SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MARSHALLTOWN FINANCIAL CORPORATION
(Name of Registrant as Specified in its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
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[ X ] Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by Registration
Statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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[MARSHALLTOWN FINANCIAL CORPORATION LETTERHEAD]
NOTICE OF SPECIAL MEETING
AND PROXY STATEMENT
October 8, 1997
Dear Stockholder:
You are cordially invited to attend the Special Meeting of
Stockholders (the "Special Meeting") of Marshalltown Financial Corporation
("MFC"), the holding company for Marshalltown Savings Bank, FSB ("Marshalltown"
or the "Bank"), to be held at the Regency Inn located at the intersection of
Iowa Avenue and Highway 14, Marshalltown, Iowa, on Friday, November 7, 1997, at
1:00 p.m., Marshalltown, Iowa time.
At the Special Meeting, stockholders will be asked to consider and
vote on a proposal to adopt an Agreement and Plan of Merger dated July 1, 1997
(the "Merger Agreement") pursuant to which, among other things, HFSB Acquisition
Co. ("Acquisition Co."), a wholly owned subsidiary of Home Federal Savings Bank,
a federal savings bank ("Home Federal"), a wholly owned subsidiary of HMN
Financial, Inc. ("HMN"), will be merged with and into MFC with MFC as the
surviving corporation (the "Merger"). If the Merger is consummated, stockholders
of MFC will receive $17.51 per share for the common stock of MFC (the "MFC
Common Stock"), subject to reduction if MFC's expenses in connection with the
Merger Agreement and the transactions contemplated thereby exceed $400,000 with
the per share reduction being calculated by dividing the excess expenses (i.e.
amount in excess of $400,000) by 1,534,205 (the total number of shares of MFC
Common Stock outstanding and shares of MFC Common Stock issuable pursuant to the
exercise of outstanding options) (the "Per Share Merger Consideration"). The Per
Share Merger Consideration will not be paid in exchange for shares held by
stockholders who have properly exercised appraisal rights. By virtue of the
Merger, all validly issued and outstanding stock options under MFC's 1994 Stock
Option and Incentive Plan will be converted into the right to receive the Per
Share Merger Consideration less the exercise price for the shares, and all such
options will thereupon be cancelled.
Adoption of the Merger Agreement requires the affirmative vote of a
majority of the issued and outstanding shares of MFC Common Stock. The Merger
Agreement and Merger have been unanimously approved and adopted by the Board of
Directors of MFC, and the Board unanimously recommends that stockholders vote
FOR adoption of the Merger Agreement. In support of its recommendation, the
Board of Directors has received an opinion from EVEREN Securities, Inc., a
financial advisory firm headquartered in Chicago, Illinois, to the effect that
the consideration to be paid to the MFC stockholders pursuant to the Merger is
fair from a financial point of view. Upon completion of the Merger, the existing
stockholders of MFC will receive the Per Share Merger Consideration, and will no
longer own any stock or have any interest in MFC or Marshalltown, nor will they
receive, as a result of the Merger, any stock of HMN, Home Federal or HFSB
Acquisition Co. Directors and executive officers of MFC will attend the Special
Meeting to respond to any questions stockholders may have.
Appraisal rights are available under Section 262 of the Delaware
General Corporation Law. A stockholder must object in writing to the Merger
prior to the Special Meeting, or at the Special Meeting but before the vote on
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the Merger Agreement, by filing with the Secretary of MFC a written objection to
the Merger, identifying himself and stating that he intends thereby to demand an
appraisal of his shares. Thereafter the stockholder must follow the provisions
set forth under Delaware law which are further described in the attached proxy
statement, including that such stockholder may not vote for adoption of the
Merger Agreement.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
The Board of Directors urges you to read the enclosed proxy statement and sign,
date and return the enclosed proxy card in the enclosed postage pre-paid
envelope as soon as possible even if you currently plan to attend the Special
Meeting. Returning your proxy card will not prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
Special Meeting.
The Merger is an important step for MFC and its stockholders. On
behalf of the Board of Directors, I urge you to vote.
Sincerely,
/s/Richard A. Rathke
--------------------
Richard A. Rathke
President and Chief Executive Officer
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION
303 West Main Street
Marshalltown, Iowa 50158
(515) 754-6000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 7, 1997
Notice is hereby given that a Special Meeting of Stockholders (the
"Special Meeting") of Marshalltown Financial Corporation ("MFC" or the
"Company"), the holding company for Marshalltown Savings Bank, FSB
("Marshalltown" or the "Bank"), will be held at the Regency Inn located at the
intersection of Iowa Avenue and Highway 14, Marshalltown, Iowa, on Friday,
November 7, 1997, at 1:00 p.m., Marshalltown, Iowa time.
A proxy card and Proxy Statement for the Special Meeting are
enclosed.
The Special Meeting is for the purpose of considering and voting
upon the following matters:
1. A proposal to adopt the Agreement and Plan of Merger, dated
as of July 1, 1997 by and among HMN Financial, Inc.
("HMN"), Home Federal Savings Bank, a federal savings bank
("Home Federal"), HFSB Acquisition Co. ("Acquisition Co."),
and MFC (the "Merger Agreement"), pursuant to which (i)
Acquisition Co., a wholly owned subsidiary of Home Federal,
a wholly owned subsidiary of HMN, would merge with and into
MFC (the "Merger"), and (ii) each outstanding share, par
value $.01 per share, of MFC common stock (the "MFC Common
Stock"), would be converted into the right to receive
$17.51 in cash, without interest, subject to reduction in
the per share price if MFC's expenses in connection with
the Merger Agreement and the transactions contemplated
thereby exceed $400,000 with the per share reduction being
calculated by dividing the excess expenses (i.e. amount in
excess of $400,000) by 1,534,205 (the total number of
shares of MFC Common Stock outstanding and shares of MFC
Common Stock issuable pursuant to the exercise of
outstanding options), all on the terms and conditions
contained in the Merger Agreement. The Per Share Merger
Consideration will not be paid in exchange for shares of
MFC Common Stock held by stockholders who have properly
exercised appraisal rights. The Merger Agreement is
attached as Appendix A to the accompanying Proxy Statement;
and
such other matters as may properly come before the Special Meeting or any
adjournments or postponements thereof. The Board of Directors of MFC (the "MFC
Board") is not aware of any other business to come before the Special Meeting.
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Any action may be taken on the foregoing proposal at the Special
Meeting on the date specified above or any adjournment or postponement thereof.
Stockholders of record at the close of business on September 26, 1997 are the
stockholders entitled to vote at the Special Meeting and any adjournment or
postponement thereof.
A complete list of stockholders entitled to vote at the Special
Meeting is available for examination by any stockholder, for any purpose germane
to the Special Meeting, during ordinary business hours at the offices of the
Company located at 303 West Main Street, Marshalltown, Iowa for a period of ten
days prior to the Special Meeting. This list will also be available for
inspection by stockholders at the Special Meeting.
You are requested to vote, sign and date the enclosed form of proxy,
which is solicited by the MFC Board, and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Special
Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Richard A. Rathke
--------------------
Richard A. Rathke
President and Chief Executive Officer
Marshalltown, Iowa
October 8, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
PROXY STATEMENT
MARSHALLTOWN FINANCIAL CORPORATION
303 WEST MAIN STREET
MARSHALLTOWN, IOWA 50158
(515) 754-6000
SPECIAL MEETING OF STOCKHOLDERS
November 7, 1997
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors (the "MFC Board") of
Marshalltown Financial Corporation ("MFC" or the "Company"), the holding company
for Marshalltown Savings Bank, FSB ("Marshalltown" or the "Bank") to be used at
the Special Meeting of Stockholders to be held on November 7, 1997 at 1:00 p.m.,
Marshalltown, Iowa time, and at any adjournment or postponement thereof (the
"Special Meeting"). The accompanying Notice of Special Meeting of Stockholders
and this Proxy Statement are first being mailed to stockholders on or about
October 8, 1997.
At the Special Meeting, stockholders will be asked to consider and
vote on a proposal to adopt the Agreement and Plan of Merger dated July 1, 1997
(the "Merger Agreement") pursuant to which HFSB Acquisition Co. ("Acquisition
Co."), a Delaware corporation and a wholly owned subsidiary of Home Federal
Savings, a federal savings bank ("Home Federal"), a wholly owned subsidiary of
HMN Financial, Inc. ("HMN"), a Delaware corporation, would be merged with and
into MFC, a Delaware corporation (the "Merger"). Pursuant to the Merger
Agreement, upon consummation of the Merger, each share of the common stock of
MFC, par value $.01 per share, ("MFC Common Stock") outstanding immediately
prior to the Effective Time (as defined hereinafter), including shares issued
pursuant to MFC's Recognition and Retention Plan (the "RRP") whether vested or
unvested, will be canceled and converted into the right to receive $17.51 per
share in cash subject to reduction in the per share price if MFC's expenses in
connection with the Merger Agreement and the transactions contemplated thereby
exceed $400,000 with the per share reduction being calculated by dividing the
excess expenses (i.e. amount in excess of $400,000) by 1,534,205 (the total
number of shares of MFC Common Stock outstanding and shares of MFC Common Stock
issuable pursuant to outstanding options) (the "Per Share Merger
Consideration"). See "THE MERGER - Expenses." The Per Share Merger Consideration
will not be paid in exchange for shares of MFC Common Stock held by HMN or any
of its affiliates or in exchange for shares held by stockholders who have
properly exercised appraisal rights (collectively, "Excluded Shares"). By virtue
of the Merger, all validly issued and outstanding stock options under MFC's
Stock Option Plan (the "Stock Option Plan"), whether vested or unvested, will be
converted into the right to receive the Per Share Merger Consideration less the
exercise price for the shares and all such options will thereupon be cancelled.
See "THE MERGER" and Appendix A. The MFC Board believes that the Merger is in
the best interest of MFC and its stockholders and unanimously recommends that
stockholders vote "FOR" adoption of the Merger Agreement.
MFC stockholders will also consider and vote upon any other business
which may be properly brought before the Special Meeting or any adjournment or
postponement thereof. As of the date hereof, the MFC Board knows of no business
that will be presented for consideration at the Special Meeting other than the
matters described in this Proxy Statement.
THE DATE OF THIS PROXY STATEMENT IS OCTOBER 8, 1997
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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SUMMARY OF PROXY STATEMENT............................................................................i
The Special Meeting..........................................................................i
Date, Time and Place.................................................................i
Matters to be Considered.............................................................i
Record Date; Shares Entitled to Vote.................................................i
Vote Required........................................................................i
Revocability of Proxies.............................................................ii
The Merger..................................................................................ii
Parties to the Merger..............................................................iii
MFC Board's Approval and Recommendation of the Merger..............................iii
Appraisal Rights....................................................................iv
Opinion of Financial Advisor........................................................iv
Effective Time......................................................................iv
Interests of Certain Persons in the Merger..........................................iv
Certain Federal Income Tax Consequences..............................................v
Method of Payment/Surrender of Stock Certificates...................................vi
Conditions to Consummation of the Merger; Regulatory Approval.......................vi
Termination; Break-up Fee...........................................................vi
Expenses............................................................................vi
Accounting Treatment...............................................................vii
Market Prices and Dividends........................................................vii
SELECTED CONSOLIDATED FINANCIAL INFORMATION........................................................viii
THE SPECIAL MEETING...................................................................................1
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES......................................................2
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF.......................................................3
THE MERGER............................................................................................4
General......................................................................................4
Background of the Merger.....................................................................5
Reasons for the Merger and Recommendation of the Board of Directors..........................6
Opinion of Financial Advisor.................................................................8
Effective Time..............................................................................12
Interests of Certain Persons in the Merger..................................................12
Employee Benefit Plans......................................................................14
Certain Federal Income Tax Consequences.....................................................15
Surrender of Stock Certificates.............................................................16
I
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<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued) Page
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<S> <C>
Regulatory Approvals........................................................................16
Representations and Warranties..............................................................17
Conditions to Consummation..................................................................17
Termination; Break up Fee...................................................................19
Business Pending Consummation...............................................................20
Waiver......................................................................................22
Appraisal Rights............................................................................22
Expenses....................................................................................26
Accounting Treatment........................................................................26
INFORMATION REGARDING HMN FINANCIAL, INC.............................................................26
STOCKHOLDER PROPOSALS................................................................................27
ACCOUNTANTS..........................................................................................27
OTHER MATTERS........................................................................................27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................................................28
Agreement and Plan of Merger (omitting schedules and exhibits)...............................Appendix A
Section 262 of the Delaware General Corporation Law..........................................Appendix B
Opinion of EVEREN Securities.................................................................Appendix C
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1996.........................................................................Appendix D
Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997..............................................................................Appendix E
II
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<PAGE>
SUMMARY OF PROXY STATEMENT
The following is a brief summary of certain information relating to
the Special Meeting and the Merger contained elsewhere in this Proxy Statement.
This summary is not intended to be a complete description of all material facts
regarding MFC and the matters to be considered at the Special Meeting, and is
qualified in all respects by the more detailed information appearing elsewhere
herein and the Appendices hereto. A copy of the Merger Agreement is set forth as
Appendix A to this Proxy Statement and reference is made thereto for a complete
description of the terms of the Merger.
The Special Meeting
Date, Time and Place
The Special Meeting will be held at 1:00 p.m., Marshalltown, Iowa
time on Friday, November 7, 1997 at the Regency Inn, located at the intersection
of Iowa Avenue and Highway 14 in Marshalltown, Iowa.
Matters to be Considered
At the Special Meeting, holders of shares of MFC Common Stock will
be asked to consider and vote upon: a proposal to adopt the Merger Agreement
pursuant to which Acquisition Co. would merge with and into MFC and each
outstanding share of MFC Common Stock would be converted into the right to
receive the Per Share Merger Consideration.
Stockholders will also consider and vote upon any other business
which may be properly brought before the Special Meeting or any adjournment or
postponement thereof. As of the date hereof, the MFC Board knows of no business
that will be presented for consideration at the Special Meeting other than the
matters described in this Proxy Statement.
Record Date; Shares Entitled to Vote
The presence, in person or by proxy, of the holders of at least
one-third of all the shares of MFC Common Stock entitled to vote at the Special
Meeting is required for a quorum. The close of business on September 26, 1997
has been fixed as the record date (the "Record Date") for the determination of
persons entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were 1,411,475 shares of MFC Common Stock issued and
outstanding and entitled to vote and 371 holders of record.
Vote Required
Adoption of the Merger Agreement will require the affirmative vote
of the holders of at least a majority of the issued and outstanding shares of
MFC Common Stock. Abstentions, broker non-votes and votes withheld will be
treated as shares that are present for purposes of determining
i
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a quorum at the Special Meeting, and abstentions and broker non-votes will have
the effect of a vote against the Merger Agreement. Stockholders are entitled to
one vote at the Special Meeting for each share of MFC Common Stock held of
record at the close of business on the Record Date. As of the Record Date, the
directors and officers of MFC, together with their affiliates, beneficially
owned 362,789 shares, or 24.2% of the outstanding shares of MFC Common Stock;
and HMN, Home Federal and Acquisition Co. together with their officers,
directors and affiliates own 60,000 shares, or 4.3%, of the outstanding shares
of MFC Common Stock. See "THE MERGER -- Interests of Certain Persons in the
Merger."
If at least a majority of the votes eligible to be cast do not vote
in favor of the Merger Agreement, MFC will continue as a separate entity and a
going concern and the Merger Agreement will be terminated. A failure to vote
will have the same effect as a vote against approval of the Merger Agreement.
Revocability of Proxies
Stockholders who execute proxies retain the right to revoke them.
Proxies may be revoked by written notice to the Secretary of MFC, by the filing
of a later dated proxy prior to a vote being taken at the Special Meeting, or by
attending the Special Meeting and voting in person. Attendance, in and of
itself, will not constitute revocation of a proxy.
The Merger
The Merger Agreement, a copy of which is attached hereto as Appendix
A and hereby incorporated by reference in this Proxy Statement, provides for the
Merger pursuant to which Acquisition Co. would be merged with and into MFC. For
a more detailed description of the Merger, see "THE MERGER."
At the Effective Time (as hereinafter defined) of the Merger, each
of the outstanding shares of MFC Common Stock outstanding immediately prior to
the Effective Time, except Excluded Shares, will be converted into the right to
receive the Per Share Merger Consideration, without interest. By virtue of the
Merger, all validly issued and outstanding stock options under the Stock Option
Plan, whether vested or unvested, will be converted into the right to receive
the Per Share Merger Consideration less the exercise price for the shares and
all such options will thereupon be cancelled. As of September 26, 1997, there
were 1,351,475 shares of MFC Common Stock issued and outstanding, excluding
60,000 shares of MFC Common Stock held by HMN which, at the Effective Time, will
be cancelled and retired with no consideration paid, but including 18,974 shares
of MFC Common Stock issued under the RRP, as well as, outstanding stock options
to acquire 122,730 shares of MFC Common Stock under the Stock Option Plan for an
aggregate consideration on that date of approximately $24.8 million. Upon
completion of the Merger, the existing stockholders of MFC will no longer own
any stock or have any interest in MFC, nor will they receive, as a result of the
Merger, any stock of HMN, Home Federal or Acquisition Co.
ii
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Parties to the Merger
Marshalltown Financial Corporation. MFC, a Delaware corporation, was
organized in 1993 for the purpose of becoming the holding company for
Marshalltown upon Marshalltown's conversion from a federally chartered mutual
savings bank to a federally chartered stock savings bank (the "Conversion"). The
Conversion was completed on March 30, 1994. At June 30, 1997, MFC had total
consolidated assets of $127.5 million, total consolidated deposits of $106.4
million and consolidated stockholders' equity of $20.1 million. MFC has not
engaged in any significant activity other than holding the stock of
Marshalltown.
As a community-oriented financial institution, Marshalltown offers
traditional financial services to meet the needs of consumers in the communities
it services. The Bank attracts retail deposits from the general public and uses
these deposits, together with other funds, to originate primarily one- to
four-family residential mortgage loans and, to a lesser extent, commercial and
multi-family real estate, construction and consumer loans. The Bank also
purchases significant amounts of mortgage-backed securities and participation
loans and invests in U.S. Government and agency obligations and other
permissible investments.
The executive offices of MFC and the Bank are located at 303 West
Main Street, Marshalltown, Iowa, and the telephone number at that address is
(515) 754-6000.
HMN Financial, Inc. HMN is a Delaware corporation and registered
savings and loan holding company. At June 30, 1997, HMN had total consolidated
assets of $566.9 million, total consolidated deposits of $365.4 million, and
consolidated stockholders' equity of $81.8 million.
HMN is the holding company for Home Federal.
The executive offices of HMN and Home Federal are located at 101
North Broadway, Spring Valley, Minnesota 55975, and its telephone number is
(507) 346-7345. See "INFORMATION REGARDING HMN FINANCIAL, INC."
MFC Board's Approval and Recommendation of the Merger
At the MFC Board's special meeting held on June 30, 1997, after
considering the terms and conditions of the Merger Agreement and obtaining the
advice of its financial advisor, the MFC Board unanimously adopted the Merger
Agreement and approved the Merger. The MFC Board believes that the Merger is in
the best interests of the stockholders of MFC and, accordingly, recommends that
stockholders of MFC vote "FOR" adoption of the Merger Agreement. For a
discussion of the circumstances surrounding the Merger and the factors
considered by the MFC Board in making its recommendation, see "THE MERGER --
Background of the Merger" and "-- Reasons for the Merger and Recommendation of
the Board of Directors."
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Appraisal Rights
Under Delaware law, holders of MFC Common Stock who object in
writing to the Merger prior to the Special Meeting, or at the Special Meeting
but prior to the vote on the Merger Agreement and do not vote in favor of the
Merger Agreement are entitled to appraisal rights provided that they comply with
certain statutory procedures. See "THE MERGER -- Appraisal Rights" and Section
262 of the Delaware General Corporation Law ("DGCL"), attached as Appendix B,
for more information respecting the appraisal rights of stockholders.
Opinion of Financial Advisor
The MFC Board retained EVEREN Securities, Inc. ("EVEREN"), a
financial advisory firm headquartered in Chicago, Illinois, to assist in the
negotiation of the Merger and to act as financial advisor in connection
therewith. EVEREN rendered to the MFC Board its opinion to the effect that the
consideration to be received by the stockholders of MFC pursuant to the Merger
Agreement is fair from a financial point of view. A copy of EVEREN's opinion is
set forth as Appendix C and should be read by stockholders in its entirety. For
further information regarding the opinion of EVEREN, see "THE MERGER -- Opinion
of Financial Advisor."
Effective Time
The Merger will become effective at the time a certificate of merger
related to the Merger is filed as provided in the DGCL ("Effective Time").
Assuming the timely receipt of all regulatory approvals, the expiration of all
statutory waiting periods and the satisfaction or waiver of all conditions in
the Merger Agreement, it is currently anticipated that the Merger will be
consummated in the fourth quarter of 1997.
Interests of Certain Persons in the Merger
The directors and executive officers of MFC, together with their
affiliates, beneficially owned as of the Record Date a total of 362,789 shares,
or 24.2% of MFC Common Stock. The directors and executive officers have
expressed their intent to vote their shares of MFC Common Stock in favor of the
Merger Agreement. Upon the Effective Time of the Merger, the directors and
executive officers will receive the same Per Share Merger Consideration for
their shares as the other stockholders of MFC, or approximately $4.4 million in
the aggregate, excluding amounts received pursuant to the Stock Option Plan and
the RRP. Certain members of MFC's management and the MFC Board have certain
interests in the Merger that are in addition to their interests as stockholders
of MFC generally, as described below and in "THE MERGER -- Interests of Certain
Persons in the Merger."
Stock Option Plan and Recognition and Retention Plan. By virtue of
the Merger, all validly issued and outstanding stock options under the Stock
Option Plan, whether vested or unvested, will be converted into the right to
receive the Per Share Merger Consideration less the exercise price for the
shares in cancellation of such stock options. Directors and executive officers
of MFC currently hold options to purchase an aggregate of 120,003 shares. Under
this
iv
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arrangement, it is anticipated that such individuals would receive in the
aggregate, net of the option exercise price of $8.00 per share, a total of
approximately $1,141,000 in cash for the options that they currently hold under
the Stock Option Plan.
In addition, by virtue of the Merger, all RRP awards, whether vested
or unvested, will become fully vested and nonforfeitable and will be treated the
same as other shares of MFC Common Stock. Directors and executive officers
currently hold an aggregate of 18,974 shares of MFC Common Stock issued pursuant
to the RRP. Pursuant to the Merger Agreement, such individuals would receive a
total of approximately $332,000 in cash for their shares of MFC Common Stock
issued pursuant to the RRP.
Employment Agreements. Pursuant to the Merger Agreement, Home
Federal has agreed to assume the terms and conditions of the employment
agreements between the Bank and Executive Officers Richard Rathke, William
Gross, Judy Roberts, Wanda Evans, John Harmer and Kathy Baker. At the Effective
Time, it is expected that Home Federal will terminate Mr. Rathke in accordance
with the terms and conditions set forth in his employment agreement with the
Bank dated June 30, 1995 and Mr. Rathke will receive a lump sum cash payment of
approximately $339,000. It is a condition to HMN's obligation to consummate the
Merger that officers Gross, Roberts, Evans, Harmer and Baker consent that the
Merger Agreement, the Merger and the transactions contemplated thereby do not
constitute a material diminution of or interference with such employee's duties,
responsibilities and benefits under such agreements. Based on their current
salaries, if these individuals are terminated within twelve months of the
Effective Time under circumstances entitling them to severance pay as described
above, they would be entitled to receive lump sum cash payments of approximately
$298,000, $107,000, $122,000, $117,000 and $98,000, respectively.
Directors' and Officers' Indemnification. After the Effective Time,
HMN will assume and honor the indemnification obligations of MFC and its
subsidiaries set forth in their respective certificate of incorporation, charter
or bylaws, as in effect on the date of the Merger Agreement with respect to any
person described in such indemnification provision. Further HMN will, for a
period of three years, maintain the current directors' and officers' liability
policies maintained by MFC and its subsidiaries with respect to claims arising
from facts or events which occurred at or before the Effective Time.
Certain Federal Income Tax Consequences
As a result of the Merger, a stockholder of MFC will generally
recognize a gain or loss for federal income tax purposes measured by the
difference between the cash received pursuant to the Merger Agreement and such
stockholder's adjusted tax basis in the shares of MFC Common Stock exchanged
therefor. EACH STOCKHOLDER SHOULD CONSULT WITH HIS OR HER TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
See "THE MERGER -- Certain Federal Income Tax Consequences."
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Method of Payment/Surrender of Stock Certificates
Assuming the Merger is approved by MFC stockholders and regulatory
authorities, promptly after consummation of the Merger, Registrar and Transfer
Company, will mail instructions to each MFC stockholder concerning the proper
method of surrendering certificates formerly representing MFC Common Stock in
exchange for the Per Share Merger Consideration. DO NOT SEND STOCK CERTIFICATES
AT THIS TIME. See "THE MERGER --Surrender of Stock Certificates."
Conditions to Consummation of the Merger; Regulatory Approval
The respective obligations of the parties to consummate the Merger
are subject to, among other things: (i) adoption of the Merger Agreement by MFC
stockholders holding not less than a majority of the issued and outstanding
shares of MFC Common Stock; (ii) receipt of all applicable regulatory approvals
without any condition which, in the reasonable opinion of HMN, is unduly
burdensome to HMN; (iii) the absence of any order prohibiting consummation of
the Merger; and (iv) the satisfaction or waiver of certain additional
conditions. For more information on conditions precedent to consummation of the
Merger and the regulatory approvals required, see "THE MERGER -- Regulatory
Approvals" and "-- Conditions to Consummation."
Termination; Break-up Fee
The Merger Agreement may be terminated at any time by mutual
agreement of the parties. The Merger Agreement may also be terminated by either
party if, among other things, (i) a condition precedent to that party's
obligation to close cannot be met by the Closing Date, as defined in "THE MERGER
- -- Effective Time"; (ii) the Effective Time has not occurred prior to June 30,
1998; (iii) the stockholders of MFC fail to adopt the Merger Agreement; (iv) any
required governmental consent or approval is not obtained; (v) the MFC Board
fails to make a favorable recommendation with regard to the Merger Agreement to
the MFC stockholders or fails to submit the Merger Agreement to stockholder
vote; or (vi) MFC enters into a definitive agreement for a business combination
with an entity other than HMN or its subsidiaries. See "THE MERGER -- Conditions
to Consummation" and "-- Termination; Break up Fee" for more information
respecting termination of the Merger Agreement. Under certain conditions, if
there has been no material breach of the Merger Agreement by HMN and the MFC
Board fails to make a favorable recommendation of the Merger Agreement to MFC
stockholders at the Special Meeting, including failing to submit the Merger
Agreement to a vote of the stockholders, or MFC enters into, or proposes to
enter into, certain business combinations with a party other than HMN or its
subsidiaries, MFC may be required to pay HMN a fee of $750,000. See "THE MERGER
- --Termination; Break up Fee."
Expenses
MFC and HMN will each pay for their costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby.
However, if MFC's costs and expenses, including environmental clean up and
remediation costs associated with the ground
vi
<PAGE>
water of the Bank's Marshalltown facility, if any, exceed $400,000, the Per
Share Merger Consideration will be reduced by the amount by which MFC's costs
and expenses exceed $400,000, divided by 1,534,205. On September 9, 1997, the
Bank received a letter from the State of Iowa Department of Natural Resources in
which the Bank was informed that, based upon a Tier I Report Review, the site
had been assigned a "No Action Required" classification. As of September 30,
1997, MFC had incurred $63,282.32 in costs and expenses (including environmental
liabilities), in addition to which a completion fee payable to EVEREN, estimated
to be $288,000, will be included in determining the costs and expenses
attributable to the Merger Agreement and the transactions contemplated thereby.
If the Per Share Merger Consideration falls below $17.25, MFC's
stockholders will be resolicited for adoption of the Merger Agreement based upon
the then available Per Share Merger Consideration.
Accounting Treatment
The Merger will be treated as a purchase for accounting purposes.
Accordingly, under generally accepted accounting principles ("GAAP"), the assets
and liabilities of MFC will be recorded on the books of HMN at their respective
fair values at the Effective Time of consummation of the Merger.
Market Prices and Dividends
MFC Common Stock is traded on the Nasdaq Stock Market National
Market (the "Nasdaq National Market") under the symbol "MFCX." The closing sales
price per share for MFC Common Stock as reported on the Nasdaq National Market
on June 30, 1997, the last full trading day prior to the announcement of the
execution of the Merger Agreement, was $15.50 and on September 25, 1997, the
last day practicable prior to mailing of the Proxy Statement, was $17.0625. MFC
has not paid any dividends since its incorporation. On September 26, 1997, there
were approximately 371 stockholders of record.
vii
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At June 30, At September 30,
------------ --------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................. $127,528 $124,183 $123,681 $124,060 $119,537 $123,000
Loans receivable, net.................... 63,407 60,284 50,386 44,189 42,536 40,573
Cash and cash equivalents................ 5,896 2,286 4,397 2,549 5,545 5,264
Mortgage-backed securities............... 42,680 47,513 55,213 62,015 55,498 57,649
Investment securities.................... 13,400 11,799 11,273 13,152 14,173 17,601
Deposits . . . . . . . .................. 106,406 103,040 103,121 104,597 111,265 115,774
Stockholders' equity..................... 20,074 19,338 19,193 18,465 7,210 6,061
Book value per share..................... 14.22 13.70 13.60 13.08 --- ---
<CAPTION>
Nine Months Ended Year Ended September 30,
------------------------
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income........................ $ 6,614 $ 8,756 $ 8,497 $8,547 $9,285 $10,333
Total interest expense....................... 4,095 5,579 5,160 4,805 5,527 7,237
-------- -------- ------- ------ ------ -------
Net interest income........................ 2,519 3,177 3,337 3,742 3,758 3,096
Provision for loan losses.................... 8 10 6 7 10 10
Net interest income after
provision for loan losses................. 2,511 3,167 3,331 3,735 3,748 3,086
-------- -------- ------- ------ ------ -------
Non-interest income:
Loan fees and service charges.............. 42 63 69 88 78 87
Other noninterest income................... 130 73 93 31 19 52
-------- -------- ------- ------ ------ -------
Total noninterest income..................... 172 136 162 119 97 139
-------- -------- ------- ------ ------ -------
Total noninterest expense.................... 1,771 3,171 2,482 2,300 2,065 1,995
-------- -------- ------- ------ ------ -------
Income before income taxes................... 912 132 1,011 1,554 1,780 1,230
Income tax expense (credit).................. 245 57 379 569 631 383
-------- -------- ------- ------ ------ -------
Net income ................................ $ 667 $ 75 $ 632 $ 985 $1,149 $ 847
======== ======== ======= ====== ====== ========
Net income per share . . . ................ $ .45 $ .05 $ .43 $ .37(1) $ --- $ ---
======== ======== ======= ====== ====== ========
(1) Subsequent to Conversion.
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
At or For the
Nine Months
Ended
June 30, At or For the Year Ended September 30,
----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets)...................... .64% .06%(1) .51% .81% .95% .69%
Interest rate spread information:
Average during period....................... 1.95 1.80 2.05 2.66 3.00 2.39
End of period............................... 1.91 1.78 1.68 2.44 2.89 2.80
Net interest margin(2)......................... 2.73 2.58 2.77 3.09 3.17 2.57
Ratio of operating expense to average total
assets........................................ 1.72 2.56(1) 2.00 1.89 1.69 1.63
Return on equity (ratio of net income to
average equity)............................... 4.08 0.39(1) 3.36 7.67 17.31 1502
Quality Ratios at End of Year:
Non-performing assets(3) to total assets....... N/A(4) N/A(4) .02 .02 N/A(4) .03
Allowance for loan losses to total loans....... .19 .19 .20 .23 .22 .21
Allowance for loan losses to non-performing
assets(3)..................................... N/A(4) N/A(4) 427.08 410.00 N/A(4) 257.58
Allowance for loan losses to non-performing
loans......................................... N/A(4) N/A(4) 5,125.00 1,464.00 N/A(4) 447.37
Capital Ratios:
Stockholders' equity to total assets, at end of
year.......................................... 15.74 15.57 15.52 14.88 6.03 4.93
Average stockholders' equity to average
assets........................................ 15.76 15.55 15.20 10.54 5.47 4.61
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 117.71% 117.42% 116.97% 110.99% 103.52% 102.93%
Number of full-service offices.................. 3 3 3 3 3 3
(1) Excluding the one-time Savings Association Insurance Fund ("SAIF")
assessment, return on assets, ratio of operating expense to average total
assets and return on equity would have been .42%, 2.01% and 2.68%,
respectively.
(2) Net interest income divided by average interest-earning assets.
(3) Non-performing assets consist of nonaccruing loans, accruing loans past-due
90 or more days and real estate owned.
(4) Not applicable since the Bank had no non-performing loans or assets at this
date.
</TABLE>
ix
<PAGE>
THE SPECIAL MEETING
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the MFC Board to be used at the Special Meeting to be
held on November 7, 1997 at 1:00 p.m., Marshalltown, Iowa time, and at any
adjournment or postponement thereof. The accompanying Notice of Special Meeting
of Stockholders and this Proxy Statement are first being mailed to stockholders
on or about October 8, 1997.
Time and Date; Record Date. The Special Meeting will be held
at the Regency Inn located at the intersection of Iowa Avenue and Highway 14,
Marshalltown, Iowa on Friday, November 7, 1997, at 1:00 p.m., Marshalltown, Iowa
time. This Proxy Statement is being sent to holders of record of MFC Common
Stock as of the Record Date, and is accompanied by a form of proxy which the MFC
Board requests that stockholders execute and return to MFC for use at the
Special Meeting and at any and all adjournments or postponements thereof.
The MFC Board has fixed the Record Date as of the close of
business on September 26, 1997 as the time for determining holders of MFC Common
Stock who are entitled to notice of and to vote at the Special Meeting. Only
holders of record of MFC Common Stock on the Record Date will be entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there were
outstanding and entitled to vote at the Special Meeting 1,411,475 shares of MFC
Common Stock.
Matters to be Considered. At the Special Meeting, stockholders
will be asked to consider and vote on a proposal to adopt the Merger Agreement
pursuant to which Acquisition Co., a wholly owned subsidiary of Home Federal, a
wholly owned subsidiary of HMN, would be merged with and into MFC. Pursuant to
the Merger Agreement, upon consummation of the Merger, each share of MFC Common
Stock outstanding immediately prior to the Effective Time (including shares
issued pursuant to the RRP whether vested or unvested) except Excluded Shares,
will be canceled and converted into the right to receive the Per Share Merger
Consideration, without any interest thereon. By virtue of the Merger, all
validly issued and outstanding stock options under the Stock Option Plan,
whether vested or unvested, will be converted into the right to receive the Per
Share Merger Consideration less the exercise price for the shares and all such
options will thereupon be cancelled. The MFC Board believes that the Merger is
in the best interest of MFC and its stockholders and unanimously recommends that
stockholders vote "FOR" adoption of the Merger Agreement.
Stockholders will also consider and vote upon any other
business which may be properly brought before the Special Meeting, including
proposals to adjourn the Special Meeting to permit further solicitation of
proxies by the MFC Board in the event that there are not sufficient votes to
adopt the Merger Agreement at the time of the Special Meeting; provided,
however, that no proxy which is voted against the Merger Agreement will be voted
in favor of adjournment to solicit further proxies for such proposal. As of the
date hereof, the MFC Board knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement.
