SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 000-27905
MFS FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 110 E. Charles Street, Muncie, Indiana
- ------------------------------------ ----------------------------------------
(State or other jurisdiction (Address of principal executive offices)
of incorporation or organization)
35-2085640 47305-2419
- ------------------------------------ --------------------------------------
(I.R.S. Employer Identification No.) (Zip Code)
Registrant's telephone number, including area code: (765) 747-2800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, computed by reference to the last sale price
of such stock on the Nasdaq National Market on March 1, 2000, was approximately
$49.8 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 1, 2000, there were issued and outstanding 5,819,611 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Portions of registrant's Annual Report to Stockholders for
the fiscal year ended December 31, 1999. PART III of Form 10-K--Portions of
registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders.
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ITEM 1. BUSINESS
General
MFS Financial, Inc., a Maryland corporation, is a savings and loan holding
company which has as its wholly-owned subsidiary Mutual Federal Savings Bank.
MFS Financial was formed in September 1999 to become the holding company of
Mutual Federal in connection with Mutual Federal's conversion from mutual to
stock form of organization on December 29, 1999. The words "we," "our" and "us"
refer to MFS Financial and Mutual Federal on a consolidated basis, except that
references to us prior to December 29, 1999 refer only to Mutual Federal.
At December 31, 1999, we had total assets of $544.5 million, deposits of
$364.6 million and stockholders' equity of $96.7 million. Our executive offices
are located at 110 E. Charles Street, Muncie, Indiana 47305-2400.
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
investments and mortgage-backed securities.
We offer 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 terms ranging from seven days to 71 months. We
solicit deposits in our market areas and we have not accepted brokered deposits.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains various forward-looking statements which are based
on assumptions and describe our future plans and strategies and our
expectations. These forward- looking statements are generally identified by
words such as "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 cause actual
results to differ materially from those estimated 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 and composition of our loan and investment portfolios, demand
for our loan products, deposit flows, our operating expenses, 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.
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MARKET AREAS
We are 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 13 retail offices primarily serving
Delaware, Randolph and Kosciusko counties in Indiana. We also originate mortgage
loans in contiguous counties and we originate indirect consumer loans throughout
Indiana and western Ohio. See "Lending Activities -- Consumer and Other
Lending."
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 December 31, 1999, our net loan
portfolio totaled $442.8 million, which constituted 81.3% of our total assets.
Mortgage loans up to $240,000 may be approved by individual officers. Any
mortgage loan over this amount but not over $300,000 must be approved by the
local market area committee (i.e., Muncie, Winchester or Warsaw markets
comprising Delaware, Randolph and Kosciusko counties). Individual loan officers
may approve multi-family and commercial real estate loans up to $250,000, with
authority up to $500,000 with the approval of two senior officers. Mortgage
loans over $300,000, multi-family and commercial real estate loans over $500,000
and any loans, regardless of amount, outside our general underwriting
guidelines, must be approved by Mutual Federal's board of directors.
At December 31, 1999, the maximum amount which we could lend to any one
borrower and the borrower's related entities was approximately $11.2 million. At
December 31, 1999, 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. 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 December 31, 1999.
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The following table presents information concerning the composition of our
loan portfolio in dollar amounts and in percentages as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family....................... $286,578 63.70% $264,461 65.42% $266,971 65.77%
Multi-family.............................. 5,544 1.23 6,282 1.56 7,694 1.90
Commercial................................ 14,559 3.24 10,293 2.54 8,131 2.00
Construction and development.............. 12,470 2.77 11,805 2.92 10,385 2.56
-------- ------ -------- ------ -------- ------
Total real estate loans............... 319,151 70.94 292,841 72.44 293,181 72.23
-------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Automobile............................... 19,887 4.42 17,820 4.41 19,977 4.92
Home equity.............................. 10,585 2.36 10,253 2.54 11,366 2.80
Home improvement......................... 14,588 3.24 12,108 2.99 14,485 3.57
Manufactured housing..................... 12,305 2.74 15,466 3.83 20,017 4.93
R.V...................................... 25,629 5.70 19,100 4.72 14,564 3.59
Boat..................................... 32,374 7.20 23,608 5.84 21,553 5.31
Other.................................... 4,554 1.01 5,753 1.42 5,585 1.38
-------- ------ -------- ------ -------- ------
Total consumer loans.................. 119,922 26.67 104,108 25.75 107,547 26.50
Commercial business loans................. 10,764 2.39 7,285 1.81 5,211 1.27
-------- ------ -------- ------ -------- ------
Total other loans..................... 130,686 29.06 111,393 27.56 112,758 27.77
-------- ------ -------- ------ -------- ------
Total loans receivable, gross............. 449,837 100.00% 404,234 100.00% 405,939 100.00%
====== ====== ======
Less:
Undisbursed portion of loans.............. 4,844 3,353 3,998
Deferred loan fees and costs.............. (1,446) (689) (440)
Allowance for losses...................... 3,652 3,424 3,091
-------- -------- --------
Total loans receivable, net............... $442,787 $398,146 $399,290
======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995
----------------------------------------------------
Amount Percent Amount Percent
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family....................... $244,518 63.17% $224,526 63.02%
Multi-family.............................. 9,598 2.48 6,544 1.84
Commercial................................ 7,878 2.03 10,090 2.83
Construction and development.............. 22,040 5.69 17,201 4.83
-------- ------ -------- ------
Total real estate loans............... 284,034 73.37 258,361 72.52
------- ----- -------- ------
Other Loans:
Consumer Loans:
Automobile............................... 20,164 5.21 19,297 5.42
Home equity.............................. 10,885 2.81 9,246 2.59
Home improvement......................... 12,066 3.12 10,994 3.08
Manufactured housing..................... 24,933 6.44 29,768 8.36
R.V...................................... 11,503 2.97 10,528 2.96
Boat..................................... 17,244 4.45 11,721 3.29
Other.................................... 5,676 1.47 6,340 1.78
-------- ------ -------- ------
Total consumer loans.................. 102,471 26.47 97,894 27.48
Commercial business loans................. 596 0.16 --- ---
-------- ------- -------- ------
Total other loans..................... 103,067 26.63 97,894 27.48
------- ------ -------- ------
Total loans receivable, gross............. 387,101 100.00% 356,255 100.00%
====== ======
Less:
Undisbursed portion of loans..............
Deferred loan fees and costs.............. 6,073 7,951
Allowance for losses...................... (252) (188)
2,990 2,754
Total loans receivable, net............... -------- --------
$378,290 $345,738
======== ========
</TABLE>
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The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family...................... $178,033 39.58% $163,262 40.39% $141,024 34.74%
Multi-family............................. 2,270 .50 2,656 0.66 2,485 0.61
Commercial............................... 6,220 1.38 2,398 0.59 1,447 0.36
Construction and development............. 5,043 1.12 8,076 2.00 4,108 1.01
-------- ------ -------- ------- -------- ------
Total real estate loans............... 191,566 42.58 176,392 43.64 149,064 36.72
Consumer.................................. 106,563 23.69 93,855 23.22 96,181 23.70
Commercial business....................... 3,320 .74 1,972 0.49 4,454 1.09
-------- ------ -------- ------- -------- ------
Total fixed-rate loans................ 301,449 67.01 272,219 67.35 249,699 61.51
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family...................... 108,545 24.13 101,199 25.03 125,947 31.03
Multi-family............................. 3,274 .73 3,626 0.90 5,209 1.29
Commercial............................... 8,339 1.85 7,895 1.95 6,684 1.64
Construction and development............. 7,427 1.65 3,729 0.92 6,277 1.55
-------- ------ -------- ------- -------- ------
Total real estate loans............... 127,585 28.36 116,449 28.80 144,117 35.51
Consumer.................................. 13,359 2.97 10,253 2.53 11,366 2.80
Commercial business....................... 7,444 1.66 5,313 1.32 757 0.18
-------- ------ -------- --------- -------- -------
Total adjustable-rate loans........... 148,388 32.99 132,015 32.65 156,240 38.49
-------- ------ -------- ------- -------- ------
Total loans........................... 449,837 100.00% 404,234 100.00% 405,939 100.00%
====== ====== ======
Less:
Undisbursed portion of loans.............. 4,844 3,353 3,998
Deferred loan fees and costs.............. (1,446) (689) (440)
Allowance for loan losses................. 3,652 3,424 3,091
-------- -------- --------
Total loans receivable, net............ $442,787 $398,146 $399,290
======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995
----------------------------------------------------
Amount Percent Amount Percent
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family...................... $132,095 34.12% $118,381 33.23%
Multi-family............................. 3,161 0.82 734 0.21
Commercial............................... 1,280 0.33 2,030 0.57
Construction and development............. 11,271 2.91 6,710 1.88
-------- ------ -------- ------
Total real estate loans............... 147,807 38.18 127,855 35.89
Consumer.................................. 91,586 23.66 88,648 24.88
Commercial business....................... 596 0.16 --- ---
-------- ------ -------- ------
Total fixed-rate loans................ 239,989 62.00 216,503 60.77
-------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family...................... 112,423 29.05 106,145 29.79
Multi-family............................. 6,437 1.66 5,810 1.63
Commercial............................... 6,598 1.70 8,060 2.26
Construction and development............. 10,769 2.78 10,491 2.95
-------- ------ -------- ------
Total real estate loans............... 136,227 35.19 130,506 36.63
Consumer.................................. 10,885 2.81 9,246 2.60
Commercial business....................... --- --- --- ---
-------- ------ -------- ------
Total adjustable-rate loans........... 147,112 38.00 139,752 39.23
-------- ------ -------- ------
Total loans........................... 387,101 100.00% 356,255 100.00%
====== ======
Less:
Undisbursed portion of loans.............. 6,073 7,951
Deferred loan fees and costs.............. (252) (188)
Allowance for loan losses................. 2,990 2,754
-------- --------
Total loans receivable, net............ $378,290 $345,738
======== ========
</TABLE>
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The following schedule illustrates the contractual maturity of our 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(1) Consumer
------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
December 31,
- -----------------------
2000(2)................ $ 1,082 7.20% $ 858 8.47% $ 80 9.25% $ 6,439 9.65%
2001................... 678 7.54 69 8.77 2 9.38 3,474 9.30
2002................... 922 8.18 53 9.13 --- --- 7,404 8.90
2003 and 2004.......... 5,326 7.40 1,957 8.05 91 8.46 22,367 8.71
2005 to 2006........... 6,554 7.48 4,746 7.80 284 7.52 11,584 9.52
2007 to 2021........... 131,846 7.18 12,355 8.25 3,547 7.59 68,531(2) 9.01
2022 and following..... 140,170 7.29 65 7.25 8,466 7.30 123 9.99
-------- ------- ------- --------
Total................. $286,578 $20,103 $12,470 $119,922
======== ======= ======= ========
</TABLE>
Commercial
Business Total
-----------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-----------------------------------------------------
(Dollars in thousands)
Due During
Years Ending
December 31,
- -----------------------
2000(2)................ $ 4,588 9.23% $ 13,047 9.22%
2001................... 78 9.11 4,301 9.01
2002................... 2,650 8.64 11,029 8.78
2003 and 2004.......... 906 8.54 30,647 8.44
2005 to 2006........... 2,155 8.74 25,323 8.58
2007 to 2021........... 387 8.69 216,666 7.83
2022 and following..... --- --- 148,824 7.29
------- ---------
Total................. $10,764 $449,837
======= ========
- -------------------------
(1) Once the construction phase has been completed, these loans will
automatically convert to permanent financing.
(2) 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 $296.7 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $140.1
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 December
31, 1999, one- to four-family residential mortgage loans totaled $286.6 million,
or 63.7% 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 to below 80%. Properties securing our
one- to four-family loans are appraised by independent state licensed fee
appraisers approved by Mutual Federal's board of directors. We require 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 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 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 Index to reprice our ARM loans.
During fiscal 1999, we originated $23 million of one- to four-family ARM loans
and $48.3 million of one- to four-family fixed rate mortgage loans. Also during
1999, we bought $3.3 million of one- to four-family arm loans that conform to
our underwriting standards to help reduce our interest rate risk exposure.
During fiscal 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 periods of time because of refinancing and other
prepayments. A significant change in interest rates could alter considerably the
average life of a residential loan in our portfolio. 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
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specified minimum and maximum interest rates, with a lifetime cap and floor, and
a periodic adjustment on the interest rate over the rate in effect on the date
of origination. As a 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 December 31, 1999, our one- to
four-family ARM loan portfolio totaled $178 million, or 39.6% of our gross loan
portfolio. At that date, the fixed-rate one- to four-family mortgage loan
portfolio totaled $108.6 million, or 24.1% 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 December 31, 1999, multi-family
and commercial real estate loans totaled $20.1 million, or 4.5% 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 also 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 Mutual Federal's board of directors. See "Loan
Originations, Purchases, Sales and Repayments."
We generally do not 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.
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Loans secured by multi-family and commercial real estate are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Multi-family and commercial real estate loans
typically involve large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by multi-family and commercial real
estate 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 Assets."
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 properties located within our
market areas. At December 31, 1999, we had $12.5 million in construction and
development loans outstanding, representing 2.8% 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 to determine the appraised value of the
subject property. Loans are based on the lesser of the 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.
Construction loans for one- to four-family homes are generally granted with
a construction period of up to one year. 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 loan-to-value ratios 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
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 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 customer
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base by increasing the number of customer relationships and providing
cross-marketing opportunities. At December 31, 1999, our consumer loan portfolio
totaled $119.9 million, or 26.7% of our gross loan portfolio. We offer a variety
of secured consumer loans, including home equity loans and lines of credit, home
improvement loans, auto loans, boat and recreational vehicle loans, manufactured
housing loans and loans secured by savings deposits. We also offer a limited
amount of unsecured loans. We originate our consumer loans both in our market
areas and throughout Indiana and western Ohio.
At December 31, 1999, our home equity loans, including lines of credit, and
home improvement loans totaled $25.2 million, or 5.6% of our gross loan
portfolio. 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 directly and indirectly originate auto loans, boat and recreational
vehicle loans and manufactured housing loans. We generally buy indirect auto
loans on a rate basis, paying the dealer a cash payment for loans with an
interest rate in excess of the rate we require. This premium is amortized over
the remaining life of the loan. Any prepayments or delinquencies are charged to
future amounts owed to that dealer, with no dealer reserve or other guarantee of
payment if the dealer stops doing business with us.
We underwrite indirect auto loans using the Fair-Isaacs credit scoring
system. We have experienced some difficulty in building the volume of our
indirect auto loan portfolio due to our willingness to accept only the more
qualified buyers based on our scoring. We also directly originate auto loans
through bank personnel. These loans are underwritten more traditionally, with a
review of the borrower's employment and credit history and an assessment of the
borrower's ability to repay the loan.
At December 31, 1999, auto loans totaled $19.9 million, or 4.4% 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 sale
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 down our marketing,
collection and related personnel costs. 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 the estimated life of each loan.
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
11
<PAGE>
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.
We underwrite indirect boat and RV loans using the Fair-Isaacs credit
scoring system and, as with our indirect auto loans, tend to accept only the
more qualified buyers based on our scoring.
Loans for boats and recreational vehicles totaled $58 million at December
31, 1999, or 12.9% 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 is 100% for used recreational
vehicles and 95% for boats. Values are based on the applicable official used
vehicle guides. The term to maturity for these types of loans is up to 10 years
for used boats and recreational vehicles and up to 15 years for new boats and
recreational vehicles. These loans are generally written with fixed rates of
interest.
At December 31, 1999, manufactured housing loans totaled $12.3 million, or
2.7% of our gross loan portfolio. This amount has decreased 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 one- to four-family residential
mortgage loans, especially consumer loans 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.
COMMERCIAL BUSINESS LENDING. At December 31, 1999, commercial business
loans totaled $10.8 million, or 2.4% of our 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 us. We issue a few standby letters of
credit which are offered at competitive rates and terms and are generally on a
secured basis. We are attempting to expand our volume of commercial business
loans.
Our commercial business lending policy includes credit file documentation
and analysis of the borrower's background, capacity to repay the loan, the
adequacy of the borrower's capital and collateral as well as an evaluation of
other conditions affecting the borrower. Analysis of the
12
<PAGE>
borrower's past, present and future cash flows also is 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 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 substantially depend on the success
of the business itself (which, in turn, often depends 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 depends 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
one- to four-family residential and 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.
13
<PAGE>
The following table shows our loan origination, purchase, sale and
repayment activities for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.............. $ 23,002 $ 19,835 $ 29,502
- multi-family.................... 37 1,051 29
- commercial...................... 3,008 2,701 657
- construction or development..... 8,710 4,160 7,389
Non-real estate - consumer..................... --- --- ---
- commercial business...... 611 3,003 1,106
--------- --------- ---------
Total adjustable-rate................... 35,368 30,750 38,683
--------- --------- ---------
Fixed rate:
Real estate - one- to four-family.............. 48,307 96,672 39,223
- multi-family.................... --- 514 ---
- commercial...................... 4,032 1,240 ---
- construction or development..... 8,486 7,297 6,857
Non-real estate - consumer..................... 47,925 32,492 34,730
- commercial business...... 491 810 2,992
--------- --------- ---------
Total fixed-rate........................ 109,241 139,025 83,802
--------- --------- ---------
Total loans originated.................. 144,609 169,775 122,485
--------- --------- ---------
Purchases:
Real estate - one- to four-family.............. 3,324 --- ---
- multi-family.................... --- --- ---
- commercial...................... --- 325 334
- construction or development..... --- --- ---
Non-real estate - consumer..................... --- --- ---
- commercial business...... --- --- ---
--------- --------- ---------
Total loans purchased................... 3,324 325 334
--------- --------- ---------
Sales and Repayments:
Sales:
Real estate - one- to four-family.............. --- 35,123 5,753
- multi-family.................... --- --- ---
- commercial...................... --- --- ---
- construction or development..... --- --- ---
Non-real estate - consumer...................... --- --- ---
- commercial business....... --- --- ---
--------- --------- ---------
Total loans sold........................ --- 35,123 5,753
Principal repayments............................. 100,480 135,909 102,867
--------- --------- ---------
Total reductions........................ 100,480 171,032 108,620
Increase (decrease) in other items, net.......... (1,850) (773) 4,639
--------- --------- ---------
Net increase (decrease)................. $ 45,603 $ (1,705) $ 18,838
========= ========= =========
</TABLE>
14
<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 delinquency 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 the borrower by phone or send a letter to the borrower in
order to identify the reason for the delinquency. Once the loan becomes 90 days
delinquent, the borrower is asked to pay the delinquent amount in full, or
establish 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. If 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 made faster than under the mortgage loan procedure.
DELINQUENT LOANS. The following table sets forth, as of December 31, 1999,
our loans delinquent 60 - 89 days by type, number, amount and percentage of
type.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------
60-89 Days
---------------------------------------------------
Percent
of Loan
Number Amount Category
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Real Estate:
One- to four-family............... 7 $ 173 .06%
Multi-family...................... --- --- ---
Commercial........................ --- --- ---
Construction and
development...................... --- --- ---
Consumer............................ 65 616 .51
Commercial business................. --- --- ---
----- ----- -----
Total.......................... 72 $ 789 .18%
===== ===== ===
</TABLE>
15
<PAGE>
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio at the dates
indicated. 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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family................................ $ 385 $ 500 $ 243 $ 558 $ 625
Multi-family....................................... --- --- --- --- 19
Commercial real estate............................. --- 31 108 471 943
Construction and development....................... --- --- --- --- ---
Consumer........................................... 368 485 331 --- ---
Commercial business................................ --- --- --- --- ---
------ ------- ------- ------- -------
Total........................................... 753 1,016 682 1,029 1,587
------ ------- ------- ------- -------
Accruing loans delinquent 90 days or more:
One- to four-family................................ 16 88 27 8 13
Multi-family....................................... --- --- --- --- ---
Commercial real estate............................. 12 --- --- --- ---
Construction and development....................... --- --- --- --- ---
Consumer........................................... --- 10 51 507 525
Commercial business................................ --- --- --- --- ---
------ ------- ------- ------- -------
Total........................................... 28 98 78 515 538
------ ------- ------- ------- -------
Total nonperfoming loans........................ 781 1,114 760 1,544 2,125
------ ------- ------- ------- -------
Foreclosed assets:
One- to four-family................................ 304 46 83 20 28
Multi-family....................................... --- --- --- --- ---
Commercial real estate............................. 425 --- 1,498 --- ---
Construction and development....................... --- --- --- --- ---
Consumer........................................... 122 223 486 561 232
Commercial business................................ --- --- --- --- ---
------ ------- ------- ------- -------
Total........................................... 851 269 2,067 581 260
------ ------- ------- ------- -------
Total non-performing assets.......................... $1,632 $ 1,383 $ 2,827 $ 2,125 $ 2,385
====== ======= ======= ======= =======
Total as a percentage of total assets................ 0.30% 0.29% 0.62% 0.49% 0.59%
===== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $33,500. No amount was included in interest
income on these loans for the year ended December 31, 1999.
At December 31, 1997, foreclosed commercial real estate consisted of two
properties acquired during 1997 from a troubled debtor. The properties,
comprised of a 50 unit apartment building and a food pantry, were sold in 1998.
16
<PAGE>
At December 31, 1999, foreclosed commercial real estate consisted of one
property acquired in the last half of the year from a troubled debtor. The
property, an office building in Muncie, is currently being offered for sale. In
addition, three residential properties acquired in 1999 from troubled debtors,
one with a book value of $210,000, were being offered for sale.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of December 31, 1999, there was an aggregate of $1.3
million in loans with respect to which known information about the possible
credit problems of the borrowers have caused management to have doubts as to the
abilities of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories. These loans have been considered in management's determination of
the adequacy of our allowance for loan losses.
Included in the $1.3 million above are several residential mortgage loans
which were obtained from a mortgage broker in 1998. In July 1998, the broker
filed for bankruptcy. Shortly before that, we discovered that there were
documentation problems with these loans.
On four of these loans, totaling approximately $759,000, 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 $157,000, 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 was current as of December 31, 1999.
The two other loans at issue, totaling approximately $793,000, were both
current as of December 31, 1999. On one, our lien position is currently behind
that of three other financial institutions. On the other, the mortgage broker
failed to assign the mortgage to us.
We are working with two other lenders, in similar situations with the
mortgage broker, in order to obtain a release of assets from the bankruptcy
trustee. In addition, we have filed a claim with our insurance carrier, although
to date the carrier has denied coverage.
This situation has been considered in determining our allowance for loan
losses. A portion of the provision in 1998 was attributable to these loans, and
two loans, totaling $346,000, were charged-off during 1998. Based on the
information available, significant additional losses are not anticipated at this
time. Changes in circumstances or adverse actions by the bankruptcy court could,
however, result in additional losses.
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
17
<PAGE>
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.
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 Mutual Federal's 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, at December 31, 1999, we had
classified $1.9 million of Mutual Federal's assets as substandard, $913,000 as
doubtful and $90,000 as loss. The total amount classified represented 3% of our
equity capital and .5% of our assets at December 31, 1999.
PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses during
the year ended December 31, 1999 of $760,000, compared to $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 year ended December 31, 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 December 31, 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
18
<PAGE>
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 on our historical
loss experience as well as on significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
The appropriateness of the allowance is reviewed by management based upon
its evaluation of then-existing economic and business conditions affecting our
key lending areas and other conditions, such as credit quality trends (including
trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the loan. Senior
management reviews these conditions quarterly in discussions with our senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the unallocated allowance. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in
the loan portfolio. Actual losses can vary significantly from the estimated
amounts. Our methodology as described permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. Due to the loss of more than
1,800 manufacturing jobs in the local community during recent years and the
increase in higher risk loans, like consumer and commercial loans, as a
percentage of total loans, management has concluded that our allowance for loan
losses should be greater than historical loss experience would otherwise
indicate.
At December 31, 1999, our allowance for loan losses was $3.7 million, or
.82% of the total loan portfolio, and approximately 468% 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 are
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 portfolio.
19
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 3,424 $ 3,091 $ 2,990 $ 2,754 $ 2,430
------- ------- ------- ------- -------
Charge-offs:
One- to four-family....................... 63 446 3 30 67
Multi-family.............................. --- 38 --- --- ---
Commercial real estate.................... 167 43 237 --- 180
Construction and development.............. --- --- --- --- ---
Consumer.................................. 421 511 450 353 242
Commercial business....................... --- --- --- --- ---
------- ------- ------- ------- ------
651 1,038 690 383 489
------- ------- ------- ------- -------
Recoveries:
One- to four-family....................... 81 40 47 6 32
Multi-family.............................. --- --- --- --- ---
Commercial real estate.................... 7 --- --- --- 96
Construction and development.............. --- --- --- --- ---
Consumer.................................. 31 66 44 43 35
Commercial business....................... --- --- --- --- ---
------- ------- ------- ------- -------
119 106 91 49 163
------- ------- ------- ------- -------
Net charge-offs............................. 532 932 599 334 326
Provisions charged to operations............ 760 1,265 700 570 650
------- ------- ------- ------- -------
Balance at end of period.................... $ 3,652 $ 3,424 $ 3,091 $ 2,990 $ 2,754
======= ======= ======= ======= =======
Ratio of net charge-offs during the period
to average loans outstanding during the
period..................................... 0.13% 0.23% 0.15% 0.09% 0.10%
====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans....................... 467.61% 307.36% 406.71% 193.65% 129.60%
====== ====== ====== ====== ======
Allowance as a percentage of total loans
(end of period)............................ 0.82% 0.85% 0.77% 0.78% 0.79%
====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
The distribution of our allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------
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....... $1,038 $286,578 63.70% $1,181 $264,461 65.42 $ 583 $266,971 65.77
Multi-family.............. 55 5,544 1.23 57 6,282 1.56 275 7,694 1.90
Commercial real estate.... 300 14,559 3.24 174 10,293 2.54 234 8,131 2.00
Construction or
development............. 62 12,470 2.77 59 11,805 2.92 52 10,385 2.56
Consumer.................. 1,647 119,922 26.67 1,535 104,108 25.75 1,480 107,547 26.50
Commercial business....... 215 10,764 2.39 146 7,285 1.81 104 5,211 1.27
Unallocated............... 335 --- --- 272 --- --- 363 --- ---
------ -------- ------ ------ -------- ------ ------ -------- ------
Total................ $3,652 $449,837 100.00% $3,424 $404,234 100.00% $3,091 $405,939 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995
---------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family....... $ 683 $244,518 63.17% $ 674 $224,526 63.02%
Multi-family.............. 363 9,598 2.48 253 6,544 1.84
Commercial real estate.... 282 7,878 2.03 558 10,090 2.83
Construction or
development............. 110 22,040 5.69 86 17,201 4.83
Consumer.................. 1,367 102,471 26.47 1,094 97,894 27.48
Commercial business....... 12 596 0.16 --- --- ---
Unallocated............... 173 --- --- 89 ---
------ -------- ------ ------ -------- ------
Total................ $2,990 $387,101 100.00% $2,754 $356,255 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
21
<PAGE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions may 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 also may invest
in investment grade commercial paper and corporate debt securities and mutual
funds the assets of which conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. See "How We Are
Regulated - Mutual Federal" and "- Qualified Thrift Lender Test" for a
discussion of additional restrictions on our investment activities.
The Chief Financial Officer has the basic responsibility for the management
of our investment portfolio, subject to the direction and guidance of the asset
and liability management committee. The Chief Financial Officer considers
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated slope of the yield curve, the level of interest rates, the trend
of new deposit inflows, and the anticipated demand for funds via deposit
withdrawals and loan originations and purchases.
The general objectives of our investment portfolio are to provide liquidity
when loan demand is high, to assist in maintaining earnings when loan demand is
low and to maximize earnings while satisfactorily managing risk, including
credit risk, reinvestment risk, liquidity risk and interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk" contained in our
Annual Report to Stockholders, filed as Exhibit 13 to this Form 10-K.
Our investment securities currently consist of U.S. Government and Agency
securities, mortgage-backed securities, marketable equity securities (which
consist of shares in mutual funds that invest in government obligations,
corporate obligations and mortgage-backed securities) and corporate obligations.
See Note 4 of the Notes to Consolidated Financial Statements contained in our
Annual Report to Stockholders, filed as Exhibit 13 to this Form 10-K. Our
mortgage-backed securities portfolio currently consists of securities issued
under government-sponsored agency programs.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, these securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors like the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
the mortgage loans and affect both the prepayment speed and value of the
securities.
At times over the past several years, we also have maintained a trading
portfolio of U.S. Government securities. Our trading portfolio totaled $1.2
million at December 31, 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 4 of the Notes to Consolidated
22
<PAGE>
Financial Statements contained in our Annual Report to Stockholders, filed as
Exhibit 13 to this Form 10-K.
Mutual Federal has investments in four separate Indiana limited
partnerships that were organized to construct, own and operate three multi-unit
apartment complexes in the Indianapolis area and one in Findley, Ohio (the
Pedcor Projects). The general partner in each of these Pedcor Projects is Pedcor
Investments. We have no financial or other relationships with Pedcor
Investments. The three Indianapolis area Pedcor Projects, which are operated as
multi-family, low and moderate-income housing projects, have been completed and
have been performing as planned for several years. The Findley, Ohio Pedcor
Project, which also will be operated as a multi-family, low and moderate-income
housing project, is near completion. At the inception of the Findley, Ohio
Pedcor Project in February 1998, we invested $2.1 million and committed to
invest an additional $1.9 million, as of December 31, 1999, of which $1.8
million remained payable over the next ten years.
A low and moderate-income housing project qualifies for certain federal
income tax credits if (1) it is a residential rental property, (2) the units are
used on a non-transient basis, and (3) at least 20% of the units in the project
are occupied by tenants whose incomes are 50% or less of the area median gross
income, adjusted for family size, or alternatively, at least 40% of the units in
the project are occupied by tenants whose incomes are 60% or less of the area
median gross income. Qualified low-income housing projects generally must comply
with these and other rules for 15 years, beginning with the first year the
project qualified for the tax credit, or some or all of the tax credit together
with interest may be recaptured. The tax credit is subject to the limitation as
the use of general business credit, but no basis reduction is required for any
portion of the tax credit claimed. As of December 31, 1999, at least 90% of the
units in the Indianapolis area Pedcor Projects were occupied, and all of the
tenants met the income test required for the tax credits.
We received tax credits of $262,000 from the Indianapolis Pedcor Projects
for each of the years ended December 31, 1999 and 1998. Additionally, the Pedcor
Projects have incurred operating losses in the early years of their operations
primarily due to accelerated depreciation of assets. We have accounted for our
investment in three of the four Pedcor Projects on the equity method.
Accordingly, we have recorded our share of these losses as reductions to Mutual
Federal's investment in the Pedcor Projects. Mutual Federal has less than a 20%
ownership interest in the remaining Pedcor Project, and we have recorded its
investment in this project at amortized cost.
23
<PAGE>
The following summarizes Mutual Federal's equity in the Pedcor Projects'
losses and tax credits recognized in our consolidated financial statements.
<TABLE>
<CAPTION>
Year the Year Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
(In Thousands)
Investments in Pedcor low
income housing projects.................. $5,275 $5,266 $1,407
====== ====== ======
Equity in losses, net of income
tax effect.............................. $ (7) $ (9) $ (187)
Tax credit................................ 262 262 262
------ ------ ------
Increase in after tax income
from Pedcor Investments.................. $ 255 $ 253 $ 75
====== ====== ======
</TABLE>
See Note 7 of the Notes to Consolidated Financial Statements contained in
our Annual Report to Stockholders filed as Exhibit 13 to this Form 10-K for
additional information regarding our limited partnership investments.
