As filed with the Securities and Exchange Commission on September 16, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MFS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 6035 To Be Requested
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
110 E. Charles Street, Muncie, Indiana 47305-2499 (765) 747-2800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------
R. Donn Roberts,
President and Chief Executive Officer
Mutual Federal Savings Bank
110 E. Charles Street
Muncie, Indiana 47305-2499
(765) 747-2800
------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Please send copies of all communications to:
James S. Fleischer, P.C.
Martin L. Meyrowitz, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Amount
Class of Securities to be Purchase Price Aggregate Offering
to be Registered(1) Registered(1) Per Share Price(2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value, 6,601,900 shares $10.00 $66,019,000 $18,354
per share
====================================================================================================================================
</TABLE>
- ------------------
(1) Includes shares of Common Stock to be issued to The Mutual Federal Savings
Bank Charitable Foundation, Inc.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
UP TO 6,348,000 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 will be listed for
trading on the Nasdaq National Market under the symbol "MFSF."
================================================================================
<TABLE>
<CAPTION>
TERMS OF THE OFFERING
Maximum,
Minimum Maximum as adjusted
------- ------- -----------
<S> <C> <C> <C>
Per Share Price ................................ $10.00 $10.00 $10.00
Number of Shares ............................... 4,080,000 5,520,000 6,348,000
Underwriting Commission and Other Expenses ..... $1,500,000 $1,500,000 $1,500,000
Net Proceeds to MFS Financial .................. $39,300,000 $53,700,000 $61,980,000
Net Proceeds Per Share, excluding the shares
issued to The Mutual Federal Savings Bank
Charitable Foundation.......................... $9.63 $9.73 $9.76
</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 _______, 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.
-------------------------------------------
[__________________], 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
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. It has not engaged in any business.
MUTUAL FEDERAL SAVINGS BANK
110 E. Charles Street
Muncie, Indiana 47305
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 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 offering between 4,080,000 and 5,520,000 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 6,348,000
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 September 10,
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
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conversion. The $10.00 price per share was determined by our board 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) Other members of Mutual Federal on [____________], 1999.
(5) Mutual Federal's directors, officers and employees.
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 [___] to [___].
TERMINATION OF THE OFFERING
The subscription offering will end noon, Muncie, Indiana time
on [__________], 1999. If all of the shares are not subscribed for in the
subscription offering and we do not get orders for the remaining shares by
[____________], 1999, 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.
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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:
$20,049,000 Retained by MFS Financial and initially placed in
short-term investments for general corporate purposes
4,593,000 Employee stock ownership plan loan
2,208,000 Cash contribution to The Mutual Federal Savings Bank
Charitable Foundation, Inc.
26,850,000 Used to buy the stock of Mutual Federal
$53,700,000 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 PLAN 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. See page [__].
THE COMMON STOCK WILL BE TRADED ON THE NASDAQ NATIONAL MARKET
We expect our common stock to be traded 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. If shares are not available for purchase by the employee stock ownership
plan in the subscription offering, then the plan will purchase the shares in the
open market. The employee stock ownership plan will provide a retirement benefit
to all employees eligible to participate in the plan.
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<PAGE>
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 $4,593,000 8.0%
Restricted Stock Awards ..... 2,296,000 4.0
Stock Options ............... -- 10.0
---------- ----
Total .................. $6,889,000 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."
WE INTEND TO CONTRIBUTE A TOTAL OF $4.4 MILLION IN CASH AND STOCK TO OUR
CHARITABLE FOUNDATION
To continue our long-standing commitment to our local communities, 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, we
will issue an additional 220,800 shares to the foundation, worth $2.2 million,
and make a cash contribution of $2.2 million to the foundation. We expect the
foundation to continue to support charitable causes in Mutual Federal's primary
market areas, up to a maximum of $4.5 million. 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 was completed without the
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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 $2.2 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 4,080,000 SHARES OR
MORE THAN 6,348,000 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 an unaffiliated institution or broker. Please
contact the conversion 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 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 [_______________], 1999, the website will provide a
current update on the status of the offering.
7
<PAGE>
SUBSCRIPTION RIGHTS
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not transfer your subscription rights. 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 [__] to [__] of this document.
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<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 the Bank - Lending Activities" and "-- Asset Quality."
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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 $2.2 million, plus cash equal to the value of 4% of
the stock sold in the stock offering, or $2.2 million at the maximum of the
estimated offering range. 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 $2.3 million at the purchase price
and 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 will 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 and executive officers intend to purchase
approximately 5.82% 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
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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:
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 OR FOR $10.00 OR MORE PER SHARE.
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. Our common stock will be quoted 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 or sell them at a price equal to or above $10.00 per share even if a
liquid trading market develops.
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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 Consolidated 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 -- 23 (28)
Other non-interest income ............. 467 548 1,077 579 775 875 892
-------- -------- -------- -------- -------- -------- --------
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
Average interest rate spread
during period ...................... 3.21 3.27 3.21 3.34 3.42 3.24 3.57
Net interest margin(2) ............... 3.39 3.48 3.42 3.58 3.66 3.50 3.76
Ratio of operating expense to average
total assets ....................... 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 ........................ 104.25 104.68 104.56 105.18 105.48 105.87 104.86
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:
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.
14
<PAGE>
MFS FINANCIAL, INC.
MFS Financial was incorporated under Maryland law to hold all of the stock
of Mutual Federal. 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 savings and loan holding company. 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.
The executive offices of Mutual Federal are located at 110 E. Charles
Street, Muncie, Indiana 47305, and its telephone number is (765) 747-2800.
15
<PAGE>
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 $39.3 million and $53.7 million and up to $62.0 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.
MFS Financial will retain 50% of the net conversion proceeds and will
purchase all of the capital stock of Mutual Federal to be issued in the
conversion in exchange for the remaining conversion proceeds, net of the cash
portion of the contribution to the foundation and the loan to be made to the
employee stock ownership plan. 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 4,080,000 shares of common stock and
5,520,000 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 $3.4 million and $4.6 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
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
16
<PAGE>
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 12.50%. 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 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
17
<PAGE>
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."
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 $39.3 million and $53.7 million, or $62.0
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;
18
<PAGE>
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
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 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.
19
<PAGE>
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").
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.
20
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended
June 30, 1999
------------------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 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 ........................................ $ 40,800 $ 48,000 $ 55,200 $ 63,480
Plus: Shares acquired by foundation (equal to 4.0% of
the shares sold in the conversion) .................. 1,632 1,920 2,208 2,539
----------- ----------- ----------- -----------
Pro forma market capitalization ....................... $ 42,432 $ 49,920 $ 57,408 $ 66,019
Gross proceeds ........................................ 40,800 48,000 55,200 63,480
Less offering expenses and commissions ................ 1,500 1,500 1,500 1,500
----------- ----------- ----------- -----------
Estimated net proceeds ........................... 39,300 46,500 53,700 61,980
Less: Shares purchased by the employee stock
ownership plan ............................. (3,395) (3,994) (4,593) (5,282)
Shares purchased by the restricted stock plan (1,697) (1,997) (2,296) (2,641)
Cash contribution to foundation ............. (1,632) (1,920) (2,208) (2,539)
----------- ----------- ----------- -----------
Total estimated net proceeds, as adjusted(2) .......... $ 32,576 $ 38,590 $ 44,603 $ 51,518
Net income(3):
Historical ....................................... $ 1,923 $ 1,923 $ 1,923 $ 1,923
Pro forma income on net proceeds, as adjusted .... 498 590 681 787
Pro forma employee stock ownership plan
adjustment(4) .................................. (68) (80) (92) (106)
Pro forma restricted stock plan adjustment(5) .... (102) (120) (138) (139)
----------- ----------- ----------- -----------
Pro forma net income ............................. $ 2,251 $ 2,313 $ 2,374 $ 2,446
Net income per share(3)(6):
Historical ....................................... $ 0.49 $ 0.42 $ 0.36 $ 0.32
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) ............. $ 0.57 $ 0.50 $ 0.44 $ 0.40
=========== =========== =========== ===========
Number of shares outstanding for pro forma net
income per share calculations(6) .................... 3,915,059 4,605,952 5,296,845 6,091,372
Offering price to pro forma net income per share(6) ... 8.77x 10.00x 11.36x 12.50x
=========== =========== =========== ===========
</TABLE>
(FOOTNOTES ON THIRD PAGE FOLLOWING)
21
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended
June 30, 1999
------------------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 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 ............................ 39,300 46,500 53,700 61,980
Plus: Shares issued to foundation ................. 1,632 1,920 2,208 2,539
Less: Cash contributed to foundation .............. (1,632) (1,920) (2,208) (2,539)
Less: Shares contributed to foundation ............ (1,632) (1,920) (2,208) (2,539)
Plus: Tax benefit of the contribution to foundation 1,306 1,536 1,766 2,031
Less: Common stock acquired by the employee
stock ownership plan(2)(4).................. (3,395) (3,994) (4,593) (5,282)
Less: Common stock to be acquired by the
restricted stock plan(5) ................... (1,697) (1,997) (2,296) (2,641)
--------- ---------- --------- ---------
Pro forma stockholders' equity(4)(5)(7)(8)......... $79,501 $85,745 $91,988 $99,169
Stockholders' equity per share(6):
Historical ........................................ $10.75 $9.14 $7.95 $6.91
Estimated net proceeds ............................ 9.26 9.31 9.35 9.39
Plus: Shares issued to foundation ................. 0.38 0.38 0.38 0.38
Less: Cash contributed to foundation .............. (0.38) (0.38) (0.38) (0.38)
Less: Shares contributed to foundation ............ (0.38) (0.38) (0.38) (0.38)
Plus: Tax benefit of the contribution to foundation 0.31 0.31 0.31 0.31
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) ................................ $18.74 $17.18 $16.03 $15.03
Offering price as a percentage of pro forma
stockholders' equity per share(6) ..................... 53.36% 58.21% 62.38% 66.53%
Number of shares outstanding for pro forma ............. 4,243,200 4,992,000 5,740,800 6,601,920
stockholders' equity per share calculations(6)
</TABLE>
- -----------------
(FOOTNOTES ON SECOND PAGE FOLLOWING)
22
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended
December 31, 1998
------------------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 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 ........................................ $40,800 $48,000 $55,200 $63,480
Plus: Shares acquired by foundation (equal to 4.0% of
the shares sold in the offerings) ................... 1,632 1,920 2,208 2,539
----------- ----------- ----------- -----------
Pro forma market capitalization ....................... $42,432 $49,920 $57,408 $66,019
Gross proceeds ........................................ 40,800 48,000 55,200 63,480
Less offering expenses and commissions................. 1,500 1,500 1,500 1,500
----------- ----------- ----------- -----------
Estimated net proceeds ........................... 39,300 46,500 53,700 61,980
Less: Shares purchased by the employee stock
ownership plan ............................. (3,395) (3,994) (4,593) (5,282)
Shares purchased by the restricted stock plan (1,697) (1,997) (2,296) (2,641)
Cash contribution to foundation ............. (1,632) (1,920) (2,208) (2,539)
----------- ----------- ----------- -----------
Total estimated net proceeds, as adjusted(2) .......... $32,576 $38,590 $44,603 $51,518
Net income(3):
Historical ....................................... $4,139 $4,139 $4,139 $4,139
Pro forma income on net proceeds, as adjusted .... 883 1,047 1,210 1,397
Pro forma employee stock ownership plan
adjustment(4) .................................. (136) (160) (184) (211)
Pro forma restricted stock plan adjustment(5) .... (204) (240) (276) (317)
----------- ----------- ----------- -----------
Pro forma net income ............................. $4,682 $4,786 $4,889 $5,008
Net income per share(3)(6):
Historical ....................................... $1.05 $0.90 $0.78 $0.68
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) ............. $1.19 $1.05 $0.93 $0.83
=========== =========== =========== ===========
Number of shares outstanding for pro forma net
income per share calculations(6) .................... 3,926,374 4,619,264 5,312,154 6,108,977
Offering price to pro forma net income per share(6) ... 8.40x 9.52x 10.75x 12.05x
=========== =========== =========== ===========
</TABLE>
(FOOTNOTES ON NEXT PAGE)
23
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended
December 31, 1998
------------------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 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 ............................ 39,300 46,500 53,700 61,980
Plus: Shares issued to foundation ................. 1,632 1,920 2,208 2,539
Less: Cash contributed to foundation .............. (1,632) (1,920) (2,208) (2,539)
Less: Shares contributed to foundation ............ (1,632) (1,920) (2,208) (2,539)
Plus: Tax benefit of the contribution to foundation 1,306 1,536 1,766 2,031
Less: Common stock acquired by the employee
stock ownership plan(2)(4) ................. (3,395) (3,994) (4,593) (5,282)
Less: Common stock to be acquired by the
restricted stock plan(5) ................... (1,697) (1,997) (2,296) (2,641)
--------- --------- ---------- -----------
Pro forma stockholders' equity(4)(5)(7)(8) ........ $77,728 $83,972 $90,215 $97,396
Stockholders' equity per share(6):
Historical ........................................ $10.33 $8.78 $7.64 $6.64
Estimated net proceeds ............................ 9.26 9.31 9.35 9.39
Plus: Shares issued to foundation ................. 0.38 0.38 0.38 0.38
Less: Cash contributed to foundation .............. (0.38) (0.38) (0.38) (0.38)
Less: Shares contributed to foundation ............ (0.38) (0.38) (0.38) (0.38)
Plus: Tax benefit of the contribution to foundation 0.31 0.31 0.31 0.31
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) ............................ $18.32 $16.82 $15.72 $14.76
Offering price as a percentage of pro forma
stockholders' equity per share(6) ..................... 54.59% 59.45% 63.61% 67.75%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(6) ........ 4,243,200 4,992,000 5,740,800 6,601,920
</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 and (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.
(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, $2.3 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 per
share would be $0.07, $0.00, $(0.05) and $(0.10) and $0.69, $0.54,
$0.42 and $0.32 at the minimum, midpoint, maximum and maximum, as
24
<PAGE>
adjusted, respectively. Per share net income data is based on
3,915,059 and 3,926,374 shares of common stock outstanding at the
minimum of the estimated offering range, 4,605,952 and 4,619,264
shares of common stock outstanding at the midpoint of this range,
5,296,845 and 5,312,154 shares of common stock outstanding at the
maximum of this range and 6,091,372 and 6,108,977 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, entitled "Employers'
Accounting for Employee Stock Ownership Plans," of the AICPA, 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 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 $0.56,
$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 $18.41, $16.91,
$15.80 and $14.83 and $18.01, $16.57, $15.50 and $14.58 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
equal to the purchase price. 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 earnings per share, in accordance with
SOP 93-6, subtracting 11,315 shares, 13,312 shares, 15,309 shares, and
17,605 shares, and 22,630 shares, 26,624 shares, 30,618 shares, and
35,210 shares, 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. Thus,
it is assumed at June 30, 1999 and December 31, 1998 that 3,915,059
shares and 3,926,374 shares of common stock are outstanding at the
minimum of the estimated offering range, 4,605,952 shares and
4,619,264 shares of common stock are outstanding at the midpoint of
such range, 5,296,845 shares and 5,312,154 shares of common stock are
outstanding at the maximum of such range and 6,091,372 shares and
6,108,977 shares of common stock are outstanding at 15% above the
maximum of the such range, respectively. Assuming the uncommitted
employee stock ownership plan shares were not subtracted from the
number of shares of common stock outstanding at June 30, 1999 and
December 31, 1998, the offering price as a multiple of pro forma net
earnings per share would be 9.43x, 10.79x, 12.09x and 13.50x and
9.06x, 10.43x, 11.74x and 13.18x at the minimum, midpoint, maximum and
15% above the maximum of the estimated offering range, respectively.
For purposes of calculating pro forma stockholders' equity per share,
it is assumed that shares outstanding total 4,243,200 shares at the
minimum of the estimated pro forma market value of Mutual Federal on a
fully converted basis, or the estimated valuation range, 4,992,000
shares at the midpoint of the range, 5,740,800 shares at the maximum
of the range and 6,601,920 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
424,320 shares at the minimum of the estimated offering range, 499,200
shares at the midpoint of the range, 574,080 shares at the maximum of
the range and 660,192 shares at 15% above the maximum of the range,
25
<PAGE>
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 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 $0.53, $0.47, $0.42,
and $0.37 and $1.10, $0.96, $0.85, and $0.76 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 $17.94, $16.53, $15.47 and $14.56
and $17.56, $16.20, $15.19, and $14.32 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 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.
26
<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., independent appraiser has estimated that the pro
forma aggregate market capitalization of MFS Financial would be approximately
$52.5 million at the midpoint, which is approximately $2.6 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 58.14% and 10.20x,
respectively, compared to 58.21% and 10.00x, 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 $17.20 and $0.49, respectively,
compared to $17.18 and $0.50, 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 without the establishment of the foundation.
27
<PAGE>
<TABLE>
<CAPTION>
At the Minimum At the Midpoint
------------------------------ ------------------------------
With No With No
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Estimated offering amount .................... $40,800 $44,625 $48,000 $52,500
Pro forma market capitalization .............. 42,432 44,625 49,920 52,500
Total assets ................................. 523,917 527,805 530,161 534,735
Total liabilities ............................ 444,416 444,416 444,416 444,416
Pro forma stockholders' equity ............... 79,501 83,389 85,745 90,319
Pro forma consolidated net earnings .......... 2,251 2,321 2,313 2,396
Pro forma stockholders' equity per share ..... 18.74 18.68 17.18 17.20
Pro forma consolidated net earning
per share ................................... 0.57 0.56 0.50 0.49
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per share ... 53.36% 53.53% 58.21% 58.14%
Offering price to pro forma net
earnings per share(1) .................. 8.77x 8.93x 10.00x 10.20x
Pro forma market capitalization to assets 8.10% 8.45% 9.42% 9.82%
Pro forma financial ratios:
Return on assets(1) ..................... 0.86% 0.88% 0.87% 0.90%
Return on stockholders' equity(1) ....... 5.66% 5.57% 5.39% 5.30%
Stockholders' equity to assets .......... 15.17% 15.80% 16.17% 16.89%
Foundation shares............................. 163,200 192,000
Share dilution........................... N/A N/A
Voting share............................. 3.85% 3.85%
Dilution............................ N/A N/A
At the Maximum,
At the Maximum As Adjusted
------------------------------- ------------------------------
With No With No
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in Thousands, except per share amounts)
Estimated offering amount .................... $55,200 $60,375 $63,480 $69,431
Pro forma market capitalization .............. 57,408 60,375 66,019 69,431
Total assets ................................. 536,404 541,665 543,585 549,635
Total liabilities ............................ 444,416 444,416 444,416 444,416
Pro forma stockholders' equity ............... 91,988 97,249 99,169 105,219
Pro forma consolidated net earnings .......... 2,374 2,470 2,446 2,556
Pro forma stockholders' equity per share ..... 16.03 16.11 15.03 15.15
Pro forma consolidated net earning
per share ................................... 0.44 0.44 0.40 0.39
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per share ... 62.38% 62.07% 66.53% 66.01%
Offering price to pro forma net
earnings per share(1) .................. 11.36x 11.36x 12.50x 12.82x
Pro forma market capitalization to assets 10.70% 11.15% 12.15% 12.63%
Pro forma financial ratios:
Return on assets(1) ..................... 0.89% 0.91% 0.90% 0.93%
Return on stockholders' equity(1) ....... 5.16% 5.08% 4.93% 4.86%
Stockholders' equity to assets .......... 17.15% 17.95% 18.24% 19.14%
Foundation shares............................. 220,800 253,920
Share dilution........................... N/A N/A
Voting share............................. 3.85% 3.85%
Dilution............................ N/A N/A
</TABLE>
- ----------------
(1) Based on annualized results for the six months ended June 30, 1999.
28
<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
-------------------------------------------------------------------------------
6,348,000
Mutual Federal 4,080,000 4,800,000 5,520,000 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
Common stock, $0.01 par value, 20,000,000
shares authorized; shares to be issued
as reflected(3) ........................ $ -- $42 $50 $57 $66
Additional paid-in capital ............... -- 39,258 46,450 53,643 61,914
Shares issued to foundation(4) ........... -- 1,632 1,920 2,208 2,539
Less: Shares contributed to foundation ... -- (1,632) (1,920) (2,208) (2,539)
Less: Cash contributed to foundation ..... -- (1,632) (1,920) (2,208) (2,539)
Retained earnings ........................ 45,725 45,725 45,725 45,725 45,725
Net unrealized gain ...................... (106) (106) (106) (106) (106)
Plus: Tax benefit of contribution to Foundation -- 1,306 1,536 1,766 2,031
Less:
Common stock to be acquired by the
employee stock ownership plan(6) ........ -- (3,395) (3,994) (4,593) (5,282)
Common stock to be acquired by the
restricted stock plan(7) ................ -- (1,697) (1,997) (2,296) (2,641)
--------- --------- --------- --------- ---------
Total stockholders' equity .................... $45,619 $79,501 $85,745 $91,988 $99,169
========= ========= ========= ========= =========
---------
</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 shares of common
29
<PAGE>
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 40.0% 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 expenses, 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.
30
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at June 30, 1999
--------------------------------------------------
Historical at 4,080,000 Shares 4,800,000 Shares
June 30, 1999 Sold at $10.00 per Share Sold at $10.00 per Share
----------------------- ------------------------ ------------------------
Percent of Percent of Percent of
Amount Assets(1) Amount Assets Amount Assets
------ --------- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Equity capital under GAAP $45,619 9.31% $60,177 11.85% $62,879 12.30%
======= ===== ======= ===== ======= =====
Tangible capital:
Actual ............. $44,139 9.04% $58,697 11.59% $61,399 12.05%
Requirement ........ 7,327 1.50 7,596 1.50 7,646 1.50
------- ----- ------- ----- ------- -----
Excess ............. $36,812 7.54% $51,101 10.09% $53,753 10.55%
======= ===== ======= ===== ======= =====
Core capital:
Actual ............. $44,139 9.04% $58,697 11.59% $61,399 12.05%
Requirement ........ 14,653 3.00 15,192 3.00 15,291 3.00
------- ----- ------- ----- ------- -----
Excess ............. $29,486 6.04% $43,505 8.59% $46,108 9.05%
======= ===== ======= ===== ======= =====
Risk-based capital
Actual ............. $47,529 15.19% $62,087 19.62% $64,789 20.43%
Requirement ........ 25,035 8.00 25,322 8.00 25,375 8.00
------- ----- ------- ----- ------- -----
Excess ............. $22,494 7.19% $36,765 11.62% $39,414 12.43%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Pro Forma at June 30, 1999
----------------------------------------------------
5,520,000 Shares 6,348,000 Shares
Sold at $10.00 per Share Sold at $10.00 per Share
------------------------ -------------------------
Percent of Percent of
Amount Assets Amount Assets
------ ------ ------ ------
<S> <C> <C> <C> <C>
Equity capital under GAAP $65,580 12.74% $68,687 13.25%
======= ===== ======= =====
Tangible capital:
Actual ............. $64,100 12.50% $67,207 13.00%
Requirement ........ 7,695 1.50 7,752 1.50
------- ----- ------- -----
Excess ............. $56,405 11.00% $59,455 11.50%
======= ===== ======= =====
Core capital:
Actual ............. $64,100 12.50% $67,207 13.00%
Requirement ........ 15,390 3.00 15,504 3.00
------- ----- ------- -----
Excess ............. $48,710 9.50% $51,703 10.00%
======= ===== ======= =====
Risk-based capital
Actual ............. $67,490 21.23% $70,597 22.16%
Requirement ........ 25,428 8.00 25,489 8.00
------- ----- ------- -----
Excess ............. $42,062 13.23% $45,108 14.16%
======= ===== ======= =====
</TABLE>
-----
- ------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
31
<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 and 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 and 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 "- Offering of MFS Financial Common Stock."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of conversion.
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.
32
<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 mutual and stock
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
33
<PAGE>
borrower from Mutual Federal. The amount, interest rate, maturity, security for
and obligations under each loan will 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
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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 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);
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o no gain or loss will be recognized by Mutual Federal solely as a result
of the conversion to stock form;
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
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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
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. 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 expected to serve as
a director of the foundation is _______________. There are no plans to change
the size of the foundation's board of directors during the one-year period after
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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.
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. 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.
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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 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 $3.3
million to $4.4 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 ______________, who serve as
directors of the foundation, expect to purchase shares of common stock as
follows: Roberts - 40,000 shares; Crull - 43,000 shares; Benson - 20,000 shares
and _______ - _____ 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 _______ shares or ____% of the total
number of shares of common stock to be issued and outstanding (assuming the sale
of 5.5 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 4,243,200 shares, 4,992,000
shares, 5,740,800 shares and 6,601,920 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."
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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 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 $92.0 million or 17.15% of pro forma consolidated assets and Mutual
Federal's pro forma tangible, core and total risk-based capital ratios would be
12.50%, 12.50% and 21.23%, 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 advisors 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 would have
been made in 1998, MFS Financial would have received tax benefits of
approximately $2.7 million based on Mutual Federal's pre-tax income for 1998, an
assumed tax rate of 40.0% and a deduction for the contribution of cash and
common stock equal to $4.4 million. Assuming the close of the conversion at the
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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 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 establishment of the foundation will reduce
our earnings" and "- The contribution to the foundation means that your total
ownership will be 3.85% less after we make the contribution."
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 is expected
to 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;
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(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:
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.
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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 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;
o 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.
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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 September 10, 1999, the estimated pro
forma market value of the common stock on a fully converted basis, assuming a
contribution to a foundation in an amount equal to the value of 8.0% of the
shares sold, ranged from a minimum of $40.8 million to a maximum of $55.2
million with a midpoint of $48.0 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 4,243,200 shares and
5,740,800 shares, with a midpoint of 4,992,000 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, or
to fill the order of the employee stock ownership plan. In the event the
estimated offering range is updated to amend the value of the common stock below
$40.8 million or above $63.5 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 $55.2 million (the maximum of the
estimated offering range) and up to $63.5 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 5,740,800 shares 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.
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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 6,348,000 shares 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.
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. If the number of
shares of common stock issued in the conversion is increased due to an increase
of up to 15% in the estimated offering range to reflect changes in market or
financial conditions or to fill the order of the employee stock ownership plan,
persons who subscribed for the maximum number of shares will be given the
opportunity to subscribe for the adjusted maximum number of shares. See "--
Limitations on Stock Purchases."
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 change in structure
and stock offering which could further reduce your voting interest" and "Pro
Forma Data."
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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."
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 ___________, 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.
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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. Subscription Rights of Eligible Account Holders will be subordinated
to the priority rights of 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 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 339,500 shares and 459,300 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 range. 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."
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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
(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
__________, 1999, the date for determining voting members entitled to vote at
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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 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 noon, Muncie, Indiana time, on ________, 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
________, 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, 4,080,000 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 certain members of the general public,
with preference given to natural persons residing in the counties in which
Mutual Federal has offices. These natural persons are referred to as Preferred
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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 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 offering 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
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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 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; and
o such registration, qualification or filing in the judgment of Mutual
Federal would be impracticable or unduly burdensome for reasons of cost
or otherwise.
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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:
(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
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(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;
(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 certain Eligible
Account Holders and Supplemental Eligible Account Holders whose
subscription rights are based upon the amount of their deposits, 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 groups 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.
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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;
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:
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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
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
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be given by completing the appropriate blanks in the order form, must be
received by Mutual Federal by 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, September 30, 1999,
and depositors and certain borrowers as of the close of business on the Voting
Record Date, __________, 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.
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<PAGE>
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.
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 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.
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<PAGE>
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.
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.
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<PAGE>
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 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.
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<PAGE>
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.
PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Mutual Federal's directors and
for all of the directors 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>
Linn A. Crull $ 400,000 40,000 0.98 40,000 0.72
Wilbur R. Davis 400,000 40,000 0.98 40,000 0.72
Edward Dobrow 400,000 40,000 0.98 40,000 0.72
William V. Hughes 200,000 20,000 0.49 20,000 0.36
R. Donn Roberts 430,000 43,000 1.05 43,000 0.78
James D. Rosema 400,000 40,000 0.98 40,000 0.72
Julie Skinner 400,000 40,000 0.98 40,000 0.72
All directors and executive ---------- ------- ---- ------- ----
officers as a group (11 persons) $3,210,000 321,000 7.87 321,000 5.82
========== ======= ==== ======= ====
</TABLE>
60
<PAGE>
<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
Increase in cash surrender value of
life insurance 210,000 138,000 383,856 240,000 161,365
Other income 152,766 165,940 262,302 115,701 224,166
-------------------------------------------------------------------------------
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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<PAGE>
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.
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<PAGE>
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 33% of our loan portfolio has
consisted 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
63
<PAGE>
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 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 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
64
<PAGE>
assumptions, but without effect to any steps that management might take to
counteract that change.
<TABLE>
<CAPTION>
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
- ------------------ -------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
+300 bp 21,591 (24,027) (53) 4.75 (460)
+200 bp 30,255 (15,363) (34) 6.49 (286)
+100 bp 38,555 (7,063) (15) 8.07 (128)
0 bp . 45,618 -- -- 9.35 --
-100 bp 50,475 4,858 11 10.18 83
-200 bp 53,776 8,158 18 10.69 135
-300 bp 56,963 11,345 25 11.18 183
</TABLE>
- -----------
(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 $490.4 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 $398.2 million
at December 31, 1998.
65
<PAGE>
LOANS. Mutual Federal's net loan portfolio increased from $398.2 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 increases in home-building activities in some
of our markets. The loan 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 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 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 $398.2 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 $6.6 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. 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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<PAGE>
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
------- ---- ---- ------- ---- ----
<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................... 38,509 30,109
-------- --------
Total assets.......................... $478,176 $464,920
======== ========
Interest-Earning 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 13,055 208 3.16
Certificates of deposit ............... 252,263 6,735 5.34 251,484 7,066 5.62
-------- -------- -------- --------
Total deposits ........................ 376,007 7,915 4.21 354,451 8,178 4.61
Borrowings ............................ 47,667 1,336 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 earnings 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... 104.25x 104.68x
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997
----------------------------------- -------------------------------------
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 ............. $ 7,330 $ 358 4.88% $ 3,908 $ 217 5.55%
Trading account securities ............ 337 20 5.93 603 39 6.47
Mortgage-backed securities:
Available-for-sale ................. 4,575 329 7.19 4,498 334 7.43
Other Investment securities
Available-for-sale ................. 7,001 416 5.94 8,164 487 5.97
Held-to-maturity ................... 9,642 584 6.06 8,995 479 5.33
Loans receivable ...................... 399,982 32,488 8.12 389,731 32,240 8.27
Stock in FHLB of Indianapolis ......... 3,812 279 7.72 3,470 289 8.33
-------- -------- -------- --------
Total interest-earning assets(1)....... 432,479 34,474 7.97 419,369 34,085 8.13
Non-interest earning assets, net
of allowance for loan losses and
unrealized gain/loss................... 32,362 23,849
-------- --------
Total assets.......................... $464,841 $443,218
======== ========
Interest-Earning Liabilities:
Demand and NOW accounts ............... $ 49,646 745 1.50 $ 44,803 719 1.60
Savings deposits ...................... 41,332 1,038 2.51 40,224 1,114 2.77
Money market accounts ................. 16,442 560 3.41 12,888 391 3.03
Certificates of deposit ............... 250,953 14,100 5.62 239,311 13,179 5.51
-------- -------- -------- --------
Total deposits ........................ 358,373 16,443 4.59 337,226 15,403 4.57
Borrowings ............................ 55,234 3,247 5.88 61,491 3,679 5.98
-------- -------- -------- --------
Total interest-bearing liabilities... 413,607 19,690 4.76 398,717 19,082 4.79
Other liabilities...................... 9,115 8,086
-------- --------
Total liabilities..................... 422,722 406,803
Equity capital......................... 42,119 36,415
-------- --------
Total liabilities and equity capital. $464,841 $443,218
======== ========
Net earnings assets..................... $ 18,872 $ 20,652
======== ========
Net interest income..................... $14,784 $15,003
======= =======
Net interest rate spread................ 3.21% 3.34%
===== =====
Net yield on average interest-earning
assets............................... 3.42% 3.58%
===== =====
Average interest-earning assets to
average interest-bearing liabilities... 104.56x 105.18x
======= =======
</TABLE>
<PAGE>
Year Ended December 31,
-----------------------------------
1996
-----------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
Interest-Earning Assets:
Interest-bearing deposits ............. $ 3,714 $ 194 5.22%
Trading account securities ............ 1,008 67 6.65
Mortgage-backed securities:
Available-for-sale ................. 5,060 372 7.35
Other Investment securities
Available-for-sale ................. 5,345 305 5.71
Held-to-maturity ................... 10,996 570 5.18
Loans receivable ...................... 368,688 30,676 8.32
Stock in FHLB of Indianapolis ......... 3,108 243 7.82
-------- --------
Total interest-earning assets(1)....... 397,919 32,427 8.15
Non-interest earning assets, net
of allowance for loan losses and
unrealized gain/loss................... 22,594
--------
Total assets.......................... $420,513
========
Interest-Earning Liabilities:
Demand and NOW accounts ............... $ 42,423 696 1.64
Savings deposits ...................... 40,761 1,135 2.78
Money market accounts ................. 13,945 426 3.05
Certificates of deposit ............... 220,469 12,125 5.50
-------- --------
Total deposits ........................ 317,598 14,382 4.53
Borrowings ............................ 59,646 3,469 5.82
-------- --------
Total interest-bearing liabilities... 377,244 17,851 4.73
Other liabilities...................... 8,625
-------
Total liabilities..................... 385,869
Equity capital......................... 34,644
--------
Total liabilities and equity capital. $420,513
========
Net earnings assets..................... $ 20,675
========
Net interest income..................... $14,576
=======
Net interest rate spread................ 3.42%
=====
Net yield on average interest-earning
assets............................... 3.66%
=====
Average interest-earning assets to
average interest-bearing liabilities... 105.48x
=======
- -----------------
(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
-------------------------------------- ---------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits .......... $ (8) $ (3) $ (11) $ 170 $ (29) $ 141
Trading accounting securities ...... 8 (1) 7 (16) (3) (19)
Mortgage-backed securities ......... 24 (14) 10 6 (11) (5)
Investment securities:
Available-for-sale ............... 44 (27) 17 (69) (2) (71)
Held-to-maturity ................. 63 (7) 56 36 69 105
Loans receivable ................... 98 (982) (884) 839 (591) 248
Stock in FHLB of Indianapolis ...... -- 11 11 12 (22) (10)
------- ------- ------- ------- ------- -------
Total interest-earning assets .... $ 229 $(1,023) (794) $ 978 $ (589) 389
======= ======= ------- ======= ======= -------
Interest-bearing liabilities:
Demand and NOW accounts ............ $ 35 $ (90) (55) $ 75 $ (49) 26
Savings deposits ................... 27 (166) (139) 30 (106) (76)
Money market accounts .............. 238 24 262 117 52 169
Certificate accounts ............... 22 (353) (331) 650 271 921
Borrowings ......................... (375) (84) (459) (369) (63) (432)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ (53) $ (669) (722) $ 503 $ 105 608
======= ======= ------- ======= ======= -------
Net interest income.................. $ (72) $ (219)
======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 vs. 1996
-------------------------------------
Increase
(Decrease ) Total
Due to Increase
Volume Rate (Decrease)
------ ---- ----------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits .......... $ 10 $ 13 $ 23
Trading accounting securities ...... (26) (2) (28)
Mortgage-backed securities ......... (42) 4 (38)
Investment securities:
Available-for-sale ............... 168 14 182
Held-to-maturity ................. (106) 15 (91)
Loans receivable ................... 1,742 (178) 1,564
Stock in FHLB of Indianapolis ...... 29 17 46
------- ------- -------
Total interest-earning assets .... $ 1,775 $ (117) 1,658
======= ======= -------
Interest-bearing liabilities:
Demand and NOW accounts ............ $ 38 $ (15) 23
Savings deposits ................... (15) (6) (21)
Money market accounts .............. (32) (3) (35)
Certificate accounts ............... 1,038 16 1,054
Borrowings ......................... 109 101 210
------- ------- -------
Total interest-bearing liabilities $ 1,138 $ 93 1,231
======= ======= -------
Net interest income.................. $ 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 .................... 5.95%
Held-to-maturity ...................... 6.24%
Loans receivable ....................... 7.73%
FHLB stock ............................. 8.00%
Combined weighted average yield on
interest-earning assets .......... 7.64%
Weighted average rate paid on:
Demand and NOW accounts ............... 0.96%
Savings deposits ....................... 1.95%
Money market accounts .................. 3.57%
Certificate accounts ................... 5.26%
Borrowings ............................. 5.46%
Combined weighted average rate paid on
interest-bearing liabilities ...... 4.33%
Spread ................................. 3.31%
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 sale 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
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<PAGE>
increase in the average balance of Mutual Federal's interest-earning assets. The
average yield earned on Mutual Federal's loan portfolio decreased from 8.21% in
the 1998 period to 7.73% in the 1999 period, primarily due to the effect of
refinancing activity and loan sales in 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 nonaccrual 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 an increase in the number of employees.
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
reserve on 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.
71
<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
expense 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
loan portfolio, including an increase in consumer loans. See "Business of Mutual
Federal - 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 no
gain in 1996.
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 $1.9 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
7.38%.
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 provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
72
<PAGE>
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.
YEAR 2000 ISSUES
GENERAL. The Year 2000 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 will 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
73
<PAGE>
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 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 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.
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<PAGE>
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 include
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 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.
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.
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<PAGE>
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, as well as 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 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
$700,000, 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.
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<PAGE>
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 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.
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<PAGE>
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 is effective
for Mutual Federal's financial statements as of January 1, 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
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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.
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, Warsaw or Winchester
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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<PAGE>
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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<PAGE>
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 December 31, 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
--------------------- --------------------- ----------------------
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(1) ............ $ 181 8.59% $ 106 8.75 $ --- ---%
2000 ............... 1,171 7.24 584 8.30 -- ---
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
------ ---- ------ ---- ------ ----
Due During
Years Ending
December 31,
- --------------------
<S> <C> <C> <C> <C> <C> <C>
1999(1) ............ $ 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 8.95 912 8.36 225,436 7.79
2021 and following.. 148 10.15 --- --- 132,683 7.30
</TABLE>
- -----------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
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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
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<PAGE>
over the rate in effect on the date of origination. As a 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. Because payments on
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<PAGE>
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
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<PAGE>
secured by savings deposits. We also offer a limited 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 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 mobile
home 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 currently
amortized over 24 months. 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, like 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 or adjustable 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
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<PAGE>
other conditions affecting the borrower. Analysis of the 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 ... 928 587 (2,767) 4,639 2,455
--------- --------- --------- --------- ---------
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 ................. -- -- -- -- -- --
Construction and development ........... -- -- -- -- -- --
Consumer ............................... 45 10 51 507 525 497
Commercial business .................... 504 -- -- -- -- --
------ ------ ------ ------ ------ ------
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.
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 in net book value of loans with respect to which known information about
the possible credit problems of the borrowers have caused management to have
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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.
We have in our portfolio 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
funds from the allowance were used to pay off the prior liens noted above. 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
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.
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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 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.
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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.
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.
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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>
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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 ......... 54 5,702 1.33 57 6,282 1.56 271 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 84 5,211 1.27
Unallocated .......... 256 -- -- 271 -- -- 387 -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
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 .. $ 684 $244,518 63.17% $ 675 $224,526 63.02% $ 712 $206,926 62.75%
Multi-family ......... 251 9,598 2.48 247 6,544 1.84 238 6,613 2.01
Commercial real estate 390 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 27.48 849 91,914 27.87
Commercial business .. 12 596 0.16 -- -- -- 10 490 0.15
Unallocated .......... 176 -- -- 94 -- -- -- -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ........... $ 2,990 $387,101 100.00% $ 2,754 $356,255 100.00% $ 2,430 $329,745 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
96
<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 Savings" 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 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. We have also invested in limited partnerships which build, own and
operate apartment complexes. See Note 6 of the Notes to Consolidated Financial
Statements for additional information regarding our limited partnership
investments.
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.
97
<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 Market Amortized Market Amortized Market Amortized Market
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 ........................ $ 1,445 $ 1,358 $ -- $ -- $ -- $ -- $ 479 $ 455
------- ------- ------- ------- ------- ------- ------- -------
Total trading account securities .............. 1,445 1,358 -- -- -- -- 479 455
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities ........................ 24,567 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 .................................. $34,051 $34,606 $28,150 $27,147
======= ======= ======= =======
</TABLE>
98
<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 Market
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 1,846 4,508 4,495 500 11,349 11,174
Municipal obligations ..... -- -- -- 150 150 150
Mutual funds .............. 5,983 -- -- -- 5,983 5,844
Mortgage-backed securities:
Freddie Mac ............. 26 621 -- 473 1,120 1,129
Fannie Mae .............. -- 894 120 1,381 2,395 2,320
------- ------- ------- ------- ------- -------
$ 8,360 $ 7,643 $ 4,615 $ 2,504 $23,122 $22,742
======= ======= ======= ======= ======= =======
Weighted average yield .... 5.83% 6.25% 6.41% 6.50% 6.16%
</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.
99
<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 1,009,751 1,027,102 993,088
Withdrawals ........ (548,529) (491,490) (1,002,644) (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>
100
<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 1.95% ............ $ 42,896 11.16% $ 42,242 11.54% $ 42,359 12.28% $ 42,019 12.72%
NOW and demand accounts 0% -- 1.25% 52,186 13.57 57,239 15.64 46,703 13.54 44,402 13.45
Money market accounts 1.25% -- 4.29% 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>
101
<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
102
<PAGE>
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.
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 --- 1,830 --- ---
Average Balance:
FHLB advances............................................ $47,667 $60,914 $55,232 $61,471 $56,929
Securities sold under agreements to repurchase........... --- 5 2 20 2,717
Other borrowings......................................... 1,799 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 --- 1,830 --- ---
------- ------- ------- ------- -------
Total borrowings......................... $53,161 $58,135 $52,462 $66,255 $61,109
======= ======= ======= ======= =======
Weighted average interest rate of FHLB
advances..................................... 5.36% 5.75% 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 0% ---% 0% ---% ---%
borrowings...................................
</TABLE>
103
<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 care and life insurance products. All
securities related products and services made available through Mutual Financial
Services are offered by a thrid 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
104
<PAGE>
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.
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 $1.1
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 will consist 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 Federal" and "- Executive Officers Who Are
105
<PAGE>
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.
<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 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.
106
<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 for
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 on a bi-monthly basis. 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.
107
<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. 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 met 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 to the fees paid to the members of the board of directors,
Mutual Federal maintains a director deferred compensation program which allows
directors the opportunity to defer all or a portion of their board fees to
receive income when they are no longer an active director. 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 $100,000.
108
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
----------------------------------- -----------------------
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(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
Executive Officer, Chief Operating
Officer and Director
Steven R. Campbell, Senior Vice 1998 102,000 11,353 --- --- --- 36,954
President of the Retail Banking
Division
Timothy J. McArdle, Senior Vice 1998 96,500 11,754 --- --- --- 27,303
President, Treasurer and Controller
Stephen C. Selby, Senior Vice 1998 92,000 14,048 --- --- --- 21,721
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 Deferred Compensation
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
retirement 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. Mutual Federal provides for monthly
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accruals of specified amounts necessary to meet the 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 the Internal
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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 10% and 4%, respectively, of
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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 executives 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 executive's
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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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 2.9% 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 savings and loan holding
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
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Office of Thrift Supervision. 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
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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
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.
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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.
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 $3.7 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. For a discussion of what Mutual Federal includes in liquid
assets, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Commitments." 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 7.38%.
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. See "- MFS
Financial."
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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 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
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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 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 7.74% and were 8.00% 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 in 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 $445,000.
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
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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.
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 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,
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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, 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
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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
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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 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 acquired 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 ESOP 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
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opportune time in order to obtain maximum value for MFS Financial and its
stockholders, 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 also deprive MFS
Financial's remaining stockholders of the benefits of certain protective
provisions 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, certain benefit plans of MFS Financial and Mutual
Federal adopted in connection with the conversion 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 the benefit plans and the provisions of such 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 5,520,000 shares of common stock, or 6,348,000 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
- ----------------------------.
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 has been be 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 will be 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 will
be passed upon for 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, 110 E. Charles Street, Muncie, Indiana
47305-2499.
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MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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.......................................61
Consolidated Statement of Equity Capital for the Six Months
Ended June 30, 1999 and 1998 (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-7
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 $ 2,230,933 $ 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) ---
Proceeds from sales on loans held for sale --- 16,468,717 35,447,044 5,743,831 ---
Gains on sales of loans held for sale --- (52,883) (548,491) (37,518) ---
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 61,083 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
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)
---------------------------------------------------------------------------
F-5
<PAGE>
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-6
<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.
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-7
<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.
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. 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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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
==================================================================
</TABLE>
F-20
<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-21
<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-22
<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 $40,717 $33,530 $31,984
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.
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.
F-23
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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-24
<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
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
<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>
F-25
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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>
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.
F-26
<PAGE>
MUTUAL FEDERAL SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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-27
<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-28
<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-29
<PAGE>
============================================ =================================
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, UP TO
MUTUAL FEDERAL OR CHARLES WEBB &
COMPANY. THIS PROSPECTUS DOES NOT 6,348,000 SHARES
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 DO MFS FINANCIAL, INC.
SO, OR TO ANY PERSON TO WHOM IT IS (Proposed Holding Company for
UNLAWFUL TO MAKE SUCH OFFER OR Mutual Federal Savings Bank)
SOLICITATION IN SUCH JURISDICTION.
NEITHER THE 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. COMMON STOCK
--------------
TABLE OF CONTENTS
Page
--------------
Summary................................ 3
Risk Factors........................... 9 PROSPECTUS
Selected Financial and Other Data...... 13 --------------
MFS Financial.......................... 15
Mutual Federal Savings Bank............ 15
How We Intend to Use the Proceeds...... 16
Market for the Common Stock............ 17
Our Policy Regarding Dividends......... 18
Pro Forma Data......................... 18
Comparison of Valuation and Pro Forma
Information With No Foundation...... 27 CHARLES WEBB & COMPANY,
Capitalization......................... 29 a Division of Keefe,
Mutual Federal Exceeds All Regulatory Bruyette & Woods, Inc.
Capital Requirements................ 30
Mutual Federal's Conversion............ 32
Proposed Purchases by Management....... 60 ____________, 1999
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 62
Business of MFS Financial.............. 78
Business of Mutual Federal............. 78
Management ............................ 105
How We Are Regulated................... 113
Taxation............................... 122
Restrictions on Acquisition of MFS
Financial and Mutual Federal........ 123
Description of Capital Stock of MFS
Financial........................... 128
Transfer Agent and Registrar........... 129
Experts................................ 129
Legal and Tax Opinions................. 129
Additional Information................. 130
Index to Consolidated Financial
Statements.......................... F-1
Until the later of __________, 2000
or 25 days after the commencement
of the public offering, if any, all
dealers effecting transactions in
the registered securities, whether
or not participating in this
distribution, may be required to
deliver a prospectus. This is in
addition to the obligation of
dealers to deliver a prospectus
when acting as underwriters and
with respect to their unsold
allotments or subscriptions.
============================================ =================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses to be incurred in connection
with the issuance and distribution of the securities being registered. All of
the amounts shown are estimated.
SEC registration fees............................................. $ 18,354
NASD fee.......................................................... 7,102
Nasdaq registration fee........................................... 66,875
OTS filing fees................................................... 14,400
Legal fees and expenses........................................... 225,000
Accounting fees and expenses...................................... 100,000
Appraisal and business plan fees and expenses..................... 37,500
Conversion agent fees and expenses................................ 20,000
Marketing agent's fee and expenses................................ 775,000
EDGAR, copying, printing, postage and mailing..................... 220,000
Blue sky fees and expenses........................................ 5,000
Other expenses.................................................... 10,769
--------
TOTAL......................................................... $1,500,000
==========
- -------------------
Item 14. Indemnification of Directors and Officers
Article 12 of MFS Financial, Inc's Articles of Incorporation provides for
indemnification of current and former directors and officers or individuals
serving any other entity at the request of MFS Financial, to the fullest extent
required or permitted under Maryland law. In addition, Article 12 provides for
the indemnification of other employees and agents to the extent authorized by
the Board of Directors and permitted under Maryland law. Article 12 also
provides MFS Financial with the authority to purchase insurance for
indemnification purposes. The indemnification provisions set forth within
Article 12 are non-exclusive in nature, however, MFS Financial shall not be
liable for any payment under Article 12 to the extent that said person entitled
to be indemnified has actually received payment under any insurance policy,
agreement or otherwise of the amounts indemnifiable under Article 12.
Section 2-418 of the General Corporation Law of the State of Maryland
permits a corporation to indemnify a person against judgments, penalties,
settlements and reasonable expenses unless it is proven that (1) the conduct of
the person was material to the matter giving rise to the proceeding and the
person acted in bad faith or with "active and deliberate dishonesty," (2) the
person actually
II-1
<PAGE>
received an improper benefit or (3) in the case of a criminal proceeding, the
person had reason to believe that his conduct was unlawful.
Maryland law provides that where a person is a defendant in a derivative
proceeding, the person may not be indemnified if the person is found liable to
the corporation. Maryland law also provides that a person may not be indemnified
in any proceeding alleging improper personal benefit to the person in which the
person was found liable on the grounds that personal benefit was improperly
received.
Maryland law further provides that unless otherwise provided in the
corporation's Articles of Incorporation, a director or officer (but not an
employee or agent) who is successful on the merits or otherwise in defense of
any proceeding must be indemnified against reasonable expenses. The Articles of
Incorporation do not otherwise provide a bar against mandatory indemnification.
Finally, Section 2-418 of the General Corporation Law also permits expenses
incurred by a person in defending a proceeding to be paid by the corporation in
advance of the final disposition of the proceeding upon the receipt of an
undertaking by the director or officer to repay this amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation
against these expenses. The person seeking indemnification of expenses must
affirm in writing that he or she believes in good faith that he or she has met
the applicable standard for indemnification of expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of Mutual Federal Savings Bank pursuant to the Amended Plan
of Conversion (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date.