1
<PAGE>
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Stockholders of record as of the date of the close of business
on September 26, 1997 are entitled to one vote for each share then held. As of
the Record Date, 1,411,475 shares of MFC Common Stock were issued and
outstanding. At that date, such shares were held of record by approximately 371
stockholders. The presence, in person or by proxy, of at least one-third of all
the outstanding shares of MFC Common Stock entitled to vote at the meeting is
necessary to constitute a quorum at the Special Meeting.
The affirmative vote of the holders of at least a majority of
the issued and outstanding shares of MFC Common Stock is required in order to
adopt the Merger Agreement. Therefore, a failure to return a properly executed
proxy card or to vote in person at the Special Meeting will have the same effect
as a vote against adoption of the Merger Agreement.
Shares subject to abstentions, broker "non-votes" (i.e.,
proxies from brokers or other nominees indicating that such persons have not
received instructions from the beneficial owners or other persons as to certain
proposals on which such beneficial owners or persons are entitled to vote their
shares but with respect to which the brokers or nominees have no discretionary
power to vote without such instructions) and votes withheld will be treated as
shares that are present at the Special Meeting for purposes of determining the
presence of a quorum. Such shares will have the effect of votes against the
adoption of the Merger Agreement.
As of the Record Date, the directors and executive officers of
MFC and their affiliates beneficially owned a total of 362,789 shares of MFC
Common Stock, or 24.2% of the outstanding shares.
As of the Record Date, HMN, Home Federal, Acquisition Co., the
directors and executive officers of HMN, Home Federal and Acquisition Co. and
their affiliates beneficially owned a total of 60,000 shares, or 4.3%, of the
outstanding shares of MFC Common Stock.
Shares of MFC Common Stock represented by properly executed
proxies will be voted in accordance with the instructions indicated on the
proxies or, if no instructions are indicated, will be voted by the MFC Board
"FOR" the adoption of the proposal disclosed herein to be voted upon at the
Special Meeting. Stockholders who execute proxies retain the right to revoke
them at any time. Proxies may be revoked by written notice to the Secretary of
MFC, by the filing of a later dated proxy prior to a vote being taken at the
Special Meeting, or by attending the Special Meeting and voting in person. A
proxy will not be voted if a stockholder attends the Special Meeting and votes
in person; however, attendance in and of itself will not constitute revocation
of a proxy.
2
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Persons and groups owning in excess of five percent of MFC's
Common Stock are required to file certain reports with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Based upon such reports, the following table
sets forth, as of September 26, 1997, certain information as to those persons
and groups who were beneficial owners of more than 5% of the outstanding shares
of MFC's Common Stock. Management knows of no persons or groups at September 26,
1997 other than those named in the following table who owned more than 5% of the
outstanding shares of MFC's Common Stock. The following table also sets forth,
as of the same date, certain information as to the shares of MFC's Common Stock
beneficially owned by all directors and officers of MFC as a group. As of the
Record Date, 1,411,475 shares of MFC Common Stock were issued and outstanding.
<TABLE>
<CAPTION>
Amount of Shares Percent of
Beneficially Owned Common Stock
Name and Address of Beneficial Owner at September 26, 1997 Outstanding
------------------------------------ --------------------- -----------
<S> <C> <C>
Marshalltown Savings Bank, FSB Profit Sharing Plan 108,534(1) 7.7
303 West Main Street
Marshalltown, Iowa 50158
Richard A. Rathke, President and Chief Executive Officer 106,839(2) 7.4
303 West Main Street
Marshalltown, Iowa 50158
Directors and Executive Officers as a Group (12 persons) 362,789(3) 24.2
- -------------
(1) The amount reported represents shares purchased by the Marshalltown Savings
Bank, FSB Profit Sharing Plan (the "Profit Sharing Plan") for the exclusive
benefit of participating employees. The Board of Directors has appointed
Norwest Bank Iowa, N.A. as trustee for the Profit Sharing Plan.
(2) Includes 59,790 shares held by Norwest Bank Iowa, N.A., as trustee for Mr.
Rathke, through Marshalltown's Profit Sharing Plan, 6,546 restricted shares
awarded to Mr. Rathke pursuant to the RRP, and 30,684 shares subject to
options exercisable within 60 days of September 26, 1997 pursuant to the
Stock Option Plan.
(3) Amount includes shares held directly, as well as shares held jointly with
family members, shares held in retirement accounts, shares allocated to the
accounts of the group members pursuant to the Profit Sharing Plan and
shares held in a fiduciary capacity or by certain family members, with
respect to which shares the group members may be deemed to have sole voting
and/or investment power. Amount reported above also includes 18,974 shares
of restricted stock awarded under the RRP as well as 90,009 shares subject
to options exercisable within 60 days of September 26, 1997 pursuant to the
Stock Option Plan.
</TABLE>
3
<PAGE>
THE MERGER
The following information concerning the terms of the Merger
Agreement and the Merger is qualified in its entirety by reference to the Merger
Agreement, which is attached hereto as Appendix A. All MFC Stockholders are
urged to read the Merger Agreement in its entirety.
General
Under the terms of the Merger Agreement, Acquisition Co. will
be merged with and into MFC. Upon completion of the Merger, stockholders of MFC
will no longer own any stock in MFC and will not, as a result of the Merger, own
any shares of HMN, Home Federal or Acquisition Co. common stock. Following the
Merger, it is anticipated that Marshalltown will be merged into Home Federal.
At the Effective Time, each of the shares of MFC Common Stock
outstanding as of the Effective Time (including shares issued pursuant to the
RRP), except Excluded Shares, will be converted into the right to receive the
Per Share Merger Consideration, without any interest thereon. By virtue of the
Merger, all validly issued and outstanding stock options under the Stock Option
Plan, whether vested or unvested, will be converted into the right to receive
the Per Share Merger Consideration less the exercise price for the shares and
all such options will thereupon be cancelled. As of the Record Date, there were
1,351,475 shares of MFC Common Stock issued and outstanding (including 18,974
shares of MFC Common Stock issued under the RRP but excluding 60,000 shares of
MFC Common Stock held by HMN which, at the Effective Time, will be cancelled and
retired with no consideration paid) and outstanding stock options to acquire
122,730 shares of MFC Common Stock for an aggregate consideration on that date
of approximately $24.8 million. Immediately after the Effective Time, Registrar
and Transfer Company, as the paying agent, will mail to holders of MFC Common
Stock a letter of transmittal and instructions for surrendering certificates
evidencing MFC Common Stock. Upon delivery to the paying agent of a properly
executed letter of transmittal and such certificates, a stockholder will receive
a check for the Per Share Merger Consideration for the shares of MFC Common
Stock represented by the certificates and the certificates so surrendered will
be canceled. No interest will be paid or accrued on the cash amount that MFC
stockholders are entitled to receive in the Merger. DO NOT SEND STOCK
CERTIFICATES AT THIS TIME.
Under Delaware law, holders of MFC Common Stock who object in
writing to the Merger prior to the Special Meeting, or at the Special Meeting
but prior to the vote on the Merger Agreement and who do not vote in favor of
the Merger Agreement are entitled to appraisal rights provided that they comply
with certain statutory procedures. See "THE MERGER -- Appraisal Rights" and
Section 262 of the DGCL, attached as Appendix B, for more information respecting
the appraisal rights of stockholders.
4
<PAGE>
Background of the Merger
In February 1995, the MFC Board met to discuss, among other
things, short- and long-term strategic planning for the Company. The MFC Board
had invited several financial advisory firms to present their thoughts about the
future of the banking and thrift industries and some of the factors the MFC
Board should consider in the strategic planning process. In April 1995, at a
special meeting of the MFC Board, various long-range strategic options were
considered and reviewed in an effort to enhance earnings and improve
performance. Such options included the attraction of additional savings,
expansion of MFC's mortgage lending market share, and improvements in
efficiency. It was noted that various efforts that had been directed toward
these goals had little effect. Acquisition opportunities were also discussed, as
was the potential sale of the institution. A special committee, consisting of
Chairman of the Board Ryden and Directors Norris, Grossman, Thompson, Davis and
Bestmann, comprising all of the outside members of the MFC Board was
subsequently formed to investigate and examine the strategic planning options
and alternatives available to MFC. The role of the Special Committee was limited
to meeting with financial advisory firms and reporting to the full MFC Board the
details of the discussions held. At the February 28, 1995 MFC Board meeting
there was a lengthy presentation by EVEREN which was than known as Kemper
Securities, Inc., regarding factors that should be taken into account in
considering the possible sale of MFC. For a discussion of the various factors
presented, see "THE MERGER -- Reasons for the Merger and Recommendation of the
Board of Directors" and (e) and (f) thereunder. In addition, EVEREN provided the
MFC Board with an overview of the procedure involved in a typical sale.
Thereafter, at a subsequent meeting, the MFC Board, based on
its analysis of the thrift industry, the loss of deposits at Marshalltown, MFC's
decrease in earnings, the prospect of a differential between insurance premiums
charged to banks and savings institutions, concern over the extent to which
Marshalltown could remain competitive, and in light of recommendations received
from various financial advisory firms, voted to pursue a possible sale of the
Company, and, subject to the completion of a satisfactory engagement letter, to
retain EVEREN. From time to time, Director Bestmann has provided services in
regards to bank conversion transactions to EVEREN in exchange for compensation,
therefore, Director Bestmann abstained from voting with respect to the
engagement decision.
In May 1995, the MFC Board revisited the issue and once again
voted to pursue a possible sale, noting additionally that while savings outflows
had stemmed, little new money had been attracted. It was further noted that
Norwest Bank had become, within the last half year, a new competitor, and that
Marshalltown had failed to capture any additional share of the mortgage lending
market, despite efforts to do so. In June 1995, EVEREN was engaged to assist MFC
in the possible sale of the Company. On November 3, 1995 MFC entered into an
agreement with BancSecurity Corporation ("BancSecurity") and a wholly-owned
subsidiary of BancSecurity pursuant to which MFC would become a wholly-owned
subsidiary of BancSecurity and MFC's stockholders would receive $16.75 in cash
for each share of MFC Common Stock. Ultimately, the acquisition was disapproved
by the Board of Governors of the Federal Reserve on competition grounds.
5
<PAGE>
Subsequently, the MFC Board met to discuss the disapproval and
to develop a course of action. The MFC Board determined that the conditions
leading to the decision to sell the Company in 1995 were still present and the
MFC Board decided to renew the process to sell the Company. A new process was
commenced and in January and February of 1997 a new confidential descriptive
memorandum describing MFC and Marshalltown was prepared and invitations to
submit acquisition proposals on MFC and confidentiality agreements were sent to
14 banks and savings institutions that had been identified by EVEREN as having a
continuing interest in acquiring MFC. The invitation solicited non-binding
proposals or expressions of interest, and four such proposals were received by
March, 1997. The consideration offered consisted of three cash proposals and one
proposal consisting of a combination of cash and stock with value of the
proposals ranging from a low of $14.56 per share to a high of $17.00 per share.
The three highest bidders were then permitted to conduct a due diligence review
of MFC and final proposals were submitted. On March 21, 1997, EVEREN presented
the MFC Board with an evaluation of the three highest proposals. The MFC Board
considered all of the proposals including the cash and stock proposal and
determined that HMN had made the highest offer with its proposal of $17.51 per
share in cash.
Reasons for the Merger and Recommendation of the Board of Directors
The MFC Board believes that the terms of the Merger Agreement,
which was the product of arm's length negotiations between representatives of
HMN and MFC, are fair and the Merger is in the best interests of MFC and its
stockholders. In the course of reaching its determination, the MFC Board
consulted with legal counsel with respect to its legal duties, the terms of the
Merger Agreement and the issues related thereto; with its financial advisor with
respect to the financial aspects and fairness of the transaction; and with
senior management regarding, among other things, operational matters.
In reaching its determination to adopt the Merger Agreement
and the Merger, the MFC Board considered all factors it deemed material,
consisting of the following:
(a) The MFC Board considered the current operating
environment, the continued consolidation and increasing competition in the
banking and financial services industries, the prospect for further changes in
these industries and the importance of being able to capitalize on developing
opportunities in these industries. This information had been periodically
reviewed by the MFC Board at its regular board meetings in the months prior to
the final consideration of the Merger Agreement and was also discussed between
the MFC Board and MFC's advisors.
(b) The MFC Board analyzed information with respect to the
consolidated financial condition, results of operations, cash flow, businesses
and prospects of MFC. In this regard, the MFC Board analyzed the options of
selling MFC or continuing on a stand-alone basis. The range of values on a sale
of control basis were determined to generally exceed the present value of MFC
shares on a stand-alone basis under business strategies which could be
reasonably implemented by MFC.
6
<PAGE>
(c) The MFC Board considered the written opinion of EVEREN
that, as of July 1, 1997, the Consideration to be received by holders of MFC
Common Stock pursuant to the Merger Agreement was fair to MFC stockholders from
a financial point of view. See "-- Opinion of Financial Advisor."
(d) The MFC Board considered the other terms of the Merger
Agreement and the taxable nature of the consideration to be paid to MFC's
stockholders.
(e) The MFC Board considered the detailed financial analyses
and other information with respect to the financial condition, results of
operations, cash flow and business prospects of MFC on a consolidated basis as
well as the MFC Board's own knowledge of MFC, HMN and their respective
businesses. The MFC Board gave consideration to the MFC Common Stock price
performance and compared the price/book and price/earnings ratios of the MFC
Common Stock to the ratios of similar institutions and concluded that the
potential for significant further stock appreciation for MFC on a stand alone
basis was limited. The MFC Board observed at the time it voted to pursue the
possibility of a sale, MFC's stock had a price to earnings multiple of 25x and a
price-book value ratio of 109%. This compared to a price-earnings multiple of
19.7x and 36.2x for thrift institutions nationally and for thrift institutions
with less than $250 million in assets, respectively. Also, this compared to a
price-book value ratio of 96.1% and 102.1% for thrift institutions nationally
and for thrift institutions with less than $250 million in assets, respectively.
In this regard, the latest financial and other information regarding
Marshalltown were analyzed, including a comparison of Marshalltown's current,
and management's assessment of anticipated future, operating results to
publicly-available financial and other information for other similar savings
institutions. EVEREN presented a chart showing historical price to earnings
multiples for thrift and bank acquisitions nationally for the years of 1992
through 1996. For the periods analyzed, thrift acquisitions prices ranged from a
low of 12.9x earnings for 1992 to a high of 18.8x earnings for 1995. This
compared to a price to earning multiple for the HMN offer of 52.8x MFC's
earnings. EVEREN then presented a chart showing historical average price to book
value ratios for thrift and bank acquisitions nationally for the years of 1992
through 1996. For the periods analyzed, thrift acquisitions prices ranged from a
low of 129% of book value in 1992 to a high of 155% of book value in 1994. This
compared to the HMN offer of 134% of MFC's book value. EVEREN went on to
demonstrate that if MFC's "extra" capital (capital in excess of 7% of total
assets) was deducted from MFC's capital and HMN's total offer price, HMN's offer
would be 176% of MFC's "adjusted" book value. Finally, EVEREN presented a table
consisting of 30 completed and announced thrift acquisitions which had occurred
in the past two years in Iowa, Indiana, Illinois, Kansas, Michigan, Minnesota,
Missouri, Nebraska and Wisconsin. The median transaction specifics for the
transactions analyzed were a price to book value of 138%, price to earnings
ratio of 18.2x and price to adjusted book value of 161% compared to transaction
specifics for HMN's offer to MFC of a price to book value of 134%, price to
earnings ratio of 52.8x and price to adjusted book value of 176%. As a result of
the discussions between MFC and its financial advisor, the MFC Board concluded
that a sale offered the best opportunity available to MFC and its stockholders
because the range of values on a sale of control basis were determined to
generally exceed the present value of MFC on a stand-alone basis under the
business strategies which could be reasonably implemented by MFC. The MFC Board
further concluded
7
<PAGE>
that the sale to HMN resulted in the highest value to stockholders of all the
proposals received. See "--Background of the Merger."
(f) The MFC Board considered the likelihood of the Merger
being approved by the appropriate regulatory authorities, and the factors upon
whether such approval is granted such as market share analyses, the acquiror's
Community Reinvestment Act rating at that time and the estimated pro forma
financial impact of the Merger on HMN. See "-- Regulatory Approvals."
(g) The MFC Board considered the likelihood of the conditions
to the closing of the Merger being satisfied;
(h) The MFC Board considered the ability of HMN to pay the
aggregate consideration.
The foregoing discussion of the information and factors
considered by the MFC Board is not intended to be exhaustive. In reaching its
determination to approve and recommend the Merger Agreement, the MFC Board did
not assign any relative or specific weights to the foregoing factors, and
individual directors may have weighed factors differently. After deliberating
with respect to the Merger and the other transactions contemplated by the Merger
Agreement, considering the matters discussed above and the fairness opinion of
EVEREN referred to above, the MFC Board unanimously approved and adopted the
Merger Agreement and the transactions contemplated thereby as being in the best
interests of MFC and its stockholders.
FOR THE REASONS SET FORTH ABOVE, THE MFC BOARD HAS UNANIMOUSLY
ADOPTED THE MERGER AGREEMENT AND THE MERGER AS ADVISABLE AND IN THE BEST
INTERESTS OF MFC AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF
MFC VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
Opinion of Financial Advisor
EVEREN has delivered its written opinion to the MFC Board
that, as of the date of this Proxy Statement, the consideration to be received
by the stockholders of MFC pursuant to the Merger is fair, from a financial
point of view. See "THE MERGER - General." EVEREN's written opinion essentially
confirms its oral opinion provided to the MFC Board on June 30, 1997, prior to
the execution of the Merger Agreement, and its written opinion dated as of the
date of the Merger Agreement.
The full text of the opinion of EVEREN dated as of the date of
this Proxy Statement, which sets forth the assumptions made, matters considered,
and limits on the review undertaken, is attached as Appendix C to this Proxy
Statement. MFC's shareholders are urged to read EVEREN's opinion in its
entirety. EVEREN's opinion is directed only to the consideration to be paid by
HMN in the Merger and does not constitute a recommendation to any MFC
stockholder as to how such stockholder should vote at the Special Meeting. The
summary of EVEREN's opinion is qualified in its entirety by reference to the
full text of such opinion.
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In connection with its opinion, EVEREN, among other things:
(i) reviewed drafts of this Proxy Statement (ii) reviewed the Agreement; (iii)
reviewed MFC's financial statements and certain internal management reports and
certain publicly available financial and other data with respect to MFC,
including financial statements for recent years and interim periods to date and
certain other relevant financial and operating data; (iv) discussed MFC's
history, operations, service areas, asset/liability structure and quality,
financial condition and performance, and prospects, among other factors, with
members of MFC's management and the MFC Board; (v) reviewed the reported price
and trading activity of MFC Shares (vi) reviewed the financial terms of certain
recent business combinations in the thrift industry specifically; (vii)
discussed the Merger and the Merger Agreement with MFC's counsel; and (viii)
performed such other studies and analyses as it considered appropriate. EVEREN
also took into account general economic, market, and financial conditions as
well as its experience in other transactions, its knowledge of the thrift and
commercial banking industry, and its experience in securities valuation.
EVEREN relied without independent verification upon the
accuracy and completeness of the foregoing financial and other information
reviewed by it for purposes of its opinion. EVEREN also assumed that there has
been no material change in MFC's or HMN's assets, financial condition, results
of operations, business, or prospects since the date of the last financial
statements made available to it for MFC and HMN, respectively. In addition,
EVEREN did not make an independent evaluation, appraisal, or physical inspection
of the assets or individual properties of MFC or HMN, nor was EVEREN furnished
with such appraisals. Further, EVEREN's opinion is based on economic, monetary,
and market conditions existing as of the date of this Proxy Statement. No
limitations were imposed by MFC upon EVEREN on the scope of its investigation
nor were any specific instructions given to EVEREN in connection with its
fairness opinion.
EVEREN was retained by MFC on the basis of the firm's
reputation, experience, and familiarity with the thrift and commercial banking
industries and with merger and acquisition transactions. As part of its
investment banking services, EVEREN is regularly engaged in the valuation of
businesses and their securities in connection with merger and acquisition
transactions, public offerings, private placements, recapitalization, and other
purposes.
Pursuant to its agreement with EVEREN in 1995, MFC has thus
far paid EVEREN a retainer of $25,000 for its services and will pay an
additional completion fee equal to 1% of the aggregate consideration plus
additional compensation to the extent that the Per Share Merger Consideration
exceeds certain benchmarks. Based upon the Per Share Merger Consideration of
$17.51, the completion fee to be paid to EVEREN at closing is estimated to be
$288,000. Additionally, MFC will pay EVEREN for its reasonable out-of-pocket
expenses, upon request. In 1996, MFC paid EVEREN $3,906.00 for EVEREN's
expenses.
For the purposes of its opinion, EVEREN believes it is
independent of MFC and HMN. Other than its services to MFC in connection with
its initial public stock offering on March 31, 1994, with the proposed merger
and related fairness opinion of the prior transaction which was not consummated,
and in connection with the Merger and related fairness opinion, EVEREN has
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provided no other professional services to either MFC or HMN. Except for the
$25,000 retainer paid in 1995 and the $3,906.00 reimbursement of expenses in
1996, MFC has paid no fees to EVEREN in connection with EVEREN's involvement
with the Merger and the related fairness opinion.
The following is a summary of the material matters considered
and financial analyses utilized by EVEREN in connection with providing its
written opinion dated July 1, 1997 to the MFC Board but does not purport to be a
complete description of the analyses performed by EVEREN. EVEREN reviewed the
following matters and financial analyses with the MFC Board on June 30, 1997.
Sale Process. EVEREN reviewed its activities as MFC's
financial advisor to solicit, evaluate, and negotiate acquisition proposals.
Financial Overview. EVEREN reviewed and discussed basic
historical financial position and performance information on MFC for fiscal
years ended September 1992 through 1996 and the six months ended March 31, 1997.
EVEREN noted that MFC's total assets at March 31, 1997 were $127.1 million which
was not significantly greater than total assets at the end of prior periods.
EVEREN also noted that MFC's net income had decreased to $75,000 for the fiscal
year ended September 30, 1996 from $847,000 for the fiscal year ended September
30, 1992. However, fiscal year 1996 included a one-time SAIF assessment of
$681,920 and approximately $158,000 of non-recurring expenses associated with
the proposed sale of MFC. Excluding the non-recurring expenses in 1996, net
income for the year would have been approximately $587,000. Net income totaled
$463,000 for the six months ended March 31, 1997. Additionally, EVEREN noted
that MFC's annualized return on average assets and return on average equity
increased to 0.73% and 4.72%, respectively, for the six months ended March 31,
1997 from 0.06% and 0.39% for the fiscal year ended September 30, 1996. EVEREN
identified that MFC's annualized operating expenses, which totaled 1.84% of
average assets for the six months ended March 31, 1997, was slightly lower than
the 1.88% operating expense ratio for the fiscal year ended September 30, 1996.
EVEREN also noted that MFC appeared to have excellent asset quality, with no
non-performing assets as of March 31, 1997, and that MFC had a level of capital
well in excess of regulatory requirements.
Status of the Securities Markets. EVEREN examined selected
indicators of equity markets since June 1995. Specifically, monthly observations
of the NASDAQ Banking Stocks Index ("Banks") and the Standard & Poors Savings &
Loan Index ("Savings & Loans") were compared to each other and to the Standard &
Poors 500 Index (the "S&P 500") and the NASDAQ Composite Index ("NASDAQ
Composite"). This analysis indicated that over the period, the stocks of the
Savings and Loans had increased in price to a greater extent than did those of
Banks, the S&P 500 and the NASDAQ Composite. In addition, the month ending stock
price and monthly trading volume of MFC was analyzed. This analysis indicated
that over the period since March 1994, MFC's stock price had increased from its
initial offering price of $8.00 in March 1994 to approximately $16.50 in April
1996, then decreased to approximately $14.50 in January 1997, and then increased
to $15.25 in May 1997.
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Thrift Acquisition Price Trends. EVEREN reviewed the pricing
relationships associated with thrift and bank merger and acquisition
transactions for the five calendar years ended December 31, 1996, as well as on
a quarterly basis from the first quarter of 1995 to the first quarter of 1997.
The analysis indicated that the median price-earnings multiples of thrift and
bank acquisitions nationally had increased to 17.8x and 16.6x, respectively, for
the calendar year end of 1996. These increases were higher than the values of
all prior periods since 1992, with the exception of 18.8x in 1995 for thrift
acquisitions. The first quarter of 1997 indicated a median price-earnings
multiple of 25.3x. Prior to this quarter, the median price-earnings multiple of
thrift acquisitions ranged from a high of 27.1x for the fourth quarter of 1996
to a low of 15.0x for the first quarter of 1995. Another analysis indicated that
the average price-book value ratio of thrift acquisitions nationally had
increased to a high of 185% for the quarter ended March 31, 1997 from 165% for
the quarter ended December 31, 1996. On an annual basis, the price-book ratio
for thrifts was at 119% in 1992, increased to 155% in 1994, and decreased to
149% in 1996.
Analysis of Comparable Transactions. EVEREN reviewed the
financial terms of certain thrift merger and acquisition transactions which
involved the purchase of thrifts and thrift holding companies located in the
states of Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, and
Nebraska that were either pending or completed for the past two years and had
asset sizes less than $500 million.
EVEREN calculated, reviewed, and compared selected financial
data and ratios for approximately 30 thrifts and thrift holding companies
involved in pending and completed merger and acquisition transactions (the
"Comparative Group"). With respect to the median of Comparative Group merger and
acquisition transactions based on most recently available information or the
completion date, the analysis indicates that: (i) the price-earnings multiple
for MFC in the Merger was 31.0x (excluding a one-time SAIF assessment of
$681,920), corresponding to 18.5x for the Comparative Group transactions; and
(ii) the price-book value ratio for MFC in the Merger was 130.5%, corresponding
to 135.8% for the Comparative Group transactions.
In addition, EVEREN calculated the ratio of "adjusted offer
value" to "normalized tangible book value" for each Comparative Group merger and
acquisition transaction (the "adjusted price-book value"). EVEREN assumed
"normalized tangible book value" to be the acquired company's actual tangible
equity less an assumed dividend that would result in tangible equity of 7.0% of
tangible assets, "adjusted offer value" to be the actual offer value minus the
difference between the acquired company's actual tangible equity and "normalized
tangible book equity." With respect to the median of the Comparative Group
transactions, the analysis indicated that: the adjusted price-book value ratio
for MFC in the Merger was 169.6% corresponding to 158.1% for the Comparative
Group transactions.
EVEREN discussed with the MFC Board that the analysis showed
that the price-book ratio was lower, but on the "adjusted" basis was higher,
than median price-book value for the Comparative Group. EVEREN discussed with
the MFC Board that the combination of the analysis, the price-earning multiple,
price-book value and adjusted price-book value provided support for EVEREN's
recommendation as to the fairness of the transaction.
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General. The foregoing is a summary of the material matters
considered and financial analyses performed by EVEREN but does not purport to be
a complete description of the analyses performed by EVEREN. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Selecting portions of the analyses or
of the summary set forth above, without considering the analysis as a whole,
could create an incomplete view of the processes underlying EVEREN's opinion. In
arriving at its fairness determination, EVEREN considered the results of all of
such analyses. No specific Comparative Group institution is identical to MFC,
and no selected Comparative Group merger and acquisition transaction is
identical to the Merger. Accordingly, EVEREN indicated to MFC's Board that the
analyses of the results described above are not mathematical, but rather involve
complex considerations and judgments concerning differences in operating and
financial characteristics. The above analyses do not purport to be appraisals
nor do they necessarily reflect the prices at which MFC or its securities
actually may be sold.
Effective Time
The Effective Time of the Merger shall be upon the filing, on
the day of "Closing" (described hereinbelow) (the "Closing Date") or as soon
thereafter as is practicable, of a certificate of merger as provided in the
DGCL. The Closing of the Merger shall take place on the (i) fifth day after the
latest to occur of (A) receipt of all necessary regulatory approvals and the
expiration of any waiting periods imposed by law and (B) the date on which the
MFC stockholders adopt the Merger Agreement or (ii) such date as HMN, Home
Federal, Acquisition Co. and MFC shall agree to. It is currently anticipated
that the Merger will be consummated in the fourth quarter of 1997. Either MFC or
HMN may terminate the Merger Agreement if the Merger is not consummated by June
30, 1998 or for certain other reasons discussed herein and specified in the
Merger Agreement.
Interests of Certain Persons in the Merger
Directors and executive officers of MFC together with their
affiliates, beneficially owned a total of 362,789 shares of MFC Common Stock
(representing 24.2% of all outstanding shares of MFC Common Stock) on the Record
Date. Of this amount, 18,974 shares were awarded, subject to restrictions,
pursuant to the RRP and 90,009 shares represent currently exercisable options
granted pursuant to the Stock Option Plan. The exercise price of all shares
subject to options is $8.00 per share.
Directors and executive officers will receive the same Per
Share Merger Consideration for their shares of MFC Common Stock, including any
shares which they may acquire prior to the Effective Time pursuant to the
exercise of options, as the other stockholders of MFC. Based on the total number
of shares of MFC Common Stock owned, including shares represented by exercisable
options, options not currently exercisable and shares subject to restrictions
pursuant to the RRP, directors and executive officers will receive approximately
$5.9 million in the aggregate in connection with the Merger. Certain members of
MFC's management and the MFC Board have certain interests in the Merger that are
in addition to their interest as stockholders of
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MFC generally. The MFC Board was aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
1994 Stock Option and Incentive Plan. Under the Stock Option
Plan, options to purchase 120,003 shares of MFC Common Stock have been issued to
the current directors and executive officers of MFC and were outstanding as of
July 1, 1997, and no additional options have been issued to them since such
date. By virtue of the Merger, each holder of an option outstanding, whether
vested or unvested, will, without any action on the part of the holder thereof,
be granted the right to receive from HMN the Per Share Merger Consideration
reduced by the option exercise price (subject to any payroll tax withholding
obligations imposed by Section 83 of the Internal Revenue Code of 1986, as
amended), for each option held at the Effective Time, and all such options will
thereupon be cancelled. Under this arrangement, it is anticipated that MFC's
directors and executive officers would receive a total of approximately
$1,141,000 in cash for the options that they currently hold under the Stock
Option Plan.
1994 Recognition and Retention Plan. Pursuant to the RRP,
grants of 18,974 shares of restricted stock have been awarded to directors and
executive officers of MFC. By virtue of the Merger, all RRP awards, whether
vested or unvested, will become fully vested and nonforfeitable and will be
treated the same as all other shares of MFC Common Stock, without any action on
the part of the holder thereof, be converted solely into the right to receive
from HMN the Per Share Merger Consideration for each RRP share held at the
Effective Time, and all RRP awards will thereupon be cancelled. Pursuant to this
arrangement, it is anticipated that MFC's directors and executive officers would
receive a total of approximately $332,000 in cash for their shares of MFC Common
Stock issued pursuant to the RRP.
Employment Agreements. Richard A. Rathke, who currently serves
as President and Chief Executive Officer of MFC and Marshalltown, William C.
Gross, Executive Vice President, Judy L. Roberts, Vice President and Treasurer,
Wanda L. Evans, Vice President and Corporate Secretary, John C. Harmer, Vice
President, and Kathy L. Baker, Vice President, have employment agreements with
Marshalltown, which, pursuant to the Merger Agreement, Home Federal has agreed
to assume; however, it is expected that immediately after the Effective Time,
Mr. Rathke will be terminated in accordance with the terms and conditions set
forth in his employment agreement with Marshalltown. Based on his current
salary, President Rathke will receive a lump sum cash payment of approximately
$339,000 in connection with the termination, assuming the Effective Date is
November 30, 1997.
The employment agreements provide for annual base salary in an
amount not less than the employee's current salary and provide for termination
upon the employee's death, disability, for cause, or in certain events specified
by OTS regulations. The employment agreements are also terminable by the
employee upon 90 days notice to the Bank. These employment agreements provide
for an initial term of up to three years. The employment agreements terminate on
the third anniversary of the effective date of such agreements (or sooner for
those employment agreements with initial terms of less than three years), unless
the Bank gives prior notice to the contrary. The employment agreements for
Messrs. Rathke and Gross provide for salary payments during the remainder of the
term of the agreement and for a lump sum payment to the employee
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of up to 299%, and for the other officers 100%, of their then-current annual
compensation in the event there is a change in control of the Bank and
employment terminates involuntarily in connection with such change in control or
within twelve months thereafter. These termination payments are subject to
reduction if, in the event of a change in control, any payments to the employee
would be non-deductible by the Bank under Section 280G of the Code. For the
purposes of the employment agreements, a change in control is defined to mean an
acquisition of control of the Bank or MFC (other than by a trustee or other
fiduciary holding securities under an employee benefit plan of MFC or its
subsidiary) as defined in OTS regulations which could require the filing of an
application for acquisition of control or notice of change in control. The
Merger will constitute a change in control. The agreements guarantee
participation in an equitable manner in employee benefits applicable to
executive personnel.
It is a condition to HMN's obligation to consummate the Merger
that officers Gross, Roberts, Evans, Harmer and Baker consent that the Merger
Agreement, the Merger and the transactions contemplated thereby do not
constitute a material diminution of or interference with such employee's duties,
responsibilities and benefits under such agreements. Based on their current
salaries, if these individuals are terminated within twelve months of the
Effective Time under circumstances entitling them to severance pay as described
above, they would be entitled to receive lump sum cash payments of approximately
$298,000, $107,000, $122,000, $117,000 and $98,000, respectively.
Directors' and Officers' Indemnification. HMN has agreed that
from and after the Effective Time it will assume and honor the indemnification
obligations of MFC and its subsidiaries set forth in their respective
certificate of incorporation, charter or bylaws, as in effect on July 1, 1997
with respect to any person described in such provision (the "indemnitees"). HMN
has also agreed that for a period of three years from and after the Effective
Time it will maintain and cause to remain in effect the current directors' and
officers' liability insurance policies maintained by MFC and its subsidiaries
with respect to claims arising from facts or events which occurred at or before
the Effective Time. In the event HMN or any of its successors or assigns (i)
reorganizes or consolidates with or merges into or enters into another business
combination transaction with any other person or entity and is not the
resulting, continuing or surviving corporation or entity of such consolidation,
merger or transaction, or (ii) liquidates, dissolves or transfers all or
substantially all of its properties and assets to any person or entity, then,
and in each such case, proper provision shall be made so that the successors and
assigns of HMN assume these indemnification obligations. HMN's indemnification
obligation shall be construed as an agreement, as to which the indemnitees are
intended to be third-party beneficiaries, between HMN and such indemnities as
unaffiliated third parties and is not subject to any limitations to which HMN
may be subject in indemnifying its own directors or officers or other persons.
Employee Benefit Plans
At the Effective Time HMN will assume all employee benefit
plans, programs, policies, contracts, agreements and arrangements maintained by
MFC or either of its subsidiaries (the "MFC Employee Plans") and shall succeed
to all rights as the employer or sponsor under the MFC Employee Plans to amend,
modify or terminate the same in accordance with their terms and
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applicable law. To the extent after the Effective Time employees of MFC and its
subsidiaries participate in any employee benefit plans, programs, policies,
contracts, agreements and arrangements of HMN, such employees will receive prior
service credit for participation, vesting and benefit accrual purposes, except
no benefit accrual credit will be given for prior service with MFC or its
subsidiaries relating to any HMN defined benefit retirement plan.
