
Mutual Federal is a member of the Federal Home Loan Bank of Indianapolis,
which is one of 12 regional Federal Home Loan Banks, that administers the home
financing credit function of savings institutions. Each Federal Home Loan Bank
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans or advances to
members in accordance with policies and procedures, established by the board of
directors of the Federal Home Loan Bank, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the Federal Home Loan Bank
are required to be fully secured by sufficient collateral as determined by the
Federal Home Loan Bank. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, Mutual Federal is required to purchase and maintain stock in
the Federal Home Loan Bank of Indianapolis. At June 30, 1999, Mutual Federal had
$3.6 million in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years, Mutual Federal has received substantial dividends on
its Federal Home Loan Bank stock. Over the past five fiscal years such dividends
have averaged 7.61% and were 8.01% for 1998.
Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Mutual Federal's Federal Home Loan Bank stock may result in a corresponding
reduction in Mutual Federal's capital.
For the six months ended June 30, 1999, dividends paid by the Federal Home
Loan Bank of Indianapolis to Mutual Federal totaled $143,000, as compared to
$289,000 for all of 1998.
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TAXATION
FEDERAL TAXATION
GENERAL. MFS Financial and Mutual Federal will be subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to MFS Financial or
Mutual Federal. Mutual Federal's federal income tax returns have been closed
without audit by the IRS through its year ended December 31, 1995.
Following the conversion, MFS Financial anticipates that it will file a
consolidated federal income tax return with Mutual Federal commencing with the
first taxable year after completion of the conversion. Accordingly, it is
anticipated that any cash distributions made by MFS Financial to its
stockholders would be considered to be taxable dividends and not as a
non-taxable return of capital to stockholders for federal and state tax
purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Mutual Federal
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on December 31, for filing its federal income tax
return.
BAD DEBT RESERVES. Prior to the Small Business Job Protection Act, Mutual
Federal was permitted to establish a reserve for bad debts under the percentage
of taxable income method and to make annual additions to the reserve utilizing
that method. These additions could, within specified formula limits, be deducted
in arriving at taxable income. As a result of the Small Business Job Protection
Act, savings associations of Mutual Federal's size may now use the experience
method in computing bad debt deductions beginning with their 1996 Federal tax
return. In addition, federal legislation requires Mutual Federal to recapture,
over a six year period, the excess of tax bad debt reserves at December 31, 1997
over those established as of the base year reserve balance as of December 31,
1987. The amount of such reserve subject to recapture as of June 30, 1999 for
Mutual Federal is approximately $448,000.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended December 31,
1997, were subject to recapture into taxable income should Mutual Federal fail
to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
Mutual Federal make certain non-dividend distributions or cease to maintain a
thrift/bank charter.
MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Mutual Federal has not been subject to the alternative minimum tax, nor do we
have any such amounts available as credits for carryover.
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NET OPERATING LOSS CARRYOVERS. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At June 30, 1999, Mutual Federal had no net
operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. MFS Financial may eliminate from
its income dividends received from Mutual Federal as a wholly owned subsidiary
of MFS Financial if it elects to file a consolidated return with Mutual Federal.
The corporate dividends-received deduction is 100% or 80%, in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated tax return, depending on the level of stock ownership of the
payor of the dividend. Corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of dividends received or
accrued on their behalf.
STATE TAXATION
We are subject to Indiana's financial institutions tax, which is imposed
at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of the financial institutions tax, begins with taxable income as
defined by Section 63 of the Internal Revenue Code and incorporates federal tax
law to the extent that it affects the computation of taxable income. Federal
taxable income is then adjusted by several Indiana modifications.
Other applicable state taxes include generally applicable sales and use
taxes plus real and personal property taxes.
RESTRICTIONS ON ACQUISITION
OF MFS FINANCIAL AND MUTUAL FEDERAL
The principal federal regulatory restrictions which affect the ability of
any person, firm or entity to acquire MFS Financial, Mutual Federal or their
respective capital stock are described below. Also discussed are certain
provisions in MFS Financial's articles of incorporation and
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bylaws which may be deemed to affect the ability of a person, firm or entity to
acquire MFS Financial.
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. 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 conversion, Office
of Thrift Supervision regulations generally prohibit any person from acquiring
or making an offer to acquire beneficial ownership of more than 10% of the stock
of MFS Financial or Mutual Federal without Office of Thrift Supervision
approval.
ARTICLES OF INCORPORATION AND BYLAWS OF MFS FINANCIAL
The following discussion is a summary of certain provisions of the
articles of incorporation and bylaws of MFS Financial that relate to corporate
governance. The description is necessarily general and qualified by reference to
the articles of incorporation and bylaws.
DIRECTORS. Certain provisions of MFS Financial's articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. MFS Financial's articles of incorporation provide that the board of
directors will be divided into three classes, with directors in each class
elected for three-year staggered terms except for the initial directors. Thus,
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<PAGE>
assuming a board of three directors or more, it would take two annual elections
to replace a majority of MFS Financial's board. MFS Financial's articles of
incorporation also provides that the size of the board of directors may be
increased or decreased only by a majority vote of the whole board or by a vote
of 80% of the shares eligible to be voted at a duly constituted meeting of
stockholders called for such purpose. The bylaws also provide that any vacancy
occurring in the board of directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Finally, the bylaws
impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the board of directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The articles of incorporation provide that a director may only be removed
for cause by the affirmative vote of 80% of the shares eligible to vote.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The articles of incorporation of
MFS Financial provides that a special meeting of stockholders may be called only
through a resolution of the board of directors and only for business as directed
by the board. Stockholders are not authorized to call a special meeting.
ABSENCE OF CUMULATIVE VOTING. MFS Financial's articles of incorporation
do not provide for cumulative voting rights in the election of directors.
AUTHORIZATION OF PREFERRED STOCK. The articles of incorporation of MFS
Financial authorizes 5,000,000 shares of serial preferred stock, $.01 par value.
MFS Financial is authorized to issue preferred stock from time to time in one or
more series subject to applicable provisions of law, and the board of directors
is authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights, which could be multiple or as a separate class, and conversion
rights. In the event of a proposed merger, tender offer or other attempt to gain
control of MFS Financial that the board of directors does not approve, it might
be possible for the board of directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. If MFS Financial issued any preferred stock which
disparately reduced the voting rights of the common stock, the common stock
could be required to be delisted from the Nasdaq System. An effect of the
possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The board of directors has no present plans or understandings
for the issuance of any preferred stock and does not intend to issue any
preferred stock except on terms which the board deems to be in the best
interests of MFS Financial and its stockholders.
LIMITATION ON VOTING RIGHTS. The articles of incorporation of MFS
Financial provide that in no event shall any record owner of any outstanding
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns more than 10% of the then outstanding shares of common
stock, be entitled or permitted to any vote in respect of the shares held in
excess of the 10% limit. This limitation would not stop any person from
soliciting or voting proxies from other beneficial owners for more than 10% of
the common stock. This includes shares beneficially owned by any affiliate of a
person, shares which a person or his affiliates have the right to acquire upon
the exercise of conversion rights or options and shares as to which a person and
his affiliates have or share investment or voting power, but shall not
include shares beneficially owned by directors, officers and employees of Mutual
Federal or MFS Financial. This provision will be enforced by the board of
directors to limit the voting rights of persons beneficially owning more than
10% of the stock and thus could be utilized in a proxy contest or other
solicitation to defeat a proposal that is desired by a majority of the
stockholders.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. MFS Financial's articles of
incorporation require that certain business combinations, including transactions
initiated by management, between MFS Financial, or any majority-owned subsidiary
thereof, and a 10% or more stockholder either (i) be approved by at least 80% of
the total number of outstanding voting shares, voting as a single class, of MFS
Financial, (ii) be approved by two-thirds of the board of
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<PAGE>
directors (i.e., persons serving prior to the 10% stockholder reaching that
ownership level) or (iii) involve consideration per share generally equal to
that paid by the 10% stockholder when it ac quired its block of stock.