Item 16. Exhibits and Financial Statement Schedules
(a) See the Exhibit Index filed as part of this Registration Statement
(b) Financial Statement Schedules
All financial statements have been omitted as the required information is
not applicable or has been included in the Registrant's financial statements and
related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in
II-2
<PAGE>
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration statement as of the time
it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Form S-1 Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Muncie, State of
Indiana on September 16, 1999.
MFS FINANCIAL, INC.
(In organization)
By: /s/ R. Donn Roberts
R. Donn Roberts
President, Chief Executive Officer,
Chief Operating Officer and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
Each person whose signature appears below hereby makes, constitutes and
appoints R. Donn Roberts his true and lawful attorney, with full power to sign
for each person and in such person's name and capacity indicated below, and with
full power of substitution, any and all amendments to this Registration
Statement, hereby ratifying and confirming such person's signature as it may be
signed by said attorney to any and all amendments. Pursuant to the requirements
of the Securities Act of 1933, this Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------- -------------------------------------- --------------
<S> <C> <C>
/s/ R. Donn Roberts President, Chief Executive Officer, September 16, 1999
- ------------------------- Chief Operating Officer and Director
R. Donn Roberts (Principal Executive Officer)
/s/ Timothy J. McArdle Senior Vice President, Treasurer and September 16, 1999
- ------------------------- Controller
Timothy J. McArdle (Principal Financial and Accounting
Officer)
/s/ Wilbur R. Davis Chairman of the Board September 16, 1999
- -------------------------
Wilbur R. Davis
/s/ Linn A. Crull Director September 16, 1999
- -------------------------
Linn A. Crull
II-4
<PAGE>
/s/ Edward Dobrow Director September 16, 1999
- -------------------------
Edward Dobrow
/s/ William V. Hughes Director September 16, 1999
- --------------------------
William V. Hughes
/s/ James D. Rosema Director September 16, 1999
- --------------------------
James D. Rosema
/s/ Julie Skinner Director September 16, 1999
- --------------------------
Julie Skinner
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibits:
1.1 Engagement Letter with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc.
1.2 Form of Agency Agreement with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc.
2.0 Amended Plan of Conversion
3.1 Articles of Incorporation for MFS Financial, Inc.
3.2 Bylaws of MFS Financial, Inc.
4.0 Form of Stock Certificate of MFS Financial, Inc.
5.0 Opinion of Silver, Freedman & Taff L.L.P. Re: Legality
8.1 Opinion of Silver, Freedman & Taff L.L.P. Re: Federal Tax Matters
8.2 Opinion of Olive L.L.P. Re: State Tax Matters*
8.3 Letter of RP Financial, LC. Re: Subscription Rights
10.1 Form of Employment Agreement
10.2 Employee Stock Ownership Plan
10.3 Letter Agreement regarding Appraisal Services
10.4 Letter Agreement regarding Business Plan
10.5 Letter Agreement regarding the Charitable Foundation
21.0 Subsidiaries of the Registrant
23.1 Consent of Silver, Freedman & Taff L.L.P. Re: Legality
(included in Exhibit 5.0)
23.2 Consent of Olive L.L.P.
23.3 Consent of RP Financial, LC.
23.4 Consent of Olive L.L.P. Re: State Tax Matters (included in Exhibit 8.2)
24.0 Power of Attorney, included in signature pages
27.0 Financial Data Schedule
99.1 Appraisal Report of RP Financial, LC. (P)
99.2 Subscription Order Form and Instructions
99.3 Additional Solicitation Material
- -----------------------------
(P) Filed in paper format pursuant to continuing hardship exemption.
* To be filed by amendment.
[Charles Webb & Company Letterhead]
April 27, 1999
Mr. R. Donn Roberts
President & Chief Executive Officer
Mutual Federal Savings Bank
110 E. Charles Street
Muncie, Indiana 47305
Dear Mr. Roberts:
This proposal is in connection with Mutual Federal Savings Bank's (the
"Bank") intention to acquire a stock financial institution (the "Acquisition")
and in connection therewith convert from a mutual to a capital stock form of
organization (the "Conversion"). In order to effect the Conversion, it is
contemplated that all of the Bank's common stock to be outstanding pursuant to
the Conversion will be issued to a holding company (the "Company") to be formed
by the Bank, and that the Company will offer and sell shares of its common stock
first to eligible persons (pursuant to the Bank's Plan of Conversion) in a
Subscription and Community Offering. In order to effect the Acquisition, it is
contemplated that the Company will issue cash, its stock, or a combination
thereof, immediately following the Conversion.
Charles Webb & Company ("Webb"), a Division of Keefe, Bruyette and Woods,
Inc. ("KBW"), will act as the Bank's and the Company's financial advisor and
marketing agent in connection with the Acquisition/Conversion. This letter sets
forth selected terms and conditions of our engagement.
1. Merger & Acquisition Services. As the Bank's and Company's financial
advisor, Webb will perform the following services:
(a) prepare a summary of recent merger and acquisition trends in the
financial services industry, including tactics employed by others and
typical terms and values applied;
(b) advise the Bank as to the structure and form of a proposed Acquisition
Transaction;
(c) make presentations to the Board of Directors about the Acquisition
Transaction;
(d) perform financial analyses of the Bank and prospective Target in the
context of a possible Acquisition Transaction;
1
<PAGE>
(e) counsel the Bank as to strategy and tactics for initiating discussions
and negotiations with the prospective Target and participate in such
discussions and negotiations;
(f) coordinate and participate in (i) initial discussions between the Bank
and prospective Target and (ii) "due diligence" investigations of Bank and
prospective Target;
(g) assuming an agreement in principle is reached for a Transaction, assist
you in negotiating a letter of intent, memorandum of understanding and a
definitive acquisition agreement;
(h) assist the Bank in any proceedings relating to regulatory approvals
required for a Transaction;
(i) if requested by the Bank, rendering an opinion at the time of execution
of an agreement and an update of such opinion as of the date of mailing the
proxy statement ("Opinion") as to whether or not the consideration to be
paid in a proposed Transaction is fair to the Company from a financial
point of view: and
(j) render such other financial advisory and investment banking services as
are customary in such engagements and as may be agreed upon by Webb and the
Bank.
2. Conversion/Advisory Services. As the Bank's and Company's financial
advisor and marketing agent, Webb will provide the Bank and the Company with a
comprehensive program of conversion services designed to promote an orderly,
efficient, cost-effective and long-term stock distribution. Webb will provide
financial and logistical advice to the Bank and the Company concerning the
offering and related issues. Webb will assist the Bank and provide conversion
enhancement services intended to maximize stock sales in the Subscription
Offering and to residents of the Bank's market area, if necessary, in the
Community Offering.
Webb shall provide financial advisory services to the Bank which are
typical in connection with an equity offering and include, but are not limited
to, overall financial analysis of the Bank with a focus on identifying factors
which impact the valuation of the common stock and provide the appropriate
recommendations for the betterment of the equity valuation.
Additionally, post conversion financial advisory services will include
advice on shareholder relations, NASDAQ listing, dividend policy (for both
regular and special dividends), stock repurchase strategy and communication with
market makers. Prior to the closing of the offering, Webb shall furnish to
client a Post-Conversion reference manual which will include specifics relative
to these items. (The nature of the services to be provided by Webb as the Bank's
and the Company's financial advisor and marketing agent are further described in
Exhibit A attached hereto.)
2
<PAGE>
3. Due Diligence Review. Prior to filing the Registration Statement,
Acquisition Application and Application for Conversion or any offering or other
documents naming Webb as the Bank's and the Company's financial advisor and
marketing agent, Webb and their representatives will undertake substantial
investigations to learn about the Bank's and the Target's business and
operations ("due diligence review") in order to confirm information provided to
us and to evaluate information to be contained in the Bank's and/or the
Company's offering documents. The Bank agrees that it will make available to
Webb all relevant information, whether or not publicly available, which Webb
reasonably requests, and will permit Webb to discuss with management the
operations and prospects of the Bank. Webb will treat all material non-public
information as confidential. The Bank acknowledges that Webb will rely upon the
accuracy and completeness of all information received from the Bank, its
officers, directors, employees, agents and representatives, accountants and
counsel including this letter to serve as the Bank's and the Company's financial
advisor and marketing agent.
4. Regulatory Filings. The Bank and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies including, the
Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), Federal Deposit Insurance Corporation ("FDIC"),
Office of Thrift Supervision ("OTS") and such state securities commissioners as
may be determined by the Bank.
5. Agency Agreement. The specific terms of the conversion services,
conversion offering enhancement and syndicated offering services contemplated in
this letter shall be set forth in an Agency Agreement between Webb and the Bank
and the Company to be executed prior to commencement of the offering, and dated
the date that the Company's Prospectus is declared effective and/or authorized
to be disseminated by the appropriate regulatory agencies, the SEC, the NASD,
the OTS, the FDIC, and such state securities commissioners and other regulatory
agencies as required by applicable law.
6. Representations, Warranties and Covenants. The Agency Agreement will
provide for customary representations, warranties and covenants by the Bank and
Webb. Further the Bank and Webb agree to the mutual indemnification and
contribution provisions set forth in Exhibit B, which shall also be set forth in
the Agency Agreement.
7. Fees. For the services hereunder, the Bank and/or Company shall pay the
following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $40,000 payable in four consecutive monthly
installments of $10,000 commencing with the signing of this letter. Such
fees shall be deemed to have been earned when due. Should the Acquisition
or Conversion be terminated for any reason not attributable to the action
or inaction of Webb, Webb shall have earned and be entitled to be paid fees
accruing through the stage at which point the termination occurred.
3
<PAGE>
(b) With respect to the Acquisition Transaction, a Success Fee of
0.50% of the total fair market value of any securities issued and any
non-cash and cash consideration paid as of the closing of the Acquisition
Transaction, including any amounts paid by the Company or the Target to any
stock benefit plans maintained by the Target or an affiliate or paid to any
holders of any options or stock appreciation rights granted by the Target,
whether or not vested, provided that for purposes of determining the
amounts paid with respect to such options or appreciation rights, as the
case may be, which remain unexercised immediately prior to the closing of
the subject Transaction, the amount paid with respect to such stock options
or appreciation rights, shall be deemed to equal the difference between the
aggregate fair market value of the common stock underlying such options and
rights and the aggregate exercise price of such options and rights. The
Acquisition Success Fee shall be due and payable at the closing of such
Acquisition. In the event this transaction occurs in the first year of this
agreement, the Management Fee in 7 (a) will be deducted from the total
Success Fee in this section.
(c ) For delivery of a fairness opinion pursuant to an Acquisition
Transaction, Webb shall receive a fee of $25,000, payable upon the issuance
of the fairness opinion to the Board at the time the definitive agreement
is signed; provided that such fee shall be deemed earned at the time of the
events described whether or not a Transaction is eventually consummated.
(Such fairness opinion fees shall be deducted from amount due under 7 (a)
above.)
(d) With respect to the Conversion, a Success Fee of 1.35% of the
aggregate Purchase Price of Common Stock sold in the conversion, excluding
shares purchased by the Bank's officers, directors, or employees (or
members of their immediate families) plus any ESOP, tax-qualified or stock
based compensation plans (except IRA's) or similar plan created by the Bank
for some or all of its directors or employees.
(e) As an alternative to section 7 (d) a fixed Success Fee of $725,000
may be selected.
(f) If any shares of the Company's stock remain available after the
subscription offering, at the request of the Bank, Webb will seek to form a
syndicate of registered broker-dealers to assist in the sale of such common
stock on a best efforts basis, subject to the terms and conditions set
forth in the selected dealers agreement. Webb will endeavor to distribute
the common stock among dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan of Conversion. Webb will
be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the
shares of common stock sold by them. Webb will pass onto selected
broker-dealers, who assist in the syndicated community, an amount
competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a
similar market environment. Fees with respect to purchases effected with
the assistance of a broker/dealer other than Webb shall be transmitted by
Webb to such broker/dealer. The decision to utilize selected broker-dealers
will be made by the Bank upon consultation with Webb. In the event, with
respect to any stock purchases, fees are paid pursuant to this subparagraph
7(f), such fees shall be in lieu of, and not in addition to, payment
pursuant to subparagraph 7(a) and 7(d).
4
<PAGE>
(g) Financial Advisory Fees with respect to the preliminary
acquisition analysis will be paid to Webb. The fees will be based on an
hourly rate with a total annual maximum amount paid under this section not
to exceed $10,000 without prior approval of the Bank. Any fees paid under
this section will be applied against the fees described under Section 7(b)
in the event an acquisition is consummated.
Notwithstanding anything to the contrary, the fees set forth in this
section 7(a) through 7(g) shall not be deemed earned by Webb or payable by the
Bank unless and until such time as the Board of Directors of the Bank shall have
adopted a Plan of Conversion and a definitive agreement relating to an
Acquisition Transaction.
For purposes of Paragraph 7 (b) above, "total fair market value" of
securities and non-cash consideration shall have the following meaning: (i) in
the case of an exchange of common stock in a transaction in which the number of
shares of the Company to be received by the shareholders of Target will vary in
a manner designed to produce a fixed value to be received in exchange for each
share of Target, the "total fair market value" shall mean the maximum number of
shares of Company stock to be exchanged in such transaction, multiplied by the
value per share specified in the agreement between Company and the Target; (ii)
in the case of an exchange of common stock in a transaction in which the number
of shares of the Company to be received in exchange for each share of the Target
is fixed and the value of such shares may vary, the "total fair market value"
shall mean the per share price of the Company's stock as sold in the conversion,
multiplied by the maximum number of shares of common stock of the Company
issuable upon conversion of Target's common stock in the transaction.
5
<PAGE>
8. Additional Services. Webb further agrees to provide financial advisory
assistance to the Company and the Bank for a period of one year following
completion of the Conversion, including formation of a dividend policy and share
repurchase program, assistance with shareholder reporting and shareholder
relations matters, general advice on mergers and acquisitions and other related
financial matters, without the payment by the Company and the Bank of any fees
in addition to those set forth in Section 7 hereof. Nothing in this Agreement
shall require the Company and the Bank to obtain such services from Webb.
Following this initial one year term, if both parties wish to continue the
relationship, a fee will be negotiated and an agreement entered into at that
time.
9. Expenses. The Bank will bear those expenses of the proposed offering
customarily borne by issuers, including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the
Bank's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing, conversion agent fees and syndicate expenses
associated with the Conversion; the fees set forth in Section 7; and fees for
"Blue Sky" legal work. If Webb incurs expenses on behalf of the Bank for any of
the aforementioned matters, the Bank will reimburse Webb for such expenses.
Webb shall be reimbursed for reasonable out-of-pocket expenses, including
costs of travel, meals and lodging, photocopying, telephone, facsimile and
couriers and expenses of their counsel. Reimbursement of Webb's total
out-of-pocket expenses shall not exceed $50,000, of which $40,000 shall be for
legal fees, without the prior consent of the Bank.
10. Conditions. Webb's willingness and obligation to proceed hereunder
shall be subject to, among other things, satisfaction of the following
conditions in Webb's opinion, which opinion shall have been formed in good faith
by Webb after reasonable determination and consideration of all relevant
factors: (a) legally sufficient disclosure of all relevant material, financial
and other information in the disclosure documents; (b) no material adverse
change in the condition or operations of the Bank subsequent to the execution of
the agreement; and (c) no adverse market conditions at the time of offering
which in Webb's opinion make the sale of the shares by the Company inadvisable.
11. Preparation of Acquisition/Stock Offering Documents. The Bank, the
Company and their counsel will draft the Acquisition Agreement, Application for
Acquisition, Registration Statement, Application for Conversion, Prospectus and
other documents to be used in connection with the Conversion and Acquisition.
Webb will attend meetings to review these documents and advise you on their form
and content. Webb and its counsel will draft appropriate agency agreement and
related documents as well as marketing materials other than the Prospectus.
12. Benefit. This Agreement shall inure to the benefit of the parties
hereto and their respective successors and to the parties indemnified pursuant
to the terms and conditions of the Agency Agreement and their successors, and
the obligations and liabilities assumed hereunder by the parties hereto shall be
binding upon their respective successors provided, however, that this Agreement
shall not be assignable by Webb.
6
<PAGE>
13. Definitive Agreement. This letter reflects Webb's present intention of
proceeding to work with the Bank on its proposed Acquisition and Conversion. It
does not create a binding obligation on the part of the Bank, the Company or
Webb except as to the agreement to maintain the confidentiality of non-public
information set forth in Section 3, the payment of certain fees as set forth in
Section 7 and the assumption of expenses as set forth in Section 9, and the
mutual indemnification provisions set forth in Exhibit B, all of which shall
constitute the binding obligations of the parties hereto and which shall survive
the termination of this Agreement or the completion of the services furnished
hereunder and shall remain operative and in full force and effect. You further
acknowledge that any report or analysis rendered by Webb pursuant to this
engagement is rendered for use solely by the management of the Bank and its
agents in connection with the Acquisition or the Conversion. Accordingly, you
agree that you will not provide any such information to any other person without
our prior written consent.
Webb acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, Webb agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.
7
<PAGE>
If the foregoing correctly sets forth our mutual understanding, please so
indicate by selecting either the variable 7(d) or fixed (e) fee structure by
encircling the appropriate selection and then signing and returning the original
copy of this letter to the undersigned.
Very truly yours,
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE
& WOODS, INC.
By: /s/ Charles R. Webb
-------------------------------------
Charles R. Webb
President and Chief Executive Officer
MUTUAL FEDERAL SAVINGS BANK
By: /s/ R. Donn Roberts Date: May 26, 1999
------------------------------------- -------------
R. Donn Roberts
President and Chief Executive Officer
8
<PAGE>
EXHIBIT A
CONVERSION SERVICES PROPOSAL
TO MUTUAL FEDERAL SAVINGS BANK
Charles Webb & Company provides thrift institutions converting from mutual
to stock form of ownership with a comprehensive program of conversion services
designed to promote an orderly, efficient, cost-effective and long-term stock
distribution. The following list is representative of the conversion services,
if appropriate, we propose to perform on behalf of the Bank.
General Services
- ----------------
Assist management and legal counsel with the design of the transaction
structure.
Analyze and make recommendations on bids from printing, transfer agent, and
appraisal firms.
Assist officers and directors in obtaining bank loans to purchase stock, if
requested.
Assist in drafting and distribution of press releases as required or
appropriate.
Conversion Offering Enhancement Services
- ----------------------------------------
Establish and manage Stock Information Center at the Bank. Stock
Information Center personnel will track prospective investors; record stock
orders; mail order confirmations; provide the Bank's senior management with
daily reports; answer customer inquiries; and handle special situations as they
arise.
Assign Webb's personnel to be at the Bank through completion of the
Subscription and Community Offerings to manage the Stock Information Center. If
so desired by the Bank, Webb's personnel will also meet with prospective
shareholders at individual and community information meetings, solicit local
investor interest through a tele-marketing campaign, answer inquiries, and
otherwise assist in the sale of stock in the Subscription and Community
Offerings. This effort will be lead by a Principal of Webb/KBW.
Provide proxy solicitation, member vote tabulation and act as inspector of
election at the special meeting of members.
Create target investor list based upon review of the Bank's depositor base.
Provide intensive financial and marketing input for drafting of the
prospectus.
1
<PAGE>
Conversion Offering Enhancement Services- Continued
- ----------------------------------------------------
Prepare other marketing materials, including prospecting letters and
brochures, and media advertisements.
Arrange logistics of community information meeting(s) as required.
Prepare audio-visual presentation by senior management for community
information meeting(s).
Prepare management for question-and-answer period at community information
meeting(s).
Attend and address community information meeting(s) and be available to
answer questions.
Broker-Assisted Sales Services.
- --------------------------------
Arrange for broker information meeting(s) as required.
Prepare audio-visual presentation for broker information meeting(s).
Prepare script for presentation by senior management at broker information
meeting(s).
Prepare management for question-and-answer period at broker information
meeting(s).
Attend and address broker information meeting(s) and be available to answer
questions.
Produce confidential broker memorandum to assist participating brokers in
selling the Bank's common stock.
Aftermarket Support Services.
- -----------------------------
Webb, through Keefe, Bruyette & Woods, Inc., will provide market making and
on-going research of the Company. In addition, Webb will use its best efforts to
secure a commitment from at least one additional NASD firm to provide market
making services.
Conversion Agent Services.
- --------------------------
Webb will utilize the services of Crowe, Chizek & Company for aggregation
of accounts. The services provided will be a part of a separate agreement
between the Bank and Crowe Chizek.
2
<PAGE>
EXHIBIT B
Section 1. Indemnification.
----------------
(a) The Holding Company and the Bank agree to indemnify and hold harmless
Webb (also referred herein as the "Agent"), its officers, directors, agents,
servants and employees and each person, if any, who controls the Agent within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against
any and all loss, liability, claim, damage or expense whatsoever (including but
not limited to settlement expenses), joint or several, that the Agent or any of
them may suffer or to which the Agent and any such persons may become subject
under all applicable federal and state laws or otherwise, and to promptly
reimburse the Agent and any such persons upon written demand for any reasonable
expenses (including fees and disbursements of counsel) incurred by the Agent or
any of them in connection with investigating, preparing or defending any
actions, proceedings or claims (whether commenced or threatened) to the extent
such losses, claims, damages, liabilities or actions (i) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment or supplement
thereto), preliminary or final Prospectus (or any amendment or supplement
thereto), any regulatory application ("Application"), or any blue sky
application or other instrument or document of the Holding Company or the Bank
or based upon written information supplied by the Holding Company or the Bank
filed in any state or jurisdiction to register or qualify any or all of the
Shares under the securities laws thereof (collectively, the "Blue Sky
Application"), or any application or other document, advertisement, or
communication ("Sales Information") prepared, made or executed by or on behalf
of the Holding Company or the Bank with its consent or based upon written
information furnished by or on behalf of the Holding Company or the Bank,
whether or not filed in any jurisdiction in order to qualify or register the
Shares under the securities laws thereof; (ii) arise out of or based upon the
omission or alleged omission to state in any of the foregoing documents or
information, a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (iii) arise from any theory of liability whatsoever
relating to or arising from or based upon the Registration Statement (or any
amendment or supplement thereto), preliminary or final Prospectus (or any
amendment or supplement thereto), the Application, any Blue Sky Application or
Sales Information or other documentation distributed in connection with the
transactions contemplated by this letter agreement (the "Transactions") or
relating to or arising from the Transactions contemplated hereby or any action
of the Agent acting as agent of the Holding Company or the Bank pursuant to this
Agreement; provided, however, that no indemnification is required under this
paragraph (a) to the extent such losses, claims, damages, liabilities or actions
arise out of or are based upon any untrue material statements or alleged untrue
material statements in, or material omission or alleged material omission from,
the Registration Statement (or any amendment or supplement thereto) or the
preliminary or final Prospectus (or any amendment or supplement thereto) the
Application, the Blue Sky Application or Sales Information or other
documentation distributed in connection with the Transactions made in reliance
upon and in conformity with written information furnished to the Holding Company
or the Bank by the Agent with respect to the Agent expressly for use in the
1
<PAGE>
Registration Statement (or any amendment or supplement thereto) or Prospectus
(or any amendment or supplement thereto) under the caption "The Conversion -
Marketing Arrangements" therein. Provided further, that the Holding Company and
the Bank will not be responsible for any loss, liability, claim, damage or
expense to the extent they result primarily from actions taken or omitted to be
taken by the Agent in bad faith or from the Agent's gross negligence, and the
Agent agrees to repay to the Holding Company any amounts advanced by it to the
Agent in connection with matters as to which the Agent are found not to be
entitled to indemnification hereunder. Notwithstanding the foregoing, the
indemnification provided for in this paragraph (a) shall not apply to the Bank
to the extent that such indemnification by the Bank would constitute a covered
transaction under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Holding Company and
Bank, their directors and officers, agents, servants and employees and each
person, if any, who controls the Holding Company and Bank within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage or expense whatsoever (including but not limited
to settlement expenses), joint or several which they, or any of them, in
connection with investigating, preparing or defending any actions, proceedings
or claims (whether commenced or threatened) (i) to the extent they result
primarily from actions taken or omitted to be taken by the Agent in bad faith or
from the Agent's gross negligence, or (ii) to the extent such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment of supplement thereto), the
Application, the Holding Company Application or any Blue Sky Application or
Sales Information or are based upon the omission or alleged omission to state in
any of the foregoing documents a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Agent's
obligations under this Section 1(b)(ii) shall exist only if and only to the
extent that such untrue statement or alleged untrue statement was made in, or
such material fact or alleged material fact was omitted from, the Registration
Statement (or any amendment or supplement thereto) or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Holding Company by the Agent expressly for use
under the caption "The Conversion - Marketing Arrangements" therein.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 1 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for all indemnified parties in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings or
claims in the same jurisdiction arising out of the same general allegations or
circumstances.
2
<PAGE>
(d) The agreements contained in this Section 1 and in Section 2 hereof
shall remain operative and in full force and effect regardless of: (i) any
investigation made by or on behalf of the Agent or its officers, directors or
controlling persons, agents or employees or by or on behalf of the Holding
Company or the Bank or any officers, directors or controlling persons, agents or
employees of the Holding Company or the Bank or any controlling person, director
or officer of the Holding Company or the Bank; (ii) delivery of and payment
hereunder for the Shares; or (iii) any termination of this Agreement.
Section 2. Contribution.
-------------
(a) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 1 is due in
accordance with its terms but is for any reason held by a court to be
unavailable from the Holding Company and the Bank, or the Agent, as the case may
be, the Holding Company and the Bank, or the Agent, as the case may be, shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses incurred in connection therewith and
any amount paid in settlement of any action, suit or proceeding of any claims
asserted, but after deducting any contribution received by the Holding Company
and the Bank or the Agent, as the case may be from persons other than the other
party thereto, who may also be liable for contribution) in such proportion so
that the Agent is responsible for that portion represented by the percentage
that the fees paid to the Agent pursuant to this Agreement (not including
expenses) bears to the gross proceeds received by the Holding Company from the
sale of the Shares in the Subscription and Community Offering and the Holding
Company and the Bank shall be responsible for the balance. If, however, the
allocation provided above is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section 1 above, then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault of the Holding Company and the Bank on the one hand and the Agent
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions, proceedings or claims
in respect thereof), but also the relative benefits received by the Holding
3
<PAGE>
Company and Bank on the one hand and the Agent on the other from the offering,
as well as any other relevant equitable considerations. The relative benefits
received by the Holding Company and the Bank on the one hand and the Agent on
the other shall be deemed to be in the same proportion as the total gross
proceeds from the Subscription and Community Offering (before deducting
expenses) received by the Holding Company bear to the total fees (not including
expenses) received by the Agent. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Holding Company and/or the Bank on the
one hand or the Agent on the other and the parties relative intent, good faith,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Holding Company and the Agent agree that it would not
be just and equitable if contribution pursuant to this Section 2 were determined
by pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 2. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or action, proceedings or claims in respect
thereof) referred to above in this Section 2 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action, proceeding or claim.
It is expressly agreed that the Agent shall not be liable for any loss,
liability, claim, damage or expense or be required to contribute any amount
which in the aggregate exceeds the amount paid (excluding reimbursable expenses)
to the Agent under this Agreement. It is understood that the above-stated
limitation on the Agent's liability is essential to the Agent and that the Agent
would not have entered into this Agreement if such limitation had not been
agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not found guilty
of such fraudulent misrepresentation. The obligations of the Holding Company,
the Bank, and the Agent under this Section 2 and under Section 1 shall be in
addition to any liability which the Holding Company, the Bank, and the Agent may
otherwise have. For purposes of this Section 2, each of the Agent's, the Holding
Company's and the Bank's officers and directors and each person, if any, who
controls the Agent or the Holding Company and the Bank within the meaning of the
1933 Act and the 1934 Act shall have the same rights to contribution as the
Holding Company, the Bank and the Agent. Any party entitled to contribution,
promptly after receipt of notice of commencement of any action, suit, claim or
proceeding against such party in respect of which a claim for contribution may
be made against another party under this Section 2, will notify such party from
whom contribution may be sought, but the omission to so notify such party shall
not relive the party from whom contribution may be sought from any other
obligation it may have hereunder or otherwise than under this Section 2.
4
MFS FINANCIAL, INC.
6,348,000 Shares
COMMON SHARES
(Par Value $.01 Per Share)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
____________________, 1999
Charles Webb & Company, a Division of
Keefe, Bruyette & Woods, Inc.
211 Bradenton Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
MFS Financial, Inc., a Maryland corporation (the "Company"), and Mutual
Federal Savings Bank, Muncie, Indiana, a federally chartered mutual savings bank
(the "Bank") (references to the "Bank" include the Bank in the mutual or stock
form, as indicated by the context), with its deposit accounts insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"), hereby confirm their agreement with Charles Webb
& Company, a Division of Keefe, Bruyette & Woods, Inc. ("Webb", "KBW" or "the
Agent"), as follows:
Section 1. The Offering. The Bank, in accordance with its plan of
conversion adopted by its Board of Directors (the "Plan"), intends to convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, and will issue all of its issued and outstanding capital stock to
the Company. In addition, pursuant to the Plan, the Company will offer and sell
up to 6,348,000 of its common shares, par value $.01 per share ("Common
Shares"), in a subscription offering (the "Subscription Offering") to (1)
depositors of the Bank with Qualifying Deposits (as defined in the Plan) as of
July 31, 1998 ("Eligible Account Holders"), (2) the Mutual Federal Savings Bank
Employee Stock Ownership Plan (the "ESOP"), (3) depositors of the Bank with
Qualifying Deposits as of September 30, 1999 ("Supplemental Eligible Account
Holders"), (4) the Bank's Other Members as defined in the Plan and (5)
directors, officers and employees of the Bank. The Common Shares to be sold by
the Company in the Offering (as defined below) are hereinafter called the
"Shares." Subject to the prior subscription rights of the above-listed parties,
the Company is offering for sale in a community offering (the "Community
Offering" and when referred to together with the Subscription Offering, the
-1-
<PAGE>
"Subscription and Community Offering") conducted concurrently with the
Subscription Offering, the Shares not subscribed for or ordered in the
Subscription Offering to members of the general public to whom a copy of the
Prospectus (as hereinafter defined) is delivered with a preference given to
residents of Delaware, Randolph and Kosciusko Counties, Indiana. It is
anticipated that shares not subscribed for in the Subscription and Community
Offering will be offered to certain members of the general public on a best
efforts basis through a selected dealers agreement (the "Syndicated Community
Offering") (the Subscription Offering, Community Offering and Syndicated
Community Offering are collectively referred to as the "Offering"). In addition,
as described in the Plan, the Company and the Bank expect to contribute cash and
Common Shares in an amount equal to 8% of the Shares sold in the Offering to The
Mutual Federal Savings Bank Charitable Foundation (the "Foundation"). Such
Common Shares are referred to herein as the "Foundation Shares." It is
acknowledged that the purchase of Shares in the Offering is subject to the
maximum and minimum purchase limitations as described in the Plan and that the
Company and the Bank may reject, in whole or in part, any orders received in the
Community Offering or Syndicated Community Offering. Collectively, these
transactions are referred to herein as the "Conversion."
Immediately following the consummation of the Conversion, subject to the
approval of the establishment of the Foundation by the members of the Bank and
compliance with certain conditions as may be imposed by regulatory authorities,
the Company will contribute to the Foundation newly issued Common Shares in an
amount equal to 4% of the Shares sold in the Conversion and the Bank will
contribute to the Foundation cash in an amount equal to 4% of the Shares sold in
the Conversion (based upon the $10.00 per share subscription price).
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-_____) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares and the Foundation Shares under the Securities
Act of 1933 (the "1933 Act"), and has filed such amendments thereof and such
amended prospectuses as may have been required to the date hereof. The term
"Registration Statement" shall include any documents incorporated by reference
therein and all financial schedules and exhibits thereto, as amended, including
post-effective amendments. The prospectus, as amended, on file with the
Commission at the time the Registration Statement initially became effective is
hereinafter called the "Prospectus," except that if any Prospectus is filed by
the Company pursuant to Rule 424(b) or (c) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") differing from the
prospectus on file at the time the Registration Statement initially becomes
effective, the term "Prospectus" shall refer to the prospectus filed pursuant to
Rule 424(b) or (c) from and after the time said prospectus is filed with the
Commission.
In accordance with Title 12, Part 563b of the Code of Federal Regulations
(the "Conversion Regulations"), the Bank has filed with the Office of Thrift
Supervision (the "OTS") an Application for Conversion (the "Conversion
Application"), including the Prospectus and the Conversion Valuation Appraisal
Report prepared by RP Financial and has filed such amendments thereto as may
have been required by the OTS. The Conversion Application has been approved by
the OTS and the related Prospectus has been authorized for use by the OTS. In
-2-
<PAGE>
addition, the Company has filed with the OTS its application on Form H-(e)1 (the
"Holding Company Application") to become a registered savings and loan holding
company under the Home Owners' Loan Act, as amended ("HOLA"), which has been
approved.
Section 2. Retention of Agent; Compensation; Sale and Delivery of the
Shares. Subject to the terms and conditions herein set forth, the Company and
the Bank hereby appoint the Agent as their exclusive financial advisor and
marketing agent to utilize its best efforts to solicit subscriptions for Shares
and to advise and assist the Company and the Bank with respect to the Company's
sale of the Shares in the Offering.
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the Agent
accepts such appointment and agrees to consult with and advise the Company and
the Bank as to the matters set forth in the letter agreement, dated April 27,
1999, between the Bank and Webb (a copy of which is attached hereto as Exhibit
A). It is acknowledged by the Company and the Bank that the Agent shall not be
required to purchase any Shares or be obligated to take any action which is
inconsistent with all applicable laws, regulations, decisions or orders.
The obligations of the Agent pursuant to this Agreement shall terminate
upon the completion or termination or abandonment of the Plan by the Company or
upon termination of the Offering, but in no event later than 45 days after the
completion of the Subscription Offering (the "End Date"). All fees or expenses
due to the Agent but unpaid will be payable to the Agent in next day funds at
the earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offering is extended beyond the End Date, the Company, the Bank and
the Agent may agree to renew this Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of 4,080,000 Shares
within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares
the full amount which it may have received from them plus accrued interest, as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as set forth in this
Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offering is terminated for any reason not attributable to
the action or inaction of the Agent, the Agent shall be paid the fees due to the
date of such termination pursuant to subparagraphs (a) and (d) below.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan; provided, however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
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<PAGE>
been complied with to the reasonable satisfaction of the Agent and its counsel.
The release of Shares against payment therefor shall be made on a date and at a
place acceptable to the Company, the Bank and the Agent. Certificates for shares
shall be delivered directly to the purchasers in accordance with their
directions. The date upon which the Company shall release or deliver the Shares
sold in the Offering, in accordance with the terms herein, is called the
"Closing Date."
The Agent shall receive the following compensation for its services
hereunder:
(a) A management fee of $40,000, payable in four consecutive monthly
installments of $10,000, of which $___________ has been paid. Such fees shall be
deemed to have been earned when due. Should the Conversion be terminated for any
reason not attributable to the action or inaction of the Agent, the Agent shall
have earned and be entitled to be paid fees accruing through the stage at which
the termination occurred, including any accrued legal fees expended by the
Agent.
(b) A Success Fee of $725,000 upon completion of the Offering. The
management fee described in subparagraph 2(a) shall be applied against the
Success Fee described in this subparagraph 2(b).
(c) If any of the Common Shares remain available after the Subscription
Offering, at the request of the Bank, Webb will seek to form a syndicate of
registered broker-dealers ("Selected Dealers") to assist in the sale of such
Common Shares on a best efforts basis, subject to the terms and conditions set
forth in the selected dealers agreement. Webb will endeavor to distribute the
Common Shares among the Selected Dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan. Webb will be paid a fee not to
exceed 5.5% of the aggregate purchase price of the Shares sold by the Selected
Dealers. Webb will pass onto the Selected Dealers who assist in the Syndicated
Community Offering an amount competitive with gross underwriting discounts
charged at such time for comparable amounts of stock sold at a comparable price
per share in a similar market environment. Fees with respect to purchases
affected with the assistance of Selected Dealers other than Webb shall be
transmitted by Webb to such Selected Dealers. The decision to utilize Selected
Dealers will be made by the Bank upon consultation with Webb.
(d) The Agent shall be reimbursed for reasonable out-of-pocket expenses,
including travel, meals and lodging, photocopying, telephone, facsimile and
couriers and expenses of its counsel. Reimbursement of the Agent's total
out-of-pocket expenses shall not exceed $45,000, of which $40,000 shall be for
legal fees, without the prior consent of the Bank. The Bank will bear the
expenses of the Offering customarily borne by issuers including, without
limitation, regulatory filing fees, Commission, "Blue Sky," and NASD filing and
registration fees; the fees of the Bank's accountants, attorneys, appraiser,
transfer agent and registrar,
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<PAGE>
printing, mailing and marketing expenses associated with the conversion; and the
fees set forth under this Section 2; and fees for "Blue sky" legal work. The
Company or the Bank will reimburse Webb for expenses incurred by Webb on their
behalf.
Full payment of Agent's fees and expenses, as described above, shall be
made in next day funds on the earlier of the Closing Date or a determination by
the Bank to terminate or abandon the Plan.
Section 3. Prospectus; Offering. The Shares are to be initially offered in
the Offering at the purchase price set forth on the cover page of the
Prospectus.
Section 4. Representations and Warranties.
(a) The Company and the Bank jointly and severally represent and warrant to
and agree with the Agent as follows:
(i) The Registration Statement which was prepared by the Company and
the Bank and filed with the Commission was declared effective by the
Commission on ______________, 1999. At the time the Registration Statement,
including the Prospectus contained therein (including any amendment or
supplement), became effective, the Registration Statement contained all
statements that were required to be stated therein in accordance with the
1933 Act and the 1933 Act Regulations, complied in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and the
Registration Statement, including the Prospectus contained therein
(including any amendment or supplement thereto), and any information
regarding the Company or the Bank contained in Sales Information (as such
term is defined in Section 8 hereof) authorized by the Company or the Bank
for use in connection with the Offering, did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and at the
time any Rule 424(b) or (c) Prospectus was filed with the Commission and at
the Closing Date referred to in Section 2, the Registration Statement,
including the Prospectus contained therein (including any amendment or
supplement thereto), and any information regarding the Company or the Bank
contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Company or the Bank for use in connection with
the Offering will contain all statements that are required to be stated
therein in accordance with the 1933 Act and the 1933 Act Regulations and
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under
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<PAGE>
which they were made, not misleading; provided, however, that the
representations and warranties in this Section 4(a)(i) shall not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company or the Bank by the Agent or
its counsel expressly regarding the Agent for use in the Prospectus under
the caption "Mutual Federal's Conversion-Marketing Arrangements" or in any
Sales Information.
(ii) The Conversion Application which was prepared by the Company and
the Bank and filed with the OTS was approved on ______________, 1999 and
the related Prospectus has been authorized for use by the OTS. At the time
of the approval of the Conversion Application, including the Prospectus
(including any amendment or supplement thereto), by the OTS and at all
times subsequent thereto until the Closing Date, the Conversion
Application, including the Prospectus (including any amendment or
supplement thereto), will comply in all material respects with the
Conversion Regulations, except to the extent waived in writing by the OTS.
The Conversion Application, including the Prospectus (including any
amendment or supplement thereto), does not include any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this Section 4(a)(ii)
shall not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company or the Bank by
the Agent or its counsel expressly regarding the Agent for use in the
Prospectus contained in the Conversion Application under the caption
"Mutual Federal's Conversion-Marketing Arrangements" or in any Sales
Information
(iii) The Holding Company Application has been prepared by the Bank
and the Company in material conformity with the requirements of all
applicable regulations and has been filed with and approved by the OTS. A
conformed copy of the Holding Company Application has been delivered to the
Agent.
(iv) No order has been issued by the Commission, the OTS, any state
securities administrator or the FDIC (hereinafter any reference to the FDIC
shall include the SAIF) preventing or suspending the use of the Prospectus,
and no action by or before any such government entity to revoke any
approval, authorization or order of effectiveness related to the Conversion
is pending or, to the best knowledge of the Company or the Bank,
threatened.
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<PAGE>
(v) The Plan has been adopted by the Boards of Directors of both the
Company and the Bank and, at the Closing Date, will have been approved by
the members of the Bank; at the Closing Date, the offer and sale of the
Shares will have been conducted in all material respects in accordance with
the Plan, the Conversion Regulations, and all other applicable laws,
regulations, decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion imposed upon the
Company or the Bank by the OTS, the Commission, or any other regulatory
authority and in the manner described in the Prospectus. No person has
sought to obtain review of the final action of the OTS in approving the
Plan or in approving the Conversion or the Holding Company Application
pursuant to the HOLA or any other statute or regulation.
(vi) The Bank has been organized and is a validly existing federally
chartered savings bank in mutual form of organization and upon the
Conversion will become a duly organized and validly existing federally
chartered savings bank in permanent capital stock form of organization, in
both instances duly authorized to conduct its business and own its property
as described in the Registration Statement and the Prospectus; the Bank has
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of its business, except those that
individually or in the aggregate would not materially adversely affect the
financial condition, earnings, capital, assets, properties or business of
the Company and the Bank, taken as a whole; all such licenses, permits and
governmental authorizations are in full force and effect, and the Bank is
in compliance with all material laws, rules, regulations and orders
applicable to the operation of its business; the Bank is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which its ownership of property or leasing of property or
the conduct of its business requires such qualification, unless the failure
to be so qualified in one or more of such jurisdictions would not
individually or in the aggregate have a material adverse effect on the
financial condition, earnings, capital, assets, properties or business of
the Bank. The Bank does not own equity securities or any equity interest in
any other business enterprise except for First M.F.S.B. Corporation and
Third M.F.S.B. Corporation ("Subsidiaries") and as described in the
Prospectus or as would not be material to the operations of the Bank. Upon
completion of the Conversion, (i) all of the authorized and outstanding
capital stock of the Bank will be owned by the Company and (ii) the Company
will have no direct subsidiaries other than the Bank. At the Closing Date,
the Conversion will have been effected in all material respects in
accordance with all applicable statutes, regulations, decisions and orders;
and, except with respect to the filing of certain post-sale,
post-Conversion reports,
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<PAGE>
and documents in compliance with the 1933 Act Regulations, the OTS's
resolutions or letters of approval, all terms, conditions, requirements and
provisions with respect to the Conversion imposed by the Commission, the
OTS and the FDIC, if any, will have been complied with by the Company and
the Bank in all material respects or appropriate waivers will have been
obtained and all material notice and waiting periods will have been
satisfied, waived or elapsed.
(vii) The Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the laws of the
State of Indiana with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus. The Foundation will not be a savings and loan holding company
within the meaning of 12 C.F.R. Section 574.2(q) as a result of the
issuance of the Foundation Shares to it in accordance with the terms of the
Plan and in the amounts as described in the Prospectus. No approvals are
required to establish the Foundation and to contribute the cash and the
Foundation Shares thereto as described in the Prospectus other than those
set forth in the OTS's approval of the Conversion Application. Except as
specifically disclosed in the Prospectus and the Proxy Statement, there are
no agreements and/or understandings, written or oral, between the Company
and/or the Bank and the Foundation with respect to the control, directly or
indirectly, over the voting and the acquisition or disposition of the
Foundation Shares. The Internal Revenue Service has recognized the
Foundation as a tax-exempt organization under Section 503(c) of the
Internal Revenue Code of 1986, as amended.
(viii) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland
with corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and
the Prospectus; the Company is qualified to do business as a foreign
corporation in Indiana and in each jurisdiction in which the conduct of its
business requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the financial
condition, earnings, capital, assets, properties or business of the
Company. The Company has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its
business except those that individually or in the aggregate would not
materially adversely affect the financial condition, earnings, capital,
assets, properties or business of the Company and the Bank, taken as a
whole; all such licenses, permits and governmental authorizations are in
full force and effect,
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<PAGE>
and the Company is in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its business.
(ix) The Bank is a member of the Federal Home Loan Bank of
Indianapolis ("FHLB-Indianapolis"). The deposit accounts of the Bank are
insured by the FDIC up to the applicable limits, and no proceedings for the
termination or revocation of such insurance are pending or, to the best
knowledge of the Company or the Bank, threatened. Upon consummation of the
Conversion, the liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly established
in accordance with the requirements of the Conversion Regulations.
(x) The Subsidiaries are organized, validly existing and in good
standing under the laws of the State of Indiana; with full power and
authority to own their property and conduct their business; each of the
Subsidiaries is duly qualified as a foreign corporation to transact
business in each jurisdiction in which failure to so qualify would have a
material adverse effect on the financial condition, earnings, capital,
assets or properties of the Bank and the Subsidiaries, taken as a whole;
the Subsidiaries hold all licenses, certificates and permits from
governmental authorities necessary for the conduct of their business,
except where failure to hold such licences, permit or authorizations would
not have a material adverse effect on the financial condition, earnings,
capital, assets or properties of the Bank and the Subsidiaries, taken as a
whole; all of the outstanding capital stock of the Subsidiaries has been
duly authorized and is fully paid and non-assessable, and is owned directly
or indirectly by the Bank, free and clear of any liens or encumbrances; the
activities of the Subsidiaries are permitted to be conducted by
subsidiaries of a federally-chartered savings bank pursuant to the HOLA and
the Federal Deposit Insurance Act and the regulations promulgated
thereunder.
(xi) The Company and the Bank have good and marketable title to all
real property and good title to all other assets material to the business
of the Company and the Bank, taken as a whole, and to those properties and
assets described in the Registration Statement and Prospectus as owned by
them, in each case free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Registration Statement
and Prospectus, or are not material to the business of the Company and the
Bank, taken as a whole; and all of the leases and subleases material to the
business of the Company and the Bank, taken as a whole, under which the
Company or the Bank hold properties, including those described in the
Registration Statement and Prospectus, are in full force and effect.
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<PAGE>
(xii) The Company and the Bank have received an opinion of their
special counsel, Silver, Freedman & Taff, LLP, with respect to the federal
income tax consequences of the Conversion and an opinion from Olive LLP
with respect to the Indiana income tax consequences of the Conversion; all
material aspects of the opinions of Silver, Freedman & Taff, LLP and Olive
LLP are accurately summarized in the Registration Statement and Prospectus;
the facts upon which such opinions are based are truthful, accurate and
complete.
(xiii) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof and to issue
and sell the Shares to be sold by the Company as provided herein and as
described in the Prospectus, except approval or confirmation by the OTS of
the final appraisal of the Bank. The consummation of the Conversion, the
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated have been duly and validly
authorized by all necessary corporate action on the part of the Company and
the Bank and this Agreement has been validly executed and delivered by the
Company and the Bank and is the valid, legal and binding agreement of the
Company and the Bank enforceable in accordance with its terms (except as
the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally or the rights of creditors of
savings and loan holding companies, the accounts of whose subsidiaries are
insured by the FDIC, or by general equity principles, regardless of whether
such enforceability is considered in a proceeding in equity or at law, and
except to the extent, if any, that the provisions of Sections 8 and 9
hereof may be unenforceable as against public policy).
(xiv) Neither the Company nor the Bank is in violation of any
directive received from the OTS, the FDIC, or any other agency to make any
material change in the method of conducting their businesses so as to
comply in all material respects with all applicable statutes and
regulations (including, without limitation, regulations, decisions,
directives and orders of the OTS and the FDIC) and, except as set forth in
the Registration Statement and the Prospectus, there is no suit,
proceeding, charge or action before or by any court, regulatory authority
or governmental agency or body, pending or, to the best knowledge of the
Company or the Bank, threatened, which might materially and adversely
affect the Conversion, the performance of this Agreement or the
consummation of the transactions contemplated in the Plan and as described
in the Registration Statement and the Prospectus or which might result in
any material adverse change in the financial
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<PAGE>
condition, earnings, capital, assets, properties or business of the Company
and the Bank, taken as a whole.
(xv) The financial statements, schedules and notes related thereto
which are included in the Prospectus fairly present the financial
condition, results of operations, retained earnings and cash flows of the
Bank at the respective dates indicated and for the respective periods
covered thereby and comply as to form in all material respects with the
applicable accounting requirements of Title 12 of the Code of Federal
Regulations, Regulation S- X of the Commission and generally accepted
accounting principles (including those requiring the recording of certain
assets at their current market value). Such financial statements, schedules
and notes related thereto have been prepared in accordance with generally
accepted accounting principles consistently applied through the periods
involved, present fairly in all material respects the information required
to be stated therein and are consistent with the most recent financial
statements and other reports filed by the Bank with the OTS, except that
accounting principles employed in such regulatory filings conform to the
requirements of the OTS and not necessarily to GAAP. The other financial,
statistical and pro forma information and related notes included in the
Prospectus present fairly the information shown therein on a basis
consistent with the audited and unaudited financial statements of the Bank
included in the Prospectus, and as to the pro forma adjustments, the
adjustments made therein have been properly applied on the basis described
therein.
(xvi) Since the respective dates as of which information is given in
the Registration Statement including the Prospectus: (i) there has not been
any material adverse change in the financial condition, earnings, capital,
assets, properties or business of the Company and the Bank, taken as a
whole, whether or not arising in the ordinary course of business; (ii)
there has not been any material increase in the long-term debt of the Bank
or in the principal amount of the Bank's assets which are classified by the
Bank as substandard, doubtful or loss or in loans past due 90 days or more
or real estate acquired by foreclosure, by deed-in-lieu of foreclosure or
deemed in-substance foreclosure or any material decrease in equity capital
or total assets of the Bank, nor has the Company or the Bank issued any
securities (other than in connection with the incorporation of the Company)
or incurred any liability or obligation for borrowing other than in the
ordinary course of business; (iii) there have not been any material
transactions entered into by the Company or the Bank; (iv) there has not
been any material adverse change in the aggregate dollar amount of the
Bank's deposits or its consolidated net worth; (v) there has been no
material adverse change in the Company's or the Bank's relationship
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<PAGE>
with its insurance carriers, including, without limitation, cancellation or
other termination of the Company's or the Bank's fidelity bond or any other
type of insurance coverage; (vi) except as disclosed in the Prospectus,
there has been no material change in management of the Company or the Bank,
neither of which has any material undisclosed liability of any kind,
contingent or otherwise; (vii) neither the Company nor the Bank has
sustained any material loss or interference with its respective business or
properties from fire, flood, windstorm, earthquake, accident or other
calamity, whether or not covered by insurance; (viii) neither the Company
nor the Bank is in default in the payment of principal or interest on any
outstanding debt obligations; (ix) the capitalization, liabilities, assets,
properties and business of the Company and the Bank conform in all material
respects to the descriptions thereof contained in the Prospectus; and (x)
neither the Company nor the Bank has any material contingent liabilities,
except as set forth in the Prospectus.