The existing Marshalltown profit sharing plan will be
continued, at the option of HMN, through either December 31, 1997 or December
31, 1998 at which time it will be terminated with all participant accounts
becoming fully vested. Prior to termination eligible employees will be entitled
to employer contributions at 15% of eligible compensation for the year ended
December 31, 1997 and an amount equivalent to the percentage allocation under
the HMN Employee Stock Ownership Plan for the year ended December 31, 1998. Upon
termination of the Marshalltown profit sharing plan, full-time employees of MFC
and its subsidiaries employed as of the Effective Time will be eligible to
participate (subject to eligibility and vesting provisions thereof) in the Home
Federal Savings Bank 401(k) Plan and the HMN Employee Stock Ownership Plan. For
purposes of such participation, employees of MFC and its subsidiaries will
receive prior service credit for their service with MFC or its subsidiaries for
eligibility, participation and vesting purposes only.
Employees of MFC and its subsidiaries will participate in
their existing employee welfare programs at existing contribution rates through
the Effective Time. At the Effective Time, such programs will be terminated and
replaced with HMN plans.
Certain Federal Income Tax Consequences
The receipt of cash for MFC Common Stock pursuant to the
Merger will be a taxable transaction for federal income tax purposes to
stockholders receiving such cash (and may be a taxable transaction for state,
local and foreign tax purposes as well). A holder of MFC Common stock will
recognize a gain or loss measured by the difference between such stockholder's
tax basis for the MFC Common Stock owned by him or her at the time of the Merger
and the amount of cash received therefor. Such gain or loss will be a capital
gain or loss if the stock is a capital asset in the hands of the stockholder.
The cash payments due the holders of MFC Common Stock upon the
exchange of such MFC Common Stock pursuant to the Merger (other than certain
exempt persons or entities) will be subject to "backup withholding" for federal
income tax purposes unless certain requirements are met. Under federal law, the
third-party paying agent must withhold 31% of the cash payments to holders of
MFC Common Stock to whom backup withholding applies, and the federal income tax
liability of such persons will be reduced by the amount so withheld. To avoid
backup withholding, a holder of MFC Common Stock must provide the third-party
paying agent with his or her taxpayer identification number and complete a form
in which he or she certifies that he or she has not been notified by the
Internal Revenue Service ("IRS") that he or she is subject to backup withholding
as a result of a failure to report interest and dividends. The taxpayer
identification number of an individual is his or her Social Security number.
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No ruling has been or will be requested from the IRS as to any
of the tax effects to MFC's stockholders of the transactions discussed in this
Proxy Statement, and no opinion of counsel has been or will be rendered to MFC's
stockholders with respect to any of the tax effects of the Merger to
stockholders.
THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. THEREFORE, EACH STOCKHOLDER IS
URGED TO CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THOSE RELATING TO STATE,
LOCAL AND/OR OTHER TAXES.
Surrender of Stock Certificates
Promptly after the Effective Time of the Merger, Registrar and
Transfer Company, located in Cranford, New Jersey, as paying agent, will mail
written transmittal material concerning the surrender of stock certificates to
each record holder of shares of MFC Common Stock outstanding at the Effective
Time. The transmittal material will contain instructions with respect to the
proper method for surrender of certificates formerly representing shares of MFC
Common Stock in exchange for the Consideration. DO NOT SEND STOCK CERTIFICATES
AT THIS TIME.
Upon delivery to the paying agent of certificates formerly
representing shares of MFC Common Stock for cancellation, together with properly
completed transmittal material, a MFC stockholder will receive a check in
payment of the Per Share Merger Consideration for the shares of MFC Common Stock
represented by such certificates. MFC stockholders will not be entitled to
receive interest on any cash to be received in the Merger.
Regulatory Approvals
The Merger is subject to regulatory approval. It is
anticipated that applications to obtain regulatory approval of the Merger will
be filed during the third quarter of 1997. Final approval of the Merger is
expected during the fourth quarter of 1997.
The Merger Agreement provides that either party may terminate
the Merger Agreement if the Merger has not been consummated by June 30, 1998.
See "-- Conditions to Consummation" and "--Termination; Break up Fee." Since
there is the possibility that regulatory approval may not be obtained for a
substantial period of time after approval of the Merger Agreement by MFC's
stockholders, there can be no assurance that the Merger will be consummated by
June 30, 1998. In addition, should regulatory authorities impose any material
changes to the Merger Agreement, a resolicitation of stockholders may be
required if regulatory approval is obtained after stockholder approval of the
Merger Agreement.
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Representations and Warranties
In the Merger Agreement, MFC on the one hand, and HMN, Home
Federal and Acquisition Co. on the other hand, have made certain representations
and warranties to each other. MFC has represented and warranted, with respect to
itself and its subsidiaries, among other things, as to its organization and
compliance with the law, capitalization, authority to enter into the Merger
Agreement and to consummate the Merger, no notices or approvals are required or
conflicts exist with entering into the Merger Agreement or consummating the
Merger, accuracy of its financial statements and public reports, continuation of
its business in the ordinary course and the absence of certain changes and
events up to the date of the Merger Agreement, certain fees paid in connection
with the Merger Agreement and the Merger, litigation, employee benefit plans,
taxes, intellectual property, absence of secured debt, receipt of opinion of
financial advisor, deposit insurance, properties, insurance, affiliate
transactions, environmental matters, financial institutions bonds, loans,
absence of questionable payments, guarantees, interest rate risk management
instruments, mortgage servicing agreements, regulatory matters and the accuracy
of the information provided by MFC.
HMN, Home Federal and Acquisition Co. have represented and
warranted to MFC, among other things, as to their organization and compliance
with the law, authority to enter into the Merger Agreement and to consummate the
Merger, no notices or approvals are required or conflicts exist with entering
into the Merger Agreement or consummating the Merger, HMN has the financial
ability to consummate the Merger, receipt of opinion of financial advisor,
certain fees paid in connection with the Merger Agreement and the Merger and
litigation.
For detailed information on such representations and
warranties, see the Merger Agreement attached hereto as Appendix A.
Conditions to Consummation
Conditions to the Obligations of the Parties. Notwithstanding
any other provision of the Merger Agreement, the obligations of HMN, Home
Federal and Acquisition Co. on the one hand and MFC on the other hand, to
consummate the Merger are subject to the following conditions precedent: (i)
approval and adoption of the Merger Agreement and the Merger by the stockholders
of MFC; (ii) approval of the Merger and other transactions contemplated thereby
by the OTS and any other regulatory authorities without any condition which, in
the reasonable opinion of HMN, would be unduly burdensome to HMN, and all
conditions required by such authorities have been satisfied and all waiting
periods related to such approvals shall have expired; (iii) no order shall have
been entered and remain in effect which would prevent or make illegal the
consummation of the Merger; and (iv) there shall have been obtained such other
permits, consents and approvals of bank, thrift, insurance or securities
commissions or agencies that may reasonably be deemed necessary for the
consummation of the Merger and the transactions contemplated thereby without any
condition which in the reasonable opinion of HMN would be unduly burdensome to
HMN.
Additional Conditions to the Obligations of HMN, Home Federal
and Acquisition Co. The obligations of HMN, Home Federal and Acquisition Co. to
effect the Merger and to consummate
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the other transactions contemplated by the Merger Agreement are, at the option
of HMN, Home Federal and Acquisition Co., also subject to the fulfillment of the
following conditions precedent: (i) the representations and warranties of MFC
contained in the Merger Agreement shall be accurate in all material respects as
of the date of the Merger Agreement, and there shall be no inaccuracy in any
such representations and warranties as of the Closing Date except to the extent
that any such inaccuracy individually or in the aggregate does not constitute a
material adverse change in the financial condition, results of operations or
business of MFC and its subsidiaries, taken as a whole; all of the terms,
covenants and conditions of the Merger Agreement to be complied with and
performed by MFC at or before the Closing shall have been duly complied with and
performed in all material respects; and a certificate to such effect dated as of
the Closing Date and signed by the Chief Executive Officer and Chief Financial
Officer of MFC shall have been delivered to HMN; (ii) after execution of the
Merger Agreement, no material adverse change in the financial condition, results
of operations or businesses of MFC and its subsidiaries, taken as a whole, shall
have occurred, and a certificate to such effect dated as of the Closing Date and
signed by the Chief Executive Officer or Chief Financial Officer of MFC shall
have been delivered to HMN; (iii) Dissenting Shares shall constitute no more
than 7 1/2% of the shares of MFC Common Stock issued and outstanding immediately
prior to the Effective Time; (iv) HMN shall have received the written opinion of
counsel to MFC, dated as of the Closing Date, substantially to the effect set
forth as in an exhibit to the Merger Agreement; (v) HMN shall have received the
consent in writing of William C. Gross, Judy L. Roberts, Wanda L. Evans, John C.
Harmer and Kathy L. Baker as parties to employment agreements to the effect that
the transactions contemplated by the Merger Agreement, including the Merger, and
the transactions contemplated thereby, do not constitute a material diminution
of or interference with such employee's duties, responsibilities and benefits
under such agreements; and (vi) HMN shall have completed its examination of the
assets and liabilities of MFC, including, but not limited to, a review of the
results of the most recent regulatory examination report of MFC and all previous
regulatory examination reports and related correspondence and administrative
actions, and all the documentation relating to assets or liabilities of MFC (all
of which will be updated by MFC at its expense), and the results of such
examinations shall have disclosed no material adverse change in the financial
condition, results of operations or business of MFC.
Additional Conditions to Obligations of MFC. The obligations
of MFC to effect the Merger and to consummate the other transactions
contemplated hereby are, at the option of MFC, also subject to the fulfillment
at or prior to the Closing of the following conditions: (i) the representations
and warranties of HMN, Home Federal and Acquisition Co. contained in the Merger
Agreement shall be accurate in all material respects as of the date of the
Merger Agreement, and there shall be no inaccuracy in any such representations
and warranties as of the Closing Date except to the extent that any such
inaccuracy individually or in the aggregate does not constitute a material
adverse change in the financial condition, results of operations or business of
HMN and its subsidiaries, taken as a whole; all of the terms, covenants and
conditions of the Merger Agreement to be complied with and performed by HMN,
Home Federal and Acquisition Co. at or before the Closing shall have been duly
complied with and performed in all material respects; and a certificate to the
foregoing effect dated as of the Closing Date and signed by the Chief Executive
Officer and Chief Financial Officer of HMN shall have been delivered to MFC;
(ii) on the date of the Proxy Statement, the MFC Board shall have received from
EVEREN
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<PAGE>
Securities, Inc. a written update, dated as of such date, confirming its opinion
that the consideration paid by HMN pursuant to the Merger is fair to the
stockholders of MFC from a financial point of view; and (iii) MFC shall have
received written opinion of Faegre & Benson LLP, counsel to HMN, dated as of the
Closing Date, substantially to the effect as set forth in an exhibit to the
Merger Agreement.
Termination; Break-up Fee
Termination. The Merger Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time, either before or after
approval by the MFC stockholders, as follows: (i) by the mutual written consent
of the HMN Board and the MFC Board; (ii) by the HMN Board or the MFC Board, if
the Merger shall not have been consummated on or before June 30, 1998 (unless
such circumstance is the result of a breach of the terms thereof in any material
respect by the party asserting the termination right); (iii) by the MFC Board,
if a condition to MFC's obligations to close, as set forth above, cannot be met
on the Closing Date and is not waived; (iv) by the HMN Board, if a condition to
HMN's obligations to close, as set forth above, cannot be met on the Closing
Date and is not waived; (v) by the HMN Board or the MFC Board, if a final
unappealable order to restrain, enjoin or otherwise prevent, or awarding
substantial damages in connection with, the consummation of the Merger or the
other transactions contemplated by the Merger Agreement shall have been entered
by a court of competent jurisdiction, the OTS or other regulatory authority;
(vi) by the HMN Board or the MFC Board, if the Merger and the Merger Agreement
shall have been submitted to a vote of the stockholders of MFC and shall not
have been approved by the requisite vote; (vii) by the HMN Board or the MFC
Board, if the MFC Board does not make to the stockholders of MFC a favorable
recommendation with respect to the Merger or such recommendation is modified or
withdrawn in a way detrimental to HMN (HMN and MFC agree that a determination by
the MFC Board not to call the meeting of stockholders contemplated by the Merger
Agreement or the cancellation or adjournment of such meeting without a vote on
the Merger and the Merger Agreement being taken (except under circumstances
where MFC is otherwise attempting to secure a vote of its stockholders in favor
of approval and adoption of the Merger and the Merger Agreement) shall be deemed
to be such a failure to make or withdrawal of such recommendation); and (viii)
by the HMN Board or the MFC Board, if MFC shall have entered into a definitive
agreement for an Acquisition Transaction as defined in the Merger Agreement.
Break-up Fee. If (i) there has been no material breach by HMN
of the representations, warranties, covenants and agreements of HMN under the
Merger Agreement (an "HMN Material Breach"), (ii) the Merger Agreement is
terminated because the Merger Agreement and the Merger are not approved by the
stockholders of MFC, (iii) prior to such termination an Acquisition Proposal (as
hereinafter defined) is outstanding, and (iv) an Acquisition Proposal, as it may
be modified, or a substitute, alternative or other Acquisition Proposal, is
consummated within 18 months after the Merger Agreement is terminated due to
such lack of stockholder approval, then MFC will at the time of such
consummation or promptly thereafter, but in no event later than three business
days after receiving a written request from HMN therefor, pay to HMN a fee of
$750,000. As used herein, an "Acquisition Proposal" shall mean a
publicly-announced offer, or a publicly-announced intent to make an offer, from
a party other than HMN or its affiliates, to
19
<PAGE>
acquire MFC or the Bank in a merger, consolidation, share exchange or other
business combination or joint venture, to acquire all or substantially all of
the assets of MFC or the Bank or a substantial part of the assets of MFC and the
Bank, taken as a whole, or to acquire at least 50% of the outstanding MFC Common
Stock or at least 50% of the equity interests in the Bank, or a negotiated
transaction for any of the foregoing.
If (i) there has been no HMN Material Breach and (ii) the
Merger Agreement is terminated due to the MFC Board's failure to make a
favorable recommendation of the Merger to its stockholders or due to the MFC
Board entering into a definitive agreement for an Acquisition Transaction (as
defined in the Merger Agreement), then MFC will promptly thereafter, but in no
event later than three business days after receiving a written request by HMN
therefor, pay to HMN a fee of $750,000. In addition, the Merger Agreement may be
terminated by either MFC or HMN if the other party materially breaches any
representation, warranty, covenant, undertaking or restriction and such breach
has not been cured within thirty days after the giving of written notice.
Business Pending Consummation
Pursuant to terms of the Merger Agreement, MFC shall, and
shall cause its subsidiaries to, conduct its businesses and the business of its
subsidiaries, only in, and MFC and its subsidiaries will not take any material
action except in, the ordinary course of business and consistent with prior
practices.
The Merger Agreement contains certain restrictions upon the
conduct of MFC and its subsidiaries' business pending consummation of the
Merger. In particular, the Merger Agreement provides that, except as otherwise
provided in the Merger Agreement or with the written consent of HMN, neither
MFC, nor its subsidiaries, may directly or indirectly do any of the following:
(i) issue, sell, pledge, dispose of or encumber (A) any shares of capital stock
of MFC or its subsidiaries, except upon exercise of options outstanding under
the MFC Plan as of the date hereof, (B) any investment assets, loans or mortgage
servicing rights of MFC or its subsidiaries other than in the ordinary course of
business consistent with prior practices and not in excess of $150,000, or (C)
any other assets or properties of MFC or its subsidiaries other than in the
ordinary course of business and consistent with prior practices and not in
excess of $10,000 in the aggregate; (ii) amend or propose to amend their
respective charters or by-laws; (iii) split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect to their
respective shares of capital stock whether now or hereafter outstanding; (iv)
redeem, purchase or acquire or offer to acquire any of the shares of capital
stock of MFC or its subsidiaries; or (v) agree or commit to do any of the
foregoing.
Except as otherwise provided in the Merger Agreement or with
the written consent of HMN, each of MFC and its subsidiaries will not directly
or indirectly do any of the following: (i) grant, issue, sell, pledge or dispose
of any options, warrants or rights of any kind to acquire any shares of any
class of capital stock of MFC or either of its subsidiaries or any securities
that are convertible or exchangeable therefor; (ii) acquire (whether by merger,
consolidation,
20
<PAGE>
acquisition of stock or assets or otherwise) any corporation, partnership or
other business organization or division thereof; (iii) other than short term
borrowings in the ordinary course of the Bank's banking business, incur any
indebtedness for borrowed money or issue any debt securities; (iv) cancel any
material debts or obligations owing to it, except in connection with the
ordinary course of the Bank's lending business; (v) liquidate or merge into or
consolidate with any other corporation, partnership, or other business
organization except for unsolicitated proposals which, in the opinion of the MFC
provide higher shareholder value than the Merger and of which HMN has received a
copy of such proposal (in which case MFC will promptly submit the break up fee
to HMN); or (vi) agree or commit to do any of the foregoing.
Except as otherwise provided in the Merger Agreement or with
the written consent of HMN, each of MFC and its subsidiaries will not directly
or indirectly do any of the following, (i) enter into or increase any loan or
credit commitment (including stand-by letters of credit) to, or invest or agree
to invest in, any one person, entity or obligor or modify any of the material
provisions or renew or otherwise extend the maturity date of any existing loan
or credit commitment to any one person, entity or obligor (collectively, "Lend
to") in an amount in excess of $150,000, provided no such consent shall be
required in respect of (A) single-family residential loans or credits not
exceeding $214,600 that are saleable in recognized secondary markets pursuant to
the Bank's lending policies as in effect on the date hereof, (B) any loans
originated under an Iowa Housing Authority program and saleable to such agency,
or (C) with the prior approval of HMN, loans or participation in loans
originated by AnchorBank, S.S.B.; (ii) enter into, or increase in an amount, any
commercial or multi-family real estate loan or credit commitment (including
stand-by letters of credit) to, or invest or agree to invest in, any commercial
or multi-family real estate project or entity, or Lend to any person other than
in accordance with lending policies as in effect on the date hereof, provided
that the Bank may make any such loan in the event (A) the Bank has delivered to
HMN or its designated representative a notice of its intention to make such loan
and such information as HMN or its designated representative may reasonably
require in respect thereof, and (B) HMN or its designated representative shall
not have objected to such loan by giving written or facsimile notice of such
objection within two business days following the delivery to HMN of the notice
of intention and information as aforesaid; (iii) Lend to any person or entity,
with respect to any of the loans or other extensions of credit to which or
investments in which are on a "watch list" or similar internal report of the
Bank; (iv) enter into any agreement or engage in any transaction which
reasonably could be construed as materially affecting the asset/liability
management or interest rate risk management position of the Bank, (v) materially
change current deposit pricing practices or policies (in this regard, the Bank
shall promptly telecopy to HMN copies of all the Bank's proposed deposit
pricing), (vi) purchase, acquire or agree to offer to purchase or acquire any
investment securities with a maturity in excess of three years, except for any
securities, the purchase or acquisition of which is approved by HMN prior to any
such purchase or acquisition; or (vii) change lending, credit, investment,
liability management and other material banking policies in any respect which is
material to the Bank; provided, however, that nothing in this provision shall
prohibit the Bank from honoring any contractual obligation in existence on the
date of the Merger Agreement;
Each of MFC and its subsidiaries will not enter into, amend in
any material respect, terminate or waive any material right under any of its
material contracts or agreements. Each of
21
<PAGE>
MFC and its subsidiaries will not enter into or amend any employment,
consulting, separation or termination agreement, arrangement or understanding
nor take any action with respect to the grant of any separation or termination
pay or with respect to any increase of benefits payable under its separation or
termination pay policies or agreements or arrangements in effect as of the date
of the Merger Agreement.
Each of MFC and its subsidiaries will not (i) hire any new
executive employees, (ii) except for replacements in the ordinary course of
business consistent with prior practices, hire any other new employee, (iii)
except in the ordinary course of business consistent with prior practices,
increase the compensation of any employee, or (iv) adopt or amend (except to
comply with applicable law) any bonus, profit sharing, compensation, stock
option, pension, retirement, separation, deferred compensation or other employee
benefit plan, agreement, trust fund or arrangement for the benefit or welfare
of, any employee or former employee.
Each of MFC and its subsidiaries will not make any capital
expenditure or commitment for which it is not contractually bound at the date
hereof except necessary replacements in the ordinary course of business and
capital expenditures reflected in the current annual budget of the Bank (a copy
of which was provided by MFC to HMN and accepted by HMN prior to the execution
of the Merger Agreement).
Each of MFC and its subsidiaries will not knowingly take any
of the foregoing actions or willfully engage in any activity, enter into any
transaction or take or omit to take any other voluntary act which would make any
of MFC's representations and warranties in the Merger Agreement untrue or
incorrect in any material respect if made anew after engaging in such activity,
entering into such transaction, or taking or omitting such other act.
Subject to the provisions hereof, MFC will use all reasonable
efforts (i) to preserve intact the business organization of MFC and the Bank and
to preserve the goodwill of those having relationships with MFC or the Bank, and
(ii) to prepare with HMN, prior to communicating with MFC's employees,
depositors, borrowers and other customers, any written information regarding the
Merger and continuing operations after consummation of the Merger.
Waiver
Prior to the Effective Time, any provision of the Merger
Agreement (to the extent allowed by law) may be waived in writing by the party
benefitted by the provision.
Appraisal Rights
Pursuant to Section 262 of the DGCL, any holder of MFC Common
Stock who does not wish to accept the Per Share Merger Consideration may dissent
from the Merger and elect to have the fair value of his or her shares (exclusive
of any element of value arising from the accomplishment or expectation of the
Merger) judicially determined and paid in cash, provided that such stockholder
complies with the provisions of Section 262.
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The following is a brief summary of the statutory procedures
to be followed by a holder of MFC Common Stock in order to dissent from the
Merger and perfect appraisal rights under the DGCL. This summary is not intended
to be complete and is qualified in its entirety by reference to Section 262, the
text of which is attached as Appendix B to this Proxy Statement and incorporated
by reference herein.
If any holder of MFC Common Stock elects to exercise his or
her right to dissent from the Merger and demand appraisal, such stockholder must
satisfy each of the following conditions:
(i) such stockholder must deliver a written demand
for appraisal of his or her shares to MFC before the
stockholder vote with respect to the Merger Agreement (the
written demand for appraisal must be in addition to and
separate from any proxy or vote against the Merger Agreement;
neither voting against, abstaining from voting nor failing to
vote on the Merger Agreement will constitute a demand for
appraisal within the meaning of Section 262);
(ii) such stockholder must not vote in favor of the
Merger Agreement (a failure to vote will satisfy this
requirement, but a vote in favor of the Merger Agreement, by
proxy or in person, or the return of a signed proxy which does
not specify a vote against approval and adoption of the Merger
Agreement or a direction to abstain, will constitute a waiver
of such stockholder's right of appraisal and will nullify any
previously filed written demand for appraisal); and
(iii) such stockholder must continuously hold such
shares from the date of the making of the demand through the
Effective Time.
If any holder of MFC Common Stock fails to comply with any of
these conditions and the Merger occurs, he or she will be entitled to receive
the consideration provided in the Merger Agreement, and will have no appraisal
rights with respect to his or her shares of MFC Common Stock.
All written demands for appraisal should be addressed to
Marshalltown Financial Corporation, 303 West Main Street, Marshalltown, Iowa
50158, Attention: Wanda L. Evans, Corporate Secretary, before the taking of the
vote concerning the Merger Agreement at the Special Meeting, and should be
executed by, or on behalf of, the holder of record. Such demand must reasonably
inform MFC of the identity of the stockholder and that such stockholder is
thereby demanding appraisal of his or her shares.
To be effective, a demand for appraisal must be executed by or
for the stockholder of record who held such shares on the date of making such
demand, and who continuously holds such shares through the Effective Time, fully
and correctly, as such stockholder's name appears on his stock certificate(s)
and cannot be made by the beneficial holder if he or she does not also hold the
shares of record. The beneficial holder, in such case, must have the registered
owner submit the required demand in respect of such shares.
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<PAGE>
If MFC Common Stock is owned of record in a fiduciary
capacity, as by a trustee, guardian or custodian, execution of a demand for
appraisal should be made in such capacity. If MFC Common Stock is owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by or for all joint owners. An authorized agent,
including one of two or more joint owners, may execute the demand for appraisal
for a stockholder of record; however, the agent must identify the record owner
or owners and expressly disclose the fact that, in executing the demand, he or
she is acting as agent for the record owner. A record owner, such as a broker,
who holds MFC Common Stock as a nominee for others may exercise his or her right
of appraisal with respect to the shares held for one or more beneficial owners,
while not exercising such right for other beneficial owners. In such case, the
written demand should set forth the number of shares as to which the record
owner dissents. Where no number of shares is expressly mentioned, the demand
will be presumed to cover all shares of MFC Common Stock in the name of such
record owner.
Any such stockholder entitled to appraisal rights may, within
20 days after the date of mailing of the notice, demand in writing from MFC the
appraisal of his or her shares of MFC Common Stock. Within 120 days after the
Effective Time, but not thereafter, either MFC, or Home Federal in the event
that MFC is merged with or into Home Federal concurrent with or subsequent to
the Merger (collectively the "Survivor Corporation") or any holder of shares of
MFC Common Stock who has complied with the requirements of Section 262, may file
a petition in the Delaware Court of Chancery (the "Court of Chancery") demanding
a determination of the value of the shares of MFC Common Stock held by all
stockholders entitled to appraisal. The Survivor Corporation does not presently
intend to file such a petition. Inasmuch as the Survivor Corporation has no
obligation to file such a petition, the failure of a stockholder to do so within
the period specified could nullify such stockholder's previous written demand
for appraisal. In any event, at any time within 60 days after the Effective Time
(or at any time thereafter with the written consent of the Survivor
Corporation), any stockholder who has demanded appraisal has the right to
withdraw the demand and to accept payment of the consideration provided in the
Merger Agreement.
Within 120 days after the Effective Time, any stockholder who
has complied with the provisions of Section 262 to that point in time will be
entitled to receive from the Survivor Corporation, upon written request, a
statement setting forth the aggregate number of shares of MFC Common Stock not
voted in favor of the Merger Agreement and with respect to which demands for
appraisal have been received along with the aggregate number of holders of such
shares. The Survivor Corporation must mail such statement to the stockholder
within ten days of receipt of such request.
If a petition for appraisal is duly filed by a stockholder and
a copy thereof is delivered to the Survivor Corporation, the Survivor
Corporation will then be obligated within 20 days to provide the Court of
Chancery with a duly verified list containing the names and addresses of all
stockholders who have demanded an appraisal of their shares and with whom
agreement as to the value of such shares has not been reached. After notice to
such stockholders, the Court of Chancery is empowered to conduct a hearing upon
the petition to determine those stockholders who have complied with Section 262
and who have become entitled to appraisal rights thereunder.
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<PAGE>
The Court of Chancery may require the stockholders who demanded payment for
their shares to submit their stock certificates to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings, and if any
stockholder fails to comply with such direction, the Court of Chancery may
dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to an
appraisal, the Court of Chancery will appraise the shares of MFC Common Stock,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the Merger. When the value is so determined,
the Court will direct the payment by the Survivor Corporation of such value,
with interest thereon, simple or compound, if the Court so determines, to the
stockholders entitled to receive the same, upon surrender to the Survivor
Corporation by such stockholders of the certificates representing such MFC
Common Stock.
In determining fair value, the Court of Chancery will take
into account all relevant factors, and may consider proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court. Under Delaware law, the Court of
Chancery must consider market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which could be ascertained as
of the date of the Merger that shed any light on future prospects of the merged
corporation.
Section 262 provides that fair value is to be "exclusive of
any element of value arising from the accomplishment or expectation of the
merger." The Delaware Supreme Court has construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and are not the
product of speculation, may be considered." Stockholders who are considering
seeking an appraisal should bear in mind that the fair value of their shares of
MFC Common Stock determined under Section 262 could be more than, the same as or
less than the Consideration, and that an opinion of an investment banking firm
as to fairness is not an opinion as to fair value under Section 262.
Costs of the appraisal proceeding may be assessed against the
parties thereto (i.e., the Survivor Corporation and the stockholders
participating in the appraisal proceeding) by the Court of Chancery as the court
deems equitable in the circumstances. Upon the application of any stockholder,
the Court of Chancery may determine the amount of interest, if any, to be paid
upon the value of the stock of stockholders entitled thereto. Upon application
of a stockholder, the court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, to be charged pro rata against the value of all shares entitled to
appraisal. Any stockholder who has demanded appraisal rights will not be
entitled, after the Effective Time, to vote the stock subject to such demand for
any purpose or to receive payment of dividends or any other distribution with
respect to such shares (other than dividends or distributions, if any, payable
to holders of record as of a record date prior to the Effective Time) or to
receive the payment of the Consideration. However, if no petition for an
appraisal is filed within 120 days after the Effective Time or if such
stockholder delivers to the Survivor Corporation a written withdrawal of his
demand for an appraisal and an acceptance of the Merger, either within 60 days
25
<PAGE>
after the Effective Time or thereafter with the written approval of the Survivor
Corporation, then the right of such stockholder to an appraisal will cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
will be dismissed as to any stockholder without the approval of the court, and
such approval may be conditioned upon such terms as the court deems just.
Failure to comply strictly with these procedures may cause the
stockholder to lose his or her appraisal rights. Consequently, any stockholder
who desires to exercise his or her appraisal rights is urged to consult a legal
advisor before attempting to exercise such rights.
Expenses
All costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid by the party
incurring such costs and expenses; provided, however, that any of such costs and
expenses incurred by MFC or either of its subsidiaries and payable to third
parties (other than HMN) in excess of $400,000 shall result in an adjustment to
the amount of the Per Share Merger Consideration as follows: the amount, if any,
in excess of $400,000 shall be divided by 1,534,205, and shall be subtracted
from the amount of the Per Share Merger Consideration paid by HMN. MFC's
expenses will include unreimbursed costs and expenses associated with clean up
and remediation of the environmental contaminants detected in the soil and
ground water of the Bank's facility at 29 South Center Street, Marshalltown,
Iowa, except for testing and assessment expenses; however, the Bank received a
letter from the State of Iowa Department of Natural Resources (the "Department")
dated September 9, 1997 which stated that based upon a Tier I Report Review, the
Department has assigned the site a "No Action Required" classification. As of
September 30, 1997, MFC has incurred $63,282.32 in costs and expenses (including
environmental liabilities) in addition to which, a completion fee payable to
EVEREN, estimated to be $288,000, will be included in determining the costs and
expenses attributable to the Merger Agreement and the transactions contemplated
thereby. If the Per Share Merger Consideration falls below $17.25, MFC's
stockholders will be resolicited for adoption of the Merger Agreement based upon
the then available Per Share Merger Consideration.
Accounting Treatment
The Merger, if completed as proposed, will be treated as a
purchase in accordance with GAAP. Accordingly, the assets and liabilities of MFC
will be recorded on the books of HMN at their respective fair values at the
Effective Time of consummation of the Merger.
- --------------------------------------------------------------------------------
INFORMATION REGARDING HMN FINANCIAL, INC.
- --------------------------------------------------------------------------------
HMN Financial, Inc. was incorporated under the laws of the
State of Delaware in March 1994 for the purpose of becoming the savings and loan
holding company of Home Federal in connection with Home Federal's conversion
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, pursuant to its plan of conversion. HMN has three wholly owned
subsidiaries: Home Federal, Security Finance Corporation, and HMN Mortgage
Services, Inc. Home Federal has two wholly owned subsidiaries, Osterud Insurance
Agency, Inc. and Acquisition Co. Acquisition Co. was formed for the sole purpose
of acquiring MFC.
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At June 30, 1997, HMN had total consolidated assets of $566.9
million and consolidated stockholders equity of $81.8 million. HMN Financial,
Inc. and Home Federal are headquartered in Spring Valley, Minnesota. Home
Federal operates seven offices in southern Minnesota and a mortgage banking
office in Eden Prairie, Minnesota.
- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------
MFC will hold a 1998 Annual Meeting of Stockholders only if
the Merger is not consummated before the time of such meeting, which is
presently expected to be held in January, 1999. In order to be eligible for
inclusion in MFC's proxy materials for the 1998 annual meeting of stockholders,
any stockholder proposal to take action at such meeting must be received at
MFC's office located at 303 West Main Street, Marshalltown, Iowa 50158, no later
than October 1, 1998. Any such proposal shall be subject to the requirements of
the proxy rules adopted under the Exchange Act.
- --------------------------------------------------------------------------------
ACCOUNTANTS
- --------------------------------------------------------------------------------
A representative of MFC's independent auditors, McGladrey &
Pullen, LLP is expected to attend the Special Meeting to respond to appropriate
questions.
- --------------------------------------------------------------------------------
OTHER MATTERS
- --------------------------------------------------------------------------------
The MFC Board is not aware of any business to come before the
Special Meeting other than the matter described above in this Proxy Statement.
However, if any other matter should properly come before the Special Meeting, it
is intended that holders of the proxies will act in accordance with their best
judgment.
The cost of solicitation of proxies will be borne by MFC. MFC
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of MFC Common Stock. MFC has retained Kissel-Blake, Inc. to
assist in the solicitation of proxies and to send proxy materials to brokerage
houses and other custodians, nominees and fiduciaries for transmittal to
beneficial holders of MFC Common Stock for a fee of $3,500, plus expenses. In
addition to solicitation by mail, directors, officers and regular employees of
MFC and/or the Bank may solicit proxies personally or by telegraph or telephone
without additional compensation.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
This Proxy Statement incorporates by reference MFC's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1996 and MFC's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997 which are
attached hereto as Appendix D and Appendix E, respectively.
Marshalltown, Iowa
October 8, 1997
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REVOCABLE PROXY
MARSHALLTOWN FINANCIAL CORPORATION
[ X ] PLEASE MARK VOTES AS IN THIS EXAMPLE
SPECIAL MEETING OF STOCKHOLDERS
November 7, 1997
The undersigned hereby appoints the Board of Directors of Marshalltown
Financial Corporation (the "Corporation"), and its survivor, with full power of
substitution, to act as attorneys and proxies for the undersigned to vote all
shares of common stock of the Corporation which the undersigned is entitled to
vote at the Special Meeting of Stockholders (the "Meeting"), to be held on
November 7, 1997 at the Regency Inn located at the intersection of Iowa Avenue
and Highway 14, Marshalltown, Iowa, at 1:00 P.M., Marshalltown, Iowa time, and
at any and all adjournments thereof, as specified. If no specification is made,
the shares will be voted for adoption of the Agreement and Plan of Merger, dated
as of July 1, 1997 by and among HMN Financial, Inc., Home Federal Savings Bank,
a federal savings bank, HFSB Acquisition Co., and MFC (the "Merger Agreement"),
pursuant to which (i) Acquisition Co., a wholly owned subsidiary of Home
Federal, a wholly owned subsidiary of HMN, would merge with and into MFC (the
"Merger"), as more fully described in the Proxy Statement and the Merger
Agreement attached as Appendix A thereto.
1. Adoption of the Merger Agreement
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
ADOPTION OF THE MERGER AGREEMENT.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE PROPOSAL STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
Please be sure to sign and date this Proxy in the box below.
_________________________________________
Date
_________________________________________
Stockholder sign above
_________________________________________
Co-holder (if any) sign above
<PAGE>
Detach above card, sign, date and mail in postage paid envelope provided.
MARSHALLTOWN FINANCIAL CORPORATION
Should the above signed be present and elect to vote at the Meeting or at any
adjournment thereof, and after notification to the Secretary of the Corporation
at the Meeting of the stockholder's decision to terminate this Proxy, then the
power of such attorneys and proxies shall be deemed terminated and of no further
force and effect.
The above signed acknowledges receipt from the Corporation, prior to the
execution of this Proxy, of Notice of the Special Meeting and a Proxy Statement
dated October 8, 1997.