24
<PAGE>
The following table sets forth the composition of our investment and
mortgage-related securities portfolio and other investments at the dates
indicated. As of December 31, 1999, our investment securities portfolio 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,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held-to-maturity:
Federal agency obligations......................... $10,200 $ 9,787 $ 6,220 $ 6,220 $ 8,381 $ 8,371
Corporate obligations.............................. 2,099 2,079 4,634 4,651 1,636 1,646
Municipal obligations.............................. 150 150 150 150 150 150
------- -------- ------- ------- ------- --------
Total investment securities held to maturity.... 12,449 12,016 11,004 11,021 10,167 10,167
------- -------- ------- ------- ------- --------
Investment securities available-for-sale:
Mutual funds....................................... 5,781 5,587 7,761 7,625 6,843 6,704
Federal agency obligations......................... 2,416 2,382 1,244 1,286 1,406 1,426
Mortgage-backed securities......................... 9,517 9,385 5,129 5,297 4,125 4,240
Collateralized mortgage obligations................ 4,584 4,536 --- --- --- ---
Corporate obligations.............................. 7,781 7,707 --- --- --- ---
------- -------- -------- ------- ------- --------
Total investment securities held for sale....... 30,079 29,597 14,134 14,208 12,374 12,370
------- -------- -------- ------- ------- --------
Trading account securities:
U.S. Treasury obligations.......................... 1,447 1,235 --- --- --- ---
------- -------- -------- ------- ------- --------
Total trading account securities................ 1,447 1,235 --- --- --- ---
------- -------- -------- ------- ------- --------
Total investment securities.......................... 43,975 42,848 25,138 25,229 22,541 22,537
Investment in limited partnerships................... 5,275 N/A 5,266 N/A 1,407 N/A
Investment in insurance company...................... 590 N/A 590 N/A 590 N/A
Federal Home Loan Bank stock......................... 5,339 N/A 3,612 N/A 3,612 N/A
------- -------- -------
Total investments.................................... $55,179 $34,606 $28,150
======= ======= =======
</TABLE>
25
<PAGE>
The following table indicates, as of December 31, 1999, the composition and
maturities of our investment securities and mortgage-backed securities
portfolio, excluding Federal Home Loan Bank stock and our trading securities.
<TABLE>
<CAPTION>
Due in
-----------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Years Years 10 Years Investment Securities
------------- ----------- ---------- ----------- ---------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
------------- ----------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Corporate obligations............. $1,113 $ 7,796 $ 470 $ 501 $ 9,880 $ 9,786
Federal agency obligations........ 749 6,431 3,993 1,443 12,616 12,169
Municipal obligations............. --- --- --- 150 150 150
Mutual funds...................... 5,781 --- --- --- 5,781 5,587
Mortgage-backed securities:
Freddie Mac..................... --- 530 --- 1,433 1,963 1,953
Fannie Mae...................... 248 593 605 5,609 7,055 6,935
Ginnie Mae...................... --- --- --- 1,467 1,467 1,458
Other........................... --- --- --- 3,616 3,616 3,575
------ ------- ------ ------- ------- -------
$7,891 $15,350 $5,068 $14,219 $42,528 $41,613
====== ======= ====== ======= ======= =======
Weighted average yield............ 6.21% 6.21% 6.55% 6.92% 6.63%
</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 deposit accounts to consumers 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 our deposit accounts has allowed us to be
competitive in obtaining funds and to respond 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.
Our ability to attract and maintain these deposits, however, and the rates paid
on them, has been and will continue to be affected significantly by market
conditions.
26
<PAGE>
The following table sets forth our deposit flows during the years
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Opening balance............................. $ 365,999 $ 344,860 $ 330,235
Deposits.................................... 1,205,702 1,010,169 1,027,102
Withdrawals................................. (1,220,992) (1,003,062) (1,025,662)
Interest credited........................... 13,895 14,032 13,185
----------- ---------- ----------
Ending balance.............................. $ 364,604 $ 365,999 $ 344,860
============ ========== ==========
Net increase (decrease)..................... $ (1,395) $ 21,139 $ 14,625
=========== ========== ==========
Percent increase (decrease)................. (.38)% 6.13% 4.43%
====== ==== ====
</TABLE>
27
<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,
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook accounts................................ $ 39,792 10.91% $ 42,242 11.54% $ 42,359 12.28%
NOW and demand accounts ......................... 52,560 14.42 57,239 15.64 46,703 13.54
Money market accounts............................ 42,091 11.54 33,686 9.20 26,236 7.61
--------- ------ -------- ------ -------- ------
Total non-certificates........................... 134,443 36.87 133,167 36.38 115,298 33.43
--------- ------ -------- ------ -------- ------
Certificates:
0.00 - 1.99%................................... --- --- --- --- --- ---
2.00 - 3.99%................................... 5,494 1.51 8,691 2.38 --- ---
4.00 - 5.99%................................... 185,993 51.01 171,455 46.85 166,424 48.26
6.00 - 7.99%................................... 36,957 10.14 50,928 13.91 61,398 17.80
8.00 - 9.99%................................... 1,717 .47 1,758 0.48 1,740 0.51
10.00% and over.................................. --- --- --- --- --- ---
-------- ------ -------- ------ ------- ------
Total certificates............................... 230,161 63.13 232,832 63.62 229,562 66.57
-------- ------ -------- ------ -------- ------
Total deposits................................... $364,604 100.00% $365,999 100.00% $344,860 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
28
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of December 31, 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:
March 31, 2000................. $5,485 $ 41,150 $11,028 $ --- $ 57,663 25.05%
June 30, 2000.................. 9 45,176 11,600 --- 56,785 24.67
September 30, 2000............. --- 20,844 3,961 --- 24,805 10.78
December 31, 2000.............. --- 17,807 1,442 --- 19,249 8.36
March 31, 2001................. --- 20,775 441 --- 21,216 9.22
June 30, 2001.................. --- 22,549 1,183 --- 23,732 10.31
September 30, 2001............. --- 6,498 1,840 --- 8,338 3.62
December 31, 2001.............. --- 2,230 --- --- 2,230 0.97
March 31, 2002................. --- 936 1,079 --- 2,015 0.88
June 30, 2002................. --- 485 1,335 37 1,857 0.81
September 30, 2002............. --- 207 1,256 631 2,094 0.91
December 31, 2002.............. --- 327 1,102 453 1,882 0.82
2003........................... --- 3,853 86 596 4,535 1.97
2004 --- 3,156 604 --- 3,760 1.63
Thereafter..................... --- --- --- --- --- ---
------- -------- ------- ------ -------- ------
Total....................... $5,494 $185,993 $36,957 $1,717 $230,161 100.00%
======= ======== ======= ====== ======== ======
Percent of total............ 2.39% 80.81% 16.06% .74%
===== ===== ===== ===
</TABLE>
The following table indicates, as of December 31, 1999, the amount of our
certificates of deposit and other deposits by time remaining until maturity.
<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....... $40,916 $44,565 $36,667 $58,209 $180,357
Certificates of deposit of $100,000 or more...... 5,687 10,045 6,887 12,550 35,169
Public funds (1)................................. 11,060 2,175 500 900 14,635
------- ------- ------- ------- --------
Total certificates of deposit.................... $57,663 $56,785 $44,054 $71,659 $230,161
======= ======= ======= ======= ========
- ---------------
<FN>
(1) Deposits from governmental and other public entities.
</FN>
</TABLE>
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
29
<PAGE>
asset/liability management goals. Our borrowings historically have consisted of
advances from the Federal Home Loan Bank of Indianapolis and securities sold
under agreement to repurchase. See Notes 9, 10 and 11 of the Notes to
Consolidated Financial Statements contained in our Annual Report to
Stockholders, filed as Exhibit 13 to this Form 10-K.
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
December 31, 1999, we had $72.3 million in Federal Home Loan Bank advances
outstanding.
The following table sets forth, for the years indicated, the maximum
month-end balance and average balance of Federal Home Loan Bank advances,
securities sold under agreement to repurchase and other borrowings.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................... $99,039 $63,754 $70,254
Securities sold under agreements to repurchase.......... 895 --- 875
Other borrowings........................................ 1,799 1,830 ---
Average Balance:
FHLB advances........................................... $62,243 $55,232 $61,471
Securities sold under agreements to repurchase.......... 400 --- 73
Other borrowings........................................ 1,784 1,685 ---
</TABLE>
The following table sets forth certain information as to our borrowings at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
FHLB advances................................ $72,289 $50,632 $66,255
Securities sold under agreements to
repurchase.................................. 840 --- ---
Other borrowings............................. 1,768 1,830 ---
------- ------- -------
Total borrowings........................ $74,897 $52,462 $66,255
======= ======= =======
Weighted average interest rate of FHLB
advances.................................... 5.69% 5.50% 5.89%
Weighted average interest rate of securities
sold under agreements to repurchase......... 5.50% ---% ---%
Weighted average interest rate of other ---% ---% ---%
borrowings..................................
</TABLE>
30
<PAGE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, Mutual Federal is permitted by
Office of Thrift Supervision regulations to invest up to 2% of its assets, or
$10.9 million at December 31, 1999, in the stock of, or unsecured loans to,
service corporation subsidiaries. Mutual Federal may invest an additional 1% of
its assets in service corporations where such additional funds are used for
inner-city or community development purposes.
At December 31, 1999, Mutual Federal 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 December 31,
1999, Mutual Federal's total investment in this subsidiary was $718,000. For the
year ended December 31, 1999, First M.F.S.B. reported net income of $83,000,
which consisted of dividends from Family Financial Life.
Third M.F.S.B., which does business as Mutual Financial Services, offers
tax-deferred annuities, long-term health and life insurance products. All
securities related products and services made available through Mutual Financial
Services are offered by a third party independent broker-dealer. As of December
31, 1999, Mutual Federal's total investment in this subsidiary was $319,000. For
the year ended December 31, 1999, Third M.F.S.B. reported net income of
$161,000, 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 our deposits through our branch office system. Competition for
deposits comes 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 deposits by offering superior service
and a variety of account types at competitive rates.
EMPLOYEES
At December 31, 1999, we had a total of 208 employees, including 58
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
31
<PAGE>
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which apply to us. This description, as well as other descriptions of laws and
regulations contained in this Form 10- K, is not 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 our operations. In addition, the regulations by which we are
governed may be amended from time to time. Any such legislation or regulatory
changes could adversely affect us. We cannot assure you as to whether or in what
form any such changes will 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 Mutual Federal's 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 to requirements of 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 savings institutions are prohibited from
engaging in any activities not permitted by such laws and regulations. This
regulation and supervision primarily is intended for the protection of
depositors and not for the purpose of protecting shareholders.
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
these laws and regulations, whether by the FDIC, the Office of Thrift
Supervision or Congress, could have a material adverse impact on our 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, directly or through other subsidiaries, any business activity other
than those approved for multiple thrift companies or
32
<PAGE>
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 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. 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 September
30, 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, 1999 was $96,000.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Mutual
Federal and MFS Financial. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Except under certain circumstances, final
enforcement actions by the Office of Thrift Supervision must be publicly
disclosed.
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 December 31, 1999, Mutual Federal's lending
limit under this restriction was $11.2 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
33
<PAGE>
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Mutual Federal is a member of the Savings Association Insurance Fund, which
is administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Savings Association Insurance Fund or the Bank Insurance
Fund. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate an institution's 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
also may 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.
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. For Savings
Association Insurance Fund insured institutions, this assessment is
approximately six basis points for each $100 in domestic deposits, and for Bank
Insurance Fund insured institutions this assessment is approximately one basis
point for each $100 in domestic deposits. It is expected that the assessment
will soon be changed to two basis points for all insured institutions,
regardless of fund. The assessment, which may be revised further based
34
<PAGE>
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 also may
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 December 31, 1999, Mutual Federal had $1.5 million of
intangible assets.
At December 31, 1999, Mutual Federal had tangible capital of $73.4 million,
or 13.6% of adjusted total assets, which is approximately $65.3 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3.0% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4.0% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3.0% ratio. At December 31, 1999,
Mutual Federal had $1.5 million of intangible assets which were subject to these
tests.
At December 31, 1999, Mutual Federal had core capital equal to $73.4
million, or 13.6% of adjusted total assets, which is $57.2 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
December 31, 1999, Mutual Federal had $3.6 million of general loan loss
reserves, which was less than 1.25% of risk-weighted assets.
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<PAGE>
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.
As of December 31, 1999, Mutual Federal had total risk-based capital of
$77.0 million and risk-weighted assets of $354.5 million; or total capital of
21.7% of risk-weighted assets. This amount was $48.6 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 actions against savings institutions
that fail to meet their capital requirements. The Office of Thrift Supervision
is generally required 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.
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 ratio 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 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 our
operations and profitability.
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<PAGE>
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
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."
LIQUIDITY
Each savings institution, including Mutual Federal, is required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. This liquid asset ratio requirement may vary from time to
time between 4% and 10%, depending upon economic conditions and savings flows of
all savings institutions. At the present time, the minimum liquid asset ratio is
4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At December 31, 1999, Mutual Federal was in compliance
with the requirement, with an overall liquid asset ratio of 9.3%.
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 the 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 December 31, 1999, Mutual Federal met the test and has always met the test
since its effectiveness.
37
<PAGE>
Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank charter, unless it requalifies as a qualified
thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund-insured until the FDIC permits it to
transfer to the Bank Insurance Fund. If such an institution has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings institution and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the institution is immediately ineligible to receive any new Federal
Home Loan Bank borrowings and is subject to national bank limits for payment of
dividends. If such an institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding Federal Home Loan Bank borrowings, which may
result in prepayment penalties. If any institution that fails the qualified
thrift lender test is controlled by a holding company, then within one year
after the failure, the holding company must register as a bank holding company
and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution is
obligated, 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. An unsatisfactory rating may be
used as the basis for the denial of an application. 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.
38
<PAGE>
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 loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The common stock of MFS Financial is registered with the SEC under the
Securities Exchange Act of 1934. MFS Financial is 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 under the Securities Act of 1933 unless sold
in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders. If MFS
Financial meets specified current public information requirements, each
affiliate of MFS Financial is permitted 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 December
31, 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.
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 collateral deemed sufficient by the Federal
Home Loan Bank. In addition, all long-term advances must be used for residential
home financing.
39
<PAGE>
As a member, Mutual Federal is required to purchase and hold stock in the
Federal Home Loan Bank of Indianapolis. At December 31, 1999, Mutual Federal had
$5.3 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, these
dividends have averaged 7.97% and were 8.10% for 1999.
Under federal law, the Federal Home Loan Banks must provide funds for the
resolution of troubled savings institutions and 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 also could affect adversely the future value of Federal Home Loan
Bank stock. 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 year ended December 31, 1999, dividends paid to Mutual Federal by
the Federal Home Loan Bank of Indianapolis totaled $318,000, as compared to
$289,000 for the year ended December 31, 1998.
FEDERAL TAXATION
GENERAL. We are 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 us. Mutual Federal's federal income tax returns have
been closed without audit by the IRS through its year ended December 31, 1995.
We expect that MFS Financial and Mutual Federal will file a consolidated
federal income tax return commencing with the year 2000, the first taxable year
after completion of the conversion.
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. As of December 31, 1999 the amount of Mutual Federal's reserves subject to
recapture were approximately $358,000.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended failed
December 31, 1997 were subject to recapture into taxable income if Mutual
Federal failed to meet certain thrift asset and definitional tests. Recent
federal legislation eliminated these thrift related recapture rules. However,
under
40
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current law, pre-1988 reserves remain subject to recapture should Mutual Federal
make certain non-dividend distributions or cease to maintain a thrift/bank
charter.
MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Mutual Federal has not been subject to the alternative minimum tax, and does not
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 December 31, 1999, we 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
Mutual Federal is 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.
41
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The business experience for at least the past five years for each of our
executive officers who do not serve as directors is set forth below.
STEVEN R. CAMPBELL. Age 56 years. Mr. Campbell is Senior Vice President of
Mutual Federal's Retail Banking Division, 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 Mutual Federal's Vice
President of Human Resources, Marketing and Administration. He has served in
these positions since 1993, and started with Mutual Federal in 1986.
TIMOTHY J. MCARDLE. Age 49 years. Mr. McArdle, a certified public
accountant, has served as Senior Vice President of Mutual Federal since 1995,
and Treasurer and Controller of Mutual Federal since 1986. He also serves as
Senior Vice President, Treasurer and Controller of MFS Financial. He has been
employed by Mutual Federal since 1981.
STEPHEN C. SELBY. Age 54 years. Since 1995, Mr. Selby has served as Senior
Vice President of the Operations Division at Mutual Federal. Prior to 1995, 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.
ITEM 2. DESCRIPTION OF PROPERTY
At December 31, 1999, we had 13 full service offices. We own the office
building in which our home office and executive offices are located. At December
31, 1999, we owned all but one of our other branch offices. The net book value
of our investment in premises, equipment and leaseholds, excluding computer
equipment, was approximately $6.7 million at December 31, 1999.
We believe that our current facilities are adequate to meet our present and
immediately foreseeable needs.
We utilize a third party service provider to maintain our database of
depositor and borrower customer information. At December 31, 1999, the net book
value of the data processing and computer equipment utilized by us was $1.1
million.
ITEM 3. 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.
42
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 29, 1999, the Company's common stock began trading on the
Nasdaq National Market under the symbol "MFSF." The Company's Board of Directors
intends to declare the payment of cash dividends, dependent on the Company's
financial condition and results of operations, tax considerations, economic
conditions, statutory and regulatory limitations and other factors. The
Company's ability to pay dividends depends, in large part, upon its receipt of
dividends from Mutual Federal. Restrictions on Mutual Federal's payment of
dividends to the Company are described in Note 16 of the Notes to Consolidated
Financial Statements included in the Company's Annual Report to Stockholders for
the year ended December 31, 1999, portions of which are included as Exhibit 13
to this Form 10-K.
As of March 29, 2000, the Company had approximately 1,473 stockholders of
record.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial and Other Data" in
the Company's Annual Report to Stockholders for the year ended December 31,
1999, portions of which are included as Exhibit 13 to this Form 10-K, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report to
Stockholders for the year ended December 31, 1999, portions of which are
included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset and Liability Management
and Market Risk" in the Company's Annual Report to Stockholders for the year
ended December 31, 1999, portions of which are included as Exhibit 13 to this
Form 10-K, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto contained in the
Company's Annual Report to Stockholders for the year ended December 31, 1999,
portions of which are included as Exhibit 13 to this Form 10-K, are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure under this item is required.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information concerning the Company's directors is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Stockholders to be held in 2000, which has been filed with the SEC.
EXECUTIVE OFFICERS
Information concerning the executive officers of the Company who are not
directors is incorporated herein by reference from Part I of this Form 10-K
under the caption "Executive Officers of the Registrant Who Are Not Directors."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information concerning compliance with Section 16(a) reporting requirements
by the Company's directors and executive officers is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Stockholders to be held in 2000, which has been filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Stockholders to be held in 2000, which has been filed with the SEC. The
compensation committee report included in the proxy statement pursuant to Item
402(k) of Regulation S-K is specifically not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
proxy statement for its Annual Meeting of Stockholders to be held in 2000,
which has been filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive proxy statement
for its Annual Meeting of Stockholders to be held in 2000, which has been filed
with the SEC.
44
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following are contained in the portions of the Company's Annual Report
to Stockholders filed as Exhibit 13 to this Form 10-K and are incorporated by
reference into Item 8 of this Form 10-K:
Independent Auditor's Report
Consolidated Balance Sheet at December 31, 1999 and 1998
Consolidated Statement of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is not applicable.
45
<PAGE>
(a)(3) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing or
Regulation S-K Exhibit Number
Exhibit Number Document Attached Hereto
- ------------------- ------------------------------------------------------ ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders,
including indentures:
Form of MFS Financial, Inc. Common Stock *
Certificate
9 Voting Trust Agreement None
10 Material contracts:
Employment Agreement with R. Donn Roberts 10.1
Employment Agreement with Timothy J. McArdle 10.2
Form of Supplemental Retirement Plan Income 10.3
Agreements and related documents for R. Donn
Roberts, Steven Campbell, David W. Heeter,
Timothy J. McArdle and Stephen C. Selby
Form of Agreements and related documents for 10.4
Executive Deferred Compensation Plan for
R. Donn Roberts, Steven Campbell, David W.
Heeter, Timothy J. McArdle and Stephen C. Selby
11 Statement re computation of per share earnings None
12 Statements re computation of ratios None
13 Portions of Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts and Counsel Not Required
24 Power of Attorney None
27 Financial Data Schedule 27
99 Additional Exhibits None
- --------------------
<FN>
* Filed as an exhibit to the Company's Form S-1 registration statement filed
on September 16, 1999 (File No. 333-87239) pursuant to Section 5 of the
Securities Act of 1933. Such previously filed document is incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
</FN>
</TABLE>
46
<PAGE>
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, no Current Reports on Form 8-K
were filed by the Company.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MFS FINANCIAL, INC.
By: /s/ R. Donn Roberts
------------------------------------
R. Donn Roberts, President,
Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ R. Donn Roberts /s/ Wilbur R. Davis
- ------------------------------------------- --------------------------------------------
R. Donn Roberts, President, Chief Executive Wilbur R. Davis, Chairman of the Board
Officer and Director (Principal Executive
Officer)
Date: March 29, 2000 Date: March 29, 2000
/s/ Linn A. Crull /s/ Edward J. Dobrow
- -------------------------------------------- --------------------------------------------
Linn A. Crull, Director
Date: March 29, 2000 Date: March 29, 2000
/s/ William V. Hughes /s/ James D. Rosema
- -------------------------------------------- --------------------------------------------
William V. Hughes, Director James D. Rosema, Director
Date: March 29, 2000 Date: March 29, 2000
/s/ Julie A. Skinner /s/ Timothy J. McArdle
- -------------------------------------------- ---------------------------------------------
Julie A. Skinner, Director Timothy J. McArdle, Senior Vice President,
Treasurer and Controller (Principal Financial
and Accounting Officer)
Date: March 29, 2000 Date: March 29, 2000
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Number Description
- ------- ---------------------------------------------------
10.1 Employment Agreement with R. Donn Roberts
10.2 Employment Agreement with Timothy J. McArdle
10.3 Form of Supplemental Retirement Plan Income
Agreements and related documents
10.4 Form of Agreements and related documents for
Executive Deferred Compensation Plan
13 Portions of Annual Report to Security Holders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
1st day of January, 2000, by and between Mutual Federal Savings Bank
(hereinafter referred to as the "Bank") and R. Donn Roberts (the "Employee").
WHEREAS, the Employee is currently serving as President and Chief Executive
Officer of the Bank; and
WHEREAS, effective December 29, 1999, the Bank converted to capital stock
form as the subsidiary of a holding company (the "Holding Company"); 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 January 1, 2000.
1
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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 President and Chief Executive
Officer, 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 President and Chief Executive
Officer 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.
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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 $258,000 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
<PAGE>
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.
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<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: Wilbur R. Davis
Its: Chairman of the Board
Employee
-------------------------------------
R. Donn Roberts
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
1st day of January, 2000, by and between Mutual Federal Savings Bank
(hereinafter referred to as the "Bank") and Timothy J. McArdle (the "Employee").
WHEREAS, the Employee is currently serving as Senior Vice President,
Treasurer and Controller of the Bank; and
WHEREAS, effective December 29, 1999, the Bank converted to capital stock
form as the subsidiary of a holding company (the "Holding Company"); 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 January 1, 2000.
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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 Senior Vice President, Treasurer
and Controller, 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 Senior Vice President, Treasurer
and Controller 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.
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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 $110,000 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.
(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.
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<PAGE>
(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, 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
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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.
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.
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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: R. Donn Roberts
Its: President and Chief Executive Officer
Employee
-------------------------------------
Timothy J. McArdle
7
FORM OF
RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT
INCOME AGREEMENT
This Restated Executive Supplemental Retirement Income Agreement (the
"Agreement"), effective as of the _____ day of ______________ 1996, amends and
restates the Executive Supplemental Retirement Income Agreement entered into on
October 1, 1993 and formalizes the understanding by and between MUTUAL FEDERAL
SAVINGS BANK (the "Bank"), a federally chartered savings institution, and
_________________, hereinafter referred to as "Executive".
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
by the Executive and wishes to encourage continued employment; and
WHEREAS, the Executive wishes to be assured that he will be entitled to
a certain amount of additional compensation for some definite period of time
from and after retirement from active service with the Bank or other termination
of employment and wishes to provide his beneficiary with benefits after his
death; and
WHEREAS, the Bank and the Executive wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executive after retirement or other termination of employment and/or death
benefits to his beneficiary after his death; and
WHEREAS, the Bank has adopted this Restated Executive Supplemental
Retirement Income Agreement which controls all issues relating to benefits as
described herein:
NOW, THEREFORE, in consideration of the premises and of the mutual
promises herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit Account" shall be represented by the bookkeeping entries
required to record the Executive's (i) Phantom Contributions plus (ii) accrued
interest, equal to the Interest Factor, earned to date on such amounts. However,
neither the existence of such bookkeeping entries nor the Accrued Benefit
Account itself shall be deemed to create either a trust of any kind, or a
fiduciary relationship between the Bank and the Executive or any Beneficiary.
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1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
1.3 "Bank" means Mutual Federal Savings Bank and any successor thereto.
1.4 "Beneficiary" means the person or persons (and their heirs) designated as
Beneficiary in Exhibit B of this Agreement to whom the deceased Executive's
benefits are payable. If no Beneficiary is so designated, then the Executive's
Spouse, if living, will be deemed the Beneficiary. If the Executive's Spouse is
not living, then the Children of the Executive will be deemed the Beneficiaries
and will take on a per stirpes basis. If there are no Children, then the Estate
of the Executive will be deemed the Beneficiary.
1.5 "Benefit Age" means the later of: (i) the Executive's sixty-fifth (65th)
birthday or (ii) the actual date the Executive's full-time service with the Bank
terminates. The Board of Directors may, however, in its sole discretion, amend
clause (i) of this Subsection to lower the Executive's Benefit Age in any
instance in which the Executive's employment terminates prior to Retirement Age
and the Board of Directors determines that such an amendment is advisable, based
on the circumstances of such termination.
1.6 "Benefit Eligibility Date" means the date on which the Executive is entitled
to receive any benefit(s) pursuant to Section(s) III or V of this Agreement. It
shall be the first day of the month following the month in which the Executive
attains his Benefit Age.
1.7 "Board of Directors" means the board of directors of the Bank.
1.8 "Cause" means personal dishonesty, willful misconduct, willful malfeasance,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, regulation (other
than traffic violations or similar offenses), or final cease-and-desist order,
material breach of any provision of this Agreement, or gross negligence in
matters of material importance to the Bank.
1.9 "Change in Control" shall mean and include the following with respect to the
Bank:
(1) a Change in Control of a nature that would be required to be reported
in response to Item I (a) 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"); or
(2) a change in control of the Bank within the meaning of 12 C.F.R. 574.4;
or
(3) a Change in Control at such time as
(i) 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,
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of securities of the Bank representing Twenty Five Percent (25.0%) or more of
the combined voting power of the Bank's outstanding securities ordinarily having
the right to vote at the election of directors, except for any stock purchased
by the Bank's Employee Stock Ownership Plan and/or trust; or
(ii) individuals who constitute the board of directors 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 Bank's stockholders was approved by the Bank's nominating committee which is
comprised of members of the Incumbent Board, shall be, for purposes of this
clause (ii), considered as though he were a member of the Incumbent Board; or
(iii) merger, consolidation, or sale of all or substantially all of the
assets of the Bank occurs; or
(iv) a proxy statement is issued soliciting proxies from the stockholders
of the Bank by someone other than the current management of the Bank, seeking
stockholder approval of a plan of reorganization, merger, or consolidation of
the Bank with one or more corporations as a result of which the outstanding
shares of the class of the Bank's securities are exchanged for or converted into
cash or property or securities not issued by the Bank.
The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint venture, a pool, a joint
stock company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities. The term "acquire" means obtaining ownership, control,
power to vote or sole power of disposition of stock, directly or indirectly or
through one or more transactions or subsidiaries, through purchase, assignment,
transfer, exchange, succession or other means, including (1) an increase in
percentage ownership resulting from a redemption, repurchase, reverse stock
split or a similar transaction involving other securities of the same class; and
(2) the acquisition of stock by a group of persons and/or companies acting in
concert which shall be deemed to occur upon the formation of such group,
provided that an investment advisor shall not be deemed to acquire the voting
stock of its advisee if the advisor (a) votes the stock only upon instruction
from the beneficial owner and (b) does not provide the beneficial owner with
advice concerning the voting of such stock. The term "security" includes
nontransferable subscription rights issued pursuant to a plan of conversion, as
well as a "security," as defined in 15 U.S.C. ss. 78c(2)(1`); and the term
"acting in concert" means (1) knowing
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participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (2) 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.
Further, acting in concert with any person or company shall also be deemed to be
acting in concert with any person or company that is acting in concert with such
other person or company.
Notwithstanding the above definitions, the Board, in its absolute
discretion, may make a finding that a Change in Control of the Bank has taken
place without the occurrence of any or all of the events enumerated above.
1.10 "Children" means all natural or adopted children of the Executive, and
issue of any predeceased child or children.
1.11 "Code" means the Internal Revenue Code of 1986. as amended from time to
time.
1.12 "Contributions" means those annual contributions which the Bank is required
to make to the Retirement Income Trust Fund on behalf of the Executive in
accordance with Subsection 2.1(a) and in the amounts set forth in Exhibit A of
the Agreement.
1.13 (a) "Disability Benefit" means the benefit payable to the Executive
following a determination, in accordance with Subsection 6.1(a), that he is no
longer able, properly and satisfactorily, to perform his duties at the Bank.
(b) "Disability Benefit-Supplemental" (if applicable) means the benefit
payable to the Executive's Beneficiary upon the Executive's death in accordance
with Subsection 6.1(b).
1.14 "Effective Date" of this Agreement shall be _____________, 1996.
1.15 "Estate" means the estate of the Executive.
1.16 "Interest Factor" means monthly compounding, discounting or annuitizing, as
applicable, at a rate set forth in Exhibit A.
1.17 "Payout Period" means the time frame during which certain benefits payable
hereunder shall be distributed. Payments shall be made in monthly installments
commencing on the first day of the month following the occurrence of the event
which triggers distribution and continuing for a period of one hundred eighty
(180) months. Should the Executive make a Timely Election to receive a lump sum
benefit payment, the Executive's Payout Period shall be deemed to be one (1)
month.
1.18 "Phantom Contributions" means those annual Contributions which the Bank is
no longer required
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to make on behalf of the Executive to the Retirement Income Trust Fund. Rather,
once the Executive has exercised the withdrawal rights provided for in
Subsection 2.2, the Bank shall be required to record the annual amounts set
forth in Exhibit A of the Agreement in the Executive's Accrued Benefit Account,
pursuant to Subsection 2.1.
1.19 "Plan Administrator" or "Administrator" shall mean Financial Institution
Consulting Corporation, Memphis, Tennessee ("FICC") or its successor.
1.20 "Plan Year" shall mean _____________, 1996, through December 31, 1996, for
the first Plan Year. Thereafter, the term shall mean the twelve (12) month
period commencing January 1, 1997 and each consecutive twelve (12) month period
thereafter.
1.21 "Retirement Age" means the Executive's sixty-fifth (65th) birthday
provided, however, that the Executive's actual retirement from full-time
employment may occur at any later date mutually agreed upon by the parties.
1.22 "Retirement Income Trust Fund" means the trust fund established by the
Executive and into which annual Contributions will be made by the Bank on behalf
of the Executive pursuant to Subsection 2.1. The contractual rights of the Bank
and the Executive with respect to the Retirement Income Trust Fund shall be
provided for in a separate writing to be known as the R. Donn Roberts Grantor
Trust Agreement (the "Grantor Trust Agreement").
1.23 "Spouse" means the individual to whom the Executive is legally married at
the time of the Executive's death.
1.24 "Supplemental Retirement Income Benefit" means an annual amount (before
taking into account federal and state income taxes), payable in monthly
installments throughout the Payout Period. Such benefit is projected pursuant to
the Agreement for the purpose of determining the Contributions to be made to the
Retirement Income Trust Fund (or Phantom Contributions to be recorded in the
Accrued Benefit Account).
The annual Contributions and Phantom Contributions have been actuarially
determined, using the assumptions set forth in Exhibit A, in order to fund for
the projected Supplemental Retirement Income Benefit. The Supplemental
Retirement Income Benefit for which Contributions (or Phantom Contributions) are
being made (or recorded) is set forth in Exhibit A.