It should be noted that, since the board and management intend to purchase
approximately $3.2 million of the shares offered in the conversion and may
control the voting of additional shares through the employee stock ownership
plan and proposed restricted stock plan and stock option plan, the board and
management may be able to block the approval of combinations requiring an 80%
vote even where a majority of the stockholders vote to approve such
combinations.
AMENDMENTS TO THE ARTICLES OF INCORPORATION AND BYLAWS. Amendments to MFS
Financial's articles of incorporation must be approved by MFS Financial's board
of Directors and also by a majority of the outstanding shares of MFS Financial's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for amendment of certain
provisions, including provisions relating to number, classification, election
and removal of directors; amendment of bylaws; call of special stockholder
meetings; offers to acquire and acquisitions of control; director liability;
certain business combinations; power of indemnification; and amendments to
provisions relating to the foregoing in the articles of incorporation.
The bylaws may be amended by a majority vote of the board of directors or
the affirmative vote of at least 80% of the total votes eligible to be voted at
a duly constituted meeting of stockholders.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF MFS FINANCIAL'S ARTICLES OF
INCORPORATION AND BYLAWS. We believe that the provisions described above are
prudent and will reduce MFS Financial's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its board of directors. These provisions will also assist us in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the conversion. We believe these provisions are in the best
interest of Mutual Federal and of MFS Financial. MFS Financial's board will be
in the best position to determine the true value of MFS Financial and to
negotiate more effectively for what may be in the best interests of our
stockholders. Accordingly, we believe that it is in the best interests of MFS
Financial and its stockholders to encourage potential acquirors to negotiate
directly with the board of directors of MFS Financial and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also our view that these provisions should not discourage persons from
proposing a merger or other transaction at prices reflective of the true value
of MFS Financial and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding companies
have recently become increasingly common. Takeover attempts which have not been
negotiated with and approved by the board of directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the board of
directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for MFS Financial and its
stockholders,
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with due consideration given to matters such as the management and business of
the acquiring corporation and maximum strategic development of MFS Financial's
assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, these offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could result in MFS
Financial no longer being a reporting company with the SEC and therefore deprive
MFS Financial's remaining stockholders of the benefits of the disclosure
requirements of the Federal securities laws.
Despite our belief as to the benefits to stockholders of these provisions
of MFS Financial's articles of incorporation and bylaws, these provisions may
also have the effect of discouraging a future takeover attempt which would not
be approved by MFS Financial's board, but pursuant to which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have any opportunity to do so. These provisions will also render the
removal of MFS Financial's board of directors and of management more difficult.
MFS Financial will enforce the voting limitation provisions of the articles of
incorporation in proxy solicitations and accordingly could utilize these
provisions to defeat proposals that are favored by a majority of the
stockholders. We, however, have concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the conversion, MFS Financial may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Maryland corporation. MFS Financial does not presently intend to
propose the adoption of further restrictions on the acquisition of MFS
Financial's equity securities.
BENEFIT PLANS
In addition to the provisions of MFS Financial's articles of
incorporation and bylaws described above, the employment agreements entered into
in connection with the conversion and certain benefit plans that MFS Financial
and Mutual Federal intend to adopt after completion of this offering contain
provisions which also may discourage hostile takeover attempts which the board
of directors of Mutual Federal might conclude are not in the best interests of
MFS Financial, MFS Financial and Mutual Federal or MFS Financial's stockholders.
For a description of these employment agreements and benefit plans and the
provisions of such employment agreements and plans relating to changes in
control of MFS Financial or Mutual Federal, see "Management - Benefits."
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DESCRIPTION OF CAPITAL STOCK OF
MFS FINANCIAL
GENERAL
MFS Financial is authorized to issue 20 million shares of common stock
having a par value of $0.01 per share and 5 million shares of preferred stock
having a par value of $0.01 per share. MFS Financial currently expects to issue
up to a maximum of 5,175,000 shares of common stock, or 5,951,250 shares in the
event that the maximum of the estimated offering range is increased by 15%, and
no shares of preferred stock in the conversion. Each share of MFS Financial's
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 plan of conversion, all of the
stock will be duly authorized, fully paid and nonassessable. Presented below is
a description of all aspects of MFS Financial's capital stock which are deemed
material to an investment decision with respect to the conversion.
The common stock of MFS Financial will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
COMMON STOCK
DISTRIBUTIONS. MFS Financial can pay dividends if, as and when declared by
its board of directors, subject to compliance with limitations which are imposed
by law. See "Our Policy Regarding Dividends." The holders of common stock of MFS
Financial will be entitled to receive and share equally in these dividends as
they may be declared by the board of directors of MFS Financial out of funds
legally available therefor. If MFS Financial issues preferred stock, the holders
thereof may have a priority over the holders of the common stock with respect to
dividends.
VOTING RIGHTS. Upon the effective date of the conversion, the holders of
common stock of MFS Financial will possess exclusive voting rights in MFS
Financial. 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 shares of common stock may be considered "excess shares" and,
accordingly, not be entitled to vote. See "Restrictions on Acquisition of MFS
Financial and Mutual Federal." If MFS Financial 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
Mutual Federal, MFS Financial, as holder of Mutual Federal's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of Mutual Federal, including all deposit accounts and
accrued interest thereon, all assets of Mutual Federal available for
distribution. In the event of liquidation, dissolution or winding up of MFS
Financial, 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 MFS Financial 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.
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RIGHTS TO BUY ADDITIONAL SHARES. Holders of the common stock of MFS
Financial will not be entitled to preemptive rights with respect to any shares
which may be issued. Preemptive rights are the priority right to buy additional
shares if MFS Financial issues more shares in the future. The common stock is
not subject to redemption.
PREFERRED STOCK
None of the shares of MFS Financial's authorized preferred stock will be
issued in the conversion. This stock may be issued with 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. MFS Financial
has no present plans to issue preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for MFS Financial common stock is
Continental Stock Transfer & Trust Company, New York, New York.
EXPERTS
Our consolidated financial statements at December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been audited by Olive LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the registration
statement, and are included in reliance upon the report of this firm given upon
the authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to Mutual Federal setting forth its opinion as to the estimated pro forma
market value of the common stock upon conversion and its letter with respect to
subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences
of the conversion have been passed upon for Mutual Federal by Silver, Freedman &
Taff, L.L.P., Washington, D.C., special counsel to Mutual Federal and MFS
Financial. The Indiana income tax consequences of the conversion have been
passed upon for Mutual Federal by Olive LLP. The federal income tax
consequences of the deductibility of a contribution of MFS Financial common
stock to the private foundation, and applicability of the self-dealing rules to
the contribution have been passed upon Mutual Federal by Olive LLP. Certain
legal matters will be passed upon for Charles Webb & Company by Muldoon, Murphy
& Faucette LLP, Washington, D.C.
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ADDITIONAL INFORMATION
MFS Financial has filed with the SEC a registration statement under the
Securities Act of 1933 with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus does not
contain all the information set forth in the registration statement. This
information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of this material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including MFS Financial. The
statements contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
statement is qualified by reference to the contract or document. Mutual Federal
also maintains a website (HTTP://WWW.MFSBANK.COM) which contains various
information about Mutual Federal.