Please sign exactly as your name appears hereon. When signing as attorney,
administrator, trustee or guardian, please give your full title. If shares are
held jointly, each holder should sign.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
by and among
HMN FINANCIAL, INC.,
HOME FEDERAL SAVINGS BANK,
HFSB ACQUISITION CO.
and
MARSHALLTOWN FINANCIAL CORPORATION
Dated as of
July 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
I. CONVERSION OF SHARES....................................................A-2
1.1 The Merger.........................................................A-2
1.2 Effect of the Merger...............................................A-2
1.3 Consummation of the Merger.........................................A-3
1.4 Closing............................................................A-3
1.5 Corporate Matters..................................................A-3
1.6 Conversion of Securities...........................................A-3
1.7 Payment for Shares.................................................A-5
1.8 Lost, Stolen or Destroyed Certificate..............................A-6
1.9 Further Action.....................................................A-6
II. REPRESENTATIONS AND WARRANTIES.........................................A-6
2.1 Representations and Warranties of HMN..............................A-6
(a) Organization and Compliance with Law.......................A-6
(b) Authorization and Validity of Agreements...................A-7
(c) No Notices or Approvals Required and No Conflicts..........A-7
(d) Financial Ability to Perform...............................A-7
(e) Opinion of Financial Advisor...............................A-8
(f) Certain Fees...............................................A-8
(g) Litigation.................................................A-8
2.2 Representations and Warranties of Marshalltown.....................A-8
(a) Organization and Compliance with Law.......................A-8
(b) Capitalization.............................................A-9
(c) Authorization and Validity of Agreements..................A-10
(d) No Notices or Approvals Required and No Conflicts.........A-10
(e) Marshalltown Reports and Financial Statements.............A-11
(f) Conduct of Business in the Ordinary Course and Absence
of Certain Changes and Events...........................A-13
(g) Certain Fees..............................................A-13
(h) Litigation................................................A-14
(i) Employee Benefit Plans....................................A-14
(j) Taxes.....................................................A-16
(k) Intellectual Property.....................................A-17
(l) No Secured Debt...........................................A-17
(m) Opinion of Financial Advisor..............................A-17
(n) Deposit Insurance.........................................A-17
(o) Properties................................................A-17
(p) Insurance.................................................A-18
(q) Affiliate Transactions....................................A-18
(r) Environmental Matters.....................................A-18
(s) Financial Institutions Bond...............................A-19
(t) Loans.....................................................A-19
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(u) Absence Of Questionable Payments..........................A-20
(v) Powers of Attorney, Guarantees............................A-20
(w) Interest Rate Risk Management Instruments.................A-20
(x) Mortgage Servicing Agreements.............................A-21
(y) Regulatory Matters........................................A-21
(z) Accuracy of Information...................................A-21
III. COVENANTS OF MARSHALLTOWN............................................A-21
3.1 Conduct of Business by Marshalltown and Marshalltown
Subsidiaries Pending the Merger................................A-21
3.2 Proxy Statement...................................................A-23
3.3 Meeting of Stockholders of Marshalltown...........................A-24
3.4 No Solicitation of Acquisition Transactions.......................A-24
3.5 Access to Information.............................................A-25
3.6 Government Filings................................................A-26
3.7 Establishment of Accruals.........................................A-26
3.8 Filing of Tax Returns and Adjustments.............................A-26
3.9 No Further Action Letter..........................................A-27
IV. COVENANTS OF HMN......................................................A-27
4.1 Conduct of Business by HMN Pending the Merger.....................A-27
4.2 Proxy Statement...................................................A-27
4.3 Access to Information.............................................A-27
4.4 Employee Benefits.................................................A-28
4.5 Indemnification...................................................A-29
V. MUTUAL COVENANTS.......................................................A-29
5.1 Expenses..........................................................A-29
5.2 Additional Agreements.............................................A-31
5.3 Notification of Certain Matters...................................A-31
5.4 Agreement to Defend...............................................A-31
5.5 Regulatory Approvals..............................................A-31
VI. CONDITIONS............................................................A-31
6.1 Conditions to Obligations of Each Party to Effect the Merger......A-31
6.2 Additional Conditions to Obligations of HMN.......................A-32
6.3 Additional Conditions to Obligations of Marshalltown..............A-33
VII. MISCELLANEOUS........................................................A-33
7.1 Termination.......................................................A-33
7.2 Effect of Termination.............................................A-34
7.3 Waiver and Amendment..............................................A-35
7.4 Nonsurvival of Representations and Warranties.....................A-35
7.5 Public Statements.................................................A-35
7.6 Knowledge.........................................................A-35
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7.7 Assignment........................................................A-35
7.8 Notices...........................................................A-35
7.9 Governing Law.....................................................A-36
7.10 Severability.....................................................A-36
7.11 Counterparts.....................................................A-36
7.12 Headings.........................................................A-36
7.13 Entire Agreement.................................................A-36
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 1,
1997, by and among HMN Financial, Inc., a Delaware corporation ("HMN"), Home
Federal Savings Bank, a federal savings bank ("Home Federal"), HFSB Acquisition
Co., a Delaware corporation ("Sub"), and Marshalltown Financial Corporation, a
Delaware corporation ("Marshalltown").
WHEREAS, Marshalltown is the beneficial and record owner of 100% of the
issued and outstanding capital stock of Marshalltown Savings Bank FSB, a federal
savings bank (the "Bank"); and
WHEREAS, Home Federal, a wholly-owned subsidiary of HMN, is the
beneficial and record owner of 100% of the issued and outstanding capital stock
of Sub; and
WHEREAS, the Boards of Directors of HMN, Home Federal, Sub and
Marshalltown, respectively, deem it advisable and in the best interests of their
respective stockholders that Home Federal acquire Marshalltown and the Bank,
pursuant to the terms and conditions of this Agreement, and, in furtherance of
such acquisition, such Boards of Directors (and Home Federal as the sole
stockholder of Sub) have approved this Agreement and the merger of Sub with and
into Marshalltown (the "Merger") in accordance with the terms of this Agreement,
applicable federal law and the General Corporation Law of the State of Delaware
(the "Delaware Law"); and
WHEREAS, HMN, Home Federal, Sub and Marshalltown desire to adopt a plan
of reorganization, providing for the Merger pursuant to which all of the issued
and outstanding shares of Common Stock, $0.01 par value per share, of
Marshalltown ("Marshalltown Common Stock") will be converted into the right to
receive cash (the "Merger Consideration") payable to the holder thereof in such
amounts as set forth in this Agreement; and
WHEREAS, through the Merger, Home Federal will obtain control over
Marshalltown and the Bank; and immediately after the Merger, (i) Marshalltown
will be liquidated (the "Liquidation"), and then (ii) the Bank will be merged
with and into Home Federal (the "Subsequent Merger"); and
WHEREAS, following the Liquidation and the Subsequent Merger, Home
Federal shall be the surviving institution (sometimes hereinafter referred to as
the "Resulting Institution"); and
WHEREAS, HMN, Home Federal, Sub and Marshalltown desire to effect the
Merger and the other transactions contemplated hereby; and
WHEREAS, the parties hereto desire to set forth certain
representations, warranties, covenants and agreements made by each to the others
as an inducement to the consummation of the Merger and the other transactions
contemplated hereby;
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<PAGE>
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
I. CONVERSION OF SHARES
In accordance with the terms and subject to the conditions of this
Agreement, HMN, Home Federal, Sub and Marshalltown shall effect the Merger as
follows:
1.1 The Merger. At the Effective Time (as defined in Section 1.3), Sub
shall be merged with and into Marshalltown and the separate existence of Sub
shall thereupon cease, and Marshalltown shall continue as the surviving
institution (sometimes hereinafter called the "Surviving Corporation"). HMN may
structure the acquisition of Marshalltown contemplated by this Agreement in any
other form of reorganization or combination as HMN may elect; including (i) the
merger of any direct or indirect subsidiary of HMN, other than Sub, with and
into Marshalltown, (ii) the merger of Marshalltown with and into any direct
subsidiary of HMN, or (iii) the conversion of Marshalltown (the "Conversion"),
prior to the Merger, to a savings association to which Marshalltown will
contribute all of its assets and assign all of its liabilities and obligations
(including Marshalltown's obligations under this Agreement); provided that any
such election shall not result in a material delay to the consummation of the
transactions contemplated by this Agreement. In the event of the foregoing
election by HMN, the parties hereto agree to execute an appropriate amendment to
this Agreement in order to reflect such election, provided, that as a result of
such election, the consideration to be received by the stockholders of
Marshalltown pursuant to the terms of this Agreement shall not be changed or
altered.
1.2 Effect of the Merger. At the Effective Time, the Surviving
Corporation shall thereupon and thereafter possess all the rights, privileges,
powers and franchises, as well of a public as of a private nature, of Sub and
Marshalltown (collectively, the "Constituent Corporations") and be subject to
all the restrictions, disabilities and duties of each of the Constituent
Corporations; all and singular, the rights, privileges, powers and franchises of
each of the Constituent Corporations, and all property of each of the
Constituent Corporations, real, personal and mixed, and all debts due to each of
the Constituent Corporations on whatever account, as well for stock
subscriptions as all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation; all
assets, property, rights, privileges, powers and franchises and all and every
other interest of each of the Constituent Corporations shall be thereafter the
property of the Surviving Corporation as they were of the respective Constituent
Corporations; and the title to any real estate vested by deed or otherwise under
the laws of the United States, the State of Delaware, or other jurisdiction in
each of the Constituent Corporations shall be vested in the Surviving
Corporation and shall not revert or be in any way impaired by reason of the
Merger; all rights of creditors and all liens upon any property of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities, obligations and duties of each of the Constituent Corporations
shall thenceforth attach to the Surviving Corporation and may be enforced
against it to the extent as if such debts, liabilities, obligations and duties
had been incurred or contracted by it.
A-2
<PAGE>
1.3 Consummation of the Merger. As soon as is practicable on the
Closing Date (as defined in Section 1.4) after all conditions to the
consummation of the Merger set forth herein have been satisfied or duly waived,
the parties hereto shall cause the Merger to be consummated by filing with the
Secretary of State of the State of Delaware, a certificate of merger in such
form as is required by, and executed, acknowledged and certified in accordance
with, the Delaware Law (the time of such filing is herein referred to as the
"Effective Time").
1.4 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Faegre & Benson
LLP, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402,
at 10:00 a.m. local time on (i) the fifth day after the latest to occur of (A)
receipt of all necessary regulatory approvals and the expiration of any waiting
periods imposed by law and (B) the date on which the stockholders of
Marshalltown approve the Merger, or (ii) such other date and at such other time
and place as HMN, Home Federal, Sub and Marshalltown shall agree (such date, the
"Closing Date").
1.5 Corporate Matters. At the Effective Time:
(a) Charter. The Certificate of Incorporation of the Sub, as
in effect at the Effective Time, shall be the Certificate of Incorporation of
the Surviving Corporation until amended in accordance with applicable law.
(b) By-Laws. The By-Laws of Sub, as in effect immediately
prior to the Effective Time, shall be the By-Laws of the Surviving Corporation
until amended in accordance with applicable law.
(c) Board of Directors. Subject to obtaining any requisite
approval of the Office of Thrift Supervision of the Department of the Treasury
(the "OTS"), the directors of the Surviving Corporation shall consist of the
directors on the Board of Directors of Sub, subject to the right of the
shareholder of the Surviving Corporation to remove and elect such directors.
(d) Officers. The officers of the Surviving Corporation
immediately after the Effective Time shall be the officers of the Sub, and such
other officers as the Board of Directors of the Surviving Corporation may elect
on the Closing Date, until their successors are elected and qualified, and
subject to the right of the Board of Directors of the Surviving Corporation to
remove and elect officers after the Closing Date.
1.6 Conversion of Securities. In accordance with the terms and subject
to the conditions of this Agreement, at the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any of the following
securities:
(a) Marshalltown Common Stock. Each share of Marshalltown
Common Stock outstanding immediately prior to the Effective Time (except for
shares owned of record by HMN or any affiliate and except for Dissenting Shares
(as defined in Section 1.6(e)), including shares of Marshalltown Common Stock
issued pursuant to the Marshalltown 1994 Recognition and Retention Plan (the
"RRP"), which shares shall become fully vested and nonforfeitable as of the
Effective Time,
A-3
<PAGE>
shall be automatically converted into the right to receive, in cash, the Merger
Consideration payable to the holder thereof (pro rated for fractional shares, if
any) without interest thereon. Subject to the terms and conditions of this
Agreement, including Section 5.1(a), the Merger Consideration shall be $17.51
per share of Marshalltown Common Stock. The certificates representing
outstanding shares of Marshalltown Common Stock shall, after the Effective Time,
represent only the right to receive the per share Merger Consideration from Home
Federal. Each holder of Marshalltown Common Stock, upon surrender to Registrar
and Transfer Company, (the "Paying Agent"), in proper form for cancellation, of
the stock certificate or certificates representing such shares of Marshalltown
Common Stock, shall be entitled to receive a check from the Paying Agent in an
appropriate amount of Merger Consideration for such shares. Until so presented
and surrendered in exchange for the Merger Consideration, each certificate which
represented issued and outstanding shares of Marshalltown Common Stock (other
than Dissenting Shares) shall be deemed for all purposes to evidence ownership
of the Merger Consideration. After the Effective Time, there shall be no
transfer on the stock transfer books of shares of Marshalltown Common Stock. No
interest shall accrue or be payable with respect to the Merger Consideration.
(b) Marshalltown Options. Each option granted under the
Marshalltown 1994 Stock Option and Incentive Plan (the "Marshalltown Plan")
issued and outstanding immediately prior to the Effective Time shall be canceled
and be converted into the right to receive, in cash, the difference between the
Merger Consideration per share and the applicable option exercise price per
share (subject to all applicable tax withholding requirements). Upon surrender
to the Paying Agent of the applicable option agreement, each holder shall be
entitled to receive a check from the Paying Agent in an appropriate amount for
such option. Schedule 1.6(b) is a true and complete list of all such options
identifying (i) the name of the option holder, (ii) the number of options held,
and (iii) the exercise price.
(c) Marshalltown Common Stock held by HMN. Each share of
Marshalltown Common Stock issued and owned of record by HMN, Home Federal or any
affiliate of HMN or Home Federal at the Effective Time shall be canceled and
retired, and no securities shall be issuable and no cash paid with respect
thereto.
(d) Sub Common Stock. Each share of common stock of Sub issued
and outstanding at the Effective Time shall, without any action on the part of
the holder thereof, continue as one share of the common stock of the Surviving
Corporation and all of such shares of common stock of the Surviving Corporation
shall be owned by Home Federal.
(e) Dissenting Shares.
(i) Notwithstanding any provision of this Agreement
to the contrary, the holder (a "Dissenting Shareholder") of any shares of
Marshalltown Common Stock who has demanded and perfected such holder's demand
for appraisal of said shares (the "Dissenting Shares") in accordance with the
provisions of applicable law (if applicable law provides such rights) and at the
Effective Time has neither effectively withdrawn nor lost his or her right to
such appraisal, shall not have a right to receive the Merger Consideration for
such Dissenting Shares pursuant to Section 1.6(a) above and shall only be
entitled to such rights as are granted by applicable law. Home
A-4
<PAGE>
Federal or the Surviving Corporation shall make any and all payments due to
holders of Dissenting Shares.
(ii) Notwithstanding the provisions of Section
1.6(e)(i) above, if any Dissenting Shareholder demanding appraisal of such
Dissenting Shareholder's Dissenting Shares under applicable law shall
effectively withdraw or lose (through failure to perfect or otherwise) his or
her right to appraisal, then as of the Effective Time or the occurrence of such
event, whichever later occurs, such Dissenting Shares shall automatically be
converted into and represent only the right to receive the Merger Consideration
as provided in Section 1.6(a) upon surrender of the certificate or certificates
representing such Dissenting Shares.
(iii) Marshalltown shall give HMN prompt notice of
any demands by a Dissenting Shareholder for payment, or notices of intent to
demand payment received by Marshalltown, and HMN shall have the right to
participate in all negotiations and proceedings with respect to such demands.
Marshalltown shall not, except with the prior written consent of HMN, make any
payment with respect to, or settle, or offer to settle, any such demands.
1.7 Payment for Shares. At and from time to time after the Effective
Time, Home Federal shall make available or cause to be made available to the
Paying Agent amounts sufficient in the aggregate to provide all funds necessary
for the Paying Agent to make payments of the Merger Consideration hereof to
holders of shares of Marshalltown Common Stock issued and outstanding
immediately prior to the Effective Time. As soon as practicable after the
Effective Time, Home Federal shall cause to be mailed to each person (or
otherwise to be delivered to each person, at such person's expense, who requests
delivery) who was, at the Effective Time, a holder of record of issued and
outstanding shares of Marshalltown Common Stock (other than Dissenting Shares),
a letter of transmittal and instructions for use in effecting the surrender of
the certificate(s) which, immediately prior to the Effective Time, represented
such shares. Upon surrender to the Paying Agent of such certificates (or, in
accordance with Section 1.8, such documentation as is acceptable to and required
by the Paying Agent with respect to lost certificates), together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the Paying Agent shall promptly cause to be paid to the
persons entitled thereto a check in the amount to which such persons are
entitled, after giving effect to any required tax withholdings. If payment is to
be made to a person other than the registered holder of the certificate(s)
surrendered, it shall be a condition of such payment that the certificate(s) so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the certificate(s) surrendered or established to the satisfaction of
Home Federal or the Paying Agent that such tax has been paid or is not
applicable. 180 days following the Effective Time, Home Federal shall be
entitled to cause the Paying Agent to deliver to Home Federal any funds
(including any interest received with respect thereto) made available to the
Paying Agent which have not been disbursed to holders of certificates formerly
representing shares of Marshalltown Common Stock outstanding at the Effective
Time, and thereafter such holder shall be entitled to look to Home Federal only
as general creditors thereof with respect to the cash payable upon due surrender
of their certificates. Notwithstanding anything in this Section 1.7 or elsewhere
in this Agreement to the contrary, neither the Paying Agent nor any party hereto
shall be liable to a former holder of shares of Marshalltown Common Stock for
any cash
A-5
<PAGE>
delivered to a public official pursuant to applicable escheat or abandoned
property laws. The Paying Agent shall also deliver to Home Federal a certified
list of the names and addresses of all former registered holder of shares of
Marshalltown Common Stock who have not then surrendered their certificates to
receive the Merger Consideration to which they are entitled. Except as otherwise
provided therein or in the letter of transmittal, Home Federal shall pay all
charges and expenses, including those of the Paying Agent, in connection with
the payment of the Merger Consideration in exchange for shares of Marshalltown
Common Stock.
1.8 Lost, Stolen or Destroyed Certificate. In the event that any
certificate evidencing shares of Marshalltown Common Stock shall be alleged to
have been lost, stolen or destroyed, the Paying Agent shall pay the Merger
Consideration in exchange for such alleged lost, stolen or destroyed
certificate, upon the making of an affidavit of such allegation by the record
holder thereof; provided however, that Home Federal may, in its discretion and
as a condition precedent to the issuance thereof, require such holder of such
alleged lost, stolen or destroyed certificate to deliver a bond in such sum as
Home Federal may reasonably direct as indemnity against any claim that may be
made against Home Federal or the Paying Agent with respect to the certificate
alleged to have been lost, stolen or destroyed.
1.9 Further Action. Each of HMN, Home Federal, Sub and Marshalltown
shall take all such reasonable and lawful action as may be necessary or
appropriate in order to effectuate the Merger as promptly as possible. If, at
any time after the Effective Time, any further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of the Constituent Corporations, the
directors and officers of each of the Constituent Corporations are fully
authorized and empowered in the name and on behalf of their respective
corporation or otherwise to take, and shall take, all such further action.
II. REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of HMN. HMN, Home Federal and Sub
each hereby represent and warrant to Marshalltown that:
(a) Organization and Compliance with Law. Each of HMN and its
direct and indirect subsidiaries (all such direct and indirect subsidiaries,
including without limitation Home Federal and Sub, sometimes collectively
referred to as the "HMN Subsidiaries") is duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization and has all
requisite power and corporate authority and all requisite governmental and other
authorizations to own, lease and operate its assets and properties and to carry
on its business as now being conducted, except such governmental and other
authorizations (if any) where the failure to have such authorizations does not
and would not, either individually or in the aggregate, have a material adverse
effect on the financial condition, results of operations or business of HMN and
the HMN Subsidiaries, taken as a whole. HMN and Sub are incorporated in the
State of Delaware. Except as disclosed in a disclosure letter delivered by HMN
to Marshalltown prior to the date hereof (the "HMN Disclosure Letter"), each of
HMN, Home Federal and Sub possesses all material permits, licenses,
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<PAGE>
authorizations, certificates, franchises, orders, consents or other indicia of
authority required by any governmental, administrative or regulatory authority
or agency and is in compliance with all applicable laws, judgments, orders,
decrees, rules and regulations.
(b) Authorization and Validity of Agreements. HMN, Home
Federal and Sub have all requisite power and authority to enter into this
Agreement and to perform their respective obligations hereunder, the execution
and delivery by HMN, Home Federal and Sub of this Agreement and the consummation
by HMN, Home Federal and Sub of the transactions contemplated hereby have been
duly authorized by all requisite action. This Agreement has been duly executed
and delivered by HMN, Home Federal and Sub and is the valid and binding
obligation of HMN, Home Federal and Sub, enforceable against HMN, Home Federal
and Sub in accordance with its terms, except that (i) such enforcement may be
subject to bankruptcy, insolvency, moratorium or similar laws affecting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to certain
equitable defenses and to the discretion of the court before which any
proceedings therefor may be brought.
(c) No Notices or Approvals Required and No Conflicts. None of
the execution and delivery of this Agreement by HMN, Home Federal or Sub, the
performance by HMN, Home Federal or Sub of their respective obligations
hereunder, or the consummation by HMN, Home Federal or Sub of the transactions
contemplated hereby will:
(i) conflict with the charter or by-laws of HMN, Home
Federal or Sub;
(ii) assuming satisfaction of the requirements set
forth in Clause (iii) (A) and (B) below, violate any provision of law applicable
to HMN, Home Federal or Sub;
(iii) require any consent or approval of, or filing
with or notice to, any public body or authority, domestic or foreign, under any
provision of law applicable to HMN, Home Federal or Sub, except for (A)
requirements arising under the Home Owners Loan Act, as amended (the "HOLA"),
the Savings and Loan Holding Company Act, as amended (the "SLHC Act") and the
Federal Deposit Insurance Act, as amended (the "FDI Act") and (B) the filing of
this Agreement or a certificate of merger in accordance with the Delaware Law
and applicable federal law; or
(iv) require any consent, approval or notice under,
or violate, breach, be in conflict with or constitute a default (or an event
that, with notice or lapse of time or both, would constitute a default) under,
or permit the termination of, or result in the creation or imposition of any
lien upon any assets, properties or business of HMN, Home Federal or Sub under,
any note, bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument or other agreement or commitment,
order, judgment or decree to which HMN, Home Federal or Sub is a party or by
which HMN, Home Federal or Sub or any of the assets or properties thereof is
bound or encumbered.
(d) Financial Ability to Perform. Home Federal has cash funds
available sufficient to make all cash payments required to be made hereby for
the shares of Marshalltown Common Stock in the Merger.
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<PAGE>
(e) Opinion of Financial Advisor. HMN has received a written
opinion, in a form reasonably acceptable to HMN, from Capital Resources Group,
Inc., to the effect that the Merger is fair, from a financial point of view, to
the stockholders of HMN.
(f) Certain Fees. Except for Capital Resources Group, Inc.,
none of HMN, Home Federal, Sub or any of their respective directors, officers,
employees, agents or representatives, on behalf of HMN, Home Federal or Sub or
their respective boards of directors, or any committee thereof, has employed any
financial advisor, broker or finder or incurred any liability for any financial
advisory, brokerage or finders' fees or commissions in connection with the
transactions contemplated hereby.
(g) Litigation. There are no claims, actions, suits,
investigations or proceedings pending or, to the knowledge of HMN, threatened
against or affecting HMN or any of the HMN Subsidiaries or any of their
respective assets or properties, at law or in equity, before or by any Federal,
state, municipal, regulatory or other governmental agency or authority, foreign
or domestic, or before any arbitration board or panel, wherever located, either
individually or in the aggregate, that would reasonably be expected to delay
materially or prevent the consummation of the Merger.
2.2 Representations and Warranties of Marshalltown. Marshalltown hereby
represents and warrants to HMN, Home Federal and Sub that:
(a) Organization and Compliance with Law. Marshalltown is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Bank is a wholly-owned subsidiary of Marshalltown.
The Bank is a federal stock savings bank organized, validly subsisting and in
good standing under the laws of the United States. The Bank is the only
subsidiary of Marshalltown. MSL Financial Corporation ("MSL") is a corporation
duly organized, validly existing and in good standing under the laws of Iowa.
MSL is a wholly-owned subsidiary of the Bank. MSL is the only subsidiary of the
Bank. Except for (i) common stock of the Federal Home Loan Bank of Des Moines,
(ii) readily marketable securities owned by Marshalltown or the Marshalltown
Subsidiaries in the ordinary course of their respective businesses, and (iii)
limited partnership interests in Douglas Wood Limited Partnership and Southbrook
Green Limited Partnership, none of Marshalltown, the Bank or MSL is a partner,
investor, security holder or a party to any joint venture, partnership,
corporation or other entity, or have any obligations to make capital
contributions. Marshalltown, the Bank and MSL have all requisite power and
authority and all requisite governmental and other authorizations to own, lease
and operate their respective assets and properties and to carry on their
respective businesses as now being conducted. The Bank and MSL are sometimes
hereinafter called the "Marshalltown Subsidiaries". Each of Marshalltown and the
Marshalltown Subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
would not have a material adverse effect on the financial condition, results of
operations or business of Marshalltown or the Marshalltown Subsidiaries.
Marshalltown is registered as a savings and loan holding company with the OTS
under the SLHC Act. Except as disclosed in a disclosure letter delivered by
Marshalltown to HMN prior to the date hereof (the "Marshalltown Disclosure
Letter"), Marshalltown and the Marshalltown Subsidiaries each possess all
material permits, licenses,
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authorizations, certificates, franchises, orders, consents or other indicia of
authority required by any governmental, administrative or regulatory authority
or agency and is in compliance with all applicable laws, judgments, orders,
decrees, rules and regulations. Marshalltown has heretofore delivered to HMN
true and complete copies of its certificate of incorporation and by-laws and of
the charter and by-laws of the Marshalltown Subsidiaries, in each case, as in
existence on the date hereof.
(b) Capitalization.
(i) The authorized capital stock of Marshalltown
consists of 3,250,000 shares of Marshalltown Common Stock and 250,000 shares of
Preferred Stock, $0.01 par value per share ("Marshalltown Preferred Stock"). As
of March 31, 1997, there were issued and outstanding 1,411,475 shares of
Marshalltown Common Stock (including 18,974 shares of Marshalltown Common Stock
issued pursuant to the terms of the RRP) and no shares of Marshalltown Preferred
Stock. As of March 31, 1997, Marshalltown had 383 record stockholders. Except as
disclosed in the Marshalltown Disclosure Letter, since such date no shares of
Marshalltown Common Stock or Marshalltown Preferred Stock have been issued. All
outstanding shares of Marshalltown Common Stock are validly issued, fully paid
and nonassessable and no holder thereof is entitled to any preemptive rights.
Marshalltown and the Marshalltown Subsidiaries are not parties to, nor is
Marshalltown aware of, any voting agreement, voting trust or similar agreement,
arrangement or understanding relating to any class of capital stock of, or any
agreement, arrangement or understanding providing for registration rights with
respect to any class of capital stock or other securities of, Marshalltown or
either of the Marshalltown Subsidiaries.
(ii) As of the date hereof, there are pursuant to the
terms of the Marshalltown Plan, outstanding options to purchase an aggregate of
not more than 122,730 shares of Marshalltown Common Stock at an exercise price
per share of $8.00. Other than these options, and any shares of Marshalltown
Common Stock issued pursuant to any of the foregoing, there are not now, and at
the Effective Time there will not be, any outstanding options, warrants, scrip,
rights to subscribe for, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of any class of capital stock of Marshalltown, or contracts, agreements,
arrangements or understandings to which Marshalltown is a party, or by which it
is or may be bound, to issue additional shares of any class of its capital stock
or options, warrants, scrip or rights to subscribe for, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable for, any additional shares of any class of capital stock of
Marshalltown. Marshalltown has heretofore delivered to HMN a true and complete
copy of the Marshalltown Plan and of each of the option agreements thereunder,
in each case as in existence on the date hereof.
(iii) The shares of capital stock or other equity
securities of the Marshalltown Subsidiaries are collectively referred to herein
as the "Marshalltown Subsidiary Shares". All outstanding Marshalltown Subsidiary
Shares are validly issued, fully paid and nonassessable and owned beneficially
and of record directly or indirectly by Marshalltown, free and clear of all
liens, pledges, security interests, claims or other encumbrances. There are not
now, and at the Effective Time there will not be, any (A) outstanding
Marshalltown Subsidiary Shares that are owned of record or beneficially by any
person or entity other than Marshalltown or the Bank, or
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(B) outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any class of capital stock of
the Marshalltown Subsidiaries, or contracts, agreements, arrangements or
understandings to which Marshalltown or the Marshalltown Subsidiaries is a
party, or by which any thereof is or may be bound, to issue additional shares of
any class of capital stock or options, warrants, scrip or rights to subscribe
for, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, any additional shares of capital
stock of either of the Marshalltown Subsidiaries.
(c) Authorization and Validity of Agreements.
(i) Subject to approval of this Agreement and the
Merger by the stockholders of Marshalltown as provided for in Section 3.3, (x)
Marshalltown has all requisite corporate power and corporate authority to enter
into this Agreement and to perform its obligations hereunder, and (y) the
execution and delivery by Marshalltown of this Agreement and the consummation by
it of the transactions contemplated hereby have been duly authorized by all
requisite corporate action.
(ii) On or prior to the date hereof, the Marshalltown
Board of Directors (the "Marshalltown Board") has determined to recommend
approval of this Agreement and the Merger to the stockholders of Marshalltown,
and such determination is in effect as of the date hereof. The affirmative vote
of holders of a majority of the outstanding shares of Marshalltown Common Stock
is the only vote necessary to approve the Merger and this Agreement. As of the
date of this Agreement, neither Marshalltown nor any director, officer or
representative thereof is soliciting, initiating or engaged in any discussions
or other negotiations with or providing any information to any third party
concerning any possible Acquisition Transaction (as defined in Section 3.4).
(iii) This Agreement has been duly executed and
delivered by Marshalltown and is the valid and binding obligation of
Marshalltown, enforceable against Marshalltown in accordance with its terms,
except that (i) such enforcement may be subject to bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to certain equitable defenses and to the discretion of the
court before which any proceedings therefor may be brought.
(d) No Notices or Approvals Required and No Conflicts. None of
the execution and delivery of this Agreement by Marshalltown, the performance by
Marshalltown of its obligations hereunder or the consummation by Marshalltown of
the transactions contemplated hereby will:
(i) conflict with the certificate of incorporation or
by-laws of Marshalltown or with the charter or by-laws of the Marshalltown
Subsidiaries;
(ii) assuming satisfaction of the requirements set
forth in Clause (iii) (A), (B) and (C) below, violate any provision of law
applicable to Marshalltown or the Marshalltown Subsidiaries;
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(iii) require any consent or approval of, or filing
with or notice to, any public body or authority, domestic or foreign, under any
provision of law applicable to Marshalltown or the Marshalltown Subsidiaries,
except for (A) requirements of Federal and state securities laws, (B)
requirements arising under the HOLA, the SLHC Act, and the FDI Act and (C) the
filing of this Agreement or a certificate of merger in accordance with the
Delaware Law and applicable federal law; or
(iv) require any consent, approval or notice under,
or violate, breach, be in conflict with or constitute a default (or an event
that, with notice or lapse of time or both, would constitute a default) under,
or permit the termination of, or result in the creation or imposition of any
lien upon any assets, properties or business of Marshalltown or the Marshalltown
Subsidiaries under, any note, bond, indenture, mortgage, deed of trust, lease,
franchise, permit, authorization, license, contract, instrument or other
agreement or commitment, order, judgment or decree to which Marshalltown or
either of the Marshalltown Subsidiaries is a party or by which Marshalltown or
either of the Marshalltown Subsidiaries or any of the assets or properties
thereof is bound or encumbered, except those disclosed in the Marshalltown
Disclosure Letter or those which the violation, breach, conflict or default of
which would not have a material adverse effect on the financial condition,
results of operations or business of Marshalltown and the Marshalltown
Subsidiaries, taken as a whole.
(e) Marshalltown Reports and Financial Statements.
(i) Each of Marshalltown and the Marshalltown
Subsidiaries has filed all reports, registration statements and other filings,
together with any amendments required to be made with respect thereto, that it
has been required to file with the Securities and Exchange Commission ("SEC")
under the Securities Act of 1933, as amended (the "1933 Act") and the Securities
Exchange Act of 1934, as amended (the "1934 Act"). All reports, registration
statements and other filings (including all exhibits, notes and schedules
thereto and documents incorporated by reference therein) filed by Marshalltown
and the Marshalltown Subsidiaries with the SEC, together with any amendments
thereto, including, when filed, the Proxy Statement (as defined in Section 3.2),
together with any amendments thereto, insofar as the Proxy Statement contains
data and information with respect to Marshalltown or the Marshalltown
Subsidiaries, are herein sometimes collectively referred to as the "Marshalltown
SEC Reports". Marshalltown has heretofore delivered to HMN true and complete
copies of all of the Marshalltown SEC Reports that have been filed with the SEC
prior to the date hereof. As of (A) with respect to all of the Marshalltown SEC
Reports other than registration statements filed under the 1933 Act, the
respective dates of their filing with the SEC, and (B) with respect to all
registration statements filed under the 1933 Act, their respective effective
dates, the Marshalltown SEC Reports complied or will comply, as the case may be,
in all material respects with the rules and regulations of the SEC and did not
or will not, as the case may be, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein not misleading.
(ii) All material contracts, agreements, arrangements
and understandings of Marshalltown have been disclosed in the Marshalltown SEC
Reports filed with the SEC or in the Marshalltown Disclosure Letter except for
those contracts, agreements, arrangements and
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understandings that have already been fully performed and as to which there are
not contingent liabilities on the part of Marshalltown.
(iii) The consolidated financial statements
(including any related notes or schedules) included in Marshalltown's Annual
Report on Form 10-KSB for the year ended September 30, 1996 (the "Marshalltown
10-K") and Marshalltown's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1996 (the "Marshalltown 10-Q"), as filed with the SEC, were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be noted therein or in the notes or schedules
thereto) and fairly present the consolidated financial position of Marshalltown
and its consolidated subsidiaries as of September 30, 1995 and 1996 and December
31, 1996 and the consolidated results of their operations and cash flows for
each of the two years in the two-year period ended September 30, 1996 and each
of the three months ended December 31, 1995 and 1996. The independent auditors
who certified any financial statements and supporting schedules included or
incorporated by reference in the Marshalltown SEC Reports are independent
certified public accountants with respect to Marshalltown as required by the
rules and regulations of the SEC. Subject to the provisions of Section 3.7, all
of the obligations or liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due, and regardless of when
asserted) arising out of transactions or events heretofore entered into, or any
action or inaction, including taxes with respect to or based upon transactions
or events heretofore occurring, that are required to be reflected, disclosed or
reserved against in the consolidated financial statements of Marshalltown in
accordance with generally accepted accounting principles are reflected,
disclosed or reserved against in the consolidated financial statements, and
Marshalltown and its consolidated subsidiaries have no other obligations or
liabilities except liabilities incurred since the date of its last audited
annual consolidated financial statements, in the ordinary course of business, or
in connection with the transactions contemplated by this Agreement.