1.25 "Timely Election" means the Executive has made an election to change the
form of his benefit payment(s) by filing with the Administrator a Notice of
Election to Change Form of Payment (Exhibit C of this Agreement). In the case of
benefits payable from the Accrued Benefit Account, such election shall have
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been made prior to the event which triggers distribution and at least two (2)
years prior to the Executive's Benefit Eligibility Date. In the case of benefits
payable from the Retirement Income Trust Fund, such election may be made at any
time.
SECTION II
BENEFITS - GENERALLY
2.1 (a) RETIREMENT INCOME TRUST FUND AND ACCRUED BENEFIT ACCOUNT. The Executive
shall establish the R. Donn Roberts Grantor Trust (the "Grantor Trust") into
which the Bank shall be required to make annual Contributions on the Executive's
behalf, pursuant to Exhibit A and this Section II. A trustee shall be selected
by the Executive. The trustee shall maintain a trust fund, which shall
constitute the Retirement Income Trust Fund. The trustee shall be charged with
the responsibility of investing all contributed funds. Distributions from the
Grantor Trust may be made by the trustee to the Executive, for purposes of
payment of any income or employment taxes due and owing on any Contributions by
the Bank to the Retirement Income Trust Fund, and on any taxable earnings
associated with such Contributions which the Executive shall be required to pay
from year to year, under applicable law, prior to actual receipt of any benefit
payments from the Retirement Income Trust Fund. If the Executive exercises his
withdrawal rights pursuant to Subsection 2.2, the Bank's obligation to make
Contributions to the Retirement Income Trust Fund shall cease and the Bank's
obligation to record Phantom Contributions in the Accrued Benefit Account shall
immediately commence pursuant to Exhibit A and this Section II. To the extent
any provisions of this Agreement are inconsistent with the provisions of the
Grantor Trust Agreement, this Agreement shall control.
The annual Contributions (or Phantom Contributions) required to be made by
the Bank to the Retirement Income Trust Fund (or recorded by the Bank in the
Accrued Benefit Account) have been actuarially determined and are set forth in
Exhibit A which is attached hereto and incorporated herein by reference.
Contributions shall be made by the Bank to the Retirement Income Trust Fund (i)
within seventy-five (75) days of establishment of the Grantor Trust, and (ii)
within the first thirty (30) days of the beginning of each subsequent Plan Year,
unless this Section expressly provides otherwise. Phantom Contributions, if any,
shall be recorded in the Accrued Benefit Account within the first thirty (30)
days of the beginning of each applicable Plan Year, unless this Section
expressly provides otherwise. Phantom Contributions shall accrue interest at a
rate equal to the Interest Factor during the Payout Period until the balance of
the Accrued Benefit Account has been fully distributed. Interest on any Phantom
Contribution shall not commence until such Payout Period commences.
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The Administrator shall review the schedule of annual Contributions (or
Phantom Contributions) provided for in Exhibit A (i) within thirty (30) days
prior to the close of each Plan Year and (ii) if the Executive is employed by
the Bank until attaining Retirement Age, on or immediately before attainment of
such Retirement Age. Such review shall consist of an evaluation of the accuracy
of all assumptions used to establish the schedule of Contributions (or Phantom
Contributions). Provided that (i) the Executive has not exercised his withdrawal
rights pursuant to Subsection 2.2 and (ii) the investments contained in the
Retirement Income Trust Fund have been deemed reasonable by the Bank, the
Administrator shall prospectively amend or supplement the schedule of
Contributions provided for in Exhibit A should the Administrator determine
during any such review that an increase in or supplement to the schedule of
Contributions is necessary in order to adequately fund the Retirement Income
Trust Fund so as to provide an annual benefit (or to provide the lump sum
equivalent of such benefit, as applicable) equal to the Supplemental Retirement
Income Benefit on an after-tax basis, commencing at Benefit Age and payable for
the duration of the Payout Period.
(b) WITHDRAWAL RIGHTS NOT EXERCISED.
(1) CONTRIBUTIONS MADE ANNUALLY. If the Executive does not exercise any
withdrawal rights pursuant to Subsection 2.2, the annual Contributions to the
Retirement Income Trust Fund shall continue each year, unless this Subsection
2.1(b) specifically states otherwise, until the earlier of (i) the last Plan
Year that Contributions are required pursuant to Exhibit A, or (ii) the Plan
Year of the Executive's termination of employment.
(2) TERMINATION FOLLOWING A CHANGE IN CONTROL. If the Executive does not
exercise his withdrawal rights pursuant to Subsection 2.2 and a Change in
Control occurs at the Bank, followed within thirty-six (36) months by either (i)
the Executive's involuntary termination of employment, or (ii) Executive's
voluntary termination of employment after: (A) a material change in the
Executive's function, duties, or responsibilities, which change would cause the
Executive's position to become one of lesser responsibility, importance, or
scope from the position the Executive held at the time of the Change in Control,
(B) a relocation of the Executive's principal place of employment by more than
thirty (30) miles from its location prior to the Change in Control, or (C) a
material reduction in the benefits and perquisites to the Executive from those
being provided at the time of the Change in Control, the Contribution set forth
below shall be required of the Bank. The Bank shall be required to make a final
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Contribution to the Retirement Income Trust Fund within ten (10) days of the
Executive's termination of employment. The amount of such final Contribution
shall be equal to the present value (using the Interest Factor) of all remaining
Contributions which would have been required to be made on behalf of the
Executive if the Executive had remained in the employ of the Bank until Benefit
Age.
(3) TERMINATION FOR CAUSE. If the Executive (i) does not exercise his
withdrawal rights pursuant to Subsection 2.2, and (ii) is terminated for Cause
pursuant to Subsection 5.2, no further Contributions to the Retirement Income
Trust Fund shall be required of the Bank, and if not yet made, no Contribution
shall be required for the Plan Year in which such termination for Cause occurs.
(4) VOLUNTARY TERMINATION OF EMPLOYMENT. If (i) the Executive does not
exercise his withdrawal rights pursuant to Subsection 2.2, and (ii) the
Executive's employment with the Bank is voluntarily terminated for any reason
other than a termination related to disability, termination for Cause, or
termination following a Change in Control, the Executive shall not be entitled
to any Contributions to the Retirement Income Trust Fund attributable to any
Plan Years which commence subsequent to the date of termination, provided,
however, that, if necessary, an amount shall be contributed to the Retirement
Income Trust Fund which is sufficient to provide the Executive with after tax
benefits (assuming a constant tax rate equal to the rate in effect as of the
date of the Executive's termination) beginning at his Benefit Age, equal in
amount to that benefit which would have been payable to the Executive if no
secular trust had been implemented and the benefit obligation had been accrued
under APB Opinion No. 12, as amended by FAS 106.
(5) INVOLUNTARY TERMINATION OF EMPLOYMENT. If the Executive does not
exercise his withdrawal rights pursuant to Subsection 2.2, and the Executive's
employment with the Bank is involuntarily terminated for any reason, including a
termination due to disability of the Executive but excluding termination for
Cause, or termination following a Change in Control, within ten (10) days of
such involuntary termination of employment, the Bank shall be required to make
an immediate lump sum Contribution to the Executive's Retirement Income Trust
Fund in an amount equal to: (i) the full Contribution required for the Plan Year
in which such involuntary termination occurs, if not yet made, plus (ii) the
present value (computed using a discount rate equal to the Interest Factor) of
the lesser of (A) the next five (5) years Contributions to the Retirement Income
Trust Fund or (B) all remaining Contributions to the Retirement Income Trust
Fund.
(6) DEATH DURING EMPLOYMENT. If the Executive does not exercise any
withdrawal
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rights pursuant to Subsection 2.2, and dies while employed by the Bank, and if,
following the Executive's death, the assets of the Retirement Income Trust Fund
are insufficient to provide the Supplemental Retirement Income Benefit to which
the Executive is entitled, the Bank shall be required to make a Contribution to
the Retirement Income Trust Fund equal to the sum of the remaining Contributions
set forth on Exhibit A, reduced by any payments under any life insurance
policies that may have been obtained on the Executive's life by the Retirement
Income Trust Fund. Such final contribution shall be payable in a lump sum to the
Retirement Income Trust Fund within ten (10) days of the Executive's death.
(c) WITHDRAWAL RIGHTS EXERCISED.
(1) PHANTOM CONTRIBUTIONS MADE ANNUALLY. If the Executive exercises his
withdrawal rights pursuant to Subsection 2.2, no further Contributions to the
Retirement Income Trust Fund shall be required of the Bank. Thereafter, Phantom
Contributions shall be recorded annually in the Executive's Accrued Benefit
Account within thirty (30) days of the beginning of each Plan Year, commencing
with the first Plan Year following the Plan Year in which the Executive
exercises his withdrawal rights. Such Phantom Contributions shall continue to be
recorded annually, unless this Subsection 2.1(c) specifically states otherwise,
until the earlier of (1) the last Plan Year that Phantom Contributions are
required pursuant to Exhibit A, or (ii) the Plan Year of the Executive's
termination of employment.
(2) TERMINATION FOLLOWING A CHANGE IN CONTROL. If the Executive exercises
his withdrawal rights pursuant to Subsection 2.2, Phantom Contributions shall
commence in the Plan Year following the Plan Year in which the Executive first
exercises his withdrawal rights. If a Change in Control occurs at the Bank, and
within thirty-six (36) months of such Change in Control, the Executive's
employment is either (i) involuntarily terminated, or (ii) voluntarily
terminated by the Executive after: (A) a material change in the Executive's
function, duties, or responsibilities, which change would cause the Executive's
position to become one of lesser responsibility, importance, or scope from the
position the Executive held at the time of the Change in Control, (B) a
relocation of the Executive's principal place of employment by more than thirty
(30) miles from its location prior to the Change in Control, or (C) a material
reduction in the benefits and perquisites to the Executive from those being
provided at the time of the Change in Control, the Phantom Contribution set
forth below shall be required of the Bank. The Bank shall be required to record
a lump sum Phantom Contribution in the Accrued Benefit Account
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within thirty (30) days of the Executive's termination of employment. The amount
of such final Phantom Contribution shall be actuarially determined based on the
Phantom Contribution required, at such time, in order to provide a benefit via
this Agreement equivalent to the Supplemental Retirement Income Benefit, on an
after tax basis, commencing on the Executive's Benefit Eligibility Date and
continuing for the duration of the Payout Period. (Such actuarial determination
shall reflect the fact that amounts shall be payable from both the Accrued
Benefit Account as well as the Retirement Income Trust Fund and shall also
reflect the amount and timing of any withdrawal(s) made by the Executive from
the Retirement Income Trust Fund pursuant to Subsection 2.2.)
(3) TERMINATION FOR CAUSE. If the Executive is terminated for Cause
pursuant to Subsection 5.2, the entire balance of the Executive's Accrued
Benefit Account at the time of such termination, which shall include any Phantom
Contributions which have been recorded plus interest accrued on such Phantom
Contributions, shall be forfeited.
(4) VOLUNTARY TERMINATION OF EMPLOYMENT. If (i) the Executive exercises his
withdrawal rights pursuant to Subsection 2.2, and (ii) the Executive's
employment with the Bank is voluntarily terminated for any reason other than a
termination related to disability, termination for Cause, or termination
following a Change in Control, the Executive shall not be entitled to any
Phantom Contributions to the Retirement Income Trust Fund attributable to any
Plan Years which commence subsequent to the date of termination.
(5) INVOLUNTARY TERMINATION OF EMPLOYMENT. If the Executive exercises his
withdrawal rights pursuant to Subsection 2.2, and the Executive's employment
with the Bank is involuntarily terminated for any reason including termination
due to disability of the Executive, but excluding termination for Cause, or
termination following a Change in Control, within ten (10) days of such
involuntary termination of employment, the Bank shall be required to record a
final Phantom Contribution in an amount equal to: (i) the full Phantom
Contribution required for the Plan Year in which such involuntary termination
occurs, if not yet made, plus (ii) the present value (computed using a discount
rate equal to the Interest Factor) of the lesser of (A) the next five (5) years
Contributions to the Retirement Income Trust Fund or (B) all remaining Phantom
Contributions.
(6) DEATH DURING EMPLOYMENT. If the Executive (i) exercises his withdrawal
rights pursuant to Subsection 2.2, and (ii) dies while employed by the Bank,
Phantom Contributions included on Exhibit A shall be required of the Bank. Such
Phantom Contributions shall commence in the Plan
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Year following the Plan Year in which the Executive exercises his withdrawal
rights and shall continue through the Plan Year in which the Executive dies. The
Bank shall also be required to record a final Phantom Contribution within thirty
(30) days of the Executive's death. The amount of such final Phantom
Contribution shall be actuarially determined based on the Phantom Contribution
required at such time (if any), in order to provide a benefit via this Agreement
equivalent to the Supplemental Retirement Income Benefit commencing within
thirty (30) days of the date the Administrator receives notice of the
Executive's death and continuing for the duration of the Payout Period. (Such
actuarial determination shall reflect the fact that amounts shall be payable
from the Accrued Benefit Account as well as the Retirement Income Trust Fund and
shall also reflect the amount and timing of any withdrawal(s) made by the
Executive pursuant to Subsection 2.2.)
2.2 WITHDRAWALS FROM RETIREMENT INCOME TRUST FUND. Exercise of withdrawal rights
by the Executive pursuant to the Grantor Trust Agreement shall terminate the
Bank's obligation to make any further Contributions to the Retirement Income
Trust Fund, and the Bank's obligation to record Phantom Contributions pursuant
to Subsection 2.1 (c) shall commence. For purposes of this Subsection 2.2,
"exercise of withdrawal rights" shall mean those withdrawal rights to which the
Executive is entitled under Section 3 of the Grantor Trust Agreement and shall
exclude any distributions made by the trustee of the Grantor Fund to the
Executive for purposes of payment of income taxes in accordance with Subsection
2.1 of this Agreement and the tax reimbursement provision contained in the
Grantor Trust Agreement, or other trust expenses properly payable from the
Grantor Trust pursuant to the provisions of the Grantor Trust Agreement.
2.3 BENEFITS PAYABLE FROM GRANTOR TRUST. Notwithstanding anything else to the
contrary in this Agreement, in the event that the trustee of the Grantor Trust
purchases a life insurance policy with the Contributions to and, if applicable,
earnings of the Trust, and such life insurance policy is intended to continue in
force beyond the Payout Period for the disability or retirement benefits payable
from the Retirement Income Trust Fund pursuant to this Agreement, then the
Trustee shall be directed by the Administrator in determining the portion of the
cash value of such policy available for purposes of annuitizing the Retirement
Income Trust Fund to provide the disability or retirement benefits payable under
this Agreement, after taking into consideration the amounts reasonably believed
to be required in order to maintain the cash value of such policy to continue
such policy in effect until the death of the Executive and payment of death
benefits thereunder.
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SECTION III
RETIREMENT BENEFIT
3.1 (a) NORMAL FORM OF PAYMENT. If (i) the Executive is employed with the Bank
until reaching his Retirement Age, and (ii) the Executive has not made a Timely
Election to receive a lump sum benefit, this Subsection 3.1(a) shall be
controlling with respect to retirement benefits.
The Retirement Income Trust Fund, measured as of the Executive's Benefit
Age, shall be annuitized (using the Interest Factor) into monthly installments
and shall be payable for the Payout Period. Such benefit payments shall commence
on the Executive's Benefit Eligibility Date. Should Retirement Income Trust Fund
assets actually earn a rate of return, following the date such balance is
annuitized, which is less than the rate of return used to annuitize the
Retirement Income Trust Fund, no additional contributions to the Retirement
Income Trust Fund shall be required by the Bank in order to fund the final
benefit payment(s) and make up for any shortage attributable to the
less-than-expected rate of return. Should Retirement Income Trust Fund assets
actually earn a rate of return, following the date such balance is annuitized,
which is greater than the rate of return used to annuitize the Retirement Income
Trust Fund, the final benefit payment to the Executive (or his Beneficiary)
shall include the excess amounts attributable to the greater-than expected rate
of return. In the event the Executive dies at any time after attaining his
Benefit Age, but prior to commencement or completion of all the payments due and
owing hereunder, (i) the trustee of the Grantor Trust shall pay to the
Executive's Beneficiary the monthly installments (or a continuation of such
monthly installments if they have already commenced) for the balance of months
remaining in the Payout Period, or (ii) the Executive's Beneficiary may request
to receive the unpaid balance of the Executive's Retirement Income Trust Fund in
a lump sum payment. If a lump sum payment is requested by the Beneficiary,
payment of the balance of the Retirement Income Trust Fund in such lump sum form
shall be made only if the Executive's Beneficiary (i) obtains approval from the
trustee of the Grantor Trust and (ii) notifies the Administrator in writing of
such election within ninety (90) days of the Executive's death. Such lump sum
payment, if approved by the trustee, shall be payable within thirty (30) days of
such trustee approval.
The Executive's Accrued Benefit Account (if applicable), measured as of the
Executive's Benefit Age, shall be annuitized (using the Interest Factor) into
monthly installments and shall be payable for the Payout Period. Such benefit
payments shall commence on the Executive's Benefit Eligibility Date. In the
event the Executive dies at any time after attaining his Benefit Age, but prior
to commencement or
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completion of all the payments due and owing hereunder, (i) the Bank shall pay
to the Executive's Beneficiary the same monthly installments (or a continuation
of such monthly installments if they have already commenced) for the balance of
months remaining in the Payout Period, or (ii) the Executive's Beneficiary may
request to receive the remainder of any unpaid benefit payments In a lump sum
payment. If a lump sum payment is requested by the Beneficiary, the amount of
such lump sum payment shall be equal to the unpaid balance of the Executive's
Accrued Benefit Account. Payment in such lump sum form shall be made only if the
Executive's Beneficiary (i) obtains Board of Director approval, and (ii)
notifies the Administrator in writing of such election within ninety (90) days
of the Executive's death. Such lump sum payment shall be made within thirty (30)
days of approval by the Board of Directors.
(b) ALTERATIVE PAYOUT OPTION. If (i) the Executive is employed with the
Bank until reaching his Retirement Age, and (ii) the Executive has made a Timely
Election to receive a lump sum benefit, this Subsection 3.1 (b) shall be
controlling with respect to retirement benefits. The balance of the Retirement
Income Trust Fund, measured as of the Executive's Benefit Age, shall be paid to
the Executive in a lump sum on his Benefit Eligibility Date. In the event the
Executive dies after becoming eligible for such payment (upon attainment of his
Benefit Age), but before the actual payment is made, his Beneficiary shall be
entitled to receive the lump sum benefit in accordance with this Subsection
3.1(b) within thirty (30) days of the date the Administrator receives notice of
the Executive's death.
The balance of the Executive's Accrued Benefit Account (if applicable),
measured as of the Executive's Benefit Age, shall be paid to the Executive in a
lump sum on his Benefit Eligibility Date. In the event the Executive dies after
becoming eligible for such payment (upon attainment of his Benefit Age), but
before the actual payment is made, his Beneficiary shall be entitled to receive
the lump sum benefit in accordance with this Subsection 3. I (b) within thirty
(30) days of the date the Administrator receives notice of the Executive's
death.
SECTION IV
PRE-RETIREMENT DEATH BENEFIT
4.1 (a) NORMAL FORM OF PAYMENT. If (i) the Executive dies while employed by the
Bank, and (ii) the Executive has not made a Timely Election to receive a lump
sum benefit, this Subsection 4.1(a) shall be controlling with respect to
pre-retirement death benefits.
The Executive's Retirement Income Trust Fund, measured as of the
Executive's death, shall be annuitized (using the Interest Factor) into monthly
installments and shall be payable to the Executive's
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Beneficiary for the Payout Period. Such benefit payments shall commence within
thirty (30) days of the date the Administrator receives notice of the
Executive's death. Should Retirement Income Trust Fund assets actually earn a
rate of return, following the date such balance is annuitized, which is less
than the rate of return used to annuitize the Retirement Income Trust Fund, no
additional contributions to the Retirement Income Trust Fund shall be required
by the Bank in order to fund the final benefit payment(s) and make up for any
shortage attributable to the less-than-expected rate of return. Should
Retirement Income Trust Fund assets actually earn a rate of return, following
the date such balance is annuitized, which is greater than the rate of return
used to annuitize the Retirement Income Trust Fund, the final benefit payment to
the Executive's Beneficiary shall include the excess amounts attributable to the
greater-thanexpected rate of return. The Executive's Beneficiary may request to
receive the unpaid balance of the Executive's Retirement Income Trust Fund in a
lump sum payment. If a lump sum payment is requested by the Beneficiary, payment
of the balance of the Retirement Income Trust Fund in such lump sum form shall
be made only if the Executive's Beneficiary (i) obtains approval from the
trustee of the Grantor Trust and (ii) notifies the Administrator in writing of
such election within ninety (90) days of the Executive's death. Such lump sum
payment, if approved by the trustee, shall be made within thirty (30) days of
such trustee approval.
The Executive's Accrued Benefit Account (if applicable), measured as of the
later of (i) the Executive's death or (ii) the date any final lump sum Phantom
Contribution is recorded in the Accrued Benefit Account pursuant to Subsection
2.1(c), shall be annuitized (using the Interest Factor) into monthly
installments and shall be payable to the Executive's Beneficiary for the Payout
Period. Such benefit payments shall commence within thirty (30) days of the date
the Administrator receives notice of the Executive's death, or if later, within
thirty (30) days after any final lump sum Phantom Contribution is recorded in
the Accrued Benefit Account in accordance with Subsection 2.1(c). The
Executive's Beneficiary may request to receive the remainder of any unpaid
monthly benefit payments due from the Accrued Benefit Account in a lump sum
payment. If a lump sum payment is requested by the Beneficiary, the amount of
such lump sum payment shall be equal to the unpaid balance of the Executive's
Accrued Benefit Account. Payment in such lump sum form shall be made only if the
Executive's Beneficiary (i) obtains Board of Director approval, and (ii)
notifies the Administrator in writing of such election within ninety (90) days
of the Executive's death. Such lump sum payment, if approved by the Board of
Directors, shall be payable within thirty (30) days of such Board approval.
(b) ALTERATIVE PAYOUT OPTION. If (i) the Executive dies while employed by
the Bank, and
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(ii) the Executive has made a Timely Election to receive a lump sum benefit,
this Subsection 4.1(b) shall be controlling with respect to pre-retirement death
benefits.
The balance of the Executive's Retirement Income Trust Fund, measured as of
the later of (i) the Executive's death, or (ii) the date any final lump sum
Contribution is made pursuant to Subsection 2.1(b), shall be paid to the
Executive's Beneficiary in a lump sum within thirty (30) days of the date the
Administrator receives notice of the Executive's death.
The balance of the Executive's Accrued Benefit Account (if applicable),
measured as of the later of (i) the Executive's death, or (ii) the date any
final Phantom Contribution is recorded pursuant to Subsection 2.1(c), shall be
paid to the Executive's Beneficiary in a lump sum within thirty (30) days of the
date the Administrator receives notice of the Executive's death.
SECTION V
BENEFIT(S) IN THE EVENT OF TERMINATION OF SERVICE
PRIOR TO RETIREMENT AGE
5.1 VOLUNTARY OR INVOLUNTARY TERMINATION OF SERVICE OTHER THAN FOR CAUSE. In the
event the Executive's service with the Bank is voluntarily or involuntarily
terminated prior to Retirement Age for any reason, including a Change in
Control, but excluding (1) any disability related termination for which the
Board of Directors has approved early payment of benefits pursuant to Subsection
6. 1, (ii) the Executive's pre-retirement death, which is provided for in
Section IV, or (iii) termination for Cause, which is provided for in Subsection
5.2, the Executive (or his Beneficiary) shall be entitled to receive benefits in
accordance with this Subsection 5.1. Payments of benefits pursuant to this
Subsection 5.1 shall be made in accordance with Subsection 5.1 (a) or 5.1 (b)
below, as applicable.
(a) NORMAL FORM OF PAYMENT.
(1) Executive Lives Until Benefit Age. If (i) after such termination, the
Executive lives until attaining his Benefit Age, and (ii) the Executive has not
made a Timely Election to receive a lump sum benefit. This Subsection 5.1 (a)(1)
shall be controlling with respect to retirement benefits.
The Retirement Income Trust Fund, measured as of the Executive's Benefit
Age, shall be annuitized (using the Interest Factor) into monthly installments
and shall be payable for the Payout Period. Such payments shall commence on the
Executive's Benefit Eligibility Date. Should Retirement Income Trust Fund assets
actually earn a rate of return, following the date such balance is annuitized,
which is less than the rate of return used to annuitize the Retirement Income
Trust Fund, no additional contributions to the Retirement Income Trust Fund
shall be required by the Bank in order to fund the final benefit payment(s) and
make up
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for any shortage attributable to the less-than-expected rate of return. Should
Retirement Income Trust Fund assets actually earn a rate of return, following
the date such balance is annuitized, which is greater than the rate of return
used to annuitize the Retirement Income Trust Fund, the final benefit payment to
the Executive (or his Beneficiary) shall include the excess amounts attributable
to the greater-than expected rate of return. In the event the Executive dies at
any time after attaining his Benefit Age, but prior to commencement or
completion of all the payments due and owing hereunder, (i) the trustee of the
Grantor Trust shall pay to the Executive's Beneficiary the monthly installments
(or a continuation of the monthly installments if they have already commenced)
for the remaining months in the Payout Period, or (ii) the Executive's
Beneficiary may request to receive the unpaid balance of the Executive's
Retirement Income Trust Fund in a lump sum payment. If a lump sum payment is
requested by the Beneficiary, payment of the balance of the Retirement Income
Trust Fund in such lump sum form shall be made only if the Executive's
Beneficiary (i) obtains approval from the trustee of the Grantor Trust and (ii)
notifies the Administrator in writing of such election within ninety (90) days
of the Executive's death. Such lump sum payment, if approved by the trustee,
shall be made within thirty (30) days of such trustee approval.
The Executive's Accrued Benefit Account (if applicable), measured as of the
Executive's Benefit Age, shall be annuitized (using the Interest Factor) into
monthly installments and shall be payable for the Payout Period. Such benefit
payments shall commence on the Executive's Benefit Eligibility Date. In the
event the Executive dies at any time after attaining his Benefit Age, but prior
to commencement or completion of all the payments due and owing hereunder, (i)
the Bank shall pay to the Executive's Beneficiary the same monthly installments
(or a continuation of such monthly installments if they have already commenced)
for the balance of months remaining in the Payout Period, or (ii) the
Executive's Beneficiary may request to receive the remainder of any unpaid
benefit payments in a lump sum payment. If a lump sum payment is requested by
the Beneficiary, the amount of such lump sum payment shall be equal to the
unpaid balance of the Executive's Accrued Benefit Account. Payment in such lump
sum shall be made only if the Executive's Beneficiary (i) obtains Board of
Director approval, and (ii) notifies the Administrator in writing of such
election within ninety (90) days of the Executive's death. Such lump sum
payment, if approved by the Board of Directors, shall be made within thirty (30)
days of such Board of Director approval.
(2) EXECUTIVE DIES PRIOR TO BENEFIT AGE. If (i) after such termination, the
Executive dies prior to attaining his Benefit Age, and (ii) the Executive has
not made a Timely Election to receive a lump sum benefit, this Subsection
5.1(a)(2) shall be controlling with respect to retirement benefits.
The Retirement Income Trust Fund, measured as of the date of the
Executive's death, shall be
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annuitized (using the Interest Factor) into monthly installments and shall be
payable for the Payout Period. Such benefit payments shall commence within
thirty (30) days of the date the Administrator receives notice of the
Executive's death. Should Retirement Income Trust Fund assets actually earn a
rate of return, following the date such balance is annuitized, which is less
than the rate of return used to annuitize the Retirement Income Trust Fund, no
additional contributions to the Retirement Income Trust Fund shall be required
by the Bank in order to fund the final benefit payment(s) and make up for any
shortage attributable to the less-than-expected rate of return. Should
Retirement Income Trust Fund assets actually earn a rate of return, following
the date such balance is annuitized, which is greater than the rate of return
used to annuitize the Retirement Income Trust Fund as of the date of the
Executive's death, the final benefit payment to the Executive's Beneficiary
shall include the excess amounts attributable to the greater-than-expected rate
of return. The Executive's Beneficiary may request to receive the unpaid balance
of the Executive's Retirement Income Trust Fund in the form of a lump sum
payment. If a lump sum payment is requested by the Beneficiary, payment of the
balance of the Retirement Income Trust Fund in such lump sum form shall be made
only if the Executive's Beneficiary (i) obtains approval from the trustee of the
Grantor Trust and (ii) notifies the Administrator in writing of such election
within ninety (90) days of the Executive's death. Such lump sum payment, if
approved by the trustee, shall be made within thirty (30) days of such trustee
approval.
The Executive's Accrued Benefit Account (if applicable), measured as of the
Executive's Benefit Age, shall be annuitized (using the Interest Factor) into
monthly installments and shall be payable for the Payout Period. Such benefit
payments shall commence on the Executive's Benefit Eligibility Date. In the
event the Executive dies at any time after attaining his Benefit Age, but prior
to commencement or completion of all the payments due and owing hereunder, (i)
the Bank shall pay to the Executive's Beneficiary the same monthly installments
(or a continuation of such monthly installments if they have already commenced)
for the balance of months remaining in the Payout Period, or (ii) the
Executive's Beneficiary may request to receive the remainder of any unpaid
benefit payments in a lump sum payment. If a lump sum payment is requested by
the Beneficiary, the amount of such lump sum payment shall be equal to the
unpaid balance of the Executive's Accrued Benefit Account. Payment in such lump
sum fund shall be made only if the Executive's Beneficiary (i) obtains Board of
Director approval, and (ii) notifies the Administrator in writing of such
election within ninety (90) days of the Executive's death. Such lump sum
payment, if approved by the Board of Directors, shall be made within thirty (30)
days of such Board of Director approval.
(b) ALTERNATIVE PAYOUT OPTION.
(1) EXECUTIVE LIVES UNTIL BENEFIT AGE. If (i) after such termination, the
Executive lives until
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attaining his Benefit Age, and (ii) the Executive has made a Timely Election to
receive a lump sum benefit, this Subsection 5.1(b)(1) shall be controlling with
respect to retirement benefits.
The balance of the Retirement Income Trust Fund, measured as of the
Executive's Benefit Age, shall be paid to the Executive in a lump sum on his
Benefit Eligibility Date. In the event the Executive dies after becoming
eligible for such payment (upon attainment of his Benefit Age), but before the
actual payment is made, his Beneficiary shall be entitled to receive the lump
sum benefit in accordance with this Subsection 5.1(b)(1) within thirty (30) days
of the date the Administrator receives notice of the Executive's death.
The balance of the Executive's Accrued Benefit Account (if applicable),
measured as of the Executive's Benefit Age, shall be paid to the Executive in a
lump sum on his Benefit Eligibility Date. In the event the Executive dies after
becoming eligible for such payment (upon attainment of his Benefit Age), but
before the actual payment is made, his Beneficiary shall be entitled to receive
the lump sum benefit in accordance with this Subsection 5.1(b)(1) within thirty
(30) days of the date the Administrator receives notice of the Executive's
death.
(2) EXECUTIVE DIES PRIOR TO BENEFIT AGE. If (i) after such termination, the
Executive dies prior to attaining his Benefit Age, and (ii) the Executive has
made a Timely Election to receive a lump sum benefit, this Subsection 5.1(b)(2)
shall be controlling with respect to retirement benefits.
The balance of the Retirement Income Trust Fund, measured as of the date of
the Executive's death, shall be paid to the Executive's Beneficiary within
thirty (30) days of the date the Administrator receives notice of the
Executive's death.
The balance of the Executive's Accrued Benefit Account (if applicable),
measured as of the date of the Executive's death, shall be paid to the
Executive's Beneficiary within thirty (30) days of the date the Administrator
receives notice of the Executive's death. 5.2 Termination For Cause. If the
Executive is terminated for Cause, all benefits under this Agreement, other than
those which can be paid from previous Contributions to the Retirement Income
Trust Fund (and earnings on such Contributions), shall be forfeited.
Furthermore, no further Contributions (or Phantom Contributions, as applicable)
shall be required of the Bank for the year in which such termination for Cause
occurs (if not yet made). The Executive shall be entitled to receive a benefit
in accordance with this Subsection 5.2.