Mutual Federal has filed an Application for Conversion and a Holding
Company Application on Form H-(e)1 with the Office of Thrift Supervision with
respect to the conversion. This prospectus omits certain information contained
in those applications. The applications may be examined at the principal office
of the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C.
20552, and at the Central Regional Office of the Office of Thrift Supervision
located at 200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
In connection with the conversion, MFS Financial has registered its common
stock with the SEC under Section 12 of the Securities Exchange Act of 1934, and,
upon such registration, MFS Financial and the holders of its stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Securities Exchange Act of 1934. Under the plan of conversion, MFS
Financial has undertaken that it will not terminate this registration for a
period of at least three years following the conversion.
A copy of the plan of conversion, the articles of incorporation and the
charter and bylaws of MFS Financial and Mutual Federal are available without
charge from Mutual Federal. Requests for such information should be directed to:
Stockholder Relations, Mutual Federal Savings Bank, 110 E. Charles Street,
Muncie, Indiana 47305-2400.
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MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
Independent Auditors' Report.........................................................................F-2
Consolidated Balance Sheet as of June 30, 1999 (unaudited) and
December 31, 1998 and 1997..........................................................................F-3
Consolidated Statement of Income for the Six Months Ended June 30, 1999
and 1998 (unaudited) and for the Years Ended December 31, 1998, 1997 and 1996........................66
Consolidated Statement of Equity Capital for the Six Months Ended June 30, 1999
(unaudited) and for the Years Ended December 30, 1998, 1997 and 1996................................F-4
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999
and 1998 (unaudited) and for the Years Ended December 31, 1998, 1997 and 1996.......................F-5
Notes to Consolidated Financial Statements...........................................................F-6
</TABLE>
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of MFS Financial have been omitted because MFS
Financial has not yet issued any stock, has no assets or liabilities, and has
not conducted any business other than that of an organizational nature.
F-1
<PAGE>
Independent Auditor's Report
Board of Directors
Mutual Federal Savings Bank and Subsidiaries
Muncie, Indiana
We have audited the accompanying consolidated balance sheet of
Mutual Federal Savings Bank and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of
income, equity capital, and cash flows for each of the three
years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of
the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
described above present fairly, in all material respects, the
consolidated financial position of Mutual Federal Savings Bank
and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Olive LLP
Indianapolis, Indiana
February 10, 1999, except for Note 18
as to which the date is August 25, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Balance Sheet
December 31
June 30, ------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash $ 11,673,094 $ 11,368,571 $ 9,433,375
Short-term interest-bearing demand deposits in other banks 927,071 1,569,531 915,173
------------------------------------------------
Cash and cash equivalents 12,600,165 12,938,102 10,348,548
Trading account securities 1,357,734
Investment securities
Available for sale 10,121,443 14,207,620 12,370,202
Held to maturity (fair value of $12,621,000,
$11,021,000 and $10,167,000) 12,825,818 11,003,674 10,167,389
-------------------------------------------------
Total investment securities 22,947,261 25,211,294 22,537,591
Loans 424,202,812 401,569,693 402,380,696
Allowance for loan losses (3,663,759) (3,423,650) (3,090,919)
-------------------------------------------------
Net loans 420,539,053 398,146,043 399,289,777
Premises and equipment 7,786,233 7,728,569 6,862,625
Federal Home Loan Bank stock 3,612,400 3,612,400 3,612,400
Investment in limited partnerships 5,282,436 5,265,796 1,407,410
Cash surrender value of life insurance 9,560,000 9,350,000 5,966,144
Foreclosed assets 210,000 45,911 1,590,909
Interest receivable
Loans 2,150,363 1,976,335 2,147,736
Mortgage-backed securities 22,398 41,290 57,567
Investment securities and interest-bearing deposits 314,091 168,927 173,459
Core deposit intangibles and goodwill 1,584,696 1,702,465 1,906,227
Deferred income tax benefit 1,000,138 1,024,450 1,338,669
Other assets 1,067,963 2,303,843 1,455,872
-------------------------------------------------
Total assets $490,034,931 $469,515,425 $458,694,934
=================================================
Liabilities
Deposits
Non-interest bearing $ 14,409,444 $ 14,884,904 $ 12,437,447
Interest bearing 370,152,900 351,114,505 332,422,771
-------------------------------------------------
Total deposits 384,562,344 365,999,409 344,860,218
Borrowings 53,160,624 52,462,018 66,254,521
Advances by borrowers for taxes and insurance 1,349,720 1,260,298 1,288,649
Interest payable 1,852,452 2,327,966 2,469,504
Other liabilities 3,490,502 3,619,938 4,162,382
-------------------------------------------------
Total liabilities 444,415,642 425,669,629 419,035,274
-------------------------------------------------
Commitments and Contingencies
Equity Capital
Retained earnings 45,724,829 43,801,385 39,662,165
Accumulated other comprehensive income (loss) (105,540) 44,411 (2,505)
-------------------------------------------------
Total equity capital 45,619,289 43,845,796 39,659,660
-------------------------------------------------
Total liabilities and equity capital $490,034,931 $469,515,425 $458,694,934
=================================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Equity Capital
Accumulated
Other
Comprehensive Retained Comprehensive
Income Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 $32,827,663 $ 36,606 $32,864,269
Comprehensive income
Net income $2,699,526 2,699,526 2,699,526
Other comprehensive loss, net of tax
Unrealized losses on securities, net
of reclassification adjustment (84,406) (84,406) (84,406)
----------
Comprehensive income $2,615,120
==========---------------------------------------------------------
Balances, December 31, 1996 35,527,189 (47,800) 35,479,389
Comprehensive income
Net income $4,134,976 4,134,976 4,134,976
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment 45,295 45,295 45,295
----------
Comprehensive income $4,180,271
==========---------------------------------------------------------
Balances, December 31, 1997 39,662,165 (2,505) 39,659,660
Comprehensive income
Net income $4,139,220 4,139,220 4,139,220
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment 46,916 46,916 46,916
----------
Comprehensive income $4,186,136
==========---------------------------------------------------------
Balances, December 31, 1998 43,801,385 44,411 43,845,796
Comprehensive income
Net income for the six months ended
June 30, 1999 (unaudited) $1,923,444 1,923,444 1,923,444
Other comprehensive loss, net of tax
Unrealized losses on securities, net
of reclassification adjustment (149,951) (149,951) (149,951)
----------
Comprehensive income for the six months
ended June 30, 1999 (unaudited) $1.773,493
==========
Balances, June 30, 1999 (unaudited) $45,724,829 $(105,540) $45,619,289
=================================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Six Months Ended
June 30 Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income $1,923,444 $ 2,230,932 $ 4,139,220 $ 4,134,976 $ 2,699,526
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 380,000 382,500 1,265,000 700,000 570,000
Securities gains (32,326) (1,000) (1,000) (3,000)
Net loss on disposal of premise and
equipment --- --- 19,301
Net loss on sale of real estate owned 34,077 74,607 137,112
Securities amortization (accretion), net (9,458) (22,383) (26,390) 90 33,061
Equity in losses of limited partnerships 10,327 12,580 14,435 311,874 6,902
Amortization of net loan origination
costs 108,723 259,643 842,251 840,125 899,631
Amortization of core deposit
intangibles and goodwill 117,769 123,036 246,194 33,078 9,147
Depreciation and amortization 333,241 263,746 570,184 616,787 591,940
Deferred income tax 96,135 375,520 282,942 (269,454) (199,864)
Loans originated for sale --- (16,415,824) (16,295,533) (5,706,313) (5,824,760)
Proceeds from sales on loans held for sale --- 16,468,717 35,447,044 5,743,831 5,836,706
Gains on sales of loans held for sale --- (52,883) (548,491) (37,518) (11,946)
Change in
Trading account securities (1,357,734) --- --- 454,732 (454,732)
Interest receivable (300,300) (31,953) 192,210 (47,054) (29,197)
Other assets 1,164,057 (299,823) (847,971) 106,847 (500,306)
Interest payable (475,514) (569,801) (141,538) 33,975 15,387
Other liabilities (129,436) (775,044) (542,445) 405,047 644,795
Increase in cash surrender value of