(xvii) All documents made available to or delivered or to be made
available to or delivered by the Bank or the Company or their
representatives in connection with the issuance and sale of the Shares,
including records of account holders, depositors, borrowers and other
members of the Bank, or in connection with the Agent's exercise of due
diligence, except for those documents which were prepared by parties other
than the Bank, the Company or their representatives were on the dates on
which they were delivered, or will be on the dates on which they are to be
delivered, true, complete and correct in all material respects.
(xviii) Neither the Company nor the Bank is (i) in violation of its
articles of incorporation or charter or bylaws, respectively (and the Bank
will not be in violation of its charter or bylaws in capital stock form
upon consummation of the Conversion), or (ii) in default in the performance
or observance of any material obligation, agreement, covenant, or condition
contained in any material contract, lease, loan agreement, indenture or
other instrument to which it is a party or by which it or any of its
property may be bound. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated will not: (i) conflict
with or constitute a breach of, or default under, or result in the creation
of any material lien, charge or encumbrance (with the exception of the
liquidation account established in the Conversion) upon any of the assets
of the Company or the Bank pursuant to the Articles of Incorporation and
Bylaws of the Company or the Charter and Bylaws of the Bank (in either
mutual or capital stock form) or any material contract, lease or other
instrument in which the Company or the Bank has a beneficial interest, or
any applicable law, rule, regulation or order; (ii) violate
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any authorization approval, judgement, decree, order, statute, rule or
regulation applicable to the Company or the Bank, except for such
violations which would not have a material adverse effect on the financial
condition and results of operations of the Company and the Bank on a
consolidated basis; or (iii) with the exception of the liquidation account
established in the Conversion, result in the creation of any material lien,
charge or encumbrance upon any property of the Company or the Bank.
(xix) No default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default on the part of the
Company or the Bank in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of trust, note, bank
loan or credit agreement or any other instrument or agreement to which the
Company or the Bank is a party or by which any of them or any of their
property is bound or affected, except such defaults which would not have a
material adverse affect on the financial condition or results of operations
of the Company and the Bank on a consolidated basis; such agreements are in
full force and effect; and no other party to any such agreements has
instituted or, to the best knowledge of the Company and the Bank,
threatened any action or proceeding wherein the Company or the Bank would
or might be alleged to be in default thereunder, where such action or
proceeding, if determined adversely to the Company or the Bank, would have
a material adverse effect on the financial condition, earnings, capital,
assets, properties or business of the Company and the Bank, taken as a
whole.
(xx) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company will be within the range set
forth in the Prospectus under the caption "Capitalization," and no Common
Shares have been or will be issued and outstanding prior to the Closing
Date; the Shares and the Foundation Shares will have been duly and validly
authorized for issuance and, when issued and delivered by the Company
pursuant to the Plan against payment of the consideration calculated as set
forth in the Plan and in the Prospectus, will be duly and validly issued,
fully paid and non-assessable, except for shares purchased by the ESOP with
funds borrowed from the Company to the extent payment therefor in cash has
not been received by the Company; except to the extent that subscription
rights and priorities pursuant thereto exist pursuant to the Plan, no
preemptive rights exist with respect to the Shares or the Foundation
Shares; and the terms and provisions of the Common Shares conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus. To the best knowledge of the Company and the
Bank, upon the issuance of the Shares, good title to the Shares will be
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transferred from the Company to the purchasers thereof against payment
therefor, subject to such claims as may be asserted against the purchasers
thereof by third-party claimants.
(xxi) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares or the Foundation Shares, except
for the approval of the Commission and the OTS, and any necessary
qualification, notification, registration or exemption under the securities
or blue sky laws of the various states in which the Shares are to be
offered, and except as may be required under the rules and regulations of
the National Association of Securities Dealers, Inc. ("NASD") and/or The
Nasdaq Stock Market.
(xxii) Olive LLP, which has certified the audited financial statements
and schedules of the Bank included in the Prospectus, has advised the
Company and the Bank in writing that they are, with respect to the Company
and the Bank, independent public accountants within the meaning of the Code
of Professional Ethics of the American Institute of Certified Public
Accountants and applicable regulations of the OTS.
(xxiii) RP Financial, which has prepared the Bank's Conversion
Valuation Appraisal Report as of September 10, 1999 (as amended or
supplemented, if so amended or supplemented) (the "Appraisal"), has advised
the Company in writing that it is independent of the Company and the Bank
within the meaning of the Conversion Regulations.
(xxiv) The Company and the Bank have timely filed all required
federal, state and local tax returns; the Company and the Bank have paid
all taxes that have become due and payable in respect of such returns,
except where permitted to be extended, have made adequate reserves for
similar future tax liabilities and no deficiency has been asserted with
respect thereto by any taxing authority.
(xxv) The Bank is in compliance in all material respects with the
applicable financial record-keeping and reporting requirements of the
Currency and Foreign Transactions Reporting Act of 1970, as amended, and
the regulations and rules thereunder.
(xxvi) To the knowledge of the Company and the Bank, neither the
Company, the Bank nor employees of the Company or the Bank has made any
payment of funds of the Company or the Bank as a loan for the purchase of
the Shares or made any other payment of funds prohibited by law, and no
funds have been set aside to be used for any payment prohibited by law.
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<PAGE>
(xxvii) Neither the Company nor the Bank has: (i) issued any
securities within the last 18 months (except for notes to evidence bank
loans and reverse repurchase agreements or other liabilities in the
ordinary course of business or as described in the Prospectus); (ii) had
any material dealings within the 12 months prior to the date hereof with
any member of the NASD, or any person related to or associated with such
member, other than discussions and meetings relating to the proposed
Offering and routine purchases and sales of United States government and
agency and other securities in the ordinary course of business; (iii)
entered into a financial or management consulting agreement except as
contemplated hereunder; and (iv) engaged any intermediary between the Agent
and the Company and the Bank in connection with the offering of the Shares,
and no person is being compensated in any manner for such service.
Appropriate arrangements have been made for placing the funds received from
subscriptions for Shares in a special interest-bearing account with the
Bank until all Shares are sold and paid for, with provision for refund to
the purchasers in the event that the Conversion is not completed for
whatever reason or for delivery to the Company if all Shares are sold.
(xxviii) The Company and the Bank have not relied upon the Agent or
its legal counsel or other advisors for any legal, tax or accounting advice
in connection with the Conversion.
(xxix) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxx) Any certificates signed by an officer of the Company or the Bank
pursuant to the conditions of this Agreement and delivered to the Agent or
their counsel that refers to this Agreement shall be deemed to be a
representation and warranty by the Company or the Bank to the Agent as to
the matters covered thereby with the same effect as if such representation
and warranty were set forth herein.
(b) The Agent represents and warrants to the Company and the Bank that:
(i) KWB is a corporation validly existing in good standing under the
laws of the State of New York and licensed to conduct business in the State
of Indiana and that Webb is an unincorporated division thereof with full
power and authority to provide the services to be furnished to the Bank and
the Company hereunder.
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<PAGE>
(ii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of the Agent, and this
Agreement has been duly and validly executed and delivered by the Agent and
is a legal, valid and binding agreement of the Agent, enforceable in
accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights
generally, or by general equity principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and
except to the extent, if any, that the provisions of Sections 8 and 9
hereof may be unenforceable as against public policy).
(iii) Each of the Agent and its employees, agents and representatives
who shall perform any of the services hereunder shall be duly authorized
and empowered, and shall have all licenses, approvals and permits necessary
to perform such services; and the Agent is a registered selling agent in
each of the jurisdictions in which the Shares are to be offered by the
Company in reliance upon the Agent as a registered selling agent as set
forth in the blue sky memorandum prepared with respect to the Offering.
(iv) The execution and delivery of this Agreement by the Agent, the
consummation of the transactions contemplated hereby and compliance with
the terms and provisions hereof will not conflict with, or result in a
breach of, any of the terms, provisions or conditions of, or constitute a
default (or an event which with notice or lapse of time or both would
constitute a default) under, the Articles of Incorporation or Bylaws of the
Agent or any material agreement, indenture or other instrument to which the
Agent is a party or by which it or its property is bound.
(v) No approval of any regulatory or supervisory or other public
authority is required in connection with the Agent's execution and delivery
of this Agreement, except as may have been received.
(vi) There is no suit or proceeding or charge or action before or by
any court, regulatory authority or government agency or body or, to the
knowledge of the Agent, pending or threatened, which might materially
adversely affect the Agent's performance of this Agreement.
Section 5. Covenants of the Company and the Bank. The Company and the Bank
hereby jointly and severally covenant with the Agent as follows:
(a) The Company will not file any amendment or supplement to the
Registration Statement without providing the Agent and its
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counsel an opportunity to review such amendment or supplement or file any
amendment or supplement to which amendment or supplement the Agent or its
counsel shall reasonably object.
(b) The Bank will not file any amendment or supplement to the Conversion
Application without providing the Agent and its counsel an opportunity to review
such amendment or supplement or file any amendment or supplement to which
amendment or supplement the Agent or its counsel shall reasonably object.
(c) The Company will not file any amendment or supplement to the Holding
Company Application without providing the Agent and its counsel an opportunity
to review the nonconfidential portions of such amendment or supplement or file
any amendment or supplement to which amendment or supplement the Agent or its
counsel shall reasonably object.
(d) The Company and the Bank will use their best efforts to cause any post
effective amendment to the Registration Statement to be declared effective by
the Commission and any post-approval amendment to the Conversion Application to
be approved by the OTS and will immediately upon receipt of any information
concerning the events listed below notify the Agent: (i) when the Registration
Statement, as amended, has become effective; (ii) when the Conversion
Application, as amended, has been approved by the OTS; (iii) when the Bank or
the Company receives any comments from the Commission, the OTS, or any other
governmental entity with respect to the Conversion or the transactions
contemplated by this Agreement; (iv) when the Commission, the OTS, or any other
governmental entity requests any amendment or supplement to the Registration
Statement, the Conversion Application or any additional information; (v) the
issuance by the Commission, the OTS, or any other governmental entity of any
order or other action suspending the Offering or the use of the Registration
Statement or the Prospectus or any other filing of the Company or the Bank under
the Conversion Regulations, or other applicable law, or the threat of any such
action; (vi) the issuance by the Commission, the OTS, or any authority of any
stop order suspending the effectiveness of the Registration Statement or of the
initiation or threat of initiation or threat of any proceedings for that
purpose; or (vii) the occurrence of any event mentioned in paragraph (h) below.
The Company and the Bank will make every reasonable effort (i) to prevent the
issuance by the Commission, the OTS, or any other state authority of any such
order and, if any such order shall at any time be issued, (ii) to obtain the
lifting thereof at the earliest possible time.
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(e) The Company and the Bank will deliver to the Agent and to its counsel
two conformed copies of the Registration Statement, the Conversion Application
and the Holding Company Application, as originally filed and of each amendment
or supplement thereto, including all exhibits. Further, the Company and the Bank
will deliver such additional copies of the foregoing documents to counsel to the
Agent as may be required for any NASD filings.
(f) The Company and the Bank will furnish to the Agent, from time to time
during the period when the Prospectus (or any later prospectus related to this
offering) is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of such Prospectus
(as amended or supplemented) as the Agent may reasonably request for the
purposes contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or
the rules and regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes the Agent to use the Prospectus (as
amended or supplemented, if amended or supplemented) in any lawful manner
contemplated by the Plan in connection with the sale of the Shares by the Agent.
(g) The Company and the Bank will comply with any and all material terms,
conditions, requirements and provisions with respect to the Conversion and the
transactions contemplated thereby (including those conditions relating to the
establishment and operations of the Foundation) imposed by the Commission, the
OTS or the Conversion Regulations, and by the 1933 Act, the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior
to or subsequent to the Closing Date and when the Prospectus is required to be
delivered, and during such time period the Company and the Bank will comply, at
their own expense, with all material requirements imposed upon them by the
Commission, the OTS or the Conversion Regulations, and by the 1933 Act, the 1933
Act Regulations, the 1934 Act and the 1934 Act Regulations, including, without
limitation, Rule 10b-5 under the 1934 Act, in each case as from time to time in
force, so far as necessary to permit the continuance of sales or dealing in the
Common Shares during such period in accordance with the provisions hereof and
the Prospectus.
(h) If, at any time during the period when the Prospectus is required to be
delivered, any event relating to or affecting the Company or the Bank shall
occur, as a result of which it is necessary or appropriate, in the opinion of
the Agent's counsel, to amend or supplement the Registration Statement or
Prospectus in order to make the Registration Statement or Prospectus not
misleading in light of the circumstances existing at the time the Prospectus is
delivered, the Company and the Bank will at their own expense, prepare
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and file with the Commission, and the OTS and furnish to the Agent a reasonable
number of copies of an amendment or amendments of, or a supplement or
supplements to, the Registration Statement or Prospectus (in form and substance
reasonably satisfactory to the Agent and its counsel after a reasonable time for
review) which will amend or supplement the Registration Statement or Prospectus
so that as amended or supplemented it will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading. For the purpose of this
Agreement, the Company and the Bank each will timely furnish to the Agent such
information with respect to itself as the Agent may from time to time reasonably
request.
(i) The Company and the Bank will take all necessary actions in cooperating
with the Agent and furnish to whomever the Agent may direct such information as
may be required to qualify or register the Shares for offering and sale by the
Company or to exempt such Shares from registration, or to exempt the Company as
a broker-dealer and its officers, directors and employees as broker-dealers or
agents under the applicable securities or blue sky laws of such jurisdictions in
which the Shares are required under the Conversion Regulations to be sold or as
the Agent and the Company and the Bank may reasonably agree upon; provided,
however, that the Company shall not be obligated to file any general consent to
service of process, to qualify to do business in any jurisdiction in which it is
not so qualified, or to register its directors or officers as brokers, dealers,
salesmen or agents in any jurisdiction. In each jurisdiction where any of the
Shares shall have been qualified or registered as above provided, the Company
will make and file such statements and reports in each fiscal period as are or
may be required by the laws of such jurisdiction.
(j) The Bank shall duly establish and maintain the liquidation account for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in accordance with the requirements of the OTS, and such Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain their savings accounts in the Bank will have an inchoate interest in
their pro rata portion of the liquidation account, which shall have a priority
superior to that of the holders of the Common Shares in the event of a complete
liquidation of the Bank.
(k) The Company and the Bank will not sell or issue, contract to sell or
otherwise dispose of, for a period of 180 days after the Closing Date, without
the Agent's prior written consent, any of their capital stock, other than in
connection with any plan or arrangement described in the Prospectus.
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(l) The Company shall register its Common Shares under Section 12(g) of the
1934 Act concurrently with the Offering and shall request that such registration
be effective prior to or upon completion of the Conversion. The Company shall
maintain the effectiveness of such registration for not less than three years or
such shorter period as may be required by the OTS.
(m) During the period during which the Common Shares are registered under
the 1934 Act or for three (3) years from the date hereof, whichever period is
greater, the Company will furnish to its shareholders as soon as practicable
after the end of each fiscal year an annual report of the Company in accordance
with the 1934 Act Regulations (including a consolidated balance sheet and
statements of consolidated income, shareholders' equity and cash flows of the
Company and its subsidiaries as at the end of and for such year, certified by
independent public accountants in accordance with Regulation S-X under the 1933
Act and the 1934 Act).
(n) During the period of three years from the date hereof, the Company will
furnish to the Agent: (i) as soon as practicable after such information is
publicly available, a copy of each report of the Company furnished to or filed
with the Commission under the 1934 Act or any national securities exchange or
system on which any class of securities of the Company is listed or quoted
(including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all
proxy statements and annual reports to stockholders), (ii) a copy of each other
non-confidential report of the Company mailed to its shareholders or filed with
the Commission, the OTS or any other supervisory or regulatory authority or any
national securities exchange or system on which any class of securities of the
Company is listed or quoted, each press release and material news items and
additional documents and information with respect to the Company or the Bank as
the Agent may reasonably request; and (iii) from time to time, such other
nonconfidential information concerning the Company or the Bank as the Agent may
reasonably request.
(o) The Company and the Bank will use the net proceeds from the sale of the
Shares in the manner set forth in the Prospectus under the caption "How We
Intend to Use the Proceeds."
(p) Other than as permitted by the Conversion Regulations, the HOLA, the
1933 Act, the 1933 Act Regulations and its rules and regulations and the laws of
any state in which the Shares are registered or qualified for sale or exempt
from registration, neither the Company nor the Bank will distribute any
prospectus, offering circular or other offering material in connection with the
offer and sale of the Shares.
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(q) The Company will use its best efforts to (i) encourage and assist three
market makers to establish and maintain a market for the Shares and (ii) list
and maintain quotation of the Shares on a national or regional securities
exchange or on The Nasdaq Stock Market effective on or prior to the Closing
Date.
(r) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to purchase
Shares in the Offering on an interest-bearing basis at the rate described in the
Prospectus until the Closing Date and satisfaction of all conditions precedent
to the release of the Bank's obligation to refund payments received from persons
subscribing for or ordering Shares in the Offering in accordance with the Plan
and as described in the Prospectus or until refunds of such funds have been made
to the persons entitled thereto or withdrawal authorizations canceled in
accordance with the Plan and as described in the Prospectus. The Bank will
maintain such records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the maximum extent
allowable) and to enable the Bank to make the appropriate refunds of such funds
in the event that such refunds are required to be made in accordance with the
Plan and as described in the Prospectus.
(s) The Company will promptly take all necessary action to register as a
savings and loan holding company under the HOLA.
(t) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent to
ensure compliance with the NASD's "Interpretation Relating to Free Riding and
Withholding."
(u) Neither the Company nor the Bank will amend the Plan of Conversion
without notifying the Agent prior thereto.
(v) The Company shall assist the Agent, if necessary, in connection with
the allocation of the Shares in the event of an oversubscription and shall
provide the Agent with any information necessary to assist the Company in
allocating the Shares in such event and such information shall be accurate and
reliable in all material respects.
(w) Prior to the Closing Date, the Company and the Bank will inform the
Agent of any event or circumstances of which it is aware as a result of which
the Registration Statement and/or Prospectus, as then amended or supplemented,
would contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading.
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<PAGE>
(x) Subsequent to the date the Registration Statement is declared effective
by the Commission and prior to the Closing Date, except as otherwise may be
indicated or contemplated therein or set forth in an amendment or supplement
thereto, neither the Company nor the Bank will have: (i) issued any securities
or incurred any liability or obligation, direct or contingent, for borrowed
money, except borrowings from the same or similar sources indicated in the
Prospectus in the ordinary course of its business, or (ii) entered into any
transaction which is material in light of the business and properties of the
Company and the Bank, taken as a whole.
(y) The Company and the Bank will take no action which will result in the
possible loss of the Foundation's tax-exempt status; and neither the Company nor
the Bank will contribute any additional assets to the Foundation until such time
that such additional contributions will be deductible for federal and state
income tax purposes.
Section 6. Payment of Expenses. Whether or not the Conversion is completed
or the sale of the Shares by the Company is consummated, the Company and the
Bank jointly and severally agree to pay or reimburse the Agent for: (a) all
filing fees in connection with all filings related to the Offering with the
NASD; (b) any stock issue or transfer taxes which may be payable with respect to
the sale of the Shares; (c) all reasonable expenses of the Conversion, including
but not limited to the Company's and the Bank's, and the Agent's attorneys' fees
(not to exceed $45,000 without the Bank's consent) and expenses, blue sky fees,
transfer agent, registrar and other agent charges, fees relating to auditing and
accounting or other advisors and costs of printing all documents necessary in
connection with the Conversion; provided, however, there will be no
out-of-pocket expenses charged by the Agent for expenses such as travel,
photocopying lodging and meals. In the event the Company is unable to sell a
minimum of 4,080,000 Shares or the Conversion is terminated or otherwise
abandoned, the Company and the Bank shall promptly reimburse the Agent in
accordance with Section 2(d) hereof.
Section 7. Conditions to the Agent's Obligations. The obligations of the
Agent hereunder are subject, to the extent not waived in writing by the Agent,
to the condition that all representations and warranties of the Company and the
Bank herein are, at and as of the commencement of the Offering and at and as of
the Closing Date, true and correct in all material respects, the condition that
the Company and the Bank shall have performed all of their obligations hereunder
to be performed on or before such dates, and to the following further
conditions:
(a) At the Closing Date, the Company and the Bank shall have conducted the
Conversion in all material respects in accordance with the Plan, the Conversion
Regulations and all other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent to the
Conversion imposed upon them by the OTS, the Commission and any state securities
agency.
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(b) The Registration Statement shall have been declared effective by the
Commission and the Conversion Application approved by the OTS not later than
5:30 p.m. on the date of this Agreement, or with the Agent's consent at a later
time and date; and at the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission or
any state authority, and no order or other action suspending the authorization
of the Prospectus or the consummation of the Conversion shall have been issued
or proceedings therefor initiated or, to the Company's or the Bank's knowledge,
threatened by the Commission, the OTS, the FDIC, or any other governmental
authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date and addressed
to the Agent and for its benefit, of Silver, Freedman & Taff, LLP, special
counsel for the Company and the Bank, in form and substance to the effect
that:
(i) The Company has been duly incorporated and is validly
existing in good standing as a corporation under the laws of the State
of Maryland. The Company is qualified to do business in Indiana.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus.
(iii) The Bank is a validly existing federally chartered savings
bank in mutual form and immediately following the completion of the
Conversion will be a validly existing federally chartered savings bank
in permanent capital stock form of organization, in both instances
duly authorized to conduct its business and own its property as
described in the Registration Statement and the Prospectus. All of the
capital stock of the Bank outstanding upon completion of the
Conversion will be duly authorized and, upon payment therefor, will be
validly issued, fully paid and non-assessable and will be owned by the
Company, to such counsel's Actual Knowledge, free and clear of any
liens, encumbrances, claims or other restrictions.
(iv) The Bank is a member of the FHLB-Indianapolis. The deposit
accounts of the Bank are insured by the FDIC up to the maximum amount
allowed under law and no proceedings for the termination or revocation
of such insurance are pending or, to such counsel's Actual Knowledge,
threatened; the description of the liquidation account as set forth in
the Prospectus under the captions "Mutual Federal's Conversion-
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Effects of the Conversion-Depositors' Rights if We Liquidate," to
the extent that such information constitutes matters of law and legal
conclusions, has been reviewed by such counsel and is accurately
described in all material respects.
(v) Immediately following the consummation of the Conversion, the
authorized, issued and outstanding Common Shares of the Company will
be within the range set forth in the Prospectus under the caption
"Capitalization," and no Common Shares have been issued prior to the
Closing Date; the Shares subscribed for pursuant to the Offering and
the Foundation Shares have been duly and validly authorized for
issuance, and when issued and delivered by the Company pursuant to the
Plan against payment of the consideration calculated as set forth in
the Plan and the Prospectus, will be duly and validly issued and fully
paid and non-assessable, except for Shares purchased by the ESOP with
funds borrowed from the Company to the extent payment therefor in cash
has not been received by the Company; except to the extent that
subscription rights and priorities pursuant thereto exist pursuant to
the Plan, the issuance of the Shares and the Foundation Shares is not
subject to preemptive rights and the terms and provisions of the
Common Shares conform in all material respects to the description
thereof contained in the Prospectus. The form of certificate used to
evidence the Common Shares complies with applicable laws. To such
counsel's Actual Knowledge, upon the issuance of the Shares, good
title to the Shares will be transferred from the Company to the
purchasers thereof against payment therefor, subject to such claims as
may be asserted against the purchasers thereof by third-party
claimants.
(vi) The Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the laws of
the State of Indiana with corporate power and authority to own lease,
and operate its properties and to conduct its business as described in
the Prospectus; the Foundation is not a savings and loan holding
company within the meaning of 12 C.F.R. Section 574.2(q) as a result
of the issuance of the Foundation Shares to it in accordance with the
terms of the Plan and in the amounts as described in the Prospectus;
no approvals are required to establish the Foundation and to
contribute the cash and the Foundation Shares thereto as described in
the Prospectus other than those set forth in any written notice or
order of approval of the Conversion, the Conversion Application, the
Holding Company Application.
(vii) The Bank and the Company have full corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby and by the Plan. The execution and
delivery of this Agreement and the consummation of the transactions
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contemplated hereby have been duly and validly authorized by all
necessary action on the part of the Company and the Bank; and this
Agreement is a valid and binding obligation of the Company and the
Bank, enforceable against the Company and the Bank in accordance
with its terms, except as the enforceability thereof may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws now or hereafter
in effect relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of federally chartered
savings institutions, (ii) general equitable principles, (iii) laws
relating to the safety and soundness of insured depository
institutions, and (iv) applicable law or public policy with respect to
the indemnification and/or contribution provisions contained herein,
including without limitation the provisions of Sections 23A and 23B of
the Federal Reserve Act and except that no opinion need be expressed
as to the effect or availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(viii) The Conversion Application (including the establishment of
the Foundation and the contribution of cash and the Foundation Shares
thereto) has been approved by the OTS and the Prospectus has been
authorized for use by the OTS. The OTS has approved the Holding
Company Application and the purchase by the Company of all of the
issued and outstanding capital stock of the Bank and no action has
been taken, and to such counsel's Actual Knowledge, none is pending or
threatened, to revoke any such authorization or approval.
(ix) The Plan has been duly adopted by the required vote of the
directors of the Company and the Bank, and based upon the certificate
of the inspectors of election, by the members of the Bank.
(x) Subject to the satisfaction of the conditions to the OTS's
approval of the Conversion, no further approval, registration,
authorization, consent or other order of any federal regulatory agency
is required in connection with the execution and delivery of this
Agreement, the issuance of the Shares or the Foundation Shares and the
consummation of the Conversion, except as may be required under the
securities or blue sky laws of various jurisdictions (as to which no
opinion need be rendered) and except as may be required under the
rules and regulations of the NASD and/or The Nasdaq Stock Market (as
to which no opinion need by rendered).
(xi) The Registration Statement is effective under the 1933 Act
and no stop order suspending the effectiveness has been issued under
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the 1933 Act or proceedings therefor initiated or, to such counsel's
Actual Knowledge, threatened by the Commission.
(xii) At the time the Conversion Application, including the
Prospectus contained therein, was approved by the OTS, the Conversion
Application, including the Prospectus contained therein, complied as
to form in all material respects with the requirements of the
Conversion Regulations, federal and state law and all applicable rules
and regulations promulgated thereunder (other than the financial
statements, the notes thereto, and other tabular, financial,
statistical and appraisal data included therein, as to which no
opinion need be rendered).
(xiii) At the time that the Registration Statement became
effective, (i) the Registration Statement (as amended or supplemented,
if so amended or supplemented) (other than the financial statements,
the notes thereto, and other tabular, financial, statistical and
appraisal data included therein, as to which no opinion need be
rendered), complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations, and (ii)
the Prospectus (other than the financial statements, the notes
thereto, and other tabular, financial, statistical and appraisal data
included therein, as to which no opinion need be rendered) complied as
to form in all material respects with the requirements of the 1933
Act, the 1933 Act Regulations, the Conversion Regulations and federal
law.
(xiv) To such counsel's Actual Knowledge, there are no legal or
governmental proceedings pending or threatened which are required to
be disclosed in the Registration Statement and Prospectus, other than
those disclosed therein.
(xv) To such counsel's Actual Knowledge, there are no material
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Conversion Application, the Registration Statement or the Prospectus
or required to be filed as exhibits thereto other than those described
or referred to therein or filed as exhibits thereto in the Conversion
Application, the Registration Statement or the Prospectus. The
description in the Conversion Application, the Registration Statement
and the Prospectus of such documents and exhibits is accurate in all
material respects and fairly presents the information required to be
shown.
(xvi) The Plan complies in all material respects with all
applicable federal laws, rules, regulations, decisions and orders
including, but not limited to, the Conversion Regulations; no order
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has been issued by the OTS, the Commission, the FDIC, or any state
authority to suspend the Offering or the use of the Prospectus, and no
action for such purposes has been instituted, or to such counsel's
Actual Knowledge, threatened by the OTS, the Commission, the FDIC, or
any other governmental authority and, to such counsel's Actual
Knowledge, no person has sought to obtain regulatory or judicial
review of the final action of the OTS approving the Plan, the
Conversion Application, the Holding Company Application or the
Prospectus.
(xvii) To such counsel's Actual Knowledge, the Company and the
Bank have obtained all material licenses, permits and other
governmental authorizations currently required for the conduct of
their businesses and all such licenses, permits and other governmental
authorizations are in full force and effect, and the Company and the
Bank are in all material respects complying therewith.
(xviii) To such counsel's Actual Knowledge, neither the Company
nor the Bank is in violation of its Articles of Incorporation and
Bylaws or its Charter and Bylaws, as appropriate or, to such counsel's
Actual Knowledge, in default or violation of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which it
is a party or by which it or its property may be bound, except for
such defaults or violations which would not have a material adverse
impact on the financial condition or results of operations of the
Company and the Bank on a consolidated basis; the execution and
delivery of this Agreement, the incurrence of the obligations herein
set forth and the consummation of the transactions contemplated herein
do not (a) conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or the Bank
pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or the
Bank is a party or by which any of them may be bound, or to which any
of the property or assets of the Company or the Bank are subject
(other than the establishment of the liquidation account), (b) result
in any violation of the provisions of the Articles of Incorporation or
Bylaws of the Company or the Charter or the Bylaws of the Bank or, (c)
result in any violation of any applicable federal or state law, act,
regulation (except that no opinion with respect to the securities and
blue sky laws of various jurisdictions or the rules or regulations of
the NASD and/or The Nasdaq Stock Market need be rendered) or order or
court order, writ, injunction or decree.
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(xix) The Company's Articles of Incorporation and Bylaws comply
in all material respects with the laws of the State of Maryland. The
Bank's Charter and Bylaws comply in all material respects with federal
law.
(xx) To such counsel's Actual Knowledge, neither the Company nor
the Bank is in violation of any directive from the OTS or the FDIC to
make any material change in the method of conducting its respective
business.
(xxi) The information in the Prospectus under the captions "How
We are Regulated," "Mutual Federal's Conversion," "Restrictions on
Acquisition of MFS Financial and Mutual Federal" and "Description of
Capital Stock of MFS Financial," to the extent that such information
constitutes matters of law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been reviewed by such counsel
and is correct in all material respects. The description of the
Conversion process in the Prospectus under the caption "Mutual
Federal's Conversion" to the extent that such information constitutes
matters of law, summaries of legal matters, documents or proceedings,
or legal conclusions, has been reviewed by such counsel and fairly
describes such process in all material respects. The descriptions in
the Prospectus of statutes or regulations are accurate summaries and
fairly present the information required to be shown. The information
under the caption "Mutual Federal's Conversion-Effects of the
Conversion--Tax Effects of the Conversion" has been reviewed by such
counsel and fairly describes the opinions rendered by them to the
Company and the Bank with respect to such matters.
In addition, such counsel shall state that during the preparation of the
Conversion Application, the Registration Statement and the Prospectus, they
participated in conferences with certain officers of, the independent public and
internal accountants for, and other representatives of, the Company and the
Bank, at which conferences the contents of the Conversion Application, the
Registration Statement and the Prospectus and related matters were discussed
and, while such counsel have not confirmed the accuracy or completeness of or
otherwise verified the information contained in the Conversion Application, the
Registration Statement or the Prospectus and do not assume any responsibility
for such information, based upon such conferences and a review of documents
deemed relevant for the purpose of rendering their opinion (relying as to
materiality as to factual matters on certificates of officers and other factual
representations by the Company and the Bank), nothing has come to their
attention that would lead them to believe that the Conversion Application, the
Registration Statement, the Prospectus, or any amendment or supplement thereto
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(other than the financial statements, the notes thereto, and other tabular,
financial, statistical and appraisal data included therein as to which no view
need be contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
In giving such opinion, such counsel may rely as to all matters of fact on
certificates of officers or directors of the Company and the Bank and
certificates of public officials. Such counsel's opinion shall be limited to
matters governed by federal laws and by the laws of the States of Maryland and
Indiana. The term "Actual Knowledge" as used herein shall have the meaning set
forth in the Legal Opinion Accord of the American Bar Association Section of
Business Law. For purposes of such opinion, no proceedings shall be deemed to be
pending, no order or stop order shall be deemed to be issued, and no action
shall be deemed to be instituted unless, in each case, a director or executive
officer of the Company or the Bank shall have received a copy of such
proceedings, order, stop order or action. In addition, such opinion may be
limited to present statutes, regulations and judicial interpretations and to
facts as they presently exist; in rendering such opinion, such counsel need
assume no obligation to revise or supplement it should the present laws be
changed by legislative or regulatory action, judicial decision or otherwise; and
such counsel need express no view, opinion or belief with respect to whether any
proposed or pending legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any regulatory agency, whether or not
promulgated pursuant to any such legislation, would affect the validity of the
Conversion or any aspect thereof. Such counsel may assume that any agreement is
the valid and binding obligation of any parties to such agreement other than the
Company or the Bank.
(d) At the Closing Date, the Agent shall receive a certificate of the Chief
Executive Officer and the principal accounting officer of the Company and the
Bank in form and substance reasonably satisfactory to the Agent's Counsel, dated
as of such Closing Date, to the effect that: (i) they have carefully examined
the Prospectus and, in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) since the date the Prospectus became authorized for final
use, no event has occurred which should have been set forth in an amendment or
supplement to the Prospectus which has not been so set forth, including
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specifically, but without limitation, any material adverse change in the
condition, financial or otherwise, or in the earnings, capital, properties or
business of the Company or the Bank and the conditions set forth in this Section
7 have been satisfied; (iii) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, capital or properties of the Company or the Bank independently, or of
the Company and the Bank considered as one enterprise, whether or not arising in
the ordinary course of business; (iv) the representations and warranties in
Section 4 are true and correct with the same force and effect as though
expressly made at and as of the Closing Date; (v) the Company and the Bank have
complied in all material respects with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to the Closing
Date and will comply in all material respects with all obligations to be
satisfied by them after the Conversion; (vi) no stop order suspending the
effectiveness of the Registration Statement has been initiated or, to the best
knowledge of the Company or the Bank, threatened by the Commission or any state
authority; (vii) no order suspending the Offering, the Conversion, the
acquisition of all of the capital stock of the Bank by the Company or the
effectiveness of the Prospectus has been issued and no proceedings for that
purpose are pending or, to the best knowledge of the Company or the Bank,
threatened by the OTS, the Commission, the FDIC, or any governmental authority;
and (viii) to the best knowledge of the Company or the Bank, no person has
sought to obtain review of the final action of the OTS approving the Plan.
(e) Prior to and at the Closing Date: (i) in the reasonable opinion of the
Agent, there shall have been no material adverse change in the condition,
financial or otherwise, or in the earnings or business of the Company or the
Bank independently, or of the Company and the Bank considered as one enterprise,
from that as of the latest dates as of which such condition is set forth in the
Prospectus, other than transactions referred to or contemplated therein; (ii)
the Company or the Bank shall not have received from the OTS or the FDIC any
direction (oral or written) to make any material change in the method of
conducting their business with which it has not complied (which direction, if
any, shall have been disclosed to the Agent) or which materially and adversely
would affect the business, operations or financial condition or income of the
Company and the Bank taken as a whole; (iii) neither the Company nor the Bank
shall have been in default (nor shall an event have occurred which, with notice
or lapse of time or both, would constitute a default) under any provision of any
agreement or instrument relating to any outstanding indebtedness; (iv) no
action, suit or proceeding, at law or in equity or before or by any federal or
state commission, board or other administrative agency, shall be pending or, to
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the knowledge of the Company or the Bank, threatened against the Company or the
Bank or affecting any of their properties wherein an unfavorable decision,
ruling or finding would materially and adversely affect the business,
operations, financial condition or income of the Company or the Bank taken as a
whole; and (v) the Shares shall have been qualified or registered for offering
and sale or exempted therefrom under the securities or blue sky laws of the
jurisdictions as the Agent shall have reasonably requested and as agreed to by
the Company and the Bank.
(f) Concurrently with the execution of this Agreement, the Agent shall
receive a letter from Olive LLP dated as of the date of the Prospectus and
addressed to the Agent: (i) confirming that Olive LLP is a firm of independent
public accountants within the meaning of Rule 101 of the Code of Professional
Ethics of the American Institute of Certified Public Accountants and applicable
regulations of the Commission and the OTS and stating in effect that in their
opinion the financial statements, schedules and related notes of the Bank as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, included in the Prospectus and covered by their opinion
included therein, comply as to form in all material respects with the applicable
accounting requirements and related published rules and regulations of the OTS
and the 1933 Act; (ii) stating in effect that, on the basis of certain agreed
upon procedures (but not an audit in accordance with generally accepted auditing
standards) consisting of a reading of the latest available unaudited interim
financial statements of the Bank prepared by the Bank, a reading of the minutes
of the meetings of the Board of Directors and members of the Bank and
consultations with officers of the Bank responsible for financial and accounting
matters, nothing came to their attention which caused them to believe that: (A)
the unaudited financial statements included in the Prospectus are not in
conformity with the 1933 Act, applicable accounting requirements of the OTS and
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Prospectus; or (B) during the period from the date of the latest unaudited
financial statements included in the Prospectus to a specified date not more
than three business days prior to the date of the Prospectus, except as has been
described in the Prospectus, there was any increase in borrowings, other than
normal deposit fluctuations, by the Bank; or (C) there was any decrease in the
net assets or retained earnings of the Bank at the date of such letter as
compared with amounts shown in the latest unaudited balance sheets included in
the Prospectus or there was any decrease in net income or net interest income of
the Bank for the number of full months commencing immediately after the period
covered by the latest audited income statement included in the Prospectus and
ended on the latest month end prior to the date of the Prospectus as compared to
the corresponding period in the preceding year; and (iii) stating that, in
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addition to the audit referred to in their opinion included in the Prospectus
and the performance of the procedures referred to in clause (ii) of this
subsection (f), they have compared with the general accounting records of the
Bank, which are subject to the internal controls of the Bank, the accounting
system and other data prepared by the Bank, directly from such accounting
records, to the extent specified in such letter, such amounts and/or percentages
set forth in the Prospectus as the Agent may reasonably request, and they have
found such amounts and percentages to be in agreement therewith.
(g) At the Closing Date, the Agent shall receive a letter dated the Closing
Date, addressed to the Agent, confirming the statements made by Olive LLP in the
letter delivered by it pursuant to subsection (f) of this Section 7, the
"specified date" referred to in clause (ii) of subsection (f) to be a date
specified in the letter required by this subsection (g) which for purposes of
such letter shall not be more than three business days prior to the Closing
Date.
(h) At the Closing Date, the Agent shall receive a letter from RP
Financial, dated the Closing Date and addressed to the Agent (i) confirming that
said firm is independent of the Company and the Bank and is experienced and
expert in the area of corporate appraisals within the meaning of Title 12 of the
Code of Federal Regulations, Section 563b.7(f)(1)(i), (ii) stating in effect
that the Appraisal prepared by such firm complies in all material respects with
the applicable requirements of Title 12 of the Code of Federal Regulations, and
(iii) further stating that its opinion of the aggregate pro forma market value
of the Company and the Bank expressed in its Appraisal, as most recently
updated, remains in effect.
(i) The Company and the Bank shall not have sustained since the date of the
latest financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Registration Statement and Prospectus and since the
respective dates as of which information is given in the Registration Statement
and Prospectus, there shall not have been any change in the long-term debt of
the Company or the Bank other than debt incurred in relation to the purchase of
Shares by the Bank's eligible plans, or any change, or any development involving
a prospective change, in or affecting the general affairs, management, financial
position, shareholders' equity or results of operations of the Company or the
Bank, otherwise than as set forth or contemplated in the Registration Statement
and Prospectus, the effect of which, in any such case described above, is in
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Webb's reasonable judgment sufficiently material and adverse as to make it
impracticable or inadvisable to proceed with the Subscription Offering or the
delivery of the Shares on the terms and in the manner contemplated in the
Prospectus.
(j) At or prior to the Closing Date, the Agent shall receive: (i) a copy of
the letters from the OTS approving the Conversion Application and authorizing
the use of the Prospectus; (ii) a copy of the order from the Commission
declaring the Registration Statement effective; (iii) a certificate from the OTS
evidencing the existence of the Bank; (iv) a certificate of good standing from
the State of Maryland evidencing the good standing of the Company; (v) a
certificate from the FDIC evidencing the Bank's insurance of accounts; (vi) a
certificate from the FHLB-Indianapolis evidencing the Bank's membership therein;
(vii) a copy of the letter from the OTS approving the Company's Holding Company
Application; (viii) a certified copy of the Bank's Charter and Bylaws and (ix)
any other documents that the Agent shall reasonably request.
(k) Subsequent to the date hereof, there shall not have occurred any of the
following: (i) a suspension or limitation in trading in securities generally on
the New York Stock Exchange or in the over-the-counter market, or quotations
halted generally on The Nasdaq Stock Market, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required by either of such exchanges or the NASD or by order of the Commission
or any other governmental authority; (ii) a general moratorium on the operations
of commercial banks, or federal savings and loan associations or a general
moratorium on the withdrawal of deposits from commercial banks or federal
savings and loan associations declared by federal or state authorities; (iii)
the engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities if the effect
of such a declaration or decline, in the Agent's reasonable judgement, makes it
impracticable or inadvisable to proceed with the Offering or the delivery of the
Shares on the terms and in the manner contemplated in the Registration Statement
and the Prospectus.
(l) At or prior to the Closing Date, counsel to the Agent shall have been
furnished with such documents and opinions as they may reasonably require for
the purpose of enabling them to pass upon the sale of the Shares as herein
contemplated and related proceedings or in order to evidence the occurrence or
completeness of any of the representations or warranties, or the fulfillment of
any of the conditions, herein contained; and all proceedings taken by the
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Company or the Bank in connection with the Conversion and the sale of the Shares
as herein contemplated shall be satisfactory in form and substance to Webb and
its counsel.
Section 8. Indemnification.
(a) The Company and the Bank jointly and severally agree to indemnify and
hold harmless the Agent, its officers and directors, employees and agents, and
each person, if any, who controls the Agent within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss,
liability, claim, damage or expense whatsoever (including, but not limited to,
settlement expenses), joint or several, that the Agent or any of them may suffer
or to which the Agent and any such persons may become subject under all
applicable federal or state laws or otherwise, and to promptly reimburse the
Agent and any such persons upon written demand for any expenses (including
reasonable fees and disbursements of counsel) incurred by the Agent or any of
them in connection with investigating, preparing to defend or defending any
actions, proceedings or claims (whether commenced or threatened) to the extent
such losses, claims, damages, liabilities or actions: (i) arise out of or are
related to the Conversion or any action taken by the Agent where acting as agent
of the Company and the Bank, including without limitation, the denial or
reduction of a subscription or order to purchase Shares based upon the deposit
records of the Bank or otherwise; (ii) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), the Holding Company
Application or any instrument or document executed by the Company or the Bank or
based upon written information supplied by the Company or the Bank filed in any
state or jurisdiction to register or qualify any or all of the Shares or to
claim an exemption therefrom or provided to any state or jurisdiction to exempt
the Company as a broker-dealer or its officers, directors and employees as
broker-dealers or agent, under the securities laws thereof (collectively, the
"Blue Sky Application"), or any document, advertisement, oral statement or
communication ("Sales Information") prepared, made or executed by or on behalf
of the Company or the Bank with their consent or based upon written or oral
information furnished by or on behalf of the Company or the Bank, whether or not
filed in any jurisdiction, in order to qualify or register the Shares or to
claim an exemption therefrom under the securities laws thereof; (iii) arise out
of or are based upon the omission or alleged omission to state in any of the
foregoing documents or information a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
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which they were made, not misleading; or (iv) arise from any theory of liability
whatsoever relating to or arising from or based upon the Registration Statement
(or any amendment or supplement thereto), preliminary or final Prospectus (or
any amendment or supplement thereto), the Conversion Application (or any
amendment or supplement thereto), any Blue Sky Application or Sales Information
or other documentation distributed in connection with the Conversion; provided,
however, that no indemnification is required under this paragraph (a) to the
extent such losses, claims, damages, liabilities or actions arise out of or are
based upon any untrue material statement or alleged untrue material statement
in, or material omission or alleged material omission from, the Registration
Statement (or any amendment or supplement thereto), preliminary or final
Prospectus (or any amendment or supplement thereto), the Conversion Application,
any Blue Sky Application or Sales Information made in reliance upon and in
conformity with information furnished in writing to the Company or the Bank by
the Agent or its counsel regarding the Agent, provided, that it is agreed and
understood that the only information furnished in writing to the Company or the
Bank by the Agent regarding the Agent is set forth in the Prospectus under the
caption "The Conversion-Offering of Common Stock"; and, provided further, that
such indemnification shall be to the extent not prohibited by the Commission,
the OTS, the FDIC and the Board of Governors of the Federal Reserve and that the
Company and the Bank shall not be liable under clause (i) of the foregoing
indemnification provision to the extent that any loss, claim, damage, liability
or action is found in a final judgment by a court of competent jurisdiction to
have resulted from the Agent's bad faith or gross negligence.
(b) The Agent agrees to indemnify and hold harmless the Company and the
Bank, their directors and officers and each person, if any, who controls the
Company or the Bank within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act against any and all loss, liability, claim, damage or
expense whatsoever (including but not limited to settlement expenses), joint or
several, which they, or any of them, may suffer or to which they, or any of them
may become subject under all applicable federal and state laws or otherwise, and
to promptly reimburse the Company, the Bank, and any such persons upon written
demand for any expenses (including reasonable fees and disbursements of counsel)
incurred by them, or any of them, in connection with investigating, preparing to
defend or defending any actions, proceedings or claims (whether commenced or
threatened) to the extent such losses, claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment or supplement thereto), the Conversion Application (or any amendment
or supplement thereto), the preliminary or final Prospectus (or any amendment
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or supplement thereto), any Blue Sky Application or Sales Information, (ii) are
based upon the omission or alleged omission to state in any of the foregoing
documents a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or (iii) arise from any theory of liability whatsoever
relating to or arising from or based upon the Registration Statement (or any
amendment or supplement thereto), preliminary or final Prospectus (or any
amendment or supplement thereto), the Conversion Application (or any amendment
or supplement thereto), or any Blue Sky Application or Sales Information or
other documentation distributed in connection with the Conversion; provided,
however, that the Agent's obligations under this Section 8(b) shall exist only
if and only to the extent that such untrue statement or alleged untrue statement
was made in, or such material fact or alleged material fact was omitted from,
the Registration Statement (or any amendment or supplement thereto), the
preliminary or final Prospectus (or any amendment or supplement thereto), the
Conversion Application (or any amendment or supplement thereto), any Blue Sky
Application or Sales Information in reliance upon and in conformity with
information furnished in writing to the Company or the Bank by the Agent or its
counsel regarding the Agent, provided, that it is agreed and understood that the
only information furnished in writing to the Company or the Bank by the Agent
regarding the Agent is set forth in the Prospectus under the caption "Mutual
Federal's Conversion."
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 8 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
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one separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action, proceeding
or claim or separate but similar or related actions, proceedings or claims in
the same jurisdiction arising out of the same general allegations or
circumstances.
(d) The agreements contained in this Section 8 and in Section 9 hereof and
the representations and warranties of the Company and the Bank set forth in this
Agreement shall remain operative and in full force and effect regardless of: (i)
any investigation made by or on behalf of the Agent or its officers, directors
or controlling persons, agent or employees or by or on behalf of the Company or
the Bank or any officers, directors or controlling persons, agent or employees
of the Company or the Bank; (ii) delivery of and payment hereunder for the
Shares; or (iii) any termination of this Agreement.
Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or the Agent, the Company,
the Bank and the Agent shall contribute to the aggregate losses, claims, damages
and liabilities (including any investigation, legal and other expenses incurred
in connection with, and any amount paid in settlement of, any action, suit or
proceeding, but after deducting any contribution received by the Company, the
Bank or the Agent from persons other than the other parties thereto, who may
also be liable for contribution) in such proportion so that the Agent is
responsible for that portion represented by the percentage that the fees paid to
the Agent pursuant to Section 2 of this Agreement (not including expenses) bears
to the gross proceeds received by the Company from the sale of the Shares in the
Offering, and the Company and the Bank shall be responsible for the balance. If,
however, the allocation provided above is not permitted by applicable law, then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault of the Company and the Bank on the one hand and the Agent on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions, proceedings or claims in
respect thereto), but also the relative benefits received by the Company and the
Bank on the one hand and the Agent on the other from the Offering (before
deducting expenses). The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and/or the Bank on the one hand or the Agent
on the other and the parties' relative intent, good faith, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Bank and the Agent agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro-rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above in this Section 9. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions, proceedings or claims in respect thereof)
referred to above in this Section 9 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
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investigating or defending any such action, proceeding or claim. It is expressly
agreed that the Agent shall not be liable for any loss, liability, claim, damage
or expense or be required to contribute any amount pursuant to Section 8(b) or
this Section 9 which in the aggregate exceeds the amount paid (excluding
reimbursable expenses) to the Agent under this Agreement. It is understood that
the above stated limitation on the Agent's liability is essential to the Agent
and that the Agent would not have entered into this Agreement if such limitation
had not been agreed to by the parties to this Agreement. No person found guilty
of any fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was not found
guilty of such fraudulent misrepresentation. The obligations of the Company, the
Bank and the Agent under this Section 9 and under Section 8 shall be in addition
to any liability which the Company, the Bank and the Agent may otherwise have.