The balance of the Executive's Retirement Income Trust Fund shall be paid
to the Executive in a lump sum on his Benefit Eligibility Date. In the event the
Executive dies prior to his Benefit Eligibility Date, his Beneficiary shall be
entitled to receive the balance of the Executive's Retirement Income Trust Fund
in a
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lump sum within thirty (30) days of the date the Administrator receives notice
of the Executive's death.
SECTION VI
OTHER BENEFITS
6.1 (a) DISABILITY BENEFIT. If the Executive's service is terminated prior to
Retirement Age due to a disability which meets the criteria set forth below, the
Executive may request to receive the Disability Benefit in lieu of the
retirement benefit(s) available pursuant to Section 5.1 (which is (are) not
available prior to the Executive's Benefit Eligibility Date).
In any instance in which: (i) it is determined by a duly licensed,
independent physician selected by the Bank, that the Executive is no longer
able, properly and satisfactorily, to perform his regular duties as an officer,
because of ill health, accident, disability or general inability due to age,
(ii) the Executive requests payment under this Subsection in lieu of Subsection
5.1, and (iii) Board of Director approval is obtained to allow payment under
this Subsection, in lieu of Subsection 5.1, the Executive shall be entitled to
the following lump sum benefits: (i) the balance of the Retirement Income Trust
Fund, plus (ii) the balance of the Accrued Benefit Account (if applicable). The
benefits shall be paid within thirty (30) days following the date of the
Executive's request for such benefit is approved by the Board of Directors. In
the event the Executive dies after becoming eligible for such payments but
before the actual payments are made, his Beneficiary shall be entitled to
receive the benefits provided for in this Subsection 6.1 (a) within thirty (30)
days of the date the Administrator receives notice of the Executive's death.
(b) DISABILITY BENEFIT - SUPPLEMENTAL. Furthermore, if Board of Director
approval is obtained within thirty (30) days of the Executive's death, the Bank
shall make a direct, lump sum payment to the Executive's Beneficiary in an
amount equal to the sum of all remaining Contributions (or Phantom
Contributions) set forth in Exhibit A, but not required pursuant to Subsection
2.1(b) (or-2.1(c)) due to the Executive's disability-related termination. Such
lump sum payment, if approved by the Board of Directors, shall be payable to the
Executive's Beneficiary within thirty (30) days of such Board of Director
approval.
6.2 Additional Death Benefit - Funeral Expense. Upon the Executive's
death, the Executive's Beneficiary shall also be entitled to receive a one-time
lump sum death benefit in the amount of Thirty Thousand Dollars ($30,000.00).
This benefit shall be paid directly from the Bank to the Beneficiary and shall
be provided specifically for the purpose of providing payment for funeral
expenses of the Executive. Such death benefit shall be payable within thirty
(30) days from the date the Administrator receives notice of the Executive's
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death. The Executive's Beneficiary shall not be entitled to such benefit if the
Executive is terminated for Cause prior to death.
SECTION VII
NON-COMPETITION
7.1 NON-COMPETITION. In consideration of the agreements of the Bank contained
herein and of the payments to be made by the Bank pursuant hereto, the Executive
hereby agrees that, for as long as he remains employed by the Bank, he will
devote substantially all of his time, skill, diligence and attention to the
business of the Bank, and will not actively engage, either directly or
indirectly, in any business or other activity which is, or may be deemed to be,
in any way competitive with or adverse to the best interests of the business of
the Bank. The Executive further agrees that following his employment with the
Bank and continuing through the Payout Period he will not actively engage,
either directly or indirectly, in any business or other activity which is, or
may be deemed to be, in any way competitive with or adverse to the best
interests of the Bank, unless the Executive has the prior express written
consent of the Board of Directors of the Bank.
7.2 BREACH OF NON-COMPETITION CLAUSE.
(a) During Employment. In the event the Executive breaches Subsection 7.1
while employed at the Bank, all further Contributions to the Retirement Income
Trust Fund (or Phantom Contributions to the Accrued Benefit Account) shall
immediately cease, and all benefits under this Agreement, other than those which
can be paid from previous Contributions to the Retirement Income Trust Fund (and
earnings on such Contributions), shall be forfeited. If, following such breach,
the Executive lives until attaining his Benefit Age, he shall be entitled to
receive a benefit from the Retirement Income Trust Fund equal to the balance of
the Retirement Income Trust Fund, payable in a lump sum on his Benefit
Eligibility Date. In the event the Executive dies after attaining his Benefit
Age but before actual payment is made, his Beneficiary shall be entitled to
receive the lump sum benefit payable within thirty (30) days of the date of the
Bank receives notice of the Executive's death. If, following such breach, the
Executive dies prior to attaining his Benefit Age, his Beneficiary shall be
entitled to receive a benefit from the Retirement Income Trust Fund equal to the
balance of the Retirement Income Trust Fund, payable in a lump sum within thirty
(30) days of the date the Bank receives notice of the Executive's death.
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In the event (i) any breach by the Executive of the agreements and
covenants described in Subsection 7.1 occurs while the Executive is employed at
the Bank, and (ii) the Executive's employment with the Bank is terminated due to
such breach, such termination shall be deemed to be for Cause and the benefits
payable to the Executive shall be paid in accordance with Subsection 5.2 of this
Agreement.
(b) BREACH FOLLOWING TERMINATION OF EMPLOYMENT. In the event the Executive
breaches Subsection 7.1 following the Executive's termination of employment with
the Bank, all benefits under this Agreement, other than those which can be paid
from previous Contributions to the Retirement Income Trust Fund shall be
forfeited, regardless of whether the Executive is receiving benefits at such
time. If the Executive has attained his Benefit Age and is receiving a benefit
at the time of such breach, his remaining balance in the Retirement Income Trust
Fund shall be paid to him in a lump sum within thirty (30) days of the date the
Bank has received notice of such breach (or in the event of the Executive's
death after attainment of his Benefit Age but before actual payment of such lump
sum, payment shall be made to the Executive's Beneficiary within thirty (30)
days of the date the Bank has received notice of the Executive's death). If the
Executive has not attained his Benefit Age at the time of the breach, and
following such breach, the Executive lives until attaining his Benefit Age, he
shall be entitled to receive a benefit from the Grantor Trust equal to the
balance of the Retirement Income Trust Fund, payable in a lump sum on his
Benefit Eligibility Date. In the event the Executive dies after attaining his
Benefit Age but before actual payment is made, his Beneficiary shall be entitled
to receive the lump sum benefit payable within thirty (30) days of the date of
the Bank receives notice of the Executive's death. If the Executive has not
attained his Benefit Age at the time of the breach, and following such breach,
the Executive dies prior to attaining his Benefit Age, his Beneficiary shall be
entitled to receive a benefit from the Retirement Income Trust Fund equal to the
balance of the Retirement Income Trust Fund, payable in a lump sum within thirty
(30) days of the date the Bank receives notice of the Executive's death.
In the event of a termination related to a Change in Control as described
in Subsection 2.1 (b)(2) (or 2.1 (c)(2)), Subsection 7.1 shall cease to be a
condition to the performance by the Bank of its obligations under this
Agreement.
SECTION VIII
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and secondary
Beneficiaries upon
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execution of this Agreement and shall have the right to change such designation,
at any subsequent time, by submitting to (i) the Administrator, and (ii) the
trustee of the Retirement Income Trust Fund, in substantially the form attached
as Exhibit B to this Agreement, a written designation of primary and secondary
Beneficiaries. Any Beneficiary designation made subsequent to execution of this
Agreement shall become effective only when receipt thereof is acknowledged in
writing by the Administrator.
SECTION IX
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person claiming
through the Executive under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments or amounts so specified under this
Agreement. The Executive agrees that he, his Beneficiary, or any other person
claiming through him shall have no rights or interests whatsoever in any asset
of the Bank, including any insurance policies or contracts which the Bank may
possess or obtain to informally fund this Agreement. Any asset used or acquired
by the Bank in connection with the liabilities it has assumed under this
Agreement shall not be deemed to be held under any trust for the benefit of the
Executive or his Beneficiaries, unless such asset is contained in the rabbi
trust described in Section XII of this Agreement. Any such asset shall be and
remain, a general, unpledged asset of the Bank in the event of the Bank's
insolvency.
SECTION X
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund
or money with which to pay its obligations under this Agreement, other than
those Contributions required to be made to the Retirement Income Trust Fund. The
Executive, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right in its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to replace such assets from time to time or to
terminate its investment in such assets at any time, in whole or in part. At no
time shall the Executive be deemed to have any lien, right, title or interest in
or to any specific investment or to any assets of the Bank. If the Bank elects
to invest in a life insurance, disability or annuity policy upon the life of the
Executive, then the Executive shall assist the Bank by freely submitting to a
physical examination and by supplying such additional information necessary to
obtain such insurance or annuities.
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SECTION XI
ACT PROVISIONS
11.1 NAMED FIDUCIARY AND ADMINISTRATOR. The Bank shall be the Named Fiduciary
and FICC shall be the Administrator of this Agreement. The Administrator shall
be responsible for the interpretation and administration of the Agreement as
established herein. The Bank may delegate to others certain aspects of the
management and operational responsibilities of the Agreement, including the
employment of advisors and the delegation of ministerial duties to qualified
individuals. 11.2 Claims Procedure-and Arbitration. In the event that benefits
under this Agreement are not paid to the Executive (or to his Beneficiary in the
case of the Executive's death) and such claimant feels he is entitled to receive
such benefits, then a written claim must be made to the Administrator within
sixty (60) days from the date payments are refused. The Administrator shall
review the written claim and, if the claim is denied, in whole or in part, it
shall provide in writing, within ninety (90) days of receipt of such claim, its
specific reasons for such denial, reference to the provisions of this Agreement
upon which the denial is based, and any additional material or information
necessary to perfect the claim. Such writing by the Administrator shall further
indicate the additional steps which must be undertaken by claimant if an
additional review of the claim denial is desired.
If claimant desires a second review, they shall notify the Administrator in
writing within sixty (60) days of the first claim denial. Claimant may review
this Agreement or any documents relating thereto and submit any issues and
comments, in writing, he may feel appropriate. In its sole discretion, the
Administrator shall then review the second claim and provide a written decision
within sixty (60) days of receipt of such claim. This decision shall state the
specific reasons for the decision and shall include reference to specific
provisions of this Agreement upon which the decision is based.
If claimant continues to dispute the benefit denial based upon completed
performance of this Agreement or the meaning and effect of the terms and
conditions thereof, then claimant may submit the dispute to an arbitration panel
for settlement. The arbitration panel shall consist of three members: one member
selected by the claimant, one member selected by the Bank, and the third member
selected by the first two members. The arbitration panel shall conduct the
arbitration in accordance with the applicable rules of the American Arbitration
Association. The arbitral award may grant any relief deemed by the arbitrators
to be just and equitable and shall state the reasons for the award and the
relief granted. The parties hereto agree that they, their heirs, personal
representatives, successors and assigns shall be bound by the decision of the
arbitration panel with respect to any controversy properly submitted
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to it for determination. Any award rendered may be confirmed, judgment upon any
award rendered may be entered, and such award of the judgment thereon may be
enforced in any court of any state or country having jurisdiction over the
parties.
SECTION XII
MISCELLANEOUS
12.1 NO EFFECT ON EMPLOYMENT RIGHTS. Nothing contained herein will confer upon
the Executive the right to be retained in the service of the Bank nor limit the
right of the Bank to discharge or otherwise deal with the Executive without
regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b),
the following conditions shall apply to this Agreement:
(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than termination for
Cause shall not prejudice the Executive's vested right to compensation or other
benefits under the Agreement. As provided in Subsection 5.2, the Executive shall
have no right to receive additional compensation or other benefits, other than
those provided for in Subsection 5.2, after termination for Cause.
(2) If the Executive 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 Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1)) the Bank's obligations under the Agreement shall be
suspended (except vested rights) as of the date of termination of service unless
stayed by appropriate proceedings. If the charges in the notice are dismissed,
the Bank may in its discretion (i) pay the Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
(3) If the Executive is terminated 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 Federal Deposit Insurance Act (12 U.S.C.
1818(e)(4) or (g)(1)), all non-vested obligations of the Bank under the
Agreement shall terminate as of the effective date of the order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the Agreement shall
terminate as of the date of default.
(5) All non-vested obligations under the Agreement shall be terminated,
except to the extent determined that continuation of the Agreement is necessary
for the continued operation of the Bank:
(i) by the Director [of the Federal Deposit Insurance Corporation] or his
designee at
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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
ss. 13(c) of the Federal Deposit Insurance Act; or
(ii) by the Director [of the Federal Deposit Insurance Corporation] or his
designee, at the time the Director or his 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, (i.e., the balance of
the Executive's Retirement Income Trust Fund and the balance of the Executive's
Accrued Benefit Account, if applicable), however, shall not be affected by such
action.
12.2 STATE LAW. The Agreement is established under, and will be construed
according to, the laws of the state of Indiana, to the extent such laws are not
preempted by the Act and valid regulations published thereunder.
12.3 SEVERABILITY. In the event that any of the provisions of this Agreement or
portion thereof, are held to be inoperative or invalid by any court of competent
jurisdiction, then: (1) insofar as is reasonable, effect will be given to the
intent manifested in the provisions held invalid or inoperative, and (2) the
validity and enforceability of the remaining provisions will not be affected
thereby.
12.4 INCAPACITY OF RECIPIENT. In the event the Executive is declared incompetent
and a conservator or other person legally charged with the care of his person or
Estate is appointed, any benefits under the Agreement to which such Executive is
entitled shall be paid to such conservator or other person legally charged with
the care of his person or Estate.
12.5 UNCLAIMED BENEFIT. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The Bank shall not
be obligated to search for the whereabouts of any person. If the location of the
Executive is not made known to the Bank as of the date upon which any payment of
any benefits from the Accrued Benefit Account may first be made, the Bank shall
delay payment of the Executive's benefit payment(s) until the location of the
Executive is made known to the Bank; however, the Bank shall only be obligated
to hold such benefit payment(s) for the Executive until the expiration of
thirty-six (36) months. Upon expiration of the thirty-six (36) month period, the
Bank may discharge its obligation by payment to the Executive's Beneficiary. If
the location of the Executive's Beneficiary is not made known to the Bank by the
end of an additional two (2) month period following expiration of the thirty-six
(36) month period, the Bank may discharge its obligation by payment to the
Executive's Estate. If there is no Estate in existence at such time or if such
fact cannot be determined by
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the Bank, the Executive and his Beneficiary(ies) shall thereupon forfeit any
rights to the balance, if any, of the Executive's Accrued Benefit Account
provided for such Executive and/or Beneficiary under this Agreement.
12.6 LIMITATIONS ON LIABILITY. Notwithstanding any of the preceding provisions
of the Agreement, no individual acting as an employee or agent of the Bank, or
as a member of the Board of Directors shall be personally liable to the
Executive or any other person for any claim. loss. liability or expense incurred
in connection with the Agreement.
12.7 GENDER AND NUMBER. Whenever in this Agreement words are used in the
masculine or neuter gender, they shall be read and construed as in the
masculine, feminine or neuter gender, whenever they should so apply. Similarly,
words in the plural shall be construed in the singular and vice versa, whenever
applicable.
12.8 EFFECT ON OTHER CORPORATE BENEFIT AGREEMENTS. Nothing contained in this
Agreement shall affect the right of the Executive to participate in or be
covered by any qualified or non-qualified pension, profit sharing, group, bonus
or other supplemental compensation plan or fringe benefit agreement constituting
a part of the Bank's existing or future compensation structure.
12.9 SUICIDE. Notwithstanding anything to the contrary in this Agreement, if the
Executive's death results from suicide, whether sane or insane, within
twenty-six (26) months after execution of this Agreement, all further
Contributions to the Retirement Income Trust Fund (or Phantom Contributions
recorded in the Accrued Benefit Account) shall thereupon cease, and no
Contribution (or Phantom Contribution) shall be made by the Bank to the
Retirement Income Trust Fund (or recorded in the Accrued Benefit Account) in the
year such death resulting from suicide occurs (if not yet made). All benefits
other than those available from previous Contributions to the Retirement Income
Trust Fund under this Agreement shall be forfeited, and this Agreement shall
become null and void. The balance of the Retirement Income Trust Fund, measured
as of the Executive's date of death, shall be paid to the Beneficiary within
thirty (30) days of the date the Administrator receives notice of the
Executive's death.
12.10 INUREMENT. This Agreement shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive, his
successors, heirs, executors, administrators, and Beneficiaries.
12.11 HEADINGS. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this Agreement.
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12.12 ESTABLISHMENT OF A RABBI TRUST. The Bank shall establish a rabbi trust
into which the Bank shall contribute assets which shall be held therein, subject
to the claims of the Bank's creditors in the event of the Bank's "Insolvency"
(as defined in such rabbi trust agreement), until the contributed assets are
paid to the Executive and/or his Beneficiary in such manner and at such times as
specified in this Agreement. It is the intention of the Bank that the
contribution or contributions to the rabbi trust shall provide the Bank with a
source of funds to assist it in meeting the liabilities of this Agreement.
SECTION XIII
AMENDMENT/PLAN TERMINATION
13.1 AMENDMENT OR PLAN TERMINATION. The Bank intends this Agreement to be
permanent, but reserves the right to amend or terminate the Agreement when, in
the sole opinion of the Bank, such amendment or termination is advisable.
However, any termination of the Agreement which is done in anticipation of or
pursuant to a "Change in Control", as defined in Subsection 1.9, shall be deemed
to trigger Subsection 2.1(b)(2) (or 2.1(c)(2), as applicable) of the Agreement
notwithstanding the Executive's continued employment, and benefit(s) shall be
paid from the Retirement Income Trust Fund (and Accrued Benefit Account, if
applicable) in accordance with Subsection 13.2 below and with Subsections
2.1(b)(2) (or 2.1(c)(2), as applicable). Any amendment or termination of the
Agreement shall be made pursuant to a resolution of the Board of Directors of
the Bank and shall be effective as of the date of such resolution. No amendment
or termination of the Agreement shall directly or indirectly deprive the
Executive of all or any portion of the Executive's Retirement Income Trust Fund
(and Accrued Benefit Account, if applicable) as of the effective date of the
resolution amending or terminating the Agreement.
13.2 EXECUTIVE'S RIGHT TO PAYMENT FOLLOWING PLAN TERMINATION. In the event of a
termination of the Agreement, the Executive shall be entitled to the balance, if
any, of his Retirement Income Trust Fund and Accrued Benefit Account, if
applicable. However, if such termination is done in anticipation of or pursuant
to a "Change in Control," such balances shall include the final Contribution (or
final Phantom Contribution) made (or recorded) pursuant to Subsection 2.1(b)(2)
(or 2.1(c)(2)). Payment of the balances of the Executive's Retirement Income
Trust Fund and Accrued Benefit Account, if applicable, shall not be dependent
upon his continuation of employment with the Bank following the termination date
of the Agreement. Payment of the balances of the Executive's Retirement Income
Trust Fund and Accrued Benefit Account, if applicable, shall be made in a lump
sum within thirty (30) days of the date of termination of the Agreement.
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SECTION XIV
EXECUTION
14.1 This Agreement and the Grantor Trust Agreement set forth the entire
understanding of the parties hereto with respect to the transactions
contemplated hereby, and any previous agreements or understandings between the
parties hereto regarding the subject matter hereof are merged into and
superseded by this Agreement and the Grantor Trust Agreement.
14.2 This Agreement shall be executed in triplicate, each copy of which, when so
executed and delivered, shall be an original, but all three copies shall
together constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Bank and the Executive have caused this Agreement
to be executed on the day and date first above written.
ATTEST: MUTUAL FEDERAL SAVINGS BANK
(Bank)
By:
--------------------------------
- ------------------------ -----------------------------------
Secretary (Title)
WITNESS: EXECUTIVE:
- ------------------------ -----------------------------------
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CONDITIONS, ASSUMPTIONS,
AND
SCHEDULE OF CONTRIBUTIONS AND PHANTOM CONTRIBUTIONS
1. Interest Factor - for purposes of:
a. the Accrued Benefit Account - shall be Eight percent (8%) per annum,
compounded monthly.
b. the Retirement Income Trust Fund - for purposes of annuitizing the
balance of the Retirement Income Trust Fund over the Payout Period,
the trustee of the Grantor Trust shall exercise discretion in
selecting the appropriate rate given the nature of the investments
contained in the Retirement Income Trust Fund and the expected return
associated with the investments.
2. The amount of the annual Contributions (or Phantom Contributions) to the
Retirement Income Trust Fund (or Accrued Benefit Account) has been based on
the annual incremental accounting accruals which would be required of the
Bank through the earlier of the Executive's death or Retirement Age, (i)
pursuant to APB Opinion No. 12, as amended by FAS 106 and (ii) assuming a
discount rate equal to Eight percent (8%) per annum, in order to provide
the unfunded, non-qualified Supplemental Retirement Income Benefit.
3. Supplemental Retirement Income Benefit means an actuarially determined
annual amount equal to _________________________ ($_________).
The Supplemental Retirement Income Benefit:
o the definition of Supplemental Retirement Income Benefit has been
incorporated into the Agreement for the sole purpose of actuarially
establishing the amount of annual Contributions (or Phantom Contributions)
to the Retirement Income Trust Fund (or Accrued Benefit Account). The
amount of any actual retirement, pre-retirement or disability benefit
payable pursuant to the Agreement will be a function of (i) the amount and
timing of Contributions (or Phantom Contributions) to the Retirement Income
Trust Fund (or Accrued Benefit Account) and (ii) the actual investment
experience of such Contributions (or the monthly compounding rate of
Phantom Contributions).
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4. Schedule of Annual Gross Contributions/Phantom Contributions
Plan Year Amount
--------- ------
1996 $
1997 $
1998 $
1999 $
2000 $
2001 $
2002 $
2003 $
Exhibit A
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RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Restated Executive Supplemental
Retirement Income Agreement executed by the Bank, dated the ______ day of
__________________, 19__, hereby designates the following Beneficiary to receive
any guaranteed payments or death benefits under such Agreement, following his
death:
PRIMARY BENEFICIARY: _________________________________
SECONDARY BENEFICIARY: _________________________________
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
This Beneficiary Designation is revocable.
DATE:___________________ , 19___
- ------------------------------------ ------------------------------------
(WITNESS) EXECUTIVE
Exhibit B
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RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
NOTICE OF ELECTION TO CHANGE FORM OF PAYMENT
TO: Bank
Attention:
I hereby give notice of my election to change the form of payment of my
Supplemental Retirement Income Benefit, as specified below. I UNDERSTAND THAT
SUCH NOTICE, IN ORDER TO BE EFFECTIVE, MUST BE SUBMITTED IN ACCORDANCE WITH THE
TIME REQUIREMENTS DESCRIBED IN MY RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT
INCOME AGREEMENT.
|_| I hereby elect to change the form of payment of my benefits
from monthly installments throughout my Payout Period to a
lump sum benefit payment.
|_| I hereby elect to change the form of payment of my benefits
from a lump sum benefit payment to monthly installments
throughout my Payout Period. Such election hereby revokes my
previous notice of election to receive a lump sum form of
benefit payments.
----------------------------------
Executive
----------------------------------
Date
Acknowledged
By:
-------------------------------
Title:
----------------------------
----------------------------------
Date
Exhibit C
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MUTUAL FEDERAL SAVINGS BANK
RABBI TRUST FOR THE
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT(S)
-------------------------------------------------------------------
This Agreement is made this 15th day of November, 1996 by and between
MUTUAL FEDERAL SAVINGS BANK, a federally chartered savings institution, having
its principal place of business in Munice, Indiana, (the "Bank"), and Indiana
Federal Bank for Savings, a banking organization organized under the laws of the
state of Indiana (the "Trustee").
WHEREAS, the Bank has adopted Restated Executive Supplement Retirement
Income Agreement(s)(the "Plan"), effective as of the 15th day of November, 1996,
which constitutes a non-qualified deferred compensation plan, a copy of which is
attached hereto as Appendix A.
WHEREAS, Bank has incurred or expects to incur liability under the terms of
the Plan with respect to the individual(s) participating in the Plan;
WHEREAS, Bank wishes to establish a trust (the "Trust") and to contribute
to the Trust assets that shall be held therein, subject to the claims of Bank's
creditors in the event of Bank's Insolvency, as herein defined, until paid to
Plan participants and their beneficiaries in such manner and at such times as
specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan, maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees,
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended;
WHEREAS, it is the intention of Bank to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
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1. ESTABLISHMENT OF TRUST.
(a) Bank hereby deposits with Trustee in trust assets which shall become
the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Bank is grantor,
within the meaning of subpart E. part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall
be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Bank and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their
beneficiaries shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries
against Bank. Any assets held by the Trust will be subject to the
claims of Bank's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) Within seventy-five (75) days following the end of each calender year,
Bank shall be required to irrevocably deposit additional cash or other
property to the Trust in an amount sufficient to pay each Plan
participant or beneficiary the benefits payable pursuant to the terms
of the Plan as of the close of the calendar year.
(f) Upon (i) a Change in Control (as defined herein) or (ii) the death of
a participant during service but prior to "Benefit Age" (as such term
is defined in the Plan), Bank shall as soon a possible, but in no
event longer than seventy-five (75) days following such event, make an
additional irrevocable contribution to the Trust in
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an amount that is sufficient to pay each Plan participant or
beneficiary the benefits to which Plan participants or their
beneficiaries would be entitled pursuant to the terms of the Plan as
of the date such event occurred.
2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) Bank shall deliver to Trustee a schedule (the "Payment Schedule") that
indicates the amounts payable in respect of each Plan participant (and
his or her beneficiaries), that provides a formula or other
instructions acceptable to Trustee for determining the amounts so
payable, the form in which such amount is to be paid (as provided for
or available under the Plan), and the time of commencement for payment
of such amounts. Except as otherwise provided herein, Trustee shall
make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state, or
local taxes that may be required to be withheld with respect to the
payment of benefits pursuant to the terms of the Plan and shall pay
amounts withheld to the appropriate taxing authorities or determine
that such amounts have been reported, withheld and paid by Bank.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Bank or such party as
it shall designate under the Plan, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the
Plan.
(c) Bank may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan.
Bank shall notify Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to participants or
their beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of benefits
in accordance with the terms of the Plan, Bank shall make
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<PAGE>
the balance of each such payment as it falls due. Trustee shall notify
Bank where principal and earnings are not sufficient.
3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN BANK IS
INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Bank is Insolvent. Bank shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Bank is unable
to pay its debts as they become due, (ii) Bank is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code, or
(iii) Bank is determined to be insolvent by the Director of the
Federal Deposit Insurance Corporation or the Resolution Trust
Corporation.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Bank under federal and state
law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Bank
shall have the duty to inform Trustee in writing of Bank's
Insolvency. If a person claiming to be a creditor of Bank alleges
in writing to Trustee that Bank has become Insolvent, Trustee
shall determine whether Bank is Insolvent and, pending such
determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Bank's Insolvency, or has
received notice from Bank or person claiming to be a creditor
alleging that Bank is Insolvent, Trustee shall have no duty to
inquire whether Bank is Insolvent. Trustee may in all events rely
on such evidence concerning Bank's solvency as may be furnished
to Trustee and that provides Trustee with a reasonable basis for
making a determination concerning Bank's solvency.
4
<PAGE>
(3) If at any time Trustee has determined that Bank is Insolvent,
Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the
benefit of Bank's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Plan
participants or their beneficiaries to pursue their rights as
general creditors of Bank with respect to benefits due under the
Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants
or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Bank is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due
to Plan participants or their beneficiaries under the terms of the
Plan for the period of such discontinuance, less the aggregate amount
of any payments made to Plan participants or their beneficiaries by
Bank in lieu of the payments provided for hereunder during any such
period of discontinuance.
4. PAYMENTS TO BANK.
Except as provided in Sections 3 or 12 hereof, after the Trust has become
irrevocable, Bank shall have no right or power to direct Trustee to return to
Bank or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan.
5
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5. INVESTMENT AUTHORITY.
Trustee shall maintain all investments deposited upon establishment of the
trust (and listed on Exhibit A), until such time as the investments reach
maturity. Liquidation of such investments prior to maturity shall only be
allowable by the Trustee if (i) there is insufficient cash in the trust at the
time a benefit payment is due under the Plan and (ii) with knowledge of such
insufficiency, the Bank affirmatively chooses not to pay any or all of the
benefit payment due from Bank assets held outside the trust itself. As the
investments listed on Exhibit A mature, the Trustee's investment authority, with
respect to the proceeds from such investments, shall be subject to the
following:
(a) In no event may Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by Bank, other than a
de minimis amount held in common investment vehicles in which Trustee
invests, except where such de minimis investment is prohibited by
applicable banking regulations. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by
Trustee, and shall in no event be exercisable by or rest with Plan
participants.
(b) Trustee shall have the following powers and authority in the
administration of the assets of Trust, in addition to those vested in
it elsewhere in this Trust or by law:
(i) To invest and reinvest the assets of Trust, without distinction
between principal and income, in any kind of property, real,
personal or mixed, tangible or intangible, and in any kind of
investment, security or obligation suitable for the investment of
Trust assets, including federal, state and municipal tax-free
obligations and other tax-free investment vehicles, insurance
policies and annuity contracts, and any common trust fund, group
trust, pooled fund, or other commingled investment fund
maintained by the Trustee or any other bank or entity for trust
investment purposes;
(ii) To purchase, and maintain as owner, life insurance policies with
respect to participants;
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<PAGE>
(iii) To sell for cash or on credit, to grant options, convert,
redeem, exchange for other securities or other property, or
otherwise to dispose of, any security or other property at any
time held;
(iv) To settle, compromise or submit to arbitration, any claims, debts
or damages, due or owing to or from the Trust, to commence or
defend suits or legal proceedings and to represent the Trust in
all suits or legal proceedings;
(v) To exercise any conversion privilege and/or subscription right
available in connection with securities or other property at any
time held, to oppose or to consent to the reorganization,
consolidation, merger or readjustment of the finances of any
corporation, Bank or association or to the sale, mortgage, pledge
or lease of the property of an corporation, Bank or association
any of the securities of which may at any time be held and to do
any act with reference thereto, including the exercise of
options, the making of agreement or subscription, which may be
deemed necessary or advisable in connection therewith, and to
hold and retain any securities or other properties so acquired;
(vi) To hold cash uninvested for a reasonable period of time (not in
excess of ten (10) days) under the circumstances without
liability for interest, pending investment thereof or the payment
of expenses or making distributions therewith;
(vii) To form corporations and to create trusts to hold title to any
securities or other property, all upon such terms and conditions
as may be deemed advisable;
(viii) To register any securities held hereunder in the name of the
Trustee or in the name of a nominee with or without the addition
of words indicating that such securities are held in a fiduciary
capacity and to hold any securities in bearer form;
7
<PAGE>
(ix) To make, execute and deliver, as Trustee, any and all
conveyances, contracts, waivers, releases or other instruments in
writing necessary or proper for the accomplishment of any of the
foregoing powers;
(x) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation; and
(xi) To have any and all other power of authority, under the laws of
the state in which the Trustee's principal executive offices are
located, relevant to performance in the capacity as Trustee.
6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between Bank
and Trustee. Within ninety (90) days following the close of each calendar year
and within sixty (60) days after the removal or resignation of Trustee, Trustee
shall deliver to Bank a written account of its administration of the Trust
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
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<PAGE>
8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however,
that Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by Bank which
is contemplated by, and in conformity with, the terms of the Plan or
this Trust and is given in writing by Bank. In the event of a dispute
between Bank and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, except litigation arising out of the Trustee's
negligence or breach of fiduciary duty, Bank agrees to indemnify
Trustee against Trustee's costs, expenses and liabilities (including,
without limitation, attorney's fees and expenses) relating thereto and
to be primarily liable for such payments. If Bank does not pay such
costs, expenses and liabilities in a reasonable manner, Trustee may
obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Bank generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an insurance policy is held as an
asset of the Trust, Trustee shall have no power to name a beneficiary
of the policy other than the Trust, to assign the policy (as distinct
from conversion of the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of any
borrowing against such policy.
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(f) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and
dividing the gains therefrom, within the meaning of section 301.7701-2
of the Procedure and Administrative Regulations promulgated pursuant
to the Internal Revenue Code.