life insurance (210,000) (138,000) (383,856) (240,000) (161,044)
Other adjustments 131,602 61,084 6,646 258,439 (27,933)
Net cash provided by operating ---------------------------------------------------------------------------
activities 1,784,607 1,945,654 24,375,315 7,336,462 4,097,313
---------------------------------------------------------------------------
Investing Activities
Purchases of securities available for sale (2,014,539) (2,513,031) (7,016,986) (10,828,305) (1,198,996)
Proceeds from maturities and paydowns
of securities available for sale 963,216 479,630 2,150,076 894,391 818,642
Proceeds from sales of securities
available for sale 4,874,497 1,690,338 4,115,510 9,415,998 987,723
Purchases of securities held to maturity (6,006,993) (2,498,438) (11,793,604) (5,684,297) (1,599,188)
Proceeds from maturities and paydowns
of securities held to maturity 4,175,686 4,550,000 10,973,718 4,505,500 6,035,000
Net change in loans (23,276,595) (3,711,230) (20,685,925) (24,212,540) (34,397,531)
Purchases of premises and equipment (390,906) (595,990) (1,461,965) (903,571) (778,439)
Proceeds from real estate owned sales 203,149 1,439,969 1,565,489 52,425 413,269
Purchase of FHLB of Indianapolis stock --- --- --- (241,700) (817,900)
Purchase of interest in limited
partnership --- (2,085,000) (2,085,000) --- ---
Distribution from limited partnership 5,521 26,309 55,074 137,098 110,041
Purchases of insurance contracts --- (2,250,000) (3,000,000) (300,000)
Cash received on branch acquisition --- 309,413 309,413 11,903,914
Other investing activities (6,543) (27,320) (22,778) 118,676 638
Net cash used by investing ---------------------------------------------------------------------------
activities (21,473,507) (5,185,350) (26,896,978) (15,142,411) (30,426,741)
---------------------------------------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits 948,842 634,469 23,571,794 (9,259,396) 3,944,769
Certificates of deposits 17,614,093 13,471,474 (2,784,446) 9,811,301 14,072,148
Short-tem borrowings --- --- --- (1,400,000) (800,000)
Repayment of note payable (30,678) --- (25,566)
Proceeds from FHLB advances 32,000,000 35,500,000 53,700,000 113,195,000 115,584,400
Repayment of FHLB advances (31,270,716) (43,619,182) (69,322,214) (106,649,421) (104,458,249)
Net change in advances by borrowers
for taxes and insurance 89,422 34,734 (28,351) (83,756) 61,707
Net cash provided by financing ---------------------------------------------------------------------------
activities 19,350,963 6,021,495 5,111,217 5,613,728 28,404,775
---------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (337,937) 2,781,799 2,589,554 (2,192,221) 2,075,347
Cash and Cash Equivalents, Beginning of Year 12,938,102 10,348,548 10,348,548 12,540,769 10,465,422
---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $12,600,165 $13,130,347 $12,938,102 $10,348,548 $12,540,769
===========================================================================
Additional Cash Flows Information
Interest paid $ 9,727,013 $10,626,260 $19,831,233 $19,048,580 $17,835,312
Income tax paid 670,000 1,323,400 2,524,700 2,449,536 1,035,762
Transfers from loans to foreclosed real
estate 394,862 82,378 128,288 1,873,356 376,708
Note payable issued for investment in
limited partnership --- 1,855,277 1,855,277 --- ---
Loans transferred to loans held for sale --- --- 18,603,020 --- ---
Mortgage servicing rights capitalized --- 164,171 257,185 146,828 ---
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Mutual Federal Savings Bank (Bank) and
its wholly owned subsidiaries, First MFSB Corporation and Third MFSB
Corporation, conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the policies
are described below.
During the year, Kosciusko Service Corporation, a formerly wholly owned
subsidiary, was merged into the Bank.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Bank operates under a federal thrift charter and provides full banking
services. As a federally chartered thrift, the Bank is subject to regulation by
the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Delaware, Kosciusko, Randolph and surrounding
counties. The Bank's loans are generally secured by specific items of collateral
including real property and consumer assets. First MFSB sells various insurance
products. Third MFSB offers tax deferred annuities and long-term health care and
life insurance products.
Consolidation--The consolidated financial statements include the accounts of the
Bank and its subsidiaries after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Bank has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost. Debt securities not
classified as held to maturity, or included in the trading account and
marketable equity securities not classified as trading, are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in accumulated other
comprehensive income, net of tax. Trading account securities are held for resale
in anticipation of short-term market movements and are valued at fair value.
Gains and losses, both realized and unrealized, are included in other income.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities, adjusted for anticipated
prepayments. Realized gains and losses are recorded as net security gains
(losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-6
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Bank
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual maturity of the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 1999 (unaudited) and December 31, 1998 and 1997, the allowance for loan
losses is adequate based on information currently available. A worsening or
protracted economic decline in the area within which the Bank operates would
increase the likelihood of additional losses due to credit and market risks and
could create the need for additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 3 to 50 years. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank (FHLB) system. The required investment in
the common stock is based on a predetermined formula.
Investment in limited partnerships is recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
F-7
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Intangible assets are being amortized primarily on a straight-line and
accelerated basis over a period of fifteen years. Such assets are periodically
evaluated as to the recoverability of their carrying value.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
files consolidated income tax returns with its subsidiaries.
Reclassifications of certain amounts in the 1998, 1997 and 1996 consolidated
financial statements have been made to conform to the 1999 presentation.
Note 2 - Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at June 30, 1999 (unaudited) was
$2,022,000 and at December 31, 1998, was $3,652,000.
Note 3 - Investment Securities
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities $ 3,515 $21 $ (87) $ 3,449
Federal agencies 798 30 828
Marketable equity securities 5,983 (139) 5,844
-----------------------------------------------------------------
Total available for sale 10,296 51 (226) 10,121
-----------------------------------------------------------------
Held to maturity
Federal agencies 10,551 1 (206) 10,346
Corporate obligations 2,125 2,125
Municipal obligation 150 150
-----------------------------------------------------------------
Total held to maturity 12,826 1 (206) 12,621
-----------------------------------------------------------------
Total investment securities $23,122 $52 $(432) $22,742
=================================================================
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale
Mortgage-backed securities $ 5,129 $171 $ (3) $ 5,297
Federal agencies 1,244 42 1,286
Marketable equity securities 7,761 (136) 7,625
-----------------------------------------------------------------
Total available for sale 14,134 213 (139) 14,208
-----------------------------------------------------------------
Held to maturity
Federal agencies 6,220 13 (13) 6,220
Corporate obligations 4,634 22 (5) 4,651
Municipal 150 150
-----------------------------------------------------------------
Total held to maturity 11,004 35 (18) 11,021
-----------------------------------------------------------------
Total investment securities $25,138 $248 $(157) $25,229
=================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale
Mortgage-backed securities $ 4,125 $142 $ (27) $ 4,240
Federal agencies 1,406 28 (8) 1,426
Marketable equity securities 6,843 (139) 6,704
-----------------------------------------------------------------
Total available for sale 12,374 170 (174) 12,370
-----------------------------------------------------------------
Held to maturity
Federal agencies 8,381 (10) 8,371
Corporate obligations 1,636 10 1,646
Municipal 150 150
-----------------------------------------------------------------
Total held to maturity 10,167 10 (10) 10,167
-----------------------------------------------------------------
Total investment securities $22,541 $180 $(184) $22,537
=================================================================
</TABLE>
Marketable equity securities consist of shares in mutual funds which invest in
government obligations and mortgage-backed securities.