For purposes of this Section 9, each of the Agent's, the Company's or the Bank's
officers and directors and each person, if any, who controls the Agent or the
Company or the Bank within the meaning of the 1933 Act and the 1934 Act shall
have the same rights to contribution as the Agent, the Company or the Bank. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action, suit, claim or proceeding against such party in respect of which
a claim for contribution may be made against another party under this Section 9,
will notify such party from whom contribution may be sought, but the omission to
so notify such party shall not relieve the party from whom contribution may be
sought from any other obligation it may have hereunder or otherwise than under
this Section 9.
Section 10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company, the Bank and the Agent and the
representations and warranties and other statements of the Company, the Bank and
the Agent set forth in or made pursuant to this Agreement shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of the Agent, the Company,
the Bank or any controlling person referred to in Section 8 hereof, and shall
survive the issuance of the Shares, and any successor or assign of the Agent,
the Company, the Bank, and any such controlling person shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
Section 11. Termination. The Agent may terminate this Agreement by giving
the notice indicated below in this Section 11 at any time after this Agreement
becomes effective as follows:
(a) In the event the Company fails to sell the required minimum number of
the Shares by March 31, 2000, and in accordance with the provisions of the Plan
or as required by the Conversion Regulations, and applicable law, this Agreement
shall terminate upon refund by the Company to each person who has subscribed for
or ordered any of the Shares the full amount which it may have received from
such person, together with interest as provided in the Prospectus, and no party
to this Agreement shall have any obligation to the other hereunder, except as
set forth in Sections 2(a), 6, 8 and 9 hereof.
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(b) If any of the conditions specified in Section 7 shall not have been
fulfilled when and as required by this Agreement, unless waived in writing, or
by the Closing Date, this Agreement and all of the Agent's obligations hereunder
may be canceled by the Agent by notifying the Company and the Bank of such
cancellation in writing or by telegram at any time at or prior to the Closing
Date, and any such cancellation shall be without liability of any party to any
other party except as otherwise provided in Sections 2(a), 6, 8 and 9 hereof.
(c) In the event either the Company or the Bank is in material breach of
the representations and warranties or covenants contained in Sections 4 and 5
and such breach has not been cured after the Agent has provided the Company and
the Bank with notice of such breach.
If the Agent elects to terminate this Agreement as provided in this
Section, the Company and the Bank shall be notified promptly by telephone or
telegram, confirmed by letter.
The Company and the Bank may terminate this Agreement in the event the
Agent is in material breach of the representations and warranties or covenants
contained in Section 5 and such breach has not been cured after the Company and
the Bank have provided the Agent with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed, delivered or telegraphed and confirmed to Charles Webb &
Company, 211 Bradenton Drive, Dublin, Ohio 43017-5034, Attention: Harold T.
Hanley III (with a copy to Muldoon, Murphy & Faucette LLP., Attention: Paul M.
Aguggia, Esq., and, if sent to the Company and the Bank, shall be mailed,
delivered or telegraphed and confirmed to the Company and the Bank at 110 E.
Charles Street, Muncie, Indiana 47305-2499, Attention: R. Donn Roberts,
President (with a copy to Silver, Freedman & Taff, LLP, Attention: James S.
Fleischer, P.C.).
Section 13. Parties. The Company and the Bank shall be entitled to act and
rely on any request, notice, consent, waiver or agreement purportedly given on
behalf of the Agent when the same shall have been given by the undersigned. The
Agent shall be entitled to act and rely on any request, notice, consent, waiver
or agreement purportedly given on behalf of the Company or the Bank, when the
same shall have been given by the undersigned or any other officer of the
Company or the Bank. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Agent, the Company, the Bank, and their respective
successors and assigns, and no other person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. It is understood and
agreed that this Agreement is the exclusive agreement among the parties hereto,
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and supersedes any prior agreement among the parties (except for specific
references to the letter agreement with the Agent) and may not be varied except
in writing signed by all the parties.
Section 14. Closing. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by the Agent
and the Company and the Bank. At the closing, the Company and the Bank shall
deliver to the Agent in next day funds the commissions, fees and expenses due
and owing to the Agent as set forth in Sections 2 and 6 hereof and the opinions
and certificates required hereby and other documents deemed reasonably necessary
by the Agent shall be executed and delivered to effect the sale of the Shares as
contemplated hereby and pursuant to the terms of the Prospectus.
Section 15. Partial Invalidity. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in accordance
with the laws of the State of New York.
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
If the foregoing correctly sets forth the arrangement among the Company,
the Bank and the Agent, please indicate acceptance thereof in the space provided
below for that purpose, whereupon this letter and the Agent's acceptance shall
constitute a binding agreement.
Very truly yours,
MFS Financial, Inc. Mutual Federal Savings Bank
By Its Authorized By Its Authorized
Representative: Representative:
- --------------------------- ----------------------------
R. Donn Roberts R. Donn Roberts
President and Chief Executive Officer President and Chief Executive Officer
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<PAGE>
Charles Webb & Company, A Division of
Keefe, Bruyette & Woods, Inc.
By Its Authorized
Representative:
Harold T. Hanley III
Senior Vice President
-41-
MUTUAL FEDERAL SAVINGS BANK
Muncie, Indiana
AMENDED PLAN OF CONVERSION
From Mutual to Stock Form of Organization
I. GENERAL
On August 25, 1999, the Board of Directors of Mutual Federal Savings Bank
(the "Bank") adopted this Amended Plan of Conversion whereby the Bank would
convert from a mutual savings institution to a stock savings institution. The
Plan was subsequently amended to read as set forth below. The Plan includes, as
part of the Conversion, the concurrent formation of the Holding Company, to be
named in the future. The Plan provides that non-transferable subscription rights
to purchase Holding Company Conversion Stock will be offered first to Eligible
Account Holders of record as of the Eligibility Record Date, then to the Holding
Company and the Bank's Tax-Qualified Employee Plans, then to Supplemental
Eligible Account Holders of record as of the Supplemental Eligibility Record
Date, then to Other Members, and then to directors, officers and employees.
Concurrently with, at any time during, or promptly after the Subscription
Offering, and on a lowest priority basis, an opportunity to subscribe may also
be offered to the general public in a Direct Community Offering or a Public
Offering. The price of the Holding Company Conversion Stock will be based upon
an independent appraisal of the Bank and will reflect its estimated pro forma
market value, as converted. It is the desire of the Board of Directors of the
Bank to attract new capital to the Bank in order to increase its capital,
support future savings growth and increase the amount of funds available for
residential and other lending. The Converted Bank is also expected to benefit
from its management and other personnel having a stock ownership in its
business, since stock ownership is viewed as an effective performance incentive
and a means of attracting, retaining and compensating management and other
personnel. No change will be made in the Board of Directors or management of the
Bank as a result of the Conversion.
In furtherance of the Bank's long term commitment to its community, the
Plan provides that, in connection with the Conversion, the Holding Company will
make a donation to the Foundation in cash and/or common stock in an amount equal
to up to 8% of the aggregate value of the Holding Company Conversion Stock
issued in the Conversion. Under the terms of the Plan, this donation will be
subject to the approval of the voting members of the Bank. In the event that the
donation is not approved, the Bank may determine to complete the Conversion
without the donation.
II. DEFINITIONS
Acting in Concert: The term "acting in concert" shall have the same meaning
given it in ss.574.2(c) of the Rules and Regulations of the OTS.
Actual Subscription Price: The price per share, determined as provided in
Section V of the Plan, at which Holding Company Conversion Stock will be sold in
the Subscription Offering.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a specified
Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship with
any Person, means (i) any corporation or organization (other than the Holding
Company, the Bank or a majority-owned subsidiary of the Holding Company) of
which such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent or more of any class of equity securities, (ii)
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
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fiduciary capacity, and (iii) 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 the Holding Company or the Bank or any subsidiary of the
Holding Company; provided, however, that any Tax-Qualified or Non-Tax-Qualified
Employee Plan shall not be deemed to be an associate of any director or officer
of the Holding Company or the Bank, to the extent provided in Section V hereof.
Bank: Mutual Federal Savings Bank or such other name as the institution may
adopt.
Conversion: Change of the Bank's charter and bylaws to a federal stock
charter and bylaws; sale by the Holding Company of Holding Company Conversion
Stock; and issuance and sale by the Converted Bank of its common stock to the
Holding Company, all as provided for in the Plan.
Converted Bank: The federally chartered stock savings institution resulting
from the Conversion of the Bank in accordance with the Plan.
Deposit Account: Any withdrawable or repurchasable account or deposit in
the Bank including Savings Accounts and demand accounts.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section V hereof.
Eligibility Record Date: The close of business on July 31, 1998.
Eligible Account Holder: Any Person holding a Qualifying Deposit in the
Bank on the Eligibility Record Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Foundation: The Mutual Federal Savings Bank Charitable Foundation, Inc.
Holding Company: A corporation which upon completion of the Conversion will
own all of the outstanding common stock of the Converted Bank, and the name of
which will be selected in the future.
Holding Company Conversion Stock: Shares of common stock, par value $.01
per share, to be issued by the Holding Company as a part of the Conversion.
Market Maker: A dealer (i.e., any Person who engages directly or indirectly
as agent, broker or principal in the business of offering, buying, selling, or
otherwise dealing or trading in securities issued by another Person) who, with
respect to a particular security, (i) regularly publishes bona fide, competitive
bid and offer quotations in a recognized inter-dealer quotation system; or (ii)
furnishes bona fide competitive bid and offer quotations on request; and (iii)
is ready, willing, and able to effect transactions in reasonable quantities at
his quoted prices with other brokers or dealers.
Maximum Subscription Price: The price per share of Holding Company
Conversion Stock to be paid initially by subscribers in the Subscription
Offering.
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Member: Any Person or entity that qualifies as a member of the Bank
pursuant to its charter and bylaws.
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust does not meet the requirements to be "qualified" under Section
401 of the Internal Revenue Code.
OTS: Office of Thrift Supervision, Department of the Treasury, and its
successors.
Officer: An executive officer of the Holding Company or the Bank, including
the Chairman of the Board, President, Executive Vice Presidents, Senior Vice
Presidents in charge of principal business functions, Secretary and Treasurer.
Order Forms: Forms to be used in the Subscription Offering to exercise
Subscription Rights.
Other Members: Members of the Bank, other than Eligible Account Holders,
Tax-Qualified Employee Plans or Supplemental Eligible Account Holders, as of the
Voting Record Date.
Person: An individual, a corporation, a partnership, an association, a
joint-stock company, a trust, any unincorporated organization, or a government
or political subdivision thereof.
Plan: This Amended Plan of Conversion of the Bank, including any amendment
approved as provided in this Plan.
Public Offering: The offering for sale through the Underwriters to selected
members of the general public of any shares of Holding Company Conversion Stock
not subscribed for in the Subscription Offering or the Direct Community
Offering, if any.
Public Offering Price: The price per share at which any unsubscribed shares
of Holding Company Conversion Stock are initially offered for sale in the Public
Offering.
Qualifying Deposit: The aggregate balance of $50 or more of each Deposit
Account of an Eligible Account Holder as of the Eligibility Record Date or of a
Supplemental Eligible Account Holder as of the Supplemental Eligibility Record
Date.
SAIF: Savings Association Insurance Fund.
Savings Account: The term "Savings Account" means any withdrawable account
in the Bank except a demand account.
SEC: Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members called for the purpose of
considering and voting upon the Plan of Conversion.
Subscription Offering: The offering of shares of Holding Company Conversion
Stock for subscription and purchase pursuant to Section V of the Plan.
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Subscription Rights: Non-transferable, non-negotiable, personal rights of
the Bank's Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental
Eligible Account Holders, Other Members, and directors, Officers and employees
to subscribe for shares of Holding Company Conversion Stock in the Subscription
Offering.
Supplemental Eligibility Record Date: The last day of the calendar quarter
preceding approval of the Plan by the OTS.
Supplemental Eligible Account Holder: Any person holding a Qualifying
Deposit in the Bank (other than an officer or director and their associates) on
the Supplemental Eligibility Record Date.
Tax-Qualified Employee Plans: Any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust meets the requirements to be "qualified" under Section 401 of
the Internal Revenue Code.
Underwriters: The investment banking firm or firms agreeing to offer and
sell Holding Company Conversion Stock in the Public Offering.
Voting Record Date: The date set by the Board of Directors in accordance
with federal regulations for determining Members eligible to vote at the Special
Meeting.
III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE MEMBERS FOR
APPROVAL
Prior to submission of the Plan of Conversion to its Members for approval,
the Bank must receive from the OTS approval of the Application for Approval of
Conversion to convert to the federal stock form of organization. The following
steps must be taken prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a two-thirds
vote.
B. The Bank shall notify its Members of the adoption of the Plan by
publishing a statement in a newspaper having a general circulation in each
community in which the Bank maintains an office.
C. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at each office of the Bank.
D. The Bank will promptly cause an Application for Approval of Conversion on
Form AC to be prepared and filed with the OTS, an Application on Form
H-(e)1 (or other applicable form) to be prepared and filed with the OTS
and a Registration Statement on Form S-1 to be prepared and filed with the
SEC.
E. Upon receipt of notice from the OTS to do so, the Bank shall notify its
Members that it has filed the Application for Approval of Conversion by
posting notice in each of its offices and by publishing notice in a
newspaper having general circulation in each community in which the Bank
maintains an office.
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IV. CONVERSION PROCEDURE
Following approval of the application by the OTS, the Plan will be
submitted to a vote of the Members at the Special Meeting. If the Plan is
approved by Members holding a majority of the total number of votes entitled to
be cast at the Special Meeting, the Bank will take all other necessary steps
pursuant to applicable laws and regulations to convert to a federal stock
savings institution as part of a concurrent holding company formation pursuant
to the terms of the Plan.
The Holding Company Conversion Stock will be offered for sale in the
Subscription Offering at the Maximum Subscription Price to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and directors, Officers and employees of the Bank, prior to or
within 45 days after the date of the Special Meeting. The Bank may, either
concurrently with, at any time during, or promptly after the Subscription
Offering, also offer the Holding Company Conversion Stock to and accept
subscriptions from other Persons in a Direct Community Offering or a Public
Offering; provided that the Bank's Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members and
directors, Officers and employees shall have the priority rights to subscribe
for Holding Company Conversion Stock as set forth in Section V of the Plan.
However, the Holding Company and the Bank may delay commencing the Subscription
Offering beyond such 45-day period in the event there exist unforeseen material
adverse market or financial conditions. If the Subscription Offering commences
prior to the Special Meeting, subscriptions will be accepted subject to the
approval of the Plan at the Special Meeting.
The period for the Subscription Offering and Direct Community Offering will
be not less than 20 days nor more than 45 days unless extended by the Bank. Upon
completion of the Subscription Offering and Direct Community Offering, if any,
any unsubscribed shares of Holding Company Conversion Stock may be sold through
the Underwriters to selected members of the general public in the Public
Offering. If for any reason all of the shares are not sold in the Subscription
Offering, Direct Community Offering, if any, and Public Offering, if any, the
Holding Company and the Bank will use their best efforts to obtain other
purchasers, subject to OTS approval. Completion of the sale of all shares of
Holding Company Conversion Stock not sold in the Subscription Offering is
required within 45 days after termination of the Subscription Offering, subject
to extension of such 45-day period by the Holding Company and the Bank with the
approval of the OTS. The Holding Company and the Bank may jointly seek one or
more extensions of such 45-day period if necessary to complete the sale of all
shares of Holding Company Conversion Stock. In connection with such extensions,
subscribers and other purchasers will be permitted to increase, decrease or
rescind their subscriptions or purchase orders to the extent required by the OTS
in approving the extensions. Completion of the sale of all shares of Holding
Company Conversion Stock is required within 24 months after the date of the
Special Meeting.
V. STOCK OFFERING
A. Total Number of Shares and Purchase Price of Conversion Stock
The total number of shares of Holding Company Conversion Stock to be issued
in the Conversion will be determined jointly by the Boards of Directors of the
Holding Company and the Bank prior to the commencement of the Subscription
Offering, subject to adjustment if necessitated by market or financial
conditions prior to consummation of the Conversion. The total number of shares
of Holding Company Conversion Stock shall also be subject to increase in
connection with any oversubscriptions in the Subscription Offering or Direct
Community Offering.
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The aggregate price for which all shares of Holding Company Conversion
Stock will be sold will be based on an independent appraisal of the estimated
total pro forma market value of the Holding Company and the Converted Bank. Such
appraisal shall be performed in accordance with OTS guidelines and will be
updated as appropriate under or required by applicable regulations.
The appraisal will be made by an independent investment banking or
financial consulting firm experienced in the area of thrift institution
appraisals. The appraisal will include, among other things, an analysis of the
historical and pro forma operating results and net worth of the Converted Bank
and a comparison of the Holding Company, the Converted Bank and the Holding
Company Conversion Stock with comparable thrift institutions and holding
companies and their respective outstanding capital stocks.
Based upon the independent appraisal, the Boards of Directors of the
Holding Company and the Bank will jointly fix the Maximum Subscription Price.
If, following completion of the Subscription Offering and Direct Community
Offering, if any, a Public Offering is effected, the Actual Subscription Price
for each share of Holding Company Conversion Stock will be the same as the
Public Offering Price at which unsubscribed shares of Holding Company Conversion
Stock are initially offered for sale by the Underwriters in the Public Offering.
If, upon completion of the Subscription Offering, Direct Community
Offering, if any, and Public Offering, if any, all of the Holding Company
Conversion Stock is subscribed for or only a limited number of shares remain
unsubscribed for, subject to Part VII hereof, the Actual Subscription Price for
each share of Holding Company Conversion Stock will be determined by dividing
the estimated appraised aggregate pro forma market value of the Holding Company
and the Converted Bank, based on the independent appraisal as updated upon
completion of the Subscription Offering or other sale of all of the Holding
Company Conversion Stock, by the total number of shares of Holding Company
Conversion Stock to be issued by the Holding Company upon Conversion. Such
appraisal will then be expressed in terms of a specific aggregate dollar amount
rather than as a range.
B. Subscription Rights
Non-transferable Subscription Rights to purchase Holding Company Conversion
Stock will be issued without payment therefor to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other
Members and directors, Officers and employees of the Bank as set forth below.
1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive non-transferable Subscription
Rights to subscribe for shares of Holding Company Conversion Stock in an amount
equal to the greater of $200,000, or one-tenth of one percent (.10%) of the
total offering of shares, or 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Holding
Company Conversion Stock to be issued by a fraction of which the numerator is
the amount of the Qualifying Deposit of the Eligible
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Account Holder and the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders in the Bank in each case on the Eligibility Record
Date.
If sufficient shares are not available, shares shall be allocated first to
permit each subscribing Eligible Account Holder to purchase to the extent
possible 100 shares, and thereafter among each subscribing Eligible Account
Holder pro rata in the same proportion that his Qualifying Deposit bears to the
total Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unsatisfied.
Non-transferable Subscription Rights to purchase Holding Company Conversion
Stock received by directors and Officers of the Bank and their Associates, based
on their increased deposits in the Bank in the one-year period preceding the
Eligibility Record Date, shall be subordinated to all other subscriptions
involving the exercise of non-transferable Subscription Rights of Eligible
Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to receive
non-transferable Subscription Rights to purchase up to 10% of the shares of
Holding Company Conversion Stock, provided that singly 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 the Holding Company Conversion Stock.
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 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
Holding Company Conversion Stock sold in the Conversion exceeds the maximum of
the appraisal range as set forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account Holders
Each Supplemental Eligible Account Holder shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company Conversion Stock
in an amount equal to the greater of $200,000, or one-tenth of one percent
(.10%) of the total offering of Holding Company Conversion Stock, or 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Holding Company Conversion 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 the Bank in
each case on the Supplemental Eligibility Record Date.
Subscription Rights received pursuant to this Category shall be
subordinated to all Subscription Rights received by Eligible Account Holders and
Tax-Qualified Employee Plans pursuant to Category Nos. 1 and 2 above.
Any non-transferable Subscription Rights to purchase shares received by an
Eligible Account Holder in accordance with Category No. 1 shall reduce to the
extent thereof the Subscription Rights to be distributed to such person pursuant
to this Category.
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In the event of an oversubscription for shares under this Category, the
shares available shall be allocated first to permit each subscribing
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 100
shares, and thereafter among each subscribing Supplemental Eligible Account
Holder pro rata in the same proportion that his Qualifying Deposit bears to the
total Qualifying Deposits of all subscribing Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied.
4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable Subscription Rights to
subscribe for shares of Holding Company Conversion Stock remaining after
satisfying the subscriptions provided for under Category Nos. 1 through 3 above,
subject to the following conditions:
a. Each Other Member shall be entitled to subscribe for an amount of
shares equal to the greater of $200,000, or one-tenth of one
percent (.10%) of the total offering of Holding Company
Conversion Stock, to the extent that Holding Company Conversion
Stock is available.
b. In the event of an oversubscription for shares under this
Caterogy, the shares available shall be allocated among the
subscribing Other Members pro rata in the same proportion that
his number of votes on 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 the Bank's mutual charter and bylaws in
effect on the date of approval by members of the Plan.
5. Preference Category No. 5: Directors, Officers and Employees
Each director, Officer and employee of the Bank as of the date of the
commencement of the Subscription Offering shall be entitled to receive
non-transferable Subscription Rights to purchase shares of the Holding Company
Conversion Stock to the extent that shares are available after satisfying
subscriptions under Category Nos. 1 through 4 above. The shares which may be
purchased under this Category are subject to the following conditions:
a. The total number of shares which may be purchased under this Category
may not exceed 16% of the number of shares of Holding Company
Conversion Stock.
b. The maximum amount of shares which may be purchased under this
Category by any Person is $200,000 of Holding Company Conversion
Stock. In the event of an oversubscription for shares under this
Category, the shares available shall be allocated pro rata among all
subscribers in this Category.
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C. Direct Community Offering and Public Offering
1. Any shares of Holding Company Conversion Stock not subscribed for in the
Subscription Offering may be offered for sale in a Direct Community Offering.
This may involve an offering of all unsubscribed shares directly to the general
public with a preference to those natural persons residing in the counties in
which the Bank has an office. The purchase price per share to the general public
in a Direct Community Offering shall be the same as the Actual Subscription
Price. The Holding Company and the Bank may use an investment banking firm or
firms on a best efforts basis to sell the unsubscribed shares in the
Subscription and Direct Community Offering. The Holding Company and the Bank may
pay a commission or other fee to such investment banking firm or firms as to the
shares sold by such firm or firms in the Subscription and Direct Community
Offering and may also reimburse such firm or firms for expenses incurred in
connection with the sale. The Holding Company Conversion Stock will be offered
and sold in the Direct Community Offering, if any, in accordance with OTS
regulations, so as to achieve the widest distribution of the Holding Company
Conversion Stock. No person, by himself or herself, or with an Associate or
group of Persons acting in concert, may subscribe for or purchase more than
$200,000 of Holding Company Conversion Stock in the Direct Community Offering,
if any. Further, the Bank may limit total subscriptions under this Section V.C.1
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 Holding Company
Conversion Stock. Finally, the Bank may reserve shares offered in the Direct
Community Offering for sales to institutional investors.
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 cover orders of natural persons residing in the counties in which the Bank
has an office, then to cover the orders of any other person subscribing for
shares in the Direct Community Offering so that each such person may receive
1,000 shares, and thereafter, on a pro rata basis to such persons based on the
amount of their respective subscriptions.
The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any Person under this Section
V.C.1. Further, the Bank and the Holding Company may, at their sole discretion,
elect to forego a Direct Community Offering and instead effect a Public Offering
as described below.
2. Any shares of Holding Company Conversion Stock not sold in the
Subscription Offering or in the Direct Community Offering, if any, may then be
sold through the Underwriters to selected members of the general public in 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. The Bank and the Holding Company, in their sole
discretion, may reject any subscription, in whole or in part, received in the
Public Offering. The Public Offering shall be completed within 45 days after the
termination of the Subscription Offering, unless such period is extended as
provided in Section IV hereof. No person, by himself or herself, or with an
Associate or group of Persons acting in concert, may purchase more than $200,000
of Holding Company Conversion Stock in the Public Offering, if any.
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3. If for any reason any shares remain unsold after the Subscription
Offering, Direct Community Offering, if any, and Public Offering, if any, the
Boards of Directors of the Holding Company and the Bank will seek to make other
arrangements for the sale of the remaining shares of Holding Company Conversion
Stock. Such other arrangements will be subject to the approval of the OTS and to
compliance with applicable securities laws.
D. Additional Limitations Upon Purchases of Shares of Holding Company
Conversion Stock
The following additional limitations shall be imposed on all purchases of
Holding Company Conversion Stock in the Conversion:
1. No Person, by himself or herself, or with an Associate or group of
Persons acting in concert, may subscribe for or purchase in the Conversion a
number of shares of Holding Company Conversion Stock which exceeds an amount of
shares equal to $700,000. For purposes of this paragraph, an Associate of a
Person does not include a Tax-Qualified or Non-Tax Qualified Employee Plan in
which the Person has a substantial beneficial interest or serves as a trustee or
in a similar fiduciary capacity. Moreover, for purposes of this paragraph,
shares held by one or more Tax-Qualified or Non-Tax Qualified Employee Plans
attributed to a Person shall not be aggregated with shares purchased directly by
or otherwise attributable to that Person.
2. Directors and Officers and their Associates may not purchase in all
categories in the Conversion an aggregate of more than 26% of the Holding
Company Conversion Stock. For purposes of this paragraph, an Associate of a
Person does not include any Tax- Qualified Employee Plan. Moreover, any shares
attributable to the Officers and directors and their Associates, but held by one
or more Tax-Qualified Employee Plans shall not be included in calculating the
number of shares which may be purchased under the limitation in this paragraph.
3. The minimum number of shares of Holding Company Conversion Stock that
may be purchased by any Person in the Conversion is 25 shares, provided
sufficient shares are available.
4. The Boards of Directors of the Holding Company and the Bank may, in
their sole discretion, increase the maximum purchase limitation referred to in
paragraph 1 of this subpart D, up to 9.99%, provided that orders for shares
exceeding 5% of the Holding Company Conversion Stock offered in the Conversion
shall not exceed, in the aggregate, 10% of the Holding Company Conversion Stock
being offered in the Conversion. Requests to purchase additional shares of
Holding Company Conversion Stock under this provision will be allocated by the
Boards of Directors on a pro rata basis giving priority in accordance with the
priority rights set forth in this Section V.
Depending upon market and financial conditions, the Boards of Directors of
the Holding Company and the Bank, with the approval of the OTS and without
further approval of the Members, may increase or decrease any of the above
purchase limitations.
For purposes of this Section V, the directors of the Holding Company and
the Bank shall not be deemed to be Associates or a group acting in concert
solely as a result of their serving in such capacities.
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Each Person purchasing Holding Company Conversion Stock in the Conversion
shall be deemed to confirm that such purchase does not conflict with the above
purchase limitations.
E. Restrictions and Other Characteristics of Holding Company Conversion
Stock Being Sold
1. Transferability. Holding Company Conversion Stock purchased by Persons
other than --------------- directors and Officers of the Holding Company or the
Bank will be transferable without restriction. Shares purchased by directors or
Officers shall not be sold or otherwise disposed of for value for a period of
one year from the date of Conversion, except for any disposition of such shares
(i) following the death of the original purchaser, or (ii) resulting from an
exchange of securities in a merger or acquisition approved by the applicable
regulatory authorities. Any transfers that could result in a change in control
of the Bank or the Holding Company or result in the ownership by any Person or
group acting in concert of more than 10% of any class of the Bank's or the
Holding Company's equity securities are subject to the prior approval of the
OTS.
The certificates representing shares of Holding Company Conversion Stock
issued to directors and Officers shall bear a legend giving appropriate notice
of the one-year holding period restriction. Appropriate instructions shall be
given to the transfer agent for such stock with respect to the applicable
restrictions relating to the transfer of restricted stock. Any shares of common
stock of the Holding Company subsequently issued as a stock dividend, stock
split, or otherwise, with respect to any such restricted stock, shall be subject
to the same holding period restrictions for Holding Company or Bank directors
and Officers as may be then applicable to such restricted stock.
No director or Officer of the Holding Company or of the Bank, or Associate
of such a director or Officer, shall purchase any outstanding shares of capital
stock of the Holding Company for a period of three years following the
Conversion without the prior written approval of the OTS, except through a
broker or dealer registered with the SEC or in a "negotiated transaction"
involving more than one percent of the then-outstanding shares of common stock
of the Holding Company. As used herein, the term "negotiated transaction" means
a transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any Person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
2. Repurchase and Dividend Rights. Any cash dividend by the Converted Bank
or stock repurchase by the Holding Company during the first three years
following Conversion will, to the extent required, be made in accordance with
OTS policies as in effect at the time of such cash dividends or stock
repurchase.
3. Voting Rights. After Conversion, holders of Deposit Accounts will not
have voting rights in the Bank or the Holding Company. Exclusive voting rights
as to the Bank will be vested in the Holding Company, as the sole stockholder of
the Bank. Voting rights as to the Holding Company will be held exclusively by
its stockholders.
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F. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with the solicitation
of proxies for the Special Meeting, the subscription prospectus and Order Form
may be sent to each Eligible Account Holder, Tax-Qualified Employee Plan,
Supplemental Eligible Account Holder, Other Member, and director, Officer and
employee at their last known address as shown on the records of the Bank.
However, the Bank may, and if the Subscription Offering commences after the
Special Meeting the Bank shall, furnish a subscription prospectus and Order Form
only to Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental
Eligible Account Holders, Other Members, and directors, Officers and employees
who have returned to the Bank by a specified date prior to the commencement of
the Subscription Offering a post card or other written communication requesting
a subscription prospectus and Order Form. In such event, the Bank shall provide
a postage-paid post card for this purpose and make appropriate disclosure in its
proxy statement for the solicitation of proxies to be voted at the Special
Meeting and/or letter sent in lieu of the proxy statement to those Eligible
Account Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account
Holders who are not Members on the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a subscription
prospectus describing the Holding Company and the Converted Bank and the shares
of Holding Company Conversion Stock being offered for subscription and
containing all other information required by the OTS or the SEC or necessary to
enable Persons to make informed investment decisions regarding the purchase of
Holding Company Conversion Stock.
3. The Order Forms (or accompanying instructions) used for the Subscription
Offering will contain, among other things, the following:
(i) A clear and intelligible explanation of the Subscription Rights
granted under the Plan to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members,
and directors, Officers and employees;
(ii) A specified expiration date by which Order Forms must be returned to
and actually received by the Bank or its representative for purposes
of exercising Subscription Rights, which date will be not less than 20
days after the Order Forms are mailed by the Bank;
(iii)The Maximum Subscription Price to be paid for each share subscribed
for when the Order Form is returned;
(iv) A statement that 25 shares is the minimum number of shares of Holding
Company Conversion Stock that may be subscribed for under the Plan;
(v) A specifically designated blank space for indicating the number of
shares being subscribed for;
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(vi) A set of detailed instructions as to how to complete the Order Form
including a statement as to the available alternative methods of
payment for the shares being subscribed for;
(vii)Specifically designated blank spaces for dating and signing the Order
Form;
(viii) An acknowledgment that the subscriber has received the subscription
prospectus;
(ix) A statement of the consequences of failing to properly complete and
return the Order Form, including a statement that the Subscription
Rights will expire on the expiration date specified on the Order Form
unless such expiration date is extended by the Holding Company and the
Bank, and that the Subscription Rights may be exercised only by
delivering the Order Form, properly completed and executed, to the
Bank or its representative by the expiration date, together with
required payment of the Maximum Subscription Price for all shares of
Holding Company Conversion Stock subscribed for;
(x) A statement that the Subscription Rights are non-transferable and that
all shares of Holding Company Conversion Stock subscribed for upon
exercise of Subscription Rights must be purchased on behalf of the
Person exercising the Subscription Rights for his own account; and
(xi) A statement that, after receipt by the Bank or its representative, a
subscription may not be modified, withdrawn or canceled without the
consent of the Bank.
G. Method of Payment
Payment for all shares of Holding Company Conversion Stock subscribed for,
computed on the basis of the Maximum Subscription Price, must accompany all
completed Order Forms. Payment may be made in cash (if presented in Person), by
check, or, if the subscriber has a Deposit Account in the Bank (including a
certificate of deposit), the subscriber may authorize the Bank to charge the
subscriber's Deposit Account.
If a subscriber authorizes the Bank to charge his or her Deposit Account,
the funds will continue to earn interest, but may not be used by the subscriber
until all Holding Company Conversion Stock has been sold or the Plan is
terminated, whichever is earlier. The Bank will allow subscribers to purchase
shares by withdrawing funds from certificate accounts without the assessment of
early withdrawal penalties with the exception of prepaid interest in the form of
promotional gifts. In the case of early withdrawal of only a portion of such
account, the certificate evidencing such account shall be canceled if the
remaining balance of the account is less than the applicable minimum balance
requirement, in which event the remaining balance will earn interest at the
passbook rate. This waiver of the early withdrawal penalty is applicable only to
withdrawals made in connection with the purchase of Holding Company Conversion
Stock under the Plan. Interest will also be paid, at not less than the
then-current passbook rate, on all orders paid in cash, by check or money order,
from the date payment is received until consummation of the Conversion. Payments
made in cash, by check or money order will be placed by the Bank in an escrow or
other account established specifically for this purpose.
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In the event of an unfilled amount of any subscription order, the Converted
Bank will make an appropriate refund or cancel an appropriate portion of the
related withdrawal authorization, after consummation of the Conversion,
including any difference between the Maximum Subscription Price and the Actual
Subscription Price (unless subscribers are afforded the right to apply such
difference to the purchase of additional whole shares). If for any reason the
Conversion is not consummated, purchasers will have refunded to them all
payments made and all withdrawal authorizations will be canceled in the case of
subscription payments authorized from Deposit Accounts at the Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
may pay for such shares of Holding Company Conversion Stock subscribed for upon
consummation of the Conversion. 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 appraisal range included in the subscription prospectus, the Tax
Qualified and Non-Tax Qualified Employee Plans shall 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 appraisal range provided
that such subscriptions shall continue to be subject to applicable purchase
limits and stock allocation procedures.
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
The Boards of Directors of the Holding Company and the Bank shall have the
absolute right, in their sole discretion, to reject any Order Form, including
but not limited to, any Order Forms which (i) are not delivered or are returned
by the United States Postal Service (or the addressee cannot be located); (ii)
are not received back by the Bank or its representative, or are received after
the expiration date specified thereon; (iii) are defectively completed or
executed; (iv) are not accompanied by the total required payment for the shares
of Holding Company Conversion Stock subscribed for (including cases in which the
subscribers' Deposit Accounts or certificate accounts are insufficient to cover
the authorized withdrawal for the required payment); or (v) are submitted by or
on behalf of a Person whose representations the Boards of Directors of the
Holding Company and the Bank believe to be false or who they otherwise believe,
either alone or acting in concert with others, is violating, evading or
circumventing, or intends to violate, evade or circumvent, the terms and
conditions of the Plan. In such event, the Subscription Rights of the Person to
whom such rights have been granted will not be honored and will be treated as
though such Person failed to return the completed Order Form within the time
period specified therein. The Bank may, but will not be required to, waive any
irregularity relating to any Order Form or require submission of corrected Order
Forms or the remittance of full payment for subscribed shares by such date as
the Bank may specify. The interpretation of the Holding Company and the Bank of
the terms and conditions of the Plan and of the proper completion of the Order
Form will be final, subject to the authority of the OTS.
I. Member in Non-Qualified States or in Foreign Countries
The Holding Company and the Bank will make reasonable efforts to comply
with the securities laws of all states in the United States in which Persons
entitled to subscribe for Holding Company Conversion Stock pursuant to the Plan
reside. However, no shares will be offered or sold under the Plan to any such
Person who (1) resides in a foreign country or (2)
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resides in a state of the United States in which a small number of Persons
otherwise eligible to subscribe for shares under the Plan reside or as to which
the Holding Company and the Bank determine that compliance with the securities
laws of such state would be impracticable for reasons of cost or otherwise,
including, but not limited to, a requirement that the Holding Company or the
Bank or any of their Officers, directors or employees register, under the
securities laws of such state, as a broker, dealer, salesman or agent. No
payments will be made in lieu of the granting of Subscription Rights to any such
Person.
VI. FEDERAL STOCK CHARTER AND BYLAWS
A. As part of the Conversion, the Bank will take all appropriate
steps to amend its charter to read in the form of federal stock
savings institution charter as prescribed by the OTS. The name of
the Bank, as converted, will be "Mutual Federal Savings Bank." A
copy of the proposed stock charter is available upon request. By
their approval of the Plan, the Members of the Bank will thereby
approve and adopt such charter.
B. The Bank will also take appropriate steps to amend its bylaws to
read in the form prescribed by the OTS for a federal stock savings
institution. A copy of the proposed federal stock bylaws is
available upon request.
C. The effective date of the adoption of the Bank's federal stock
charter and bylaws shall be the date of the issuance and sale of
the Holding Company Conversion Stock as specified by the OTS.
VII. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company and the Bank intend to
establish the Foundation which will qualify as an exempt organization under
Section 501(c)(3) of the Internal Revenue Code and donate to the Foundation cash
and/or Holding Company Conversion Stock in an amount up to 8% of the aggregate
value of shares of Holding Company Conversion Stock sold in the Conversion. The
Foundation would be formed to complement the Bank's existing community
reinvestment activities and to share with the Bank's local community a part of
the Bank's financial success as a community-oriented financial services
institution. The Foundation will be dedicated to the promotion of charitable
purposes including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations or
civic-minded projects. It is expected that the Foundation will annually
distribute total grants to assist charitable organizations or to fund projects
within its local community of not less than 5% of the average fair value of
Foundation assets each year. In order to serve the purposes for which it was
formed and maintain its Section 501(c)(3) qualification, the Foundation may
sell, on an annual basis, a limited portion of any securities contributed to it
by the Holding Company.
The board of directors of the Foundation will be comprised of individuals
who are employees or Directors of the Bank, or other persons with a business or
other relationship with the communities in which the Bank does business. The
board of directors of the Foundation will be responsible for establishing the
policies of the Foundation with respect to grants or donations, consistent with
the stated purposes of the Foundation. The establishment and funding of the
Foundation as part of the Conversion is subject to the approval of the OTS and a
majority of the votes eligible to be cast by the Bank's voting members at the
Special Meeting.
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VIII. HOLDING COMPANY CERTIFICATE OF INCORPORATION
A copy of the proposed certificate of incorporation of the Holding Company
will be made available to members upon request.
IX. DIRECTORS OF THE CONVERTED ASSOCIATION
Each Person serving as a member of the Board of Directors of the Bank at
the time of the Conversion will thereupon become a director of the Converted
Bank.
X. STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN
In order to provide an incentive for directors, Officers and employees of
the Holding Company and its subsidiaries (including the Converted Bank), the
Board of Directors of the Holding Company intends to adopt, subject to
shareholder approval, a stock option and incentive plan and a recognition and
retention plan following the Conversion.
XI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS
The Converted Bank and the Holding Company may in their discretion make
scheduled contributions to any Tax-Qualified Employee Plans, provided that any
such contributions which are for the acquisition of Holding Company Conversion
Stock, or the repayment of debt incurred for such an acquisition, do not cause
the Converted Bank to fail to meet its regulatory capital requirements.
XII. SECURITIES REGISTRATION AND MARKET MAKING
Promptly following the Conversion, the Holding Company will register its
stock with the SEC pursuant to the Exchange Act. In connection with the
registration, the Holding Company will undertake not to deregister such stock,
without the approval of the OTS, for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist two
or more market makers to establish and maintain a market for its common stock
promptly following Conversion. The Holding Company will also use its best
efforts to cause its common stock to be quoted on the Nasdaq System or to be
listed on a national or regional securities exchange.
XIII. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION
Each Deposit Account holder shall retain, without payment, a withdrawable
Deposit Account or Accounts in the Converted Bank, equal in amount to the
withdrawable value of such account holder's Deposit Account or Accounts prior to
Conversion. All Deposit Accounts will continue to be insured by the SAIF up to
the applicable limits of insurance coverage, and shall be subject to the same
terms and conditions (except as to voting and liquidation rights) as such
Deposit Account in the Bank at the time of the Conversion. All loans shall
retain the same status after Conversion as such loans had prior to Conversion.
XIV. LIQUIDATION ACCOUNT
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts at the
Converted Bank a priority in the event of a complete liquidation of the
Converted Bank, the Converted Bank will, at the time of Conversion, establish a
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liquidation account in an amount equal to the net worth of the Bank as shown on
its latest statement of financial condition contained in the final offering
circular used in connection with the Conversion. The creation and maintenance of
the liquidation account will not operate to restrict the use or application of
any of the regulatory capital accounts of the Converted Bank; provided, however,
that such regulatory capital accounts will not be voluntarily reduced below the
required dollar amount of the liquidation account. Each Eligible Account Holder
and Supplemental Eligible Account Holder shall, with respect to the Deposit
Account held, have a related inchoate interest in a portion of the liquidation
account balance ("subaccount balance").
The initial subaccount balance of a Deposit Account held by an Eligible
Account Holder and/or Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the Qualifying Deposit in the Deposit
Account on the Eligibility Record Date and/or the Supplemental Eligibility
Record Date and the denominator is the total amount of the Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders on
such record dates in the Bank. For Deposit Accounts in existence at both dates,
separate subaccounts shall be determined on the basis of the Qualifying Deposits
in such Deposit Accounts on such record dates. Such initial subaccount balance
shall not be increased, and it shall be subject to downward adjustment as
provided below.
If the deposit balance in any Deposit Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing date subsequent to the record date is less than the lesser of (i) the
deposit balance in such Deposit Account at the close of business on any other
annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Deposit Account on the Eligibility Record Date or Supplemental
Eligibility Record Date, the subaccount balance shall be reduced in an amount
proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Deposit
Account. If all funds in such Deposit Account are withdrawn, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then-current adjusted subaccount
balances for Deposit Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Deposit Accounts and other liabilities, or similar transactions
with another institution the accounts of which are insured by the SAIF, shall be
considered to be a complete liquidation. In such transactions, the liquidation
account shall be assumed by the surviving institution.
XV. RESTRICTIONS ON ACQUISITION OF CONVERTED ASSOCIATION
Regulations of the OTS limit acquisitions, and offers to acquire, direct or
indirect beneficial ownership of more than 10% of any class of an equity
security of the Converted Bank or the Holding Company. In addition, consistent
with the regulations of the OTS, the charter of the Converted Bank shall provide
that for a period of five years following completion of the Conversion: (i) no
Person (i.e., no individual, group acting in concert, corporation, partnership,
association, joint stock company, trust, or unincorporated organization or
similar company, syndicate, or any other group formed for the purpose of
acquiring, holding or disposing of securities of an insured institution) shall
directly or indirectly offer to acquire or acquire beneficial ownership of more
than 10% of any class of the Converted Bank's equity
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securities. Shares beneficially owned in violation of this charter provision
shall not be counted as shares entitled to vote and shall not be voted by any
Person or counted as voting shares in connection with any matter submitted to
the shareholders for a vote. This limitation shall not apply to any offer to
acquire or acquisition of beneficial ownership of more than 10% of the common
stock of the Converted Bank by a corporation whose ownership is or will be
substantially the same as the ownership of the Converted Bank, provided that (i)
the offer or acquisition is made more than one year following the date of
completion of the Conversion; (ii) stockholders shall not be permitted to
cumulate their votes for elections of directors; and (iii) special meetings of
the stockholders relating to changes in control or amendment of the charter may
only be called by the Board of Directors.
XVI. AMENDMENT OR TERMINATION OF PLAN
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members by a two-thirds vote
of the respective Boards of Directors of the Holding Company and the Bank. After
submission of the Plan and proxy materials to the Members, the Plan may be
amended by a two-thirds vote of the respective Boards of Directors of the
Holding Company and the Bank only with the concurrence of the OTS. In the event
that the Bank determines that for tax purposes or otherwise it is in the best
interest of the Bank to convert from a federal mutual to a federal stock
institution without the concurrent formation of a holding company, the Plan may
be substantively amended, with OTS approval, in such respects as the Board of
Directors of the Bank deems appropriate to reflect such change from a holding
company conversion to a direct conversion. In the event the Plan is so amended,
common stock of the Bank will be substituted for Holding Company Conversion
Stock in the Subscription, Direct Community or Public Offerings, and subscribers
will be resolicited as described in Section V hereof. Any amendments to the Plan
(including amendments to reflect the elimination of the concurrent holding
company formation) made after approval by the Members with the concurrence of
the OTS shall not necessitate further approval by the Members unless otherwise
required.
The Plan may be terminated by a two-thirds vote of the Bank's Board of
Directors at any time prior to the Special Meeting of Members, and at any time
following such Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors of the Bank may modify or terminate the Plan
upon the order or with the approval of the OTS and without further approval by
Members. The Plan shall terminate if the sale of all shares of Holding Company
Conversion Stock is not completed within 24 months of the date of the Special
Meeting. A specific resolution approved by a majority of the Board of Directors
of the Bank is required in order for the Bank to terminate the Plan prior to the
end of such 24-month period.
XVII. EXPENSES OF THE CONVERSION
The Holding Company and the Bank shall use their best efforts to assure
that expenses incurred by them in connection with the Conversion shall be
reasonable.
XVIII. TAX RULING
Consummation of the Conversion is expressly conditioned upon prior receipt
of either a ruling of the United States Internal Revenue Service or an opinion
of tax counsel with respect to federal taxation, and either a ruling of the
Indiana taxation authorities or an opinion of tax counsel or other tax advisor
with respect to Indiana taxation, to the effect that consummation of the
transactions contemplated herein will not be taxable to the Holding Company or
the Converted Bank.
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XIX. EXTENSION OF CREDIT FOR PURCHASE OF STOCK
The Bank may not knowingly loan funds or otherwise extend credit to any
Person to purchase in the Conversion shares of Holding Company Conversion Stock.
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ARTICLES OF INCORPORATION
OF
MFS FINANCIAL, INC.
The Undersigned, R. Donn Roberts, whose address is 110 E. Charles Street,
Muncie, Indiana 47305, being at least 18 years of age, acting as sole
incorporator, does hereby form a corporation under the General Laws of the State
of Maryland having the following Articles:
ARTICLE 1. Name. The name of the corporation is MFS Financial, Inc. (herein
the "Corporation").
ARTICLE 2. Principal Office. The address of the principal office of the
Corporation in the State of Maryland is c/o The Corporation Trust Incorporated,
300 East Lombard Street, Baltimore, Maryland 21202.
ARTICLE 3. Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which the corporation may be organized under the
General Corporation Law of the State of Maryland (the "MGCL").
ARTICLE 4. Resident Agent. The name and address of the registered agent of
the Corporation in the State of Maryland is The Corporation Trust Incorporated,
300 East Lombard Street, Baltimore, Maryland 21202. Said resident agent is a
Maryland corporation.
ARTICLE 5. Initial Directors. The number of directors constituting the
initial board of directors of the Corporation is seven, which number may be
increased or decreased pursuant to the Bylaws of the Corporation and ARTICLE 9
of the Articles of Incorporation, but shall never be less than the minimum
number permitted by the MGCL now or hereafter in force. The names of the persons
who are to serve as directors until their successors are elected and qualified,
are:
Name Term to Expire in
William V. Hughes 2000
R. Donn Roberts 2000
James D. Rosema 2000
Edward Dobrow 2001
Julie Skinner 2001
Linn A. Crull 2002
Wilbur R. Davis 2002
ARTICLE 6.
Capital Stock. The total number of shares of capital stock which the
Corporation shall have the authority to issue is twenty five million
(25,000,000) shares consisting of:
1. Five million (5,000,000) shares of preferred stock, par value one cent
($.0l) per share (the "Preferred Stock"); and
2. Twenty million (20,000,000) shares of common stock, par value one cent
($.0l) per share (the "Common Stock").
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The aggregate par value of all the authorized of capital stock is two
hundred fifty thousand dollars ($250,000). Except to the extent required by
governing law, rule or regulation, the shares of capital stock may be issued
from time to time by the Board of Directors without further approval of the
stockholders of the Corporation. The Corporation shall have the authority to
purchase its capital stock out of funds lawfully available therefore which funds
shall include, without limitation, the Corporation's unreserved and unrestricted
capital surplus.
B. Preferred Stock. The Board of Directors is hereby expressly authorized,
subject to any limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in series, to establish from time to time the number
of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of the Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of the Preferred Stock.
C. Common Stock. Except as provided for in the Articles of Incorporation
(or any resolution or resolutions adopted by the Board of Directors pursuant
hereto) the exclusive voting power shall be vested in the Common Stock, the
holders thereof being entitled to one vote for each share of such Common Stock
standing in the holder's name on the books of the Corporation. Subject to any
rights and preferences of any class of stock having preferences over the Common
Stock, holders of Common Stock shall be entitled to such dividends as may be
declared by the Board of Directors out of funds lawfully available therefor.
Upon any liquidation, dissolution or winding up of the affairs of the
Corporation, whether voluntary or involuntary, holders of Common Stock shall be
entitled to receive pro rata the remaining assets of the Corporation after
payment or provision for payment of all debts and liabilities of the Corporation
and payment or provision for payment of any amounts owed to the holders of any
class of stock having preference over the Common Stock on distributions on
liquidation, dissolution or winding up of the Corporation.
D. Restrictions on Voting Rights of the Corporation's Equity Securities.
1. Notwithstanding any other provision of these Articles of Incorporation,
in no event shall any record owner of any outstanding Common Stock which is
beneficially owned, directly or indirectly, by a person who, as of any record
date for the determination of stockholders entitled to vote on any matter,
beneficially owns in excess of 10% of the then-outstanding shares of Common
Stock (the "Limit"), be entitled, or permitted to any vote in respect of the
shares held in excess of the Limit. The number of votes which may be cast by any
record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
beneficially owned by such person and owned of record by such record owner and
the denominator of which is the total number of shares of Common Stock
beneficially owned by such person owning shares in excess of the Limit.