9. FEES AND EXPENSES OF TRUSTEE.
Bank shall pay all administrative and Trustee's fees and expenses. If not
so paid, the fees and expenses shall be paid from the Trust.
10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Bank, which shall
be effective sixty (60) days after receipt of such notice unless Bank
and Trustee agree otherwise.
(b) Trustee may be removed by Bank on sixty (60) days prior written notice
or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be
removed by Bank for two (2) years following the date of such Change in
Control, nor may such Trustee be removed by Bank in anticipation of a
Change of Control.
(d) If Trustee resigns at any time following a Change in Control, or if
Trustee is removed by Bank at any time following the expiration of the
two (2) year period (as described in Subpart (c) above) following a
Change in Control, Trustee shall select a successor Trustee in
accordance with the provisions of 11(a) hereof prior to the effective
date of Trustee's resignation or removal. In all other instances of
resignation or removal, Bank shall select a successor Trustee in
accordance with the provisions of 11(a) hereof prior to the effective
date of Trustee's resignation or removal.
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(e) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred
to the successor Trustee. The transfer shall be completed within
fifteen (15) days after receipt of notice of resignation, removal
or transfer, unless Bank extends the time limit.
(f) If Trustee resigns or is removed under paragraph (a), (b), or (d)
of this Section 10, a successor shall be appointed in accordance
with Section 11 hereof, by the effective date of resignation or
removal. If no such appointment has been made, Trustee or Bank
(as specified above) may apply to a court of competent
jurisdiction for appointment of a successor or for instructions.
Should the Trustee be required to apply to a court of competent
jurisdiction for such purpose, all expenses of Trustee in
connection with the proceeding shall be allowed as administrative
expenses of the Trust.
11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed pursuant to the provisions of
Section 10 hereof, Bank or Trustee (as specified above) may
appoint any third party, such as a bank trust department or other
party that may be granted corporate trustee powers under state
law, as a successor to replace Trustee upon resignation or
removal. The appointment of a successor Trustee shall be
effective when accepted in writing by the new Trustee. The new
Trustee shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The
former Trustee shall execute any instrument necessary or
reasonably requested by the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust
assets, subject to Sections 7 and 8 hereof. The successor Trustee
shall not be responsible for and Bank shall indemnify and defend
the successor Trustee from any claim or liability resulting
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from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it
becomes successor Trustee.
12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Bank. Notwithstanding the foregoing, no
such amendment shall conflict with the terms of the Plan or shall
make the Trust revocable after it has become irrevocable in
accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to
benefits pursuant to the terms of the Plan. Upon termination of
the Trust any assets remaining in the Trust shall be returned to
Bank.
(c) Upon written approval of participants or beneficiaries entitled
to payment of benefits pursuant to the terms of the Plan, Bank
may terminate this Trust prior to the time all benefit payments
under the Plan have been made. All assets in the Trust at
termination shall be returned to Bank.
(d) Sections 1(one), 2 (two), 6 (six), 10 (ten) and 12 (twelve) of
this Trust Agreement may not be amended by Bank (i) in
anticipation of or (ii) for two (2) years following a Change of
Control, as defined herein.
13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without
invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned
(either at law or in equity), alienated,
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pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the state in which the Trustee's
principal executive offices are located.
(d) For purposes of this Trust, Change of Control shall mean;
(1) a change of control of a nature that 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 (hereinafter
the "Exchange Act"); or
(2) a change of control of the Bank within the meaning of 12
C.F.R. 4\574.4; or
(3) a Change of Control at such time as
(i) 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 representing Twenty Percent (20%) or more of
the combined voting power of the Bank's outstanding
securities ordinarily having the right to vote at the
elections of Directors except for (i) any stock of the
Bank purchased by the Holding Company in connection
with the conversion of the Bank to stock form, and (ii)
any stock purchased by any Employee Stock Ownership
Plan and/or trust sponsored by the Bank; or
(ii) individuals who constitute the Board of Directors on
the date hereof (hereinafter 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
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by the Bank's members (or stockholders) was approved by
the Bank's Nominating Committee which is comprised of
members of the Incumbent Board, shall be, for purposes
of this clause (ii), considered as though he were a
member of the Incumbent Board; or
(iii) merger, consolidation, or sale of all or substantially
all the assets of the Bank occurs; or
(iv) a proxy statement is issued soliciting proxies from the
members (or stockholders) of the Bank by someone other
than the current management of the Bank, seeking member
(or stockholder) approval of a plan of reorganization,
merger, or consolidation of the Bank with one or more
corporations as a result of which the outstanding
shares of the class of the Bank's securities are
exchanged for or converted into cash or property or
securities not issued by the Bank.
For these purposes, the terms "stockholders(s)" and "member(s)"
shall be considered one and the same. The term "Holding Company"
shall mean the holding company (including any successor thereto)
organized to acquire the capital stock of the Bank upon the
Bank's conversion from mutual to stock form.
14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be the 15th day of
November, 1996.
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IN WITNESS WHEREOF, this instrument has been executed as of the day and
year first written above.
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
--------------------------------------------
(Trustee)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
15
<PAGE>
FIRST
AMENDMENT
TO THE
MUTUAL FEDERAL SAVINGS BANK
RABBI TRUST FOR THE
RESTATED
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT(S)
----------------------------------------------------------------
This Agreement is made this 19th day of October, 1999 by and between MUTUAL
FEDERAL SAVINGS BANK, a federally chartered savings institution, having its
principal place of business in Munice, Indiana, (the "Bank"), and SECURITY
FEDERAL SAVINGS BANK, a federally chartered savings institution, with its
principal place of business in the state of Indiana, (the "Trustee").
WHEREAS, the Bank has adopted a restated Executive Supplemental Retirement
Income Agreement, effective as of the 15th day of November, 1996, which
constitutes a non-qualified deferred compensation plan;
WHEREAS, the Bank has adopted an Executive Deferred Compensation Master
Agreement, effective as of the 15th day of November, 1996, which constitutes a
non-qualified deferred compensation plan;
WHEREAS, the Bank has adopted a Director Deferred Compensation Master
Agreement (the "Plans"), effective as of the 15th day of November, 1996, which
constitutes a non-qualified deferred compensation plan;
WHEREAS, it is the parties intention to merge and consolidate all of the
assets of the Mutual Federal Savings Bank Rabbi Trust for the Restated Executive
Supplemental Retirement Income Agreement(s) ("the Trust"), the Mutual Federal
Savings Bank Rabbi Trust for the Executive Deferred Compensation Master
Agreement, and the Mutual Federal Savings Bank Rabbi Trust for the Director
Deferred Compensation Master Agreement;
NOW, THEREFORE, the parties do hereby amend and rename the Trust the
"Mutual Federal Savings Bank Rabbi Trust for the Restated Executive Supplemental
Retirement Income Agreement(s), the Director Deferred Compensation Master
Agreement, and the Executive Deferred Compensation Master Agreement."
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IN WITNESS WHEREOF, this instrument has been executed as of the day and
year first written above.
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
SECURITY FEDERAL SAVINGS BANK
(Trustee)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
2
<PAGE>
FORM OF
GRANTOR TRUST AGREEMENT
This Trust Agreement is made this 15th day of November, 1996, by and
among _______________ (the "Grantor"), MUTUAL FEDERAL SAVINGS BANK, a state
chartered mutual savings bank having its principal place of business in MUNCIE,
INDIANA, (the "Bank"), and Indiana Federal Bank for Savings (the "Trustee").
RECITALS:
WHEREAS, the Bank has entered into a certain Restated Executive
Supplemental Retirement Income Agreement, effective as of the 15th day of
November, 1996, (the "Agreement") with Grantor, a copy of which is attached
hereto as Exhibit A; and
WHEREAS, the Agreement provides for certain payments of benefits to be paid
to the Grantor or his designated Beneficiary in accordance with the terms and
provisions of the Agreement, (the "Benefits"); and
WHEREAS, Grantor and the Bank desire to establish an irrevocable trust fund
for the purpose of accumulating funds to provide the Benefits under the
Agreement; and
WHEREAS, Grantor and the Bank desire the Trustee to hold all funds
contributed by the Bank, and the Trustee is willing to hold and administer such
funds in trust, pursuant to the terms of the Agreement and this Trust.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, Grantor, Bank and Trustee do hereby covenant and agree as
follows:
1. ESTABLISHMENT OF TRUST.
Grantor hereby establishes the Trust and does hereby transfer, assign,
convey and grant to the Trustee, the property listed on Exhibit B attached
hereto and made a part hereof for Grantor's benefit and the benefit of any
Beneficiary named hereunder. The Trustee agrees to hold said property and such
additional property as may be hereafter acquired by Trustee under the provisions
of this Trust. The Trust established by this Trust Agreement is intended to be a
"Grantor Trust", treated as established by the Grantor, with the result that the
principal and income of the Trust are
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treated for tax purposes as assets and income of the Grantor pursuant to
Sections 671 through 679 of the Internal Revenue Code of 1986, as amended. Any
capitalized terms set forth in this Trust that are not specifically defined
herein shall have the same meaning as set forth in the Agreement.
2. ACCEPTANCE OF TRUST.
The Trustee hereby accepts this Trust as evidenced by the Trustee's
execution of this Trust Agreement. The Bank hereby represents and warrants that
is has the full power, authority, and capacity to execute this Trust and perform
its obligation hereunder. This Trust constitutes a legal, valid and binding
obligation of the Bank, and is enforceable against the Bank in accordance with
its terms.
3. TRUST FUND PROVISIONS.
The Trustee shall receive any property from the Grantor and Contributions
paid to it in cash, or in other property acceptable to it, which shall from time
to time be transferred to the Trust by the Bank. The Trustee shall be
accountable for all property and Contributions received, but the Trustee shall
have no duty to see that the Contributions received are sufficient to provide
the Benefits, nor shall the Trustee be obligated or have any right to enforce or
collect any Contributions from the Bank. All property and Contributions so
received together with the income therefrom and any other increment thereon
shall be held, managed and administered by the Trustee pursuant to the terms of
the Agreement and this Trust.
The Trustee shall establish and maintain a separate Trust Fund for the
benefit of the Grantor to which shall be credited all Contributions by the Bank,
and other property conveyed to the Trust, and all earnings and profits thereon,
and from which shall be deducted all distributions of Benefits and charges
authorized herein.
The Bank shall make Contributions to the Trust each year at the time and in
the manner and amount specified in the Agreement. As of the end of each calendar
year the Trustee shall determine the fair market value of the Trust Fund, after
adding any Contributions made to the Trust and deducting distributions and any
expenses of administration paid out of the Trust during such year. All income of
the Trust earned during each calendar year shall be added to principal as of the
end of such year.
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<PAGE>
The Bank shall notify Grantor, as soon as reasonably practicable, after
each Contribution to the Trustee on behalf of the Grantor. The form of such
notice shall be by mutual agreement between the Grantor and Bank.
Any and all Contributions, as well as earnings thereon, made on behalf of
Grantor shall be deemed to be the sole and exclusive property of the Grantor.
The Grantor may withdraw, either in whole or in part, any and all amounts
contributed on behalf of the Grantor by Bank, including earnings thereon, at any
time and from time to time within thirty (30) days after the date of such
Contribution to the Trust, as determined in the sole and exclusive discretion of
the Grantor. Withdrawal instructions shall be given to the Trustee in writing,
and signed by the Grantor. Such withdrawal instructions must be delivered to the
Trustee on or before midnight of the thirtieth (30th) day after the date of each
Contribution. All withdrawals shall be deducted from Contributions on a first in
first out basis in the event of more than one Contribution within a thirty (30)
day period. The lapse of or failure to properly execute the withdrawal right for
each separate Contribution shall be final and conclusive with respect to that
particular withdrawal right and such withdrawal right or rights shall not be
cumulative and shall not be carried forward from year to year. No further claim
or right of withdrawal exists in favor of Grantor or any person, except those
claims as set forth and specified by the terms of the Agreement and this Trust
relating to Benefits.
Exercise of such withdrawal rights shall terminate Bank's obligation to
make future Contributions to the Trust.
To the extent the Grantor does not exercise his withdrawal rights with
respect to the Contributions, the Contributions shall be used by the Trustee:
(i) to provide retirement benefits or disability benefits payable to the
Grantor pursuant to the Agreement;
(ii) to provide the pre-retirement death benefit payable to the Beneficiary
pursuant to the Agreement;
(iii) to provide the Grantor with sufficient funds to pay any income taxes
owed by Grantor as the result of Grantor's interest in the Trust, to
the extent such taxes have not been withheld and paid by the Bank; and
(iv) for the reasonable compensation of, and reasonable expenses incurred
by, the Trustee in connection with the administration of the Trust, to
the extent such compensation and expenses are not paid directly by the
Bank.
3
<PAGE>
The assets of the Trust Fund shall at no time be subject to the rights or
claims of any creditors of the Bank, Grantor or Beneficiary.
Grantor shall have the right to direct the Trustee as to the investment of
the Trust Fund. Such investment direction and instruction shall be delivered to
the Trustee in writing by the Grantor. In the absence of specific instruction,
the Trustee shall invest and reinvest the Trust Fund pursuant to the terms
hereof.
All amounts contributed by the Bank on behalf of the Grantor are intended
to be taxable compensation to Grantor. All earnings on the Contributions, to the
extent Contributions are invested in taxable investments, are intended to be
taxable to the Grantor in accordance with the grantor trust rules under Sections
671 through 679 of the Internal Revenue Code of 1986. No part of the Trust Fund
shall at any time or under any circumstances revert to the Bank.
The Grantor may direct the Trustee in writing to make distributions from
the Trust to the Grantor in an amount sufficient to satisfy the Grantor's
federal and state income tax liability attributable to amounts contributed to
the Trust and to earnings on the Trust's assets. The Grantor shall provide the
Trustee such information as the Trustee may require to determine the amount
needed for such purpose.
4. PAYMENTS FROM THE TRUST FUND.
The Trustee shall make distributions from the Trust Fund to pay the
Benefits at the time and in the manner provided for in the Agreement. The Bank
or its duly authorized representative, shall deliver instructions to the Trustee
as to the amounts payable, the form in which such amounts are to be paid, and
the time payment is to commence. Other payments authorized under Section 3 to be
made by Trustee shall also be made from the Trust Fund as appropriate.
Nothing in this Trust Agreement shall relieve the Bank of its obligation to
pay the Benefits provided to Grantor or Beneficiary under the Agreement except
to the extent such obligation is met by the application of the Trust Fund or by
any direct payments expressly required by the Agreement. In all instances, if
the language in the Agreement conflicts with the language in this Trust, the
Agreement shall be controlling.
4
<PAGE>
5. NON-ALIENATION.
Except to the extent otherwise specifically required by law, (i) no amount
payable at any time under the Trust shall be subject in any manner to alienation
by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment,
charge or encumbrance of any kind, and any attempt to so alienate, sell,
transfer, assign, pledge, attach, charge or otherwise encumber any such amount,
whether presently or thereafter payable, shall be void; and (ii) the Trust Fund
shall in no manner be liable for or subject to the debts or liabilities of or
claims against the Bank, Grantor or Beneficiary.
6. TRUSTEE'S POWERS.
The Trustee shall have the following powers and authority in the
administration of the Trust Fund, in addition to those vested in it elsewhere in
this Trust Agreement or by law:
(a) Subject to the Grantor's right to direct the investment of the Trust
Fund, as provided in Section 3, to invest and reinvest the Trust Fund,
without distinction between principal and income, in any kind of
property, real, personal or mixed, tangible or intangible, and in any
kind of investment, security or obligation suitable for the investment
of trust funds, including federal, state and municipal tax-free
obligations and other tax-free investment vehicles, insurance policies
and annuity contracts, and any common trust fund, group trust, pooled
fund, or other commingled investment fund maintained by the Trustee or
any other bank or entity for trust investment purposes; provided,
however, that it is the desire of the Grantor, which shall be
precatory and not binding, that the Trustee invest the Trust Fund, in
the absence of specific investment direction from the Grantor, to the
extent possible, in tax- deferred investment vehicles, such as life
insurance or annuity products.
(b) To purchase, and maintain as owner, a life insurance policy on the
life of Grantor;
(c) To sell for cash or on credit, to grant options, convert, redeem,
exchange for other securities or other property, or otherwise to
dispose of, any security or other property at any time held;
(d) To settle, compromise or submit to arbitration, any claims, debts or
damages, due or owing to or from the Trust, to commence or defend
suits or legal proceedings and to represent the Trust in all suits or
legal proceedings;
(e) To exercise any conversion privilege and/or subscription right
available in connection with securities or other property at any time
held, to oppose or to consent
5
<PAGE>
to the reorganization, consolidation, merger or readjustment of the
finances of any corporation, company or association or to the sale,
mortgage, pledge or lease of the property of any corporation, company
or association any of the securities of which may at any time be held
in the Trust Fund and to do any act with reference thereto, including
the exercise of options, the making of agreements or subscriptions,
which may be deemed necessary or advisable in connection therewith,
and to hold and retain any securities or other properties so acquired;
(f) To hold cash uninvested for a reasonable period of time (not in excess
of ten (10) days without the express written consent of the Grantor)
without liability for interest, pending investment thereof or the
payment of expenses or making distributions therewith;
(g) To form corporations and to create trusts to hold title to any
securities or other property, all upon such terms and conditions as
may be deemed advisable;
(h) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation;
(i) To register any securities held hereunder in the name of the Trustee
or in the name of a nominee with or without the addition of words
indicating that such securities are held in a fiduciary capacity and
to hold any securities in bearer form;
(j) To make, execute and deliver, as Trustee, any and all conveyances,
contracts, waivers, releases or other instruments in writing necessary
or proper for the accomplishment of any of the foregoing powers; and
(k) To have any and all other powers or authority, under the laws of the
state in which the Trustee's principal executive offices are located,
relevant to performance in the capacity as Trustee.
7. FEES AND EXPENSES OF TRUSTEE.
The Trustee shall be paid such reasonable compensation as shall from time
to time be agreed upon by the Bank and the Trustee. Such compensation and all
reasonable costs, charges and expenses incurred by the Trustee in connection
with the administration of the Trust, including
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<PAGE>
counsel fees, shall be withdrawn by the Trustee out of the Trust Fund unless
paid or advanced by the Bank.
8. ACCOUNTING BY TRUSTEE.
The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements and other transactions with respect to the Trust. The
Trustee shall make available such records for inspection by the Bank or Grantor
or Beneficiary. Within thirty (30) days following the close of each calendar
year and within thirty (30) days after the removal or resignation of Trustee,
Trustee shall deliver to Grantor (or in the event of Grantor's death, the
Beneficiary) and to Bank a written account of its administration of the Trust
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, and disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
9. PROTECTION OF THE TRUSTEE.
The Trustee shall be fully protected in relying upon a certification of an
authorized representative of the Bank with respect to any instruction, direction
or approval of the Bank required or permitted hereunder, and protected also in
relying upon the certification until a subsequent certification is filed with
the Trustee.
The Trustee shall be fully protected in acting upon any instrument,
certificate, or paper believed by it to be genuine and to be signed or presented
by the proper person or persons, and the Trustee shall be under no duty to make
any investigation or inquiry as to any statement contained in any such writing,
but may accept the same as conclusive evidence of the trust and accuracy
contained therein.
The Trustee shall not be liable for following any direction or instruction
of the Bank or its duly authorized representative, or for the proper application
of any part of the Trust Fund if distributions are made in accordance with the
directions of the Bank or its duly authorized representative. The Trustee shall
not be liable hereunder for any loss or diminution of the Trust Fund resulting
from any reasonable action taken or omitted.
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<PAGE>
The Trustee's obligations hereunder shall be determined solely by the terms
of this Trust Agreement and the directions of the Bank or its duly authorized
representative given to it pursuant to the terms of this Trust.
10. RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE.
The Trustee may resign at any time by giving at least sixty (60) days
written notice to the Grantor and the Bank. The Grantor and the Bank may remove
the Trustee at any time by giving at least sixty (60) days prior written notice
to the Trustee or upon shorter notice accepted by Trustee. The Grantor and the
Bank shall appoint a successor trustee to fill any vacancy in the office of
Trustee, howsoever caused, which successor trustee shall be a bank or trust
company (with a combined capital and surplus in excess of one hundred million
dollars) located in the continental United States and independent of and not
providing services to the Grantor or Bank.
Each successor trustee shall succeed to the title to the Trust Fund vested
in its predecessor, without the signing or filing of any further instrument, but
any resigning or removed trustee shall execute all documents and do any acts
necessary to vest such title of record in any successor trustee. Each successor
trustee shall have and enjoy all powers, both discretionary and ministerial, of
its predecessor. No successor trustee shall be liable for any act or failure to
act of any predecessor trustee; and, with the approval of the Grantor and Bank,
a successor trustee may accept the account rendered and the property delivered
to it by its predecessor trustee as a full and complete discharge of the
predecessor trustee without incurring any liability or responsibility for so
doing.
11. IRREVOCABILITY.
This Trust is irrevocable. This Trust Agreement may only be amended with
the unanimous consent of the Trustee, the Bank, and Grantor (or if applicable,
the Beneficiary).
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<PAGE>
12. TERMINATION OF TRUST.
The Trust shall continue throughout the life of the Grantor until all
retirement or disability benefits payable from the Trust Fund are paid, and if
necessary, the Trust shall continue throughout the life of Beneficiary until any
remaining retirement or disability benefits are paid or until any pre-retirement
death benefits payable from the Trust Fund are paid. The Trust shall terminate
only upon:
(i) the complete satisfaction of all Benefit obligations of the Bank to
Grantor or Beneficiary payable from the Trust Fund pursuant to the
Agreement, or
(ii) the complete distribution of all of the assets of the Trust Fund
pursuant to the terms of the Agreement.
Upon termination of the Trust, any assets remaining in the Trust shall be
distributed to the Grantor or Beneficiary.
13. FIDUCIARY RESPONSIBILITY AND LIABILITY.
In carrying out its responsibilities under the Trust, the Trustee and any
other fiduciary hereunder shall act solely in the interest of the Grantor and
Beneficiary and with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims.
The Bank shall, to the extent permitted by law, indemnify the Trustee and
hold it harmless from and against any claims or liabilities, losses, costs or
expenses (including reasonable attorney's fees) of whatsoever kind and nature
that may be asserted against or incurred by the Trustee by reason
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<PAGE>
of its taking or refraining from taking action hereunder, except to the extent
due to the Trustee's gross negligence or willful misconduct.
14. NOTICE.
Every direction, revocation or notice authorized or required hereunder
shall be deemed delivered to the Bank or the Trustee as the case may be:
(i) on the date it is personally delivered to the Bank or the Trustee at
its respective principal executive offices, or
(ii) three business days after it is sent by registered or certified mail,
postage prepaid, addressed to the Bank or the Trustee at such
principal executive offices.
Every direction, revocation or notice authorized or required hereunder
shall be deemed delivered to the Grantor or Beneficiary as the case may be:
(i) on the date it is personally delivered to him, or
(ii) three business days after it is sent by registered or certified mail,
postage prepaid, addressed to him at the last address shown on the
records of the Bank.
Grantor shall keep the Bank and the Trustee informed of his current address
and the current address of the Beneficiary. Neither the Bank nor the Trustee
shall be obligated to search for the whereabouts of any person. If the location
of Grantor is not made known to the Bank or the Trustee within one (1) year
after the date on which distribution of retirement benefits from the Account is
to first be made per the Agreement, distribution may be made as though Grantor
had died at the end of the one (1) year period.
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15. MISCELLANEOUS.
(a) This Trust Agreement and the Trust created herein shall be construed
and administered under the laws of the state in which the Trustee's principal
executive offices are located.
(b) Any notice required hereunder may be waived by the person entitled
thereto.
(c) Where the context permits, words in the masculine gender shall include
the feminine and neuter genders, the singular shall include the plural, and the
plural shall include the singular.
(d) The headings of Sections of this Trust Agreement are for convenience of
reference only and shall have no substantive effect on the provisions of this
Trust Agreement.
(e) In the event any provision of this Trust Agreement shall be held
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Trust Agreement, and the Trust Agreement
shall be construed and enforced as if such illegal or invalid provision had
never been contained herein.
(f) In the event of the merger or consolidation of the Bank with or into
any other corporation, or in the event substantially all of the assets of the
Bank shall be transferred to another corporation, the successor corporation
resulting from the merger or consolidation, or the transferee of such assets, as
the case may be, shall, as a condition to the consummation of the merger,
consolidation or sale, assume the obligations of the Bank hereunder and shall be
substituted for the Bank hereunder.
(g) This Trust Agreement shall extend to and be binding upon the successors
of the parties hereto.
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IN WITNESS WHEREOF, this Trust Agreement has been executed as of the day
and year first above written.
Attest: By:
----------------------------------
Grantor
----------------------------------
(Trustee)
Attest: By:
----------------------------------
Title:
-------------------------------
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
---------------------------------
Title:
------------------------------
EXECUTIVE DEFERRED
COMPENSATION AGREEMENTS
Mutual Federal Savings Bank
Muncie, Indiana
Financial Institution Consulting Corporation
700 Colonial Road, Suite 260
Memphis, Tennessee 38117
WATS: 1-800-873-0089
FAX: (901) 684-7414
(901) 684-7400
<PAGE>
EXECUTIVE DEFERRED COMPENSATION MASTER AGREEMENT
This Executive Deferred Compensation Master Agreement (the "Agreement"),
effective as of the lst day of October, 1993, by and between MUTUAL FEDERAL
SAVINGS BANK (the "Bank"), a federally chartered mutual association, and certain
key employees, hereinafter referred to as "Executive", who shall be approved by
the Bank to participate and who shall elect to become a party to this Executive
Deferred Compensation Master Agreement by execution of an Executive Deferred
Compensation Joinder Agreement ("Joinder Agreement") in a form provided by the
Bank.
W I T N E S S E T H:
WHEREAS, the Executives are employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed for
it by such Executives and wishes to encourage continued employment; and
WHEREAS, the Executives wish to be assured that they will be entitled to a
certain amount of additional compensation for some definite period of time from
and after retirement from active service with the Bank or other termination of
employment and wish to provide their beneficiaries with benefits from and after
death; and
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WHEREAS, the Bank and the Executives wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executives after retirement or other termination of employment and/or death
benefits to their beneficiaries after death; and
WHEREAS, the Bank and the Executives intend this Agreement to be considered
an unfunded arrangement, maintained primarily to provide retirement income for
such Executives, members of a select group of management or highly compensated
employees of the Bank, for purposes of the Employee Retirement Income Security
Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Executive Deferred Compensation Master
Agreement which controls all issues relating to Deferred Compensation Benefits
as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the meanings
below unless the context clearly indicates otherwise:
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1.1 "Act" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
1.2 "Bank" means Mutual Federal Savings Bank and any successor thereto.
1.3 "Beneficiary" means the person or persons (and their heirs) designated as
Beneficiary in the Executive's Joinder Agreement to whom the deceased
Executive's benefits are payable. If no Beneficiary is so designated, then
the Executive's Spouse, if living, will be deemed the Beneficiary. If the
Executive's Spouse is not living, then the Children of the Executive will
be deemed the Beneficiaries and will take on a per stirpes basis. If there
are no living Children, then the Estate of the Executive will be deemed the
Beneficiary.
1.4 "Benefit Age" shall be the birthday on which the Executive becomes eligible
to receive benefits under the Plan. Such birthday shall be designated in
the Executive's Joinder Agreement.
1.5 "Benefit Eligibility Date" shall be the date on which a Executive is
entitled to receive his Deferred Compensation Benefit. It shall be the 1st
day of the month coincident with or next following the month in which the
Executive attains the Benefit Age designated in his Joinder Agreement.
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1.6 "Cause" means personal dishonesty, willful misconduct, willful malfeasance,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses), or final
cease-and-desist order, material breach of any provision of this Agreement,
or gross negligence in matters of material importance to the Bank.
1.7 "Children" means the Executive's children, both natural and adopted, then
living at the time payments are due the Children under this Agreement.
1.8 "Deferral Period" means the period of months designated in the Executive's
Joinder Agreement during which the Executive shall defer current
compensation. The Deferral Period shall commence on the date designated in
the Executive's Joinder Agreement.
1.9 "Deferred Compensation Benefit" means the annuitized value of the
Executive's Elective Contribution and Matching Contribution Accounts,
measured as of the Executive's Benefit Age, payable in monthly installments
throughout the Payout Period and commencing on the Executive's Benefit
Eligibility Date.
1.10 "Disability Benefit" means the benefit annuity payable to the Executive
following a determination, in accordance with Subsection 5.2, that he is no
longer able, properly and satisfactorily, to perform his duties as
Executive.
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1.11 "Effective Date" of this Agreement shall be October 1, 1993.
1.12 "Elective Contribution" shall refer to any bookkeeping entry required to
record an Executive's monthly pre-tax deferral of a percentage of his base
compensation which shall be made in accordance with the Executive's Joinder
Agreement.
1.13 "Elective Contribution Account" shall be represented by the bookkeeping
entries required to record (i) an Executive's Elective Contributions plus
(ii) accrued interest, equal to the Interest Factor, earned to date on such
amounts. However, neither the existence of such bookkeeping entries nor the
Elective Contribution Account itself shall be deemed to create either a
trust of any kind, or a fiduciary relationship between the Bank and the
Executive or any Beneficiary.
1.14 "Estate" means the estate of the Executive.
1.15 "Interest Factor" means monthly compounding at Ten (10%) Percent per annum.
1.16 "Matching Contribution" shall refer to all amounts credited on the
Executive's behalf, by the Bank, computed in accordance with the Matching
Formula designated in the Joinder Agreement and based on the amount of the
Executive's Elective Contributions. There shall be bookkeeping entries to
record all such amounts.
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1.17 "Matching Contribution Account" shall be represented by the bookkeeping
entries required to record (i) Matching Contributions plus (ii) accrued
interest, equal to the Interest Factor, earned to date on such amounts.
However, neither the existence of such bookkeeping entries nor the Matching
Contribution Account itself shall be deemed to create either a trust of any
kind, or a fiduciary relationship between the Bank and the Executive or any
Beneficiary.
1.18 "Matching Formula" shall be the computation required to determine the
amount of the Bank's Matching Contribution. The Matching Formula shall be
designated in the Joinder Agreement.
1.19 "Payout Period" means the time frame during which certain benefits payable
hereunder shall be distributed. Payments shall be made in equal monthly
installments commencing on the first day of the month coincident with or
next following the occurrence of the event which triggers distribution and
continuing for a period of months, as designated in the Executive's Joinder
Agreement.
1.20 "'Projected Deferral" is an estimate, determined upon execution of a
Joinder Agreement, of the total amount to be deferred by the Executive
during his Deferral Period, and so designated in the Executive's Joinder
Agreement.
1.21 "Spouse" means the individual to whom the Executive is legally married at
the time of the Executive's death.
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1.22 "Survivor's Benefit" means an annuity stream payable to the Beneficiary in
monthly installments throughout the Payout Period, equal to the amount
designated in the Joinder Agreement, and subject to Subsection 6.1.
1.23 "Vested' means the non-forfeitable portion of Matching Contributions to
which the Executive is entitled. The Executive shall Vest in Matching
Contributions plus accrued interest earned or to be earned on such amounts,
in accordance with the Vesting schedule in his Joinder Agreement. The
Executive shall always be 100% Vested in all Elective Contributions.
1.24 "Year of Service" shall be earned upon completing twelve (12) months of
continuous service (including authorized leaves of absence), beginning from
the later of (i) the Effective Date of this Agreement or (ii) the execution
date of the Executive's Joinder Agreement.
SECTION II
DEFERRED COMPENSATION
Commencing on the Effective Date, and continuing through the end of the
Deferral Period, the Executive and the Bank agree that the Executive shall defer
into his Elective Contribution Account between one (1%) and fifteen (15%)
percent of monthly base compensation that the Executive would otherwise be
entitled to receive from the Bank for each month of the Deferral Period, with
the total deferral during the term of the Deferral Period not to exceed the
Executive's Projected Deferral. The specific amount of the Executive's monthly
deferred compensation shall be
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designated in the Executive's Joinder Agreement and shall apply only to
compensation attributable to services not yet performed.