F-9
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1999 (unaudited) and at December 31, 1998, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------------------------------------------
Amortized Fair Amortized Fair
June 30 Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Within one year $ 1,553 $ 1,549
One to five years 6,128 6,052
Five to ten years 4,495 4,399
After ten years 650 621
-------------------------------------------------------------------
12,826 12,621
Mortgage-backed securities $ 3,515 $ 3,449
Small Business Administration 798 828
Marketable equity securities 5,983 5,844
-------------------------------------------------------------------
Totals $10,296 $10,121 $12,826 $12,621
===================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------------------------------------------
Amortized Fair Amortized Fair
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 3,806 $ 3,807
One to five years 4,873 4,897
Five to ten years 2,175 2,167
After ten years 150 150
-------------------------------------------------------------------
11,004 11,021
Mortgage-backed securities $ 5,129 $ 5,297
Small Business Administration 1,244 1,286
Marketable equity securities 7,761 7,625
-------------------------------------------------------------------
Totals $14,134 $14,208 $11,004 $11,021
===================================================================
</TABLE>
Securities with a carrying value of $16,186,000, $12,803,000 and $14,038,000
were pledged at June 30, 1999 (unaudited) and at December 31, 1998 and 1997 to
secure FHLB advances.
Proceeds from sales of securities available for sale during the six months ended
June 30, 1999 and 1998 (unaudited) and the years ended December 31, 1998, 1997
and 1996 were $4,874,000, $1,690,000, $4,116,000, $9,416,000 and $988,000. Gross
gains of $79,000 and $1,000 and gross losses of $47,000 for the six months ended
June 30, 1999 and 1998 (unaudited) and gross gains of $1,000 and $3,000 were
realized on those sales in 1998 and 1997. No gains or losses were realized on
the sales in 1996.
F-10
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Trading account securities at June 30, 1999 (unaudited) consisted of U. S.
Government bonds with a fair value of $1,358,000. Unrealized holding losses of
$89,000 were included in earnings for the six months ended June 30, 1999
(unaudited) and there were no unrealized holding gains or losses on trading
securities included in earnings in 1998, 1997 and 1996.
Mortgage-backed securities included in investment securities available for sale
above consist of the following:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Freddie Mac $1,120 $21 $(11) $1,130
Fannie Mae 2,395 (76) 2,319
-------------------------------------------------------------------
Total mortgage-backed securities $3,515 $21 $(87) $3,449
===================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ginnie Mae $ 887 $ 49 $ 936
Freddie Mac 1,273 47 1,320
Fannie Mae 1,970 28 $(3) 1,995
Veterans Affairs 999 47 1,046
-------------------------------------------------------------------
Total mortgage-backed securities $5,129 $171 $(3) $5,297
===================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ginnie Mae $1,215 $ 55 $1,270
Freddie Mac 1,059 37 1,096
Fannie Mae 853 $(27) 826
Veterans Affairs 998 50 1,048
-------------------------------------------------------------------
Total mortgage-backed securities $4,125 $142 $(27) $4,240
===================================================================
</TABLE>
F-11
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 - Loans and Allowance
<TABLE>
<CAPTION>
December 31
June 30, ---------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loans
Real estate loans
One to four family $277,852 $264,461 $266,971
Multi family 5,702 6,282 7,694
Commercial 13,136 10,293 8,131
Construction and development 8,874 11,805 10,385
----------------------------------------------------
305,564 292,841 293,181
----------------------------------------------------
Consumer loans
Auto 17,644 17,820 19,977
Home equity 10,047 10,253 11,366
Home improvement 12,134 12,108 14,485
Mobile home 13,708 15,466 20,017
Recreational vehicles 22,418 19,100 14,564
Boats 32,275 23,608 21,553
Credit cards 2,025 2,281 2,578
Other 2,421 3,472 3,007
----------------------------------------------------
112,672 104,108 107,547
Commercial business loans 9,600 7,285 5,211
----------------------------------------------------
Total loans 427,836 404,234 405,939
Less
Undisbursed portion of loans 4,647 3,353 3,998
Deferred loan fees, and costs, net (1,014) (689) (440)
----------------------------------------------------
$424,203 $401,570 $402,381
====================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
------------------------------------------------------------------
1999 1998 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
Balances, beginning of period $3,424 $3,091 $3,091 $2,990 $2,754
Provision for losses 380 382 1,265 700 570
Recoveries on loans 105 57 106 91 49
Loans charged off (245) (293) (1,038) (690) (383)
------------------------------------------------------------------
Balances, end of period $3,664 $3,237 $3,424 $3,091 $2,990
==================================================================
</TABLE>
F-12
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Impaired loans with an allowance $504 $506
=============================
Allowance for impaired loans included in the Bank's
allowance for loan losses $100 $25
=============================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
--------------------------------------------------------------
1999 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Average balance of impaired loans $504 $519 $517 $949 $526
Interest income recognized on impaired
loans 9 25 56
Cash-basis interest included above 9 25 56
</TABLE>
There were no impaired loans at December 31, 1997.
Note 5 - Premises and Equipment
<TABLE>
<CAPTION>
December 31
June 30, --------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cost
Land $1,569 $1,557 $1,442
Buildings and land improvements 8,246 8,213 7,833
Equipment 4,939 4,635 4,405
--------------------------------------------------
Total cost 14,754 14,405 13,680
Accumulated depreciation (6,968) (6,676) (6,817)
--------------------------------------------------
Net $7,786 $7,729 $6,863
==================================================
</TABLE>
F-13
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 - Investment In Limited Partnership
<TABLE>
<CAPTION>
December 31
June 30, -----------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Investments in limited partnerships
Pedcor Investments 1988-V (98.97 percent
ownership, equity method of accounting) $ 514 $ 523 $ 578
Pedcor Investments 1990-XIII (99.00 percent
ownership, equity method of accounting) 693 696 711
Pedcor Investments 1990-XI (19.79 percent
ownership, at amortized cost) 101 107 118
Pedcor Investments 1997-XXVlll (99.00 percent
ownership, equity method of accounting) 3,974 3,940
-------------------------------------------------
$5,282 $5,266 $1,407
=================================================
</TABLE>
The limited partnerships build, own and operate apartment complexes. The Bank
records its equity in the net income or loss of the Pedcor Investments 1988-V,
1990-XIII, and 1997-XXVIII based on the Bank's interest in the partnerships. The
Bank has recorded its investment in Pedcor Investments 1990-XI, which represents
less than a 20 percent ownership, at amortized cost and records income when
distributions are received. In addition, the Bank has recorded the benefit of
low income housing credits of $131,000 for the six months ended June 30, 1999
and 1998 (unaudited) and $262,000 for 1998, 1997 and 1996. Condensed financial
statements for Pedcor Investments 1988-V, 1990-XIII, and 1997-XXVIII recorded
under the equity method of accounting are as follows:
<TABLE>
<CAPTION>
December 31
June 30, -----------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Condensed statement of financial condition
Assets
Cash $ 221 $ 198 $ 180
Land and property 21,234 18,664 12,640
Other assets 3,172 6,303 1,094
----------------------------------------------
Total assets $24,627 $25,165 $13,914
==============================================
Liabilities
Notes payable $22,957 $23,021 $14,109
Other liabilities 514 1,020 435
----------------------------------------------
Total liabilities 23,471 24,041 14,544
Partners' equity (deficit) 1,156 1,124 (630)
----------------------------------------------
Total liabilities and partners' equity $24,627 $25,165 $13,914
==============================================
</TABLE>
F-14
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
---------------------------------------------------------------------
1999 1998 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Condensed statement of operations
Total revenue $1,191 $1,154 $2,389 $2,418 $2,380
Total expenses 1,184 1,142 2,377 2,418 2,511
---------------------------------------------------------------------
Net income $ 7 $ 12 $ 12 $ 0 $ (131)
=====================================================================
</TABLE>
Note 7 - Deposits
<TABLE>
<CAPTION>
December 31
June 30, ----------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Noninterest-bearing demand $ 14,409 $ 14,885 $ 12,437
Interest-bearing demand 37,777 42,354 34,266
Regular passbook 40,329 39,418 39,793
90-day passbook 2,567 2,824 2,566
Money market savings 39,035 33,686 26,236
Certificates and other time deposits of
$100,000 or more 63,785 36,148 33,867
Other certificates 186,660 196,684 195,695
----------------------------------------------------
Total deposits $384,562 $365,999 $344,860
====================================================
</TABLE>
Certificates including other time deposits of $100,000 or more maturing in years
ending:
June 30 December 31
- ----------------------------------------------------------
(Unaudited)
1999 $154,662
2000 $192,800 58,418
2001 39,781 8,527
2002 7,669 6,553
2003 5,846 4,651
2004 4,349 21
----------------------------------
$250,445 $232,832
==================================
F-15
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Deposits in excess of $100,000 are not federally insured.