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2. The following definitions shall apply to this Section D of this Article.
(a) An "affiliate" of a specified person shall mean a person that directly,
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the person specified.
(b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of
the General Rules and Regulations under the Securities Exchange Act of 1934 (or
any successor rule or statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or statutory provision thereto,
pursuant to said Rule 13d-3 as in effect on August 31, 1994; Provided, however,
that a person shall, in any event, also be deemed the "beneficial owner" of any
Common Stock:
(1) which such person or any of its affiliates beneficially owns,
directly or indirectly; or
(2) which such person or any of its affiliates has (i) the right to
acquire (whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or understanding
(but shall not be deemed to be the beneficial owner of any voting shares
solely by reason of an agreement, contract, or other arrangement with this
Corporation to effect any transaction which is described in any one or more
of the clauses of Section A of ARTICLE 10) or upon the exercise of
conversion rights, exchange rights, warrants, or options or otherwise, or
(ii) sole or shared voting or investment power with respect thereto
pursuant to any agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial owner of any voting
shares solely by reason of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public solicitation of proxies for
such meeting, with respect to shares of which neither such person nor any
such affiliate is otherwise deemed the beneficial owner), or
(3) which are beneficially owned, directly or indirectly, by any other
person with which such first mentioned person or any of its affiliates acts
as a partnership, limited partnership, syndicate or other group pursuant to
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of this
Corporation;
and provided further, however, that (1) no director or officer of this
Corporation (or any affiliate of any such director or officer) shall,
solely by reason of any or all of such directors or officers acting in
their capacities as such, be deemed, for any purposes hereof, to
beneficially own any Common Stock beneficially owned by any other such
director or officer (or any affiliate thereof), and (2) neither any
employee stock ownership or similar plan of this Corporation or any
subsidiary of this Corporation nor any trustee with respect thereto
(or any affiliate of such trustee) shall, solely by reason of such
capacity of such trustee, be deemed, for any purposes hereof, to
beneficially own any Common Stock held under any such plan. For
purposes of computing the percentage beneficial ownership of Common
Stock of a person, the outstanding Common Stock shall include shares
deemed owned by such
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person through application of this subsection but shall not include
any other Common Stock which may be issuable by this Corporation
pursuant to any agreement, or upon exercise of conversion rights,
warrants or options, or otherwise. For all other purposes, the
outstanding Common Stock shall include only Common Stock then
outstanding and shall not include any Common Stock which may be
issuable by this Corporation pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or otherwise.
(c) A "Person" shall mean any individual, firm, corporation, or other
entity.
(d) The Board of Directors shall have the power to construe and apply the
provisions of this section and to make all determinations necessary or desirable
to implement such provisions, including but not limited to matters with respect
to (1) the number of shares of Common Stock beneficially owned by any person,
(2) whether a person is an affiliate of another, (3) whether a person has an
agreement, arrangement, or understanding with another as to the matters referred
to in the definition of beneficial ownership, (4) the application of any other
definition or operative provision of this Section to the given facts, or (5) any
other matter relating to the applicability or effect of this Section.
3. The Board of Directors shall have the right to demand that any person
who is reasonably believed to beneficially own Common Stock in excess of the
Limit (or holds of record Common Stock beneficially owned by any person in
excess of the Limit) (a "Holder in Excess") supply the Corporation with complete
information as to (a) the record owner(s) of all shares beneficially owned by
such Holder in Excess, and (b) any other factual matter relating to the
applicability or effect of this section as may reasonably be requested of such
Holder in Excess. The Board of Directors shall further have the right to receive
from any Holder in Excess reimbursement for all expenses incurred by the Board
in connection with its investigation of any matters relating to the
applicability or effect of this section on such Holder in Excess, to the extent
such investigation is deemed appropriate by the Board of Directors as a result
of the Holder in Excess refusing to supply the Corporation with the information
described in the previous sentence.
4. Except as otherwise provided by law or expressly provided in this
Section D, the presence, in person or by proxy, of the holders of record of
shares of capital stock of the Corporation entitling the holders thereof to cast
one-third of the votes (after giving effect, if required, to the provisions of
this Section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in these Articles of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock.
5. Any constructions, applications, or determinations made by the Board of
Directors, pursuant to this Section in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose,
shall be conclusive and binding upon the Corporation and its stockholders.
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6. In the event any provision (or portion thereof) of this Section D shall
be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
each such remaining provision (or portion thereof) of this Section D remain, to
the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
E. Voting Rights of Certain Control Shares. Notwithstanding any contrary
provision of law, the provisions of Subtitle 7 of Title 3 of the MGCL, now or
hereafter in force, shall not apply to the voting rights of the Common Stock of
the Corporation as to all existing and future holders of Common Stock of the
Corporation.
F. Majority Vote. Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of the total
number of shares of all classes of capital stock or of the total number of
shares of any class of capital stock, such action shall be valid and effective
if authorized by the affirmative vote of the holders of a majority of the total
number of shares of all classes outstanding and entitled to vote thereon, except
as otherwise provided in the Articles of Incorporation.
ARTICLE 7. Preemptive Rights. No holder of the capital stock of the
Corporation or series of stock or of options, warrants or other rights to
purchase shares of any class or series of stock or of other securities of the
Corporation shall have any preemptive right to purchase or subscribe for any
unissued capital stock of any class or series, or any unissued bonds,
certificates of indebtedness, debentures or other securities convertible into or
exchangeable for capital stock of any class or series or carrying any right to
purchase stock of any class or series.
ARTICLE 8. Directors.
A. Management of the Corporation. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. In addition to the powers and authority expressly conferred upon them
by Statute or by the Articles of Incorporation or the Bylaws of the Corporation,
the directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
B. Number, Class and Terms of Directors; Cumulative Voting. The number of
directors shall be fixed from time to time exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the Board. The directors,
other than those who may be elected by the holders of any class or series of
Preferred Stock, shall be divided into three classes, as nearly equal in number
as reasonably possible, with the term of office of the first class to expire at
the conclusion of the first annual meeting of stockholders, the term of office
of the second class to expire at the conclusion of the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the conclusion of the annual meeting of stockholders two years
thereafter, with each director to hold office until his or her successor shall
have been duly elected and qualified. At each annual meeting of stockholders,
directors elected to succeed those directors whose terms expire shall be elected
for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified. Stockholders shall
not be permitted to cumulate their votes in the election of directors.
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C. Vacancies. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall be filled only by a majority vote of
the directors then in office, though less than a quorum. A director so chosen by
the remaining directors shall hold office until the next succeeding annual
meeting of stockholders, at which time the stockholders shall elect a director
to hold office for the balance of the term then remaining. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
D. Removal. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and then only by the
affirmative vote of the holders of at least 80% of the combined voting power of
all of the then-outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (after giving effect to the
provisions of ARTICLE 6 of the Articles of Incorporation) voting together as a
single class.
E. Stockholder Proposals and Nominations of Directors. For any stockholder
proposal to be presented in connection with an annual meeting of stockholders of
the Corporation, including any nomination or proposal relating to the nomination
of a director to be elected to the Board of Directors of the Corporation, the
stockholder must have given timely written notice thereof to the Secretary of
the Corporation in the manner and containing the information required by the
Bylaws of the Corporation. Stockholder proposals to be presented in connection
with a special meeting of stockholders will be presented by the Corporation only
to the extent required by Section 2-502 of the MGCL and the Bylaws of the
Corporation.
ARTICLE 9. Bylaws. The Board of Directors is expressly empowered to adopt,
amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal
of the Bylaws of the Corporation by the Board of Directors shall require the
approval of a majority of the total number of directors which the Corporation
would have if there were no vacancies on the Board of Directors. The
stockholders shall also have power to adopt, amend or repeal the Bylaws of the
Corporation. In addition to any vote of the holders of any class or series of
stock of this Corporation required by law or by the Articles of Incorporation,
the affirmative vote of the holders of at least 80% of the voting power of all
of the then-outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors (after giving effect to the
provisions of ARTICLE 6 hereof), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation.
ARTICLE 10. Approval of Certain Business Combinations.
A. Super-majority Voting Requirement; Business Combination Defined. In
addition to any affirmative vote required by law or the Articles of
Incorporation, and except as otherwise expressly provided in this Section:
1. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (a) any Interested Stockholder (as
hereinafter defined) or (b) any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Stockholder; or
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2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereafter defined) equaling or exceeding 25% or more of
the combined assets of the Corporation and its Subsidiaries, or
3. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value equaling or exceeding 25% of the combined assets of the Corporation
and its Subsidiaries except pursuant to an employee benefit plan of the
Corporation or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate of any Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder (a "Disproportionate Transaction");
provided, however, that no such transaction shall be deemed a
Disproportionate Transaction if the increase in the proportionate ownership
of the Interested Stockholder or Affiliate as a result of such transaction
is no greater than the increase experienced by the other stockholders
generally;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of directors (the "Voting Stock"), voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or by any other provisions of the Articles of Incorporation or any Preferred
Stock or in any agreement with any national securities exchange or quotation
system or otherwise.
The term "Business Combination" as used in this Article shall mean any
transaction which is referred to in any one or more of paragraphs 1 through 5 of
Section A of this Article.
B. Exception to Super-majority Voting Requirement. The provisions of
Section A of this Article shall not be applicable to any particular Business
Combination, and such Business Combination shall require only the affirmative
vote of the majority of the outstanding shares of capital stock entitled to
vote, or such vote as is required by law or by the Articles of Incorporation,
if, in the case of any Business Combination that does not involve any cash or
other consideration being received by the stockholders of the Corporation solely
in their capacity as stockholders of the Corporation, the condition specified in
the following paragraph 1 is met or, in the case of any other Business
Combination, all of the conditions specified in either of the following
paragraphs 1 and 2 are met:
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1. The Business Combination shall have been approved by a majority of
the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the holders
of Common Stock in such Business Combination shall at least be equal
to the higher of the following:
(i) (if applicable) the Highest Per Share Price, including
any brokerage commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder or any of its Affiliates
for any shares of Common stock acquired by it (i) within the
two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the
"Announcement Date"), or (ii) in the transaction in which it
became an Interested Stockholder, whichever is higher.
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article as the "Determination Date"),
whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination or
consideration other than cash to be received per share by holders of
shares of any class of outstanding Voting Stock other than Common
Stock shall be at least equal to the highest of the following (it
being intended that the requirements of this subparagraph (b) shall be
required to be met with respect to every such class of outstanding
Voting Stock, whether or not the Interested Stockholder has previously
acquired any shares of a particular class of Voting Stock):
(i) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder for any shares of such class of Voting
Stock acquired by it (i) within the two-year period immediately
prior to the Announcement Date, or (ii) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(ii) (if applicable) the highest preferential amount per
share to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; and
(iii) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the Determination
Date, whichever is higher.
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(c) The consideration to be received by holders of a particular class
of outstanding Voting Stock (including Common Stock) shall be in cash or in
the same form as the Interested Stockholder has previously paid for shares
of such class of Voting Stock. If the Interested Stockholder has paid for
shares of any class of Voting Stock with varying forms of consideration,
the form of consideration to be received per share by holders of shares of
such class of Voting Stock shall be either cash or the form used to acquire
the largest number of shares of such class of Voting Stock previously
acquired by the Interested Stockholder. The price determined in accordance
with Section B.2. of this Article shall be subject to appropriate
adjustment in the event of any stock dividend, stock split, combination of
shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination; (i)
except as approved by a majority of the Disinterested Directors, there
shall have been no failure to declare and pay at the regular date therefor
any full quarterly dividends (whether or not cumulative) on any outstanding
stock having preference over the Common Stock as to dividends or
liquidation; (ii) there shall have been (X) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Disinterested Directors, and (Y) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of Common Stock, unless the failure to so increase such annual rate
is approved by a majority of the Disinterested Directors; and (iii) neither
such Interested Stockholder nor any of its Affiliates shall have become the
beneficial owner of any additional shares of Voting Stock except as part of
the transaction which results in such Interested Stockholder becoming an
Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise.
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934 and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall be mailed to
stockholders of the Corporation at least 30 days prior to the consummation
of such Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or subsequent
provisions).
C. Certain Definitions. For the purposes of this Article:
1. A "Person" shall include an individual, a group acting in concert, a
corporation, a partnership, an association, a joint venture, a pool, a joint
stock company, a
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trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities.
2. "Interested Stockholder" shall mean any Person (other than the
Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more than 10%
of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period immediately
prior to the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in the
course of a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
3. A Person shall be a "beneficial owner" of any Voting Stock:
(a) which such Person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in
effect on August 31, 1999; or
(b) which such Person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote pursuant to
any agreement, arrangement or understanding (but neither such Person nor
any such Affiliate or Associate shall be deemed to be the beneficial owner
of any shares of Voting Stock solely by reason of a revocable proxy granted
for a particular meeting of stockholders, pursuant to a public solicitation
of proxies for such meeting, and with respect to which shares neither such
Person nor any such Affiliate or Associate is otherwise deemed the
beneficial owner); or
(c) which are beneficially owned, directly or indirectly within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in
effect on August 31, 1994, by any other Person with which such Person or
any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purposes of acquiring, holding, voting (other than
solely by reason of a revocable proxy as described in Subparagraph (b) of
this Paragraph 3) or in disposing of any shares of Voting Stock;
provided, however, that, in the case of any employee stock ownership or
similar plan of the Corporation or of any Subsidiary in which the
beneficiaries thereof possess the right to vote any shares of Voting Stock
held by such plan, no such plan nor any trustee with respect thereto (nor
any Affiliate of such trustee), solely by reason of such capacity of such
trustee,
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shall be deemed, for any purposes hereof, to beneficially own any shares of
Voting Stock held under any such plan.
4. For the purpose of determining whether a Person is an Interested
Stockholder pursuant to Section C.2., the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned through
application of this Section C.3. but shall not include any other shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement
or understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
5. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on August 31, 1999.
6. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
Provided, however, that for the purposes of the definition of Interested
Stockholder set forth in this Section C.2., the term "Subsidiary" shall
mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
7. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and any director who is thereafter chosen to
fill any vacancy on the Board of Directors or who is elected and who, in
either event, is unaffiliated with the Interested Stockholder, and in
connection with his or her initial assumption of office is recommended for
appointment or election by a majority of Disinterested Directors then on
the Board of Directors.
8. "Fair Market Value" means: (a) in the case of stock, the highest
closing sales price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock on the Nasdaq
System or any system then in use, or, if such stock is admitted to trading
on a principal United States securities exchange registered under the
Securities Exchange Act of 1934, Fair Market Value shall be the highest
sale price reported during the 30-day period preceding the date in
question, or, if no such quotations are available, the Fair Market Value on
the date in question of a share of such stock as determined by the Board of
Directors in good faith, in each case with respect to any class of stock,
appropriately adjusted for any dividend or distribution in shares of such
stock or in combination or reclassification of outstanding shares of such
stock into a smaller number of shares of such stock, and (b) in the case of
property other than cash or stock, the Fair Market Value of such property
on the date in question as determined by the Board of Directors in good
faith.
9. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
10. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in Sections B.2.(a) and
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B.2.(b) of this ARTICLE 10 shall include the shares of Common Stock and/or
the shares of any other class of outstanding Voting Stock retained by the
holders of such shares.
D. Construction and Interpretation. A majority of the Disinterested
Directors of the Corporation shall have the power and duty to determine for the
purposes of this Article, on the basis of information known to them after
reasonable inquiry, (a) whether a person is an Interested Stockholder; (b) the
number of shares of Voting Stock beneficially owned by any person; (c) whether a
person is an Affiliate or Associate of another; and (d) whether the assets which
are the subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has, an aggregate Fair Market Value
equaling or exceeding 25% of the combined assets of the Corporation and its
Subsidiaries. A majority of the Disinterested Directors shall have the further
power to interpret all of the terms and provisions of this Article.
E. Fiduciary Duty. Nothing contained in this Article shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
F. Maryland Business Combination Statute. Notwithstanding any contrary
provision of law, the provisions of Sections 3-601 through 3-604 of the MGCL, as
now and hereafter in force, shall not apply to any business combination (as
defined in Section 3-601(e) of the MGCL, as now and hereafter in force), of the
Corporation.
ARTICLE 11. Evaluation of Certain Offers. The Board of Directors of the
Corporation, when evaluating any offer of another Person (as defined in ARTICLE
10 hereof) to (A) make a tender or exchange offer for any equity security of the
Corporation, (B) merge or consolidate the Corporation with another corporation
or entity, or (C) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, may, in connection with the exercise
of its judgment in determining what is in the best interest of the Corporation
and its stockholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effect of acceptance of such offer
on the Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in ARTICLE 10 hereof); on the communities in which the
Corporation and its Subsidiaries operate or are located; on the ability of the
Corporation to fulfill its corporate objectives as a financial institution
holding company and on the ability of its subsidiary financial institution to
fulfill the objectives of a federally insured financial institution under
applicable statutes and regulations.
ARTICLE 12. Indemnification, etc. of Directors and Officers.
A. Indemnification. The Corporation shall indemnify (1) its current and
former directors and officers, whether serving the Corporation or at its request
any other entity, to the fullest extent required or permitted by the MGCL now or
hereafter in force (but, in the case of any amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification rights
than such law permitted the Corporation to provide prior to such amendment),
including the advancement of expenses under the procedures and to the fullest
extent permitted by law, and (2) other employees and agents to such extent as
shall be authorized by the Board of Directors and permitted by law; provided,
however, that, except as provided in Section B hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
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B. Procedure. If a claim under Section A of this Article is not paid in
full by the Corporation within 60 days after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part in any such suit,
the indemnitee shall also be entitled to be reimbursed the expense of
prosecuting or defending such suit. It shall be a defense to any action for
advancement of expenses that the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the indemnitee of his good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met. Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the MGCL, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article or otherwise shall be on the Corporation.
D. Non-Exclusivity. The rights to indemnification and to the advancement of
expenses conferred in this Article shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Articles of Incorporation, Bylaws, agreement, vote of stockholders
or Disinterested Directors or otherwise.
E. Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the MGCL.
F. Miscellaneous. The Corporation shall not be liable for any payment under
this Article in connection with a claim made by any indemnitee to the extent
such indemnitee has otherwise actually received payment under any insurance
policy, agreement, or otherwise, of the amounts otherwise indemnifiable
hereunder. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article shall be contract rights and such
rights shall continue as to an indemnitee who has ceased to be a director or
officer and shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
Any repeal or modification of this Article shall not in any way diminish
any rights to indemnification or advancement of expenses of such director or
officer or the obligations of the Corporation arising hereunder with respect to
events occurring, or claims made, while this Article is in force.
ARTICLE 13. Limitation of Liability. An officer or director of the
Corporation, as such, shall not be liable to the Corporation or its stockholders
for money damages, except (i) to the extent that it is proved that the person
actually received an improper benefit or profit in money, property
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or services for the amount of the benefit or profit in money, property or
services actually received; (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
in the proceeding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding; or (iii) to the extent otherwise required by the
MGCL. If the MGCL is amended to further eliminate or limit the personal
liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by MGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director or officer of the Corporation existing at the time of such repeal or
modification.
ARTICLE 14. Amendment of the Articles of Incorporation. The Corporation
reserves the right to amend or repeal any provision contained in the Articles of
Incorporation in the manner prescribed by the MGCL and all rights conferred upon
stockholders are granted subject to this reservation; Provided, however, that,
notwithstanding any other provision of the Articles of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by the Articles of Incorporation, the affirmative
vote of the holders of at least 80% of the voting power of all of the
then-outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors (after giving effect to the provisions of
ARTICLE 6), voting together as a single class, shall be required to amend or
repeal this ARTICLE 14, Sections B, D or E of ARTICLE 6, ARTICLE 8, ARTICLE 9,
ARTICLE 10 or ARTICLE 12.
ARTICLE 15. Name and Address of Incorporator. The name and mailing address
of the sole incorporator are as follows:
NAME MAILING ADDRESS
R. Donn Roberts 110 E. Charles Street
Muncie, Indiana 47305
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I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Maryland, do make, file and record
the Articles of Incorporation, do certify that the facts herein stated are true,
and, accordingly, have hereto set my hand this 14th day of September 1999.
/s/ R. Donn Roberts
-----------------------------
R. Donn Roberts, Incorporator
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MFS FINANCIAL, INC.
BYLAWS
ARTICLE I
STOCKHOLDERS
Section 1.01. Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix.
Section 1.02. Special Meetings. Subject to the rights of the holders of any
class or series of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called by the President or by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of directors which the Corporation would have if there were no vacancies on the
Board of Directors (hereinafter the "Whole Board"). Special meetings of the
stockholders shall be called by the Secretary at the request of stockholders
only on the written request of stockholders entitled to cast at least a majority
of all the votes entitled to be cast at the meeting. Such written request will
state the purpose or purposes of the meeting and the matters proposed to be
acted upon at the meeting, and shall be delivered at the home office of the
Corporation addressed to the President or the Secretary. The Secretary shall
inform the stockholders who make the request of the reasonable estimated cost of
preparing and mailing a notice of the meeting and, upon payment of these costs
to the Corporation, notify each stockholder entitled to notice of the meeting.
Section 1.03. Notice of Meetings. Not less than ten nor more than 90 days
before each stockholders' meeting, the Secretary shall give written notice of
the meeting to each stockholder entitled to vote at the meeting and to each
other stockholder entitled to notice of the meeting. The notice shall state the
time and place of the meeting and, if the meeting is a special meeting or notice
of the purpose is required by statute, the purpose of the meeting. Notice is
given to a stockholder when it is personally delivered to the stockholder, left
at the stockholder's usual place of business, or mailed to the stockholder at
his or her address as it appears on the records of the Corporation.
Notwithstanding the foregoing provisions, each person who is entitled to notice
waives notice if such person, before or after the meeting, signs a waiver of the
notice which is filed with the records of the stockholders' meeting, or is
present at the meeting in person or by proxy.
Section 1.04. Adjournment. A meeting of stockholders convened on the date
for which it was called may be adjourned from time to time without further
notice to a date not more than 120 days after the original record date. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
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Section 1.05. Quorum; Voting. At any meeting of the stockholders, the
presence in person or by proxy of stockholders entitled to cast at least
one-third of all the votes entitled to be cast at the meeting constitutes a
quorum for all purposes, unless or except to the extent that the presence of a
larger number may be required by law. Where a separate vote by a class or
classes is required, a majority of the shares of such class or classes, present
in person or represented by proxy, shall constitute a quorum entitled to take
action with respect to that vote on that matter. A majority of all votes cast at
a meeting at which a quorum is present is sufficient to approve any matter which
properly comes before the meeting.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
Section 1.06. General Right to Vote; Proxies. Unless the Articles of
Incorporation provides for a greater or lesser number of votes per share or
limits or denies voting rights, each outstanding share of stock, regardless of
class, is entitled to one vote on each matter submitted to a vote at a meeting
of stockholders. In all elections for directors, directors shall be determined
by a plurality of the votes cast, and except as otherwise required by law or as
provided in the Articles of Incorporation, all other matters shall be determined
by a majority of the votes cast at the meeting.
A stockholder may vote the stock the stockholder owns of record either in
person or by proxy. A stockholder may sign a writing authorizing another person
to act as proxy. Signing may be accomplished by the stockholder or the
stockholder's authorized agent signing the writing or causing the stockholder's
signature to be affixed to the writing by any reasonable means, including
facsimile signature. A stockholder may authorize another person to act as proxy
by transmitting, or authorizing the transmission of a telegram, cablegram,
datagram, or other means of electronic transmission to the person authorized to
act as proxy or to a proxy solicitation firm, proxy support service
organization, or other person authorized by the person who will act as proxy to
receive the transmission. Unless a proxy provides otherwise, it is not valid
more than 11 months after its date. A proxy is revocable by a stockholder at any
time without condition or qualification unless the proxy states that it is
irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or another general interest in the Corporation or its asset or
liabilities.
Section 1.07. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
(b) Nominations of persons for election to the Board of Directors and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving notice provided for in Section 1.09, who is entitled to vote at the
meeting and who complied with the notice procedures set forth in Section 1.09.
Nominations of persons for election to the Board of
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Directors and the proposal of business to be considered by the stockholders may
be made at a special meeting of stockholders only pursuant to the Corporation's
notice of meeting. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in Section 1.09
and, if any proposed nomination or business is not in compliance with Section
1.09, to declare that such defective nomination or proposal be disregarded.
Section 1.08. Conduct of Voting. The Board of Directors shall, in advance
of any meeting of stockholders, appoint one or more persons as inspectors of
election, to act at the meeting or any adjournment thereof and make a written
report thereof, in accordance with applicable law. At all meetings of
stockholders the proxies and ballots shall be received, and all questions
touching the qualification of voters and the validity of proxies, the acceptance
or rejection of votes not otherwise specified by these Bylaws, the Articles of
Incorporation or law, shall be decided or determined by the inspector of
elections. All voting, including on the election of directors but excepting
where otherwise required by law, may be by a voice vote; provided, however, that
upon demand therefore by a stockholder entitled to vote or his or her proxy, a
stock vote shall be taken. Every stock vote shall be taken by ballot, each of
which shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. No candidate for election as a
director at a meeting shall serve as an inspector at such meeting.
Section 1.09. Stockholder Proposals. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation (including proposals made under rule 14a-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), including any nomination
or proposal relating to the nomination of a director to be elected to the Board
of Directors of the Corporation, the stockholders must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than 90 days or more than 120 days
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
120th day prior to such annual meeting and not later than the close of business
on the later of the 90th day prior to such annual meeting or the tenth day
following the day on which notice of the date of annual meeting was mailed or
public announcement of the date of such meeting is first made. No adjournment or
postponement of an annual meeting shall commence a new period for the giving of
notice of a stockholder proposal hereunder. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, (i) the name
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and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such stockholders and
such beneficial owner.
Section 1.10. Informal Action by Stockholders. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of the stockholders' meetings a
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right to
dissent signed by each stockholder entitled to notice of the meeting but not
entitled to vote at the meeting.
Section 1.11. List of Stockholders. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
ARTICLE II
BOARD OF DIRECTORS
Section 2.01. Function of Directors, Number and Term of Office. The
business and affairs of the Corporation shall be managed by or under the
direction of the Board of Directors. The number of directors shall be as
provided for in the Articles of Incorporation. The Board of Directors shall
annually elect a Chairman of the Board and a President from among its members
and shall designate, when present, either the Chairman of the Board or the
President to preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
Section 2.02. Vacancies and Newly Created Directorships. A vacancy on
the board of Directors may be filled only in accordance with the provisions of
the Articles of Incorporation. Subject to the rights of the holders of any class
of stock separately entitled to elect one or more directors, a majority of the
remaining directors, whether or nor sufficient to constitute a quorum, may fill
a vacancy on the Board of Directors which results from any cause. A director so
chosen by the remaining directors shall hold office until the next succeeding
annual meeting of stockholders, at which time the stockholders shall elect a
director to hold office for the balance of the term then remaining.
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Any director or the entire Board of Directors may be removed only in
accordance with the provisions of the Articles of Incorporation.
Section 2.03. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
Section 2.04. Special Meetings. Special meetings of the Board of Directors
may be called by one-third (1/3) of the directors then in office (rounded up to
the nearest whole number) or by the President and shall be held at such place,
on such date, and at such time as they or he or she shall fix. Notice of the
place, date, and time of each such special meeting shall be given to each
director by whom it is not waived by mailing written notice not less than five
days before the meeting or by telegraphing or telexing or by facsimile or
electronic transmission of the same not less than 24 hours before the meeting.
Unless otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting. No notice of any meeting of the Board of
Directors need be given to any director who attends except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened, or to any
director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice. Any special
meeting of the Board of Directors may adjourn from time to time to reconvene at
the same or some other place, and no notice need be given of any such adjourned
meeting other than by announcement.
Section 2.05. Quorum. At any meeting of the Board of Directors, a majority
of the authorized number of directors then constituting the Board shall
constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 2.06. Participation in Meetings By Conference Telephone. Members of
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and such participation shall
constitute presence in person at such meeting.
Section 2.07. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 2.08. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(i) To declare dividends from time to time in accordance with law;
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(ii) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(iii) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(iv) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(v) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(vi) To adopt from time to time such stock, option, stock purchase, bonus
or other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(vii) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and
(viii) To adopt from time to time regulations, not inconsistent with these
Bylaws, for the management of the Corporation's business and affairs.
Section 2.09. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees (and expenses, if
any) and other compensation for their services as directors, including, without
limitation, their services as members of committees of the Board of Directors.
Section 2.10. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by certified mail, return receipt requested, to
the Secretary of the Corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who votes in favor
of such action.
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ARTICLE III
COMMITTEES
Section 3.01. Committees of the Board of Directors. The Board of Directors
may appoint from among its members an Executive Committee and other committees
composed of one or more directors and delegate to these committees any of the
powers of the Board of Directors, except the power to authorize dividends on
stock, elect directors, issue stock other than as provided in the next sentence,
recommend to the stockholders any action which requires stockholder approval,
amend these Bylaws, or approve any merger or share exchange which does not
require stockholder approval. If the Board of Directors has given general
authorization for the issuance of stock providing for or establishing a method
or procedure for determining the maximum number of shares to be issued, a
committee of the Board of Directors, in accordance with that general
authorization or any stock option or other plan or program adopted by the Board
of Directors, may authorize or fix the terms of stock subject to classification
or reclassification and the terms on which any stock may be issued, including
all terms and conditions required or permitted to be established or authorized
by the Board of Directors. Any committee so designated may exercise the power
and authority of the Board of Directors if the resolution which designated the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee in
his or her place, the member or members of the committee present at the meeting
and not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 3.02. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings,
one-third (1/3) of the members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
Section 3.03. Nominating Committee. The Board of Directors may appoint a
Nominating Committee of the Board, consisting of not less than three members,
one of which shall be the President if, and only so long as, the President
remains in office as a member of the Board of Directors. The Nominating
Committee shall have authority (i) to review any nominations for election to the
Board of Directors made by a stockholder of the Corporation pursuant to Section
1.07 of these Bylaws in order to determine compliance with such Bylaw and (ii)
to recommend to the Board of Directors nominees for election to the Board of
Directors to replace those directors whose terms expire at the annual meeting of
stockholders next ensuing.
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ARTICLE IV
OFFICERS
Section 4.01. Generally.
(a) The Board of Directors as soon as may be practicable after the annual
meeting of stockholders shall choose a President, a Secretary and a Treasurer
and from time to time may choose such other officers as it may deem proper. The
President shall be chosen from among the directors. Any number of offices may be
held by the same person, except no person may serve concurrently as both
President and Vice President of the Corporation.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this ARTICLE IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 4.02. President. The President shall be the chief executive officer
and, subject to the control of the Board of Directors, shall have general power
over the management and oversight of the administration and operation of the
Corporation's business and general supervisory power and authority over its
policies and affairs. The President shall see that all orders and resolutions of
the Board of Directors and of any committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his or her absence, by such officer or other person as is chosen at the
meeting. The Secretary or, in his or her absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his or her absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 4.03. Vice President. The Vice President or Vice Presidents, if
any, shall perform the duties of the President in the President's absence or
during his or her disability to act. In addition, the Vice Presidents shall
perform the duties and exercise the powers usually incident to their respective
offices and/or such other duties and powers as may be properly assigned to them
from time to time by the Board of Directors, the Chairman of the Board or the
President.
Section 4.04. Secretary. The Secretary or an Assistant Secretary shall
issue notices of meetings, shall keep their minutes, shall have charge of the
seal and the corporate books, shall perform such other duties and exercise such
other powers as are usually incident to such offices and/or such other duties
and powers as are properly assigned thereto by the Board of Directors, the
Chairman of the Board or the President.
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Section 4.05. Treasurer. The Treasurer shall have charge of all monies and
securities of the Corporation, other than monies and securities of any division
of the Corporation which has a treasurer or financial officer appointed by the
Board of Directors, and shall keep regular books of account. The funds of the
Corporation shall be deposited in the name of the Corporation by the Treasurer
with such banks or trust companies or other entities as the Board of Directors
from time to time shall designate. The Treasurer shall sign or countersign such
instruments as require his or her signature, shall perform all such duties and
have all such powers as are usually incident to such office and/or such other
duties and powers as are properly assigned to him or her by the Board of
Directors, the Chairman of the Board or the President, and may be required to
give bond, payable by the Corporation, for the faithful performance of his
duties in such sum and with such surety as may be required by the Board of
Directors.
Section 4.06. Assistant Secretaries and Other officers. The Board of
Directors may appoint one or more assistant secretaries and one or more
assistants to the Treasurer, or one appointee to both such positions, which
officers shall have such powers and shall perform such duties as are provided in
these Bylaws or as may be assigned to them by the Board of Directors, the
Chairman of the Board or the President.
Section 4.07. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President, or any
officer of the Corporation authorized by the President, shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 5.01. Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by, the President or
a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
him or her. Any or all of the signatures on the certificate may be by facsimile.
Section 5.02. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section
5.06, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 5.03. Record Dates or Closing of Transfer Books. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Section 1.04, more than 90 days before the
date on which the action requiring the determination
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will be taken; the transfer books may not be closed for a period longer than 20
days; and, in the case of a meeting of stockholders, the record date or the
closing of the transfer books shall be at least ten days before the date of the
meeting.
Section 5.04. Stock Ledger. The Corporation shall maintain a stock ledger
which contains the name and address of each stockholder and the number of shares
of stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The original or a duplicate of the
stock ledger shall be kept at the offices of a transfer agent for the particular
class of stock or, if none, at the principal executive offices of the
Corporation.
Section 5.05. Certification of Beneficial Owners. The Board of Directors
may adopt by resolution a procedure by which a stockholder of the Corporation
may certify in writing to the Corporation that any shares of stock registered in
the name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation; and any other provisions
with respect to the procedure which the Board of Directors considers necessary
or desirable. On receipt of a certification which complies with the procedure
adopted by the Board of Directors in accordance with this Section, the person
specified in the certification is, for the purpose set forth in the
certification, the holder of record of the specified stock in place of the
stockholder who makes the certification.
Section 5.06. Lost Stock Certificates. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen, or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may require the owner of the certificate to give a bond, with
sufficient surety, to indemnify the Corporation against any loss or claim
arising as a result of the issuance of a new certificate. In their discretion,
the Board of Directors or such officer or officers may refuse to issue such new
certificate save upon the order of some court having jurisdiction in the
premises.
Section 5.07. Regulations. The issue, transfer, conversion and registration
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VI
FINANCE
Section 6.01. Checks, Drafts, Etc. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the Chairman of the Board, the President, a
Vice-President, an Assistant Vice-President, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary.
10
<PAGE>
Section 6.02. Annual Statement of Affairs. The President or chief
accounting officer shall prepare annually a full and correct statement of the
affairs of the Corporation, to include a balance sheet and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
Section 6.03. Fiscal Year. The fiscal year of the Corporation shall be the
12 calendar months ending on December 31 in each year.
Section 6.04. Dividends. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Articles of
Incorporation.
Section 6.05. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 6.06. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the Board of Directors may select.
ARTICLE VII
MISCELLANEOUS
Section 7.01. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 7.02. Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
Section 7.03. Reliance upon Books, Reports and Records. Each director, each
member of any committee designated by the Board of Directors, and each officer
and agent of the Corporation shall, in the performance of his or her duties, be
fully protected in relying in good faith upon the books of account or other
records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of its officers or employees, or
committees of the Board of Directors so designated, or by any advisor,
accountant, appraiser or other experts or consultants selected by the Board of
Directors or officers of the Corporation, regardless of whether such expert or
consultant may also be a director.
11
<PAGE>
Section 7.04. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mail, postage paid, by sending such notice by prepaid telegram or
mailgram or by sending such notice by facsimile machine or other electronic
transmission. Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered or dispatched, if delivered through the mail, by telegram or mailgram
or by facsimile machine or other electronic transmission, shall be the time of
the giving of the notice.
Section 7.05. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
Section 7.06. Time Periods. In applying any provision of these Bylaws which
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The Bylaws of the Corporation may be adopted, amended or repealed as
provided in ARTICLE 9 of the Articles of Incorporation.
12
NUMBER
COMMON STOCK
CUSIP
MFS FINANCIAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE OF
MFS FINANCIAL, INC. (the "Corporation"), a Maryland corporation. The shares
represented by this certificate are transferable only on the stock transfer
books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar. This security is not a
deposit or account and is not federally insured or guaranteed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to bear the
facsimile signatures of its duly authorized officers and to be sealed with the
facsimile of its corporate seal.
DATED
------------------------ --------------------------
Rosalie Petro, Secretary R. Donn Roberts, President
and Chief Executive
Officer
[Seal]
<PAGE>
The shares represented by this certificate are issued subject to all the
provisions of the articles of incorporation and bylaws of MFS Financial, Inc.
(the "Corporation") as from time to time amended (copies of which are on file at
the principal executive offices of the Corporation).
The Corporation's articles of incorporation provide that no "person" (as
defined in the certificate of incorporation) who "beneficially owns" (as defined
in the certificate of incorporation) in excess of 10% of the outstanding shares
of the Corporation shall be entitled to vote any shares held in excess of such
limit. This provision of the articles of incorporation shall not apply to an
acquisition of securities of the Corporation by an employee stock purchase plan
or other employee benefit plan of the Corporation or any of its subsidiaries.
The Corporation's articles of incorporation also include a provision the
general effect of which is to require the affirmative vote of the holders of 80%
of the outstanding voting shares of the Corporation to approve certain business
combinations (as defined in the articles of incorporation) between the
Corporation and a 10% or more Stockholder. However, only the affirmative vote of
a majority of the outstanding shares or such vote as is otherwise required by
law (rather than the 80% voting requirement) is applicable to the particular
transaction if it is approved by a majority of the "disinterested directors" (as
defined in the articles of incorporation) or, alternatively, the transaction
satisfies certain minimum price and procedural requirements.
The Corporation will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation or to its transfer
agent and registrar.
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
UNIF GIFT MIN ACT _______ Custodian _______
(Cust) (Minor)
Under Uniform Gift to Minors
Act - ____________
(State)
UNIF TRANS MIN ACT _______ Custodian _______
(Cust) (Minor)
Under Uniform Transfers to Minors
Act - ___________
(State)
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________ hereby sell, assign and transfer
unto
- ------------------------------
- ------------------------------
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
- ----------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
- ----------------------------------------------
- --------------------------------------- Shares
of Common Stock represented by the within
certificate, and do hereby irrevocably
constitute and appoint
- ------------------------------------ Attorney
to transfer the said shares on the books of
the within named Corporation with full power
of substitution in the premises.
Dated
--------------------------------------
NOTICE: THE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
September 16, 1999
VIA EDGAR
Board of Directors
MFS Financial, Inc.
110 E. Charles Street
Muncie, IN 47305-2499
Members of the Board of Directors:
We have acted as special counsel to MFS Financial, Inc., a Maryland
corporation (the "Holding Company"), in connection with the preparation and
filing with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended, of the Registration Statement on Form S-1 (the
"Registration Statement"), relating to the issuance of up to 6,601,900 shares of
the Holding Company's common stock, par value $.01 per share (the "Common
Stock"), in connection with the conversion of Mutual Federal Savings Bank, a
federally chartered mutual savings institution (the "Bank"), into a federally
chartered stock savings institution as a wholly owned subsidiary of the Holding
Company (the "Conversion"). The Conversion and the offering of the shares of
Common Stock for sale to the public are being made in accordance with the
Amended Plan of Conversion (the "Plan"). In this regard, we have examined the
Articles of Incorporation and Bylaws of the Holding Company, resolutions of the
Board of Directors of the Bank, the Plan and such other documents and matters of
law as we deemed appropriate for the purpose of this opinion.
Based upon the foregoing, we are of the opinion as of the date hereof that
the Common Stock has been duly and validly authorized, and when issued in
accordance with the terms of the Plan, and upon the receipt of the consideration
required thereby, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Holding Company's Registration Statement and to the references to Silver,
Freedman & Taff, L.L.P. under the heading "Legal and Tax Opinions" in the
Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Silver, Freedman & Taff, L.L.P.
SILVER, FREEDMAN & TAFF, L.L.P.
[SF&T LETTERHEAD]
August 30, 1999
Board of Directors
Mutual Federal Savings Bank
110 E. Charles Street
Muncie, IN 47305-2499
RE: Federal Income Tax Opinion Relating To The Conversion Of Mutual
Federal Savings Bank From A Federally-Chartered Mutual Savings Bank To
A Federally-Chartered Stock Savings Bank Under Section 368(a)(1)(F) of
the Internal Revenue Code of 1986, As Amended
Gentlemen:
In accordance with your request set forth hereinbelow is the opinion of
this firm relating to the federal income tax consequences of the conversion of
Mutual Federal Savings Bank ("Mutual") from a federal mutual to a federal stock
institution pursuant to the provisions of Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code").
Capitalized terms used herein which are not expressly defined herein shall
have the meaning ascribed to them in the Amended Plan of Conversion dated August
25, 1999 (the "Plan").
The following assumptions have been made in connection with our opinions
hereinbelow:
1. The Conversion is implemented in accordance with the terms of the Plan
and all conditions precedent contained in the Plan shall be performed or waived
prior to the consummation of the Conversion.
1
<PAGE>
August 30, 1999
Page 2
- ---------------
2. No amount of the savings accounts and deposits of Mutual, as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, will be
excluded from participating in the liquidation account of Converted Bank. To the
best of the knowledge of the management of Mutual there is not now, nor will
there be at the time of the Conversion, any plan or intention, on the part of
the depositors in Mutual to withdraw their deposits following the Conversion.
Deposits withdrawn immediately prior to or immediately subsequent to the
Conversion (other than maturing deposits) are considered in making these
assumptions.
3. Holding Company and Converted Bank each have no plan or intention to
redeem or otherwise acquire any of the Holding Company Conversion Stock to be
issued in the proposed transaction.
4. Immediately following the consummation of the proposed transaction,
Converted Bank will possess the same assets and liabilities as Mutual held
immediately prior to the proposed transaction, plus substantially all of the net
proceeds from the sale of its stock to Holding Company except for assets used to
pay expenses of the Conversion. The liabilities transferred to Converted Bank
were incurred by Mutual in the ordinary course of business.
5. No cash or property will be given to deposit account holders in lieu of
Subscription Rights or an interest in the liquidation account of Converted Bank.
6. Following the Conversion, Converted Bank will continue to engage in its
business in substantially the same manner as Mutual engaged in business prior to
the Conversion, and it has no plan or intention to sell or otherwise dispose of
any of its assets, except in the ordinary course of business.
7. There is no plan or intention for Converted Bank to be liquidated or
merged with another corporation following the consummation of the Conversion.
8. The fair market value of each savings account plus an interest in the
liquidation account of Converted Bank will, in each instance, be approximately
equal to the fair market value of each savings account of Mutual plus the
interest in the residual equity of Mutual surrendered in exchange therefor.
9. Mutual, Converted Bank and Holding Company are each corporations within
the meaning of Section 7701(a)(3) of the Code.
10. Holding Company has no plan or intention to sell or otherwise dispose
of the stock of Converted Bank received by it in the proposed transaction.
2
<PAGE>
August 30, 1999
Page 3
- ------------------
11. Both Converted Bank and Holding Company have no plan or intention,
either currently or at the time of Conversion, to issue additional shares of
common stock following the proposed transaction, other than shares that may be
issued to employees and/or directors pursuant to certain stock option and stock
incentive plans or that may be issued to or pursuant to employee benefit plans.
12. Assets used to pay expenses of the Conversion and all distributions
(except for regular, normal interest payments and other payments in the normal
course of business made by Mutual immediately preceding the transaction) will in
the aggregate constitute less than 1% of the net assets of Mutual and any such
expenses and distributions will be paid by Converted Bank from the proceeds of
the sale of Holding Company Conversion Stock.
13. All distributions to deposit account holders in their capacity as
deposit account holders (except for regular, normal interest payments made by
Mutual), will, in the aggregate, constitute less than 1% of the fair market
value of the net assets of Mutual.
14. At the time of the proposed transaction, the fair market value of the
assets of Mutual on a going concern basis (including intangibles) will equal or
exceed the amount of its liabilities plus the amount of liabilities to which
such assets are subject. Mutual will have a positive regulatory net worth at the
time of the Conversion.
15. Mutual is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code. The
proposed transaction does not involve a receivership, foreclosure, or similar
proceeding before a federal or state agency involving a financial institution to
which Section 585 of the Code applies.
16. Mutual's Eligible Account Holders and Supplemental Eligible Account
Holders will pay expenses of the Conversion solely attributable to them, if any.
17. The liabilities of Mutual assumed by Converted Bank plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Mutual in the ordinary course of its business and are associated with the
assets being transferred.
18. There will be no purchase price advantage for Mutual's deposit account
holders who purchase Holding Company Conversion Stock.
19. Neither Mutual nor Converted Bank is an investment company as defined
in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
3
<PAGE>
August 30, 1999
Page 4
- --------------------
20. None of the compensation to be received by any deposit account holder-
employees of Mutual or Holding Company will be separate consideration for, or
allocable to, any of their deposits in Mutual. No interest in the liquidation
account of Converted Bank will be received by any deposit account
holder-employees as separate consideration for, or will otherwise be allocable
to, any employment agreement, and the compensation paid to each deposit account
holder-employee, during the twelve-month period preceding or subsequent to the
Conversion, will be for services actually rendered and will be commensurate with
amounts paid to the third parties bargaining at arm's-length for similar
services. No shares of Holding Company Conversion Stock will be issued to or
purchased by any deposit account holder-employee of Mutual or Holding Company at
a discount or as compensation in the proposed transaction.
21. No creditors of Mutual or the depositors in their role as creditors,
have taken any steps to enforce their claims against Mutual by instituting
bankruptcy or other legal proceedings, in either a court or appropriate
regulatory agency, that would eliminate the proprietary interests of the Members
prior to the Conversion of Mutual including depositors as the equity holders of
Mutual.
22. The proposed transaction does not involve the payment to Converted Bank
or Mutual of financial assistance from federal agencies within the meaning of
Notice 89-102, 1989-40 C.B.1.
23. On a per share basis, the purchase price of Holding Company Conversion
Stock will be equal to the fair market value of such stock at the time of the
completion of the proposed transaction.
24. Mutual has received or will receive an opinion from RP Financial, Inc.
("Appraiser's Opinion"), which concludes that the Subscription Rights to be
received by Eligible Account Holders, Supplemental Eligible Account Holders and
other eligible subscribers do not have any ascertainable fair market value,
since they are acquired by the recipients without cost, are non- transferable
and of short duration, and afford the recipients a right only to purchase
Holding Company Conversion Stock at a price equal to its estimated fair market
value, which will be the same price as the Public Offering Price for
unsubscribed shares of Holding Company Conversion Stock.
25. Mutual will not have any net operating losses, capital loss carryovers
or built- in losses at the time of the Conversion.
In addition, and as part of the Conversion, Holding Company and Mutual
intend to establish a charitable foundation that will qualify as an exempt
organization under Section 501(c)(3) of the Code (the "Foundation") and to
donate to the Foundation cash and/or Holding Company common stock in an amount
up to eight percent (8%) of the aggregate value of Holding Company
4
<PAGE>
August 30, 1999
Page 5
- -------------------
Conversion Stock issued in the Conversion. The establishment and funding of the
Foundation as part of the Conversion is subject to the approval of the voting
members of Mutual at the Special Meeting. In the event that the Foundation does
not receive the prerequisite approval, Mutual may determine to complete the
Conversion without the Foundation.
The Plan provides that the Foundation is being formed to complement
Mutual's existing community reinvestment activities and to share with Mutual's
local community a part of Mutual's financial success as a community-oriented
financial services institution.
The Foundation will be dedicated to the promotion of charitable purposes,
including, but not limited to, community development, grants or donations to
support housing assistance, not- for-profit community groups and other types of
organizations or civic minded projects. It is expected that the Foundation will
annually distribute total grants and donations to assist charitable
organizations or to fund projects within its local community of not less than
five percent (5%) of the average fair value of the Foundation's assets each
year.
OPINION
Based solely on the assumptions set forth hereinabove and our analysis and
examination of applicable federal income tax laws, rulings, regulations,
judicial precedents and the Appraiser's Opinion, we are of the opinion that if
the transaction is undertaken in accordance with the above assumptions:
(1) The Conversion will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Code. Neither Mutual nor Converted Bank will
recognize any gain or loss as a result of the transaction (Rev. Rul. 80-105,
1980-1 C.B. 78). Mutual and Converted Bank will each be a party to a
reorganization within the meaning of Section 368(b) of the Code.
(2) Converted Bank will recognize no gain or loss upon the receipt of money
and other property, if any, in the Conversion, in exchange for its shares.
(Section 1032(a) of the Code.)
(3) No gain or loss will be recognized by Holding Company upon the receipt
of money for Holding Company Conversion Stock. (Section 1032(a) of the Code.)
(4) The basis of Mutual's assets in the hands of Converted Bank will be the
same as the basis of those assets in the hands of Mutual immediately prior to
the transaction. (Section 362(b) of the Code.)
5
<PAGE>
August 30, 1999
Page 6
- -----------------
(5) Converted Bank's holding period of the assets of Mutual will include
the period during which such assets were held by Mutual prior to the Conversion.
(Section 1223(2) of the Code.)
(6) Converted Bank, for purposes of Section 381 of the Code, will be
treated as if there had been no reorganization. The tax attributes of Mutual
enumerated in Section 381(a) of the Code will be taken into account by Converted
Bank as if there had been no reorganization. Accordingly, the tax year of Mutual
will not end on the effective date of the Conversion. The part of the tax year
of Mutual before the Conversion will be includible in the tax year of Converted
Bank after the Conversion. Therefore, Mutual will not have to file a federal
income tax return for the portion of the tax year prior to the Conversion. (Rev.
Rul.57-276, 1957-1 C.B. 126.)