(iv) Marshalltown has furnished HMN with unaudited
statements of financial condition, operations and various supporting financial
schedules as of, and for the periods ending on, each of the last two fiscal
quarters, all as included in the Thrift Financial Reports ("TFR's") provided to
the OTS. Marshalltown and the Bank have also provided HMN with all management
letters from Marshalltown's independent certified public accountants since
December 31, 1990. The TFR's present fairly the financial condition and results
of operations of the Bank at the dates thereof, in accordance with the
instructions for preparing TFR's and, where applicable, with generally accepted
accounting principles consistently applied.
(v) Since December 31, 1990, each of Marshalltown and
the Marshalltown Subsidiaries has filed all reports and other filings, together
with any amendments required to be made with respect thereto, that it has been
required to file with federal and other banking, thrift or other regulatory
authorities (the "Marshalltown Regulatory Filings"), and all of the Marshalltown
Regulatory Filings filed prior to the date hereof complied, and all such filings
made hereafter prior to the Effective Time will comply, in all material respects
with applicable laws, rules and regulations, and, except as disclosed in the
Marshalltown Disclosure Letter, there are no material open or unresolved issues
raised by any regulatory authority with respect to any of such filings. Neither
Marshalltown nor the Bank is subject to any cease and desist order, written
agreement or
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memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of, federal or state governmental authorities charged
with the supervision or regulation of savings and loan associations or savings
and loan holding companies or engaged in the insurance of savings and loan
deposits, nor has Marshalltown been advised by any such authority that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, directive, written agreement, memorandum
of understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(f) Conduct of Business in the Ordinary Course and Absence of
Certain Changes and Events.
(i) Except as contemplated by this Agreement or as
disclosed in the Marshalltown SEC Reports filed with the SEC prior to the date
hereof or in the Marshalltown Disclosure Letter, since September 30, 1996,
Marshalltown and the Marshalltown Subsidiaries have taken no action of the type
referred to in Section 3.1 and there has not been any material adverse change in
the financial condition, results of operations or business of Marshalltown or
the Marshalltown Subsidiaries, and there has not been any condition, event or
development that is reasonably expected by Marshalltown to result in a material
adverse change in the financial condition, results of operations or business of
Marshalltown or the Marshalltown Subsidiaries. Marshalltown and the Marshalltown
Subsidiaries are not parties to any collective bargaining agreement and believe
that their relations with their employees are generally satisfactory. Since
September 30, 1996, no significant labor dispute with any employees of
Marshalltown or the Marshalltown Subsidiaries or union organizing effort has
existed or, to the knowledge of Marshalltown, is imminent or threatened.
(ii) None of Marshalltown or the Marshalltown
Subsidiaries is in violation of its charter or by-laws or in default in the
performance of, and no event has occurred that, with notice or lapse of time or
both, would constitute a default in the performance of, any note, bond,
indenture, mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment, order, judgment
or decree to which Marshalltown or either of the Marshalltown Subsidiaries is a
party or by which Marshalltown or either of the Marshalltown Subsidiaries or any
of the assets or properties thereof is bound or encumbered, except for such
defaults that do not and would not have a material adverse effect on the
financial condition, results of operations or business of Marshalltown and the
Marshalltown Subsidiaries, taken as a whole.
(g) Certain Fees. With the exception of the engagement by
Marshalltown of EVEREN Securities, Inc., none of Marshalltown, the Marshalltown
Subsidiaries, their respective directors, officers, employees, agents or
representatives, on behalf of Marshalltown or either of the Marshalltown
Subsidiaries, or their respective boards of directors, or any committee thereof,
has employed any financial advisor, broker or finder or incurred any liability
for any financial advisory, brokerage or finders' fees or commissions in
connection with the transactions contemplated hereby.
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(h) Litigation. Except as disclosed in the Marshalltown SEC
Reports filed with the SEC prior to the date hereof or in the Marshalltown
Disclosure Letter, there are to the knowledge of Marshalltown no claims,
actions, suits, investigations or proceedings pending or threatened to which
Marshalltown or either of the Marshalltown Subsidiaries is a party or to which
any of their respective assets or properties is effected, at law or in equity,
before or by any Federal, state, municipal or other governmental agency or
authority, foreign or domestic, or before any arbitration board or panel,
wherever located.
(i) Employee Benefit Plans.
(i) The Marshalltown Disclosure Letter lists (A) each
employee bonus, incentive, deferred compensation, stock purchase, stock
appreciation right, stock option and severance pay plan, (B) each pension,
profit sharing, stock bonus, thrift, savings and employee stock ownership plan,
and (C) every other employee benefit plan (within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(collectively, "Marshalltown Benefit Plans"), which Marshalltown or the
Marshalltown Subsidiaries maintains or to which Marshalltown or the Marshalltown
Subsidiaries contributes on behalf of current or former employees. Except as
disclosed in the Marshalltown Disclosure Letter, all of the Marshalltown Benefit
Plans comply and have at all times complied with all applicable requirements of
ERISA and all other applicable federal and state laws, including without
limitation the reporting and disclosure requirements of Part 1 of Title I of
ERISA. Each of the Marshalltown Benefit Plans that is intended to be a pension,
profit sharing, stock bonus, thrift, savings or employee stock ownership plan
that is qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code") has been determined by the Internal Revenue Service (the
"IRS") to qualify under Section 401(a) of the Code, and, except as disclosed in
Marshalltown Disclosure Letter, there exist no circumstances that would
adversely affect the qualified status of any such Marshalltown Benefit Plan
under that section. Except as set forth in the Marshalltown Disclosure Letter,
there is no pending or, to the knowledge of Marshalltown, threatened litigation,
governmental proceeding or investigation against or relating to any Marshalltown
Benefit Plan, and to the knowledge of Marshalltown there is no reasonable basis
for any material proceedings, claims, actions or proceedings against any
Marshalltown Benefit Plan. Except as set forth in the Marshalltown Disclosure
Letter, no Marshalltown Benefit Plan has engaged in a "prohibited transaction"
(as defined in Section 406 of ERISA and Section 4975(c) of the Code) since the
date on which said sections became applicable to such plan, and no Marshalltown
Benefit Plan has engaged in a transaction involving the purchase or sale of
employer securities by such plan from or to a "disqualified person" (within the
meaning of Section 4975 of the Code). Neither Marshalltown nor the Marshalltown
Subsidiaries has incurred any "accumulated funding deficiency" (within the
meaning of Section 412 of the Code), whether or not waived, with respect to any
Marshalltown Benefit Plan.
(ii) All Marshalltown Benefit Plans that are group
health plans, within the meaning of Section 4980E of the Code or Section 601 of
ERISA, have been operated in compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code and Section 601 of ERISA to
the extent such requirements are applicable. To the best of Marshalltown's
knowledge, all group health plans maintained by Marshalltown or the Marshalltown
Subsidiaries have
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been operated in full compliance with the provisions of Part VII of ERISA and
Subtitle K of the Code, to the extent that such provisions apply to the group
health plan.
(iii) Marshalltown has delivered to HMN copies of (A)
each Marshalltown Benefit Plan, (B) current summary plan descriptions of each
Marshalltown Benefit Plan for which they are required, (C) each trust agreement,
insurance policy or other instrument relating to the funding of any Marshalltown
Benefit Plan, (D) the three most recent Annual Reports (Form 5500 series) and
accompanying schedules filed with the IRS or United States Department of Labor
with respect to each Marshalltown Benefit Plan for which they are required, (E)
the most recent determination letter issued by the IRS with respect to each
Marshalltown Benefit Plan that is intended to qualify under Section 401 of the
Code, (F) the three most recent available financial statements for each
Marshalltown Benefit Plan that has assets, and (G) the three most recent audited
financial statements for each Marshalltown Benefit Plan for which audited
financial statements are required by ERISA.
(iv) The Marshalltown Disclosure Letter describes any
obligation that Marshalltown or the Marshalltown Subsidiaries has to provide
health and welfare benefits to retirees and other former employees or their
dependents (other than rights arising solely under Section 601 of ERISA or
Section 4980B of the Code) including information as to the number of retirees,
other former employees and dependents entitled to such coverage and their ages.
(v) With respect to each Marshalltown Benefit Plan
that is an "employee pension benefit plan", as defined in Section 3(2) of ERISA
(collectively, "Marshalltown Pension Plans"), Marshalltown and the Marshalltown
Subsidiaries have fulfilled their respective obligations to the extent
applicable under the minimum funding requirements of Section 302 of ERISA and
Section 412 of the Code with respect to the Marshalltown Pension Plans.
Marshalltown and the Marshalltown Subsidiaries have paid all premiums, if any,
that have become due to the Pension Benefit Guaranty Corporation ("PBGC") with
respect to any of the Marshalltown Pension Plans.
(vi) None of Marshalltown or the Marshalltown
Subsidiaries has, or within the past five years has had, any obligation to
contribute to any "multiemployer plan", as defined in Section 3(37) of ERISA,
and none of Marshalltown or the Marshalltown Subsidiaries has incurred, and no
event has occurred that might reasonably be expected to result in, any material
liability under Title IV of ERISA (excluding liability for required premium
payments to the Pension Benefit Guaranty Corporation ("PBGC")) in connection
with any such multiemployer plan or any of the Marshalltown Pension Plans that
is subject to Title IV of ERISA.
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(j) Taxes.
(i) Except as disclosed in the Marshalltown
Disclosure Letter, all returns and reports, including without limitation
information and withholding returns and reports (collectively, "Tax Returns") of
or relating to any foreign, Federal, state, local or other income, premium,
property, sales, excise and other taxes of any nature whatsoever, including any
interest, penalties and additions to tax in respect thereof ("Tax" or "Taxes")
heretofore required to be filed by Marshalltown or the Marshalltown Subsidiaries
have been duly filed on a timely basis. To the knowledge of Marshalltown, all
such Tax Returns were complete and accurate in all material respects. Each of
Marshalltown and the Marshalltown Subsidiaries has paid or made adequate
provision for the payment of all Taxes reflected in such Tax Returns.
(ii) As of the date of this Agreement there are no
audits or administrative proceedings, court proceedings or claims pending
against Marshalltown or the Marshalltown Subsidiaries with respect to any Taxes,
no assessment, deficiency or adjustment has been asserted or, to the knowledge
of Marshalltown, proposed with respect to any Tax Return of or with respect to
Marshalltown or the Marshalltown Subsidiaries and there are no liens for Taxes
upon the assets or properties of Marshalltown or the Marshalltown Subsidiaries,
except liens for Taxes not yet delinquent.
(iii) Except as disclosed in the Marshalltown
Disclosure Letter, there are not in force any waivers or agreements,
arrangements or understandings by or with respect to Marshalltown or the
Marshalltown Subsidiaries of or for an extension of time for the assessment or
payment of any Taxes. Neither Marshalltown nor the Marshalltown Subsidiaries has
received a written ruling of a taxing authority relating to Taxes or entered
into a written and legally binding agreement with a taxing authority relating to
Taxes. Except as disclosed in the Marshalltown Disclosure Letter, neither
Marshalltown nor the Marshalltown Subsidiaries is required to include in income
any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary
change in accounting method initiated by Marshalltown or the Marshalltown
Subsidiaries, and to the knowledge of Marshalltown the IRS has not proposed any
such adjustment or change in accounting method. For purposes of this Section
2.2(j), the term "Marshalltown Subsidiaries" shall include former subsidiaries
of Marshalltown for the periods during which any such subsidiaries were owned
directly or indirectly by Marshalltown.
(iv) Each of Marshalltown and the Marshalltown
Subsidiaries has withheld and paid all Taxes that, to the knowledge of
Marshalltown, are required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent contractor or other
third party.
(v) Neither Marshalltown nor any of the Marshalltown
Subsidiaries has filed a consent under Section 341(f) of the Code. Marshalltown
and the Marshalltown Subsidiaries are parties to Tax allocation and Tax sharing
arrangements among them, all of which arrangements have heretofore been
disclosed to HMN by Marshalltown.
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(vi) The Bank has not taken any voluntary action to
cause the bad debt reserve created under Section 593 of the Code to be
recaptured as taxable income to the Bank.
(k) Intellectual Property. As of the date of this Agreement,
Marshalltown and the Marshalltown Subsidiaries own or are otherwise duly
authorized or entitled to utilize all trademarks, service marks, trade names,
licenses, designs, copyrights, processes, patents, or applications therefor, and
other intellectual property rights as are presently used in, or necessary for,
the conduct of the business of Marshalltown and the Marshalltown Subsidiaries as
presently conducted, except where the failure to have such ownership or
authorization or entitlement does not and would not, individually or in the
aggregate, have a material adverse effect on the financial condition, results of
operations or business of Marshalltown and the Marshalltown Subsidiaries, taken
as a whole. Since December 31, 1990, to the knowledge of Marshalltown, there has
not been any violation or infringement by Marshalltown or either of the
Marshalltown Subsidiaries of any intellectual property right of any other
person, or any claim of such infringement, that has not been resolved and is
continuing, and none of Marshalltown or the Marshalltown Subsidiaries has given
to or made with any other person any indemnification, forbearance to sue or
settlement for infringement of any intellectual property right.
(l) No Secured Debt. Except as set forth in the Marshalltown
Disclosure Letter, there is not now, and there will not be immediately prior to
the Effective Time, any secured debt (including capitalized leases) of
Marshalltown or the Marshalltown Subsidiaries, except for capitalized leases of
Marshalltown and the Marshalltown Subsidiaries reflected on the consolidated
financial statements of Marshalltown, and, in either case, the existence of
which does not violate the terms of any material note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment to which Marshalltown or
either of the Marshalltown Subsidiaries is a party or by which Marshalltown or
either of the Marshalltown Subsidiaries or any of their assets or properties
thereof is bound or encumbered.
(m) Opinion of Financial Advisor. The Marshalltown Board has
received from EVEREN Securities, Inc. a written opinion, dated on or prior to
the date of this Agreement, to the effect that the Merger Consideration is fair
to the stockholders of Marshalltown from a financial point of view.
(n) Deposit Insurance. The customer deposits held by the Bank
are insured by the Savings Association Insurance Fund ("SAIF") administered by
the Federal Deposit Insurance Corporation ("FDIC") in accordance with the FDI
Act. The Bank has paid all assessments and filed all reports required by the FDI
Act.
(o) Properties. Except for property owned through foreclosure
that is, as of the date of this Agreement, under contract to be sold, or as
disclosed in the Marshalltown Disclosure Letter, the Bank has good and
marketable title, free and clear of any mortgage, pledge, lien, charge or other
encumbrance, to all of its real or personal property reflected on the most
recent consolidated financial statements of Marshalltown and the Marshalltown
Subsidiaries, except for (i) liens for current taxes not yet delinquent or taxes
reflected on the most recent consolidated financial statements of Marshalltown
and the Marshalltown Subsidiaries; (ii) such imperfections of title,
encumbrances and
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easements, if any, as are not individually or in the aggregate substantial or
material in character, amount or extent and do not materially detract from the
value, or interfere with the present or proposed use, of such properties; and
(iii) dispositions of such property or assets in the ordinary course of
business. The structure and other improvements to real estate, furniture,
fixtures and equipment, are in good operating condition and repair (ordinary
wear and tear excepted) and, to the knowledge of the Bank, comply in all
material respects with all applicable laws, ordinances and regulations,
including, without limitation, all building codes, zoning ordinances and other
similar laws. The Bank owns or has the right to use all real and personal
property used in its business as conducted on the date hereof. Each lease
pursuant to which Bank as lessee, leases real or personal property, is valid and
in effect in accordance with its respective terms, and there is not, under any
of such leases, on the part of the lessee any material existing default or any
event which with notice or lapse of time, or both, would constitute such a
default, other than defaults which would not individually or in the aggregate
have a material adverse effect on the financial condition, results of operations
or business of the Bank. The Marshalltown Disclosure Letter identifies all
parcels of real estate owned, leased or controlled by Marshalltown or either of
the Marshalltown Subsidiaries, including without limitation, real estate
managed, owned or controlled in connection with the Bank's lending or financing
operations.
(p) Insurance. Disclosed in the Marshalltown Disclosure Letter
is a listing of all insurance policies owned by Marshalltown, or the
Marshalltown Subsidiaries. Such policies are in effect and full force pursuant
to their terms. No notices of cancellation have been received in connection
therewith.
(q) Affiliate Transactions. Except as disclosed in the
Marshalltown Disclosure Letter, none of the executive officers or directors of
Marshalltown and the Marshalltown Subsidiaries, or any member of their immediate
families (which for purposes hereof shall mean a spouse, minor child or adult
child living at the home of any such officer or director), or any entity which
any of such persons "controls" (with the meaning of Regulation O of the Federal
Reserve Board), has any loan agreement, note or borrowing arrangement or any
other agreement with Marshalltown or either of the Marshalltown Subsidiaries
(other than normal employment arrangements) or any interests in any property
used in or pertaining to the business of Marshalltown and the Marshalltown
Subsidiaries pursuant to which the amount outstanding thereunder exceeds
$60,000.
(r) Environmental Matters.
(i) For purposes of this Section 2.2(r), the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation or code, license, permit, authorization,
approval relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
Environmental Law includes without limitation the Comprehensive Environmental
Response,
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Compensation and Liability Act, as amended; the Resource Conservation and
Recovery Act; the Clean Air Act, as amended, the Federal Water Pollution Control
Act, as amended; the Toxic Substances Control Act, as amended, the Emergency
Planning and Community Right to Know Act, the Safe Drinking Water Act, and all
comparable state and local laws, and any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligation for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous
or otherwise regulated under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or any derivative or
by-product thereof, asbestos, radioactive material, and polychlorinated
biphenyls.
(ii) Except as disclosed in the Marshalltown
Disclosure Letter, none of Marshalltown, the Bank or MSL has knowledge of or
received any notice within the past three years of any violation of, or claim,
citation, assessment, proposed assessment or demand for abatement in connection
with any Environmental Laws, or generated, stored, or disposed of any Hazardous
Substance.
(s) Financial Institutions Bond. Since January 1, 1991, the
Bank has continuously maintained in full force and effect a financial
institutions bond with coverage equal to or greater than that provided for on a
"Form 24" insuring against acts of dishonesty by each of its employees.
Marshalltown has provided HMN a copy of the bond currently in effect. Except as
disclosed in the Marshalltown Disclosure Letter, no claim has been made under
any such bond, and Marshalltown is unaware of any fact or condition presently
existing which might form the basis of a claim under any such bond. Marshalltown
has no reason to believe that the Bank's present financial institutions bond
will not be renewed by its carrier on substantially the same basis and terms as
those now in effect.
(t) Loans.
(i) The documentation relating to each loan of the
Bank and relating to all security interests, mortgages and other liens with
respect to all collateral for such loans is adequate, in the opinion of the
Bank's management, for the enforcement of the loans and the related security
interests, mortgages and other liens. Such documentation is valid and correct in
all material respects, genuine as to signatures of makers and endorsers, were
given for valid consideration and properly perfected. The terms of such loans
and of the related security interests, mortgages and other liens comply in all
material respects with all applicable laws, rules and regulations (including
without limitation laws, rules and regulations relating to the extension of
credit).
(ii) Except as set forth in the Marshalltown
Disclosure Letter, as of December 31, 1996, there are no loans, leases, other
extensions of credit or commitments to extend credit of the Marshalltown
Subsidiaries that have been or should have been classified as nonaccrual, as
restructured, as 90 days past due, as still accruing and doubtful of collection
or any comparable
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classification and no material information with respect to the loan portfolios
of the Bank has been withheld from HMN.
(iii) The allowances for loan losses contained in the
financial statements of the Bank were established in accordance with the past
practices and experiences of the Bank, and the allowance for loan losses shown
on the balance sheet of the Bank at December 31, 1996 is adequate in all
material respects under the requirements of generally accepted accounting
policies and the rules, regulations and policies of the OTS to provide for
possible losses on loans (including without limitation accrued interest
receivable) and credit commitments (including without limitation stand-by
letters of credit) outstanding as of such date.
(iv) Except as identified in the Marshalltown
Disclosure Letter, there are no loans or extensions of credit made by the Bank
to a customer who presently has a principal residence, if the subject loan is
personal, or a principal place of business, if the subject loan is commercial,
outside of the State of Iowa.
(v) Except with respect to sales of participations in student
loans, since January 1, 1991, the Bank has not issued or sold any loan
participations which might expose Marshalltown or either of the Marshalltown
Subsidiaries to direct or indirect recourse liability to the participant,
pursuant to any written or verbal agreements or understandings with such
participant;
(u) Absence Of Questionable Payments. From and after January
1, 1991, Marshalltown and the Marshalltown Subsidiaries have not, nor, to the
knowledge of Marshalltown, has any director, officer, agent, employee,
consultant or other person associated with, or acting on behalf of, Marshalltown
or the Marshalltown Subsidiaries (i) used any corporate funds for unlawful
contributions, gifts, entertainment or unlawful expenses relating to political
activity; or (ii) made any direct or indirect unlawful payments to governmental
officials from any corporate funds, or established or maintained any unlawful or
unrecorded accounts with funds received from Marshalltown or the Marshalltown
Subsidiaries.
(v) Powers of Attorney, Guarantees. Except as set forth in the
Marshalltown Disclosure Letter, Marshalltown and the Marshalltown Subsidiaries
have no power of attorney outstanding, or any obligation or liability, either
actual, accruing or contingent, as guarantor, surety, cosigner, endorser,
co-maker or indemnitor in respect of the obligation of any person, corporation,
partnership, joint venture, association, organization or other entity.
(w) Interest Rate Risk Management Instruments. Disclosed in
the Marshalltown Disclosure Letter is a list of all interest rate swaps, caps,
floors and option agreements and other interest rate risk management
arrangements to which Marshalltown or either of the Marshalltown Subsidiaries is
a party or by which any of their properties or assets may be bound. Each such
arrangement was entered into in the ordinary course of business and in
accordance with prudent banking practice and applicable rules, regulations and
policies.
(x) Mortgage Servicing Agreements. The Bank has previously
provided HMN copies of all mortgage servicing agreements to which Bank is a
party (the "Mortgage Servicing
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Agreements"). The Mortgage Servicing Agreements set forth all applicable terms
and conditions and have not been modified in any material respect. As of the
date of this Agreement, there is no pending or, to the knowledge of the Bank,
threatened cancellation of any Mortgage Servicing Agreement. No material
sanctions or penalties have been imposed upon the Bank under any Mortgage
Servicing Agreement or under any applicable regulation relating thereto.
(y) Regulatory Matters. None of Marshalltown or the
Marshalltown Subsidiaries has taken or agreed to take any action or has any
knowledge of any fact or circumstance that would materially impede or delay
receipt of any approval necessary to the consummation of the transactions
contemplated by this Agreement.
(z) Accuracy of Information. The statements of Marshalltown
contained in this Agreement, the Schedules, the Marshalltown Disclosure Letter
and any other written document executed and delivered by or on behalf of
Marshalltown pursuant to the terms of this Agreement are true and correct in all
material respects, and such statements and documents do not omit any material
fact necessary to make the statements contained therein not misleading.
III. COVENANTS OF MARSHALLTOWN
3.1 Conduct of Business by Marshalltown and the Marshalltown
Subsidiaries Pending the Merger. Marshalltown covenants and agrees with HMN and
Home Federal that, with respect to Marshalltown and the Marshalltown
Subsidiaries, prior to the Effective Time, unless HMN shall otherwise agree in
writing or as is otherwise expressly contemplated by this Agreement:
(a) The businesses of Marshalltown and the Marshalltown
Subsidiaries will be conducted only in, and Marshalltown and the Marshalltown
Subsidiaries will not take any material action except in, the ordinary course of
business and consistent with prior practices.
(b) Each of Marshalltown and the Marshalltown Subsidiaries
will not directly or indirectly do any of the following: (i) issue, sell,
pledge, dispose of or encumber (A) any shares of capital stock of Marshalltown
or the Marshalltown Subsidiaries, except upon exercise of options outstanding
under the Marshalltown Plan as of the date hereof, (B) any investment assets,
loans or mortgage servicing rights of Marshalltown or the Marshalltown
Subsidiaries other than in the ordinary course of business consistent with prior
practices and not in excess of $150,000, or (C) any other assets or properties
of Marshalltown or the Marshalltown Subsidiaries other than in the ordinary
course of business and consistent with prior practices and not in excess of
$10,000 in the aggregate; (ii) amend or propose to amend their respective
charters or by-laws; (iii) split, combine or reclassify any outstanding capital
stock, or declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise with respect to their respective shares of
capital stock whether now or hereafter outstanding; (iv) redeem, purchase or
acquire or offer to acquire any of the shares of capital stock of Marshalltown
or the Marshalltown Subsidiaries; or (v) agree or commit to do any of the
foregoing.
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(c) Each of Marshalltown and the Marshalltown Subsidiaries
will not directly or indirectly do any of the following: (i) grant, issue, sell,
pledge or dispose of any options, warrants or rights of any kind to acquire any
shares of any class of capital stock of Marshalltown or either of the
Marshalltown Subsidiaries or any securities that are convertible or exchangeable
therefor; (ii) acquire (whether by merger, consolidation, acquisition of stock
or assets or otherwise) any corporation, partnership or other business
organization or division thereof; (iii) other than short term borrowings in the
ordinary course of the Bank's banking business, incur any indebtedness for
borrowed money or issue any debt securities; (iv) cancel any material debts or
obligations owing to it, except in connection with the ordinary course of the
Bank's lending business; (v) liquidate or merge into or consolidate with any
other corporation, partnership, or other business organization except as
provided in Section 3.4; or (vi) agree or commit to do any of the foregoing.
(d) Each of Marshalltown and the Marshalltown Subsidiaries
will not directly or indirectly do any of the following, (i) enter into or
increase any loan or credit commitment (including stand-by letters of credit)
to, or invest or agree to invest in, any one person, entity or obligor or modify
any of the material provisions or renew or otherwise extend the maturity date of
any existing loan or credit commitment to any one person, entity or obligor
(collectively, "Lend to") in an amount in excess of $150,000, provided no such
consent shall be required in respect of (A) single-family residential loans or
credits not exceeding $214,600 that are saleable in recognized secondary markets
pursuant to the Bank's lending policies as in effect on the date hereof, (B) any
loans originated under an Iowa Housing Authority program and saleable to such
agency, or (C) with the prior approval of HMN, loans or participation in loans
originated by Anchor Bank; (ii) enter into, or increase in an amount, any
commercial or multi-family real estate loan or credit commitment (including
stand-by letters of credit) to, or invest or agree to invest in, any commercial
or multi-family real estate project or entity, or Lend to any person other than
in accordance with lending policies as in effect on the date hereof, provided
that the Bank may make any such loan in the event (A) the Bank has delivered to
HMN or its designated representative a notice of its intention to make such loan
and such information as HMN or its designated representative may reasonably
require in respect thereof, and (B) HMN or its designated representative shall
not have objected to such loan by giving written or facsimile notice of such
objection within two business days following the delivery to HMN of the notice
of intention and information as aforesaid; (iii) Lend to any person or entity,
with respect to any of the loans or other extensions of credit to which or
investments in which are on a "watch list" or similar internal report of the
Bank; (iv) enter into any agreement or engage in any transaction which
reasonably could be construed as materially affecting the asset/liability
management or interest rate risk management position of the Bank; (v) materially
change current deposit pricing practices or policies (in this regard, the Bank
shall promptly telecopy to HMN copies of all the Bank's proposed deposit
pricing), (vi) purchase, acquire or agree or offer to purchase or acquire any
investment securities with a maturity in excess of three years, except for any
securities, the purchase or acquisition of which is approved by HMN prior to any
such purchase or acquisition; or (vii) change lending, credit, investment,
liability management and other material banking policies in any respect which is
material to the Bank; provided, however, that nothing in this Section 3.1(d)
shall prohibit the Bank from honoring any contractual obligation in existence on
the date of this Agreement;
(e) Each of Marshalltown and the Marshalltown Subsidiaries
will not enter into, amend in any material respect, terminate or waive any
material right under any contract or agreement
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referred to in Section 2.2(e)(ii) or that would have been disclosed pursuant to
this Agreement if such contract or agreement had been in effect as of the date
hereof.
(f) Each of Marshalltown and the Marshalltown Subsidiaries
will not enter into or amend any employment, consulting, separation or
termination agreement, arrangement or understanding nor take any action with
respect to the grant of any separation or termination pay or with respect to any
increase of benefits payable under its separation or termination pay policies or
agreements or arrangements in effect as of the date hereof.
(g) Each of Marshalltown and the Marshalltown Subsidiaries
will not (i) hire any new executive employees, (ii) except for replacements in
the ordinary course of business consistent with prior practices, hire any other
new employee, (iii) except in the ordinary course of business consistent with
prior practices, increase the compensation of any employee, or (iv) adopt or
amend (except to comply with applicable law) any bonus, profit sharing,
compensation, stock option, pension, retirement, separation, deferred
compensation or other employee benefit plan, agreement, trust fund or
arrangement for the benefit or welfare of, any employee or former employee.
(h) Each of Marshalltown and the Marshalltown Subsidiaries
will not make any capital expenditure or commitment for which it is not
contractually bound at the date hereof except necessary replacements in the
ordinary course of business and capital expenditures reflected in the current
annual budget of the Bank (a copy of which has been provided by Marshalltown to
HMN prior to the execution of this Agreement and accepted by HMN).
(i) Each of Marshalltown and the Marshalltown Subsidiaries
will not knowingly take any of the foregoing actions or willfully engage in any
activity, enter into any transaction or take or omit to take any other voluntary
act which would make any of the representations and warranties in Section 2.2
untrue or incorrect in any material respect if made anew after engaging in such
activity, entering into such transaction, or taking or omitting such other act.
(j) Subject to the provisions hereof, Marshalltown will use
all reasonable efforts (i) to preserve intact the business organization of
Marshalltown and the Bank and to preserve the goodwill of those having
relationships with Marshalltown or the Bank, and (ii) to prepare with HMN, prior
to communicating with Marshalltown's employees, depositors, borrowers and other
customers, any written information regarding the Merger and continuing
operations after consummation of the Merger.
3.2 Proxy Statement. As promptly as practicable after the date hereof,
Marshalltown will draft and file with the SEC under the 1934 Act, and will use
all reasonable efforts to have cleared by the SEC, a proxy statement (the "Proxy
Statement") with respect to the meeting of stockholders of Marshalltown referred
to in Section 3.3. The Proxy Statement (as it relates to Marshalltown) will
comply as to form in all material respects with the requirements of the 1934 Act
and the rules and regulations of the SEC, and the Proxy Statement (except with
respect to data and information concerning HMN and the HMN Subsidiaries
furnished by or on behalf of HMN to Marshalltown specifically for use therein)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein not
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misleading. Subject to the provisions of Section 3.4, the Proxy Statement will
contain the recommendation of the Marshalltown Board that the stockholders of
Marshalltown vote to approve and adopt the Merger and this Agreement.
Marshalltown will promptly notify HMN in writing if prior to the Effective Time
it shall obtain knowledge of any fact that would make it necessary to amend the
Proxy Statement in order to render the statements made therein not misleading or
to comply with applicable law. Marshalltown will promptly furnish to HMN a true
and complete copy of each written communication of Marshalltown with the SEC
with respect to the Proxy Statement and will promptly advise HMN of the
substance of each oral communication with the SEC.
3.3 Meeting of Stockholders of Marshalltown. Subject to the provisions
of Section 3.4, as soon as the parties may agree after the date hereof, but in
no event later than the earliest practicable date after receipt of all necessary
permits, consents and approvals contemplated by Section 6.1(b), Marshalltown and
the Marshalltown Board will (i) take all action necessary in accordance with the
Delaware Law and its certificate of incorporation and by-laws to convene a
meeting of its stockholders to consider and vote upon approval and adoption of
the Merger and this Agreement, (ii) recommend that the stockholders of
Marshalltown vote to approve and adopt the Merger and this Agreement, (iii) mail
the Proxy Statement to its stockholders, (iv) use all reasonable efforts to
solicit from its stockholders proxies in favor of such approval and adoption,
and (v) take all other action reasonably necessary or helpful to secure a vote
of its stockholders in favor of such approval and adoption.
3.4 No Solicitation of Acquisition Transactions. Each of Marshalltown
and the Marshalltown Subsidiaries will not directly or indirectly, through any
director, officer, employee, agent, representative or otherwise, solicit,
initiate or intentionally encourage submission of any inquiries, proposals or
offers from any person or entity (other than HMN and the HMN Subsidiaries)
relating to any merger, consolidation, share exchange, purchase or other
acquisition of all or (other than in the ordinary course of business) any
substantial portion of the assets of or any substantial equity interest in
Marshalltown or the Bank or any business combination with Marshalltown or the
Bank (collectively, an "Acquisition Transaction"), or participate in any
discussions or negotiations regarding, or furnish to any other person any
information with respect to Marshalltown or the Bank or MSL or afford access to
the properties, books or records of Marshalltown or the Bank for the purposes
of, or cooperate with, or assist or participate in, facilitate or encourage, any
effort or attempt by any other person or entity to seek or effect an Acquisition
Transaction, or enter into an agreement with any person or entity.
Notwithstanding the foregoing, the restrictions set forth in this Agreement
shall not prevent the Marshalltown Board from taking any of the following
actions: (i) furnishing information concerning Marshalltown or (ii) negotiating
with such third party concerning an Acquisition Transaction provided that all of
the following events shall have occurred: (A) such third party has made a
written proposal to the Marshalltown Board (which proposal may be conditional)
to consummate an Acquisition Transaction which proposal identifies a price of
range of values to be paid for the outstanding securities or substantially all
of the assets of the Marshalltown, and if consummated, based on the advice of
the Marshalltown's investment bankers, the Marshalltown Board has determined is
financially more favorable to the stockholders of Marshalltown than the terms of
the Merger (a "Superior Proposal"); (B) the Marshalltown Board has determined,
based on the advice of its investment bankers, that such third party is
financially capable of consummating such Superior Proposal; (C) the Marshalltown
Board shall have determined, after
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consultation with its outside legal counsel, that the fiduciary duties of the
Marshalltown Board require Marshalltown to furnish information to and negotiate
with such third party; and (D) HMN shall have been notified in writing of such
Superior Proposal, including all of its terms and conditions, and shall have
been given copies of such proposal. In addition to the foregoing, Marshalltown
shall not accept or enter into any agreement concerning an Acquisition
Transaction for a period of not less than 48 hours after HMN's receipt of a copy
of such proposal. Upon compliance with the foregoing, Marshalltown shall be
entitled to not recommend or change its recommendation concerning the Merger;
and enter into an agreement with such third party concerning an Acquisition
Transaction, provided that Marshalltown shall immediately make payment in full
to HMN of the fee set forth in Section 5.1. In addition, following receipt of a
proposal or offer relating to an Acquisition Transaction, Marshalltown may take
and disclose to its stockholders a position contemplated by Rule 14e-2 or Rule
14d-9 under the 1934 Act or otherwise make a disclosure to its stockholders.