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
-------------------------------------------------------------------------------
1999 1998 1998 1997 1996
-------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense on deposits
Interest-bearing demand $ 324 $ 379 $ 745 $ 719 $ 696
Money market savings deposits 468 206 560 391 426
Savings deposits 388 527 1,038 1,114 1,135
Certificates 6,736 7,066 14,100 13,179 12,125
-------------------------------------------------------------------------------
$7,916 $8,178 $16,443 $15,403 $14,382
===============================================================================
</TABLE>
Note 8 - Securities Sold Under Repurchase Agreements
Mortgage-backed securities sold under agreements to repurchase consist of
obligations of the Bank to other parties. The obligations are secured by
mortgage-backed securities and such collateral is held at a financial
institution and the Federal Home Loan Bank.
There were no outstanding agreements at June 30, 1999 (unaudited) and at
December 31, 1998 and 1997 or at any month-end during 1999 and 1998. The maximum
amount of outstanding agreements at any month-end during 1997 and 1996 totaled
$875,000 and $3,914,000 and the monthly average of such agreements totaled
$5,000 for the six months ended June 30, 1998 (unaudited) and $2,000, $20,000
and $2,717,000 for the years ended December 31, 1998, 1997 and 1996.
Note 9 - Borrowings
<TABLE>
<CAPTION>
December 31
June 30, -------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Federal Home Loan Bank advances $51,362 $50,632 $66,255
Note payable to Pedcor 1,799 1,830
--------------------------------------------------
$53,161 $52,462 $66,255
==================================================
</TABLE>
The Bank has a noninterest-bearing, unsecured term note payable to Pedcor
Investments 1997-XXVIII, L.P. of $1,799,000 at June 30, 1999 (unaudited) and
$1,830,000 at December 31, 1998 payable in semiannual installments through
January 1, 2010. At June 30, 1999 (unaudited) and December 31, 1998, the Bank
was obligated under an irrevocable direct pay letter of credit for the benefit
of a third party in the amount of $1,254,000 relating to this note and the
financing for an apartment project by Pedcor Investments 1997-XXVIII L.P. (see
Note 6).
F-16
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances and outstanding letters of credit both qualifying first
mortgage loans and investment securities in an amount equal to at least 170
percent of these advances and letters of credit. Advances are subject to
restrictions or penalties in the event of prepayment.
<TABLE>
<CAPTION>
Federal Home Loan
Bank Advances
-----------------------------------
Weighted Note
Average Payable
Maturities Year Ending June 30 (Unaudited) Rate Amount Pedcor Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 5.37% $17,845 $ 61 $17,906
2001 5.69 3,289 61 3,350
2002 61 61
2003 5.45 6,000 61 6,061
2004 5.01 6,274 61 6,335
Thereafter 5.38 17,954 1,494 19,448
---------------------------------------------
5.36% $51,362 $1,799 $53,161
=============================================
</TABLE>
<TABLE>
<CAPTION>
Federal Home Loan
Bank Advances
-----------------------------------
Weighted Note
Average Payable
Maturities Year Ending December 31 Rate Amount Pedcor Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 5.64% $20,095 $ 61 $20,156
2000 5.90 2,289 61 2,350
2001 61 61
2002 5.48 4,000 61 4,061
2003 5.10 8,273 61 8,334
Thereafter 5.50 15,975 1,525 17,500
--------------------------------------------
5.50% $50,632 $1,830 $52,462
============================================
</TABLE>
F-17
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of these loans consist of the
following:
<TABLE>
<CAPTION>
June 30 December 31
------------------------------------------------------
1999 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Mortgage loan portfolio serviced for
Freddie Mac $23,946 $30,568 $26,906 $16,785 $12,983
Fannie Mae 11,342 773 14,520 908 1,322
Other investors 823 792 882 904 701
-------------------------------------------------------
$36,111 $32,133 $42,308 $18,597 $15,006
=======================================================
</TABLE>
In 1996, the Bank adopted Statement of Financial Accounting Standards (SFAS) No.
122, "Accounting for Mortgage Servicing Rights". This Statement requires the
capitalization of retained mortgage servicing rights on originated or purchased
loans by allocating the total cost of the mortgage loans between the mortgage
servicing rights and the loans (without the servicing rights) based on their
relative fair values. SFAS No. 122 was superseded during 1996 by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". SFAS No. 125 (as did SFAS No. 122) requires the assessment of
impairment of capitalized mortgage servicing rights and requires that impairment
be recognized through a valuation allowance based on the fair value of those
rights. Adoption of SFAS Nos. 122 and 125 has not had a material impact on the
financial statements.
The aggregate fair value of capitalized mortgage servicing rights at June 30,
1999 and 1998 (unaudited) and at December 31, 1998, 1997 and 1996 is based on
comparable market values and expected cash flows, with impairment assessed based
on portfolio characteristics including product type, investor type, and interest
rates.