(7) Depositors will realize gain, if any, upon the constructive issuance to
them of withdrawable deposit accounts of Converted Bank, Subscription Rights
and/or interests in the liquidation account of Converted Bank. Any gain
resulting therefrom will be recognized, but only in an amount not in excess of
the fair market value of the liquidation accounts and/or Subscription Rights
received. The liquidation accounts will have nominal, if any, fair market value.
Based solely on the accuracy of the conclusion reached in the Appraiser's
Opinion, and our reliance on such opinion, that the Subscription Rights have no
value at the time of distribution or exercise, no gain or loss will be required
to be recognized by depositors upon receipt or distribution of Subscription
Rights. (Section 1001 of the Code.) See Paulsen v. Commissioner, 469 U.S.
131,139 (1985). Likewise, based solely on the accuracy of the aforesaid
conclusion reached in the Appraiser's Opinion, and our reliance thereon, we give
the following opinions: (a) no taxable income will be recognized by the
borrowers, directors, officers and employees of Mutual upon the distribution to
them of Subscription Rights or upon the exercise or lapse of the Subscription
Rights to acquire Holding Company Conversion Stock at fair market value; (b) no
taxable income will be realized by the depositors of Mutual as a result of the
exercise or lapse of the Subscription Rights to purchase Holding Company
Conversion Stock at fair market value. Rev. Rul. 56-572, 1956-2 C.B. 182; and
(c) no taxable income will be realized by Mutual, Converted Bank or Holding
Company on the issuance or distribution of Subscription Rights to depositors of
Mutual to purchase shares of Holding Company Conversion Stock at fair market
value. (Section 311 of the Code.)
Notwithstanding the Appraiser's Opinion, if the Subscription Rights are
subsequently found to have a fair market value, income may be recognized by
various recipients of the Subscription Rights (in certain cases, whether or not
the rights are exercised) and Holding Company and/or Converted Bank may be
taxable on the distribution of the Subscription Rights. (Section 311 of the
Code.) In this regard, the Subscription Rights may be taxed partially or
entirely at ordinary income tax rates.
6
<PAGE>
August 30, 1999
Page 7
- ------------------
(8) The creation of the liquidation account on the records of Converted
Bank will have no effect on Mutual's or Converted Bank's taxable income,
deductions, or tax bad debt reserve.
(9) A depositor's basis in the savings deposits of Converted Bank will be
the same as the basis of his savings deposits in Mutual. (Section 1012 of the
Code.) Based upon the Appraiser's Opinion, the basis of the Subscription Rights
will be zero. The basis of the interest in the liquidation account of Converted
Bank received by Eligible Account Holders and Supplemental Eligible Account
Holders will be equal to the cost of such property, i.e., the fair market value
of the proprietary interest in Mutual, which in this transaction we assume to be
zero.
(10) The basis of Holding Company Conversion Stock to its shareholders will
be the purchase price thereof. (Section 1012 of the Code.)
(11) A shareholder's holding period for Holding Company Conversion Stock
acquired through the exercise of the Subscription Rights shall begin on the date
on which the Subscription Rights are exercised. (Section 1223(6) of the Code.)
The holding period for the Holding Company Conversion Stock purchase pursuant to
the Direct Community Offering, Public Offering or under other purchase
arrangements will commence on the date following the date on which such stock is
purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168).
(12) Regardless of any book entries that are made for the establishment of
a liquidation account, the reorganization will not diminish the accumulated
earnings and profits of Mutual available for the subsequent distribution of
dividends, within the meaning of Section 316 of the Code. Section 1.312-11(b)
and (c) of the Regulations. Converted Bank will succeed to and take into account
the earnings and profits or deficit in earnings and profits of Mutual as of the
date of Conversion.
The above opinions are effective to the extent that Mutual is solvent. No
opinion is expressed about the tax treatment of the transaction if Mutual is
insolvent. Whether or not Mutual is solvent will be determined at the end of the
taxable year in which the transaction is consummated.
7
<PAGE>
August 30, 1999
Page 8
- ------------------
No opinion is expressed as to the tax treatment of the transaction under
the provisions of any of the other sections of the Code and Income Tax
Regulations which may also be applicable thereto, or to the tax treatment of any
conditions existing at the time of, or effects resulting from, the transaction
which are not specifically covered by the opinions set forth above.
Respectfully submitted,
SILVER, FREEDMAN & TAFF
/s/ Barry P. Taff, P.C.
----------------------------
8
[RP Finanical Letterhead]
September 10, 1999
Board of Directors
Mutual Federal Savings Bank
110 East Charles Street
Muncie, Indiana 47305-2499
Re: The Amended Plan of Conversion: Subscription Rights
Members of the Board of Directors:
All capitalized terms not otherwise defined in this letter have the
meanings given to such terms in the Amended Plan of Conversion (the "Plan")
adopted by the Board of Directors of Mutual Federal Savings Bank ("Mutual
Federal" or the "Bank") whereby the Bank will convert from a federal mutual
savings bank and issue all of the Bank's outstanding capital stock to MFS
Financial, Inc. (the "Holding Company"). Simultaneously, the Company will issue
shares of common stock.
We understand that, in accordance with the Plan, Subscription Rights to
purchase shares of Common Stock in Bancorp are to be issued to: (1) Eligible
Account Holders; (2) the Employee Stock Ownership Plan; (3) Supplemental
Eligible Account Holders; (4) Other Members; and (5) Directors, Officers and
Employees. Based solely upon our observation that the Subscription Rights will
be available to such parties without cost, will be legally non-transferable and
of short duration, and will afford such parties the right only to purchase
shares of Common Stock at the same price as will be paid by members of the
general public, but without undertaking any independent investigation of state
or federal law or the position of the Internal Revenue Service with respect to
this issue, we are of the belief that, as a factual matter:
1. the Subscription Rights will have no ascertainable market value; and
2. the price at which the Subscription Rights are exercisable will not be
more or less than the estimated pro forma market value of the shares
upon issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates and other external forces (such as
natural disasters or significant world events) may occur from time to time,
often with great unpredictability, and may materially impact the value of thrift
stock as a whole or the Company's value alone. Accordingly, no assurance can be
given that persons who subscribe to shares of Common Stock in the Subscription
Offering will thereafter be able to buy or sell such shares at the same price
paid in the Subscription Offering.
Respectfully submitted,
/s/ RP Financial, LC.
RP FINANCIAL, LC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
___ day of __________, 1999, by and between Mutual Federal Savings Bank
(hereinafter referred to as the "Bank") and __________________ (the "Employee").
WHEREAS, the Employee is currently serving as _____________________ of the
Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will
convert to capital stock form as the subsidiary of a holding company (the
"Holding Company"), subject to the approval of the Bank's members and the Office
of Thrift Supervision (the "Conversion"); and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee; and
WHEREAS, the Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Company within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in
effect on the date hereof; or (ii) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly of securities of the Bank or the Company representing 20% or
more of the Bank's or the Company's outstanding securities; (3) individuals
who are members of the board of directors of the Bank or the Company on the
date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by
the nominating committee serving under an Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) a reorganization,
merger, consolidation, sale of all or substantially all of the assets of
the Bank or the Company or a similar transaction in which the Bank or the
Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of the
Bank or the Company. In the application of 12 C.F.R. Part 574 to a
determination of a Change in Control, determinations to be made by the OTS
or its Director under such regulations shall be made by the Board of
Directors.
(b) The term "Commencement Date" means the effective date of the
Conversion of the Bank from mutual to stock form.
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(c) The term "Date of Termination" means the date upon which the
Employee ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written consent, and
shall include a material diminution of or interference with the Employee's
duties, responsibilities and benefits as ______________________ , including
(without limitation) any of the following actions unless consented to in
writing by the Employee: (1) a change in the principal workplace of the
Employee to a location outside of a 30 mile radius from the Bank's
headquarters office as of the date hereof; (2) a material demotion of the
Employee; (3) a material reduction in the number or seniority of other Bank
personnel reporting to the Employee or a material reduction in the
frequency with which, or in the nature of the matters with respect to
which, such personnel are to report to the Employee, other than as part of
a Bank- or Company-wide reduction in staff; (4) a material adverse change
in the Employee's salary, perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied uniformly and
with equitable effect to all members of the senior management of the Bank
or the Company; and (5) a material permanent increase in the required hours
of work or the workload of the Employee. The term "Involuntary Termination"
does not include Termination for Cause or termination of employment due to
retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Bank's affairs under
Section 8 of the Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other
than traffic violations or similar offenses) or final cease-and-desist
order, or material breach of any provision of this Agreement. The Employee
shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to the Employee a copy of a resolution,
duly adopted by the affirmative vote of not less than a majority of the
entire membership of the Board of Directors of the Bank at a meeting of the
Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith
opinion of the Board the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
beginning on the Commencement Date, subject to earlier termination as provided
herein.
3. Employment. The Employee is employed as ____________________ of the Bank
as of the Commencement Date. As such, the Employee shall render administrative
and management services as are customarily performed by persons situated in
similar executive capacities, and shall have such other powers and duties of an
officer of the Bank as the Board of Directors may prescribe from time to time.
2
<PAGE>
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the term of
this Agreement, not less frequently than monthly, the salary established by
the Board of Directors, which shall be at least $___________ annually. The
amount of the Employee's salary shall be reviewed by the Board of
Directors, beginning not later than the first anniversary of the
Commencement Date. Adjustments in salary or other compensation shall not
limit or reduce any other obligation of the Bank under this Agreement. The
Employee's salary in effect from time to time during the term of this
Agreement shall not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Bank in discretionary bonuses as authorized and declared by the Board of
Directors to its executive employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies
and procedures applicable to the executive officers of the Bank, provided
that the Employee accounts for such expenses as required under such
policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life and disability insurance, medical and
dental coverage, education, cash bonuses, and other retirement or employee
benefits or combinations thereof, in which the Bank's executive officers
participate.
(b) Fringe Benefits. The Employee shall be eligible to participate in,
and receive benefits under, any fringe benefit plans which are or may
become applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid vacation
in accordance with the policies established by the Board of Directors for
executive employees and to voluntary leave of absence, with or without pay, from
time to time at such times and upon such conditions as the Board of Directors
may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may terminate the
Employee's employment at any time, but, except in the case of Termination
for Cause, termination of employment shall not prejudice the Employee's
right to compensation or other benefits under this Agreement. In the event
of Involuntary Termination other than in connection with or within twelve
(12) months after a Change in Control, (1) the Bank shall pay to the
Employee during the remaining
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term of this Agreement, the Employee's salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at
such times as such salary would have been payable to the Employee under
Section 4 if the Employee had continued to be employed by the Bank, and (2)
the Bank shall provide to the Employee during the remaining term of this
Agreement substantially the same benefits as the Bank maintained for its
executive officers immediately prior to the Date of Termination, including
Bank-paid dependent medical and dental coverage.
(b) Termination for Cause. In the event of Termination for Cause, the
Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee
under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days written
notice to the Bank or upon such shorter period as may be agreed upon
between the Employee and the Board of. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee
the Employee's salary and benefits only through the Date of Termination, at
the time such payments are due, and the Bank shall have no further
obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
connection with or within 12 months after a Change in Control which occurs
at any time while the Employee is employed under this Agreement, the Bank
shall, subject to Section 8 of this Agreement, (1) pay to the Employee in a
lump sum in cash within 25 business days after the Date of Termination an
amount equal to 299% of the Employee's "base amount" as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"); and (2)
provide to the Employee during the remaining term of this Agreement
substantially the same health benefits as the Bank maintained for its
executive officers immediately prior to the Change in Control.
(e) Death; Disability. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment,
the Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which
the Employee died. If the Employee becomes disabled as defined in the
Bank's then current disability plan, if any, or if the employee is
otherwise unable to serve in his current capacity, this Agreement shall
continue in full force and effect, except that the salary paid to the
Employee shall be reduced by any disability insurance payments made to
Employee on policies of insurance maintained by the Bank at its expense.
(f) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of its obligations
which were suspended.
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(g) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank
under this Agreement shall terminate as of the effective date of the order,
but vested rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect
any vested rights of the contracting parties.
(i) Termination by Regulators. All obligations of the Bank under this
Agreement shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued operation of
the Bank: (1) by the Director of the Office of Thrift Supervision (the
"Director") or his or her designee, at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or
on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the
Director or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by
the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any
such action.
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if payments
under this Agreement, together with any other payments received or to be
received by the Employee in connection with a Change in Control would cause
any amount to be nondeductible for federal income tax purposes pursuant to
Section 280G of the Code, then benefits under this Agreement shall be
reduced (not less than zero) to the extent necessary so as to maximize
payments to the Employee without causing any amount to become
nondeductible. The Employee shall determine the allocation of such
reduction among payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. ss. 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the amount
of any salary or other payment or benefit provided for in this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs,
5
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including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
11. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and no
party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Bank, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain
such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall
entitle the Employee to compensation from the Bank in the same amount and
on the same terms as the compensation pursuant to Section 7(d) hereof. For
purposes of implementing the provisions of this Section 11(a), the date on
which any such succession becomes effective shall be deemed the Date of
Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee
had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
Employee's devisee, legatee or other designee or if there is no such
designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary, or, if
to the Employee, to such home or other address as the Employee has most recently
provided in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
6
<PAGE>
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Indiana.
17. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: MUTUAL FEDERAL SAVINGS BANK
- ------------------------------- ------------------------------------
Secretary By:
Its:
Employee
-------------------------------------
MUTUAL FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1999
<PAGE>
MUTUAL FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
PREAMBLE......................................................................1
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION.....................................2
1.1 Definitions..............................................2
(a) Account..................................................2
(b) Act......................................................2
(c) Administrator............................................2
(d) Annual Additions.........................................2
(e) Authorized Leave of Absence..............................2
(f) Beneficiary..............................................3
(g) Board of Directors.......................................3
(h) Break....................................................3
(i) Code.....................................................3
(j) Compensation.............................................3
(k) Date of Hire.............................................3
(l) Disability...............................................3
(m) Disability Retirement Date...............................3
(n) Early Retirement Date....................................4
(o) Effective Date...........................................4
(p) Eligibility Period.......................................4
(q) Employee.................................................4
(r) Employee Stock Ownership Account.........................4
(s) Employee Stock Ownership Contribution....................4
(t) Employee Stock Ownership Suspense Account................4
(u) Employer.................................................4
(v) Employer Securities......................................4
(w) Entry Date...............................................5
(x) Exempt Loan..............................................5
(y) Exempt Loan Suspense Account.............................5
(z) Financed Shares..........................................5
(aa) Former Participant.......................................5
(bb) Fund.....................................................5
(cc) Hour of Service..........................................5
(dd) Investment Adjustments...................................6
(ee) Limitation Year..........................................6
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(ff) Normal Retirement Date...................................6
(gg) Participant..............................................6
(hh) Plan.....................................................6
(ii) Plan Year................................................6
(jj) Qualified Domestic Relations Order.......................7
(kk) Related Employer.........................................7
(ll) Retirement...............................................7
(mm) Service..................................................7
(nn) Sponsor..................................................7
(oo) Trust Agreement..........................................7
(pp) Trustee..................................................7
(qq) Valuation Date...........................................7
(rr) Year of Eligibility Service..............................7
(ss) Year of Vesting Service..................................8
1.2 Plurals and Gender...............................................8
1.3 Incorporation of Trust Agreement.................................8
1.4 Headings.........................................................8
1.5 Severability.....................................................8
1.6 References to Governmental Regulations...........................8
1.7 Notices..........................................................8
1.8 Evidence.........................................................8
1.9 Action by Employer...............................................9
ARTICLE II
PARTICIPATION...........................................................10
2.1 Commencement of Participation...................................10
2.2 Termination of Participation....................................10
2.3 Resumption of Participation.....................................10
2.4 Determination of Eligibility....................................11
2.5 Restricted Participation........................................11
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ARTICLE III
CREDITED SERVICE........................................................12
3.1 Service Counted for Eligibility Purposes........................12
3.2 Service Counted for Vesting Purposes............................12
3.3 Credit for Pre-Break Service....................................12
3.4 Service Credit During Authorized Leaves.........................12
3.5 Service Credit During Maternity or Paternity Leave..............13
3.6 Ineligible Employees............................................13
ARTICLE IV
CONTRIBUTIONS...........................................................14
4.1 Employee Stock Ownership Contribution...........................14
4.2 Time and Manner of Employee Stock Ownership Contribution........14
4.3 Records of Contributions........................................15
4.4 Erroneous Contributions.........................................15
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS...................................17
5.1 Establishment of Separate Participant Accounts..................17
5.2 Establishment of Suspense Accounts..............................17
5.3 Allocation of Earnings, Losses and Expenses.....................18
5.4 Allocation of Forfeitures.......................................18
5.5 Allocation of Employee Stock Ownership Contribution.............18
5.6 Limitation on Annual Additions..................................19
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5.7 Erroneous Allocations...........................................21
5.8 Value of Participant's Account..................................22
5.9 Investment of Account Balances..................................22
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY........................23
6.1 Normal Retirement...............................................23
6.2 Early Retirement................................................23
6.3 Disability Retirement...........................................23
6.4 Death Benefits..................................................23
6.5 Designation of Beneficiary and Manner of Payment................24
ARTICLE VII
VESTING AND FORFEITURES.................................................25
7.1 Vesting on Death, Disability and Normal Retirement..............25
7.2 Vesting on Termination of Participation.........................25
7.3 Disposition of Forfeitures......................................25
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS.....................................27
8.1 Right to Demand Employer Securities.............................27
8.2 Voting Rights...................................................27
8.3 Nondiscrimination in Employee Stock Ownership Contribution......27
8.4 Dividends.......................................................28
8.5 Exempt Loans....................................................28
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8.6 Exempt Loan Payments............................................30
8.7 Put Option......................................................31
8.8 Diversification Requirements....................................31
8.9 Independent Appraiser...........................................32
8.10 Nonterminable Rights............................................32
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS..............................................33
9.1 Payments on Termination of Service - In General.................33
9.2 Commencement of Payments........................................33
9.3 Mandatory Commencement of Benefits..............................33
9.4 Required Beginning Dates........................................36
9.5 Form of Payment.................................................36
9.6 Payments Upon Termination of Plan...............................36
9.7 Distributions Pursuant to Qualified Domestic Relations Orders...37
9.8 Cash-Out Distributions..........................................37
9.9 ESOP Distribution Rules.........................................38
9.10 Direct Rollover.................................................38
9.11 Waiver of 30-day Notice.........................................39
9.12 Re-employed Veterans............................................39
9.13 Share Legend....................................................39
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS..................................40
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10.1 Top-Heavy Rules to Control......................................40
10.2 Top-Heavy Plan Definitions......................................40
10.3 Calculation of Accrued Benefits.................................41
10.4 Determination of Top-Heavy Status...............................43
10.5 Determination of Super Top-Heavy Status.........................43
10.6 Minimum Contribution............................................43
10.7 Vesting.........................................................44
10.8 Maximum Benefit Limitation......................................45
ARTICLE XI
ADMINISTRATION..........................................................46
11.1 Appointment of Administrator....................................46
11.2 Resignation or Removal of Administrator.........................46
11.3 Appointment of Successors: Terms of Office, Etc................46
11.4 Powers and Duties of Administrator..............................46
11.5 Action by Administrator.........................................48
11.6 Participation by Administrator..................................48
11.7 Agents..........................................................48
11.8 Allocation of Duties............................................48
11.9 Delegation of Duties............................................48
11.10 Administrator's Action Conclusive...............................49
11.11 Compensation and Expenses of Administrator......................49
11.12 Records and Reports.............................................49
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11.13 Reports of Fund Open to Participants............................49
11.14 Named Fiduciary.................................................49
11.15 Information from Employer.......................................50
11.16 Reservation of Rights by Employer...............................50
11.17 Liability and Indemnification...................................50
ARTICLE XII
CLAIMS PROCEDURE........................................................51
12.1 Notice of Denial................................................51
12.2 Right to Reconsideration........................................51
12.3 Review of Documents.............................................51
12.4 Decision by Administrator.......................................51
12.5 Notice by Administrator.........................................51
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER......................................53
13.1 Amendments......................................................53
13.2 Effect of Change In Control.....................................53
13.3 Consolidation or Merger of Trust................................55
13.4 Bankruptcy or Insolvency of Employer............................55
13.5 Voluntary Termination...........................................56
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions.................................................56
ARTICLE XIV
MISCELLANEOUS...........................................................57
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14.1 No Diversion of Funds...........................................57
14.2 Liability Limited...............................................57
14.3 Facility of Payment.............................................57
14.4 Spendthrift Clause..............................................57
14.5 Benefits Limited to Fund........................................58
14.6 Cooperation of Parties..........................................58
14.7 Payments Due Missing Persons....................................58
14.8 Governing Law...................................................58
14.9 Nonguarantee of Employment......................................58
14.10 Counsel.........................................................59
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MUTUAL FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1999, MFS Financial, Inc., a federally-chartered
corporation (the "Sponsor"), has adopted the Mutual Federal Savings Bank
Employee Stock Ownership Plan in order to enable Participants to share in the
growth and prosperity of the Sponsor and its wholly owned subsidiary, Mutual
Federal Savings Bank, and to provide Participants with an opportunity to
accumulate capital for their future economic security by accumulating funds to
provide retirement, death and disability benefits. The Plan is a stock bonus
plan designed to meet the applicable requirements of Section 409 of the Code and
of an employee stock ownership plan, as defined in Section 4975(e)(7) of the
Code and Section 407(d)(6) of the Act. The employee stock ownership plan is
intended to invest primarily in "qualifying employer securities" as defined in
Section 4975(e)(8) of the Code. The Sponsor intends that the Plan will qualify
under Sections 401(a) and 501(a) of the Code and will comply with the provisions
of the Act. The Plan has been drafted to comply with all applicable provisions
of law, including the Tax Reform Act of 1986, the Omnibus Budget Reconciliation
Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and
Miscellaneous Revenue Act of 1988, the Revenue Reconciliation Act of 1989, the
Omnibus Budget Reconciliation Act of 1993, the Small Business Job Protection Act
of 1996, and the Taxpayer Relief Act of 1997. The terms of this Plan shall apply
only with respect to Employees of the Employer on and after January 1, 1999.
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ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Plan shall have the following meanings:
(a) "Account" shall mean a Participant's or Former Participant's entire
accrued benefit under the Plan, including the balance credited to his Employee
Stock Ownership Account and any other account described in Section 5.1.
(b) "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute, together with the
applicable regulations promulgated thereunder.
(c) "Administrator" shall mean the fiduciary provided for in Article XI.
(d) "Annual Additions" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's Account under this Plan and
accounts under any other qualified defined contribution plan to which the
Employer or a Related Employer contributes for any Limitation Year, consisting
of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Employee contributions (if any).
Annual Additions shall not include any Investment Adjustment. Annual
Additions also shall not include employer contributions which are used by the
Trust to pay interest on an Exempt Loan nor any forfeitures of Employer
Securities purchased with the proceeds of an Exempt Loan, provided that not more
than one-third of the employer contributions are allocated to Participants who
are among the group of employees deemed "highly compensated employees" within
the meaning of Code Section 414(q), as further described in Section 8.3.
(e) "Authorized Leave of Absence" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to
36 months, provided that the Employee resumes Service within 90 days
after discharge, or such longer period of time during which such
Employee's employment rights are protected by law; or
2
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(2) Any other absence or leave expressly approved and granted by the
Employer which does not exceed 24 months, provided that the Employee
resumes Service at or before the end of such approved leave period. In
approving such leaves of absence, the Employer shall treat all
Employees on a uniform and nondiscriminatory basis.
(f) "Beneficiary" shall mean such legal or natural persons, who may be
designated contingently or successively, as may be designated by the Participant
pursuant to Section 6.5 to receive benefits after the death of the Participant,
or in the absence of a valid designation, such persons specified in Section
6.5(b) to receive benefits after the death of the Participant.
(g) "Board of Directors" shall mean the Board of Directors of the Sponsor.
(h) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute, together with the applicable regulations
promulgated thereunder.
(j) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year, to the
extent defined as wages within the meaning of Code Section 3401(a) for the
purposes of income tax withholding at the source but determined without regard
to any rules that limit the remuneration included in wages based on the nature
or location of the employment or the services performed (such as the exception
for agricultural labor in Code Section 3401(a)(2)). Compensation shall include
elective deferrals to a cash or deferred arrangement described in Code Section
401(k), and any amount contributed on a pre-tax salary reduction basis to a
cafeteria plan described in Section 125 of the Code. Notwithstanding anything
herein to the contrary, the annual Compensation of each Participant taken into
account under the Plan for any purpose during any Plan Year shall not exceed
$160,000, as adjusted from time to time in accordance with Section 415(d) of the
Code.
(k) "Date of Hire" shall mean the date on which an Employee shall perform
his first Hour of Service. Notwithstanding the foregoing, in the event that an
Employee incurs one or more consecutive Breaks after his initial Date of Hire
which results in the forfeiture of his pre-Break Service pursuant to Section
3.3, his "Date of Hire" shall thereafter be the date on which he completes his
first Hour of Service after such Break or Breaks.
(l) "Disability" shall mean a physical or mental impairment which prevents
a Participant from performing the duties assigned to him by the Employer and
which either has caused the Social Security Administration to classify the
individual as "disabled" for purposes of Social Security or has been determined
by a qualified physician selected by the Administrator.
(m) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
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(n) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the later of the date on which a Participant
attains age 55 and completes 5 Years of Vesting Service.
(o) "Effective Date" shall mean January 1, 1999.
(p) "Eligibility Period" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding Eligibility Periods after
the initial Eligibility Period shall be based on Plan Years, the first of which
shall include the first anniversary of an Employee's Date of Hire.
(q) "Employee" shall mean any person who is classified as an employee by
the Employer or a Related Employer, including officers, but excluding directors
in their capacity as such.
(r) "Employee Stock Ownership Account" shall mean the separate bookkeeping
account established for each Participant pursuant to Section 5.1(a).
(s) "Employee Stock Ownership Contribution" shall mean the cash, Employer
Securities, or both that are contributed to the Plan by the Employer pursuant to
Article IV.
(t) "Employee Stock Ownership Suspense Account" shall mean the temporary
account in which the Trustee may maintain any Employee Stock Ownership
Contribution that is made prior to the last day of the Plan Year for which it is
made, as described in Section 5.2.
(u) "Employer" shall mean MFS Financial, Inc. a federally-chartered
corporation, and its wholly owned subsidiary, Mutual Federal Savings Bank, or
any successors to the aforesaid corporations by merger, consolidation or
otherwise, which may agree to continue this Plan, or any Related Employer or any
other business organization which, with the consent of the Sponsor, shall agree
to become a party to this Plan. To the extent required by the Code or the Act,
references herein to the Employer shall also include all Related Employers,
whether or not they are participating in this Plan.
(v) "Employer Securities" shall mean the common stock issued by MFS
Financial, Inc., a federally-chartered corporation. Such term shall also mean,
in the discretion of the Board of Directors, any other common stock issued by
the Employer or any Related Employer having voting power and dividend rights
equal to or in excess of:
(1) that class of common stock of the Employer or a Related Employer
having the greatest voting power, and
(2) that class of common stock of the Employer or a Related Employer
having the greatest dividend rights.
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Non-callable preferred stock shall be treated as Employer Securities if such
stock is convertible at any time into stock which meets the requirements of (1)
and (2) next above and if such conversion is at a conversion price which (as of
the date of the acquisition by the Plan) is reasonable. For purposes of the last
preceding sentence, preferred stock shall be treated as non-callable if, after
the call, there will be a reasonable opportunity for a conversion which meets
the requirements of the last preceding sentence.
(w) "Entry Date" shall mean each January 1 and July 1.
(x) "Exempt Loan" shall mean a loan described at Section 4975(d)(3) of the
Code to the Trustee to purchase Employer Securities for the Plan, made or
guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the
Code, including, but not limited to, a direct loan of cash, a purchase money
transaction, an assumption of an obligation of the Trustee, an unsecured
guarantee or the use of assets of such disqualified person as collateral for
such a loan.
(y) "Exempt Loan Suspense Account" shall mean the account to which Financed
Shares are initially credited until they are released in accordance with Section
8.5.
(z) "Financed Shares" shall mean the Employer Securities acquired by the
Trustee with the proceeds of an Exempt Loan and which are credited to the Exempt
Loan Suspense Account until they are released in accordance with Section 8.5.
(aa) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested Account in the Plan which has
not been distributed in full.
(bb) "Fund" shall mean the trust fund maintained by the Trustee pursuant to
the Trust Agreement in order to provide for the payment of the benefits
specified in the Plan.
(cc) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by the Employer or a Related
Employer for the performance of duties or for reasons other than the performance
of duties (such as vacation time, holidays, sickness, disability, paid lay-offs,
jury duty and similar periods of paid nonworking time). To the extent not
otherwise included, Hours of Service shall also include each hour for which back
pay, irrespective of mitigation of damages, is either awarded or agreed to by
the Employer or a Related Employer. Hours of working time shall be credited on
the basis of actual hours worked, even though compensated at a premium rate for
overtime or other reasons. In computing and crediting Hours of Service for an
Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c)
of the Department of Labor Regulations shall apply, said sections being herein
incorporated by reference. Hours of Service shall be credited to the Plan Year
or other relevant period during which the services were performed or the
nonworking time occurred, regardless of the time when compensation therefor may
be paid. Any Employee for whom no hourly employment records are kept by the
Employer or a Related Employer shall be credited with 45 Hours of Service for
each calendar week in which he would have been credited with a least one Hour or
Service under the foregoing provisions, if hourly records were available. Solely
for purposes of determining whether
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a Break for participation and vesting purposes has occurred in an Eligibility
Period or a Plan Year, an individual who is absent from work for maternity or
paternity reasons shall receive credit for the Hours of Service which would
otherwise have been credited to such individual but for such absence, or in any
case in which such hours cannot be determined, 8 Hours of Service per day of
such absence. For purposes of this Section 1.1(cc), an absence from work for
maternity or paternity reasons means an absence (1) by reason of the pregnancy
of the individual, (2) by reason of the birth of a child of the individual, (3)
by reason of the placement of a child with the individual in connection with the
adoption of such child by such individual, or (4) for purposes of caring for
such child for a period beginning immediately following such birth or placement.
The Hours of Service credited under this provision shall be credited (1) in the
computation period in which the absence begins if the crediting is necessary to
prevent a Break in that period, or (2) in all other cases, in the following
computation period.
(dd) "Investment Adjustments" shall mean the increases and/or decreases in
the value of a Participant's Account attributable to earnings, gains, losses and
expenses of the Fund, as set forth in Section 5.3.
(ee) "Limitation Year" shall mean the Plan Year.
(ff) "Normal Retirement Date" shall mean the first day of the month
coincident with or next following the later of the date on which a Participant
attains age 65 or the fifth anniversary of the date he commenced participation
in the Plan.
(gg) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof; provided, however, that the term "Participant"
shall not include (1) leased Employees (as defined in Section 414(n)(2) of the
Code), (2) any Employee who is regularly employed outside the Employer's own
offices in connection with the operation and maintenance of buildings or other
properties acquired through foreclosure or deed, (3) any individual who is
employed by a Related Employer that has not adopted the Plan in accordance with
Section 1.1(u) hereof, (4) any Employee who is a non-resident alien individual
and who has no earned income from sources within the United States, or (5) any
Employee who is included in a unit of Employees covered by a
collective-bargaining agreement with the Employer or a Related Employer that
does not expressly provide for participation of such Employees in the Plan,
where there has been good-faith bargaining between the Employer or a Related
Employer and Employees' representatives on the subject of retirement benefits.
To the extent required by the Code or the Act, or appropriate based on the
context, references herein to Participant shall include Former Participant.
(hh) "Plan" shall mean the Mutual Federal Savings Bank Employee Stock
Ownership Plan, as described herein or as hereafter amended from time to time.
(ii) "Plan Year" shall mean any 12 consecutive month period commencing on
each January 1 and ending on the next following December 31.
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(jj) "Qualified Domestic Relations Order" shall mean any judgment, decree
or order that satisfies the requirements to be a "qualified domestic relations
order," as defined in Section 414(p) of the Code.
(kk) "Related Employer" shall mean any entity that is:
(1) a member of a controlled group of corporations that includes the
Employer, while it is a member of such controlled group (within the
meaning of Section 414(b) of the Code);
(2) a member of a group of trades or businesses under common control
with the Employer, while it is under common control (within the
meaning of Section 414(c) of the Code);
(3) a member of an affiliated service group that includes the
Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code); or
(4) a leasing or other organization that is required to be aggregated
with the Employer pursuant to the provisions of Section 414(n) or
414(o) of the Code.
(ll) "Retirement" shall mean termination of employment which qualifies as
early, normal or Disability retirement as described in Article VI.
(mm) "Service" shall mean, for purposes of eligibility to participate and
vesting, employment with the Employer or any Related Employer, and for purposes
of allocation of the Employee Stock Ownership Contribution and forfeitures,
employment with the Employer.
(nn) "Sponsor" shall mean MFS Financial, Inc., a federally-chartered
corporation.
(oo) "Trust Agreement" shall mean the agreement, dated , by and between MFS
Financial, Inc., a federally-chartered corporation, and , of .
(pp) "Trustee" shall mean the trustee or trustees by whom the assets of the
Plan are held, as provided in the Trust Agreement, or his or their successors.
(qq) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the direction of the Administrator,
but in no event may the Administrator request additional valuations by the
Trustee more frequently than quarterly. Whenever such date falls on a Saturday,
Sunday or holiday, the preceding business day shall be the Valuation Date.
(rr) "Year of Eligibility Service" shall mean an Eligibility Period during
which an Employee is credited with at least 1,000 Hours of Service, except as
otherwise specified in Article III.
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(ss) "Year of Vesting Service" shall mean a Plan Year during which an
Employee is credited with at least 1,000 Hours of Service, except as otherwise
specified in Article III.
1.2 Plurals and Gender.
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 Incorporation of Trust Agreement.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan. All
contributions made under the Plan will be held, managed and controlled by the
Trustee pursuant to the terms and conditions of the Trust Agreement.
1.4 Headings.
The headings and sub-headings in this Plan are inserted for the convenience
of reference only and are to be ignored in any construction of the provisions
hereof.
1.5 Severability.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 References to Governmental Regulations.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
1.7 Notices.
Any notice or document required to be filed with the Administrator or
Trustee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Administrator in care of the Sponsor or
to the Trustee, each at its principal business offices. Any notice required
under the Plan may be waived in writing by the person entitled to notice.
1.8 Evidence.
Evidence required of anyone under the Plan may be by certificate,
affidavit, document or other information which the person acting on it considers
pertinent and reliable, and signed, made or presented by the proper party or
parties.
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1.9 Action by Employer.
Any action required or permitted to be taken by any entity constituting the
Employer under the Plan shall be by resolution of its Board of Directors or by a
person or persons authorized by its Board of Directors.
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ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.
(a) Any Employee who is otherwise eligible to become a Participant in
accordance with Section 1.1(gg) hereof shall initially become a Participant on
the Entry Date coincident with or next following the later of the following
dates, provided he is employed by the Employer on that Entry Date:
(1) The date on which he completes a Year of Eligibility Service; and
(2) The date on which he attains age 21.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) during the 12 consecutive month period prior to the Effective Date shall
become a Participant on the Effective Date, provided he is still employed by the
Employer on the Effective Date.
2.2 Termination of Participation.
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation.
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Eligibility Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service, but
whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3,
shall be treated as a new Employee and shall again be required to satisfy the
eligibility requirements contained in Section 2.1(a) before resuming
participation on the appropriate Entry Date, as specified in Section 2.1(a).
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2.4 Determination of Eligibility.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating their Date
of Hire, their Hours of Service during their Eligibility Period, their date of
birth, the original date of their reemployment with the Employer, if any, and
any Breaks they may have incurred.
2.5 Restricted Participation
Subject to the terms and conditions of the Plan, during the period between
the Participant's date of termination of participation in the Plan (as described
in Section 2.2) and the distribution of his entire Account (as described in
Article IX), and during any period that a Participant does not meet the
requirements of Section 2.1(a) or is employed by a Related Employer that is not
participating in the Plan, the Participant or, in the event of the Participant's
death, the Beneficiary of the Participant, will be considered and treated as a
Participant for all purposes of the Plan, except as follows:
(a) the Participant will not share in the Employee Stock Ownership
Contribution and forfeitures (as described in Sections 7.2 and 7.3), except as
provided in Sections 5.4 and 5.5; and
(b) the Beneficiary of a deceased Participant cannot designate a
Beneficiary under Section 6.5.
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ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes.
Except as provided in Section 3.3, all Years of Eligibility Service
completed by an Employee shall be counted in determining his eligibility to
become a Participant on and after the Effective Date, whether such Service was
completed before or after the Effective Date.
3.2 Service Counted for Vesting Purposes.
All Years of Vesting Service completed by an Employee (including Years of
Vesting Service completed prior to the Effective Date) shall be counted in
determining his vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3;
(b) Service prior to the Effective Date of this Plan if such Service would
have been disregarded under the "break in service" rules (within the meaning of
Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for eligibility and vesting purposes only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of 5 or the number of his Years of Eligibility Service or Years of
Vesting Service, as the case may be, credited to him before the Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior to
one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
An Employee shall receive no Service credit under Section 3.1 or 3.2 during
any Authorized Leave of Absence. However, solely for the purpose of determining
whether he has incurred a Break during any Plan Year in which he is absent from
Service for one or more
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Authorized Leaves of Absence, he shall be credited with 45 Hours of Service for
each week during any such leave period. Notwithstanding the foregoing, if an
Employee fails to return to Service on or before the end of a leave period, he
shall be deemed to have terminated Service as of the first day of such leave
period and his credit for Hours of Service, determined under this Section 3.4,
shall be revoked. Notwithstanding anything contained herein to the contrary, an
Employee who is absent by reason of military service as set forth in Section
1.1(e)(1) shall be given Service credit under this Plan for such military leave
period to the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
--------------------------------------------------
For purposes of determining whether a Break has occurred for participation
and vesting purposes, an individual who is on maternity or paternity leave as
described in Section 1.1(cc), shall be deemed to have completed Hours of Service
during such period of absence, all in accordance with Section 1.1(cc).
Notwithstanding the foregoing, no credit shall be given for such Hours of
Service unless the individual furnishes to the Administrator such timely
information as the Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the maternity
or paternity reasons enumerated in Section 1.1(cc); and
(b) the number of days of such absence.
In no event, however, shall any credit be given for such leave other than for
determining whether a Break has occurred.
3.6 Ineligible Employees.
Notwithstanding any provisions of this Plan to the contrary, any Employee
who is ineligible to participate in this Plan either because of his failure
(a) To meet the eligibility requirements contained in Article II; or
(b) To be a Participant, as defined in Section 1.1(gg),shall, nevertheless,
earn Years of Eligibility Service and Years of Vesting Service pursuant to the
rules contained in this Article III. However, such Employee shall not be
entitled to an allocation of any contributions or forfeitures hereunder unless
and until he becomes a Participant in this Plan, and then, only during his
period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contribution.
(a) Subject to all of the provisions of this Article IV, for each Plan Year
commencing on or after the Effective Date, the Employer shall make an Employee
Stock Ownership Contribution to the Fund in such amount as may be determined by
resolution of the Board of Directors in its discretion; provided, however, that
the Employer shall contribute an amount in cash not less than the amount
required to enable the Trustee to discharge any indebtedness incurred with
respect to an Exempt Loan in accordance with Section 8.6(c). If any part of the
Employee Stock Ownership Contribution under this Section 4.1 for any Plan Year
is in cash in an amount exceeding the amount needed to pay the amount due during
or prior to such Plan Year with respect to an Exempt Loan, such cash shall be
applied by the Trustee, as directed by the Administrator in its sole discretion,
either to the purchase of Employer Securities or to repay an Exempt Loan.
Contributions hereunder shall be in the form of cash, Employer Securities or any
combination thereof. In determining the value of Employer Securities transferred
to the Fund as an Employee Stock Ownership Contribution, the Administrator may
determine the average of closing prices of such securities for a period of up to
90 consecutive days immediately preceding the date on which the securities are
contributed to the Fund. In the event that the Employer Securities are not
readily tradable on an established securities market, the value of the Employer
Securities transferred to the Fund shall be determined by an independent
appraiser in accordance with Section 8.9.
(b) In no event shall the Employee Stock Ownership Contribution exceed for
any Plan Year the maximum amount that may be deducted by the Employer under
Section 404 of the Code, nor shall such contribution cause the Employer to
violate its regulatory capital requirements. Each Employee Stock Ownership
Contribution by the Employer shall be deemed to be made on the express condition
that the Plan, as then in effect, shall be qualified under Sections 401(a) and
501(a) of the Code and that the amount of such contribution shall be deductible
from the Employer's income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contribution.
--------------------------------------------------------
(a) The Employee Stock Ownership Contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year; provided, however, that the
Employee Stock Ownership Contribution (if any) for a Plan Year shall be made in
a timely manner to make any required payment of principal and/or interest on an
Exempt Loan for such Plan Year. Any portion of the Employee Stock Ownership
Contribution for each Plan Year that may be made prior to the last day of the
Plan Year shall, if there is an Exempt Loan outstanding at such time, at the
election of the Administrator, either (i) be applied immediately to make
payments on such Exempt Loan or (ii) be maintained by the Trustee in the
Employee Stock Ownership Suspense Account described in Section 5.2 until the
last day of such Plan Year.
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(b) If an Employee Stock Ownership Contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any extensions)
for filing of the Employer's federal income tax return for such fiscal year, it
shall be considered, for allocation purposes, as an Employee Stock Ownership
Contribution to the Fund for the Plan Year for which it was computed and
accrued, unless such contribution is accompanied by a statement to the Trustee,
signed by the Employer, which specifies that the Employee Stock Ownership
Contribution is made with respect to the Plan Year in which it is received by
the Trustee. Any Employee Stock Ownership Contribution paid by the Employer
during any Plan Year but after the due date (including any extensions) for
filing of its federal income tax return for the fiscal year of the Employer
ending on or before the last day of the preceding Plan Year shall be treated,
for allocation purposes, as an Employee Stock Ownership Contribution to the Fund
for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee
Stock Ownership Contribution shall be made for any Plan Year during which a
limitations account created pursuant to Section 5.6(c)(3) is in existence until
the balance of such limitations account has been reallocated in accordance with
Section 5.6(c)(3).
4.3 Records of Contributions.
The Employer shall deliver at least annually to the Trustee, with respect
to the Employee Stock Ownership Contribution contemplated in Section 4.1, a
certificate of the Administrator, in such form as the Trustee shall approve,
setting forth:
(a) The aggregate amount of such contribution, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 Erroneous Contributions.
(a) Notwithstanding anything herein to the contrary, upon the Employer's
written request, a contribution which was made by a mistake of fact, or
conditioned upon the initial qualification of the Plan, under Code Section
401(a), or upon the deductibility of the contribution under Section 404 of the
Code, shall be returned to the Employer by the Trustee within one year after the
payment of the contribution, the denial of the qualification or the disallowance
of the deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan, a
contribution shall not be returned unless an Application for Determination has
been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to reflect
its proportionate share of the losses of the Fund, but shall not be adjusted to
reflect any earnings or gains. Notwithstanding
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any provisions of this Plan to the contrary, the right or claim of any
Participant or Beneficiary to any asset of the Fund or any benefit under this
Plan shall be subject to and limited by this Section 4.4.
(b) In no event shall Employee contributions be accepted. Any such Employee
contributions (and any earnings attributable thereto) mistakenly received by the
Trustee shall promptly be returned to the Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts.
The Administrator shall establish and maintain a separate Account for each
Participant in the Plan and for each Former Participant in accordance with the
provisions of this Article V. Such separate Account shall be for bookkeeping
purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The Administrator may establish
subaccounts hereunder, an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust, and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities. Each Participant's Employer Stock
Account shall reflect his share of any Employee Stock Ownership Contribution
made in Employer Securities, his allocable share of forfeitures (as described in
Section 5.4), and any Employer Securities attributable to earnings on such
stock. Each Participant's Other Investments Account shall reflect any Employee
Stock Ownership Contribution made in cash, any cash dividends on Employer
Securities allocated and credited to his Employee Stock Ownership Account (other
than currently distributable dividends) and his share of corresponding cash
forfeitures, and any income, gains, losses, appreciation, or depreciation
attributable thereto.
(b) Distribution Accounts.
In any case where distribution of a terminated Participant's vested Account
is to be deferred, the Administrator shall establish a separate, nonforfeitable
account in the Fund to which the balance in his Employee Stock Ownership Account
in the Plan shall be transferred after such Participant incurs a Break. Unless
the Former Participant's distribution accounts are segregated for investment
purposes pursuant to Article IX, they shall share in Investment Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
5.2 Establishment of Suspense Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Suspense Account. There shall be credited to such account any Employee Stock
Ownership Contribution that
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may be made prior to the last day of the Plan Year and that are allocable to the
Employee Stock Ownership Suspense Account pursuant to Section 4.2(a). The
Employee Stock Ownership Suspense Account shall share proportionately as to time
and amount in any Investment Adjustments. As of the last day of each Plan Year,
the balance of the Employee Stock Ownership Suspense Account shall be added to
the Employee Stock Ownership Contribution and allocated to the Employee Stock
Ownership Accounts of Participants as provided in Section 5.5, except as
provided herein. In the event that the Plan takes an Exempt Loan, the Employer
Securities purchased thereby shall be allocated as Financed Shares to a separate
Exempt Loan Suspense Account, from which Employer Securities shall be released
in accordance with Section 8.5 and shall be allocated in accordance with Section
8.6(b).
5.3 Allocation of Earnings, Losses and Expenses.
-------------------------------------------
As of each Valuation Date, any increase or decrease in the net worth of the
aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(3)) in the proportion that the
value of each such account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership Contribution and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
accounts and for the time such funds were in such accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership Contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Employee Stock Ownership Contribution.
---------------------------------------------------
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership Contribution, the Administrator shall allocate the
Employee Stock Ownership Contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership Account of each Participant who
completed a Year of Vesting Service during that Plan Year, provided that he is
still employed by the Employer on the last day of the Plan Year. Such allocation
shall be made in the same proportion that each such Participant's Compensation
for such Plan Year bears to the total Compensation of all such Participants for
such Plan Year, subject to Section 5.6. Notwithstanding the foregoing, if a
Participant attains his Normal Retirement Date and terminates Service prior to
the last day of the Plan Year, or dies or becomes Disabled during the Plan Year,
he shall be entitled to an allocation based on his Compensation earned prior to
his termination and
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during the Plan Year. Furthermore, if a Participant completes a Year of Vesting
Service and is on a Leave of Absence on the last day of the Plan Year because of
pregnancy or other medical reason, such a Participant shall be entitled to an
allocation based on his Compensation earned during such Plan Year.
5.6 Limitation on Annual Additions.
(a) Notwithstanding any provisions of this Plan to the contrary, the total
Annual Additions credited to a Participant's Account under this Plan (and
accounts under any other defined contribution plan maintained by the Employer or
a Related Employer) for any Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation (as defined below) for such
Limitation Year; or
(2) $30,000. Whenever otherwise allowed by law, the maximum amount of
$30,000 shall be automatically adjusted annually for cost-of-living
increases in accordance with Section 415(d) of the Code, and the
highest such increase effective at any time during the Limitation Year
shall be effective for the entire Limitation Year, without any
amendment to this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation" is
defined as wages, salaries, and fees for professional services, pre-tax elective
deferrals and salary reduction contributions under a plan described in Section
401(k) or 125 of the Code, and other amounts received (without regard to whether
or not an amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer or a Related Employer, to the extent that
the amounts are includable in gross income (including, but not limited to,
commissions paid to salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses, fringe
benefits, and reimbursements or other expense allowances under a nonaccountable
plan (as described in Treas. Regs. Section 1.62-2(c)), and excluding the
following:
(1) Employer contributions by the Employer or a Related Employer to a
plan of deferred compensation (other than elective deferrals under a
plan described in Section 401(k) of the Code) which are not includable
in the Employee's gross income for the taxable year in which
contributed, or employer contributions by the Employer or a Related
Employer under a simplified employee pension plan to the extent such
contributions are deductible by the Employee, or any distributions
from a plan of deferred compensation;
(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the Employee
either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
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(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits (other than
pre-tax salary reduction contributions under a plan described in
Section 125 of the Code), or contributions made by the employer
(whether or not under a salary reduction agreement) towards the
purchase of an annuity contract described in section 403(b) of the
Code (whether or not the contributions are actually excludable from
the gross income of the Employee).
(c) In the event that the limitations on Annual Additions described in
Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
Limitation Year shall be reduced to the minimum extent required by such
limitations, in the following order of priority:
(1) The Administrator shall determine to what extent the Annual
Additions to any Participant's Employee Stock Ownership Account must
be reduced in each Limitation Year. The Administrator shall reduce the
Annual Additions to all other qualified, tax-exempt retirement plans
maintained by the Employer or a Related Employer in accordance with
the terms contained therein for required reductions or reallocations
mandated by Section 415 of the Code before reducing any Annual
Additions in this Plan.
(2) If any further reductions in Annual Additions are necessary, then
the Employee Stock Ownership Contribution and forfeitures allocated
during such Limitation Year to the Participant's Employee Stock
Ownership Account shall be reduced. The amount of any such reductions
in the Employee Stock Ownership Contribution and forfeitures shall be
reallocated to all other Participants in the same manner as set forth
under Sections 5.4 and 5.5.
(3) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(2) above
because of the limitations contained in Sections 5.6(a) and (d) shall
be credited to an account designated as the "limitations account" and
carried forward to the next and subsequent Limitation Years until it
can be reallocated to all Participants as set forth in Sections 5.4
and 5.5, as appropriate. No Investment Adjustments shall be allocated
to this limitations account. In the next and subsequent Limitation
Years, all amounts in the limitations account must be allocated in the
manner described in Sections 5.4 and 5.5, as appropriate, before any
Employee Stock Ownership Contribution may be made to this Plan for
that Limitation Year.