3.5 Access to Information.
(a) Subject to the provisions of Section 3.4, from the date
hereof to the Effective Time, each of Marshalltown and the Marshalltown
Subsidiaries will, and their respective directors, officers, employees, agents
and representatives will, afford the officers, employees, agents and
representatives of HMN reasonable access at all reasonable times to the
officers, employees, representatives, properties, books and records of
Marshalltown and the Marshalltown Subsidiaries, and to the books and records of
any predecessors thereof in the possession of Marshalltown or the Marshalltown
Subsidiaries, and will furnish to HMN all financial, operating and other data
and information as HMN and the HMN Subsidiaries, through its officers, employees
or representatives, may reasonably request. From the date hereof to the
Effective Time, Marshalltown and the Bank shall promptly furnish HMN with copies
of all monthly and other interim financial statements and other information,
including information disseminated to the Marshalltown Board, as the same become
available. Marshalltown shall promptly notify HMN of any material change in the
business or operations of Marshalltown or the Bank and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of material
litigation involving Marshalltown or the Bank. Two representatives of HMN shall
attend all meetings of the Marshalltown Board and committees thereof (except
meetings of the Marshalltown Board relating to the Merger and the transactions
contemplated hereby) and of each of its subsidiaries conducted prior to the
Effective Time, and give HMN reasonable advance notice of the date, time and
place of any such regularly scheduled meetings and special meetings of the
entire Board of Directors of any such entity. Notwithstanding anything to the
contrary in this Section 3.5(a), nothing in this Section 3.5(a) shall require
Marshalltown to provide access to or copies of any information to HMN, pursuant
to this Section 3.5(a), if such access would result in the violation of the
attorney-client privilege afforded such information.
(b) Marshalltown agrees to hold in confidence all, and not to
disclose to others for any reason whatsoever any, non-public information
received by it pursuant to Section 4.3 or otherwise in connection with the
transactions contemplated hereby, except (i) as required by law, (ii) for
disclosure to directors, officers, employees, agents and representatives as
necessary to consummate the Merger or as necessary to the operation of its and
HMN's businesses, and (iii) for information that becomes publicly available
other than through Marshalltown or the Marshalltown
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Subsidiaries or their respective directors, officers, employees, agents or
representatives. In the event that this Agreement is terminated, upon receipt of
a written request from HMN, Marshalltown will return to HMN all documents and
other material (and all copies thereof) obtained from HMN or any of the HMN
Subsidiaries in connection with the transactions contemplated hereby and will
destroy all documents and other material prepared by Marshalltown or any of the
Marshalltown Subsidiaries, or their respective directors, officers, employees,
agents and representatives, that reflect any non-public information received by
any of them in connection with the transactions contemplated hereby.
3.6 Government Filings. Marshalltown and the Marshalltown Subsidiaries
shall file all reports with the appropriate regulatory authorities and all other
reports, applications and other documents required to be filed with the OTS and
other regulatory authorities between the date of this Agreement and the
Effective Time and shall make available to HMN copies of all such reports.
3.7 Establishment of Accruals. If requested by HMN immediately prior to
the Effective Time, the Bank shall, consistent with generally accepted
accounting principles, establish such additional accruals (including an addition
of $150,000 for income taxes) and reserves as may be necessary to conform the
Bank's accounting and credit loss reserve practices and methods to those of HMN
(as such practices and methods are to be applied to the Bank from and after the
Effective Time) and reflect HMN's plans with respect to the conduct of the
Bank's business following the Merger and to provide for the costs and expenses
relating to the consummation by Marshalltown and the Bank of the transactions
contemplated by this Agreement.
3.8 Filing of Tax Returns and Adjustments.
(a) Marshalltown, on its behalf and on behalf of each of the
Marshalltown Subsidiaries, shall file (or cause to be filed) at its own expense,
on or prior to the due date, all Tax Returns, including all Marshalltown Benefit
Plan returns and reports, for all Tax periods ending on or before the Closing
Date where the due date for such Returns (taking into account valid extension of
the respective due dates) falls on or before the Closing Date; provided,
however, that Marshalltown and the Marshalltown Subsidiaries shall not amend any
Tax Returns, or other elections or information statements which reflects an
additional liability for Taxes, or consent to any material adjustment or
otherwise compromise or settle any material matters with respect to Taxes,
without prior consultation with HMN; provided, further, that Marshalltown and
the Marshalltown Subsidiaries shall not make any election or take any other
discretionary position with respect to any material amount of Taxes in a manner
inconsistent with past practices, without the prior written approval of HMN.
Marshalltown shall provide HMN with a copy of appropriate workpapers, schedules,
drafts and final copies of each material federal and state income Tax Return or
election of Marshalltown and the Marshalltown Subsidiaries (including returns of
all Marshalltown Benefit Plans) as soon as practicable before filing such return
or election and the parties shall reasonably cooperate with each other in
connection therewith.
(b) HMN, in its sole and absolute discretion, will file (or
cause to be filed) all Tax Returns of Marshalltown and the Marshalltown
Subsidiaries due after the Closing Date. After the Closing Date, HMN, in its
sole and absolute discretion and to the extent permitted by law, shall have
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the right to amend, modify or otherwise change all Tax Returns of Marshalltown
and the Marshalltown Subsidiaries for all Tax periods.
3.9 No Further Action Letter. Marshalltown will use all reasonable
efforts to file as promptly as possible any notifications or reports or other
documents required to obtain a no further action letter from the Iowa Department
of National Resources regarding the environmental contamination detected at the
Bank's facility at 29 South Center Street, Marshalltown, Iowa.
IV. COVENANTS OF HMN
4.1 Conduct of Business by HMN Pending the Merger. HMN will use all
reasonable efforts to assist Marshalltown in communicating with Marshalltown's
employees, depositors, borrowers and other customers, regarding the Merger and
continuing operations after consummation of the Merger.
4.2 Proxy Statement. As promptly as practicable after the date hereof,
HMN will cooperate with Marshalltown in drafting the Proxy Statement. The Proxy
Statement (as it relates to HMN) will not contain (with respect to data and
information concerning HMN and the HMN Subsidiaries furnished by or on behalf of
HMN to Marshalltown specifically for use therein) any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading. HMN will promptly
notify Marshalltown in writing if prior to the Effective Time it shall obtain
knowledge of any fact that would make it necessary to amend the Proxy Statement
in order to render the statements made therein not misleading or to comply with
applicable law.
4.3 Access to Information.
(a) From the date hereof to the Effective Time, HMN and its
directors, officers, employees, agents and representatives will furnish to
Marshalltown all financial, operating and other data and information, as filed
by HMN with the SEC, as Marshalltown, through its officers, employees or
representatives, may reasonably request. HMN shall also provide Marshalltown
with copies of any applications, notifications or other documents filed with the
OTS or any other applicable regulatory authority and any correspondence related
thereto. Notwithstanding anything to the contrary in this Section 4.3(a),
nothing in this Section 4.3(a) shall require HMN to provide access to or copies
of any information to Marshalltown, pursuant to this Section 4.3(a), if such
access would result in the violation of the attorney-client privilege afforded
such information.
(b) HMN agrees to hold in confidence all, and not to disclose
to others for any reason whatsoever any, non-public information received by it
pursuant to Section 3.5 or otherwise in connection with the transactions
contemplated hereby, except (i) as required by law, (ii) for disclosure to
directors, officers, employees, agents and representatives as necessary to
consummate the Merger or as necessary to the operation of its and Marshalltown's
businesses, and (iii) for information that becomes publicly available other than
through HMN or any of the HMN Subsidiaries or their respective directors,
officers, employees, agents or representatives. In the event that this
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Agreement is terminated, upon receipt of a written request from Marshalltown,
HMN will return to Marshalltown all documents and other material (and all copies
thereof) obtained from Marshalltown or any of the Marshalltown Subsidiaries in
connection with the transactions contemplated hereby and will destroy all
documents and other material prepared by HMN or any of the HMN Subsidiaries, or
their respective directors, officers, employees, agents and representatives,
that reflect any non-public information received by any of them in connection
with the transactions contemplated hereby.
4.4 Employee Benefits.
(a) At the Effective Time HMN will assume all employee benefit
plans, programs, policies, contracts, agreements and arrangements maintained by
Marshalltown or either of the Marshalltown Subsidiaries (the "Marshalltown
Employee Plans") and shall succeed to all rights as the employer or sponsor
under the Marshalltown Employee Plans to amend, modify or terminate the same in
accordance with their terms and applicable law. To the extent after the
Effective Time, employees of Marshalltown and Marshalltown Subsidiaries
participate in any employee benefit plans, programs, policies, contracts,
agreements and arrangements of HMN, such employees will receive prior service
credit for participation, vesting and benefit accrual purposes, except no
benefit accrual credit will be given for prior service with Marshalltown or
Marshalltown Subsidiaries relating to any HMN defined benefit retirement plan.
(b) The existing Marshalltown profit sharing plan will be
continued, at the option of HMN, through either December 31, 1997 or December
31, 1998 at which time it will be terminated with all participant accounts
becoming fully vested. Prior to termination eligible employees will be entitled
to employer contributions at 15% of eligible compensation for the year ended
December 31, 1997 and an amount equivalent to the percentage allocation under
the HMN Employee Stock Ownership Plan for the year ended December 31, 1998. This
percentage allocation shall be determined by the sum of the fair market value of
the ESOP shares allocated to employees of HMN and its subsidiaries during the
year divided by the total eligible compensation paid to the participants in the
ESOP Plan for the same period, subject to the 15% limit of eligible compensation
imposed by the existing Marshalltown Profit Sharing Plan. The accounts of
participants and beneficiaries shall be distributed as soon as practicable after
the termination of such plan, with distributions being subject, at the option of
the participant or beneficiary, to rollover to an HMN qualified plan (if
permitted by the terms of such plan), or to an individual retirement account (to
the extent permitted by law). Upon termination of the Marshalltown profit
sharing plan, full-time employees of Marshalltown and Marshalltown Subsidiaries
employed as of the Effective Time will be eligible to participate (subject to
eligibility and vesting provisions thereof) in the Home Federal Savings Bank
401(k) Plan and the HMN Employee Stock Ownership Plan. For purposes of such
participation, employees of Marshalltown and Marshalltown Subsidiaries will
receive prior service credit for their service with Marshalltown or Marshalltown
Subsidiaries for eligibility, participation and vesting purposes only.
(c) Employees of Marshalltown and Marshalltown Subsidiaries
will participate in their existing employee welfare programs at existing
contribution rates through the Effective Time. At the Effective Time, such
programs will be terminated and replaced with HMN plans.
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(d) Subject to satisfaction of the provisions of Section
6.2(e), at the Effective Time, Home Federal (i) will assume the terms and
conditions of certain employment agreements between the Bank and six employees
of the Bank, including Richard A. Rathke and (ii) will terminate Richard A.
Rathke in accordance with the terms and conditions set forth in the employment
agreement between Marshalltown and Richard A. Rathke dated June 30, 1995.
(e) Nothing contained in this Section 4.4 or elsewhere in this
Agreement shall confer, or be deemed to confer, upon any person who is an
employee or former employee of Marshalltown or either of the Marshalltown
Subsidiaries or a beneficiary of an employee or former employee any rights to
continued employment or, to continuation of any benefit plans, programs,
policies or arrangements, including the Marshalltown Employee Plans and the HMN
Plans, for any particular period of time following consummation of the Merger.
4.5 Indemnification.
(a) HMN agrees that from and after the Effective Time it will
assume and honor the indemnification obligations of Marshalltown and the
Marshalltown Subsidiaries set forth in their respective certificate of
incorporation, charter or bylaws, as in effect on the date hereof with respect
to any person described in such provision (the "indemnities").
(b) HMN agrees that for a period of three years from and after
the Effective Time it will maintain and cause to remain in effect the current
directors' and officers' liability insurance policies maintained by Marshalltown
and the Marshalltown Subsidiaries with respect to claims arising from facts or
events which occurred at or before the Effective Time.
(c) In the event HMN or any of its successors or assigns (i)
reorganizes or consolidates with or merges into or enters into another business
combination transaction with any other person or entity and is not the
resulting, continuing or surviving corporation or entity of such consolidation,
merger or transaction, or (ii) liquidates, dissolves or transfers all or
substantially all of its properties and assets to any person or entity, then,
and in each such case, proper provision shall be made so that the successors and
assigns of HMN assume the obligations set forth in this Section 4.5.
(d) This Section 4.5 shall be construed as an agreement, as to
which the indemnitees are intended to be third-party beneficiaries, between HMN
and such indemnitees as unaffiliated third parties and is not subject to any
limitations to which HMN may be subject in indemnifying its own directors or
officers or other persons.
V. MUTUAL COVENANTS
5.1 Expenses.
(a) All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby will be paid by the party incurring
such costs and expenses; provided, however,
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that any of such costs and expenses incurred by Marshalltown or either of the
Marshalltown Subsidiaries and payable to third parties (other than HMN) in
excess of $400,000 shall result in an adjustment to the amount of the Merger
Consideration as follows: the amount, if any, in excess of $400,000 shall be
divided by 1,534,205, and shall be subtracted from the amount of the Merger
Consideration paid per share of Marshalltown Common Stock. For purposes of this
Section 5.1(a), all costs and expenses (the "Environmental Costs") incurred or
to be incurred by Marshalltown, either of the Marshalltown Subsidiaries or any
successor thereto, with respect to the environmental contaminants detected in
the soil and groundwater of the Bank's facility at 29 South Center Street,
Marshalltown, Iowa, including, without limitation, all costs and expenses
incurred or to be incurred in connection with the remediation and clean-up of
such site shall be included; provided, however, that the testing and assessment
costs related to such site shall not be included. Notwithstanding the provisions
of the foregoing sentence, the portion, if any, of the Environmental Costs which
are reimbursed, or would be subject to reimbursement, pursuant to Iowa's
environmental reimbursement funds will not be included in Environmental Costs
provided Marshalltown delivers to HMN, on or prior to Closing, a letter or other
evidence, reasonably satisfactory to HMN, that such portion has been reimbursed
or shall qualify for reimbursement under the terms and provisions of such funds.
The calculation of the Environmental Costs, if any, to be incurred, shall be
derived from the estimate of the Environmental Costs prepared by an
environmental engineer engaged by Marshalltown in connection with any
requirements of the Iowa Department of Natural Resources related to the issuance
of a no further action letter and the approval of any monitoring or remediation
plan for the Marshalltown property. Such estimate shall be subject to HMN's
prior review and approval.
(b) Notwithstanding the provisions of Section 5.1(a),
(i) if (A) there has been no material breach by HMN
of the representations, warranties, covenants and agreements of HMN under this
Agreement (an "HMN Material Breach"), (B) this Agreement is terminated pursuant
to Section 7.1(f), (C) prior to such termination an Acquisition Proposed (as
hereinafter defined) is outstanding, and (D) an Acquisition Proposal, as it may
be modified, or a substitute, alternative or other Acquisition Proposal, is
consummated within 18 months after this Agreement is terminated pursuant to
Section 7.1(f), then Marshalltown will at the time of such consummation or
promptly thereafter, but in no event later than three business days after
receiving a written request from HMN therefor, pay to HMN a fee of $750,000. As
used herein, an "Acquisition Proposal" shall mean a publicly-announced offer, or
a publicly-announced intent to make an offer, from a party other than HMN or its
affiliates, to acquire Marshalltown or the Bank in a merger, consolidation,
share exchange or other business combination or joint venture, to acquire all or
substantially all of the assets of Marshalltown or the Bank or a substantial
part of the assets of Marshalltown and the Bank, taken as a whole, or to acquire
at least 50% of the outstanding Marshalltown Common Stock or at least 50% of the
equity interests in the Bank, or a negotiated transaction for any of the
foregoing.
(ii) if (A) there has been no HMN Material Breach and
(B) this Agreement is terminated pursuant to Section 7.1(g) or (h), then
Marshalltown will promptly thereafter, but in no event later than three business
days after receiving a written request by HMN therefor, pay to HMN a fee of
$750,000.
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(c) In no event shall more than one termination fee be payable
under Section 5.1(b) above.
5.2 Additional Agreements. In accordance with the terms and subject to
the conditions hereof, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable to fulfill the conditions and
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
5.3 Notification of Certain Matters. Marshalltown will give prompt
notice to HMN and Home Federal, and HMN and Home Federal will give prompt notice
to Marshalltown, of (a) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
at any time from the date hereof to the Effective Time, and (b) any material
failure of Marshalltown, HMN, Home Federal or Sub, or any of their respective
directors, officers, employees, agents or representatives, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
such party hereunder.
5.4 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, whether before or after the Effective Time, the parties
hereto agree to cooperate and use all reasonable efforts to defend against and
respond thereto.
5.5 Regulatory Approvals. Each of HMN, Home Federal, Sub and
Marshalltown will use all reasonable efforts to file as promptly as possible any
applications, notifications or other documents required to obtain regulatory
approvals and consents from the OTS and any other applicable regulatory
authorities of the Merger and the other transactions contemplated hereby.
VI. CONDITIONS
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party hereto to effect the Merger and to
consummate the other transactions contemplated hereby will be subject to the
fulfillment at or prior to the Closing of the following conditions:
(a) The Merger and this Agreement shall have been approved and
adopted by the requisite vote of the stockholders of Marshalltown as required by
law, and by any applicable provisions of its certificate of incorporation and
by-laws.
(b) The Merger and the other transactions contemplated hereby
shall have been approved by the OTS and any other regulatory authority without
any condition, in the reasonable opinion of HMN, unduly burdensome to HMN, all
conditions required to be satisfied prior to the
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Effective Time imposed by the terms of such approvals shall have been satisfied
and all waiting period relating to such approvals shall have expired.
(c) No order shall have been entered and remain in effect in
any action or proceeding before any foreign, Federal or state court or
governmental agency or other foreign, Federal or state regulatory or
administrative agency or commission that would prevent or make illegal the
consummation of the Merger.
(d) There shall have been obtained such other permits,
consents and approvals of bank, thrift, insurance or securities commissions or
agencies of any jurisdiction and of other governmental bodies or agencies that
may reasonably be deemed necessary so that the consummation of the Merger and
the other transactions contemplated hereby will be in compliance with applicable
laws, without any condition, in the reasonable opinion of HMN, unduly burdensome
to HMN.
6.2 Additional Conditions to Obligations of HMN. The obligations of
HMN, Home Federal and Sub to effect the Merger and to consummate the other
transactions contemplated hereby are, at the option of HMN, Home Federal and
Sub, also subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) The representations and warranties of Marshalltown
contained in Section 2.2 shall be accurate in all material respects as of the
date of this Agreement, and there shall be no inaccuracy in any such
representations and warranties as of the Closing Date except to the extent that
any such inaccuracy individually or in the aggregate does not constitute a
material adverse change in the financial condition, results of operations or
business of Marshalltown and the Marshalltown Subsidiaries, taken as a whole;
all of the terms, covenants and conditions of this Agreement to be complied with
and performed by Marshalltown at or before the Closing shall have been duly
complied with and performed in all material respects; and a certificate to the
foregoing effect dated as of the Closing Date and signed by the Chief Executive
Officer and Chief Financial Officer of Marshalltown shall have been delivered to
HMN.
(b) Since the date of this Agreement, no material adverse
change in the financial condition, results of operations or businesses of
Marshalltown and the Marshalltown Subsidiaries, taken as a whole, shall have
occurred, and a certificate to such effect dated as of the Closing Date and
signed by the Chief Executive Officer or Chief Financial Officer of Marshalltown
shall have been delivered to HMN.
(c) Dissenting Shares shall constitute no more than 7 1/2% of
the shares of Marshalltown Common Stock issued and outstanding immediately prior
to the Effective Time.
(d) HMN shall have received written opinion of counsel to
Marshalltown, dated as of the Closing Date, substantially to the effect set
forth in Exhibit 6.2(d).
(e) HMN shall have received the consent in writing of the
parties to the employment agreements listed on Exhibit 6.2(e) to the effect that
the transactions contemplated by this Agreement, including the Merger, the
Liquidation and the Subsequent Merger, do not constitute
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a material diminution of or interference with such employee's duties,
responsibilities and benefits under such agreements.
(f) As a part of HMN's continuing examination of Marshalltown,
HMN shall have completed its examination of the assets and liabilities of
Marshalltown, including, but not limited to, a review of the results of the most
recent regulatory examination report of Marshalltown and all previous regulatory
examination reports and related correspondence and administrative actions, and
all the documentation relating to assets or liabilities of Marshalltown (all of
which will be updated by Marshalltown at its expense), and the results of such
examinations shall have disclosed no material adverse change in the financial
condition, results of operations or business of Marshalltown.
6.3 Additional Conditions to Obligations of Marshalltown. The
obligations of Marshalltown to effect the Merger and to consummate the other
transactions contemplated hereby are, at the option of Marshalltown, also
subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) The representations and warranties of HMN, Home Federal
and Sub contained in Section 2.1 shall be accurate in all material respects as
of the date of this Agreement, and there shall be no inaccuracy in any such
representations and warranties as of the Closing Date except to the extent that
any such inaccuracy individually or in the aggregate does not constitute a
material adverse change in the financial condition, results of operations or
business of HMN and the HMN Subsidiaries, taken as a whole; all of the terms,
covenants and conditions of this Agreement to be complied with and performed by
HMN, Home Federal and Sub at or before the Closing shall have been duly complied
with and performed in all material respects; and a certificate to the foregoing
effect dated as of the Closing Date and signed by the Chief Executive Officer
and Chief Financial Officer of HMN shall have been delivered to Marshalltown.
(b) On the date of the Proxy Statement, the Marshalltown Board
shall have received from EVEREN Securities, Inc. a written update, dated as of
such date, confirming the opinion referred to in Section 2.2(m).
(c) Marshalltown shall have received written opinion of Faegre
& Benson LLP, counsel to HMN, dated as of the Closing Date, substantially to the
effect set forth in Exhibit 6.3(c).
VII. MISCELLANEOUS
7.1 Termination. This Agreement may be terminated and the Merger and
the other transactions contemplated hereby may be abandoned at any time prior to
the Effective Time, whether prior to or after approval by the stockholders of
Marshalltown:
(a) By mutual consent of the HMN Board and the Marshalltown
Board.
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(b) By the HMN Board or the Marshalltown Board, if the Merger
shall not have been consummated on or before June 30, 1998 (unless such
circumstance is the result of a breach of the terms hereof in any material
respect by the party asserting the termination right).
(c) By the Marshalltown Board, if a condition to
Marshalltown's obligations to close set forth in Article VI of this Agreement
cannot be met on the Closing Date and is not waived; provided however, that with
respect to the failure to satisfy a condition under Section 6.3 that is capable
of being cured within 30 days, the right of the Marshalltown Board to terminate
this Agreement shall exist only if the failure to satisfy such condition is not
cured within 30 days after written notice by Marshalltown to HMN of such
condition.
(d) By the HMN Board, if a condition to HMN's obligations to
close set forth in Article VI of this Agreement cannot be met on the Closing
Date and is not waived; provided however, that with respect to the failure to
satisfy a condition under Section 6.2 that is capable of being cured within 30
days, the right of the HMN Board to terminate this Agreement shall exist only if
the failure to satisfy such condition is not cured within 30 days after written
notice by HMN to Marshalltown of such condition.
(e) By the HMN Board or the Marshalltown Board, if a final
unappealable order to restrain, enjoin or otherwise prevent, or awarding
substantial damages in connection with, the consummation of the Merger or the
other transactions contemplated hereby shall have been entered by a court of
competent jurisdiction, the OTS or other regulatory authority.
(f) By the HMN Board or the Marshalltown Board, if the Merger
and this Agreement shall have been submitted to a vote of the stockholders of
Marshalltown and shall not have been approved by the requisite vote.
(g) By the HMN Board or the Marshalltown Board, if the
Marshalltown Board does not make to the stockholders of Marshalltown a favorable
recommendation with respect to the Merger or such recommendation is modified or
withdrawn in a way detrimental to HMN (and HMN and Marshalltown agree that a
determination by the Marshalltown Board not to call the meeting of stockholders
contemplated by Section 3.3 or the cancellation or adjournment of such meeting
without a vote on the Merger and this Agreement being taken (except under
circumstances where Marshalltown is otherwise attempting to secure a vote of its
stockholders in favor of approval and adoption of the Merger and this Agreement)
shall be deemed to be such a failure to make or withdrawal of such
recommendation).
(h) By the HMN Board or the Marshalltown Board, if
Marshalltown shall have entered into a definitive agreement for an Acquisition
Transaction in accordance with Section 3.4.
7.2 Effect of Termination. In the event of any termination of this
Agreement pursuant to Section 7.1, HMN and Marshalltown shall have no obligation
or liability to each other except that (a) the provisions of Sections 3.5(b) and
4.3(b) and the provisions of Section 5.1 shall survive any such termination, and
(b) nothing herein and no termination pursuant hereto shall relieve any party
from liability for any breach of this Agreement.
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7.3 Waiver and Amendment. Any provision of this Agreement may be waived
at any time by action of the Board of Directors of the party that is, or whose
stockholders are, entitled to the benefits thereof. This Agreement may not be
amended or supplemented at any time, except by an instrument in writing signed
on behalf of each party hereto; provided however, that after this Agreement has
been approved and adopted by the stockholders of Marshalltown this Agreement may
be amended only as may be permitted by applicable provisions of the Delaware
Law.
7.4 Nonsurvival of Representations and Warranties. No representation or
warranty in this Agreement shall survive the consummation of the Merger.
7.5 Public Statements. HMN and Marshalltown agree to consult with each
other prior to issuing any press release or otherwise making any public
statement or disclosure with respect to the transactions contemplated hereby,
and neither will issue any such press release or make any such public statement
or disclosure prior to such consultation, except as may be required by law or
applicable stock exchange policy.
7.6 Knowledge. All references in this Agreement to knowledge of a
corporation shall be deemed to mean knowledge of any one or more of its
executive officers.
7.7 Assignment. This Agreement will not be assignable by the parties
hereto.
7.8 Notices. All notices, requests, claims, demands and other
communications hereunder will be in writing and will be given (and will be
deemed to have been duly received if so given) by delivery by cable, telegram,
telex, telecopy or by registered or certified mail, postage prepaid, return
receipt requested, to the respective parties as follows:
if to HMN, Home Federal or Sub:
HMN Financial, Inc.
101 North Broadway
Spring Valley, Minnesota 55975
Attention: President and Chief Executive Officer
Telephone Number: 507/346-7345
Telecopy Number: 507/346-1111
with a copy to:
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Douglas P. Long
Telephone Number: 612/336-3288
Telecopy Number: 612/336-3026
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and if to Marshalltown:
Marshalltown Financial Corporation
303 West Main Street
Marshalltown, Iowa 50158
Attention: President and Chief Executive Officer
Telephone Number: (515) 754-6000
Telecopy Number: (515) 754-6045
with a copy to:
Silver Freedman & Taff
1100 New York Avenue N.W.
Suite 700
Washington, D.C. 20005
Attention: Jeffrey M. Werthan
Telephone Number: 202/414-6100
Telecopy Number: 202/682-0354
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
7.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE SUBSTANTIVE LAW OF THE STATE OF DELAWARE WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
7.10 Severability. If any term, provision, covenant, agreement or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants, agreements and restrictions of this Agreement will continue in full
force and effect and will in no way be affected, impaired or invalidated.
7.11 Counterparts. This Agreement may be executed in counterparts, each
of which will be an original, but all of which together will constitute one and
the same agreement.
7.12 Headings. The section headings herein are for convenience only and
will not affect the construction hereof.
7.13 Entire Agreement. This Agreement (a) constitutes the entire
agreement between the parties hereto and supersede all other prior agreements
and understandings, both oral and written, between the parties relating to the
subject matter hereof and thereof, and (b) does not confer upon any person or
entity not a party hereto or thereto any rights or remedies hereunder or
thereunder.
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IN WITNESS WHEREOF, HMN has caused this Agreement to be signed by its
Chairman or its President or a Vice President and attested by its Secretary or
an Assistant Secretary, Home Federal has caused this Agreement to be signed by
its Chairman or its President and attested by its Secretary, Sub has caused this
Agreement to be signed by its Chairman or President and attested by its
Secretary, and Marshalltown has caused this Agreement to be signed by its
Chairman or its President or a Vice President and attested by its Secretary or
an Assistant Secretary, all as of the date first above written.
HMN FINANCIAL, INC.
By:/s/ Roger P. Weise
------------------
Roger P. Weise
President and Chief Executive Officer
Attest:
/s/ Roxanne M. Hellickson
- -------------------------
Roxanne M. Hellickson, Secretary
HOME FEDERAL SAVINGS BANK
By:/s/ Roger P. Weise
------------------
Roger P. Weise, President
Attest:
/s/ Roxanne M. Hellickson
- -------------------------
Roxanne M. Hellickson, Secretary
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HFSB ACQUISITION CO.
By:/s/ Roger P. Weise
------------------
Roger P. Weise, President
Attest:
/s/ James B. Gardner
- --------------------
James B. Gardner, Secretary
MARSHALLTOWN FINANCIAL CORPORATION
By:/s/ Richard A. Rathke
---------------------
Richard A. Rathke,
President and Chief Executive Officer
Attest:
/s/ Wanda L. Evans
- ------------------
Wanda L. Evans, Secretary
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APPENDIX B
Section 262 of the
Delaware General Corporation Law
ss. 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock which, at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were
either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 stockholders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to ss. ss. 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation;
<PAGE>
b. Shares of stock of any other corporation which at
the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000
stockholders;
c. Cash in lieu of fractional shares of the
corporations described in the foregoing subparagraphs a. and
b. of this paragraph; or
d. Any combination of the shares of stock and cash in
lieu of fractional shares described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(3) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
<PAGE>
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or 253 of this title, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or
within 10 days thereafter, shall notify each of the stockholders
entitled to appraisal rights of the effective date of the merger or
consolidation and that appraisal rights are available for any or all of
the shares of the constituent corporation, and shall include in such
notice a copy of this section. The notice shall be sent by certified or
registered mail, return receipt requested, addressed to the stockholder
at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such such fair value,
the Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
<PAGE>
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<PAGE>
APPENDIX C
October 8, 1997
Board of Directors
Marshalltown Financial Corporation
303 West Main Street
Marshalltown, IA 50158
Members of the Board:
We understand that Marshalltown Financial Corporation ("Marshalltown")
and HMN Financial, Inc. ("HMN Financial") have entered into an Agreement to
Merge and Plan of Reorganization dated July 1, 1997 (the "Agreement"), pursuant
to which Marshalltown will be merged into HMN Financial (the "Merger"), and HMN
Financial shall be the surviving entity. Pursuant to the Agreement, holders of
the outstanding shares of Marshalltown Common Stock (the "Shares") will receive
$17.51 for each of the Shares, based on 1,411,475 Shares outstanding (the
"Consideration").
You have requested our opinion as to whether the Consideration to be
paid by HMN Financial pursuant to the Merger is fair, from a financial point of
view, to the holders of the Shares, as of the date hereof.
EVEREN Securities, Inc. ("EVEREN Securities"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and their securities in connection with merger and acquisition transactions,
public offerings, private placements, recapitalizations, and other purposes.
EVEREN Securities publishes monthly reviews of the economy and securities
markets, selected industries, and selected individual stocks. Our research
analysts publish regular reports on individual banks and bank holding companies,
as well as other financial institutions. Our firm makes principal markets in
approximately 125 financial institution stocks and we have managed public
offerings for banks and savings institutions, as well as other financial
institutions. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, of the Consideration
to be received by holders of the Shares from HMN Financial pursuant to the
Merger, EVEREN Securities has rendered fairness opinions for many other
significant capital transactions involving financial institutions.
For the purposes of this fairness opinion, we believe we are
independent of Marshalltown and HMN Financial. Other than our service to
Marshalltown in connection with its initial public stock offering on March 31,
1994, with the Merger, and the fairness opinion given hereby, we have provided
no other professional services to either Marshalltown or HMN Financial.
<PAGE>
In arriving at our opinion, we have, among other things: (i) reviewed
drafts of this Proxy Statement, (ii) reviewed the Agreement; (ii) reviewed
Marshalltown's financial statements and certain internal management reports and
certain publicly available financial and other data with respect to
Marshalltown, including financial statements for recent years and interim
periods to date and certain other relevant financial and operating data; (iv)
discussed Marshalltown's history, operations, service areas, asset/liability
structure and quality, financial condition and performance, and prospects, among
other factors, with members of Marshalltown's management and Board of Directors;
(v) reviewed the reported price and trading activity of Marshalltown Shares;
(vi) reviewed the financial terms of certain recent business combinations in the
thrift industry specifically; (vii) discussed the Merger and the Agreement with
Marshalltown's counsel; and (vii) performed such other studies and analyses as
we considered appropriate. We have also taken into account general economic,
market, and financial conditions as well as our experience in other
transactions, our knowledge of the thrift and commercial banking industry, and
our experience in securities valuation.
In rendering this opinion we have relied without independent
verification upon the accuracy and completeness of the foregoing financial and
other information. We have also assumed that there has been no material change
in Marshalltown's assets, financial condition, results of operations, business,
or prospects since the date of the last financial statements made available to
us for Marshalltown. In addition, we have not made an independent evaluation,
appraisal, or physical inspection of the assets or individual properties of
Marshalltown, nor have we been furnished with such appraisals. Further, our
opinion is based on economic, monetary, and market conditions existing as of the
date hereof.
We hereby consent to the inclusion of this opinion as an exhibit to a
proxy, information, registration, or other such statement. Further, we consent
to the use of our firm's name and references to this opinion in such
information, proxy, registration, or other such statement, with such uses and
references being subject to our prior approval.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion as of the date hereof that the
Consideration to be paid by HMN Financial pursuant to the Merger is fair, from a
financial point of view, to holders of the Shares.
Sincerely,
/s/EVEREN Securities, Inc.
--------------------------
EVEREN Securities, Inc.
<PAGE>
APPENDIX D
IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THIS ANNUAL
REPORT ON FORM 10-KSB IS BEING FILED IN PAPER PURSUANT TO A
CONTINUING HARDSHIP EXEMPTION.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-23352
MARSHALLTOWN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 42-1413971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 W. Main Street, Marshalltown, Iowa 50158
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 754-6000
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock,
Nasdaq National Market System par value $.01 per share
- --------------------------------------------------------------------------------
(Name of each exchange on which registered) (Title of Class)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $8.9
million.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
The Nasdaq National Market System as of December 20, 1996 was $16.8 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 December 20, 1996, there were issued and outstanding 1,411,475
shares of the Registrant's Common Stock. Transitional Small Business Disclosure
Format: YES [ ] NO [X]
<PAGE>
PART I
Item 1. Description of Business
General
Marshalltown Financial Corporation (the "Company" or "MFC") is a
Delaware corporation organized in 1993 by Marshalltown Savings Bank, FSB
("Marshalltown Savings" or the "Bank") for the purpose of becoming a savings and
loan holding company. The Company owns all of the outstanding stock of the Bank,
issued on March 30, 1994 in connection with the completion of the Bank's
conversion from the mutual to the stock form of organization (the "Conversion").
The Company issued 1,411,475 shares of Common Stock at $8.00 per share in the
Conversion. The Bank, the Company's only operating subsidiary, was initially
chartered in 1908 as an Iowa chartered savings and loan association. The Bank
converted to a federal mutual charter in 1991. All references to the Company,
unless otherwise indicated, on or before March 30, 1994 refer to the Bank and
its subsidiaries on a consolidated basis. The Company's Common Stock trades on
The Nasdaq National Market under the symbol "MFCX."
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision, Department of
the Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are backed by the full faith and credit of the United States Government
and are insured by the Savings Association Insurance Fund ("SAIF") to the
maximum extent permitted by the FDIC.
The Company serves its primary market area, Marshall County, Iowa and
the western half of Tama County, Iowa, through its three retail banking offices.
At September 30, 1996, the Company had total assets of $124.2 million, deposits
of $103.0 million, and stockholder's equity of $19.3 million.