No valuation allowance was necessary at June 30, 1999 and 1998 (unaudited) and
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
---------------------------------------------------
1999 1998 1998 1997
- ----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Mortgage Servicing Rights
Balances, beginning of period $339,904 $128,298 $128,298
Servicing rights capitalized 164,171 257,185 $146,828
Amortization of servicing rights (30,367) (15,212) (45,579) (18,530)
---------------------------------------------------
Balances, end of period $309,537 $277,257 $339,904 $128,298
===================================================
</TABLE>
F-18
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Table Dollar Amounts in Thousands)
Note 11 - Income Tax
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
------------------------------------------------------------------
1999 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 617 $ 584 $1,308 $1,837 $1,068
State 221 203 458 592 398
Deferred
Federal 72 292 216 (212) (148)
State 24 84 67 (57) (52)
------------------------------------------------------------------
Total income tax expense $ 934 $1,163 $2,049 $2,160 $1,266
==================================================================
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $ 972 $1,154 $2,104 $2,140 $1,348
Effect of state income taxes 161 189 347 353 228
Low income housing credits (131) (131) (262) (262) (262)
Tax exempt income--increase
in cash surrender value (71) (47) (131) (81) (55)
Other 3 (2) (9) 10 7
------------------------------------------------------------------
Actual tax expense $ 934 $1,163 $2,049 $2,160 $1,266
==================================================================
Effective tax rate 32.7% 34.3% 33.1% 34.3% 31.9%
==================================================================
</TABLE>
F-19
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The components of the deferred asset are as follows:
<TABLE>
<CAPTION>
December 31
June 30, ------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Allowance for loan losses $1,448 $1,342 $1,265
Deferred compensation 1,093 1,075 914
Mortgage servicing rights 55
Unrealized loss on securities available for sale 42 2
Other 120 114 104
-----------------------------------------
Total assets 2,703 2,531 2,340
-----------------------------------------
Liabilities
FHLB stock 165 165 165
Depreciation 90 84 46
State income tax 80 88 111
Loan fees 1,068 811 517
Increase in tax bad debt reserve over base year 104 115 138
Deferred securities loss on futures contract 3 4 8
Unrealized gain on securities available for sale 30
Mortgage servicing rights 127 144
Investments in limited partnership 66 66 16
-----------------------------------------
Total liabilities $1,703 1,507 1,001
-----------------------------------------
$1,000 $1,024 $1,339
=========================================
</TABLE>
Income tax expense attributable to securities gains was $12,900 and $400 for the
six months ended June 30, 1999 and 1998 (unaudited) and $400 and $1,200 for the
years ended December 31, 1998 and 1997.
Retained earnings include approximately $6,443,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts at June 30, 1999 (unaudited) and December 31, 1998 was
approximately $2,552,000.
F-20
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 - Other Comprehensive Income
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Tax
Before-Tax Expense Net-of-Tax
Six Months Ended June 30 Amount (Benefit) Amount
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(218) $ 87 $(131)
Less: reclassification adjustment for gains realized
in net income 32 (13) 19
-------------------------------------------------
Net unrealized loss $(250) $100 $(150)
=================================================
1998
-------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended December 31 Amount Expense Amount
- ------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $ 79 $(31) $ 48
Less: reclassification adjustment for gains realized
in net income 1 1
-------------------------------------------------
Net unrealized gains $ 78 $(31) $ 47
=================================================
1997
-------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended December 31 Amount Expense Amount
- ------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $ 78 $(31) $ 47
Less: reclassification adjustment for gains realized
in net income 3 (1) 2
-------------------------------------------------
Net unrealized gains $ 75 $(30) $ 45
=================================================
1996
-------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $(141) $ 57 $ (84)
=================================================
</TABLE>
F-21
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 - Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated statement of
financial condition.
Financial instruments whose contract amount represents credit risk were as
follows:
December 31
June 30 ------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(Unaudited)
Commitments to extend credit $25,099 $20,823 $15,570
At fixed rates ranging from
4.95 to 12.50% 15,474
4.95 to 12.25% 12,707
6.75 to 15.00% 16,414
Loans sold with recourse 134 165 328
Standby letters of credit 2,500 2,500 1,013
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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Bank and subsidiaries are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Bank.
F-22
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 - Year 2000
Like all entities, the Bank and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Bank has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Bank and subsidiaries do business. If remediation efforts of the Bank
or third parties with which the Bank and subsidiaries do business are not
successful, the Year 2000 Issue could have negative effects on the Bank's
financial condition and results of operations in the near term.
Note 15 - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, core capital, and
core leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1999 (unaudited) and
December 31, 1998, 1997 and 1996, the Bank is categorized as well capitalized
and met all subject capital adequacy requirements. There are no conditions or
events since June 30, 1999 (unaudited) that management believes have changed the
Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
---------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk-
weighted assets) $47,529 15.19% $25,035 8.0% $31,294 10.00%
Tier 1 risk-based capital 1 (to risk-
weighted assets) 44,139 14.06% 12,518 4.0% 29,307 6.00%
Core capital 1 (to adjusted total
assets) 44,139 9.04% 14,653 3.0% 24,422 5.00%
Core capital 1 (to adjusted tangible
assets) 44,139 9.04% 6,259 2.0% NA NA
Tangible capital 1 (to adjusted total
assets) 44,139 9.04% 7,327 1.5% NA NA
<FN>
1 As defined by regulatory agencies
</FN>
</TABLE>
F-23
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
----------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk-
weighted assets) $45,243 15.27% $23,710 8.0% $29,637 10.0%
Tier 1 risk-based capital 1 (to risk-
weighted assets) 42,100 14.21% 11,855 4.0% 17,782 6.0%
Core capital 1 (to adjusted total
assets) 42,100 9.03% 13,992 3.0% 23,320 5.0%
Tangible capital 1 (to adjusted
total assets) 42,100 9.03% 6,996 1.5% NA NA
Core capital 1 (to adjusted
tangible assets) 42,100 9.03% 9,328 2.0% NA NA
<FN>
1 As defined by regulatory agencies
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
----------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk- $40,742 14.04% $23,222 8.0% $29,028 10.0%
weighted assets)
Tier 1 risk-based capital 1 (to risk- 37,756 13.00% 11,611 4.0% 17,417 6.0%
weighted assets)
Core capital 1 (to adjusted total 37,756 8.27% 13,694 3.0% 22,823 5.0%
assets)
Core capital 1 (to adjusted tangible 37,756 8.27% 9,129 2.0% NA NA
assets)
Tangible capital 1 (to adjusted total 37,756 8.27% 6,847 1.5% NA NA
assets)
<FN>
1 As defined by regulatory agencies
</FN>
</TABLE>
Reconciliation of capital for financial statement purposes to regulatory capital
was as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------------------------------------------
Core Tangible Risk-Based Core Tangible Risk-Based
Capital Capital Capital Capital Capital Capital
---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Capital for financial statement purposes $45,619 $45,619 $45,619 $43,846 $43,846 $43,846
Less
Net unrealized gain (loss)
on securities available for sale (105) (105) (105) 44 44 44
Goodwill 1,585 1,585 1,585 1,702 1,702 1,702
Low level recourse 135 166
Add
General loan valuation allowance 3,525 3,309
---------------------------------------------------------------------------
Regulatory capital $44,139 $44,139 $47,529 $42,100 $42,100 $45,243
===========================================================================
</TABLE>
F-24
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16 - Employee Benefits
The Bank has a retirement savings 401(k) plan in which substantially all
employees may participate. The contributions are discretionary and determined
annually. For the six months ended June 30, 1999 (unaudited) and for the years
ended December 31, 1998, 1997 and 1996, the Bank matched employees'
contributions at the rate of 50% for the first $600 participant contributions to
the 401(k) and made a contribution to the profit sharing plan of 7% of qualified
compensation. The Bank's expense for the plan was $136,000 and $127,000 for the
six months ended June 30, 1999 and 1998 (unaudited) and $284,000, $252,500 and
$250,000 for the years ended December 31, 1998, 1997 and 1996.
The Bank has a supplemental retirement plan and deferred compensation
arrangements for the benefit of certain officers. These arrangements are funded
by life insurance contracts which have been purchased by the Bank. The Bank's
expense for the plan was $99,000 and $91,000 for the six months ended June 30,
1999 and 1998 (unaudited) and $188,000, $164,000 and $135,000 for the years
ended December 31, 1998, 1997 and 1996.