(4) In the event this Plan is voluntarily terminated by the Employer
under Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(3) above which have not be reallocated as
set forth herein shall be distributed to the Participants who are
still employed by the Employer on the date of termination, in the
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proportion that each Participant's Compensation bears to the
Compensation of all Participants.
(d) The Annual Additions credited to a Participant's Account for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer or Related
Employer, the sum of (1) and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a
Participant under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such
Limitation Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for
such Limitation Year and for each prior year of service with the
Employer or a Related Employer:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such
Limitation Year.
The provisions of this Section 5.6(d) shall expire with respect to all
Limitation Years beginning after December 31, 1999.
5.7 Erroneous Allocations.
No Participant shall be entitled to any Annual Additions or other
allocations to his Account in excess of those permitted under Sections 5.3, 5.4,
5.5, and 5.6. If it is determined at any time that the Administrator and/or
Trustee have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
nondiscriminatory manner,
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shall determine the manner in which such error shall be corrected and shall
promptly advise the Trustee in writing of such error and of the method for
correcting such error. The accounts of any or all Participants may be revised,
if necessary, in order to correct such error. To the extent applicable, such
correction shall be made in accordance with the provisions of IRS Revenue
Procedure 98-22 (or any amendment or successor thereto).
5.8 Value of Participant's Account.
At any time, the value of a Participant's Account shall consist of the
aggregate value of his Employee Stock Ownership Account and his distribution
account, if any, determined as of the next-preceding Valuation Date. The
Administrator shall maintain adequate records of the cost basis of Employer
Securities allocated to each Participant's Employee Stock Ownership Account.
5.9 Investment of Account Balances.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. All sales of Employer Securities by the Trustee
attributable to the Employee Stock Ownership Accounts of all Participants shall
be charged pro rata to the Employee Stock Ownership Accounts of all
Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.
A Participant who reaches his Normal Retirement Date and who shall retire
at that time shall thereupon be entitled to retirement benefits based on the
value of his Account, payable pursuant to the provisions of Section 9.1. A
Participant who remains in Service after his Normal Retirement Date shall not be
entitled to any retirement benefits until his actual termination of Service
thereafter (except as provided in Section 9.4), and he shall meanwhile continue
to participate in this Plan.
6.2 Early Retirement.
A Participant who reaches his Early Retirement Date may retire at such time
(or, at his election, as of the first day of any month thereafter prior to his
Normal Retirement Date) and shall thereupon be entitled to retirement benefits
based on the vested value of his Account, payable pursuant to the provisions of
Section 9.1.
6.3 Disability Retirement.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his Account, payable pursuant to the provisions
of Section 9.1.
6.4 Death Benefits.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his Account shall be payable pursuant to
the provisions of Section 9.1. The Administrator shall direct the Trustee to
distribute his Account to any surviving Beneficiary designated by the
Participant or, if none, to such persons specified in Section 6.5(b).
(b) Upon the death of a Former Participant, the Administrator shall direct
the Trustee to distribute any undistributed balance of his Account to any
surviving Beneficiary designated by him or, if none, to such persons specified
in Section 6.5(b).
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the balance credited to the
Account of a deceased Participant or Former Participant as the Administrator may
deem desirable. The Administrator's determination of death and of the right of
any person to receive payment shall be conclusive.
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6.5 Designation of Beneficiary and Manner of Payment.
------------------------------------------------
(a) Each Participant shall have the right to designate a Beneficiary to
receive the sum or sums to which he may be entitled upon his death. The
Participant may also designate the manner in which any death benefits under this
Plan shall be payable to his Beneficiary, provided that such designation is in
accordance with Section 9.5. Such designation of Beneficiary and manner of
payment shall be in writing and delivered to the Administrator, and shall be
effective when received by the Administrator while the Participant is alive. The
Participant shall have the right to change such designation by notice in writing
to the Administrator while the Participant is alive. Such change of Beneficiary
or the manner of payment shall become effective upon its receipt by the
Administrator while the Participant is alive. Any such change shall be deemed to
revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary, or if
no designated Beneficiary survives the Participant, the balance credited to his
Account shall be paid to the person or persons in the first of the following
classes of successive preference Beneficiaries surviving at the death of the
Participant: the Participant's (1) widow or widower, (2) natural-born or adopted
children, (3) natural-born or adoptive parents, and (4) estate. The
Administrator shall determine which Beneficiary, if any, shall have been validly
designated or entitled to receive the balance credited to the Participant's
Account in accordance with the foregoing order of preference, and its decision
shall be binding and conclusive on all persons.
(c) Notwithstanding the foregoing, if a Participant is married on the date
of his death, the sum or sums to which he may be entitled under this Plan upon
his death shall be paid to his spouse, unless the Participant's spouse shall
have consented to the election of another Beneficiary. Such a spousal consent
shall be in writing and shall be witnessed either by a representative of the
Administrator or by a notary public. Any designation by an unmarried Participant
shall be rendered ineffective by any subsequent marriage, and any consent of a
spouse shall be effective only as to that spouse. If it is established to the
satisfaction of the Administrator that spousal consent cannot be obtained
because there is no spouse, because the spouse cannot be located, or other
reasons prescribed by governmental regulations, the consent of the spouse may be
waived, and the Participant may designate a Beneficiary or Beneficiaries other
than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability and Normal Retirement.
--------------------------------------------------
Unless his participation in this Plan shall have terminated prior thereto,
upon a Participant's death, Disability or Normal Retirement Date (whether or not
he actually retires at that time) while he is still employed by the Employer,
the Participant's entire Account shall be fully vested and nonforfeitable.
7.2 Vesting on Termination of Participation.
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in a
percentage of his Employee Stock Ownership Account, such vested percentage to be
determined under the following table, based on the Years of Vesting Service
(including Years of Vesting Service prior to the Effective Date) credited to him
at the time of his termination of participation:
Years of Vesting Service Percentage Vested
Less than 5 0%
5 or more 100%
Any portion of the Participant's Employee Stock Ownership Account which is
not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3. In such event, Employer Securities shall be
forfeited only after other assets. Distribution of the vested portion of a
terminated Participant's interest in the Plan shall be payable in any manner
permitted under Section 9.1.
7.3 Disposition of Forfeitures.
(a) In the event a Participant incurs a Break and subsequently resumes both
his Service and his participation in the Plan prior to incurring at least 5
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs a
Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least 5 Breaks, or in the event that a
Participant terminates Service and incurs at least 5 Breaks but has not received
a distribution, then the forfeitable portion of his Employee Stock Ownership
Account, including Investment Adjustments, shall be reallocated to other
Participants, pursuant to Section 5.4, as of the date the Participant incurs
such Break or Breaks, as the case may be.
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(c) In the event a former Participant who had received a distribution from
the Plan is rehired, he shall repay the amount of his distribution before the
earlier of 5 years after the date of his rehire by the Employer, or the close of
the first period of 5 consecutive Breaks commencing after the withdrawal, in
order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 Right to Demand Employer Securities.
A Participant entitled to a distribution from his Account shall be entitled
to demand that his interest in the Account be distributed to him in the form of
Employer Securities, all subject to Section 9.9. The Administrator shall notify
the Participant of his right to demand distribution of his vested Account
balance entirely in whole shares of Employer Securities (with the value of any
fractional share paid in cash). However, if the charter or by-laws of the
Employer restrict ownership of substantially all of the outstanding Employer
Securities to Employees and the Trust, then the distribution of a Participant's
vested Account shall be made entirely in the form of cash or other property, and
the Participant is not entitled to a distribution in the form of Employer
Securities.
8.2 Voting Rights.
Each Participant with an Employee Stock Ownership Account shall be entitled
to direct the Trustee as to the manner in which the Employer Securities in such
account are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the same proportion as the Participants who directed the Trustee as to
the manner of voting their shares in the Employee Stock Ownership Accounts with
respect to such issue. In the event that a Participant fails to give timely
voting instructions to the Trustee with respect to the voting of Employer
Securities that are allocated to his Employee Stock Ownership Account, the
Trustee shall vote such shares in its discretion.
8.3 Nondiscrimination in Employee Stock Ownership Contribution.
In the event that the amount of the Employee Stock Ownership Contribution
that would be required in any Plan Year to make the scheduled payments on an
Exempt Loan would exceed the amount that would otherwise be deductible by the
Employer for such Plan Year under Code Section 404, then no more than one-third
of the Employee Stock Ownership Contribution for the Plan Year, which is also
the Employer's taxable year, shall be allocated to the group of Employees who:
(a) Was at any time during the Plan Year or the preceding Plan Year a 5
percent owner of the Employer; or
(b) Received compensation (within the meaning of Section 415(c)(3) of the
Code) from the Employer for the preceding Plan Year in excess of $80,000, as
adjusted under Code Section 414(q), and, if the Employer so elects, was in the
"top-paid group" of Employees (as defined below) for such year.
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An Employee shall be deemed a member of the "top-paid group" of Employees
for a given Plan Year if such Employee is in the group of the top 20% of the
Employees of the Employer when ranked on the basis of compensation (as defined
above).
A former Employee shall be included in the group of Employees described
above if either:
(c) Such former Employee was included in such group when such
Employee separated from Service, or
(d) Such former Employee was included in such group at any time
after attaining age 55.
The determination of who is included in the group of Employees described
above, including the determination of the number and identity of Employees in
the "top-paid group," will be made in accordance with Section 414(q) of the Code
and the regulations thereunder.
8.4 Dividends.
Dividends paid with respect to Employer Securities credited to a
Participant's Employee Stock Ownership Account as of the record date for the
dividend payment may be allocated to the Participant's Employee Stock Ownership
Account, paid in cash to the Participant, or used by the Trustee to make
payments on an Exempt Loan, pursuant to the direction of the Administrator. If
the Administrator shall direct that the aforesaid dividends shall be paid
directly to Participants, the dividends paid with respect to such Employer
Securities shall be paid to the Plan, from which dividend distributions in cash
shall be made to the Participants with respect to the Employer Securities in
their Employee Stock Ownership Accounts within 90 days of the close of the Plan
Year in which the dividends were paid. If dividends on Employer Securities
already allocated to Participants' Employee Stock Ownership Accounts are used to
make payments on an Exempt Loan, the Employer Securities which are released from
the Exempt Loan Suspense Account shall first be allocated to each Employee Stock
Ownership Account in an amount equal to the amount of dividends that would have
been allocated to such Account if the dividends had not been used to make
payments on an Exempt Loan, and the remaining Employer Securities (if any) which
are released shall be allocated in the proportion that the value of each
Employee Stock Ownership Account bears to the value of all such Accounts, all in
accordance with Section 404(k) of the Code. Dividends on Employer Securities
obtained pursuant to an Exempt Loan and still held in the Exempt Loan Suspense
Account may be used to make payments on an Exempt Loan, as described in Section
8.6.
8.5 Exempt Loans.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt
Loan may take the form of (i) a loan from a bank or other commercial lender to
purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii)
an installment sale of Employer Securities to the Plan. The proceeds of any such
Exempt Loan shall be used, within a
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reasonable time after the Exempt Loan is obtained, only to purchase Employer
Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such
Exempt Loan shall provide for no more than a reasonable rate of interest and
shall be without recourse against the Plan. The number of years to maturity
under the Exempt Loan must be definitely ascertainable at all times. The only
assets of the Plan that may be given as collateral for an Exempt Loan are
Financed Shares acquired with the proceeds of the Exempt Loan and Financed
Shares that were used as collateral for a prior Exempt Loan repaid with the
proceeds of the current Exempt Loan. Such Financed Shares so pledged shall be
placed in an Exempt Loan Suspense Account. No person or institution entitled to
payment under an Exempt Loan shall have recourse against Trust assets other than
the Financed Shares, the Employer Stock Ownership Contribution (other than
contributions of Employer Securities) that is available under the Plan to meet
obligations under the Exempt Loan, and earnings attributable to such Financed
Shares and the investment of such contribution. Any Employee Stock Ownership
Contribution paid during the Plan Year in which an Exempt Loan is made (whether
before or after the date the proceeds of the Exempt Loan are received), any
Employee Stock Ownership Contribution paid thereafter until the Exempt Loan has
been repaid in full, and all earnings from investment of such Employee Stock
Ownership Contribution, without regard to whether any such Employee Stock
Ownership Contribution and earnings have been allocated to Participants'
Employee Stock Ownership Accounts, shall be available to meet obligations under
the Exempt Loan as such obligations accrue, or prior to the time such
obligations accrue, unless otherwise provided by the Employer at the time any
such contribution is made. Any pledge of Employer Securities shall provide for
the release of Financed Shares upon the payment of any portion of the Exempt
Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of Financed Shares released from such pledge shall equal the number of Financed
Shares held immediately before release for the current Plan Year multiplied by a
fraction. The numerator of the fraction is the sum of principal and interest
paid in such Plan Year. The denominator of the fraction is the sum of the
numerator plus the principal and interest to be paid for all future years. Such
years will be determined without taking into account any possible extension or
renewal periods. If interest on any Exempt Loan is variable, the interest to be
paid in future years under the Exempt Loan shall be computed by using the
interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may, in accordance with the
direction of the Administrator, obtain an Exempt Loan pursuant to the terms of
which the number of Financed Shares to be released from encumbrance shall be
determined with reference to principal payments only. In the event that such an
Exempt Loan is obtained, annual payments of principal and interest shall be at a
cumulative rate that is not less rapid at any time than level payments of such
amounts for not more than 10 years. The amount of interest in any such annual
loan repayment shall be disregarded only to the extent that it would be
determined to be interest under standard loan amortization tables. The
requirement set forth in the preceding sentence shall not be applicable from the
time that, by reason of a renewal, extension, or refinancing, the sum of the
expired duration of the Exempt Loan, the renewal period, the extension period,
and the duration of a new Exempt Loan exceeds 10 years.
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8.6 Exempt Loan Payments.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) the Employee Stock Ownership Contribution to the Trust made to meet the
Plan's obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Financed Shares and
investments of such contributions (both received during or prior to the Plan
Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt
Loan; and (3) the proceeds of the sale of any Financed Shares. Such contribution
and earnings shall be accounted for separately by the Plan until the Exempt Loan
is repaid.
(b) Employer Securities released from the Exempt Loan Suspense Account by
reason of the payment of principal or interest on an Exempt Loan from amounts
allocated to Participants' Employee Stock Ownership Accounts shall immediately
upon release be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to enable
the Trust to pay principal and interest on any such Exempt Loans as they are
due, provided, however, that no such contribution shall exceed the limitations
in Section 5.6. In the event that such contributions by reason of the
limitations in Section 5.6 are insufficient to enable the Trust to pay principal
and interest on such Exempt Loan as it is due, then upon the Administrator's
direction the Employer shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet such
principal and interest payments. Such new Exempt Loan shall be subordinated
to the prior Exempt Loan. Employer Securities released from the pledge of
the prior Exempt Loan shall be pledged as collateral to secure the new
Exempt Loan. Such Employer Securities will be released from this new pledge
and allocated to the Employee Stock Ownership Accounts of the Participants
in accordance with the applicable provisions of the Plan;
(2) Purchase any Financed Shares in an amount necessary to provide the
Trustee with sufficient funds to meet the principal and interest
repayments. Any such sale by the Plan shall meet the requirements of
Section 408(e) of the Act; or
(3) Any combination of the foregoing.
However, the Employer shall not, pursuant to the provisions of this
subsection, do, fail to do or cause to be done any act or thing which would
result in a disqualification of the Plan as an employee stock ownership plan
under Section 4975(e)(7) of the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an employee stock ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no
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shares of Employer Securities acquired with the proceeds of an Exempt Loan
obtained by the Trust to purchase Employer Securities may be subject to a put,
call or other option, or buy-sell or similar arrangement, while such shares are
held by the Plan or when such shares are distributed from the Plan.
8.7 Put Option.
In the event that the Employer Securities distributed to a Participant are
not readily tradable on an established market, the Participant shall be entitled
to require that the Employer repurchase the Employer Securities under a fair
valuation formula, as provided by governmental regulations. The Participant or
Beneficiary shall be entitled to exercise the put option described in the
preceding sentence for a period of not more than 60 days following the date of
distribution of Employer Securities to him. If the put option is not exercised
within such 60-day period, the Participant or Beneficiary may exercise the put
option during an additional period of not more than 60 days after the beginning
of the first day of the first Plan Year following the Plan Year in which the
first put option period occurred, all as provided in regulations promulgated by
the Secretary of the Treasury.
If a Participant exercises the foregoing put option with respect to
Employer Securities that were distributed as part of a total distribution
pursuant to which a Participant's Employee Stock Ownership Account is
distributed to him in a single taxable year, the Employer or the Plan may elect
to pay the purchase price of the Employer Securities over a period not to exceed
5 years. Such payments shall be made in substantially equal installments not
less frequently than annually over a period beginning not later than 30 days
after the exercise of the put option. Reasonable interest shall be paid to the
Participant with respect to the unpaid balance of the purchase price, and
adequate security shall be provided with respect thereto. In the event that a
Participant exercises a put option with respect to Employer Securities that are
distributed as part of an installment distribution, if permissible under Section
9.5, the amount to be paid for such securities shall be paid not later than 30
days after the exercise of the put option.
8.8 Diversification Requirements.
Each Participant who has completed at least 10 years of participation in
the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25 percent of his Employee Stock Ownership Account
(to the extent such percentage exceeds the amount to which a prior election
under this Section 8.8 had been made). For purposes of this Section 8.8, the
term "qualified election period" shall mean the 5-Plan-Year period beginning
with the Plan Year after the Plan Year in which the Participant attains age 55
(or, if later, beginning with the Plan Year after the first Plan Year in which
the Employee first completes at least 10 years of participation in the Plan). In
the case of an Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least
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50 percent of his Employee Stock Ownership Account (to the extent such
percentage exceeds the amount to which a prior election under this Section 8.8
had been made). The Plan shall make available at least 3 investment options
(chosen by the Administrator in accordance with regulations prescribed by the
Department of Treasury) to each Participant making an election hereunder. The
Plan shall be deemed to have met the requirements of this Section if the portion
of the Participant's Employee Stock Ownership Account covered by the election
hereunder is distributed to the Participant or his designated Beneficiary within
90 days after the period during which the election may be made. In the absence
of such a distribution, the Trustee shall implement the Participant's election
within 90 days following the expiration of the qualified election period.
Notwithstanding the foregoing, if the fair market value of the Employer
Securities allocated to the Employee Stock Ownership Account of a Participant
otherwise entitled to diversify hereunder is $500 or less as of the Valuation
Date immediately preceding the first day of any election period, then such
Participant shall not be entitled to an election under this Section 8.8 for that
qualified election period.
8.9 Independent Appraiser.
An independent appraiser meeting the requirements of the regulations
promulgated under Code Section 170(a)(1) shall value the Employer Securities in
those Plan Years when such securities are not readily tradable on an established
securities market.
8.10 Nonterminable Rights.
The provisions of this Article VIII shall continue to be applicable to
Employer Securities held by the Trustee, whether or not allocated to
Participants' and Former Participants' Accounts, even if the Plan ceases to be
an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service - In General.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested Account in the Plan. As soon as practicable after a
Participant's Retirement, Disability, death or other termination of Service, the
Administrator shall ascertain the value of his vested Account, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 Commencement of Payments.
(a) Distributions upon Retirement, Disability or Death. Upon a
Participant's Retirement, Disability or death, payment of benefits under this
Plan shall, unless the Participant otherwise elects (in accordance with Section
9.3), commence as soon as practicable after the Valuation Date next following
the date of the Participant's Retirement, Disability or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement,
Disability or death, he shall be accorded an opportunity to commence receipt of
benefits as soon as practicable after the Valuation Date next following the date
of his termination of Service. A Participant who terminates Service with a
vested Account balance shall be entitled to receive from the Administrator a
statement of his benefits. In the event that a Participant elects not to
commence receipt of distribution in accordance with this Section 9.2(b) after
the Participant incurs a Break, the Administrator shall transfer his vested
Account balance to a distribution account. If a Participant's vested Account
balance does not exceed (or at the time of any prior distribution did not
exceed) $5,000, the Plan Administrator shall distribute the vested portion of
his Account balance as soon as administratively feasible without the consent of
the Participant or his spouse.
(c) Distribution of Accounts Greater Than $5,000. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $5,000, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Administrator shall notify the Participant of the right to defer
any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code Section 401(a)(9)
or Code Section 415.
9.3 Mandatory Commencement of Benefits.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest to occur of the
close of the Plan Year in which (i) the Participant attains age 65, (ii) the
tenth anniversary of the Plan Year in which the Participant
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commenced participation, or (iii) the Participant terminates Service with the
Employer and all Related Employers.
(b) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated Beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated Beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, if the Participant's interest is
to be distributed in other than a lump sum, the following minimum distribution
rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period
not extending beyond the life expectancy of the Participant or the
joint life and last survivor expectancy of the Participant and the
Participant's designated Beneficiary or (2) a period not extending
beyond the life expectancy of the designated Beneficiary, the amount
required to be distributed for each calendar year, beginning with
distributions for the first distribution calendar year, must at least
equal the quotient obtained by dividing the Participant's benefit by
the applicable life expectancy.
(ii) The amount to be distributed each year, beginning with
distributions for the first distribution calendar year, shall not be
less than the quotient obtained by dividing the Participant's Account
balance by the lesser of (1) the applicable life expectancy, or (2) if
the Participant's spouse is not the designated Beneficiary, the
applicable divisor determined from the table set forth in Q&A-4 of
section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after
the death of the Participant shall be distributed using the applicable
life expectancy in subsection (iii) of Section 9.3(b) above as the
relevant divisor without regard to Proposed Regulations section
1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the Participant's
required beginning date. The minimum distribution for other calendar
years, including the minimum distribution for the
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distribution calendar year in which the Participant's required
beginning date occurs, must be made on or before December 31 of the
distribution calendar year.
(d) If a Participant dies after a distribution has commenced in accordance
with Section 9.3(b) but before his entire interest has been distributed to him,
the remaining portion of such interest shall be distributed to his Beneficiary
at least as rapidly as under the method of distribution in effect as of the date
of his death.
(e) If a Participant shall die before the distribution of his Account
balance has begun, the entire Account balance shall be distributed by December
31 of the calendar year containing the fifth anniversary of the death of the
Participant, except in the following events:
(i) If any portion of the Participant's Account balance is payable to
(or for the benefit of) a designated Beneficiary over a period not
extending beyond the life expectancy of such Beneficiary and such
distributions begin not later than December 31 of the calendar year
immediately following the calendar year in which the Participant died;
or
(ii) If any portion of the Participant's Account balance is payable to
(or for the benefit of) the Participant's spouse over a period not
extending beyond the life expectancy of such spouse and such
distributions begin no later than December 31 of the calendar year in
which the Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time of his
death, the Participant's designated Beneficiary shall elect the method of
distribution no later than the earlier of (1) December 31 of the calendar year
in which distributions would be required to begin under this Article or (2)
December 31 of the calendar year which contains the fifth anniversary of the
date of death of the Participant. If the Participant has no designated
Beneficiary, or if the designated Beneficiary does not elect a method of
distribution, distribution of the Participant's entire interest shall be
completed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant and
his spouse may be redetermined but not more frequently than annually. The life
expectancy (or joint and last survivor expectancy) shall be calculated using the
attained age of the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be the first distribution calendar year, and if
life expectancy is being recalculated, such succeeding calendar year. Unless
otherwise elected by the Participant (or his spouse, if applicable) by the time
distributions are required to begin, life expectancies shall be recalculated
annually. Any election not to recalculate shall be irrevocable and shall apply
to all subsequent years. The life expectancy of a nonspouse Beneficiary may not
be recalculated.
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(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 Required Beginning Dates.
(a) General Rule. The required beginning date of a Participant who is a
5-percent owner of the Employer is the first day of April of the calendar year
following the calendar year in which the Participant attains age 70-1/2. The
required beginning date of a Participant who is not a 5-percent owner shall be
April 1 of the calendar year following the later of either: (i) the calendar
year in which the Participant attains age 70-1/2, or (ii) the calendar year in
which the Participant retires.
(b) 5-percent owner. A Participant is treated as a 5-percent owner for
purposes of this section if such Participant is a 5-percent owner as defined in
section 416(i) of the Code (determined in accordance with section 416 but
without regard to whether the plan is top-heavy) at any time during the Plan
Year ending with or within the calendar year in which such owner attains age
66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5-percent
owner under this section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent year.
9.5 Form of Payment.
Each Participant's vested Account balance shall be distributed in a lump
sum payment. However, in the event that the Administrator must commence
distributions, as required by Section 9.4 herein, with respect to an Employee
who has attained age 70-1/2 and is still employed by the Employer, if the
Employee does not elect a lump sum distribution, payments shall be made in
installments in such amounts as shall satisfy the minimum distribution rules of
Section 9.3.
9.6 Payments Upon Termination of Plan.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions: The
Account balance of each affected Participant and Former Participant shall
immediately become fully vested and nonforfeitable; the Account balance of all
Participants and Former Participants shall be determined within 60 days
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after such termination, and the Administrator shall have the same powers to
direct the Trustee in making payments as contained in Sections 9.1 and 13.5.
9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Upon receipt of a domestic relations order, the Administrator shall
promptly notify the Participant and any alternate payee of receipt of the order
and the Plan's procedure for determining whether the order is a Qualified
Domestic Relations Order. While the issue of whether a domestic relations order
is a Qualified Domestic Relations Order is being determined, if the benefits
would otherwise be paid, the Administrator shall segregate in a separate account
in the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto, shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.7, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions.
If a Participant receives a distribution of his entire vested Account
balance because of the termination of his participation in the Plan, the Plan
shall disregard a Participant's Service with respect to which such cash-out
distribution shall have been made, in computing his Account balance in the event
that a Former Participant shall again become an Employee and become eligible to
participate in the Plan. Such a distribution shall be deemed to be made on
termination of participation in the Plan if it is made not later than the close
of the second Plan Year following the Plan Year in which such termination
occurs. The forfeitable portion of a Participant's Account balance shall be
restored upon repayment to the Plan by such Former Participant of the full
amount of the cash-out distribution, provided that the Former Participant again
becomes an Employee. Such repayment must be made by the Employee not later than
the end of the 5-year period beginning with the date of the distribution.
Forfeitures required to be restored by virtue of such repayment shall be
restored from the following sources in the following order of preference: (i)
current forfeitures; (ii) an additional Employee Stock Ownership Contribution,
as appropriate, and as subject to Section 5.6; and (iii) investment earnings of
the Fund. In the event that a Participant's Account balance is totally
forfeitable, a Participant shall be deemed to have received a distribution of
zero upon his termination of Service. In the event of a return to Service within
5 years of the date of his deemed distribution, the Participant shall be deemed
to have repaid his distribution in accordance with the rules of this Section
9.8.
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9.9 ESOP Distribution Rules.
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing) shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, Disability or termination of Service, but not later than 1
year after the close of the Plan Year in which the Participant separates from
Service by reason of the attainment of his Normal Retirement Date, Disability,
death or separation from Service. In addition, all distributions hereunder
shall, to the extent that the Participant's Account is invested in Employer
Securities, be made in the form of Employer Securities or cash, or a combination
of Employer Securities and cash, in the discretion of the Administrator, subject
to the Participant's right to demand Employer Securities in accordance with
Section 8.1. Fractional shares, however, may be distributed in the form of cash.
9.10 Direct Rollover.
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article IX, a distributee
may elect, at the time and in the manner prescribed by the Administrator, to
have any portion of an "eligible rollover distribution" paid directly to an
"eligible retirement plan" specified by the distributee in a "direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover distribution"
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an "eligible rollover distribution" does not include:
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated Beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to Employer
Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a Participant
or Former Participant. In addition, the Participant's or Former Participant's
surviving spouse and the Participant's or Former Participant's spouse or former
spouse who is the alternate payee under a Qualified Domestic Relations Order are
"distributees" with regard to the interest of the spouse or former spouse.
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(e) For purposes of this Section 9.10, a "direct rollover" is a payment by
the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
If a distribution is one to which Sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that: (1) the Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
9.12 Re-employed Veterans.
Notwithstanding any provision of the Plan to the contrary, contributions,
benefits, Plan loan repayment suspensions and Service credit with respect to
qualified military service will be provided in accordance with Code Section
414(u).
9.13 Share Legend.
Employer Securities held or distributed by the Trustee may include such
legend restrictions on transferability as the Employer may reasonably require in
order to assure compliance with applicable Federal and State securities and
other laws.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.
Anything contained in this Plan to the contrary notwithstanding, if for any
Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of
the Code, then the Plan must meet the requirements of this Article X for such
Plan Year.
10.2 Top-Heavy Plan Definitions.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued benefits
of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular Plan
Year of this Plan, the last day of the preceding Plan Year (or, in the case of
the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the Determination
Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and
any entity which is (1) a member of a controlled group including such Employer,
while it is a member of such controlled group (within the meaning of Section
414(b) of the Code), (2) in a group of trades or businesses under common control
with such Employer, while it is under common control (within the meaning of
Section 414(c) of the Code), and (3) a member of an affiliated service group
including such Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at any
time during the Plan Year or during the 4 immediately preceding Plan Years, is
one of the following:
(1) An officer of the Employer who has compensation greater than 50%
of the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no more than 50 Employees (or, if lesser, the
greater of 3 or 10% of the Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as defined in
Section 415 of the Code) in excess of the limitation in effect under
Section
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415(c)(1)(A) of the Code, and owning (or considered as owning, within
the meaning of Section 318 of the Code) the largest interests in the
Employer;
(3) Any Employee owning (or considered as owning, within the meaning
of Section 318 of the Code) more than 5% of the outstanding stock of
the Employer or stock possessing more than 5% of the total combined
voting power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Section 415
of the Code) of more than $150,000 and who would be described in
Section 10.2(d)(3) if "1%" were substituted for "5%" wherever the
latter percentage appears.
For purposes of applying Section 318 of the Code to the provisions of this
Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by
substituting "5%" for "50%" wherever the latter percentage appears. In addition,
for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and
(m) shall not apply in determining ownership interests in the Employer. However,
for purposes of determining whether an individual has compensation in excess of
$150,000, or whether an individual is a Key Employee under Section 10.2(d)(1)
and (2), compensation from each entity required to be aggregated under Sections
414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding
anything contained herein to the contrary, all determinations as to whether a
person is or is not a Key Employee shall be resolved by reference to Section 416
of the Code and any rules and regulations promulgated thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who is not
considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the Required
Aggregation Group and any other plans maintained by the Employer which satisfy
Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of a
terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or any of the 4 preceding Plan Years, and each other plan of
the Employer which enables any plan of the Employer in which a Key Employee is a
Participant to meet the requirements of Sections 401(a)(4) and 410 of the Code.
10.3 Calculation of Accrued Benefits.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required
Aggregation Group or a
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Permissive Aggregation Group, the Employee's account balances under
the respective plan, determined as of the most recent plan valuation
date within a 12-month period ending on the Determination Date,
including contributions actually made after the valuation date but
before the Determination Date (and, in the first plan year of a plan,
also including any contributions made after the Determination Date
which are allocated as of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a
Required Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, including contributions which have not actually
been made, but which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, pursuant to the actuarial assumptions used by such
plan, and calculated as if the Employee terminated Service under such
plan as of the valuation date (except that, in the first plan year of
a plan, a current Participant's estimated Accrued Benefit as of the
Determination Date shall be taken into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the 5-year period ending on
the Determination Date, any Accrued Benefit for such individual shall
not be taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall
exclude amounts attributable to voluntary deductible Employee
contributions, if any.
(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or
plans, as the case may be, during the 5-year period ending on the
Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by another
unrelated employer, the transferring plan shall continue to count
the amount transferred; the receiving plan shall not count the
amount transferred.
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(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the transferring
plan shall no longer count the amount transferred; the receiving
plan shall count the amount transferred.
(c) If any individual has not performed services for the Employer at any
time during the 5-year period ending on the Determination Date, any Accrued
Benefit for such individual (and the account of such individual) shall not
be taken into account.
10.4 Determination of Top-Heavy Status.
This Plan shall be considered to be a top-heavy plan for any Plan Year if,
as of the Determination Date, the value of the Accrued Benefits of Key Employees
exceeds 60% of the value of the Accrued Benefits of all eligible Employees under
the Plan. Notwithstanding the foregoing, if the Employer maintains any other
qualified plan, the determination of whether this Plan is top-heavy shall be
made after aggregating all other plans of the Employer in the Required
Aggregation Group and, if desired by the Employer as a means of avoiding
top-heavy status, after aggregating any other plan of the Employer in the
Permissive Aggregation Group. If the required Aggregation Group is top-heavy,
then each plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would not otherwise be
deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not
top-heavy, then no plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would otherwise be deemed
to be top-heavy. In no event shall a plan included in a top-heavy Permissive
Aggregation Group be deemed a top-heavy plan unless such plan is also included
in a top-heavy Required Aggregation Group.
10.5 Determination of Super Top-Heavy Status.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
10.6 Minimum Contribution.
(a) For any Plan Year in which the Plan is top-heavy, each Non-Key Employee
who has met the age and service requirements, if any, contained in the Plan,
shall be entitled to a minimum contribution (which may include forfeitures
otherwise allocable) equal to a percentage of such Non-Key Employee's
compensation (as defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 3% of such Non-Key Employee's compensation.
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(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall
in no event exceed the percentage contribution made for the Key Employee
for whom such percentage is the highest for the Plan Year after taking into
account contributions under other defined contribution plans in this Plan's
Required Aggregation Group; provided, however, that this Section 10.7(b)(1)
shall not apply if this Plan is included in a Required Aggregation Group
and this Plan enables a defined benefit plan in such Required Aggregation
Group to meet the requirements of Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key Employee
under this Plan for any Plan Year if the Employer maintains another
qualified plan under which a minimum benefit or contribution is being
accrued or made on account of such Plan Year, in whole or in part, on
behalf of the Non-Key Employee, in accordance with Section 416(c) of the
Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1) any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer contributions to or any benefits under Chapter
21 of the Code (relating to the Federal Insurance Contributions Act), Title II
of the Social Security Act, or any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Vesting.
(a) For any Plan Year in which the Plan is a top-heavy plan, a
Participant's Accrued Benefit derived from Employer contributions (not including
contributions made pursuant to Code Section 401(k), if any) shall continue to
vest according to the following schedule:
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Years of Service Completed Percentage Vested
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 or more 100%
(b) For purposes of Section 10.7(a), the term "year of service" shall have
the same meaning as Year of Vesting Service, as set forth in Section 1.1(ss),
and as modified by Section 3.2.
(c) If for any Plan Year the Plan becomes top-heavy and the vesting
schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan
ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set
forth in Section 10.7(a) shall remain applicable with respect to any Participant
who has completed 3 or more Years of Service.
10.8 Maximum Benefit Limitation.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i) shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the Plan Year in which this
Section 10.8 becomes applicable. This Section 10.8 shall not apply for Plan
Years commencing after December 31, 1999.
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ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.
This Plan shall be administered by a committee consisting of up to 5
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor may
require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator" as
used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. The authority to control and
manage the operation and administration of the Plan is vested in the
Administrator appointed by the Board of Directors. The Administrator shall have
the rights, duties and obligations of an "administrator," as that term is
defined in section 3(16)(A) of the Act, and of a "plan administrator," as that
term is defined in Section 414(g) of the Code. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 Resignation or Removal of Administrator.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Sponsor and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any Administrator
with or without cause, by giving notice in writing, mailed or delivered to the
Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
Upon the death, resignation or removal of an Administrator, the Sponsor may
appoint, by Board of Directors' resolution, a successor or successors. Notice of
termination of an Administrator and notice of appointment of a successor shall
be made by the Sponsor in writing, with copies mailed or delivered to the
Trustee, and the successor shall have all the rights and privileges and all of
the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as
shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants and
Beneficiaries;
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(b) To exercise discretion in determining all questions arising in the
administration, interpretation and application of the Plan, including questions
of eligibility and of the status and rights of Participants, Beneficiaries and
any other persons hereunder;
(c) To decide any dispute arising hereunder strictly in accordance with the
terms of the Plan; provided, however, that no Administrator shall participate in
any matter involving any questions relating solely to his own participation or
benefits under this Plan;
(d) To advise the Employer and direct the Trustee regarding the known
future needs for funds to be available for distribution in order that the
Trustee may establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to
the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to the
Plan for each fiscal year;
(g) To direct the Trustee concerning all matters requiring the
Administrator's direction pursuant to the provisions of this Plan and the Trust
Agreement;
(h) To advise the Trustee on all terminations of Service by Participants,
unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the
Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee;
(l) To have all such other powers as may be necessary to discharge its
duties hereunder; and
(m) To direct the Trustee to pay all expenses of administering this Plan,
except to the extent that the Employer pays such expenses.
Full discretion is granted to the Administrator to interpret the Plan and
to determine the benefits, rights and privileges of Participants, Beneficiaries
or other persons affected by this Plan. The Administrator shall exercise its
discretion under the terms of this Plan and shall administer the Plan in
accordance with its terms, such administration to be exercised uniformly so that
all persons similarly situated shall be similarly treated.
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11.5 Action by Administrator.
The Administrator may elect a Chairman and Secretary from among its members
and may adopt rules for the conduct of its business. A majority of the members
then serving shall constitute a quorum for the transaction of business. All
resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions, instructions and other papers shall be executed on behalf
of the Administrator by either the Chairman or the Secretary of the
Administrator, if any, or by any member or agent of the Administrator duly
authorized to act on the Administrator's behalf.
11.6 Participation by Administrator.
No member of the committee constituting the Administrator shall be
precluded from becoming a Participant in the Plan if he would be otherwise
eligible, but he shall not be entitled to vote or act upon matters or to sign
any documents relating specifically to his own participation under the Plan,
except when such matters or documents relate to benefits generally. If this
disqualification results in the lack of a quorum, then the Board of Directors
shall appoint a sufficient number of temporary members of the committee
constituting the Administrator who shall serve for the sole purpose of
determining such a question.
11.7 Agents.
The Administrator may employ agents and provide for such clerical, legal,
actuarial, accounting, medical, advisory or other services as it deems necessary
to perform its duties under this Plan. The cost of such services and all other
expenses incurred by the Administrator in connection with the administration of
the Plan shall be paid from the Fund, unless paid by the Employer.
11.8 Allocation of Duties.
The duties, powers and responsibilities reserved to the Administrator may
be allocated among its members so long as such allocation is pursuant to written
procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
11.9 Delegation of Duties.
The Administrator may delegate any of its duties to any Employees of the
Employer, to the Trustee with its written consent, or to any other person or
firm, provided that the Administrator shall prudently choose such agents and
rely in good faith on their actions.
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11.10 Administrator's Action Conclusive.
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
No Administrator who is receiving compensation from the Employer as a
full-time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his services hereunder. Any other Administrator shall be
entitled to receive such reasonable compensation for his services as an
Administrator hereunder as may be mutually agreed upon between the Employer and
such Administrator. Any such compensation shall be paid from the Fund, unless
paid by the Employer. Each Administrator shall be entitled to reimbursement by
the Employer for any reasonable and necessary expenditures incurred in the
discharge of his duties.
11.12 Records and Reports.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his Account balance, as well as a complete copy of the Plan and
the Trust Agreement and copies of annual reports to the Internal Revenue
Service, shall be made available by the Administrator to the Employer for
examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's Account
balance shall not be made available for examination by any other Participant.
11.14 Named Fiduciary.
The Administrator is the named fiduciary for purposes of Section 402 of the
Act and shall be the designated agent for receipt of service of process on
behalf of the Plan. It shall use the care and diligence in the performance of
its duties under this Plan that are required of fiduciaries under the Act.
Nothing in this Plan shall preclude the Employer from purchasing liability
insurance to protect the Administrator with respect to its duties under this
Plan.
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11.15 Information from Employer.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 Responsibilities of Directors.
Subject to the rights reserved to the Board of Directors acting on behalf
of the Employer as set forth in this Plan, no member of the Board of Directors
shall have any duties or responsibilities under this Plan, except to the extent
he shall be acting in the capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
(a) To the extent not prohibited by the Act, the Administrator shall not be
responsible in any way for any action or omission of the Employer, the Trustee
or any other person in the performance of their duties and obligations set forth
in this Plan and in the Trust Agreement. To the extent not prohibited by the
Act, the Administrator shall also not be responsible for any act or omission of
any of its agents, or with respect to reliance upon advice of its counsel
(whether or not such counsel is also counsel to the Employer or the Trustee),
provided that such agents or counsel were prudently chosen by the Administrator
and that the Administrator relied in good faith upon the action of such agent or
the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the extent
that such indemnification does not violate the Act or any other federal or state
laws.
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ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.
If a Participant or his Beneficiary is denied any benefits under this Plan,
either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for
the claimant to perfect his claim, if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 Decision by Administrator.
A final and binding decision shall be made by the Administrator within 60
days of the filing by the claimant of his request for reconsideration; provided,
however, that if the Administrator feels that a hearing with the claimant or his
representative present is necessary or desirable, this period shall be extended
an additional 60 days.
12.5 Notice by Administrator.
The Administrator's decision shall be conveyed to the claimant in writing
and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
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The Administrator's decision shall be binding and conclusive with respect to all
persons interested therein unless the Administrator has no reasonable basis for
its decision.
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ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.
The Sponsor reserves the right at any time and from time to time, for any
reason and retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion of
any Participant's Account balance as of the effective date of the amendment or
change the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with 3 or more Years
of Vesting Service is permitted to elect to have the vesting schedule in effect
before the amendment used to determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit; and.
(d) No amendment may increase the duties of the Trustee without its
consent.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 Effect of Change In Control
(a) In the event of a "change in control" of the Sponsor, as defined in
paragraph (d) below, this Plan shall terminate at the effective time of such
change in control unless the Board of Directors shall affirmatively determine
prior to such effective time that the Plan shall not terminate. Nothing in this
Plan shall prevent the Sponsor from becoming a party to such a change in
control. In the event that the Board of Directors determines that the Plan shall
not terminate upon a change in control, any successor corporation or other
entity formed and resulting from such change in control shall have the right to
become the sponsor of this Plan by adopting the same by resolution. If, within
180 days from the effective time of such change in control, such entity does not
affirmatively adopt this Plan, then this Plan shall automatically be terminated,
all affected Participants' and Former Participants' Account balances shall
become fully vested and nonforfeitable, and the Trustee shall make payments to
the persons entitled thereto in accordance with Article IX.
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(b) In the event that the Plan terminates upon a change in control in
accordance with paragraph (a) above, the Account balances of all affected
Participants and Former Participants shall become fully vested and
nonforfeitable, and the Trustee shall either (i) make payments to each
Participant and Beneficiary in accordance with Section 9.5 or, (ii) in the
discretion of the Sponsor, continue the Trust Agreement and make distributions
upon the contingencies and in all the circumstances under which distributions
would have been made, on a fully vested basis, had there been no termination of
the Plan.
(c) Notwithstanding any provision of the Plan to the contrary, at and after
the effective time of a change in control, whether or not the Plan terminates at
such time, each of the following provisions shall become applicable; provided,
however, that any such provision shall not apply if the Board of Directors
determines that such provision either (i) would adversely affect the
tax-qualified status of the Plan pursuant to Code Section 401(a), (ii) would
adversely affect the accounting treatment of the change in control as a pooling
of interests, if the Board of Directors desires that such treatment apply, or
(iii) should not apply for any other reason:
(1) The Plan shall be interpreted, maintained and operated exclusively for
the benefit of those individuals who are participating in the Plan as of
the effective time of the change in control and their Beneficiaries.
Notwithstanding the provisions of Section 2.1(a), no Employee shall become
a Participant for the first time at or after the effective time of a change
in control.
(2) After a Participant's Retirement, Disability or other termination of
Service, such Participant's Account, regardless of its value, shall not be
distributed and shall share in the allocation of the Employee Stock
Ownership Contribution and Investment Adjustments until such time as either
(A) the Fund is liquidated in connection with the termination of the Plan,
or (B) the Participant (or his Beneficiary) receives a full distribution of
his Account either upon his election in accordance with Section 9.2(c) or
as required in accordance with Section 8.8, 9.3 or 9.4.
(3) Upon the termination of the Plan, Employer Securities that are
allocated to the Exempt Loan Suspense Account and that are not used to
repay an Exempt Loan shall be allocated as Investment Adjustments in
accordance with Section 5.3.
(4) Employer Securities that are released from the Exempt Loan Suspense
Account in accordance with Section 8.5 shall be allocated to the Employee
Stock Ownership Account of each Participant regardless of whether he
completed a Year of Vesting Service during the Plan Year or was an Employee
on the last day of such Plan Year.
(5) The Administrator shall consist of a committee selected by the Board of
Directors, and such committee shall have the exclusive authority (i) to
remove the Trustee and to appoint a successor trustee, (ii) to adopt
amendments to the Plan or the Trust Agreement to effectuate the provisions
and intent of this Section 13.2, and (iii) to perform any or all of the
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functions and to exercise all of the discretion that are delegated to the
Administrator pursuant to Article XI.
(6) Any application for a favorable determination letter with respect to
the tax-qualified status of the Plan under Code Section 401(a) with respect
to its termination shall be subject to the prior review, comment and
approval (which approval shall not be unreasonably withheld) of the
Administrator, as defined in paragraph (5) above.
(d) For purposes of this Section 13.2, the term "change in control" means
the occurrence of any one or more of the events specified in the following
clauses (i) through (iii): (i) any third person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Sponsor with respect to which 25% or more of
the total number of votes for the election of the Board of Directors may be
cast, (ii) as a result of, or in connection with, any cash tender offer, merger
or other business combination, sale of assets or contested election, or
combination of the foregoing, the persons who were directors of the Sponsor
shall cease to constitute a majority of the Board of Directors, or (iii) the
effective time of a transaction that is approved by the stockholders of the
Sponsor and that provides either for the Sponsor to cease to be an independent
publicly-owned corporation or for a sale or other disposition of all or
substantially all of the assets of the Sponsor.
13.3 Consolidation or Merger of Trust.
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another trust
fund held under any other plan of deferred compensation maintained or to be
established for the benefit of all or some of the Participants of this Plan, the
assets of the Fund applicable to such Participants shall be transferred to the
other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors, or of any new or successor
employer of the affected Participants, shall authorize such transfer of assets,
and, in the case of the new or successor employer of the affected Participants,
its resolutions shall include an assumption of liabilities imposed under this
Plan with respect to such Participants' inclusion in the new employer's plan;
and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
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13.4 Bankruptcy or Insolvency of Employer.
In the event of (a) the Employer's legal dissolution or liquidation by any
procedure other than a consolidation or merger, (b) the Employer's receivership,
insolvency, or cessation of its business as a going concern, or (c) the
commencement of any proceeding by or against the Employer under the federal
bankruptcy laws, or similar federal or state statute, or any federal or state
statute or rule providing for the relief of debtors, compensation of creditors,
arrangement, receivership, liquidation or any similar event which is not
dismissed within 30 days, this Plan shall terminate automatically with respect
to such entity on such date (provided, however, that if a proceeding is brought
against the Employer for reorganization under Chapter 11 of the United States
Bankruptcy Code or any similar federal or state statute, then this Plan shall
terminate automatically if and when said proceeding results in a liquidation of
the Employer, or the approval of any Plan providing therefor, or the proceeding
is converted to a case under Chapter 7 of the Bankruptcy Code or any similar
conversion to a liquidation proceeding under federal or state law including, but
not limited to, a receivership proceeding). In the event of any such termination
as provided in the foregoing sentence, the Trustee shall make payments to the
persons entitled thereto in accordance with Section 9.6 hereof.
13.5 Voluntary Termination.
The Board of Directors reserves the right to terminate this Plan at any
time by giving to the Trustee and the Administrator notice in writing of such
desire to terminate. The Plan shall terminate upon the date of receipt of such
notice, the Account balances of all affected Participants and Former
Participants shall become fully vested and nonforfeitable, and the Trustee shall
make payments to each Participant or Beneficiary in accordance with Section 9.6.
Alternatively, the Sponsor, in its discretion, may determine to continue the
Trust Agreement and to continue the maintenance of the Fund, in which event
distributions shall be made upon the contingencies and in all the circumstances
under which such distributions would have been made, on a fully vested basis,
had there been no termination of the Plan. In addition, an entity other than the
Sponsor that is participating in this Plan may terminate its participation in
the Plan on a prospective basis by action of its board of directors. Upon such
termination of participation, Participants who are employees of such entity
shall be entitled to distributions from this Plan in accordance with Article IX
and this Article XIII.
13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions.
In the event that a partial termination of the Plan shall be deemed to have
occurred, or if the Employer shall discontinue permanently its contributions
hereunder, the right of each affected Participant and Former Participant in his
Account balance shall be fully vested and nonforfeitable. The Sponsor, in its
discretion, shall decide whether to direct the Trustee to make immediate
distribution of such portion of the Fund assets to the persons entitled thereto
or to make distribution in the circumstances and contingencies which would have
controlled such distributions if there had been no partial termination or
permanent discontinuance of contributions.
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ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to the extent that a return of the Employer's contribution
is permitted under Section 4.4.
14.2 Liability Limited.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person, shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Facility of Payment.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minors
Act, or corresponding legislation (who shall be an adult, a guardian of the
minor or a trust company), and the release of such other person or institution
shall be a valid and complete discharge for the payment of such benefit.
14.4 Spendthrift Clause.
Except as permitted by the Act or the Code, including in the case of
certain judgments and settlements described in subparagraph (C) of Section
401(a)(13) of the Code, no benefits or other amounts payable under the Plan
shall be subject in any manner to anticipation, sale, transfer, assignment,
pledge, encumbrance, charge or alienation. If the Administrator determines that
any person entitled to any payments under the Plan has become insolvent or
bankrupt or has attempted to anticipate, sell, transfer, assign, pledge,
encumber, charge or otherwise in any manner alienate any benefit or other amount
payable to him under the Plan or that there is any danger of any levy or
attachment or other court process or encumbrance on the part of any creditor of
such person entitled to payments under the Plan against any benefit or other
accounts payable to such person, the Administrator may, at any time, in its
discretion, and in accordance with applicable law, direct the Trustee to
withhold any or all payments to such person under the
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Plan and apply the same for the benefit of such person, in such manner and in
such proportion as the Administrator may deem proper.