The principal business of the Company historically has consisted of
attracting retail deposits from the general public and investing those funds
primarily in one- to four-family residential mortgage loans and, to a lesser
extent, commercial and multi-family real estate, construction and consumer
loans. The Company also purchases significant amounts of mortgage-backed
securities and invests in U.S. Government and agency obligations and other
permissible investments. At September 30, 1996, 82.6% of the Company's real
estate mortgage loans (excluding mortgage-backed securities) were secured by
properties located in Iowa. See "- Originations, Purchases, Sales and Servicing
of Loans and Mortgage-Backed Securities."
The Company's revenues are derived primarily from interest on
participation loans, mortgage-backed securities, mortgage loans and investments
and, to a lesser extent, from consumer loans, income from service charges and
loan originations, and loan servicing fee income. The Company does not make
agricultural loans, loans to fund leveraged buyouts, loans to foreign
corporations or governments, and is not engaged in land development or
construction activities through joint ventures or subsidiaries.
<PAGE>
The Company currently offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits include savings
accounts, money market accounts, NOW checking accounts, and certificate accounts
with terms of 91 days to eight years. The Bank only solicits deposits in its
primary market area and does not accept brokered deposits.
The executive offices of the Company and the Bank are located at 303
West Main Street, Marshalltown, Iowa 50158. The telephone number at that address
is (515) 754-6000.
Agreement to Merge and Plan of Reorganization
On February 27, 1996, stockholders of the Company voted to approve the
Agreement to Merge and Plan of Reorganization and related Plan of Merger
(together, the "Merger Agreement") and the merger of Savings Bay Corporation
("SBC"), a wholly owned subsidiary of BancSecurity Corporation ("BancSecurity"),
with and into MFC and for MFC to become the wholly owned subsidiary of
BancSecurity (the "Merger"). Consummation of the Merger was contingent upon the
approval of the Merger by the Board of Governors of the Federal Reserve System
(the "FRB"). Under the Merger Agreement, if the Merger had not been consummated
by September 30, 1996, either party had the right to terminate the Merger
Agreement so long as such party was not in material breach of the Merger
Agreement. On November 8, 1996, the Company entered into a forbearance agreement
(the "Forbearance Agreement") with BancSecurity pursuant to which the Company
agreed not to terminate the Merger Agreement until December 13, 1996, unless the
FRB approved the Merger prior to such date, in which case the Company agreed not
to terminate the Merger Agreement until January 15, 1997. In return, the
original per share merger consideration of $16.75 in cash would be increased by
6% per annum from September 30, 1996 through the closing date of the Merger. The
Forbearance Agreement also provided that if the Merger were not consummated for
any reason (except for breach by the Company) BancSecurity was required to pay
to the Company $75,000 in cash.
On December 9, 1996, the FRB denied the Merger. The principal reason
cited by the FRB for the denial was an undue level of market concentration that
would be created by the Merger. As a result of the FRB's decision, MFC
terminated the Merger Agreement.
Lending Activities
General. Historically, MFC has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980's, MFC began to focus on the
origination of adjustable-rate mortgage ("ARM") loans for retention in its
portfolio, in order to increase the percentage of loans in its portfolio that
reprice.
MFC's primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. To a much lesser extent, MFC has originated loans secured by
commercial and multi-family real estate and a limited amount of construction and
consumer loans. During fiscal 1996, MFC purchased loan participations from other
financial institutions totalling $6.8 million. At September 30, 1996, MFC's net
loan portfolio totalled $60.3 million, which constituted 48.5% of MFC's total
assets.
<PAGE>
All loan applications must be reviewed and approved by the Bank's loan
committee in accordance with the Bank's underwriting guidelines. The loan
committee consists of three officers of the Bank and is appointed yearly by the
Board of Directors of the Bank. All loans of $250,000 or more must be approved
by an executive committee comprised of three outside directors appointed
annually by the Board of Directors.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At
September 30, 1996, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was approximately $2.2 million.
At September 30, 1996, the Bank had no groups of related loans with outstanding
balances in excess of this amount. See "Regulation - Federal Regulation of
Savings Associations."
Management reserves the right to change its lending programs as
circumstances dictate.
<PAGE>
The following information presents the composition of MFC's loan
portfolio in dollar amounts and in percentages (before deductions for loans in
process, deferred fees and discounts and allowances for losses) as of the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family............... $52,685 86.39% $44,272 86.36% $39,012 86.41%
Multi-family...................... 3,416 5.60 3,828 7.46 2,831 6.27
Commercial real estate............ 2,202 3.61 1,321 2.58 1,568 3.47
Construction...................... 700 1.15 329 .64 395 .88
------- ------ ------- ------ ------- ------
Total real estate loans....... 59,003 96.75 49,750 97.04 43,806 97.03
------- ------ ------- ------ ------- ------
Consumer Loans:
Home equity...................... 1,676 2.74 1,112 2.17 829 1.84
Home improvement................. 193 .32 198 .39 236 .52
Deposit account.................. 114 .19 202 .40 165 .37
Other............................ --- --- 3 --- 109 .24
------- ------ ------- ------ ------- ------
Total consumer loans.......... 1,983 3.25 1,515 2.96 1,339 2.97
------- ------ ------- ------ ------- ------
Total loans................... 60,986 100.00% 51,265 100.00% 45,145 100.00%
------ ====== ------ ====== ------ ======
Less:
Loans in process.................. 287 479 573
Deferred fees and discounts....... 302 297 280
Allowance for losses.............. 113 103 103
------- ------- -------
Total loans receivable, net....... $60,284 $50,386 $44,189
======= ======= =======
</TABLE>
<PAGE>
The following table shows the composition of MFC's loan portfolio by
fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- -------------------
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.............. $37,217 61.03% $31,469 61.39% $28,660 63.48%
Multi-family..................... 2,696 4.42 2,959 5.77 2,831 6.27
Commercial real estate........... 786 1.29 1,120 2.18 1,568 3.47
Construction..................... 493 .81 329 .64 395 .88
------- ------- ------- ------ ------- ------
Total real estate loans....... 41,192 67.55 35,877 69.98 33,454 74.10
Consumer......................... 1,983 3.25 1,515 2.96 1,339 2.97
------- ------- ------- ------ ------- ------
Total fixed-rate loans........ 43,175 70.80 37,392 72.94 34,793 77.07
Adjustable-Rate Loans:
Real estate:
One- to four-family.............. 15,468 25.36 12,803 24.97 10,352 22.93
Multi-family..................... 720 1.18 869 1.70 --- ---
Commercial real estate ......... 1,416 2.32 201 .39 --- ---
Construction..................... 207 .34 --- --- --- ---
------- ------- ------- ------ ------- ------
Total adjustable-rate loans... 17,811 29.20 13,873 27.06 10,352 22.93
------- ------- ------- ------ ------- ------
Total loans................... 60,986 100.00% 51,265 100.00% 45,145 100.00%
------ ====== ------ ====== ------ ======
Less:
Loans in process.................. 287 479 573
Deferred fees and discounts....... 302 297 280
Allowance for loan losses......... 113 103 103
------- ------- -------
Total loans receivable, net... $60,284 $50,386 $44,189
======= ======= =======
</TABLE>
<PAGE>
The following table illustrates the interest rate sensitivity of MFC's
loan portfolio at September 30, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------------------------------------------
Multi-family
and
Commercial real
One- to four-family estate Construction Consumer
------------------- ------ ------------ --------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1).............. $ 25 8.83% $ 198 9.13% $330 9.00% $ 117 8.19%
1998................. 293 8.45 53 9.00 --- --- 93 8.15
1999................. 149 8.58 516 9.05 --- --- 158 7.86
2000 and 2001........ 619 8.03 743 9.00 --- --- 508 8.25
2002 thru 2006....... 6,560 7.46 1,687 9.20 --- --- 1,107 8.05
2007 thru 2021....... 29,241 7.33 2,421 8.79 370 7.89 --- ---
2022 and thereafter.. 15,798 7.44 --- --- --- --- --- ---
<CAPTION>
Total
Weighted
Average
Amount Rate
------ ----
Due During
Years Ending
September 30,
-------------
<S> <C> <C>
1997(1).............. $ 670 8.89%
1998................. 439 8.43
1999................. 823 8.71
2000 and 2001........ 1,870 8.47
2002 thru 2006....... 9,354 7.84
2007 thru 2021....... 32,032 7.45
2022 and thereafter.. 15,798 7.44
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<PAGE>
At September 30, 1996, the total amount of loans due after September
30, 1997 which have fixed interest rates was $43.1 million, while the total
amount of loans due after such date which have floating or adjustable interest
rates was $17.2 million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations of this type are generated by MFC's marketing efforts (which
include advertisements in local newspapers and on local radio stations), its
existing customers, walk-in customers, and referrals from real estate agents and
builders, and involvement by MFC's directors, officers and employees in various
community organizations. MFC focuses its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences in its market area. At September 30, 1996, MFC's one- to
four-family residential mortgage loans totalled $52.7 million, or approximately
86.4% of MFC's total gross loan portfolio. See "Originations, Purchases, Sales
and Servicing of Loans and Mortgage-Backed Securities."
MFC currently offers fixed-rate mortgage loans and ARM loans. During
the year ended September 30, 1996, MFC originated $2.3 million of
adjustable-rate real estate loans, which were secured by one- to four-family
residential real estate. During the same period, MFC originated $6.0 million of
fixed-rate real estate loans which were secured by one- to four-family
residential real estate. MFC's one- to four-family residential mortgage
originations are primarily in its market area.
MFC's ARMs do not permit negative amortization of principal and are not
convertible into fixed-rate loans. MFC currently originates one- to four-family
residential mortgage loans in amounts up to 95% of the appraised value of the
security property and generally requires that private mortgage insurance be
obtained in an amount sufficient to reduce MFC's exposure to at or below 80%.
The terms of such loans are generally 15 years or less for fixed-rate loans and
30 years or less for ARM loans; however, a maximum 30-year term is also
available for fixed-rate loans. Interest charged on these mortgage loans is
competitively priced according to local market conditions. Although MFC has not
sold any loans in the secondary market since 1985, most of MFC's fixed-rate
residential mortgage loans originated since 1985 conform to secondary market
standards, i.e., those of FNMA and FHLMC.
MFC currently offers one-, five- and seven-year ARM loans with monthly
principal and interest payments typically based on a 30 year amortization
schedule. The five and seven year ARM loans are fixed-rate loans for the initial
stated term and then automatically convert into one year ARM loans. These loans
generally have a stated interest rate margin over the yields on the one-year
U.S. Treasury Constant Maturity Index. The ARM loans currently originated by the
Company generally limit interest rate increases to 2% annually and have an
established long-term ceiling rate of up to 6% over the original interest rate.
In the past, MFC originated ARM loans using a stated interest rate
margin over the U.S. Monthly Median Cost of Funds Index (the "COF Index"). The
COF Index generally does not adjust to changes in interest rates as quickly as
other indices used to set ARM loans and therefore may not be as rate sensitive
as is the Company's cost of funds or other indices. ARM loans originated by MFC
using the COF Index limited interest rate increases and decreases to 1% annually
and 5% over the life of the loan. At September 30, 1996, the total balance of
one- to four-family ARM loans was $15.5 million, of which $3.3 million, or
21.3%, utilize the COF Index.
<PAGE>
As a consequence of using an initial fixed rate and caps, the interest
rates on these loans may not be as rate sensitive as is the Company's cost of
funds. Historically, the initial rate used for ARM loans has been below the
fully-indexed rate and is established by the Company in accordance with market
and competitive factors. MFC has not experienced difficulty with the payment
history on its ARM loans.
MFC originates one- to four-family ARMs in amounts up to 95% of the
appraised value of the security property. For all loans with a loan-to-value
ratio in excess of 80%, MFC requires private mortgage insurance to reduce
exposure levels below the 80% level.
In underwriting one- to four-family residential real estate loans, MFC
evaluates the borrower's ability to make monthly payments and employment history
and the value of the property securing the loan. Most properties securing real
estate loans made by MFC are appraised by a staff appraiser who is licensed by
the State of Iowa. To keep the appraisal process independent of the underwriting
process, the staff appraiser cannot be a member of the Bank's loan committee.
MFC generally requires borrowers to obtain an attorney's title opinion, and
hazard insurance (including flood insurance, if necessary) in an amount not less
than the amount of the loan. Real estate loans originated by MFC generally
contain a "due on sale" clause allowing MFC to declare the unpaid principal
balance due and payable upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. To a more limited
extent, MFC has engaged in commercial and multi-family real estate lending. At
September 30, 1996, MFC had $5.6 million of commercial and multi-family real
estate loans, which represented 9.21% of MFC's total gross loan portfolio. This
portion of MFC's loan portfolio had generally declined since fiscal 1991 through
normal amortization and prepayments; however, MFC's commercial and multi-family
real estate lending increased from $5.1 million at September 30, 1995 to $5.6
million at September 30, 1996. This increase was due to the purchase of a
$330,000 commercial loan and the origination of a $1,000,000 commercial loan. At
September 30, 1996, there were no commercial and multi-family real estate loans
which were 30 or more days delinquent.
The largest multi-family or commercial real estate loan outstanding at
September 30, 1996 was a $1.0 million loan secured by an office building located
in and personal guaranties of certain individuals living in Des Moines, Iowa.
This loan was originated in November 1995 and has a loan to value ratio of
approximately 70.2%.
MFC's commercial and multi-family real estate loan portfolio is secured
primarily by apartment houses and commercial buildings in Marshalltown and Des
Moines, Iowa. Commercial and multi-family real estate loans generally have terms
that do not exceed 25 years. Generally, the loans have been made in amounts up
to 80% of the appraised value of the property. When MFC makes these loans, MFC
analyzes the financial condition of the borrower, the borrower's credit history,
and the reliability and predictability of the cash flow generated by the
property securing the loan. MFC generally requires personal guaranties of the
borrowers. Appraisals on properties securing multi-family or commercial real
estate loans originated by MFC have generally been performed by independent
appraisers.
<PAGE>
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction Lending. MFC originates a limited amount of construction
loans, generally to individuals for the construction of their residences.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to six months. These construction loans have rates and terms
which match any one- to four-family loans then offered by MFC, except that
during the construction phase the borrower pays interest only. Generally, the
maximum loan-to-value ratio of owner-occupied single family construction loans
is 90%. Residential construction loans are generally underwritten pursuant to
the same guidelines used for originating permanent residential loans. At
September 30, 1996, MFC had $700,000 of construction loans to borrowers
intending to live in the properties, as compared to $329,000 at September 30,
1995.
The application process includes a submission to MFC 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 current appraised value and/or the cost of construction (land plus
building).
Consumer Lending. MFC offers secured consumer loans, including home
equity loans, home improvement loans and loans secured by savings deposits. MFC
also originates a limited amount of unsecured signature loans. MFC currently
originates substantially all of its consumer loans in its primary market area.
MFC originates consumer loans on a direct basis. At September 30, 1996, MFC's
consumer loan portfolio totalled $2.0 million, or 3.25% of its total gross loan
portfolio. At September 30, 1996, all consumer loans had fixed rates of
interest.
The largest component of MFC's consumer loan portfolio consists of home
equity loans. Home equity and other loans secured by second mortgages, together
with loans secured by all prior liens, are limited to 80% or less of the
appraised value of the property securing the loan. Generally, such loans have a
maximum term of ten years. As of September 30, 1996, home equity and home
improvement loans, most of which are secured by second mortgages, amounted to
$1.9 million, or 3.1% of MFC's gross loan portfolio.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by MFC for consumer loans include an application, a
determination of the applicant's payment history on other debts, employment
stability and an assessment of ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
<PAGE>
Consumer loans may entail greater credit risk than do residential
mortgage loans. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances of the borrower. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
September 30, 1996, there were no consumer loans which were 30 days or more
delinquent.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
Real estate loans are generally originated by the Bank's staff of loan
officers. Loan applications are taken at all locations and are processed at the
main office of the Bank.
While MFC originates both adjustable-rate and fixed-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Over the last several years, the demand for fixed-rate
loans has exceeded the demand for adjustable-rate loans except during the last
six months of fiscal 1994.
MFC has traditionally purchased mortgage-backed securities with excess
funds not used to originate loans. The Board believes that the slightly lower
yield carried by mortgage-backed securities is somewhat offset by the lower
level of credit risk and the lower level of overhead required in connection with
these assets, as compared to one- to four-family, commercial, multi-family and
other types of loans. See "Investment Activities - Mortgaged-Backed Securities."
Recently, however, the Company has begun to use such excess funds to purchase
loan participations, as well as mortgage-backed securities. Such loans
participations are predominantly secured by one- to four-family, multi-family
and commercial real estate. At September 30, 1996, 36.5% of MFC's loans
purchased from other lenders had fixed rates of interest and 63.5% had
adjustable rates of interest. At September 30, 1996, MFC had $10.4 million of
loan participations in its current loan portfolio. MFC currently intends to
continue to negotiate with other lenders for the purchase of loan
participations. MFC also intends to review its policy of investing in
mortgage-backed securities, of which at least a portion of the principal and
interest payments are guaranteed by either the GNMA, FNMA or FHLMC.
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of MFC for the periods indicated. No loans were sold by MFC during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1996 1995 1994
------ ------ -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate
- one- to four-family............................. $2,295 $2,700 $ 6,049
- commercial...................................... 1,000 --- ---
- construction.................................... 207 --- 320
------ ------ -------
Total adjustable-rate........................ 3,502 2,700 6,369
------ ------ -------
Fixed-rate:
Real estate
- one- to four-family............................. 6,001 4,765 6,654
- commercial...................................... 330
- construction.................................... 493 329 75
Non-real estate - consumer.......................... 1,330 935 613
------ ------ -------
Total fixed-rate............................. 8,154 6,029 7,342
------ ------ -------
Total loans originated....................... 11,656 8,729 13,711
Purchases by type:
Mortgage-backed securities:
- Fixed-rate ...................................... 2,480 --- 18,067
- Adjustable-rate.................................. --- --- 3,086
Participations:
- Fixed............................................ 2,495 2,246 ---
- Adjustable....................................... 4,334 2,970 ---
------ ------ -------
Total purchased.............................. 9,309 5,216 21,153
Repayments:
Mortgage-backed securities.......................... 10,204 6,791 14,491
Participations...................................... 1,334 347 ---
Principal loan repayments........................... 7,429 7,517 11,793
------ ------ -------
Total repayments............................. 18,967 14,655 26,284
------ ------ -------
Net increase (decrease)...................... $ 1,998 $ (710) $ 8,580
======= ======= =======
</TABLE>
<PAGE>
Non-Performing Assets and Classified Assets
Payments on first mortgage loans are due on the first day of the month
and, if payment is not received by the 15th day of the month, the collection
process ordinarily begins. Collection personnel will contact the borrower by
telephone or in writing to cure the default. If the account becomes 60 days
delinquent (or sooner if warranted by the particular circumstances), a Notice of
Right to Cure Default will be sent. In most cases, delinquencies are cured
promptly. Foreclosure proceedings will be instituted once it is decided that
further collection efforts appear fruitless.
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes questionable, the loan will be
placed on a non-accrual status and, as a result, previously accrued interest
income on the loan will be taken out of current income. The loan will be
transferred back to an accrual status if the borrower brings the loan current.
At September 30, 1996, MFC had no loans which were delinquent.
The table below sets forth the amounts and categories of non-performing
assets in MFC's loan portfolio. For all years presented, MFC has 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 include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1996 1995 1994
------ ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................... $ --- $--- $ 7
------ ---- ---
Total............................................. --- --- 7
------ ---- ---
Accruing loans delinquent more than 90 days:
One- to four-family............................... $ --- $ 2 $---
Consumer.......................................... --- --- ---
------ ---- ---
Total............................................. --- 2 ---
------ ---- ---
Foreclosed assets:
One- to four-family............................... --- 22 18
------ ---- ---
Total............................................. --- 22 18
------ ---- ---
Total non-performing assets............................ $ --- $24 $25
===== === ===
Total as a percentage of total assets.................. ---% .02% .02%
=== === ===
</TABLE>
<PAGE>
Other Assets of Concern. As of September 30, 1996, there were no assets
which were not included in the above table where known information about the
possible credit problems of the borrowers or the cash flows of the secured
property have caused management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such item in the non-performing asset categories. See
"-Allowance for Loan Losses."
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association 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. Assets which do not
currently expose the savings association to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are required to be designated "Special Mention" by management.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. 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 a savings association 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 association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's Regional Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at September 30, 1996, the Bank had no assets
classified as substandard, doubtful, loss or special mention.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
<PAGE>
Real estate properties acquired through foreclosure are recorded at
fair value, less estimated disposition costs. If fair value at the date of
foreclosure is lower than the balance of the related loan, the difference will
be charged off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and, if the value declines, a
specific provision for losses on such property is established by a charge to
operations.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to MFC's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At September 30, 1996, MFC had a total allowance for loan losses of
$113,000, or .19% of total net loans. See Note 3 of the Notes to Consolidated
Financial Statements.
The following table sets forth an analysis of MFC's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period................ $ 103 $103 $ 95
Charge-offs................................... --- 6 ---
Recoveries.................................... --- --- ---
---- ---- ----
Net charge-offs............................... --- 6 ---
Additions charged to operations............... 10 6 8
---- ---- ----
Balance at end of period...................... $113 $103 $103
==== ==== ====
Ratio of net charge-offs during the period to average
loans outstanding during the period.......... --- % .01% --- %
=== === ===
Ratio of net charge-offs during the period to average
non-performing assets........................ ---% 24.49% ---%
=== ===== ===
</TABLE>
<PAGE>
MFC's allowance for losses on loans at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ -------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family
residential................ $113 86.39% $103 86.36% $103 86.41%
---- ----- ---- ----- ---- -----
Total................. $113 86.39% $103 86.36% $103 86.41%
==== ===== ==== ===== ==== =====
</TABLE>
Investment Activities
General. The investment policy of the Company generally is to invest
funds among various categories of investments and maturities based upon the
Company's need for liquidity, to achieve the proper balance between its desire
to minimize risk and maximize yield, to provide collateral for public funds and
borrowings, if any, and to fulfill the Company's asset/liability management
policies.
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained its liquid assets above the minimum requirements imposed by OTS
regulations and at a level believed adequate to meet requirements of normal
daily activities and potential deposit outflows. As of September 30, 1996, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 36.44%. See "Regulation -
Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade 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.
<PAGE>
Marshalltown Savings' investment and mortgage-backed securities
portfolios are managed in accordance with a written investment policy adopted
and supervised by the Board of Directors. At September 30, 1996,
available-for-sale investments consisted of FHLMC, FNMA and FHLB stock. See Note
2 of the Notes to Consolidated Financial Statements for additional information
regarding the Bank's investment and mortgage-backed securities.
The OTS and the Financial Accounting Standards Board have issued
guidelines regarding management oversight and accounting treatment for
securities, including investment securities, mortgage-backed securities and
derivative securities. The guidelines require thrift institutions to adjust the
carrying value of securities to market value unless it can be demonstrated that
a class of securities is intended to be held to maturity. At September 30, 1996,
MFC held $47.5 million and $9.5 million, respectively, of the principal amount
of mortgage-backed securities and investment securities which MFC intends to
hold until maturity. As of such date, these securities had market values of
$47.0 million and $9.4 million, respectively.
Investment Securities. At September 30, 1996, MFC's cash and
interest-bearing deposits in other financial institutions totalled $2.3 million,
or 1.8% of its total assets, and investment securities (including a $1.2 million
investment in the common stock of the FHLB of Des Moines and $1.1 million of
FHLMC and FNMA stock) totalled $11.8 million, or 9.50% of its total assets. It
is MFC's general policy to purchase U.S. Government securities and federal
agency obligations for its investment portfolio. At September 30, 1996, the
weighted average term to maturity of the investment securities portfolio,
excluding the FHLB, FNMA and FHLMC stock, was 4.2 years.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totalled $14.4 million as of September 30, 1996, plus an
additional 10% if the investments are fully secured by readily marketable
collateral. See "Regulation - Federal Regulation of Savings Associations" for a
discussion of additional restrictions on the Bank's investment activities.
<PAGE>
The following table sets forth the composition of MFC's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- ------------------------ ----------------------
Book Value % of Total Book Value % of Total Book Value % of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities........................... $ --- --- % $ 495 4.39% $ 486 3.70%
Federal and State agency obligations................. 9,485 80.39 8,978 79.64 11,494 87.39
-------- ------- ---------- -------- -------- -------
Subtotal.......................................... 9,485 80.39 9,473 84.03 11,980 91.09
FHLMC and FNMA stock................................... 1,118 9.47 628 5.57
FHLB stock............................................. 1,196 10.14 1,172 10.40 1,172 8.91
Total investment securities, FHLMC and FNMA
stock and FHLB stock............................. $11,799 100.00% $11,273 100.00% $13,152 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment securities
(excluding FHLB, FNMA and FHLMC stock)................ 4.2 Years 3.2 Years 3.1 Years
Interest-Earning Assets:
Interest-bearing deposits with banks................. $ 1,811 100.00% $ 3,418 100.00% $ 1,131 100.00%
====== ====== ======== ====== ======= ======
Average remaining life of investment securities and
other interest-earning assets......................... 3.42 Years 2.1 Years 2.8 Years
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB, FNMA and FHLMC stock, are indicated in the following table.
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
------ ----- ----- -------- --------------------------
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal and State agency
obligations............ $ --- $8,493 $ 992 $ --- $9,485 $9,402
------ ------ ----- ----- ------ ------
Total investment
securities.............. $ --- $8,493 $ 992 $ --- $9,485 $9,402
====== ====== ===== ===== ====== ======
Weighted average yield.. ---% 6.42% 7.36% ---% 6.52% 6.52%
</TABLE>
MFC's investment securities portfolio at September 30, 1996 contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of MFC's retained earnings, excluding those issued
by the United States Government or its agencies.
<PAGE>
Mortgage-Backed Securities. MFC has a substantial portfolio of
fixed-rate and adjustable-rate mortgage-backed securities which it purchases and
holds for investment. Such mortgage-backed securities can serve as collateral
for borrowings and, through repayments, as a source of liquidity. For
information regarding the carrying and market values of MFC's mortgage-backed
securities portfolio, see Note 2 of the Notes to Consolidated Financial
Statements.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees or credit
enhancements that result in reduced credit risk. However, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize obligations of MFC. In addition, mortgage-backed securities issued
or guaranteed by the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") are generally weighted at no
more than 20% for risk-based capital purposes, and mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA")
are weighted at 0% for risked-based capital purposes, as compared to an assigned
risk weighting of 50% to 100% for whole residential mortgage loans. See
"Regulation." These types of securities thus allow the Bank to optimize
regulatory capital to a greater extent than non-securitized whole loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities are subject to the same risk as whole
loans in that a fluctuating interest rate environment, along with other factors
such as the geographic distribution of the underlying mortgage loans, may alter
the prepayment rate of such mortgage loans and thereby affect both the
prepayment speed and value of such securities. Due to the relatively low
interest rate environment during fiscal year 1994, MFC experienced a
significantly higher prepayment of its mortgage-backed securities during that
year than might otherwise be expected. During fiscal year 1995, as interest
rates rose, prepayments slowed down. During fiscal 1996, although a slight
decrease in interest rates resulted in some prepayments, the majority of the
increase in prepayments was due to balloon mortgage-backed securities coming
due. At September 30, 1996, mortgage-backed securities totalled $47.5 million,
or 44.1% of MFC's total loan and mortgage-backed securities portfolio.
Adjustable-rate mortgage-backed securities at September 30, 1996 totalled $13.7
million, or 28.8%, of MFC's total mortgage-backed securities.
<PAGE>
The following table sets forth the book value of MFC's mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Issuers:
Federal Home Loan Mortgage Corporation.................. $28,513 $33,758 $38,049
Federal National Mortgage Association................... 11,527 12,858 14,586
Government National Mortgage Association................ 7,473 8,597 9,380
------- ------- -------
Total.............................................. $47,513 $55,213 $62,015
======= ======= =======
</TABLE>
At September 30, 1996, $576,000 of MFC's mortgage-backed securities
issued by the FHLMC were secured by multi-family loans.
The following table sets forth the contractual maturities of MFC's
mortgage-backed securities at September 30, 1996. All of the Company's
mortgage-backed securities are classified as held to maturity.
<TABLE>
<CAPTION>
Due in
Less than 1 to 5 to 10 Over 10 Total Mortgage Backed-
1 Year 5 Years Years Years Securities
------ ------- ----- ----- --------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation ............... $ 993 $22,432 $ 239 $ 4,849 $28,513 $28,155
Federal National Mortgage
Association ............... 438 4,263 1,002 5,824 11,527 11,229
Government National Mortgage
Association ............... -- 8 12 7,453 7,473 7,646
------- ------- ------- ------- ------- -------
Total ................. $ 1,431 $26,703 $ 1,253 $18,126 $47,513 $47,030
======= ======= ======= ======= ======= =======
Weighted Average Yield ..... 7.37% 6.28% 8.30% 6.80% 6.56% 6.55%
</TABLE>
<PAGE>
Other Investments
At September 30, 1996, MFC owned an office building, six undeveloped
parcels of land, and a residence with a total aggregate book value of $406,000,
all of which are located in Marshalltown, Iowa. The office building and
residence have a net book value of $298,000 and generate income of approximately
$46,300 annually.
MFC has entered into two joint venture low income apartment housing
projects in Des Moines, Iowa to take advantage of certain tax benefits available
under Section 42 of the Internal Revenue Code of 1986, as amended. One
investment, which MFC entered into on June 15, 1994, is for the construction of
a 62-unit apartment complex and the other, which MFC entered into on April 28,
1995, is for the construction of a 56-unit apartment complex. At September 30,
1996, the Company's equity interests in each project were $232,283 and $250,000,
respectively, representing limited partnership interests of 16.7% in each
investment. As a result of these investments, MFC will receive tax credits of
approximately $84,000 per year for ten years.
Sources of Funds
General. MFC's sources of funds are primarily deposits, amortization
and prepayment of loans and mortgage-backed securities, interest earned on or
maturation of investment securities and short-term investments, and funds
provided from operations.
Deposits. MFC offers a variety of deposit accounts having a wide range
of interest rates and terms. MFC's deposits consist of passbook and statement
savings accounts, money market accounts, NOW accounts and certificate accounts
currently ranging in terms from 91 days to eight years. MFC offers customers age
59 1/2 or older who invest in two-year certificates of deposit for their
Individual Retirement Account a rate currently equal to MFC's eight-year
certificates of deposit. MFC only solicits deposits from its market area and
does not use brokers to obtain deposits. MFC relies primarily on competitive
pricing policies, advertising and customer service (including location) to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, and competition.
The variety of deposit accounts offered by MFC has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. MFC has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more conscious of interest rates. MFC
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, MFC believes that its passbook and statement savings accounts, money
market and NOW accounts are relatively stable sources of deposits. However, the
ability of MFC to attract and retain certificate accounts and the rates paid on
these deposits has been and will continue to be significantly affected by market
conditions.
<PAGE>
The following table sets forth the savings flows at MFC during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.................................... $103,121 $104,597 $111,265
Deposits........................................... 83,108 83,990 83,481
Withdrawals........................................ 87,991 89,665 94,305
Interest credited.................................. 4,801 4,199 4,156
-------- -------- --------
Ending balance..................................... $103,039 $103,121 $104,597
======== ======== ========
Net increase (decrease)............................ $ (82) $ (1,476) $ (6,666)
======== ======== ========
Percent increase (decrease)........................ (.08)% (1.41)% (5.99)%
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of savings deposits
and accrued interest in the various types of deposit programs offered by MFC for
the periods indicated.
<TABLE>
<CAPTION>
At Year Ended September 30,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ ----------------------
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:
Savings Accounts (3.00%)................... $ 9,125 8.78% $ 9,698 9.33% $ 10,629 10.10%
NOW Accounts (2.70%)....................... 4,086 3.93 4,195 4.03 4,211 4.00
Money Market Accounts (2.75%-3.05%)........ 8,147 7.84 9,458 9.09 13,138 12.49
------- ------ -------- ------ -------- -------
Total Non-Certificates..................... $21,358 20.55 $ 23,351 22.45 27,978 26.59
------- ------ -------- ------ -------- -------
2.51 - 3.50%.............................. --- --- --- --- 11,646 11.07
3.51 - 4.50%.............................. 713 .69 6,510 6.26 26,935 25.59
4.51 - 5.50%.............................. 34,615 33.31 16,214 15.59 10,815 10.28
5.51 - 6.50%.............................. 34,059 32.77 31,582 30.36 16,953 16.11
6.51 - 7.50%.............................. 9,035 8.69 19,849 19.08 2,429 2.31
7.51 - 8.50%.............................. 2,353 2.26 4,780 4.60 7,048 6.70
8.51 and over............................. 906 .88 835 .80 793 .75
------- ------ -------- ------ -------- -------
Total Certificates......................... 81,681 78.60 79,770 76.69 76,619 72.81
------- ------ -------- ------ -------- -------
Accrued Interest........................... 887 .85 897 .86 632 .60
------- ------ -------- ------ -------- -------
Total Deposits and Accrued Interest........ $103,926 100.00% $104,018 100.00% $105,229 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for MFC's
certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
8.51%
3.51- 4.51- 5.51- 6.51- 7.51- and Percent
4.50% 5.50% 6.50% 7.50% 8.50% over Total of Total
----- ----- ----- ----- ----- ---- ----- --------
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996................. $ 266 $ 6,625 $ 6,079 $ 461 $ 293 $ --- $13,724 16.80%
March 31, 1997.................... 345 6,502 6,021 1,533 125 503 15,029 18.40
June 30, 1997..................... 102 3,002 6,376 6,270 44 358 16,152 19.78
September 30, 1997................ --- 8,305 3,535 --- 69 45 11,954 14.64
December 31, 1997................. --- 2,366 2,299 --- 215 --- 4,880 5.97
March 31, 1998.................... --- 1,218 1,781 --- 643 --- 3,642 4.46
June 30, 1998..................... --- 1,158 586 --- 162 --- 1,906 2.33
September 30, 1998................ --- 1,514 1,471 --- 55 --- 3,040 3.72
December 31, 1998................. --- 865 227 10 84 --- 1,186 1.45
March 31, 1999.................... --- 886 232 58 447 --- 1,623 1.99
June 30, 1999..................... --- 805 --- 40 145 --- 990 1.21
September 30, 1999................ --- 269 263 222 71 --- 825 1.01
Thereafter........................ --- 1,100 5,189 441 --- 6,730 8.24
------ ------- ------- ------- ------ ------ ------- -------
Total............................ $ 713 $34,615 $34,059 $ 9,035 $2,353 $ 906 $81,681 100.00%
====== ======= ======= ======= ====== ===== ======= ======
Percent of total............... .87% 42.38% 41.70% 11.06% 2.88 % 1.11% 100.00%
====== ======= ======= ======= ====== ===== ======
</TABLE>
The following table indicates the amount of MFC's certificates of
deposit and other deposits by time remaining until maturity as of September 30,
1996:
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............................. $13,179 $13,669 $26,499 $23,960 $77,307
Certificates of deposit of $100,000
or more.................................... 545 955 1,467 862 3,829
Public funds................................ --- 405 140 --- 545
------- ------- ------- ------- -------
Total certificates of deposit............... $13,724 $15,029 $28,106 $24,822 $81,681
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Borrowings. Deposits and principal and interest payments on loans and
mortgage-backed securities are MFC's primary source of funds. MFC will, when
necessary, utilize borrowings when they are a less costly source of funds and
can be invested at a positive rate of return. In addition, MFC may rely on
borrowings for short-term liquidity needs.