The Bank has deferred compensation arrangements with certain directors whereby,
in lieu of currently receiving fees, the directors or their beneficiaries will
be paid benefits for an established period following the director's retirement
or death. These arrangements are funded by life insurance contracts which have
been purchased by the Bank. The Bank's expense for the plan was $63,000 and
$58,000 for the six months ended June 30, 1999 and 1998 (unaudited) and
$117,000, $105,000 and $89,000 for the years ended December 31, 1998, 1997 and
1996.
Note 17 - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Securities and Mortgage-Backed Securities--Fair values are based on quoted
market prices.
Loans--The fair value for loans are estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
F-25
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt for periods comparable to the remaining terms to maturity of these
advances.
Note Payable to Pedcor--The fair value of this note is estimated using a
discount calculation based on current rates.
Advances by Borrowers for Taxes and Insurance--The fair value approximates
carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair values of
such commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amount of these investments are
reasonable estimates of the fair value of these financial statements.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
June 30, ---------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $12,600 $12,600 $12,938 $12,938 $10,349 $10,349
Trading account securities 1,358 1,358
Securities available for sale 10,121 10,121 14,208 14,208 12,370 12,370
Securities held to maturity 12,826 12,621 11,004 11,021 10,167 10,167
Loans 420,539 413,394 398,146 402,455 398,299 395,664
Stock in FHLB 3,612 3,612 3,612 3,612 3,612 3,612
Interest receivable 2,487 2,487 2,187 2,187 2,379 2,379
Liabilities
Deposits 384,562 381,170 365,999 366,377 344,860 344,659
FHLB Advances 51,362 51,574 50,632 50,988 66,255 66,691
Note payable--Pedcor 1,799 900 1,830 919
Interest payable 1,852 1,852 2,328 2,328 2,470 2,470
Advances by borrower for taxes
and insurance 1,350 1,350 1,260 1,260 1,289 1,289
</TABLE>
F-26
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 - Subsequent Event--Plan of Conversion
On August 25, 1999, the Board of Directors adopted a Plan of conversion (Plan)
whereby the Bank will convert from a Federally chartered mutual institution to a
Federally chartered stock savings bank. The Plan is subject to approval of
regulatory authorities and members at a special meeting. The stock of the Bank
will be issued to MFS Financial, a holding company formed in connection with the
conversion, and the Bank will become a wholly-owned subsidiary of MFS Financial.
Pursuant to the Plan, shares of capital stock of MFS Financial are expected to
be offered initially for subscription to eligible members of the Bank and
certain other persons as of specified dates subject to various subscription
priorities as provided in the Plan. The capital stock will be offered at a price
to be determined by the Board of Directors based upon an appraisal to be made by
an independent appraisal firm. The exact number of shares to be offered will be
determined by the Board of Directors in conjunction with the determination of
the subscription price. At least the minimum number of shares offered in the
conversion must be sold. Any stock not purchased in the subscription offering
will be sold in a community offering expected to be commenced following the
subscription offering.
The Plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the retained income of the Bank as of
the date of the most recent financial statements contained in the final
conversion prospectus. The liquidation account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors
(eligible account holders) at July 31, 1998 and other depositors (supplemental
eligible account holders) as of September 30, 1999 who continue to maintain
deposits in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, and only in such event, eligible account holders would
receive from the liquidation account a liquidation distribution based on their
proportionate share of the then total remaining qualifying deposits.
Pursuant to the Plan, MFS Financial intends to donate to Mutual Federal Savings
Bank Charitable Foundation, Inc. (Foundation) cash and MFS Financial's common
stock of up to 8% of the value of the common stock to be issued in the
conversion. The Foundation was formed as a complement to the Bank's existing
community activities, and is dedicated to community activities and the promotion
of charitable causes.
A contribution of cash and common stock to the Foundation by MFS Financial would
be tax deductible, subject to an annual limitation based on 10% of MFS
Financial's annual taxable income. MFS Financial, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution. MFS Financial will recognize an expense in the full amount of the
contribution, offset in part by the corresponding tax benefit, during the
quarter in which the contribution is made.
Current regulations allow the Bank to pay dividends on its stock after the
conversion equal to net retained profits for the current year and the two
preceding years, and if its regulatory capital would not thereby be reduced
below the amount then required for the aforementioned liquidation account.
Costs of conversion will be netted from proceeds of sale of common stock and
recorded as a reduction of additional paid-in capital or common stock. If the
conversion is not completed, such costs, totalling $27,500 at June 30, 1999
(unaudited), would be charged to expense.
F-27
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
MFS Financial plans to set up an employee stock ownership plan (ESOP), a
tax-qualified benefit plan, for officers and employees of MFS Financial and the
Bank. It is assumed that 8% of the shares of common stock sold in the conversion
will be purchased by the ESOP with funds loaned by MFS Financial. MFS Financial
and the Bank intend to make annual contributions to the ESOP in an amount equal
to the principal and interest requirement of the debt.
Following consummation of the conversion, MFS Financial intends to adopt a Stock
Option Plan and a Recognition and Award Plan, pursuant to which the MFS
Financial intends to reserve a number of shares of common stock equal to an
aggregate of 10% and 4%, respectively, of the common stock issued in the
conversion for issuance pursuant to stock options and stock grants.
Note 19 - Unaudited Financial Statements
The accompanying consolidated balance sheet as of June 30, 1999, and the
consolidated statements of income, comprehensive income, equity capital and cash
flows for the six months ended June 30, 1999 and 1998 are unaudited, but
management is of the opinion that all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of the
periods reported, have been included in the accompanying financial statements.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of those expected for the remainder of the year.
F-28
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MFS
FINANCIAL, MUTUAL FEDERAL OR CHARLES WEBB & COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO UP TO
DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE 5,951,250 SHARES
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF MFS FINANCIAL OR MUTUAL
FEDERAL SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
-------------- MFS FINANCIAL, INC.
(Proposed Holding Company for
TABLE OF CONTENTS Mutual Federal Savings Bank)
PAGE
Summary.................................................. 3
Risk Factors............................................. 9
Selected Financial and Other Data........................ 13
Recent Developments...................................... 15
Management's Discussion and Analysis of
Recent Financial Information............................ 17
MFS Financial, Inc....................................... 20
Mutual Federal Savings Bank.............................. 20 COMMON STOCK
How We Intend to Use the Proceeds........................ 21
Market for the Common Stock.............................. 23
Our Policy Regarding Dividends........................... 23
Pro Forma Data........................................... 24
Comparison of Valuation and Pro Forma Information
With No Foundation.................................... 32 --------------
Capitalization........................................... 34
Mutual Federal Exceeds All Regulatory Capital PROSPECTUS
Requirements.......................................... 35
Mutual Federal's Conversion.............................. 37 --------------
Proposed Purchases by Management......................... 65
Consolidated Statements of Income........................ 66
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 67
Business of MFS Financial, Inc........................... 84
Business of Mutual Federal............................... 84
Management .............................................. 113
How We Are Regulated..................................... 121
Taxation................................................. 130 CHARLES WEBB & COMPANY,
Restrictions on Acquisition of MFS a Division of Keefe, Bruyette & Woods, Inc.
Financial and Mutual Federal.......................... 131
Description of Capital Stock of MFS Financial............ 136
Transfer Agent and Registrar............................. 137 November 10, 1999
Experts.................................................. 137
Legal and Tax Opinions................................... 137
Additional Information................................... 138
Index to Consolidated Financial Statements............... F-1
</TABLE>
DEALER PROSPECTUS DELIVER OBLIGATION
Until the later of December 14, 2000 or 25 days after
the commencement of the public offering, if any, all dealers
that effect transactions in these securities, whether
or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