SECTION III
SUPPLEMENTAL COMPENSATION
Commencing on the Effective Date, and continuing through the end of the
Deferral Period, the Executive and the Bank agree that the Bank shall make
Matching Contributions, based on (i) the amount of compensation deferred by the
Executive as an Elective Contribution and (ii) the Matching Formula included in
the Executive's Joinder Agreement. The Executive will Vest in Matching
Contributions in accordance with the Vesting schedule in the Executive's Joinder
Agreement.
SECTION IV
ADJUSTMENT OF DEFERRAL AMOUNT
Deferral of the specific amount of compensation designated in the
Executive's Joinder Agreement shall continue in effect pursuant to the terms of
this Agreement unless and until the Executive amends his Joinder Agreement by
filing with the Bank and the Administrator a Notice of Adjustment of Deferral
Amount (Exhibit B of the Joinder Agreement). A Notice of Adjustment of Deferral
Amount shall be effective if filed with the Bank and the Administrator, at least
thirty (30) days prior to any January lst during the Executive's Deferral
Period. Such Notice of Adjustment of
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Deferral Amount shall be effective commencing with the January lst following its
filing and shall be applicable only to compensation attributable to services not
yet performed by the Executive.
SECTION V
RETIREMENT BENEFIT
5.1 Retirement Benefit. Subject to Subsection 6.1, the Executive shall be
entitled to receive, upon his Benefit Eligibility Date, a monthly Deferred
Compensation Benefit determined by annuitizing the value of the Executive's
Elective Contribution Account plus the value of the Vested portion of the
Matching Contribution Account, both measured as of the Executive's Benefit
Age. Such annuity payments will be made over the term of the Payout Period.
In the event of the Executive's death after commencement of the Deferred
Compensation Benefit, but prior to completion of all such payments due and
owing hereunder, the Bank shall pay to the Executive's Beneficiary a
continuation of the annuity for the remainder of the Payout Period.
5.2 Disability Benefit. Notwithstanding any other provision hereof, if
requested by the Executive and approved by the Board, the Executive shall
be entitled to receive the Disability Benefit hereunder, in any case in
which it is determined by a duly licensed physician selected by the Bank,
that the Executive is no longer able, properly and satisfactorily, to
perform his regular duties as an Executive, because of ill health,
accident, disability or general inability due to age. If the Executive's
service is terminated pursuant to this paragraph and Board
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<PAGE>
approval is obtained, the Executive may elect to begin receiving the
Disability Benefit annuity in lieu of any Deferred Compensation Benefit,
which is not available prior to the Executive's Benefit Eligibility Date.
The annuity shall not begin more than thirty (30) days following the
above-mentioned disability determination. The amount of the monthly benefit
shall be the annuitized value of the Executive's Elective Contribution
Account plus the value of the Vested portion of the Matching Contribution
Account, both measured as of the date of such determination. The Elective
Contribution Account and the Vested portion of the Matching Contribution
Account shall be annuitized using the Interest Factor and shall be payable
over the Payout Period. The Executive shall be deemed to be 100% Vested in
all Matching Contributions for purposes of the annuitizing the Matching
Contribution Account. In the event the Executive dies while receiving
payments pursuant to this Subsection, or after becoming eligible for such
payments but before the actual commencement of such payments, his
Beneficiary shall be entitled to receive those benefits provided for in
Subsection 6.1(a) and the Disability Benefits provided for in this
Subsection shall terminate upon the Executive's death.
5.3 Termination For Cause. In the event the Executive is terminated for Cause
at anytime prior to reaching his Benefit Age, he shall be entitled to
receive the balance of his Elective Contribution Account, measured as of
the date of termination. Such amount shall be paid in a lump sum within
thirty (30) days of the Executive's date of termination. He shall not be
entitled to any portion of his Matching Contribution Account. All other
benefits provided
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for the Executive or his Beneficiary under this Agreement shall be
forfeited and the Agreement shall become null and void.
SECTION VI
DEATH BENEFITS
6.1 Death Benefit Prior to Commencement of Deferred Compensation Benefit. In
the event of the Executive's death prior to commencement of the Deferred
Compensation Benefit, the Bank shall pay the Executive's Beneficiary a
monthly amount for the Payout Period, commencing within thirty (30) days of
the Executive's death. The amount of such benefit payments shall be
determined as follows:
(a) In the event death occurs (i) while the Executive is receiving the
Disability Benefit provided for in Subsection 5.2 or (ii) after the
Executive has become eligible for such Disability Benefit payments but
before such payments have commenced, the Executive's Beneficiary shall
be entitled to receive a continuation of the Disability Benefit
annuity (computed in accordance with Subsection 5.2), reduced by the
number of months Disability Benefit payments were made to the
Executive.
(b) In the event death occurs (i) while the Executive is in the service
of the Bank, or (ii) following any voluntary or involuntary
termination, other than for Cause, the
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Executive's Beneficiary shall be paid the monthly benefit which can
be provided by annuitizing the balance of the Executive's Elective
Contribution Account and the Vested portion of the Executive's
Matching Contribution account, using the Interest Factor, and payable
over the Payout Period.
SECTION VII
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and secondary
Beneficiaries upon execution of his Joinder Agreement and shall have the right
to change such designation, at any subsequent time, by submitting to the
Administrator in substantially the form attached as Exhibit A to the Joinder
Agreement, a written designation of primary and secondary Beneficiaries. Any
Beneficiary designation made subsequent to execution of the Joinder Agreement
shall become effective only when receipt thereof is acknowledged in writing by
the Administrator.
SECTION VIII
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person claiming
through the Executive under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments so specified under this Agreement. The
Executive
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agrees that he, his Beneficiary, or any other person claiming through him shall
have no rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain to
informally fund this Agreement. Any asset used or acquired by the Bank in
connection with the liabilities it has assumed under this Agreement, unless
expressly provided herein, shall not be deemed to be held under any trust for
the benefit of the Executive or his Beneficiaries, nor shall any asset be
considered security for the performance of the obligations of the Bank. Any such
asset shall be and remain, a general, unpledged, and unrestricted asset of the
Bank.
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund
or money with which to pay its obligations under this Agreement. The Executive,
his Beneficiaries or any successor in interest to him shall be and remain simply
a general unsecured creditor of the Bank in the same manner as any other
creditor having a general claim for matured and unpaid compensation. The Bank
reserves the absolute right in its sole discretion to either purchase assets to
meet its obligations undertaken by this Agreement or to refrain from the same
and to determine the extent, nature, and method of such asset purchases. Should
the Bank decide to purchase assets such as life insurance, mutual funds,
disability policies or annuities, the Bank reserves the absolute right, in its
sole discretion, to terminate such assets at any time, in whole or in part. At
no time shall the Executive be deemed to have any lien, right, title or interest
in or to any specific investment or to any assets of
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the Bank. If the Bank elects to invest in a life insurance, disability or
annuity policy upon the life of the Executive, then the Executive shall assist
the Bank by freely submitting to a physical examination and by supplying such
additional information necessary to obtain such insurance or annuities.
SECTION X
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Executive nor any Beneficiary under this Agreement shall have
any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Executive
or his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. In the event the Executive or any
Beneficiary attempts assignment, communication, hypothecation, transfer or
disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease
and terminate.
SECTION XI
ACT PROVISIONS
11.1 Named Fiduciary and Administrator. Financial Institution Consulting
Corporation, a Tennessee Corporation ("FICC") shall be the Named Fiduciary
and Administrator (the
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"Administrator") of this Agreement. As Administrator, FICC shall be
responsible for the management, control and administration of the Agreement
as established herein. The Administrator may delegate to others certain
aspects of the management and operational responsibilities of the
Agreement, including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
11.2 Claims Procedure and Arbitration. In the event that benefits under this
Agreement are not paid to the Executive (or to his Beneficiary in the case
of the Executive's death) and such claimants feel they are entitled to
receive such benefits, then a written claim must be made to the
Administrator within sixty (60) days from the date payments are refused.
The Bank and its Board shall review the written claim and, if the claim is
denied, in whole or in part, they shall provide in writing, within ninety
(90) days of receipt of such claim, their specific reasons for such denial,
reference to the provisions of this Agreement or the Joinder Agreement upon
which the denial is based, and any additional material or information
necessary to perfect the claim. Such writing by the Bank and its Board
shall further indicate the additional steps which must be undertaken by
claimants if an additional review of the claim denial is desired.
If claimants desire a second review, they shall notify the Administrator in
writing within sixty (60) days of the first claim denial. Claimants may
review this Agreement, the Joinder Agreement or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then review
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the second claim and provide a written decision within sixty (60) days of
receipt of such claim. This decision shall state the specific reasons for
the decision and shall include reference to specific provisions of this
Agreement or the Joinder Agreement upon which the decision is based.
If claimants continue to dispute the benefit denial based upon completed
performance of this Agreement and the Joinder Agreement or the meaning and
effect of the terms and conditions thereof, then claimants may submit the
dispute to a Board of Arbitration for final arbitration. Said Board shall
consist of one member selected by the claimant, one member selected by the
Bank, and the third member selected by the first two members. The Board
shall operate under any generally recognized set of arbitration rules. The
parties hereto agree that they, their heirs, personal representatives,
successors and assigns shall be bound by the decision of such Board with
respect to any controversy properly submitted to it for determination.
SECTION XII
MISCELLANEOUS
12.1 No Effect on Employment Rights. Nothing contained herein will confer upon
the Executive the right to be retained in the service of the Bank nor limit
the right of the Bank to discharge or otherwise deal with the Executive
without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss.
563.39(b), the following conditions shall apply to this Agreement:
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(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than
termination for Cause shall not prejudice the Executive's vested right
to compensation or other benefits under the contract. As provided in
Section 5.3, the Executive shall be paid the balance of his Elective
Contribution Account in a lump sum within thirty (30) days of his
termination in the event he is terminated for Cause. He shall have no
right to receive additional compensation or other benefits for any
period after termination for Cause.
(2) If the Executive 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 Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended (except vested rights) as of the date of
termination of service unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation
withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations which were
suspended.
(3) If the Executive is terminated 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 Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of
the order, but vested rights of the Executive shall not be affected.
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(4) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all non-vested obligations under the
contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Executive or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the
Bank under the authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Executive or his designee, at the time the Executive or
his designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined
by the Executive to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, (i.e., the balance of
his Elective Contribution Account and the Vested portion of his Matching
Contribution Account), however, shall not be affected by such action.
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12.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana, to the extent such laws are
not preempted by the Act and valid regulations published thereunder.
12.3 Severability. In the event that any of the provisions of this Agreement or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will be
given to the intent manifested in the provisions held invalid or
inoperative, and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
12.4 Incapacity of Recipient. In the event the Executive is declared incompetent
and a conservator or other person legally charged with the care of his
person or Estate is appointed, any benefits under the Agreement to which
such Executive is entitled shall be paid to such conservator or other
person legally charged with the care of his person or Estate. Except as
provided above in this paragraph, when the Bank's Board of Directors, in
its sole discretion, determines that the Executive is unable to manage his
financial affairs, the Board may direct the Bank to make distributions to
any person for the benefit of the Executive.
12.5 Recovery of Estate Taxes. If the Executive's gross estate for federal
estate tax purposes includes any amount determined by reference to and on
account of this Agreement, and if the Beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the Beneficiary receiving such benefit under the terms of the
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Agreement, an amount by which the total estate tax due by Executive's
estate, exceeds the total estate tax which would have been payable if the
value of such benefit had not been included in the Executive's gross
estate. If there is more than one person receiving such benefit, the right
of recovery shall be against each such person. In the event the Beneficiary
has a liability hereunder, the Beneficiary may petition the Bank for a lump
sum payment in an amount not to exceed the Beneficiary's liability
hereunder.
12.6 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. If the
location of the Executive is not made known to the Bank within three (3)
years after the date on which any payment of the Deferred Compensation
Benefit may first be made, payment may be made as though the Executive had
died at the end of the three (3) year period. If, within one (1) additional
year after such three (3) year period has elapsed, or, within three (3)
years after the actual death of the Executive, whichever occurs first, the
Bank is unable to locate any Beneficiary of the Executive, the Bank may
fully discharge its obligation by payment to the Estate.
12.7 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Agreement, neither the Bank, nor any individual acting as an
employee or agent of the Bank, or as a member of the Board of Directors
shall be liable to the Executive or any other person for any claim, loss,
liability or expense incurred in connection with the Agreement.
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12.8 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Executive to participate in or be
covered by any qualified or non-qualified pension, profit sharing, group,
bonus or other supplemental compensation or fringe benefit agreement
constituting a part of the Bank's existing or future compensation
structure.
12.10 Suicide. Notwithstanding anything to the contrary in this Agreement, the
benefits otherwise provided herein shall not be payable if the Executive's
death results from suicide, whether sane or insane, within twenty-six (26)
months after the execution of this Agreement. If the Executive dies during
this twenty-six (26) month period due to suicide, the balance of his
Elective Contribution Account will be paid to the Executive's Beneficiary
in a single payment. Payment is to be made within thirty (30) days after
the Executive's death is declared a suicide by competent legal authority.
Credit shall be given to the Bank for payments made prior to determination
of suicide.
12.11 Headings. Headings and subheadings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
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SECTION XIII
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time, in
whole or part, without the mutual written consent of the Executive and Bank, and
such mutual consent shall be required even if the Executive is no longer
employed by the Bank.
SECTION XIV
EXECUTION
14.1 This Agreement sets forth the entire understanding of the parties hereto
with respect to the transactions contemplated hereby, and any previous
agreements or understandings between the parties hereto regarding the
subject matter hereof are merged into and superseded by this Agreement.
14.2 This Agreement shall be executed in triplicate, each copy of which, when so
executed and delivered, shall be an original, but all three copies shall
together constitute one and the same instrument.
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IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed on
this __ day of ____________, 19__.
Mutual Federal Savings Bank:
By:
----------------------------------
-------------------------------------
(Title)
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FIRST AMENDMENT
TO THE
EXECUTIVE DEFERRED COMPENSATION MASTER AGREEMENT
OF
MUTUAL FEDERAL SAVINGS BANK
MUNCIE, INDIANA
This First Amendment ("Amendment"), dated the 15th day of November, 1996,
hereby amends the Executive Deferred Compensation Master Agreement ("Agreement")
of Mutual Federal Savings Bank ("Bank"), dated the 1st day of October, 1993, as
follows:
THE FOLLOWING LANGUAGE SHALL REPLACE SUBSECTION 1.9 OF THE AGREEMENT:
1.9 "Deferred Compensation Benefit" means the annuitized value (using the
Interest Factor) of the Executive's Elective Contribution and Matching
Contribution Accounts, measured as of the Executive's Benefit Age, payable
in monthly installments throughout the Payout Period, and commencing on the
Executive's Benefit Eligibility Date.
THE FOLLOWING LANGUAGE SHALL REPLACE SUBSECTION 6.1 OF THE AGREEMENT:
6.1 DEATH BENEFIT PRIOR TO COMMENCEMENT OF DEFERRED COMPENSATION BENEFIT. In
the event of the Executive's death prior to commencement of the Deferred
Compensation Benefit, the Bank shall pay the Executive's Beneficiary a
monthly amount for the Payout Period, commencing within thirty (30) days of
the Executive's death. The amount of such benefit payment shall be
determined as follows:
(a) In the event death occurs (i) while the Executive is receiving the
Disability Benefit provided for in Subsection 4.2, or (ii) after the
Executive has become eligible for such Disability Benefit payments but
before such payments have commenced, the Executive's Beneficiary shall
be entitled to receive a continuation of the Disability Benefit
annuity (computed in accordance with Subsection 4.2), reduced by the
number of months Disability Benefit payments were made to the
Executive.
(b) In the event death occurs while the Executive is (i) in the service of
the Bank, (ii) deferring compensation pursuant to Section II and (iii)
PRIOR to any reduction or discontinuance, via an effective filing of a
Notice of Adjustment of Deferral Amount, in the level of deferrals
reflected in the Executive's initial Joinder Agreement, for any period
during the Deferral Period, the Executive's Beneficiary shall be paid
the greater of: (i) the Survivor's Benefit, or (ii) the annuitized
value (using the Interest Factor) of the Executive's Elective
Contribution and Matching Contribution Accounts, measured as of the
date of the Executive's death.
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(c) In the event death occurs while the Executive is (i) in the service of
the Bank, (ii) deferring compensation pursuant to Section II and (iii)
AFTER any reduction or discontinuance, via an effective filing of a
Notice of Adjustment of Deferral Amount, in the level of deferrals
reflected in the Executive's initial Joinder Agreement, for any period
during the Deferral Period, the Executive's Beneficiary shall be paid
the greater of: (i) a reduced Survivor's Benefit, such amount being
determined by multiplying the monthly payment available as a
Survivor's Benefit by a fraction, the numerator of which is equal to
the total compensation actually deferred by the Executive plus
Matching Contributions made on his behalf as of his death and the
denominator of which is equal to the amount of compensation that would
have been deferred as of his death and Matching Contributions made on
his behalf if no reduction or discontinuance in the level of deferrals
had occurred at any time following execution of the Joinder Agreement
and during the Deferral Period, or (ii) the annuitized value (using
the Interest Factor) of the Executive's Elective Contribution and
Matching Contribution Accounts, measured as of the date of the
Executive's death.
(d) In the event the Executive completes less than one hundred percent
(100%) of his Projected Deferrals due to any voluntary or involuntary
termination other than removal for Cause, the Executive's Beneficiary
shall be paid the greater of: (i) a reduced Survivor's Benefit, such
amount being determined by multiplying the monthly payment available
as a Survivor's Benefit by a fraction, the numerator of which is equal
to the total compensation actually deferred by the Executive plus
Matching Contributions made on his behalf and the denominator of which
is equal to the Executive's Projected Deferral, or (ii) the annuitized
value (using the Interest Factor) of the Executive's Elective
Contribution and Matching Contribution Accounts, measured as of the
date of termination of the Executive's service.
THE FOLLOWING SECTION XV IS ADDED TO THE AGREEMENT:
SECTION XV
ESTABLISHMENT OF RABBI TRUST
The bank shall establish a rabbi trust into which the Bank shall contribute
assets which shall be held, managed and invested, pursuant to the agreement
which establishes such rabbi trust (the "rabbi trust agreement"). The Bank
intends to make a contribution or contributions to the rabbi trust to provide
the Bank with a source of funds to assist it in meeting obligations under this
Agreement. The trust assets shall be subject to the claims of the Bank's
creditors in the event of the Bank's "Insolvency" as defined in the rabbi trust
agreement, until the trust assets are paid to the Executive and his Beneficiary
in such manner and at such times as specified in this Agreement. Contribution(s)
to the rabbi trust shall be made in accordance with the rabbi trust agreement.
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IN WITNESS WHEREOF, the Bank has caused this Amendment to be executed in
triplicate, the day and year written here below:
MUTUAL FEDERAL SAVINGS BANK
By:
- -------------------------- ------------------------------------
------------------------------------
Title
In accordance with Section XIII of the Agreement, the following Executives
hereby give their written consent to such Amendment:
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
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<PAGE>
FORM OF
RESTATED AND AMENDED
EXECUTIVE DEFERRED COMPENSATION JOINDER AGREEMENT
I, _____________________, and MUTUAL FEDERAL SAVINGS BANK, (the "Bank")
hereby agree for good and valuable consideration, the value of which is hereby
acknowledged, that I shall participate in the Executive Deferred Compensation
Master Agreement ("Master Agreement") established on October 1, 1993 and
subsequently amended, by the Bank, as said Master Agreement may now exist or
hereafter be amended or modified, and do further agree to the terms and
conditions thereof.
I understand that I must execute this Executive Deferred Compensation
Joinder Agreement ("Joinder Agreement") as well as notify the Administrator of
such execution, in order to participate in the plan. This Joinder Agreement
amends and restates my previous Joinder Agreement dated October 1, 1993. I
understand that my election to defer hereunder shall apply only with respect to
services not yet performed.
I hereby elect to irrevocably reduce my compensation, monthly, by
_________%. Such deferrals shall commence on , 1996 and shall continue for a
period of (36 to 120) months known as the "DEFERRAL PERIOD", and will result in
a "PROJECTED DEFERRAL" in the amount of $_________.
I understand that my election to defer shall continue in accordance with
this Joinder Agreement until such time as I submit a "NOTICE OF ADJUSTMENT OF
DEFERRAL AMOUNT" (Exhibit B, hereto) to the Administrator, at least thirty (30)
days prior to any January 1st of my Deferral Period. A Notice of Adjustment of
Deferral Amount can be used to adjust the percentage of compensation to be
deferred or to discontinue deferrals altogether.
I hereby elect a "BENEFIT AGE" of ________ and a "PAYOUT PERIOD" of (120 or
180) months.
IN GENERAL, I understand that my designated Beneficiary shall be entitled
to a "SURVIVOR'S BENEFIT" monthly payment in the amount of $_________, pursuant
to Subsection 6.1 of the Master Agreement and subject to all relevant
Subsections of the Master Agreement.
I understand that the Bank will make "MATCHING CONTRIBUTIONS" computed in
accordance with the following "MATCHING FORMULA":
for every dollar of base compensation I defer as an Elective Contribution,
the Bank will make a Matching Contribution of _____________(enter 25, 50,
75, or 100) cents for up to ______________ (enter % or $ amount) of base
compensation.
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I understand that I will Vest in Matching Contributions, as well as in the
accrued interest earned or to be earned on such amounts, in accordance with the
following Vesting schedule:
Vesting in
Year(s) of Service Matching Contributions
1 20%
2 40%
3 60%
4 80%
5 100%
Interpolation shall be made for partial years. For example, 3.5 Years of
Service would result in Vesting of 70%. No Vesting shall occur, however,
until one (1) full Year of Service has been completed.
I hereby designate the following as my "BENEFICIARY." I am aware that I can
subsequently change this designation by submitting to the Administrator, at any
subsequent time and in substantially the form attached hereto as Exhibit A, a
written designation of the primary and secondary Beneficiaries to whom payment
under the Master Agreement shall be made in the event of my death prior to
complete distribution of the benefits due and payable under the Master
Agreement. I understand that any Beneficiary designation made subsequent to
execution of the Joinder Agreement shall become effective only when receipt
thereof is acknowledged in writing by the Administrator.
PRIMARY BENEFICIARY --------------------------------------
SECONDARY BENEFICIARY --------------------------------------
I understand that my deferral of compensation is intended to satisfy the
elective deferral requirements existing under federal income tax laws. A private
letter ruling has not been obtained from the Internal Revenue Service. In the
event that any portion of my deferral is subject to an adverse determination
regarding the deferral of such compensation as well as the deferral of the
corresponding tax liability by the Internal Revenue Service, such portion of my
compensation shall be excepted from the Plan and returned to me at my request.
I further understand that I am entitled to review or obtain a copy of the
Master Agreement, at any time, and may do so by contacting either the Bank or
the Administrator.
This Joinder Agreement shall become effective upon execution (below) by
both the Executive and a duly authorized officer of the Bank.
Dated this day of , 19 .
-------- -------------------------------- ----
MUTUAL FEDERAL SAVINGS BANK
By:
- ---------------------------- ----------------------------------
(Executive)
-------------------------------------
(Title)
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EXECUTIVE DEFERRED COMPENSATION JOINDER AGREEMENT
BENEFICIARY DESIGNATION
Under the terms of the Executive Deferred Compensation Master Agreement
executed by the Bank, dated , 1996, I hereby designate the following Beneficiary
to receive any death benefits under said Agreement:
PRIMARY BENEFICIARY --------------------------------------
SECONDARY BENEFICIARY --------------------------------------
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
DATE: 19 .
-----------------------, --
--------------------------------------
EXECUTIVE
ACKNOWLEDGED
BY:
-----------------------------------
TITLE:
--------------------------------
<PAGE>
Exhibit A
EXECUTIVE DEFERRED COMPENSATION JOINDER AGREEMENT
NOTICE OF ADJUSTMENT OF DEFERRAL AMOUNT
TO: Bank
Attention:
I hereby give notice of my election to adjust the amount of my compensation
deferral in accordance with my Executive Deferred Compensation Joinder
Agreement, dated the ____ day of __________, 19__. This notice is submitted at
least thirty (30) days prior to January 1st, and shall become effective January
1st, as specified below.
Adjust deferral as of: January 1st, 19__
Previous Deferral Amount ____________ per month
New Deferral Amount ____________ per month
(to discontinue deferral, enter 0%)
------------------------------------
EXECUTIVE
------------------------------------
DATE
ACKNOWLEDGED
BY:
---------------------------------
TITLE:
------------------------------
------------------------------------
DATE
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MUTUAL FEDERAL SAVINGS BANK
RABBI TRUST FOR THE
EXECUTIVE DEFERRED COMPENSATION MASTER AGREEMENT
This Agreement is made this 15th day of November, 1996 by and between
MUTUAL FEDERAL SAVINGS BANK, a federally chartered savings bank, having its
principal place of business in Muncie, Indiana, (the "Bank"), and INDIANA
FEDERAL BANK FOR SAVINGS, a banking organization organized under the laws of the
state of Indiana, (the "Trustee").
WHEREAS, the Bank has adopted the Executive Deferred Compensation Master
Agreement (the "Plan"), effective as of the 15th day of November, 1996, which
constitutes a non-qualified deferred compensation plan, a copy of which is
attached hereto as Appendix A.
WHEREAS, Bank has incurred or expects to incur liability under the terms of
the Plan with respect to the individual(s) participating in the Plan;
WHEREAS, Bank wishes to establish a trust (the "Trust") and to contribute
to the Trust assets that shall be held therein, subject to the claims of Bank's
creditors in the event of Bank's Insolvency, as herein defined, until paid to
Plan participants and their beneficiaries in such manner and at such times as
specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan, maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees,
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended;
WHEREAS, it is the intention of Bank to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan;
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NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
1. ESTABLISHMENT OF TRUST.
(a) Bank hereby deposits with Trustee in trust assets which shall become
the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Bank is grantor,
within the meaning of subpart E. part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall
be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Bank and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their
beneficiaries shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries
against Bank. Any assets held by the Trust will be subject to the
claims of Bank's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) Within seventy-five (75) days following the end of each calender year,
Bank shall be required to irrevocably deposit additional cash or other
property to the Trust in an amount sufficient to pay each Plan
participant or beneficiary the benefits payable pursuant to the terms
of the Plan as of the close of the calendar year.
(f) Upon (i) a Change in Control (as defined herein) or (ii) the death of
a participant during service but prior to "Benefit Age" (as such term
is defined in the Plan), Bank shall as soon a possible, but in no
event longer than seventy-five (75) days following such event, make an
additional irrevocable contribution to the Trust in
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<PAGE>
an amount that is sufficient to pay each Plan participant or
beneficiary the benefits to which Plan participants or their
beneficiaries would be entitled pursuant to the terms of the Plan as
of the date such event occurred.
2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) Bank shall deliver to Trustee a schedule (the "Payment Schedule") that
indicates the amounts payable in respect of each Plan participant (and
his or her beneficiaries), that provides a formula or other
instructions acceptable to Trustee for determining the amounts so
payable, the form in which such amount is to be paid (as provided for
or available under the Plan), and the time of commencement for payment
of such amounts. Except as otherwise provided herein, Trustee shall
make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state, or
local taxes that may be required to be withheld with respect to the
payment of benefits pursuant to the terms of the Plan and shall pay
amounts withheld to the appropriate taxing authorities or determine
that such amounts have been reported, withheld and paid by Bank.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Bank or such party as
it shall designate under the Plan, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the
Plan.
(c) Bank may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan.
Bank shall notify Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to participants or
their beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of benefits
in accordance with the terms of the Plan, Bank shall make
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<PAGE>
the balance of each such payment as it falls due. Trustee shall notify
Bank where principal and earnings are not sufficient.
3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN BANK IS
INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Bank is Insolvent. Bank shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Bank is unable
to pay its debts as they become due, (ii) Bank is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code, or
(iii) Bank is determined to be insolvent by the Director of the
Federal Deposit Insurance Corporation or the Resolution Trust
Corporation.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Bank under federal and state
law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Bank
shall have the duty to inform Trustee in writing of Bank's
Insolvency. If a person claiming to be a creditor of Bank alleges
in writing to Trustee that Bank has become Insolvent, Trustee
shall determine whether Bank is Insolvent and, pending such
determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Bank's Insolvency, or has
received notice from Bank or person claiming to be a creditor
alleging that Bank is Insolvent, Trustee shall have no duty to
inquire whether Bank is Insolvent. Trustee may in all events rely
on such evidence concerning Bank's solvency as may be furnished
to Trustee and that provides Trustee with a reasonable basis for
making a determination concerning Bank's solvency.
(3) If at any time Trustee has determined that Bank is Insolvent,
Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall
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<PAGE>
hold the assets of the Trust for the benefit of Bank's general
creditors. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan participants or their beneficiaries
to pursue their rights as general creditors of Bank with respect
to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants
or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Bank is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due
to Plan participants or their beneficiaries under the terms of the
Plan for the period of such discontinuance, less the aggregate amount
of any payments made to Plan participants or their beneficiaries by
Bank in lieu of the payments provided for hereunder during any such
period of discontinuance.
4. PAYMENTS TO BANK.
Except as provided in Sections 3 or 12 hereof, after the Trust has become
irrevocable, Bank shall have no right or power to direct Trustee to return to
Bank or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan.
5. INVESTMENT AUTHORITY.
Trustee shall maintain all investments deposited upon establishment of the
trust (and listed on Exhibit A), until such time as the investments reach
maturity. Liquidation of such investments prior to maturity shall only be
allowable by the Trustee if (i) there is insufficient
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<PAGE>
cash in the trust at the time a benefit payment is due under the Plan and (ii)
with knowledge of such insufficiency, the Bank affirmatively chooses not to pay
any or all of the benefit payment due from Bank assets held outside the trust
itself. As the investments listed on Exhibit A mature, the Trustee's investment
authority, with respect to the proceeds from such investments, shall be subject
to the following:
(a) In no event may Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by Bank, other than a
de minimis amount held in common investment vehicles in which Trustee
invests, except where such de minimis investment is prohibited by
applicable banking regulations. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by
Trustee, and shall in no event be exercisable by or rest with Plan
participants.
(b) Trustee shall have the following powers and authority in the
administration of the assets of Trust, in addition to those vested in
it elsewhere in this Trust or by law:
(i) To invest and reinvest the assets of Trust, without distinction
between principal and income, in any kind of property, real,
personal or mixed, tangible or intangible, and in any kind of
investment, security or obligation suitable for the investment of
Trust assets, including federal, state and municipal tax-free
obligations and other tax-free investment vehicles, insurance
policies and annuity contracts, and any common trust fund, group
trust, pooled fund, or other commingled investment fund
maintained by the Trustee or any other bank or entity for trust
investment purposes;
(ii) To purchase, and maintain as owner, life insurance policies with
respect to participants;
(iii) To sell for cash or on credit, to grant options, convert,
redeem, exchange for other securities or other property, or
otherwise to dispose of, any security or other property at any
time held;
6
<PAGE>
(iv) To settle, compromise or submit to arbitration, any claims, debts
or damages, due or owing to or from the Trust, to commence or
defend suits or legal proceedings and to represent the Trust in
all suits or legal proceedings;
(v) To exercise any conversion privilege and/or subscription right
available in connection with securities or other property at any
time held, to oppose or to consent to the reorganization,
consolidation, merger or readjustment of the finances of any
corporation, Bank or association or to the sale, mortgage, pledge
or lease of the property of an corporation, Bank or association
any of the securities of which may at any time be held and to do
any act with reference thereto, including the exercise of
options, the making of agreement or subscription, which may be
deemed necessary or advisable in connection therewith, and to
hold and retain any securities or other properties so acquired;
(vi) To hold cash uninvested for a reasonable period of time (not in
excess of ten (10) days) under the circumstances without
liability for interest, pending investment thereof or the payment
of expenses or making distributions therewith;
(vii) To form corporations and to create trusts to hold title to any
securities or other property, all upon such terms and conditions
as may be deemed advisable;
(viii) To register any securities held hereunder in the name of the
Trustee or in the name of a nominee with or without the addition
of words indicating that such securities are held in a fiduciary
capacity and to hold any securities in bearer form;
(ix) To make, execute and deliver, as Trustee, any and all
conveyances, contracts, waivers, releases or other instruments in
writing necessary or proper for the accomplishment of any of the
foregoing powers;
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(x) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation; and
(xi) To have any and all other power of authority, under the laws of
the state in which the Trustee's principal executive offices are
located, relevant to performance in the capacity as Trustee.