14.5 Benefits Limited to Fund.
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions,
except as otherwise provided herein. The benefits of this Plan shall be provided
solely by the assets of the Fund, and no liability for the payment of benefits
under the Plan or for any loss of assets due to any action or inaction of the
Trustee shall be imposed upon the Employer.
14.6 Cooperation of Parties.
All parties to this Plan and any party claiming interest hereunder agree to
perform any and all acts and execute any and all documents and papers which are
necessary and desirable for carrying out this Plan or any of its provisions.
14.7 Payments Due Missing Persons.
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however, notwithstanding
any provision in the Plan to the contrary, if, after a period of 5 years from
the date such benefit shall be due, any such persons entitled to benefits have
not been located, their rights under the Plan shall stand suspended. Before this
provision becomes operative, the Trustee shall send a certified letter to all
such persons at their last known address advising them that their interest in
benefits under the Plan shall be suspended. Any such suspended amounts shall be
held by the Trustee for a period of 3 additional years (or a total of 8 years
from the time the benefits first became payable), and thereafter such amounts
shall be reallocated among current Participants in the same manner that a
current contribution would be allocated. However, if a person subsequently makes
a valid claim with respect to such reallocated amounts and any earnings thereon,
the Plan earnings or the Employer's contribution to be allocated for the year in
which the claim shall be paid shall be reduced by the amount of such payment.
Any such suspended amounts shall be handled in a manner not inconsistent with
regulations issued by the Internal Revenue Service and Department of Labor.
14.8 Governing Law.
This Plan has been executed in the State of Indiana, and all questions
pertaining to its validity, construction and administration shall be determined
in accordance with the laws of that State, except to the extent superseded by
the Act.
58
<PAGE>
14.9 Nonguarantee of Employment.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
14.10 Counsel.
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder, or with
respect to any action or proceeding or any question of law, and they shall be
fully protected to the extent allowable by law with respect to any action taken
or omitted by them in good faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by
its duly authorized officers and its corporate seal to be affixed on this _____
day of _______, 1999.
MFS FINANCIAL, INC.
ATTEST:
____________________________ By:_________________________________
Secretary Chairman and Chief Executive Officer
[Corporate Seal]
59
[RP Financial, LC. Letterhead]
August 17, 1999
Board of Directors
Mutual Federal Savings Bank
110 East Charles Street
Muncie, Indiana 47305-2499
Dear Members of the Board:
This letter sets forth the agreement between Mutual Federal Savings Bank,
Muncie, Indiana ("Mutual" or the "Bank"), and RP Financial, LC. ("RP Financial")
for the independent appraisal services pertaining to the mutual-to-stock
conversion transaction, whereby the Bank will become a wholly-owned subsidiary
of a stock holding company. The specific appraisal services to be rendered by RP
Financial are described below. These appraisal services will be managed by one
of RP Financial's Managing Directors.
Description of Conversion Appraisal Services
Prior to preparing the valuation report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
Bank's operations, financial condition, profitability, market area, risks and
various internal and external factors which impact the pro forma market value of
the Bank. RP Financial will prepare a written detailed valuation report of the
Bank which will be fully consistent with applicable regulatory guidelines and
standard pro forma valuation practices. The appraisal report will include an
in-depth analysis of the Bank's financial condition and operating results, as
well as an assessment of the Bank's interest rate risk, credit risk and
liquidity risk. The appraisal report will describe the Bank's business
strategies, market area, prospects for the future and the intended use of
proceeds both in the short term and over the longer term. A peer group analysis
relative to publicly-traded savings institutions will be conducted for the
purpose of determining appropriate valuation adjustments relative to the group.
We will review pertinent sections of the applications and conversion documents
to obtain necessary data and information for the appraisal, including the impact
of key deal elements on the appraised value, such as dividend policy, use of
proceeds and reinvestment rate, tax rate, conversion expenses and
characteristics of stock plans. The appraisal report will conclude with a
midpoint pro forma value which will establish the range of value. The appraisal
report may be periodically updated throughout the conversion process if
appropriate, and there will be at least one updated valuation prepared at the
time of the closing of the conversion.
1
<PAGE>
RP Financial agrees to deliver the valuation appraisal and subsequent
updates, in writing, to the Bank at the above address in conjunction with the
filing of the regulatory application. Subsequent updates will be filed promptly
as certain events occur which would warrant the preparation and filing of such
valuation updates. Further, RP Financial agrees to perform such other services
as are necessary or required in connection with the regulatory review of the
appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates.
Fee Structure and Payment Schedule
Mutual agrees to pay RP Financial a fixed fee of $27,500 for these
appraisal services, plus reimbursable expenses. Payment of these fees shall be
made according to the following schedule:
o $5,000 upon execution of the letter of agreement engaging RP
Financial's appraisal services;
o $20,000 upon delivery of the completed original appraisal report; and
o $2,500 upon completion of the conversion to cover all subsequent
valuation updates that may be required, provided that the transaction
is not delayed for reasons described below.
The Bank will reimburse RP Financial for out-of-pocket expenses incurred in
preparation of the valuation. Such out-of-pocket expenses will likely include
travel, printing, telephone, facsimile, shipping, computer and data services. RP
Financial will agree to limit reimbursable expenses in connection with this
engagement and in connection with the preparation of a regulatory business plan
as described in the accompanying letter, subject to written authorization from
the Bank to exceed such level.
In the event Mutual shall, for any reason, discontinue the proposed
conversion prior to delivery of the completed documents set forth above and
payment of the respective progress payment fees, Mutual agrees to compensate RP
Financial according to RP Financial's standard billing rates for consulting
services based on accumulated and verifiable time expenses, not to exceed the
respective fee caps noted above, after giving full credit to the initial
retainer fee. RP Financial's standard billing rates range from $75 per hour for
research associates to $250 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur
so as to materially change the nature or the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by Mutual and RP Financial. Such unforeseen events shall include,
but not be limited to, major changes in the conversion regulations, appraisal
guidelines or processing procedures as they relate to appraisals, major changes
in management or procedures, operating policies or philosophies, and excessive
delays or suspension of processing of conversion applications by the regulators
such that completion of the transaction requires the preparation by RP Financial
of a new appraisal or financial projections.
2
<PAGE>
Representations and Warranties
Mutual and RP Financial agree to the following:
1. The Bank agrees to make available or to supply to RP Financial such
information with respect to its business and financial condition as RP Financial
may reasonably request in order to provide the aforesaid valuation. Such
information heretofore or hereafter supplied or made available to RP Financial
shall include: annual financial statements, periodic regulatory filings and
material agreements, debt instruments, off balance sheet assets or liabilities,
commitments and contingencies, unrealized gains or losses and corporate books
and records. All information provided by the Bank to RP Financial shall remain
strictly confidential (unless such information is otherwise made available to
the public), and if the conversion are not consummated or the services of RP
Financial are terminated hereunder, RP Financial shall upon request promptly
return to the Bank the original and any copies of such information.
2. The Bank hereby represents and warrants to RP Financial that any
information provided to RP Financial does not and will not, to the best of the
Bank's knowledge, at the times it is provided to RP Financial, contain any
untrue statement of a material fact or fail to state a material fact necessary
to make the statements therein not false or misleading in light of the
circumstances under which they were made.
3. (a) The Bank agrees that it will indemnify and hold harmless RP
Financial, any affiliates of RP Financial, the respective directors, officers,
agents and employees of RP Financial or their successors and assigns who act for
or on behalf of RP Financial in connection with the services called for under
this agreement (hereinafter referred to as "RP Financial"), from and against any
and all losses, claims, damages and liabilities (including, but not limited to,
all losses and expenses in connection with claims under the federal securities
laws) attributable to (i) any untrue statement or alleged untrue statement of a
material fact contained in the financial statements or other information
furnished or otherwise provided by the Bank to RP Financial, either orally or in
writing; (ii) the omission or alleged omission of a material fact from the
financial statements or other information furnished or otherwise made available
by the Bank to RP Financial; or (iii) any action or omission to act by the Bank,
or the Bank's respective officers, Directors, employees or agents which action
or omission is willful or negligent. The Bank will be under no obligation to
indemnify RP Financial hereunder if a court determines that RP Financial was
negligent or acted in bad faith with respect to any actions or omissions of RP
Financial related to a matter for which indemnification is sought hereunder. Any
time devoted by employees of RP Financial to situations for which
indemnification is provided hereunder, shall be an indemnifiable cost payable by
the Bank at the normal hourly professional rate chargeable by such employee.
3
<PAGE>
(b) RP Financial shall give written notice to the Bank of such claim
or facts within thirty days of the assertion of any claim or discovery of
material facts upon which RP Financial intends to base a claim for
indemnification hereunder. In the event the Bank elects, within ten
business days of the receipt of the original notice thereof, to contest
such claim by written notice to RP Financial, RP Financial will be entitled
to be paid any amounts payable by the Bank hereunder within five days after
the final determination of such contest either by written acknowledgement
of the Bank or a final judgment (including all appeals therefrom) of a
court of competent jurisdiction. If the Bank does not so elect, RP
Financial shall be paid promptly and in any event within thirty days after
receipt by the Bank of the notice of the claim.
(c) The Bank shall pay for or reimburse the reasonable expenses,
including attorneys' fees, incurred by RP Financial in advance of the final
disposition of any proceeding within thirty days of the receipt of such
request if RP Financial furnishes the Bank: (1) a written statement of RP
Financial's good faith belief that it is entitled to indemnification
hereunder; and (2) a written undertaking to repay the advance if it
ultimately is determined in a final adjudication of such proceeding that it
or he is not entitled to such indemnification. The Bank may assume the
defense of any claim (as to which notice is given in accordance with 3(b))
with counsel reasonably satisfactory to RP Financial, and after notice from
the Bank to RP Financial of its election to assume the defense thereof, the
Bank will not be liable to RP Financial for any legal or other expenses
subsequently incurred by RP Financial (other than reasonable costs of
investigation and assistance in discovery and document production matters).
Notwithstanding the foregoing, RP Financial shall have the right to employ
their own counsel in any action or proceeding if RP Financial shall have
concluded that a conflict of interest exists between the Bank and RP
Financial which would materially impact the effective representation of RP
Financial. In the event that RP Financial concludes that a conflict of
interest exists, RP Financial shall have the right to select counsel
reasonably satisfactory to the Bank which will represent RP Financial in
any such action or proceeding and the Bank shall reimburse RP Financial for
the reasonable legal fees and expenses of such counsel and other expenses
reasonably incurred by RP Financial. In no event shall the Bank be liable
for the fees and expenses of more than one counsel, separate from its own
counsel, for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising
out of the same allegations or circumstances. The Bank will not be liable
under the foregoing indemnification provision in respect of any compromise
or settlement of any action or proceeding made without its consent, which
consent shall not be unreasonably withheld.
(d) In the event the Bank does not pay any indemnified loss or make
advance reimbursements of expenses in accordance with the terms of this
agreement, RP Financial shall have all remedies available at law or in
equity to enforce such obligation.
4
<PAGE>
It is understood that, in connection with RP Financial's above-mentioned
engagement, RP Financial may also be engaged to act for the Bank in one or more
additional capacities, and that the terms of the original engagement may be
incorporated by reference in one or more separate agreements. The provisions of
Paragraph 3 herein shall apply to the original engagement, any such additional
engagement, any modification of the original engagement or such additional
engagement and shall remain in full force and effect following the completion or
termination of RP Financial's engagement(s). This agreement constitutes the
entire understanding of the Bank and RP Financial concerning the subject matter
addressed herein, and such contract shall be governed and construed in
accordance with the laws of the State of Indiana. This agreement may not be
modified, supplemented or amended except by written agreement executed by both
parties.
Mutual and RP Financial are not affiliated, and neither Mutual nor RP
Financial has an economic interest in, or is held in common with, the other and
has not derived a significant portion of its gross revenues, receipts or net
income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter, together with
the initial retainer fee of $5,000.
Sincerely,
/s/ Ronald S. Riggins
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: R. Donn Roberts /s/ R. Donn Roberts
-------------------------------------
President and Chief Executive Officer
Upon Authorization by the
Board of Directors For: Mutual Federal Savings Bank
Muncie, Indiana
Date Executed: August 25, 1999
------------------
5
[RP Financial, LC. Letterhead]
August 17, 1999
Board of Directors
Mutual Federal Savings Bank
110 East Charles Street
Muncie, Indiana 47305-2499
Dear Members of the Board:
This letter sets forth the agreement between Mutual Federal Savings Bank,
Muncie, Indiana ("Mutual" or the "Bank"), and RP Financial, LC. ("RP
Financial"), whereby the Bank has engaged RP Financial to prepare the regulatory
business plan and financial projections to be adopted by the Bank's Board of
Directors in conjunction with the stock conversion transaction, whereby the Bank
will become a wholly-owned subsidiary of a stock holding company. These services
are described in greater detail below.
Description of Proposed Services
RP Financial's business planning services will include the following areas:
(1) evaluating Mutual's current financial and operating condition, business
strategies and anticipated strategies in the future; (2) analyzing and
quantifying the impact of business strategies, incorporating the use of net
conversion proceeds both in the short and long term; (3) preparing detailed
financial projections on a quarterly basis for a period of at least three fiscal
years to reflect the impact of Board approved business strategies and use of
proceeds; (4) preparing the written business plan document which conforms with
applicable regulatory guidelines including a description of the use of proceeds
and how the convenience and needs of the community will be addressed; and (5)
preparing the detailed schedules of the capitalization of the Bank and holding
company and related cash flows.
Contents of the business plan will include: Philosophy/Goals; Economic
Environment and Background; Lending, Leasing and Investment Activities; Deposit,
Savings and Borrowing Activity; Asset and Liability Management; Operations;
Records, Systems and Controls; Growth, Profitability and Capital; Responsibility
for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies prior to filing the appropriate applications.
1
<PAGE>
Fee Structure and Payment Schedule
The Bank agrees to compensate RP Financial for preparation of the business
plan on a fixed fee basis of $7,500. Payment of the professional fees shall be
made upon delivery of the completed business plan.
The Bank also agrees to reimburse RP Financial for those direct
out-of-pocket expenses necessary and incidental to providing the business
planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses in conjunction with the appraisal engagement, subject to
written authorization from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue this planning
engagement prior to delivery of the completed business plan and payment of the
progress payment fee, the Bank agrees to compensate RP Financial according to RP
Financial's standard billing rates for consulting services based on accumulated
and verifiable time expenses, not to exceed the fixed fee described above, plus
reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Bank and RP Financial. Such unforeseen events may
include changes in regulatory requirements as it specifically relates to Mutual
or potential transactions which will dramatically impact the Bank such as a
pending acquisition or branch transaction.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ Ronald S. Riggins
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: R. Donn Roberts /s/ R. Donn Roberts
-------------------------------------
President and Chief Executive Officer
Upon Authorization by the
Board of Directors For: Mutual Federal Savings Bank
Muncie, Indiana
Date Executed: August 25, 1999
-----------------
2
[RP Financial, LC. Letterhead]
August 17, 1999
Board of Directors
Mutual Federal Savings Bank
110 East Charles Street
Muncie, Indiana 47305-2499
Dear Members of the Board:
This letter sets forth the agreement between Mutual Federal Savings Bank,
Muncie, Indiana ("Mutual" or the "Bank"), and RP Financial, LC. ("RP
Financial"), whereby the Bank has engaged RP Financial to prepare the regulatory
business plan and financial projections for the private charitable foundation to
be formed in conjunction with the stock conversion transaction, and funded by a
stock contribution to the charitable foundation. These services are described in
greater detail below.
Description of Proposed Services
RP Financial's business planning services will include the following areas:
(1) describing potential charitable organizations to receive grants or donations
based on parties identified by the Bank; (2) describing the potential cash flows
of the foundation over a five year period; (3) preparing detailed financial
projections on an annual basis for a period of five fiscal years to reflect the
impact of the anticipated cash flows; (4) describing the corporate governance of
the foundation, including the management of the charitable foundation on a
day-to-day basis; (5) preparing the written business plan document which
conforms with applicable regulatory guidelines; and (6) describing the general
policies and procedures of the charitable foundation.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies in accordance with the scheduled filing date.
Fee Structure and Payment Schedule
The Bank agrees to compensate RP Financial for preparation of the business
plan for the charitable foundation on a fixed fee basis of $2,500. Payment of
the professional fees shall be made upon delivery of the completed business
plan.
1
<PAGE>
The Bank also agrees to reimburse RP Financial for those direct
out-of-pocket expenses necessary and incidental to providing the business
planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses in conjunction with the appraisal engagement, subject to
written authorization from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue this planning
engagement prior to delivery of the completed business plan and payment of the
progress payment fee, the Bank agrees to compensate RP Financial according to RP
Financial's standard billing rates for consulting services based on accumulated
and verifiable time expenses, not to exceed the fixed fee described above, plus
reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Bank and RP Financial. Such unforeseen events may
include changes in regulatory requirements as it specifically relates to Mutual
or changes in the amount of the contribution or structure of the foundation,
which will dramatically impact the charitable foundation's cash flows, corporate
governance or operations.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ Ronald S. Riggins
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: R. Donn Roberts /s/ R. Donn Roberts
-------------------------------------
President and Chief Executive Officer
Upon Authorization by the Board of Directors For: Mutual Federal Savings Bank
Muncie, Indiana
Date Executed: August 25, 1999
-----------------
2
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
(Upon the completion of Transaction)
State of
Percentage of Incorporation or
Parent Subsidiary Ownership Organization
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Financial, Inc. Mutual Federal Savings Bank 100% Maryland
Mutual Federal Savings Bank First M.F.S.B. Corporation 100% Indiana
Mutual Federal Savings Bank Third M.F.S.B. Corporation 100% Indiana
</TABLE>
It is contemplated that the financial statements of the Registrant will be
consolidated with Mutual Federal Savings Bank.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated February 10, 1999, except for
note 18 as to which the date is August 25, 1999, on the financial statements of
Mutual Federal Savings Bank (the "Bank") and to the reference make to us under
the captions "Experts" and "Legal and Tax Opinions" in the Application of
Conversion filed by the Bank with the Office of Thrift Supervision and in the
Registration Statement on Form S-1 filed by MFS Financial, Inc. with the United
States Securities and Exchange Commission.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
September 14, 1999
[RP Financial, LC. Letterhead]
September 13, 1999
Board of Directors
Mutual Federal Savings
110 East Charles Street
Muncie, Indiana 47305-2499
Members of the Board of Directors:
We hereby consent to the use of our firm's name in the Application for
Conversion on Form AC of Mutual Federal Savings Bank and any amendments thereto,
and in the Form S-1 Registration Statement, and any amendments thereto, for MFS
Financial, Inc. We also hereby consent to the inclusion of, summary of and
references to our Appraisal Report and our letter concerning subscription rights
in such filings including the Prospectus of MFS Financial, Inc., which is a part
of this registration statement.
Sincerely,
/s/ RP Financial, LC.
RP FINANCIAL, LC.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1999
<PERIOD-START> Jan-01-1998 Jan-01-1999
<PERIOD-END> Dec-31-1998 Jun-30-1999
<CASH> 11,369 11,673
<INT-BEARING-DEPOSITS> 1,570 927
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 1,358
<INVESTMENTS-HELD-FOR-SALE> 14,208 10,121
<INVESTMENTS-CARRYING> 11,004 12,826
<INVESTMENTS-MARKET> 11,021 12,621
<LOANS> 401,570 424,203
<ALLOWANCE> (3,424) (3,664)
<TOTAL-ASSETS> 469,515 490,035
<DEPOSITS> 365,999 384,562
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 7,208 6,693
<LONG-TERM> 52,462 53,161
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 43,846 45,619
<TOTAL-LIABILITIES-AND-EQUITY> 469,515 490,035
<INTEREST-LOAN> 32,488 15,767
<INTEREST-INVEST> 1,507 845
<INTEREST-OTHER> 378 134
<INTEREST-TOTAL> 34,473 16,746
<INTEREST-DEPOSIT> 16,443 7,916
<INTEREST-EXPENSE> 19,690 9,251
<INTEREST-INCOME-NET> 14,784 7,495
<LOAN-LOSSES> 1,265 380
<SECURITIES-GAINS> 26 (42)
<EXPENSE-OTHER> 10,759 5,528
<INCOME-PRETAX> 6,188 2,857
<INCOME-PRE-EXTRAORDINARY> 6,188 2,857
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,139 1,923
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 3.42 3.39
<LOANS-NON> 1,016 642
<LOANS-PAST> 98 576
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 2,319 3,300
<ALLOWANCE-OPEN> 3,091 3,424
<CHARGE-OFFS> 1,038 245
<RECOVERIES> 106 105
<ALLOWANCE-CLOSE> 3,424 3,664
<ALLOWANCE-DOMESTIC> 3,424 3,664
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 271 256
</TABLE>
MUTUAL FEDERAL SAVINGS BANK REVOCABLE PROXY
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
MUTUAL FEDERAL SAVINGS BANK FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD
ON DECEMBER XX, 1999 AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET
FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF DIRECTORS AND
MANAGEMENT URGE YOU TO VOTE FOR THE AMENDED PLAN OF CONVERSION AND THE
CONTRIBUTION TO THE FOUNDATION.
The undersigned being a member of Mutual Federal Savings Bank, hereby authorizes
the Board of Directors of Mutual Federal Savings Bank or any successors in their
respective positions, as proxy, with full powers of substitution, to represent
the undersigned at the Special Meeting of Members of Mutual Federal Savings Bank
to be held at the Mutual Federal Savings Bank's main office at 110 East Charles
Street, Muncie, Indiana on XXXXX, 1999, at XX p.m., Muncie, Indiana Time, and at
any adjournment of said meeting, to act with respect to all votes that the
undersigned wold be entitled to cast, if then personally present, as set forth
below:
(1) To approve an Amended Plan of Conversion of Mutual Federal Savings Bank
pursuant to which (i) Mutual Federal Savings Bank will convert from a
Federally-chartered mutual savings institution, including the adoption of a
federal stock savings bank charter and bylaws, with the simultaneous issuance of
its common stock to MFS Financial, Inc., a Maryland corporation (the "Holding
Company") and sale by the Holding Company of shares of its common stock, and
(ii) MFS Financial, Inc. will offer for sale shares of its common stock in a
subscription offering and, if necessary, in a community offering and, if
necessary, in a syndicated community offering all as more specifically set forth
in the Amended Plan of Conversion.
FOR [ ] AGAINST [ ]
(2) To approve the contribution of cash and shares of Holding Company
common stock in an amount up to 8% of the total value of the shares issued in
the conversion to The Mutual Federal Savings Bank Charitable Foundation, Inc.,
(the "Foundation"), a private charitable foundation dedicated to the promotion
of charitable purposes within the communities in which the Bank operates.
(3) To vote, in its discretion, upon such other business as may properly
come before the Special Meeting or any adjournment thereof. Management is not
aware of any other such business that may come before the Special Meeting.
FOR [ ] AGAINST [ ]
This proxy, if executed, will be voted "FOR" adoption of the Amended Plan of
Conversion and for adjournment of the Special Meeting, if necessary, if no
choice is made herein. Please date and sign this proxy on the reverse side and
return it in the enclosed envelope.
- --------------------------------------------------------------------------------
MUTUAL FEDERAL SAVINGS BANK REVOCABLE PROXY
Any member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of Mutual Federal Savings Bank either a written
revocation of the proxy, or a duly executed proxy bearing a later date, or by
voting in person at the Special Meeting.
The undersigned hereby acknowledges receipt of a Notice of Special Meeting of
Members of Mutual Federal to be held on the __th day of December, 1999 and a
proxy statement for the Special Meeting prior to the signing of this proxy.
-------------------------------------------
Signature Date
-------------------------------------------
Signature Date
NOTE: Please sign exactly as your name
appears on this Proxy. Only one signature
is required in the case of a joint account.
When signing in a representative capacity,
please give title.
MFS Financial, Inc.
110 East Charles Street
Muncie, Indiana 47305
(xxx) xxx-xxxx
<PAGE>
Stock Order and Certification Form
- --------------------------------------------------------------------------------
Deadline: The Subscription Offering ends at 12:00 noon, Muncie, Indiana Time, on
December xx, 1999. Your original Stock Order Form and Certification Form,
properly executed and with the correct payment, must be received (not
postmarked) at the address on the top of this form, or at any Mutual Federal
Savings Bank ("Mutual Federal") branch office, by the deadline, or it will be
considered void. Faxes or copies of this form will not be accepted.
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount Due
- -------------------- --------------------
X $10.00 =
- -------------------- --------------------
Minimum -- 25 Shares
Maximum -- Generally 20,000 shares; however, see the Prospectus.
- --------------------------------------------------------------------------------
Method of Payment
(3)[ ] Enclosed is a check, bank draft or money order payable to MFS Financial,
Inc. for $__________.
(4)[ ] I authorize Mutual Federal to make withdrawals from my Mutual Federal
Savings Bank certificate or savings account(s) shown below and
understand that the amounts will not otherwise be available for
withdrawal:
Account Number(s) Amount(s)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Total Withdrawal
---------
There is NO penalty for early withdrawal.
- --------------------------------------------------------------------------------
(5) Purchaser Information (check one)
a. [ ] Eligible Account Holder - Check here if you were a depositor with $50.00
or more on deposit with MFS Federal Savings Bank as of July 31, 1998.
Enter information below for all deposit accounts that you had at
Mutual Federal Savings on July 31, 1998.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a depositor
with $50.00 or more on deposit with Mutual Federal Savings Bank as of
September 30, 1999 but are not an Eligible Account Holder. Enter
information below for all deposit accounts that you had at Mutual
Federal Savings Bank on September 30, 1999.
c. [ ] Other Member - Check here if you were a depositor of Mutual Federal
Savings Bank as of XXXXX XX, 1999, or borrower as of April 1, 1984
whose loan continues, but are not an Eligible Account Holder or a
Supplemental Eligible Account Holder. Enter information below for all
accounts that you had at Mutual Federal Savings Bank on XXXXX XX, 1999.
d. [ ] Directors, Officers and Employees of Mutual Federal Savings Bank.
(6) [ ] Check here if you are a director, officer or employee of Mutual Federal
Savings Bank or a member of such person's immediate family (same
household).
- --------------------------------------------------------------------------------
(7) [ ] NASD Affiliation - see description on reverse side hereof.
- --------------------------------------------------------------------------------
<PAGE>
(8) [ ] Please review the preprinted account information listed below. The
accounts printed below may not be all of your qualifying accounts or
even you accounts as of the earliest of the three dates if you have
changed names on the accounts. You should list any other accounts that
you may have or had with Mutual Federal in the box below. SEE THE
STOCK ORDER FORM INSTRUCTIONS SHEET FOR FURTHER INFORMATION. All
subscription orders are subject to the provisions of the Amended
Plan of Conversion.
------------------------------------------------------------------------
------------------------------------------------------------------------
Additional Qualifying Accounts
Account Title (Names on Accounts) Account Number
---------------------------------- ----------------------------
---------------------------------- ----------------------------
---------------------------------- ----------------------------
Please Note: Failure to list all of your accounts may result in the loss of part
or all of your Subscription Rights. (Additional space on back
of form).
- --------------------------------------------------------------------------------
(9) Stock Registration - Please Print Legibly and Fill Out Completely (Note: The
stock certificate and all correspondence related to this stock order will be
mailed to the address provided below)
[ ] Individual [ ] Corporation
[ ] Joint Tenants [ ] Partnership
[ ] Tenants in Common [ ] Individual Retirement Account
[ ] Uniform Transfer to Minors [ ] Fiduciary/Trust (Under
[ ] Uniform Gift to Minors Agreement Dated______________)
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Mailing Daytime
Address Telephone
----------------------------------------------------------------------------
Zip Evening
City State Code County Telephone
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acknowledgment: By signing below, I acknowledge receipt of the Prospectus dated
XXXX XX, 1999 and understand I may not change or revoke my order once it is
received by MFS Financial, Inc. I also certify that this stock order is for my
account and there is no agreement or understanding regarding any further sale or
transfer of these shares. Applicable regulations prohibit any persons from
transferring, or entering into any agreement directly or indirectly to transfer,
the legal or beneficial ownership of subscription rights or the underlying
securities to the account of another person. MFS Financial. Inc. will pursue any
and all legal and equitable remedies in the event it becomes aware of the
transfer of subscription rights and will not honor orders known by it to involve
such transfer. Under penalties of perjury, I further certify that: (1) the
social security number or taxpayer identification number given above is correct
and (2) I am not subject to backup withholding. You must cross out this item (2)
above if you have been notified by the Internal Revenue Service that you are
subject to backup withholding because of under-reporting interest or dividends
on your tax return. By signing below, I also acknowledge that I have not waived
any rights under the Securities Act of 1933 and the Securities Exchange Act of
1934, both as amended.
Signature: THIS FORM MUST BE SIGNED AND DATED BELOW AND ON THE BACK OF THIS
FORM. THIS ORDER IS NOT VALID IF THE STOCK ORDER AND CERTIFICATION FORM ARE NOT
BOTH SIGNED AND PROPERLY COMPLETED. Your order will be filled in accordance with
the provisions of the Amended Plan of Conversion as described in the Prospectus.
An additional signature is required only if payment is by withdrawal from an
account that requires more than one signature to withdraw funds.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
OFFICE USE Check # ______________
Date Rec'd ___/___/___ Amount $______________
Batch # _____-_____________ Order # ______________ Category ______________
<PAGE>
- --------------------------------------------------------------------------------
MFS Financial, Inc.
- --------------------------------------------------------------------------------
Item (7) continued - NASD Affiliation (this section only applies to those
individuals who meet the delineated criteria)
Check box if you are a member of the National Association of Securities Dealers,
Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
Item (8) continued; Purchaser Information
Account Title (Names on Accounts) Account Number
---------------------------------- ----------------------------
---------------------------------- ----------------------------
---------------------------------- ----------------------------
---------------------------------- ----------------------------
- --------------------------------------------------------------------------------
<PAGE>
CERTIFICATION FORM
(This Certification Must Be Signed In Addition to the Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF MFS
FINANCIAL, INC. ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY MUTUAL FEDERAL SAVINGS BANK OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office of
Thrift Supervision Central Regional Director, Ronald N. Karr and (312) 917-5005.
I further certify that, before purchasing the Common Stock of MFS Financial,
Inc. I received a copy of the Prospectus dated November XX, 1999 which discloses
the nature of the Common Stock being offered and describes the following risks
involved in an investment in the Common Stock under the heading "Risk Factors"
beginning on page 7 of the Prospectus:
1. Rising interest rates may hurt our profits.
2. 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.
3. Our loan portfolio possesses increased risk due to our substantial number
of consumer, multi-family and commercial real estate and commercial
business loans.
4. The contribution to the foundation will reduce our earnings.
5. The contribution to the foundation means that your total ownership will be
3.85% less after we make the contribution.
6. We intend to grant stock options and restricted stock to the board and
management following the conversion which could further reduce your voting
control.
7. The amount of common stock we control, our articles of incorporation and
bylaws and state and federal statutory provisions could discourage hostile
acquisitions of control.
8. Holders of MFS Financial common stock may not be able to sell their shares
when desired, or for $10.00 or more per share.
9. If our computer systems do not properly work on January 1, 2000, our
business operations will be disrupted.
- ------------------------------------ ------------------------------------
Signature Date Signataure Date
- ------------------------------------ ------------------------------------
(Note: If shares are to be held jointly; both parties must sign)
EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY
RIGHTS THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THE SHARES OF COMMON STOCK BEING OFFERED OFFERED ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
- --------------------------------------------------------------------------------
MFS Stock Ownership Guide and Stock Order Form Instructions
FINANCIAL
- --------------------------------------------------------------------------------
Stock Order Form Instructions - All subscription orders are subject to the
provisions of the Plan of Conversion.
- --------------------------------------------------------------------------------
Item 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. Generally, the maximum purchase for any person is 20,000
shares (20,000 shares x $10.00 per share = $200,000). No person, together with
associates, as defined in the Prospectus, and no person acting in concert may
purchase more than 700,000 (70,000 shares x $10.00 per share = $700,000) of the
common stock offered in the offering. For additional information, see "Mutual
Federal's Conversions -- Limitations on Stock Purchases" in the Prospectus.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person, although we request you to exchange the cash for a check with any of the
tellers at a Mutual Federal Savings Bank ("Mutual Federal") branch), by check,
bank draft or money order payable to MFS FINANCIAL, INC. DO NOT MAIL CASH. Your
funds will earn interest at the applicable account rate until the Conversion is
completed.
Item 4 - To pay by withdrawal from a savings account or certificate at Mutual
Federal, insert the depositor number(s) and the amount(s) you wish to withdraw
from each account. If more than one signature is required for a withdrawal, all
signatories must sign in the signature box on the front of this form. To
withdraw from an account with checking privileges, please write a check. Mutual
Federal will waive any applicable penalties for early withdrawal from
certificate accounts. A hold will be placed on the account(s) for the amount(s)
you indicate to be withdrawn. Payments will remain in account(s) until the stock
offering closes.
Item 5 - Please check the appropriate box to tell us the earliest of the three
dates that applies to you.
Item 6 - Please check this box if you are a director, officer or employee of
Mutual Federal, or a depositor of such person's household.
Item 7 - Please check this box if you have a National Association of Securities
Dealers, Inc. ("NASD") affiliation (as defined on the reverse side of the Stock
Order Form.)
Item 8 - Please review the preprinted qualifying depositor number(s)
information. The depositor number(s) listed may not be all of your depositor
number(s). You should list any other qualifying accounts that you may have or
had with Mutual Federal in the box located under the heading "Additional
Qualifying Accounts". These may appear on other stock order forms you have
received. For example, if you are ordering stock in just your name, you should
list all of your depositor numbers as of the earliest of the three dates that
you were a depositor. Similarly, if you are ordering stock jointly with another
depositor, you should list all depositor numbers under which either of you are
owners, i.e. individual accounts, joint accounts, etc. If you are ordering stock
in your minor child's or grandchild's name under the Uniform Gift to Minors Act
ownership, the minor must have had a depositor number on one of the three dates
and you should list only their depositor number(s). If you are ordering stock
corporately, you need to list just that corporation's depositor number, as your
individual depositor number(s) do not qualify. Failure to list all of your
qualifying depositor numbers may result in the loss of part or all of your
subscription rights.
Item 9 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of MFS Financial,
Inc., common stock. Please complete this section as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening phone numbers. We will need to call you if we
cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Subscription
rights are not transferable. If you are an eligible or supplemental eligible
account holder or other depositor, to protect your priority over other
purchasers as described in the Prospectus, you must take ownership in at least
one of the account holder's names.
(See Reverse Side for Stock Ownership Guide)
<PAGE>
- --------------------------------------------------------------------------------
MFS Stock Ownership Guide and Stock Order Form Instructions
FINANCIAL
- --------------------------------------------------------------------------------
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Uniform Gift to Minors Act - For residents of Indiana and many states, stock may
be held in the name of a custodian for the benefit of a minor under the Uniform
Gift to Minors Act. For residents in other states, stock may be held in a
similar type of ownership under the Uniform Transfer to Minors Act of the
individual state. For either ownership, the minor is the actual owner of the
stock with the adult custodian being responsible for the investment until the
child reaches legal age. Only one custodian and one minor may be designated.
Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line followed by the notation UGMA-IA or UTMA-Other State. List only the minor's
social security number.
Corporation/Partnership - Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
Please contact the Stock Information Center if you have any questions about your
IRA account and please do not delay in exploring this option. Registration for
IRA's:
On Name Line 1 - list the name of the broker or trust department followed
by CUST or TRUSTEE.
On Name Line 2 - FBO (for benefit of) YOUR NAME IRA a/c #______.
Address will be that of the broker / trust department to where the stock
certificate will be sent.
The Social Security / Tax I.D. number(s) will be either yours or your
trustees, as they direct.
Please list your phone numbers.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker, donor
or testator or the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated," fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
(See Reverse Side for Stock Order Form Instructions)
STOCK OFFERING
QUESTIONS
&
ANSWERS
MFS Financial, Inc.
THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS
ACCOMPANIED BY A STOCK ORDER FORM AND CERTIFICATION FORM.
<PAGE>
FACTS ABOUT CONVERSION
The Board of Directors of Mutual Federal Savings Bank, a federal savings bank
(the "Bank") unanimously adopted an Amended Plan of Conversion (the "Plan") to
convert from a mutual savings Bank to a stock savings Bank.
This brochure answers some of the most frequently asked questions about the Plan
and about your opportunity to invest in MFS Financial, Inc. (the "Company"), the
newly formed corporation that will serve as the holding company for the Bank
following the conversion.
Investment in the stock of MFS Financial, Inc. involves certain risks. For a
discussion of these risks and other factors, investors are urged to read the
accompanying Prospectus, especially the discussion under the heading "Risk
Factors."
WHY IS THE BANK CONVERTING TO STOCK FORM?
The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Through the sale of stock, the Bank
will raise additional capital enabling it to:
o support and expand its current financial and other services; and
o allow customers and friends to purchase stock and share in the
Company's and the Bank's future. WILL THE PLAN AFFECT ANY OF MY
DEPOSIT ACCOUNTS OR LOANS? No. The Plan will have no effect on the
balance or terms of any savings account or loan, and your deposits
will continue to be federally insured by the Federal Deposit Insurance
Corporation ("FDIC") to the maximum legal limit. Your savings account
is not being converted to stock.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING?
Certain past and present depositors and borrowers of the Bank, and the Bank's
Employee Stock Ownership Plan.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
MFS Financial, Inc. is offering up to 5,520,000 shares of common stock, subject
to adjustment as described in the Prospectus, at a price of $10.00 per share
through the Prospectus.
HOW MUCH STOCK MAY I BUY?
The minimum order is 25 shares. Generally, no person may purchase more than
$200,000 of common stock and no person, together with associates of and persons
acting in concert with such person, may purchase more than $700,000 of common
stock.
DO MEMBERS HAVE TO BUY STOCK?
No. However, the Plan will allow the Bank's depositors and borrowers an
opportunity to buy stock and become charter shareholders of the holding company
for the local financial institution with which they do business. HOW DO I ORDER
STOCK? You must complete the enclosed Stock Order Form and Certification Form.
Instructions for completing your Stock Order and Certification Form are
contained in this packet. Your order must be received by 12:00 p.m., Muncie,
Indiana time, on December xx, 1999.
HOW MAY I PAY FOR MY SHARES OF STOCK?
First, you may pay for stock by check, or money order. Interest will be paid by
the Bank on these funds at the passbook rate, which is currently x.xx% per
annum, from the day the funds are received until the completion or termination
of the Plan. Second, you may authorize us to withdrawal funds from your Bank
savings account or certificate of deposit for the amount of funds you specify
for payment. You will not have access to these funds from the day we receive
your order until completion or termination of the Plan.
CAN I PURCHASE SHARES USING FUNDS IN MY BANK IRA ACCOUNT?
Federal regulations do not permit the purchase of conversion stock from your
existing Bank IRA account. Please call our Stock Information Center for
additional information.
WILL THE STOCK BE INSURED?
No. Like any other common stock, the Company's stock will not be insured.
<PAGE>
WILL DIVIDENDS BE PAID ON THE STOCK?
The Board of Directors of the Company intends to pay a cash dividend in the
future, subject to regulatory limits and requirements. No decision has been made
as to the amount or timing of such dividends, if any.
HOW WILL THE STOCK BE TRADED?
The Company's stock will trade on the Nasdaq National Market. However, no
assurance can be given that an active and liquid market will develop.
ARE OFFICERS AND DIRECTORS OF THE BANK PLANNING TO PURCHASE STOCK?
Yes! the Bank's officers and directors plan to purchase, in the aggregate,
$x,xxx,xxx worth of stock or approximately x.xx% of the stock offered at the
midpoint of the offering range.
MUST I PAY A COMMISSION?
No. You will not be charged a commission or fee on the purchase of shares in the
Plan.
SHOULD I VOTE?
Yes. Your "YES" vote is very important!
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS!
WHY DID I GET SEVERAL PROXY CARDS?
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
HOW MANY VOTES DO I HAVE?
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100, or fraction thereof, on
deposit as of the voting record date. MAY I VOTE IN PERSON AT THE SPECIAL
MEETING? Yes, but we would still like you to sign and mail your proxy today. If
you decide to revoke your proxy you may do so by giving notice at the special
meeting.
FOR ADDITIONAL INFORMATION
YOU MAY CALL OUR STOCK
INFORMATION CENTER BETWEEN
9:00 A.M. AND 4:30 P.M. MONDAY
THROUGH FRIDAY.
STOCK INFORMATION
CENTER
(xxx) xxx-xxxx
MFS Financial, Inc.
110 E. Charles Street
Muncie, Indiana 47305
Phone (xxx) xxx-xxxx
<PAGE>
XXXXX XX, 1999
Dear Prospective Investor:
We are pleased to announce that Mutual Federal Savings Bank (the "Bank") is
converting from the mutual to the stock form of organization (the "Conversion").
In connection with the Conversion, MFS Financial, Inc. ("MFS Financial"), the
newly-formed holding company for the Bank, is offering common shares in a
subscription offering (the "Offering"). The sale of common shares in connection
with the Conversion will enable the Bank to raise additional capital to support
and enhance its current operations.
We have enclosed the following materials which will help you learn more about
the merits of MFS Financial's common shares as an investment. Please read and
review the materials carefully.
PROSPECTUS: This document provides detailed information about the Bank's
operations and the proposed Offering.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase common
shares by returning it with your payment in the enclosed business reply
envelope. The deadline for ordering common shares is 12:00 noon, Muncie,
Indiana time, on December __, 1999.
We invite our loyal customers to become shareholders of MFS Financial. Through
this Offering you have the opportunity to buy common shares directly from MFS
Financial, without paying a commission or fee. The board of directors and senior
management of the Bank fully support the Offering.
If you have additional questions regarding the Conversion and Offering, please
call us at (XXX) XXX-XXXX, Monday through Thursday from 9:00 a.m. to 4:30 p.m.,
or Friday from 9:00 a.m. to 6:00 p.m., or stop by the Stock Information Center
at 110 East Charles Street, Muncie, Indiana.
Sincerely,
R. Donn Roberts
President and Chief Executive Officer
THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND,
THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS
NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS
MADE ONLY BY THE PROSPECTUS.
<PAGE>
XXXXXXXX XX, 1999
Dear Friend:
We are pleased to announce that Mutual Federal Savings Bank (the "Bank") is
converting from the mutual to the stock form of organization (the "Conversion").
In conjunction with the Conversion, MFS Financial, Inc. ("MFS Financial"), the
newly-formed holding company for the Bank, is offering common shares in a
subscription offering offering (the "Offering"). The sale of common shares in
connection with the Conversion will enable the Bank to raise additional capital
to support and enhance its current operations.
Because we believe you may be interested in learning more about the merits of
MFS Financial's common shares as an investment, we are sending you the following
materials which describe the Offering.
PROSPECTUS: This document provides detailed information about the Bank's
operations and the proposed Offering of MFS Financial's common shares.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase stock by
returning it with your payment in the enclosed business reply envelope. The
deadline for ordering stock is 12:00 Noon, Muncie, Indiana time, on
December __, 1999.
As a friend of the Bank, you will have the opportunity to buy common shares
directly from MFS Financial in the Offering without paying a commission or fee.
If you have additional questions regarding the Conversion and Offering, please
call us at (XXX) XXX-XXXX Monday through Thursday from 9:00 a.m. to 4:30 p.m and
Friday from 9:00 a. m. to 6:00 p.m., or stop by the Conversion Information
Center at the 110 East Charles Street, Muncie, Indiana.
We are pleased to offer you this opportunity to become a shareholder of MFS
Financial.
Sincerely,
R. Donn Roberts
President and Chief Executive Officer
THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND,
THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS
NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS
MADE ONLY BY THE PROSPECTUS.
<PAGE>
XXXX XX, 1999
Dear Member:
We are pleased to announce that Mutual Federal Savings Bank (the "Bank") is
converting from the mutual to the stock form of organization (the "Conversion").
In conjunction with the Conversion, MFS Financial, Inc. ("MFS Financial"), the
newly-formed corporation that will become the holding company for the Bank, is
offering common shares in a subscription offering (the "Offering") to our
Employee Stock Ownership Plan, specific depositors and borrowers, and members of
the general public pursuant to an Amended Plan of Conversion (the "Plan").
To accomplish this Conversion, we need your participation in an important vote.
Enclosed is a proxy statement describing the Plan and your voting and
subscription rights. The Bank's Plan has been approved by the Office of Thrift
Supervision and now must be approved by you. YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the proxy materials, is your proxy card, located behind the
window of your mailing envelope. This proxy card should be signed and returned
to us prior to the Special Meeting to be held on December __, 1999. Please take
a moment now to sign the enclosed proxy card and return it to us in the
postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING
AGAINST THE CONVERSION.
The Board of Directors of the Bank feel that the Conversion offers a number of
advantages, including an opportunity for the Bank's depositors and customers to
become shareholders of MFS Financial. In connection with the Conversion, please
remember:
Your accounts at the Bank will continue to be insured up to the maximum
legal limit by the Federal Deposit Insurance Corporation ("FDIC").
There will be no change in the balance, interest rate, or maturity of any
deposit accounts because of the Conversion, unless you choose to purchase
shares using your account balances.
Members have a right, but not an obligation, to subscribe for MFS Financial
common shares before they are offered to the public.
Like all stock, THE COMMON SHARES issued in this offering WILL NOT BE
INSURED BY THE FDIC.
Enclosed are materials describing the offering of MFS Financial's common shares.
We urge you to read these materials carefully. If you are interested in
purchasing the common shares of MFS Financial, you must submit your Stock Order
and Certification Form, and payment prior to 12:00 noon, Muncie, Indiana time,
on December __, 1999.
If you have additional questions regarding the Offering, please call us at (XXX)
XXX-XXXX, Monday through Friday from 8:30 a.m. to 4:30 p.m., or Friday from 9:00
a.m. to 6:00 p.m., or stop by the Stock Information Center at 110 East Charles
Street, Muncie, Indiana.
Sincerely,
R. Donn Roberts
President and Chief Executive Officer
THE COMMON SHARES BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
XXXXX XX, 1999
Dear Member:
We are pleased to announce that Mutual Federal Savings Bank (the "Bank") is
converting from the mutual to the stock form of organization (the "Conversion").
In connection with the Conversion, MFS Financial, Inc. ("MFS Financial"), the
newly-formed holding company for the Bank, is offering common shares in a
subscription offering offering.
Unfortunately, MFS Financial is unable to either offer or sell its common shares
to you because the small number of eligible subscribers in your jurisdiction
makes registration or qualification of the common shares under the securities
laws of your jurisdiction impractical, for reasons of cost or otherwise.
Accordingly, this letter should not be considered an offer to sell or a
solicitation of an offer to buy the common shares of MFS Financial.
However, as a member of the Bank, you have the right to vote on the Amended Plan
of Conversion at the Special Meeting of Members to be held on December __, 1999.
Therefore, enclosed is a proxy card, a proxy statement (which includes the
Notice of the Special Meeting), a Prospectus (which contains information
incorporated into the proxy statement) and a return envelope for your proxy
card.
I invite you to attend the Special Meeting on December __, 1999. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope.
Sincerely,
R. Donn Roberts
President and Chief Executive Officer
<PAGE>
Charles Webb & Company
a Division of
KEEFE, BRUYETTE & WOODS, INC.
To Members and Friends of Mutual Federal Savings Bank
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc. and a member
of the National Association of Securities Dealers, Inc. ("NASD"), is assisting
Mutual Federal Savings Bank (the "Bank") in converting from the mutual to the
stock form of organization (the "Conversion"). As part of the conversion, the
Bank will issue all of its common stock to its holding company MFS Financial,
Inc. ("MFS Financial").
At the request of MFS Financial, we are enclosing materials explaining this
process and your options, including an opportunity to invest in shares of MFS
Financial common stock being offered to the customers of the Bank through
December __, 1999. Please read the enclosed offering materials carefully. MFS
Financial has asked us to forward these documents to you in view of certain
requirements of the securities laws in your state.
If you have any questions, please visit our Stock Information Center - 110 East
Charles Street, Muncie, Indiana, or feel free to call the Stock Information
Center at (XXX) XXX-XXXX.
Very truly yours,
Charles Webb & Company
a Division of Keefe, Bruyette & Woods, Inc.
THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND,
THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS
NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS
MADE ONLY BY THE PROSPECTUS.
Investment Bankers and Financial Advisors
<PAGE>
PROXY GRAM
We recently forwarded to you a proxy statement and letter informing you that the
Board of Directors of Mutual Federal Savings Bank had received conditional
regulatory approval to convert to a stock institution.
Your vote on our plan to convert to a stock savings bank has not been received.
Failure to Vote has the Same Effect as Voting Against the Amended Plan of
Conversion and the Contribution of Cash and Shares of MFS Financial, Inc.'s
Common Stock to the Foundation.
Your vote is important to us, and we are, therefore, requesting that you sign
the enclosed proxy card and return it promptly in the enclosed postage-paid
envelope.
Voting for the Amended Plan of Conversion does not obligate you to purchase
stock or affect the terms or insurance on your accounts.
The Board of Directors unanimously recommends you vote "FOR" the Amended Plan of
Conversion and "FOR" the contribution of cash and shares of MFS Financial, Inc's
common stock to the Foundation.
MUTUAL FEDERAL SAVINGS BANK
Muncie, Indiana
R. Donn Roberts
President and Chief Executive Officer
If you mailed the proxy, please accept our thanks and disregard this request.
For further information call (xxx) xxx-xxxx.
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This notice is neither an offer to sell nor a solicitation of
an offer to buy the common shares of MFS Financial, Inc.
The offer is made only by the Prospectus dated XXXX XX, 1999.
The securities offered in the conversion are not deposits
or accounts and are not federally insured or guaranteed.