6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between Bank
and Trustee. Within ninety (90) days following the close of each calendar year
and within sixty (60) days after the removal or resignation of Trustee, Trustee
shall deliver to Bank a written account of its administration of the Trust
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like
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<PAGE>
character and with like aims, provided, however, that Trustee shall
incur no liability to any person for any action taken pursuant to a
direction, request or approval given by Bank which is contemplated by,
and in conformity with, the terms of the Plan or this Trust and is
given in writing by Bank. In the event of a dispute between Bank and a
party, Trustee may apply to a court of competent jurisdiction to
resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, except litigation arising out of the Trustee's
negligence or breach of fiduciary duty, Bank agrees to indemnify
Trustee against Trustee's costs, expenses and liabilities (including,
without limitation, attorney's fees and expenses) relating thereto and
to be primarily liable for such payments. If Bank does not pay such
costs, expenses and liabilities in a reasonable manner, Trustee may
obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Bank generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an insurance policy is held as an
asset of the Trust, Trustee shall have no power to name a beneficiary
of the policy other than the Trust, to assign the policy (as distinct
from conversion of the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of any
borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and
dividing the gains therefrom, within
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the meaning of section 301.7701-2 of the Procedure and Administrative
Regulations promulgated pursuant to the Internal Revenue Code.
9. FEES AND EXPENSES OF TRUSTEE.
Bank shall pay all administrative and Trustee's fees and expenses. If not
so paid, the fees and expenses shall be paid from the Trust.
10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Bank, which shall
be effective sixty (60) days after receipt of such notice unless Bank
and Trustee agree otherwise.
(b) Trustee may be removed by Bank on sixty (60) days prior written notice
or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be
removed by Bank for two (2) years following the date of such Change in
Control, nor may such Trustee be removed by Bank in anticipation of a
Change of Control.
(d) If Trustee resigns at any time following a Change in Control, or if
Trustee is removed by Bank at any time following the expiration of the
two (2) year period (as described in Subpart (c) above) following a
Change in Control, Trustee shall select a successor Trustee in
accordance with the provisions of 11(a) hereof prior to the effective
date of Trustee's resignation or removal. In all other instances of
resignation or removal, Bank shall select a successor Trustee in
accordance with the provisions of 11(a) hereof prior to the effective
date of Trustee's resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer
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shall be completed within fifteen (15) days after receipt of notice of
resignation, removal or transfer, unless Bank extends the time limit.
(f) If Trustee resigns or is removed under paragraph (a), (b), or (d) of
this Section 10, a successor shall be appointed in accordance with
Section 11 hereof, by the effective date of resignation or removal. If
no such appointment has been made, Trustee or Bank (as specified
above) may apply to a court of competent jurisdiction for appointment
of a successor or for instructions. Should the Trustee be required to
apply to a court of competent jurisdiction for such purpose, all
expenses of Trustee in connection with the proceeding shall be allowed
as administrative expenses of the Trust.
11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed pursuant to the provisions of Section
10 hereof, Bank or Trustee (as specified above) may appoint any third
party, such as a bank trust department or other party that may be
granted corporate trustee powers under state law, as a successor to
replace Trustee upon resignation or removal. The appointment of a
successor Trustee shall be effective when accepted in writing by the
new Trustee. The new Trustee shall have all of the rights and powers
of the former Trustee, including ownership rights in the Trust assets.
The former Trustee shall execute any instrument necessary or
reasonably requested by the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets,
subject to Sections 7 and 8 hereof. The successor Trustee shall not be
responsible for and Bank shall indemnify and defend the successor
Trustee from any claim or liability resulting from any action or
inaction of any prior Trustee or from any other past event, or any
condition existing at the time it becomes successor Trustee.
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12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Bank. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Plan or shall make the Trust
revocable after it has become irrevocable in accordance with Section
1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to
benefits pursuant to the terms of the Plan. Upon termination of the
Trust any assets remaining in the Trust shall be returned to Bank.
(c) Upon written approval of participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, Bank may
terminate this Trust prior to the time all benefit payments under the
Plan have been made. All assets in the Trust at termination shall be
returned to Bank.
(d) Sections 1(one), 2 (two), 6 (six), 10 (ten) and 12 (twelve) of this
Trust Agreement may not be amended by Bank (i) in anticipation of or
(ii) for two (2) years following a Change of Control, as defined
herein.
13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without
invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law
or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable
process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the state in which the Trustee's principal executive
offices are located.
(d) For purposes of this Trust, Change of Control shall mean;
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(1) a change of control of a nature that 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 (hereinafter the "Exchange
Act"); or
(2) a change of control of the Bank within the meaning of 12
C.F.R.ss.303. 4; or
(3) a Change of Control at such time as
(i) 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
representing Twenty Percent (20%) or more of the combined
voting power of the Bank's outstanding securities ordinarily
having the right to vote at the elections of Directors
except for (i) any stock of the Bank purchased by the
Holding Company in connection with the conversion of the
Bank to stock form, and (ii) any stock purchased by any
Employee Stock Ownership Plan and/or trust sponsored by the
Bank; or
(ii) individuals who constitute the Board of Directors on the
date hereof (hereinafter 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
Bank's members (or stockholders) was approved by the Bank's
Nominating Committee which is comprised of members of the
Incumbent Board, shall be, for purposes of this clause (ii),
considered as though he were a member of the Incumbent
Board; or
(iii) merger, consolidation, or sale of all or substantially all
the assets of the Bank occurs; or
13
<PAGE>
(iv) a proxy statement is issued soliciting proxies from the
members (or stockholders) of the Bank by someone other than
the current management of the Bank, seeking member (or
stockholder) approval of a plan of reorganization, merger,
or consolidation of the Bank with one or more corporations
as a result of which the outstanding shares of the class of
the Bank's securities are exchanged for or converted into
cash or property or securities not issued by the Bank.
For these purposes, the terms "stockholders(s)" and "member(s)" shall
be considered one and the same. The term "Holding Company" shall mean
the holding company (including any successor thereto) organized to
acquire the capital stock of the Bank upon the Bank's conversion from
mutual to stock form.
14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be the 15th day of
November, 1996.
IN WITNESS WHEREOF, this instrument has been executed as of the day and
year first written above.
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
INDIANA FEDERAL BANK FOR SAVINGS
(Trustee)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
14
<PAGE>
FIRST AMENDMENT TO THE
MUTUAL FEDERAL SAVINGS BANK RABBI TRUST
FOR THE EXECUTIVE DEFERRED COMPENSATION MASTER AGREEMENT
This First Amendment to the Mutual Federal Savings Bank Rabbi Trust For the
Executive Deferred Compensation Master Agreement is for the purpose of amending
the Agreement as follows:
The second paragraph of page one (1) of the Rabbi Trust for the Executive
Deferred Compensation Master Agreement is hereby deleted and replaced with the
following provision:
WHEREAS, the Bank has adopted the Restated Executive Supplemental
Retirement Income Agreement(s) (the "Plan"), effective as of the 1st
day of October, 1993, which constitutes a non-qualified deferred
compensation plan, a copy of which is attached hereto as Appendix A.
The Trustee, formerly doing business as Indiana Federal Bank for Savings,
has merged into Pinnacle Bank. The Mutual Federal Savings Bank Rabbi Trust for
the Executive Deferred Master Agreement and Amendments thereo shall be binding
upon Pinnacle Bank of St. Joseph, Michigan, and its successors or assigns.
Remainder of page intentionally left blank.
Page 1 of 2
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this First Amendment to be executed
on this 13th day of May, 1998.
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
PINNACLE BANK
(Trustee)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
Page 2 of 2
<PAGE>
SECOND
AMENDMENT
TO THE
MUTUAL FEDERAL SAVINGS BANK
RABBI TRUST FOR THE
EXECUTIVE DEFERRED COMPENSATION MASTER AGREEMENT
This Agreement is made this 19th day of October, 1999 by and between MUTUAL
FEDERAL SAVINGS BANK, a federally chartered savings bank, having its principal
place of business in Muncie, Indiana, (the "Bank"), and SECURITY FEDERAL SAVINGS
BANK, a federally chartered savings institution organized under the laws of the
state of Indiana, (the "Trustee").
WHEREAS, the Bank has adopted the Executive Deferred Compensation Master
Agreement (the "Plan"), effective as of the 15th day of November, 1996, which
constitutes a non-qualified deferred compensation plan;
WHEREAS, the Bank established the Mutual Federal Rabbi Trust for the
Executive Deferred Compensation Master Agreement (the "Trust") to hold the
assets of the Plan;
WHEREAS, Bank now intends to transfer all assets of the Trust to the Mutual
Federal Savings Bank Rabbi Trust for the Restated Executive Supplemental
Retirement Income Agreement(s), the Director Deferred Compensation Master
Agreement, and the Executive Deferred Compensation Master Agreement.
NOW, THEREFORE, the parties do hereby merge the Trust and agree that all
assets of the Trust shall be held in the Mutual Federal Savings Bank Rabbi Trust
for the Restated Executive Supplemental Retirement Income Agreement(s), the
Director Deferred Compensation Master Agreement, and the Executive Deferred
Compensation Master Agreement.
1
<PAGE>
IN WITNESS WHEREOF, this instrument has been executed as of the day and
year first written above.
MUTUAL FEDERAL SAVINGS BANK
(Bank)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
SECURITY FEDERAL SAVINGS BANK
(Trustee)
Attest: By:
----------------------------------------
- --------------------------- --------------------------------------------
(Title)
2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is only a summary and you should read it in
conjunction with our financial statements and notes contained in this Annual
Report.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................ $ 544,523 $469,515 $458,695 $434,389 $402,708
Loans receivable, net................... 442,787 398,146 399,290 378,290 345,738
Investment securities:
Available-for-sale, at market value... 29,599 14,208 12,370 11,765 12,509
Held-to-maturity...................... 12,449 11,004 10,167 8,997 13,470
Total deposits.......................... 364,604 365,999 344,860 330,235 312,218
Total borrowings........................ 74,898 52,462 66,255 61,109 50,783
Total stockholders' equity.............. 96,712 43,846 39,660 35,479 32,864
Selected Operations Data:
Total interest income................... $ 34,811 $ 34,474 $ 34,085 $ 32,427 $ 29,915
Total interest expense.................. 19,242 19,690 19,082 17,851 16,429
---------- -------- -------- -------- --------
Net interest income.................. 15,569 14,784 15,003 14,576 13,486
Provision for loan losses............... 760 1,265 700 570 650
---------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................ 14,809 13,519 14,303 14,006 12,836
---------- -------- -------- -------- --------
Fees and service charges................ 1,728 1,544 1,316 1,132 933
Gain (loss) on sales of loans,
mortgage-backed securities and
investment securities.................. 32 807 188 12 23
Other non-interest income............... 1,091 1,077 579 763 875
---------- -------- -------- -------- --------
Total non-interest income............... 2,851 3,428 2,083 1,907 1,831
Salaries and benefits................... 7,236 6,115 5,548 5,258 5,238
Charitable contributions................ 4,570 97 69 63 52
Other expenses.......................... 4,870 4,547 4,474 6,626 4,407
---------- -------- -------- -------- --------
Total non-interest expense.............. 16,676 10,759 10,091 11,947 9,697
---------- -------- -------- -------- --------
Income before taxes..................... 984 6,188 6,295 3,966 4,970
Income tax provision.................... 138 2,049 2,160 1,266 1,545
---------- -------- -------- -------- --------
Net income.............................. $ 846 $ 4,139 $ 4,135 $ 2,700 $ 3,425
========== ======== ======== ======== ========
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <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).. 0.17% 0.89% 0.93% 0.64% 0.87%
Return on average equity (ratio of
net income to average equity)(1).... 1.83 9.83 11.36 7.79 10.92
Interest rate spread (average during
period).............................. 3.24 3.21 3.34 3.42 3.39
Net interest margin(2)................ 3.41 3.42 3.58 3.66 3.63
Ratio of operating expense to average
total assets(1)..................... 3.35 2.31 2.28 2.84 2.46
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 104.05 104.56 105.18 105.48 105.87
Efficiency ratio(1)(3)................ 90.53 59.08 59.06 72.48 63.31
Asset Quality Ratios:
Non-performing assets to total assets
at end of period..................... 0.30 0.29 0.62 0.49 0.59
Non-performing loans to total
loans............................... 0.17 0.28 0.19 0.40 0.60
Allowance for loan losses to non-
performing loans..................... 467.61 307.36 406.71 193.65 129.60
Allowance for loan losses to loans
receivable, net...................... 0.82 0.85 0.77 0.78 0.79
Capital Ratios:
Equity to total assets at end of
period.............................. 17.76 9.34 8.65 8.17 8.16
Average equity to average assets...... 9.29 9.06 8.22 8.24 7.95
Other Data:
Number of full-service offices........ 13 12 12 11 11
- ---------------------
<FN>
(1) Excluding the effect of the $4.5 million contribution to the charitable
foundation, return on average assets would have been .76%, return on
average equity would have been 8.23%, operating expenses to average assets
would have been 2.45% and the efficiency ratio would have been 66.23%.
(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.
</FN>
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
MFS Financial, Inc., a Maryland corporation, is a savings and loan holding
company which has as its wholly-owned subsidiary Mutual Federal Savings Bank.
MFS Financial was formed in September 1999 to become the holding company of
Mutual Federal in connection with Mutual Federal's conversion from mutual to
stock form of organization on December 29, 1999. The words "we," "our" and "us"
refer to MFS Financial and Mutual Federal on a consolidated basis, except that
references to us prior to December 29, 1999 refer only to Mutual Federal.
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 in 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. We are headquartered in Muncie,
Indiana and have 13 retail offices primarily serving Delaware, Randolph and
Kosciusko counties in Indiana. We also originate mortgage loans in contiguous
counties and we originate indirect consumer loans throughout Indiana and western
Ohio.
The following discussion is intended to assist your understanding of our
financial condition and results of operations. The information contained in this
section should be read in conjunction with our consolidated financial statements
and the accompanying notes to our consolidated financial statements.
Our results of operations depend primarily on our 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. Our results of operations also
are affected by the level of our noninterest income and expenses and income tax
expense.
FORWARD-LOOKING STATEMENTS
This discussion contains various forward-looking statements which are based
on assumptions and describe our future plans and strategies and our
expectations. These forward-looking statements are generally identified by words
such as "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 cause actual results to
differ materially from those estimated 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 and composition of our
loan and investment portfolios, demand for our loan products, deposit flows, our
operating expenses, competition, demand for financial services in our market
areas and accounting principles and
3
<PAGE>
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 customers in our market areas. Our commitment
is to provide a broad range of products and services to meet the needs of our
customers. As part of this commitment, we are looking to increase our emphasis
on commercial business products and services. We are also in the process of
creating a fully interactive transactional website. In addition, we are
continually looking at cost-effective ways to expand our market area.
Financial highlights of our strategy include:
o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in
diversifying our loan portfolio to reduce our reliance on any one type
of loan. Since 1994, approximately 32% of our loan portfolio has
consisted of consumer, multi-family 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 1999, we originated $71.3 million of
one- to four-family residential loans.
o CONTINUING OUR STRONG ASSET QUALITY. Since 1994, our ratio of
non-performing assets to total assets has not exceeded .62% and at
December 31, 1999 this ratio was .30%.
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 December 31,
1999, our ratio of stockholders' equity to total assets was 17.8%.
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
4
<PAGE>
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.
Mutual Federal's board of directors sets and recommends our asset and liability
policies which are implemented by the asset and liability management committee.
The asset and liability management committee is chaired by the chief financial
officer and is comprised of members of our senior management. The purpose of the
asset and liability management committee is to communicate, coordinate and
control asset/liability management consistent with our business plan and board
approved policies. The asset and liability management committee establishes and
monitors the volume and mix of assets and funding sources taking into account
relative costs and spreads, interest rate sensitivity and liquidity needs. The
objectives are to manage assets and funding sources consistent with liquidity,
capital adequacy, growth, risk and profitability goals. The asset and liability
management committee generally meets monthly 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 sought to:
o originate and purchase adjustable rate mortgage loans and commercial
business loans,
o originate shorter-term consumer loans,
o manage our deposits to establish stable deposit relationships,
o acquire longer-term borrowings at fixed interest rates, when
appropriate, to offset the negative impact of longer-term fixed rate
loans in our loan portfolio, and
o limit the percentage of fixed-rate loans in our portfolio.
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 increase our interest rate risk
position somewhat in order to maintain our net interest margin. 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
5
<PAGE>
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 our board of directors.
The Office of Thrift Supervision provides Mutual Federal with the
information presented in the following tables. The tables present the change in
our net portfolio value at December 31, 1999 and 1998 that would occur upon an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, but without effect to any steps that management might take to
counteract that change.
<TABLE>
<CAPTION>
December 31, 1999
- ------------------------------------------------------------------------------------------------------
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 41,797 (29,979) (42) 8.40 (498)
+200 bp 52,208 (19,568) (27) 10.23 (316)
+100 bp 62,435 (9,341) (13) 11.92 (147)
0 bp 71,776 --- --- 13.39 ---
-100 bp 79,142 7,366 10 14.48 109
-200 bp 84,484 12,709 18 15.21 182
-300 bp 88,638 16,862 23 15.74 236
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------------------
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 31,509 (15,656) (33) 7.04 (292)
+200 bp 37,901 (9,264) (20) 8.29 (167)
+100 bp 43,368 (3,797) (8) 9.30 (66)
0 bp 47,165 --- --- 9.96 ---
-100 bp 48,863 1,698 4 10.20 24
-200 bp 49,910 2,745 6 10.31 35
-300 bp 52,273 5,109 11 10.65 69
- -----------
<FN>
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
</FN>
</TABLE>
6
<PAGE>
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 tables. 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 tables.
FINANCIAL CONDITION AT DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
GENERAL. Our total assets increased by $75 million, or 16%, to $544.5
million at December 31, 1999 from $469.5 million at December 31, 1998. The
increase was mainly due to an increase in net loans of $44.6 million, or 11.2%,
an increase in investment securities of $16.8 million, or 66.8%, and an increase
in cash for Y2K preparation of $7.8 million, or 69%. These increases were funded
primarily by an increase of $22.4 million in borrowed funds and the net proceeds
of $49.9 million from our stock offering as part of the Bank's mutual-to-stock
conversion.
LOANS. Our net loan portfolio increased from $398.1 million at December 31,
1998 to $442.8 million at December 31, 1999. The increase in the loan portfolio
over this time period was due to continued strong loan demand caused by a
combination of a strong economy and low interest rates. The loan portfolio
increased most in the one- to four-family category, from $264.5 million at
December 31, 1998 to $286.6 million at December 31, 1999 and in the RV/Boat loan
category from $42.7 million at December 31, 1998 to $58.0 million at December
31, 1999.
SECURITIES. Investment securities amounted to $25.2 million at December 31,
1998 and $42.0 million at December 31, 1999. The increase of $16.8 million, or
66.7%, was primarily due to the investment of a portion of the conversion
proceeds.
LIABILITIES. Our total liabilities increased $22.1 million, or 5.2%, to
$447.8 million at December 31, 1999 from $425.7 million at December 31, 1998.
This increase was due primarily to an increase in borrowed funds of $22.4
million.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $52.9 million from
$43.8 million at December 31, 1998 to $96.7 million at December 31, 1999. The
increase was primarily due to net proceeds from our stock offering of $49.9
million, stock contributed to the charitable foundation of $2.2 million and net
income for 1999 of $846,000. These increases were partially offset by a decrease
in the unrealized gains (losses) on securities available for sale of $328,000.
7
<PAGE>
FINANCIAL CONDITION AT DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
GENERAL. Our total assets increased by $10.8 million, or 2.4%, to $469.5
million at December 31, 1998 from $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. Our net loan portfolio decreased from $399.3 million at December 31,
1997 to $398.1 million at December 31, 1998. The decrease in the loan portfolio
over this time period was due to the sale of $35.1 million of one- to
four-family fixed-rate long term loans during the year for asset/liability
management purposes. Loan origination volume for 1998 exceeded volume for 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. Our total liabilities increased $6.7 million, or 1.6%, to
$425.7 million at December 31, 1998 from $419.0 million at December 31, 1997.
This increase was due primarily to an increase in deposits of $21.1 million,
partially due to aggressively marketing our money market accounts. In November
1997, we acquired $14.1 million in deposits and an insignificant amount of loans
and other assets as part of an acquisition of a branch facility of another bank
in Albany, Indiana. This increase was partially offset by a $13.8 million
decrease in borrowed funds, which were paid off through the proceeds from the
loan sales.
EQUITY. Total equity amounted to $43.8 million, or 9.3% of total assets, at
December 31, 1998 and $39.7 million, or 8.7% of total assets, at December 31,
1997. This increase in equity was due to continued profitable operations.
8
<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>
Year Ended December 31,
----------------------------------------------------------------------
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.......................... $ 3,664 $ 161 4.39% $ 7,330 $ 358 4.88%
Trading account securities......................... 1,134 67 5.91 337 20 5.93
Mortgage-backed securities:
Available-for-sale.............................. 5,006 323 6.45 4,575 329 7.19
Investment securities
Available-for-sale.............................. 8,294 470 5.67 7,001 416 5.94
Held-to-maturity................................ 12,365 733 5.93 9,642 584 6.06
Loans receivable................................... 422,611 32,739 7.75 399,982 32,488 8.12
Stock in FHLB of Indianapolis...................... 3,926 318 8.10 3,612 279 7.72
--------- ------- -------- -------
Total interest-earning assets(1)................... 457,000 34,811 7.62 432,479 34,474 7.97
------- -------
Non-interest earning assets, net of allowance for
loan losses and unrealized gain/loss................ 40,162 32,362
--------- --------
Total assets....................................... $ 497,162 $464,841
========= ========
Interest-Bearing Liabilities:
Demand and NOW accounts............................. $ 54,122 553 1.02 $ 49,646 745 1.50
Savings deposits.................................... 42,709 853 2.00 41,332 1,038 2.51
Money market accounts............................... 29,299 1,056 3.60 16,442 560 3.41
Certificate accounts................................ 252,452 13,392 5.30 250,953 14,100 5.62
--------- ------- -------- -------
Total deposits...................................... 378,582 15,854 4.19 358,373 16,443 4.59
Borrowings.......................................... 60,620 3,388 5.59 55,234 3,247 5.88
--------- ------- -------- -------
Total interest-bearing liabilities................. 439,202 19,242 4.38 413,607 19,690 4.76
------- -------
Other liabilities................................... 11,767 9,115
--------- --------
Total liabilities.................................. 450,969 422,722
Stockholders' equity................................ 46,193 42,119
--------- --------
Total liabilities and stockholders' equity........ $ 497,162 $464,841
========= ========
Net earning assets................................... $ 17,798 $ 18,872
========= ========
Net interest income.................................. $15,569 $14,784
======= =======
Net interest rate spread............................. 3.24% 3.21%
====== =====
Net yield on average interest-earning assets......... 3.41% 3.42%
====== =====
Average interest-earning assets to
average interest-bearing liabilities................ 104.05% 104.56%
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
----------- -------- -------
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-bearing deposits.......................... $ 3,908 $ 217 5.55%
Trading account securities......................... 603 39 6.47
Mortgage-backed securities:
Available-for-sale.............................. 4,498 334 7.43
Investment securities
Available-for-sale.............................. 8,164 486 5.95
Held-to-maturity................................ 8,995 478 5.31
Loans receivable................................... 389,731 32,242 8.27
Stock in FHLB of Indianapolis...................... 3,470 289 8.33
-------- -------
Total interest-earning assets(1)................... 419,369 34,085 8.13
-------
Non-interest earning assets, net of allowance for
loan losses and unrealized gain/loss................ 23,849
--------
Total assets....................................... $443,218
========
Interest-Bearing Liabilities:
Demand and NOW accounts............................. $ 44,803 719 1.60
Savings deposits.................................... 40,224 1,114 2.77
Money market accounts............................... 12,888 391 3.03
Certificate accounts................................ 239,311 13,179 5.51
-------- -------
Total deposits...................................... 337,226 15,403 4.57
Borrowings.......................................... 61,491 3,679 5.98
-------- -------
Total interest-bearing liabilities................. 398,717 19,082 4.79
-------
Other liabilities................................... 8,086
--------
Total liabilities.................................. 406,803
Stockholders' equity................................ 36,415
--------
Total liabilities and stockholders' equity........ $443,218
========
Net earning assets................................... $ 20,652
========
Net interest income.................................. $15,003
=======
Net interest rate spread............................. 3.34%
=====
Net yield on average interest-earning assets......... 3.58%
=====
Average interest-earning assets to
average interest-bearing liabilities................ 105.18%
=======
- ----------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
</FN>
</TABLE>
9
<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>
Year Ended December 31,
------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ ----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
-------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits.................. $ (164) $ (33) $(197) $ 170 $ (29) $ 141
Trading accounting securities.............. 47 --- 47 (16) (3) (19)
Mortgage-backed securities................. 29 (35) (6) 6 (11) (5)
Investment securities:
Available-for-sale...................... 74 (20) 54 (69) (1) (70)
Held-to-maturity......................... 162 (13) 149 36 70 106
Loans receivable........................... 1,791 (1,540) 251 839 (593) 246
Stock in FHLB of Indianapolis.............. 25 15 40 12 (22) (10)
------ ------- ----- ----- ----- ------
Total interest-earning assets............ $1,964 $(1,626) 338 $ 978 $(589) 389
====== ======= ----- ===== ===== ------
Interest-bearing liabilities:
Demand and NOW accounts.................... $ 62 $ (254) (192) $ 75 $ (49) 26
Savings deposits........................... 36 (309) (273) 30 (106) (76)
Money market accounts...................... 462 34 496 117 52 169
Certificate accounts....................... 83 (703) (620) 650 271 921
Borrowings................................. 306 (165) 141 (369) (63) (432)
------ -------- ----- ----- ----- -------
Total interest-bearing liabilities....... $ 949 $(1,397) (448) $ 503 $ 105 608
====== ======= ----- ===== ===== -------
Net interest income......................... $ 786 (219)
===== ======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Net income for year ended December 31, 1999 decreased $3.3 million
to $846,000 compared to $4.1 million for the year ended December 31, 1998. The
decline in net income was primarily due to a one-time nonrecurring $4.5 million
contribution to the Mutual Federal Savings Bank Charitable Foundation, Inc. made
in connection with the stock conversion.
10
<PAGE>
NET INTEREST INCOME. Net interest income increased $786,000, or 5.3%, to
$15.6 million for 1999 from $14.8 million for 1998 reflecting a $448,000 or 2.3%
decrease in interest expense and a $338,000 or 1% increase in interest income.
Our interest rate spread increased to 3.24% for 1999 from 3.21% for 1998. In
addition, the ratio of average interest earning assets to average interest
bearing liabilities decreased to 104.05% for 1999 from 104.56% for 1998.
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1999 was due to an increase in the average balance of interest
earning assets partially offset by a lower yield. The average balance of the
loan portfolio increased $22.6 million or 5.7% to $422.6 million for 1999 from
$400 million for 1998 due to continued strong loan demand. The average yield on
our loan portfolio decreased from 8.12% in 1998 to 7.75% in 1999 primarily due
to continued refinancing activity resulting from lower market rates of interest.
INTEREST EXPENSE. The decrease in interest expense during the year ended
December 31, 1999 was primarily due to a reduction in the average rate paid on
deposits and borrowed funds from 4.76% in 1998 to 4.38% in 1999. This was
partially offset by an increase in the average balances of borrowings and
deposits from $413.6 million in 1998 to $439.2 million in 1999.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1999, the
provision for loan losses amounted to $760,000 compared to a provision for loan
losses in 1998 of $1.3 million. The decrease was primarily due to a $500,000
provision for loans in litigation in 1998 with no corresponding provision in
1999.
OTHER INCOME. Other income amounted to $2.9 million and $3.4 million for
the years ended December 31, 1999 and 1998, respectively. For the year 1999,
service charges and fee income was $1.7 million compared to $1.5 million for
1998 representing an increase of $200,000 or 13.3%. This increase was primarily
due to higher fees collected as a result of increased volumes in checking
account activity. Net gains on loan sales in 1998 were $806,000; there were no
loan sales in 1999.
OTHER EXPENSES. Exclusive of the $4.5 million contribution to the
foundation, total operating expenses increased to $12.2 million for 1999
compared to $10.8 million for year 1998 representing an increase of $1.4 million
or 13%. This increase was primarily attributed to a $1.1 million increase in
salaries and employee benefits due to a full year of expense for the employee
stock ownership plan in the fourth quarter, an increased bank-wide incentive
bonus, increased retirement benefit cost and staff expansion in branches and
business banking activity. Additionally, equipment expenses increased to
$829,000 for 1999 from $613,000 for 1998 primarily due to a change in the
estimated useful life of certain data processing equipment.
INCOME TAX EXPENSE. Income tax expense decreased $1.9 million, or 93.3%,
from 1998 to 1999. This variation in income tax expense is directly related to
taxable income and the low income housing income tax credits earned during those
years. The effective tax rate was 14% and 33.1% for 1999 and 1998, respectively.
The effective rate declined in 1999 as compared to 1998 because the low-income
housing income tax credits remained relatively constant while the level of
income declined. The effective tax rate is expected to increase in future
periods.
11
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
GENERAL. We 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 from $15.0 million for 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. Our interest rate spread decreased to 3.21% for
1998 from 3.34% for 1997. In addition, the ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 104.6% for 1998 from
105.2% for 1997.
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 from
$389.7 for 1997, due to increased loan demand. The average yield earned on our
loan portfolio decreased from 8.27% in 1997 to 8.12% in 1998, primarily due to
refinancing activity resulting from a general decrease in market rates of
interest.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 1998 was primarily due to the increase of $21.1 million, or 6.3%,
in the average balance of deposits, primarily due to the acquisition of $14.0
million in deposits at the end of 1997. This was partially offset by a decrease
in the average balance of borrowings. The average rate paid on deposits
increased slightly from 4.57% in 1997 to 4.59% in 1998, due to an increase in
the average rate paid on certificate accounts. The average rate paid on
borrowings decreased from 5.98% in 1997 to 5.88% in 1998.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1998, the
provision for loan losses amounted to $1.3 million compared to a provision for
loan losses in 1997 of $700,000. The increase was primarily due to a $500,000
provision for loans in litigation.
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.
LIQUIDITY AND COMMITMENTS
Mutual Federal is 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
12
<PAGE>
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 ensure that adequate liquidity is maintained.
At December 31, 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 9.93%.
Our liquidity, represented by cash and cash equivalents, is a product of
our operating, investing and financing activities. Our 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 relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. In
addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements. We also generate cash through
borrowings. We utilize Federal Home Loan Bank advances to leverage our capital
base and provide funds for our lending and investment activities, and to enhance
our 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. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-backed securities and investment securities. At December
31, 1999, the total approved loan origination commitments outstanding amounted
to $11.0 million. At the same date, the unadvanced portion of construction loans
was $4.7 million. At December 31, 1999, unused home equity lines of credit
totaled $26.0 million and outstanding letters of credit totaled $3.6 million. As
of December 31, 1999, certificates of deposit scheduled to mature in one year or
less totaled $158.5 million, and investment and mortgage-backed securities
scheduled to mature in one year or less totaled $2.1 million. Based on
historical experience, management believes that a significant portion of
maturing deposits will remain with us. We anticipate that we will continue to
have sufficient funds, through deposits and borrowings, to meet our current
commitments.
CAPITAL
Consistent with our goals to operate a sound and profitable financial
organization, Mutual Federal actively seeks to remain a "well capitalized"
institution in accordance with regulatory standards. Total stockholders' equity
of MFS Financial, Inc. was $96.7 million at December 31, 1999, or 17.76% of
total assets on that date. As of December 31, 1999, Mutual Federal exceeded all
capital requirements of the Office of Thrift Supervision. Mutual Federal's
regulatory capital ratios at December 31, 1999 were as follows: core capital
13.6%; Tier I risk-based capital, 20.7%; and total risk-based capital, 21.7%.
The regulatory capital requirements to be considered well capitalized are 5.0%,
6.0% and 10.0%, respectively.
13
<PAGE>
IMPACT OF ACCOUNTING PRONOUNCEMENTS
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 our 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 our consolidated financial statements.
IMPACT OF INFLATION
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. These principles require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates affect our performance more than general levels of inflation.
Interest rates, however, do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturity structure of our assets and liabilities are critical to
the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
increases because of inflation. Inflation also may increase the dollar value of
the collateral securing loans that we have made. We are unable to determine the
extent to which properties securing our loans have appreciated in dollar value
due to inflation.
14
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain quarterly results for the years
ended December 31, 1999 and 1998. Earninga per share information for the periods
before Mutual Federal's conversion to a stock savings bank on December 29, 1999
is not meaningful and is therefore not provided in the table below.
<TABLE>
<CAPTION>
Interest Interest Net Interest Provision for
Quarter Ended Income Expense Income Loan-Losses Net Income
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
March $ 8,247 $ 4,604 $ 3,643 $ 190 $ 967
June 8,499 4,647 3,852 190 956
September 8,570 4,837 3,733 190 951
December 9,495 5,154 4,341 190 (2,028)
------- ------- ------- ------- -------
Total $34,811 $19,242 $15,569 $ 760 $ 846
======= ======= ======= ======= =======
1998
March $ 8,715 $ 4,960 $ 3,755 $ 191 $ 1,096
June 8,825 5,013 3,812 192 1,135
September 8,459 4,883 3,576 391 1,057
December 9,475 4,834 3,641 491 851
------- ------- ------- ------- -------
Total $34,474 $19,690 $14,784 $ 1,265 $ 4,139
======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
MFS FINANCIAL, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<PAGE>
MFS Financial, Inc. and Subsidiary
Table of Contents
Page
- --------------------------------------------------------------------------------
Independent Auditor's Report 1
Financial Statements
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
<PAGE>
Independent Auditor's Report
Board of Directors
MFS Financial, Inc. and Subsidiary
Muncie, Indiana
We have audited the accompanying consolidated balance sheet of MFS
Financial, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the
Company'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 MFS Financial, Inc. and subsidiary as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Olive LLP
Indianapolis, Indiana
February 4, 2000
<PAGE>
<TABLE>
<CAPTION>
MFS Financial, Inc. and Subsidiary
Consolidated Balance Sheet
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 19,217,186 $ 11,368,571
Interest-bearing demand deposits 765,945 1,569,531
-----------------------------------
Cash and cash equivalents 19,983,131 12,938,102
Trading assets, at fair value 1,234,884
Investment securities
Available for sale 29,598,800 14,207,620
Held to maturity (fair value of $12,016,000 and $11,021,000) 12,449,013 11,003,674
-----------------------------------
Total investment securities 42,047,813 25,211,294
Loans, net of allowance for loan losses of $3,652,073 and $3,423,650 442,786,919 398,146,043
Premises and equipment 7,800,460 7,728,569
Federal Home Loan Bank stock 5,338,500 3,612,400
Investment in limited partnerships 5,274,840 5,265,796
Cash surrender value of life insurance 10,806,957 9,350,000
Foreclosed assets 728,737 45,911
Interest receivable 2,652,959 2,186,552
Core deposit intangibles and goodwill 1,466,928 1,702,465
Deferred income tax benefit 2,670,886 1,024,450
Other assets 1,730,426 2,303,843
-----------------------------------
Total assets $544,523,440 $469,515,425
===================================
Liabilities
Deposits
Noninterest bearing $ 14,360,929 $ 14,884,904
Interest bearing 350,243,469 351,114,505
-----------------------------------
Total deposits 364,604,398 365,999,409
Securities sold under repurchase agreements 840,000
Federal Home Loan Bank advances 72,289,384 50,632,307
Note payable 1,768,354 1,829,711
Advances by borrowers for taxes and insurance 1,289,179 1,260,298
Interest payable 2,153,475 2,327,966
Other liabilities 4,866,330 3,619,938
-----------------------------------
Total liabilities 447,811,120 425,669,629
-----------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--5,000,000 shares
Common stock, $.01 par value
Authorized--20,000,000 shares
Issued and outstanding--5,819,611 shares 58,196
Additional paid-in capital 56,740,190
Retained earnings 44,647,767 43,801,385
Accumulated other comprehensive income (loss) (284,047) 44,411
Unearned employee stock ownership plan (ESOP) shares (4,449,786)
-----------------------------------
Total stockholders' equity 96,712,320 43,845,796
-----------------------------------
Total liabilities and stockholders' equity $544,523,440 $469,515,425
===================================
</TABLE>
See notes to consolidated financial statements.
(2)
<PAGE>
<TABLE>
<CAPTION>
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Income
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans receivable $32,739,166 $32,488,310 $32,241,792
Trading account securities, at fair value 66,535 19,983 39,203
Investment securities
Mortgage-backed securities 323,266 329,093 334,605
Federal Home Loan Bank stock 317,938 277,765 288,838
Other investment securities 1,203,727 999,945 964,289
Deposits with financial institutions 160,812 358,346 216,646
-----------------------------------------------
Total interest and dividend income 34,811,444 34,473,442 34,085,373
-----------------------------------------------
Interest Expense
Deposits 15,854,093 16,442,842 15,403,164
Federal Home Loan Bank advances 3,350,567 3,223,168 3,647,970
Other interest expense 37,598 23,685 31,421
-----------------------------------------------
Total interest expense 19,242,258 19,689,695 19,082,555
-----------------------------------------------
Net Interest Income 15,569,186 14,783,747 15,002,818
Provision for loan losses 760,000 1,265,000 700,000
-----------------------------------------------
Net Interest Income After Provision for Loan Losses 14,809,186 13,518,747 14,302,818
-----------------------------------------------
Other Income
Service fee income 1,728,487 1,544,398 1,315,902
Net realized gains on sales of available-for-sale securities 32,326 1,000 3,000
Net trading assets profit (loss) (189,741) 24,922 31,173
Equity in losses of limited partnerships (11,702) (14,435) (311,874)
Commissions 486,706 420,414 504,193
Net gains on loan sales 805,676 184,828
Increase in cash surrender value of life insurance 490,957 383,856 240,000
Other income 314,817 262,302 115,701
-----------------------------------------------
Total other income 2,851,850 3,428,133 2,082,923
-----------------------------------------------
Other Expenses
Salaries and employee benefits 7,235,933 6,115,471 5,548,356
Net occupancy expenses 655,494 636,396 609,199
Equipment expenses 829,058 613,329 680,395
Data processing fees 472,621 479,001 477,643
Advertising and promotion 412,604 462,632 401,419
Charitable contributions 4,569,937 97,116 68,743
Other expenses 2,501,003 2,354,715 2,305,010
-----------------------------------------------
Total other expenses 16,676,650 10,758,660 10,090,765
-----------------------------------------------
Income Before Income Tax 984,386 6,188,220 6,294,976
Income tax expense 138,004 2,049,000 2,160,000
-----------------------------------------------
Net Income $ 846,382 $ 4,139,220 $ 4,134,976
===============================================
</TABLE>
See notes to consolidated financial statements.
(3)
<PAGE>
<TABLE>
<CAPTION>
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
Common Stock Accumulated
----------------------- Other
Additional Comprehensive Unearned
Shares Paid-in Comprehensive Retained Income ESOP
Outstanding Amount Capital Income Earnings (Loss) Shares Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $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 $846,382 846,382 846,382
Other comprehensive
loss, net of tax
Unrealized losses on
securities, net of
reclassification
adjustment (328,458) (328,458) (328,458)
------------
Comprehensive income $517,924
============
Stock issued in
conversion, net of
costs 5,595,780 $55,958 $54,510,552 54,566,510
Stock contributed to
charitable foundation 223,831 2,238 2,236,072 2,238,310
Contribution of
unearned ESOP shares $(4,655,680) (4,655,680)
ESOP shares earned (6,434) 205,894 199,460
----------------------------------- ------------------------------------------------
Balances, December 31, 1999 5,819,611 $58,196 $56,740,190 $44,647,767 $(284,047) $(4,449,786$96,712,320
=================================== ================================================
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE>
<TABLE>
<CAPTION>
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 846,382 $ 4,139,220 $ 4,134,976
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 760,000 1,265,000 700,000
Common stock contributed to charitable foundation 2,238,310
Securities gains (32,326) (1,000) (3,000)
Net loss on disposal of premise and equipment 19,301
Net loss on sale of real estate owned 58,676 137,112
Securities amortization (accretion), net (15,813) (26,390) 90
ESOP shares earned 199,460
Equity in losses of limited partnerships 11,702 14,435 311,874
Amortization of net loan origination costs 1,371,722 842,251 840,125
Amortization of core deposit intangibles and goodwill 235,537 246,194 33,078
Depreciation and amortization 802,486 570,184 616,787
Deferred income tax (1,418,864) 282,942 (269,454)
Loans originated for sale (16,295,533) (5,706,313)
Proceeds from sales on loans held for sale 35,447,044 5,743,831
Gains on sales of loans held for sale (548,491) (37,518)
Change in
Trading account securities (1,234,884) 454,732
Interest receivable (466,407) 192,210 (47,054)
Other assets 573,417 (847,971) 106,847
Interest payable (174,491) (141,538) 33,975
Other liabilities 1,246,392 (542,445) 405,047
Increase in cash surrender value of life insurance (490,957) (383,856) (240,000)
Other adjustments 6,646 258,439
--------------------------------------------
Net cash provided by operating activities 4,510,342 24,375,315 7,336,462
--------------------------------------------
Investing Activities
Purchases of securities available for sale (25,866,267) (7,016,986) (10,828,305)
Proceeds from maturities and paydowns of securities available for sale 1,711,883 2,150,076 894,391
Proceeds from sales of securities available for sale 8,252,785 4,115,510 9,415,998
Purchases of securities held to maturity (8,463,897) (11,793,604) (5,684,297)
Proceeds from maturities and paydowns of securities held to maturity 7,021,088 10,973,718 4,505,500
Net change in loans (47,744,581) (20,685,925) (24,212,540)
Purchases of premises and equipment (874,377) (1,461,965) (903,571)
Proceeds from real estate owned sales 266,798 1,565,489 52,425
Purchase of FHLB of Indianapolis stock (1,726,100) (241,700)
Purchase of interest in limited partnership (2,085,000)
Distribution from (to) limited partnership (20,746) 55,074 137,098
Purchases of insurance contracts (966,000) (3,000,000) (300,000)
Cash received on branch acquisition 309,413 11,903,914
Other investing activities (36,319) (22,778) 118,676
--------------------------------------------
Net cash used by investing activities (68,445,733) (26,896,978) (15,142,411)
--------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 1,275,554 23,571,794 (9,259,396)
Certificates of deposits (2,670,565) (2,784,446) 9,811,301
Securities sold under repurchase agreements 840,000 (1,400,000)
Repayment of note payable (61,357) (25,566)
Proceeds from FHLB advances 157,000,000 53,700,000 113,195,000
Repayment of FHLB advances (135,342,923) (69,322,214) (106,649,421)
Net change in advances by borrowers for taxes and insurance 28,881 (28,351) (83,756)
Proceeds from sale of common stock, net of costs 49,910,830
--------------------------------------------
Net cash provided by financing activities 70,980,420 5,111,217 5,613,728
--------------------------------------------
Net Change in Cash and Cash Equivalents 7,045,029 2,589,554 (2,192,221)
Cash and Cash Equivalents, Beginning of Year 12,938,102 10,348,548 12,540,769
--------------------------------------------
Cash and Cash Equivalents, End of Year $19,983,131 $12,938,102 $10,348,548
============================================
Additional Cash Flows Information
Interest paid $19,416,749 $19,831,233 $19,048,580
Income tax paid 1,716,402 2,524,700 2,449,536
Transfers from loans to foreclosed real estate 971,983 128,288 1,873,356
Note payable issued for investment in limited partnership 1,855,277
Loans transferred to loans held for sale 18,603,020
Mortgage servicing rights capitalized 257,185 146,828
Common stock issued to ESOP leveraged with an employee loan 4,655,680
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE>
MFS Financial, Inc. and Subsidiary
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 MFS Financial, Inc. (Company) and its
wholly owned subsidiary, Mutual Federal Savings Bank (Bank) and the Bank's
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 1998, Kosciusko Service Corporation, a formerly wholly owned subsidiary
of the Bank, 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 Company is a thrift holding company whose principal activity is the
ownership of the Bank. 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, consumer and commercial 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, consumer assets and business assets.
First MFSB sells various insurance products. Third MFSB offers tax deferred
annuities and long-term health care and life insurance products.
Consolidation--The consolidated financial statements include the accounts of the
Company and the Bank after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Company 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. 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.
(6)
<PAGE>
MFS Financial, Inc. and Subsidiary
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 Company 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 Company
considers its investmen in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual maturity of the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1999, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 3 to 50 years. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank 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.
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.
(7)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Intangible assets are being amortized primarily on a straight-line and
accelerated basis over a period of 15 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 Company
files consolidated income tax returns with its subsidiary.
Earnings per share will be computed based upon the weighted average common and
potential common shares outstanding during the period subsequent to the Bank's
conversion to a stock savings bank on December 29, 1999. Net income per share
for the periods prior to the conversion is not meaningful.
Reclassifications of certain amounts in the 1998 and 1997 consolidated financial
statements have been made to conform to the 1999 presentation.
Note 2 -- Conversion
On December 29, 1999, the Bank completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings bank and the
formation of the Company as the holding company of the Bank. As part of the
conversion, the Company issued 5,595,780 shares of common stock at $10 per
share. Net proceeds of the Company's stock issuance, after costs of $1,391,000
and excluding the shares issued for the ESOP, were $49,911,000, of which
$27,284,000 was used to acquire 100% of th stock and ownership of the Bank. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests. In connection with the Conversion, the
Company contributed 223,831 shares of common stock and cash of $2,238,000 to
Mutual Federal Savings Bank Charitable Foundation, Inc. (the Foundation), a
charitable foundation dedicated to community development activities in the
Company's market areas. This resulted in the recognition of an additional
$4,477,000 charitable contribution expense for the year ended December 31, 1999.
Note 3 -- 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 December 31, 1999, was
$2,925,000.
(8)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Investment Securities
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities $ 9,517 $25 $(155) $ 9,387
Collateralized mortgage obligations 4,584 (48) 4,536
Federal agencies 2,416 (34) 2,382
Corporate obligations 7,781 (74) 7,707
Marketable equity securities 5,781 (194) 5,587
-----------------------------------------------------------------
Total available for sale 30,079 25 (505) 29,599
-----------------------------------------------------------------
Held to maturity
Federal agencies 10,200 (413) 9,787
Corporate obligations 2,099 (20) 2,079
Municipal obligation 150 150
-----------------------------------------------------------------
Total held to maturity 12,449 (433) 12,016
-----------------------------------------------------------------
Total investment securities $42,528 $25 $(938) $41,615
=================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
Gross Grosss
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <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>
Marketable equity securities consist of shares in mutual funds which invest in
government obligations and mortgage-backed securities.
(9)
<PAGE>
MFS Financial, Inc. and Subsidiary
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 December 31, 1999, 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
December 31 Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 1,862 $ 1,854
One to five years $ 8,283 $ 8,197 5,944 5,778
Five to ten years 970 956 3,493 3,336
After ten years 501 500 1,150 1,048
-------------------------------------------------------------------
9,754 9,653 12,449 12,016
Mortgage-backed securities 9,517 9,387
Collateralized mortgage obligations 4,584 4,536
Small Business Administration 443 436
Marketable equity securities 5,781 5,587
-------------------------------------------------------------------
Totals $30,079 $29,599 $12,449 $12,016
===================================================================
</TABLE>
Securities with a carrying value of $30,159,000 and $12,803,000 were pledged at
December 31, 1999 and 1998 to secure FHLB advances.
Proceeds from sales of securities available for sale during the years ended
December 31, 1999, 1998 and 1997 were $8,253,000, $4,116,000 and $9,416,000.
Gross gains of $79,000, $1,000 and $3,000 were realized on those sales in 1999,
1998 and 1997. Gross losses of $47,000 were recognized on those sales in 1999.
Trading account securities at December 31, 1999 consisted of U. S. Government
bonds with a fair value of $1,235,000. Unrealized holding losses of $212,000
were included in earnings for the year ended December 31, 1999 and there were no
unrealized holding gains or losses on trading securities included in earnings in
1998 and 1997. Trading account securities with a carrying value of $823,000 were
pledged at December 31, 1999 to secure repurchase agreements.
(10)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Loans and Allowance
<TABLE>
<CAPTION>
December 31 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Loans
Real estate loans
One-to-four family $286,578 $264,461
Multi family 5,544 6,282
Commercial 14,559 10,293
Construction and development 12,470 11,805
----------------------------------
319,151 292,841
----------------------------------
Consumer loans
Auto 19,887 17,820
Home equity 10,585 10,253
Home improvement 14,588 12,108
Mobile home 12,305 15,466
Recreational vehicles 25,629 19,100
Boats 32,374 23,608
Credit cards 2,180 2,281
Other 2,374 3,472
----------------------------------
119,922 104,108
Commercial business loans 10,764 7,285
----------------------------------
449,837 404,234
Undisbursed portion of loans (4,844) (3,353)
Deferred loan fees, and costs, net 1,446 689
Allowance for loan losses (3,652) (3,424)
----------------------------------
Total loans $442,787 $398,146
==================================
</TABLE>
(11)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses
Balances, January 1 $3,424 $3,091 $2,990
Provision for losses 760 1,265 700
Recoveries on loans 119 106 91
Loans charged off (651) (1,038) (690)
---------------------------------------------
Balances, December 31 $3,652 $3,424 $3,091
=============================================
</TABLE>
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
December 31 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Impaired loans with an allowance $504
===============
Allowance for impaired loans included in the Company's allowance for loan losses $100
===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average balance of impaired loans $429 $517 $949
Interest income recognized on impaired loans 9 56
Cash-basis interest included above 9 56
</TABLE>
There were no impaired loans at December 31, 1999 and 1997.
Note 6 -- Premises and Equipment
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost
Land $1,691 $1,557
Buildings and land improvements 8,269 8,213
Equipment 5,236 4,635
------------------------------
Total cost 15,196 14,405
Accumulated depreciation (7,396) (6,676)
------------------------------
Net $7,800 $7,729
==============================
</TABLE>
(12)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Investment In Limited Partnerships
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Pedcor Investments 1988-V (98.97 percent ownership, equity method of accounting) $ 522 $ 523
Pedcor Investments 1990-XIII (99.00 percent ownership, equity method of accounting) 683 696
Pedcor Investments 1990-XI (19.79 percent ownership, at amortized cost) 96 107
Pedcor Investments 1997-XXVlll (99.00 percent ownership, equity method of accounting) 3,974 3,940
-------------------------------
$5,275 $5,266
===============================
</TABLE>
The limited partnerships build, own and operate apartment complexes. The Company
records its equity in the net income or loss of the Pedcor Investments 1988-V,
1990-XIII, and 1997-XXVIII based on the Company's interest in the partnerships.
The Company 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 Company has recorded
the benefit of low income housing credits of $262,000 for 1999, 1998 and 1997.
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 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Condensed statement of financial condition
Assets
Cash $ 313 $ 198
Land and property 22,401 18,664
Other assets 1,694 6,303
-------------------------------
Total assets $24,408 $25,165
===============================
Liabilities
Notes payable $22,656 $23,021
Other liabilities 820 1,020
-------------------------------
Total liabilities 23,476 24,041
-------------------------------
Partners' equity (deficit)
General partners (2,423) (2,194)
Limited partners 3,355 3,318
-------------------------------
Total partners' equity 932 1,124
-------------------------------
Total liabilities and partners' equity $24,408 $25,165
===============================
</TABLE>
(13)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Condensed statement of operations
Total revenue $2,497 $2,389 $2,418
Total expenses 2,499 2,377 2,418
-----------------------------------------
Net income $ (2) $ 12 $ 0
=========================================
</TABLE>
Note 8 -- Deposits
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $ 14,361 $ 14,885
Interest-bearing demand 38,199 42,354
Regular passbook 37,601 39,418
90-day passbook 2,191 2,824
Money market savings 42,091 33,686
Certificates and other time deposits of $100,000 or more 44,804 36,148
Other certificates 185,357 196,684
-----------------------------------
Total deposits $364,604 $365,999
===================================
</TABLE>
Certificates including other time deposits of $100,000 or more maturing in years
ending December 31:
2000 $158,502
2001 55,516
2002 7,848
2003 4,535
2004 3,760
----------------
$230,161
================
Note 9 -- Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements consist of obligations of the
Company to other parties. The obligations are secured by U. S. Treasury bonds
and such collateral is held in trust at a financial services company.
There was one outstanding agreement of $840,000 at December 31, 1999 maturing
January 13, 2000 and none at the end of 1998 nor were there any outstanding
agreements at any month-end during 1998. The maximum amount of outstanding
agreements at any month-end during 1999 and 1997 totaled $895,000 and $875,000
respectively. The monthly average of such agreements totaled $400,000, $2,000
and $20,000 for the years ended December 31, 1999, 1998 and 1997.
(14)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
Weighted
Average
Maturities Year Ending December 31 Rate Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
2000 5.89% $45,205
2001 5.23 1,000
2002 5.91 2,000
2003 5.09 8,131
2004
Thereafter 5.43 15,953
----------------
5.69% $72,289
================
</TABLE>
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.
Note 11 -- Note Payable
The Bank has a noninterest-bearing, unsecured term note payable to Pedcor
Investments 1997-XXVIII, L.P. of $1,768,000 at December 31, 1999 and $1,830,000
at December 31, 1998 payable in semiannual installments through January 1, 2010.
At December 31, 1999 and 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 7).
Note
Payable
Maturities Year Ending December 31 Pedcor
- --------------------------------------------------------------------------------
2000 $ 61
2001 61
2002 61
2003 61
2004 61
Thereafter 1,463
---------------
$1,768
===============
(15)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 -- 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>
December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loan portfolio serviced for
Freddie Mac $22,128 $26,906 $16,785
Fannie Mae 9,977 14,520 908
Other investors 311 882 904
--------------- ---------------- --------------
$32,416 $42,308 $18,597
=============== ================ ==============
</TABLE>
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1999, 1998 and 1997 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 December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Servicing Rights
Balances, January 1 $339,904 $128,298
Servicing rights capitalized 257,185 $146,828
Amortization of servicing rights (60,735) (45,579) (18,530)
----------------- --------------- ----------------
Balances, December 31 $279,169 $339,904 $128,298
================= =============== ================
</TABLE>
(16)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 -- Income Tax
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income tax expense
Currently payable
Federal $1,088 $1,308 $1,837
State 469 458 592
Deferred
Federal (1,408) 216 (212)
State (11) 67 (57)
----------------------------------------------
Total income tax expense $ 138 $2,049 $2,160
==============================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 335 $2,104 $2,140
Effect of state income taxes 302 347 353
Low income housing credits (262) (262) (262)
Tax exempt income--increase in cash surrender value (167) (131) (81)
Other (70) (9) 10
----------------------------------------------
Actual tax expense $ 138 $2,049 $2,160
==============================================
Effective tax rate 14.0% 33.1% 34.3%
==============================================
</TABLE>
(17)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The components of the deferred asset are as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Allowance for loan losses $1,485 $1,342
Deferred compensation 1,205 1,075
Charitable contribution carryover 1,390
Unrealized loss on securities available for sale 198
Other 193 110
------------------------------
Total assets 4,471 2,527
------------------------------
Liabilities
FHLB stock (165) (165)
Depreciation (116) (84)
State income tax (92) (88)
Loan fees (1,125) (811)
Increase in tax bad debt reserve over base year (92) (115)
Unrealized gain on securities available for sale (30)
Mortgage servicing rights (119) (144)
Investments in limited partnership (91) (66)
------------------------------
Total liabilities (1,800) (1,503)
------------------------------
$2,671 $1,024
==============================
</TABLE>
The Company has a charitable contribution carryover of $4,570,000 that expires
in the year ending December 31, 2005.
Income tax expense attributable to securities gains was $12,800, $400 and $1,200
for the years ended December 31, 1999 and 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 was approximately $2,552,000.
(18)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $515 $206 $(309)
Less: reclassification adjustment for gains realized in net income 32 (13) 19
-------------------------------------------------
Net unrealized losses $(547) $219 $(328)
=================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================
</TABLE>
Note 15 -- 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.
(19)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Financial instruments whose contract amount represents credit risk were as
follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Loan commitments $41,700 $33,530
Loans sold with recourse 93 165
Standby letters of credit 3,617 2,500
</TABLE>
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 Company and subsidiary 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
Company.
Note 16 -- Dividend and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding retained net income for the current calendar year plus
those for the previous two calendar years. The Bank normally restricts dividends
to a lesser amount because of the need to maintain an adequate capital
structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Banks' net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $45,619,000.
At December 31, 1999, the stockholder's equity of the Bank was $74,628,000, of
which approximately $7,966,000 was available for the payment of dividends to the
Company.
(20)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17 -- 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, Tier 1 risk-based
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 December 31, 1999 and 1998,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 1999 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required for To Be Well
Actual Adequate Capital(1) Capitalized(1)
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total risk-based capital 1 (to risk-weighted assets) $76,994 21.7% $28,357 8.0% $35,446 10.00%
Tier 1 risk-based capital 1 (to risk-weighted assets) 73,445 20.7% 14,179 4.0% 21,268 6.00%
Core capital 1 (to adjusted total assets) 73,445 13.6% 16,252 3.0% 27,086 5.00%
Core capital 1 (to adjusted tangible assets) 73,445 13.6% 10,835 2.0% NA NA
Tangible capital 1 (to adjusted total assets) 73,445 13.6% 8,126 1.5% NA NA
As of December 31, 1998
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%
Core capital 1 (to adjusted tangible assets) 42,100 9.03% 9,328 2.0% NA NA
Tangible capital 1 (to adjusted total assets) 42,100 9.03% 6,996 1.5% NA NA
(1) As defined by regulatory agencies
</TABLE>
(21)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 -- Employee Benefits
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The contributions are discretionary and determined
annually. For the years ended December 31, 1999, 1998 and 1997, the Company
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 Company's expense for the plan
was $286,000, $284,000 and $252,500 fo the years ended December 31, 1999, 1998
and 1997.
The Company 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 Company. The
Company's expense for the plan was $214,000, $188,000 and $164,000 for the years
ended December 31, 1999, 1998 and 1997.
The Company 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 Company. The Company's expense for
the plan was $106,000, $117,000 and $105,000 for the years ended December 31,
1999, 1998 and 1997.
As part of the conversion in 1999, the Company established an ESOP covering
substantially all its employees. The ESOP acquired 465,568 shares of the Company
common stock at $10 per share in the conversion with funds provided by a loan
from the Company. Accordingly, the $4,655,680 of common stock acquired by the
ESOP is shown as a reduction of stockholders' equity. At December 31, 1999, the
Company had 444,979 unearned ESOP shares with a fair value of $4,339,000. Shares
are released to participants proportionately as the loan is repaid. Dividends on
allocated shares are recorded as dividends and charged to retained earnings.
Dividends on unallocated shares, which may be distributed to participants, or
used to repay the loan are treated as compensation expense. Compensation expense
is recorded equal to the fair market value of the stock when contributions,
which are determined annually by the Board of Directors of the Company and Bank,
are made to the ESOP. Expense under the ESOP for the year ended December 31,
1999 was $199,000. At December 31, 1999, the ESOP had no allocated shares,
444,979 suspense shares and 20,589 committed-to-be released shares.
In connection with the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Award Plan (RAP). The Plans are subject to
stockholders' approval. Under the stock option plan, stock options covering
shares representing an aggregate of up to 10% of the common stock issued in the
conversion may be granted to directors and executive officers. Restricted stock
awards covering up to 4% of the common stock issued in the conversion may be
awarded to directors and executiv officers under the RAP.
(22)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 19 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Securities and Mortgage-Backed Securities--Fair values are based on quoted
market prices.
Loans--The fair value for loans are estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Securities Sold Under Repurchase Agreements--Securities sold under repurchase
agreements are short-term borrowing arrangements. The rates at December 31,
1999, approximate market rates, thus the fair value approximates carrying value.
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.
(23)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $19,983 $19,983 $12,938 $12,938
Trading account securities 1,235 1,235
Securities available for sale 29,599 29,599 14,208 14,208
Securities held to maturity 12,449 12,016 11,004 11,021
Loans 442,787 433,630 398,146 402,455
Stock in FHLB 5,339 5,339 3,612 3,612
Interest receivable 2,653 2,653 2,187 2,187
Liabilities
Deposits 364,604 365,566 365,999 366,377
Securities sold under repurchase agreements 840 840
FHLB Advances 72,289 72,304 50,632 50,988
Note payable--Pedcor 1,768 986 1,830 919
Interest payable 2,153 2,153 2,328 2,328
Advances by borrowers for taxes and insurance 1,289 1,289 1,260 1,260
</TABLE>
Note 20 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1999
- --------------------------------------------------------------------------------
Assets
Short-term noninterest-bearing deposit with subsidiary $20,470
Investment in common stock of subsidiary 74,628
Deferred income tax 1,393
Other assets 343
----------
Total assets $96,834
==========
Liabilities--other $ 122
Stockholders' Equity 96,712
----------
Total liabilities and stockholders' equity $96,834
==========
(24)
<PAGE>
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses
Interest expense $ 40
Charitable contribution 4,477
---------------------------------------
Loss before income tax benefit and equity in undistributed income of subsidiary
4,517
Income tax benefit 1,536
---------------------------------------
Loss before equity in undistributed income of subsidiary (2,981)
Equity in undistributed income of subsidiary 3,827 $4,139 $4,135
---------------------------------------
Net Income $ 846 $4,139 $4,135
=======================================
</TABLE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 846 $4,139 $4,135
Adjustments to reconcile net income to net cash used by operating activities
Earned ESOP shares 199
Charitable contribution of Company's common stock 2,238
Deferred income tax benefit (1,393)
Undistributed income of subsidiary (3,827)
Other (221) (4,139) (4,135)
---------------------------------------
Net cash used by operating activities (2,158)
Investing Activity--capital contribution to subsidiary (27,283)
Financing Activity--proceeds from sale of common stock, net of costs 49,911
---------------------------------------
Short-Term Interest-Bearing Deposit with Subsidiary at End of Year $20,470 $ 0 $ 0
=======================================
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employee loan $ 4,656
</TABLE>
(25)
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ----------------------------- ---------------------------- ---------- --------------
<S> <C> <C> <C>
MFS Financial, Inc. Mutual Federal Savings Bank 100% United States
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>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Income filed as
part of the annual report on Form 10-K and is qualified in its entirety by
reference to such annual report on Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,217
<INT-BEARING-DEPOSITS> 766
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,235
<INVESTMENTS-HELD-FOR-SALE> 29,599
<INVESTMENTS-CARRYING> 12,449
<INVESTMENTS-MARKET> 12,016
<LOANS> 446,439
<ALLOWANCE> 3,652
<TOTAL-ASSETS> 544,523
<DEPOSITS> 364,604
<SHORT-TERM> 840
<LIABILITIES-OTHER> 8,308
<LONG-TERM> 74,057
0
0
<COMMON> 5
<OTHER-SE> 96,654
<TOTAL-LIABILITIES-AND-EQUITY> 544,523
<INTEREST-LOAN> 32,739
<INTEREST-INVEST> 1,845
<INTEREST-OTHER> 227
<INTEREST-TOTAL> 34,811
<INTEREST-DEPOSIT> 15,854
<INTEREST-EXPENSE> 19,242
<INTEREST-INCOME-NET> 15,569
<LOAN-LOSSES> 760
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 16,677
<INCOME-PRETAX> 984
<INCOME-PRE-EXTRAORDINARY> 846
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 846
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.41
<LOANS-NON> 753
<LOANS-PAST> 28
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,300
<ALLOWANCE-OPEN> 3,424
<CHARGE-OFFS> 651
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 3,652
<ALLOWANCE-DOMESTIC> 3,652
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 335
</TABLE>