Marshalltown Savings may obtain advances from the FHLB of Des Moines
upon the security of a blanket collateral agreement of a percentage of
unencumbered loans. Such advances can be obtained pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. At September 30, 1996, MFC had no borrowings outstanding and the
Bank has had no outstanding FHLB advances or other borrowings since 1989.
Subsidiary Activities
As a federally chartered savings bank, Marshalltown Savings is
permitted by OTS regulations to invest up to 2% of its assets, or $2.4 million
at September 30, 1996, in the stock of, or loans to, service corporation
subsidiaries. As of such date, the net book value of the Bank's investment in
its service corporation was approximately $131,000. Marshalltown Savings may
invest an additional 1% of its assets in service corporations where such
additional funds are used for inner-city or community development purposes and
up to 50% of its total capital in conforming loans to service corporations in
which it owns more than 10% of the capital stock. In addition to investments in
service corporations, federal savings banks are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities in which a federal
savings bank may engage in directly.
Marshalltown Savings organized a single service corporation in August
1983 named MSL Financial Corporation ("MSL Financial"), located in Marshalltown,
Iowa. MSL Financial currently offers annuities to MFC's customers and members of
the general public. MSL Financial reported net income of $6,254 for the 1996
fiscal year.
Regulation
The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all its operations. The Bank is a member of the FHLB
of Des Moines and is subject to certain limited regulation by the Federal
Reserve Board. As the savings and loan holding company of the Bank, MFC also is
subject to federal regulation and oversight. The purpose of the regulation of
MFC and other holding companies is to protect subsidiary savings associations.
The Bank is a member of the SAIF and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of September 30, 1996 and June 8,
1990, respectively. When these examinations are conducted by the OTS and FDIC,
<PAGE>
the examiners may require the Bank to provide for higher general or specific
loan loss reserves. All savings associations are subject to a semi-annual
assessment, based upon the savings association's total assets, to fund the
operations of the OTS. The Bank's OTS assessment for the fiscal year ended
September 30, 1996 was $34,342.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and MFC. 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 OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the
Bank is generally prescribed by federal laws, and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
association may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal associations in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's 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 September 30,
1996, the Bank's lending limit under this restriction was $2.2 million. The Bank
is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
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 SAIF or the Bank Insurance Fund (the "BIF").
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
<PAGE>
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 semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF in order to maintain the reserve ratio of the
BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured institutions would continue to be generally subject to
higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted on September 30,
1996. The legislation provides for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF. It also provides for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special assessment
rate has been established at .657% of deposits by the FDIC. At September 30,
1996, $681,920 was accrued for the special assessment, and the amount paid for
the special assessment (during November 1996) was $675,101. This special
assessment significantly increased noninterest expense and adversely affected
the Bank's results of operations for the year ended September 30, 1996. As a
result of the special assessment, the Bank's deposit insurance premium for the
fourth quarter of calendar year 1996 will be reduced to 18 basis points based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
<PAGE>
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF-assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The precise rates to be established by the FDIC to
implement this requirement for all FDIC-insured institutions are uncertain at
this time but the assessments are anticipated to be approximately 6.5 basis
points on SAIF deposits and 1.5 basis points on BIF deposits until BIF- insured
institutions participate fully in the repayment of FICO obligations.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS 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 associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations 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
this requirement. At September 30, 1996, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's subsidiary qualifies as an includable
subsidiary.
At September 30, 1996, the Bank had tangible capital of $14.3 million,
or 12.0% of adjusted total assets, which was approximately $12.5 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% 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 association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
<PAGE>
At September 30, 1996, the Bank had core capital equal to $14.3
million, or 12.0% of adjusted total assets, which was $10.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% 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
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of nontraditional activities. At September 30, 1996, the Bank had
no capital instruments that qualify as supplementary capital and $113,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had $117,000 of
such exclusions from capital and assets at September 30, 1996.
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 OTS 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 the FNMA or FHLMC.
OTS regulations also require every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On September 30, 1996, the Bank had total capital of $14.3 million
(including $14.3 million in core capital and $113,000 in qualifying
supplementary capital) and risk-weighted assets of $42.4 million (including no
converted off-balance sheet assets); or total capital of 33.72% of risk-weighted
assets. This amount was $10.9 million above the 8% requirement in effect on that
date.
<PAGE>
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS 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 OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association 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 association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association 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 OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. MFC shareholders do not have preemptive rights, and therefore, if
MFC is directed by the OTS or the FDIC to issue additional shares of Common
Stock, such issuance may result in the dilution in the percentage of ownership
of MFC.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "-- Regulatory Capital
Requirements."
<PAGE>
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of their net income for the most recent
four quarter period. However, an association deemed to be in need of more than
normal supervision by the OTS may have its dividend authority restricted by the
OTS. The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance can be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." 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 associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At September 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 36.44% and a short-term
liquid asset ratio of 2.90%.
<PAGE>
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association 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. Such assets primarily consist of residential
housing related loans and investments. At September 30, 1996, the Bank met the
test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
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 FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act of
1977 (the "CRA"), every FDIC insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to help
meet the credit needs of its entire community, including those of low and
moderate income neighborhoods. The CRA 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 CRA.
The CRA requires the OTS, in connection with the examination of the Bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
<PAGE>
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1995 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include MFC and any company which is under common control with the Bank. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiary is not deemed an affiliate; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. 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 be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. MFC is a unitary savings and loan holding
company subject to regulatory oversight by the OTS. As such, MFC is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over MFC
and its non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, MFC generally is not
subject to activity restrictions. If MFC acquired control of another savings
association as a separate subsidiary, MFC would become a multiple savings and
loan holding company, and the activities of MFC and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualified as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, MFC must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure MFC must register as, and will become subject to, the
restrictions applicable to bank holding companies. The activities authorized for
a bank holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "-- Qualified Thrift
Lender Test."
<PAGE>
MFC must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law. The stock of MFC is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). MFC
is subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of MFC may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
MFC meets specified current public information requirements, each affiliate of
MFC is able to sell in the public market, without registration, a limited number
of shares in any three-month period.
Federal Reserve System. The FRB 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 September 30, 1996, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements that may be imposed by
the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but FRB regulations require associations to exhaust
other reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB 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 FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At September 30, 1996, the Bank had $1.2 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 8.47%, and were 7.00% for the first
three quarters of calendar year 1996.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
<PAGE>
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
As with the year ended September 30, 1995, for the year ended September
30, 1996, dividends paid by the FHLB of Des Moines to the Bank totalled $86,000.
The $22,000 dividend received for the quarter ended September 30, 1996 reflects
an annualized rate of 7.29%, as compared to an annualized rate of 7.00% for
fiscal 1995.
Federal and State Taxation. Prior to the enactment of recent
legislation (discussed below), savings associations such as the Bank that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which could, within specified formula limits, be taken
as a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) could be computed under either the experience method or the percentage
of taxable income method (based on an annual election).
In August 1996, legislation was enacted that repeals the percentage of
taxable income method of accounting used by many thrifts to calculate their bad
debt reserve for federal income tax purposes. As a result, small thrifts such as
the Bank must recapture that portion of the reserve that exceeds the amount that
could have been taken under the experience method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Bank does not believe that the
legislation will have a material impact on the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
<PAGE>
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, the Bank's Excess for tax purposes totalled
approximately $2.2 million.
MFC, the Bank and the Bank's subsidiary file consolidated federal
income tax returns on a fiscal year basis ending September 30 using the accrual
method of accounting. Savings associations such as the Bank that file federal
income tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of computing
the percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiary have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1985. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiary.
Iowa Taxation. MFC and the Bank's subsidiary file Iowa corporation tax
returns on a fiscal year basis ending September 30. The Bank currently files an
Iowa franchise tax return.
Iowa imposes a franchise tax on the taxable income of both mutual and
stock savings banks. The tax rate is 5%, which may effectively be increased, in
individual cases, by application of a minimum tax provision. Taxable income
under the franchise tax is generally similar to taxable income under the federal
corporate income tax, except that, under the Iowa franchise tax, no deduction is
allowed for Iowa franchise tax payments and taxable income includes interest on
state and municipal obligations.
Delaware Taxation. As a Delaware holding company, MFC is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. MFC is also subject to an annual
franchise tax imposed by the State of Delaware.
Competition
MFC faces strong competition, both in originating real estate loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from other commercial banks, savings banks, credit unions and mortgage
bankers making loans secured by real estate located in the Company's market
area. Commercial banks, savings banks, credit unions and finance companies
provide vigorous competition in consumer lending. The Company competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, interest rates and loan fees it charges, and the types of
loans it originates.
<PAGE>
Because the Company attracts all of its deposits through its retail
banking offices, primarily from the communities in which those retail banking
offices are located, competition for those deposits comes principally from other
commercial banks, savings banks, credit unions and brokerage houses located
in the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each location.
The Company serves Marshall County and the western half of Tama County,
Iowa. There are 12 commercial banks, one savings bank, other than Marshalltown
Savings, and six credit unions which compete for deposits and loans in MFC's
primary market area.
Employees
At September 30, 1996, the Company and its subsidiary had a total of 34
employees, including 4 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers Who Are Not Directors
The following is a description of the Executive Officers of the Company
and the Bank who are not also Directors, as of September 30, 1996.
Judy L. Roberts. Ms. Roberts, age 51, joined Marshalltown Savings in
1973 as a member of the accounting department. She was appointed Treasurer in
1982 and Vice President of the Bank in 1990. Ms. Roberts worked full-time as the
office manager at McGladrey & Pullen, Des Moines, Iowa while attending Drake
University. In 1972, Ms. Roberts graduated from Drake University with a degree
in business education and in 1992 from Buena Vista College with a degree in
accounting. Ms. Roberts is a Certified Public Accountant.
Wanda L. Evans. Ms. Evans, age 54, started as a teller at Marshalltown
Savings in 1970 and in 1982 was promoted to Vice President in charge of Teller
Operations, Data Processing and Branch Operations. Ms. Evans is also the Bank's
Corporate Secretary. Prior to joining Marshalltown Savings, Ms. Evans worked as
a teller at Home Federal Savings of Sioux City, Iowa.
John C. Harmer. Mr. Harmer, age 57, was employed as Assistant Vice
President/Branch Manager with Associates Financial Services located in Ames,
Iowa, until 1976 when he joined Marshalltown Savings as Vice President in charge
of Loan Origination. Currently, he is Vice President of Loan Servicing. Mr.
Harmer received his A.A. degree from Norfolk Junior College in Norfolk, Nebraska
in 1959.
Kathy L. Baker. Ms. Baker, age 49, is the Bank's Vice President in
charge of Savings, Marketing and Loan Originations. Ms. Baker joined
Marshalltown Savings in 1980 as a savings counselor and, in 1985, was appointed
Vice President. In 1968, Ms. Baker received her B.S. degree in psychology from
Iowa State University.
<PAGE>
Item 2. Description of Property
The Company conducts its business at its main office and branch offices
in Marshalltown and Toledo, Iowa. The following table sets forth information
relating to each of the Company's offices as of September 30, 1996. The total
net book value of the Company's premises and equipment (including land, building
and leasehold improvements and furniture, fixtures and equipment) at September
30, 1996 was $436,000. See Note 5 of Notes to Consolidated Financial Statements
in the Annual Report.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value in Thousands
Location Acquired Footage at September 30, 1996
-------- -------- ------- ---------------------
<S> <C> <C> <C>
Main Office:
303 West Main Street 1964 9,950 $194
Marshalltown, Iowa
Branch Offices:
29 South Center Street 1976 1,876 128
Marshalltown, Iowa
119 High Street --- 1,700 4
Toledo, Iowa (1)
(1) Lease scheduled to expire March 14, 2000.
</TABLE>
MFC believes that its current facilities are adequate to meet the
present and foreseeable needs of the Bank and the Company.
The Company maintains an on-line data base with a service bureau
servicing financial institutions. The net book value of the data processing and
computer equipment utilized by the Company at September 30, 1996 was $8,000.
Item 3. Legal Proceedings
MFC is involved from time to time as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing MFC in the
proceedings, that the resolution of these proceedings should not have a material
effect on MFC's consolidated financial position or results of operations.
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 September 30,
1996.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The per share price range of the common stock for each quarter during
the last two fiscal years is as follows:
<TABLE>
<CAPTION>
Quarter Ended Fiscal 1996 Fiscal 1995
- ------------- ---------------------- -----------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
December 31 $16.25 $14.25 $11.625 $10.25
March 31 16.75 15.50 13.50 11.50
June 30 16.50 15.50 13.25 12.00
September 30 16.50 15.25 16.25 12.75
</TABLE>
The stock price information set forth in the table above was provided
by The Nasdaq Stock Market. Such information reflects interdealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. The closing price of Marshalltown Financial Corporation's common
stock on December 20, 1996 was $14.75.
To date, the Company has not paid any dividends on its Common Stock.
The Company may consider paying dividends in the future. Dividend payment
decisions, however, are made with consideration of a variety of factors,
including earnings, financial condition, market considerations and regulatory
restrictions.
At December 20, 1996, there were 1,411,475 shares of Marshalltown
Financial Corporation common stock issued and outstanding and there were 421
holders of record.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The primary asset of Marshalltown Financial Corporation (the "Company"
or "MFC") is Marshalltown Savings Bank, FSB ("Marshalltown Savings" or the
"Bank"). In connection with the Bank's conversion to stock form, the Company
completed its initial public offering with the issuance of 1,411,475 shares of
common stock on March 30, 1994. Unless otherwise noted, all references to the
Company prior to March 30, 1994 are to the Bank and its subsidiary on a
consolidated basis.
The Company's basic mission is to provide mortgage money on a
profitable basis to the communities it serves. In seeking to accomplish this
objective, the Company has focused on offering a full range of deposit products
and using the funds from these deposits for lending on first mortgage home
loans, home equity loans and home improvement loans. When excess funds are
available, MFC will invest in loans through the purchase of whole loans,
participation loans and mortgage-backed securities.
<PAGE>
The operations of MFC are significantly affected by prevailing
economic conditions, the monetary and fiscal policies of federal agencies as
well as the policies of agencies that regulate financial institutions. The
Company has always sought to maintain quality assets which have enhanced its
earnings as well as helped to maintain its capital levels well above minimum
standards.
The Company's results of operations are primarily dependent on the
difference or "spread" between the average yield earned on loans,
mortgage-backed securities and investments, and the average rate paid on
deposits. The interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. The Company, like other thrift institutions, is subject to interest rate
risk to the degree that its interest-earning assets mature or reprice at
different times, or on a different basis, than its interest-bearing liabilities.
On February 27, 1996, stockholders of the Company voted to approve the
Agreement to Merge and Plan of Reorganization and related Plan of Merger
(together, the "Merger Agreement") and the merger of Savings Bay Corporation
("SBC"), a wholly owned subsidiary of BancSecurity Corporation ("BancSecurity"),
with and into MFC and for MFC to become the wholly owned subsidiary of
BancSecurity (the "Merger"). Consummation of the Merger was contingent upon the
approval of the Merger by the Board of Governors of the Federal Reserve System
(the "FRB"). Under the Merger Agreement, if the Merger had not been consummated
by September 30, 1996, either party had the right to terminate the Merger
Agreement so long as such party was not in material breach of the Merger
Agreement. On November 8, 1996, the Company entered into a forbearance agreement
(the "Forbearance Agreement") with BancSecurity pursuant to which the Company
agreed not to terminate the Merger Agreement until December 13, 1996, unless the
FRB approved the Merger prior to such date, in which case the Company agreed not
to terminate the Merger Agreement until January 15, 1997. In return, the
original per share merger consideration of $16.75 in cash would be increased by
6% per annum from September 30, 1996 through the closing date of the Merger. The
Forbearance Agreement also provided that if the Merger were not consummated for
any reason (except for breach by the Company) BancSecurity was required to pay
to the Company $75,000 in cash.
On December 9, 1996, the FRB denied the Merger. The principal reason
cited by the FRB for the denial was an undue level of market concentration that
would be created by the Merger. As a result of the FRB's decision, MFC
terminated the Merger Agreement.
Financial Condition
The Company had total assets at September 30, 1996 of $124.2 million,
an increase of $502,000 from $123.7 million at September 30, 1995. The increase
was primarily due to an increase in loans receivable. During fiscal 1996, loans
receivable increased to $60.3 million at September 30, 1996 from $50.4 million
at September 30, 1995 for a total increase of $9.9 million or 19.64%. This
increase was primarily a result of loan participation purchases from other
financial institutions.
The increase in the loan portfolio was funded by cash, cash
equivalents, and investment securities which decreased $1.6 million to $14.1
million at September 30, 1996 from $15.7 million at September 30, 1995 and
mortgage backed securities which decreased $7.7 million or 13.95% to $47.5
million at September 30, 1996 from $55.2 million at September 30, 1995.
<PAGE>
The Company had total liabilities at September 30, 1996 of $104.8
million, an increase of $357,000 from $104.5 million at September 30, 1995.
Total deposits of the Company remained relatively stable during fiscal 1996. At
September 30, 1996, deposits totalled $103.0 million, a decrease from $103.1
million at September 30, 1995. Accrued expenses and other liabilities increased
due to the projected special assessment of $682,000 payable by the Bank to
recapitalize the Federal Deposit Insurance Corporation's ("FDIC") Savings
Association Insurance Fund ("SAIF").
Stockholders' equity increased by $145,000 to $19.3 million at
September 30, 1996 from $19.2 million at September 30, 1995. The increase was
due primarily to the profit for the year and the amortization of the unused
shares under the deferred Recognition and Retention Plan.
Results of Operations
The Company's results of operations depend primarily on net interest
income, noninterest expense, and, to a lesser extent, income taxes and
noninterest income. Net interest income is a function of the volume of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such assets and liabilities, respectively. Noninterest expense
consists primarily of general and administrative expenses, which this year also
included a one-time special assessment to recapitalize the SAIF. The Company's
noninterest income consists primarily of fees charged on deposit accounts, loan
late charges and prepayment fees which help to offset the costs associated with
establishing and maintaining these deposit and loan accounts.
Comparison of Operating Results for Years Ended September 30, 1996 and
September 30, 1995
Net Income. The Company's net income decreased $557,000, or 88.1% to
$75,000 for the year ended September 30, 1996 from $632,000 for the year ended
September 30, 1995. The decrease in net income was primarily the result of the
one-time special SAIF assessment discussed above. Net income, without the SAIF
assessment, for the year ended September 30, 1996 would have been $523,000, a
decrease of $109,000 or 17.25% over the same period in 1995.
Net Interest Income. Net interest income decreased $160,000 to $3.2
million in fiscal 1996 from $3.3 million in fiscal 1995. The Company's average
net interest rate spread decreased to 1.80% for the year ended September 30,
1996 from 2.05% for the year ended September 30, 1995. Net interest margin
decreased to 2.58% for the year ended September 30, 1996 from 2.77% for the year
ended September 30, 1995. The net interest margin decrease was attributable to
the Company's cost of funds. The ratio of average interest-earning assets to
average interest-bearing liabilities increased to 117.42% during fiscal 1996
from 116.97% during fiscal 1995.
Interest Income. Interest income increased by $259,000 to $8.8 million
in fiscal 1996 from $8.5 million in fiscal 1995, primarily as a result of an
increase in the volume of average interest-earning assets during fiscal 1996.
The average yield on interest-earning assets increased to 7.13% in fiscal 1996
from 7.06% in fiscal 1995.
Interest Expense. Interest expense increased by $419,000 to $5.6
million in fiscal 1996 compared to $5.2 million for fiscal 1995, an increase of
8.12%. This increase was due to taking a position, as a result of the pending
merger with BancSecurity Corporation, to retain deposits at a reasonable cost.
<PAGE>
Provision for Loan Losses. The provision for loan losses was $10,000
for the year ended September 30, 1996 compared to $6,000 for the year ended
September 30, 1995. The Company's allowance for loan losses was based on
management's analysis of historic loan losses, current economic conditions, the
level of non-performing loans and management's current belief that the allowance
for loan losses reflects an adequate reserve against potential losses.
Management will continue to monitor the allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions and loan portfolio quality dictate. Although the Company
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for losses, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, allowance for loan losses
is subject to review by the Bank's regulators, as part of their examination
process, which may result in the establishment of an additional allowance based
upon their evaluation of the information available to them at the time of their
examination.
Noninterest Income. Noninterest income decreased by $25,000 to $136,000
in fiscal 1996 from $161,000 in fiscal 1995, primarily due to a loss incurred on
a limited partnership investment.
Noninterest Expense. Noninterest expense increased by $690,000, or
27.81%, to $3.2 million for the year ended September 30, 1996 from $2.5 million
for the year ended September 30, 1995. This increase was primarily the result of
the one-time special assessment on SAIF-insured institutions to recapitalize the
SAIF.
On September 30, 1996, federal legislation was enacted that requires the
SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions equal to 65.7 basis points on SAIF-insured deposits
maintained by those institutions as of March 31, 1995. The Company's SAIF
assessment, which was paid to the FDIC on November 27, 1996, was approximately
$682,000 and was accrued by the Company at September 30, 1996. The Bank, after
recording the SAIF assessment charge to earnings, still remains a well
capitalized institution for regulatory capital purposes.
As a result of the SAIF recapitalization, the FDIC has proposed to amend
its regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC has
proposed that the SAIF insurance premium for all SAIF-insured institutions, such
as the Bank, that are required to pay the Financing Corporation ("FICO")
obligation be reduced to a range of 18 to 27 basis points from 23 to 31 basis
points per $100 of domestic deposits. The Bank currently qualifies for the
minimum SAIF insurance premium of 23 basis points. The FDIC has also proposed to
further reduce the SAIF insurance premium to a range of 0 to 27 basis points per
$100 of domestic deposits, effective January 1, 1997. Management cannot predict
whether or in what form the FDIC's final regulation may be promulgated.
Income Tax Expense. Income tax expense was $57,000 in fiscal 1996
compared to $379,000 in fiscal 1995, a decrease of $322,000 or 84.96%. Income
taxes decreased primarily as a result of decreased earnings, due to the special
assessment on the Bank's SAIF deposits.
<PAGE>
Interest Rates, Yields and Average Balance Sheets
The following table presents for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and the
resultant yields, as well as the total dollar amount of interest expense paid on
average interest-bearing liabilities, expressed both in dollars and rates. No
tax equivalent adjustments were made. All average balances are monthly average
balances. Non-accruing loans have been included in the table as loans carrying a
zero yield.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1996
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 44,572 $3,644 8.18%
Mortgage-backed securities 59,607 3,824 6.42%
Investment securities 11,991 824 6.87%
Other investments 3,624 158 4.37%
FHLB stock 1,172 97 8.27%
------- ------
Total interest-earning
assets (1) $120,966 $8,547 7.07%
======== ------
Interest-bearing liabilities:
Certificates of deposit $ 78,975 $3,899 4.94%
NOW, money market, and
savings 29,912 903 3.02%
Advance payments by
borrowers for taxes and
insurance 104 3 2.44%
-------- ------
Total interest-bearing
liabilities $108,991 $4,805 4.41%
======== ------
Net interest income $3,742
======
Net interest rate spread 2.66%
=====
Net earning assets $ 11,975
========
Net yield on average
interest-earning assets 3.09%
=====
Average interest-earning
assets to average interest-
bearing liabilities 110.99%
=======
(1)Calculated net of deferred loan fees, loan discounts, loans in process, and
loss reserves.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------
1995 1994
-------------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 56,087 $4,386 7.82% $ 47,548 $3,723 7.83%
Mortgage-backed securities 51,038 3,384 6.63% 58,402 3,843 6.58%
Investment securities 8,484 551 6.50% 9,438 611 6.47%
Other investments 6,051 349 5.76% 3,821 234 6.12%
FHLB stock 1,191 86 7.24% 1,172 86 7.38%
-------- -- ----- ------
Total interest-earning
assets (1) $122,851 $8,756 7.13% $120,381 $8,497 7.06%
======== ------ ======== ------
Interest-bearing liabilities:
Certificates of deposit $81,851 $4,904 5.99% $ 77,711 $4,405 5.67%
NOW, money market, and
savings 22,745 674 2.96% 25,122 753 3.00%
Advance payments by
borrowers for taxes and
insurance 27 1 3.70% $ 87 $ 2 2.34%
-------- ------ -------- ------
Total interest-bearing
liabilities $104,623 $5,579 5.33% $102,920 $5,160 5.01%
======== ------ ======== ------
Net interest income $3,177 $3,337
====== ======
Net interest rate spread 1.80% 2.05%
===== =====
Net earning assets $18,228 $17,461
======= =======
Net yield on average
interest-earning assets 2.58% 2.77%
===== =====
Average interest-earning
assets to average interest-
bearing liabilities 117.42% 116.97%
======= =======
</TABLE>
<PAGE>
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the unprecedented levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1996 vs. 1995 1995 vs. 1994
------------- -------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------ ------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ............... $ 668 $ (5) $ 663 $ 237 $(158) $ (79)
Mortgage-backed securities ..... (488) 29 (459) (77) 96 19
Investment securities .......... (62) 2 (60) (167) (46) (213)
Stock .......................... 1 (1) 0 -- (11) (11)
Other Investments .............. 130 (15) 115 9 67 76
----- ----- ----- ----- ----- -----
Total interest-earning assets $ 249 $ 10 $ 259 $ 2 $ (52) $ (50)
===== ===== ----- ===== ===== -----
Interest-bearing liabilities:
Certificates of deposit ........ 241 258 499 (63) (568) (505)
NOW, money market, and savings . (71) (10) (81) (144) (6) (150)
Advance payments by borrowers
for taxes and insurance ..... (1) 2 1 -- -- --
----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities ................. $ 169 $ 250 $ 419 $(207) $ 562 $ 355
===== ===== ----- ===== ===== -----
Net interest income $(160) $(405)
===== =====
</TABLE>
<PAGE>
Interest Rate Spread
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on interest-earning assets and the rates paid
on interest-bearing liabilities, primarily deposits, and by the relative amounts
of interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average yields earned by the
Company on its interest-earning assets, the weighted average rate paid on
interest-bearing liabilities, the interest rate spread and the net yield on
weighted average interest-earning assets as of the dates shown.
<TABLE>
<CAPTION>
At September 30,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.58% 7.17% 7.73%
Mortgage-backed securities 6.56 6.63 6.39
Investment securities 6.52 6.56 6.73
Other interest-earning
assets 5.70 6.16 7.26
Combined weighted average
yield on interest-earning
assets 7.03% 7.06% 6.93%
Weighted average rate paid on:
Savings accounts 3.00% 3.00% 3.00%
NOW and money market accounts 2.90 2.91 2.93
Certificates of deposit 5.85 6.10 5.05
Other interest-bearing
liabilities 3.00 3.00 3.00
Combined weighted average
rate paid on interest-
bearing liabilities 5.25 5.38 4.49
Spread 1.78% 1.68% 2.44%
</TABLE>
<PAGE>
Asset/Liability Management
The Bank, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly or on a different basis than
its interest-earning assets. Management believes it is critical to manage the
relationship between interest rates and the effect on the Bank's net portfolio
value ("NPV"). This approach calculates the difference between the present value
of expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance sheet contracts.
Management of the Bank's assets and liabilities is done within the context of
the marketplace, but also considering limits established by the Board of
Directors on the amount of change in NPV which is acceptable given certain
interest rate changes.
The OTS has issued a regulation which uses a net market value
methodology to measure the interest rate risk exposure of thrift institutions.
Under OTS regulations, an institution's "normal" level of interest rate risk in
the event of an assumed change in interest rates is a decrease in the
institution's NPV in an amount not exceeding 2% of the present value of its
assets. Thrift institutions with greater than "normal" interest rate exposure
must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of the deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is
defined as 2% of the present value of its assets. The regulation, however will
not become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed. Furthermore, the Bank,
due to its asset size and level of risk-based capital is exempt from this
requirement. Nevertheless, utilizing this measuring concept, as of September 30,
1996, a change in interest rates of positive 200 basis points would have
resulted in a 3.29% decrease (as a percentage of the net present value of the
Bank's assets)in the Bank's NPV while a change in interest rates of negative 200
basis points would have resulted in a 1.81% increase (as a percentage of the net
present value of the Bank's assets) in the Bank's NPV. Accordingly, a deduction
to risk-based capital would have been required as of September 30, 1996 if the
regulation applied to the Bank. However, even if such deduction was applied, the
Bank would still be considered "well capitalized" under current regulatory
guidelines.
Presented below, as of September 30, 1996, is an analysis of the
Bank's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve in 100 basis point increments, up
and down 400 basis points, compared to Board policy limits and in accordance
with OTS regulations, based on the assumptions described below. Such limits have
been established with consideration of the dollar impact of various rate changes
and the Bank's strong capital position. As illustrated, the Bank's NPV is more
sensitive to increasing rates than decreasing rates.
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
---------------------------
Change in Interest Board Limit $ Change % Change
Rate (Basis Points) % Change in NPV in NPV
------------------- -------- ------ ------
(in thousands)
<S> <C> <C> <C>
+400 -90% $-9,326 -61%
+300 -60 -6,960 -45
+200 -35 -4,555 -30
+100 -15 -2,191 -14
0 0 0 0
-100 -15 1,804 12
-200 -30 2,864 19
-300 -40 3,295 21
-400 -50 3,903 25
</TABLE>
As of September 30, 1996, the Bank was in compliance with the Board limits
regarding changes in NPV and management continually works to achieve a neutral
position regarding interest rate risk. In managing its asset/liability mix, the
Bank, at times, depending on the relationship between long- and short-term
interest rates, market conditions and consumer preference, may place greater
emphasis on maximizing its net interest margin than on matching the interest
rate sensitivity of its assets and liabilities, in an effort to improve or
maintain its spread. Management believes that the increased net income resulting
from a mismatch in the maturity of its asset and liability portfolios can,
during periods of declining or stable interest rates, provide high enough
returns to justify the increased vulnerability to sudden and unexpected
increases in interest rates which can result from such a mismatch. As a result,
the Bank may at certain times be more vulnerable to rapid increases in interest
rates than some other institutions which concentrate principally on matching the
maturities of their assets and liabilities.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
change in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
repayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the above table.
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, interest on
investments and maturing investment securities. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and loan
prepayments are influenced by the level of interest rates, general economic
conditions and competition.
The primary investing activities of the Company are the origination of
loans, the purchase of mortgage-backed and investment securities and loan
participations.
Federal regulations have historically required the Bank to maintain
minimum levels of liquid assets. The required percentage is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, governmental agency
and corporate securities and obligations and mortgage-backed securities that
generally have remaining terms to maturity of less than five years. The Bank has
historically maintained its liquidity ratio at levels in excess of those
required. The Bank's regulatory liquidity ratio at September 30, 1996 was
36.44%.
Liquidity management is both a daily and long-term function of the
Company's management strategy. The Company monitors its investments in liquid
assets based upon management's assessment of (i) expected loan demand in the
Company's market area, (ii) expected deposit flows, and (iii) the objectives of
its asset/liability management program. Excess liquidity is generally invested
in interest-earning overnight deposits and other short-term agency obligations.
If the Company requires funds beyond its ability to generate them internally, it
has borrowing capacity with the Federal Home Loan Bank of Des Moines and
collateral available for use in connection with other borrowing.
At September 30, 1996, the Company had outstanding commitments to
originate loans in the amount of $390,000. The Company did not have any
commitments to purchase mortgage-backed securities at September 30, 1996.
Certificates of deposit scheduled to mature in one year or less from September
30, 1996 totalled $56.9 million. Based on the Company's historical experience,
management believes that a significant portion of such deposits will remain with
the Company; however, there can be no assurance that the Company will retain all
such deposits. The Company anticipates that it will have sufficient funds
available to meet the Company's foreseeable liquidity needs.
At September 30, 1996, the Bank's tangible, core and risk-based capital ratios
were 11.96%, 11.96% and 33.72% respectively compared to the current regulatory
requirements of 1.5%, 3.0% and 8.0% respectively.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike industrial companies,
nearly all the assets and liabilities of the Company are monetary in nature. As
a result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
<PAGE>
CONTENTS
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated statements of financial condition
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
<PAGE>
INDEPENDENT AUDITOR'S REPORT
McGLADREY & PULLEN
Certified Public Accountants and Consultants
To the Board of Directors
Marshalltown Financial Corporation
Marshalltown, Iowa
We have audited the accompanying consolidated statements of financial condition
of Marshalltown Financial Corporation and subsidiaries as of September 30, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 referred to above present
fairly, in all material respects, the financial position of Marshalltown
Financial Corporation and subsidiaries as of September 30, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
- --------------------------
McGladrey & Pullen, LLP
Des Moines, Iowa
October 15, 1996, except for Note 15 as to
which the date is November 8, 1996
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Interest-bearing deposits $ 1,811,278 $ 3,417,901
Noninterest-bearing deposits 474,786 979,040
Securities available for sale (Note 2) 2,314,172 1,799,900
Securities held to maturity (Note 2) 9,484,506 9,473,333
Mortgage-backed securities held to maturity (Note 2) 47,513,070 55,212,637
Investment in limited partnerships 482,283 500,000
Loans receivable, net (Notes 3 and 4) 60,284,275 50,385,936
Accrued interest receivable 747,918 791,263
Foreclosed real estate -- 22,220
Real estate acquired for investment 406,187 405,932
Premises and equipment, net (Note 5) 435,536 512,208
Deferred tax asset (Note 7) 57,741 --
Other assets 171,340 180,689
- -----------------------------------------------------------------------------------------------------------------------------------
$124,183,092 $123,681,059
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Notes 2 and 6):
Demand $ 4,086,063 $ 4,194,998
Savings and money market 17,272,240 19,156,286
Certificates of deposit 81,681,395 79,769,771
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 103,039,698 103,121,055
- -----------------------------------------------------------------------------------------------------------------------------------
Advances from borrowers for taxes and insurance 22,870 184,565
Income taxes (Note 7):
Current 48,972 12,059
Deferred -- 150,870
Accrued expenses and other liabilities 1,733,543 1,019,786
- -----------------------------------------------------------------------------------------------------------------------------------
104,845,083 104,488,335
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 8)
Common stock, par value $.01 per share; authorized 3,250,000
shares; issued and outstanding 1,411,475 shares; (Notes 10 and 13) 14,115 14,115
Additional paid-in capital 10,599,090 10,599,090
Retained earnings, substantially restricted (Note 7) 8,902,114 8,827,384
Unrealized gain on securities available for sale, net (Note 2) 12,384 17,801
Less deferred recognition and retention plan (Note 10) (189,694) (265,666)
- -----------------------------------------------------------------------------------------------------------------------------------
19,338,009 19,192,724
- -----------------------------------------------------------------------------------------------------------------------------------
$124,183,092 $123,681,059
===================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable $4,386,435 $3,723,343
Securities available for sale 148,600 132,124
Securities held to maturity 551,307 611,014
Mortgage-backed securities held to maturity 3,383,557 3,842,519
Other interest-earning assets 286,312 188,496
- -----------------------------------------------------------------------------------------------------------------------------------
8,756,211 8,497,496
Interest expense, deposits 5,579,496 5,159,949
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,176,715 3,337,547
Provision for loan losses (Note 3) 10,000 6,151
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,166,715 3,331,396
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges 62,661 68,566
Other, net 73,930 92,723
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 136,591 161,289
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 1,314,115 1,389,702
Occupancy and equipment 200,758 197,913
SAIF deposit insurance premium 239,406 240,553
SAIF special assessment 681,920 --
Data processing 103,898 105,427
Other 631,267 547,925
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,171,364 2,481,520
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 131,942 1,011,165
Income tax expense (Note 7) 57,212 378,809
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 74,730 $ 632,356
===================================================================================================================================
Earnings per common share $ 0.05 $ 0.43
===================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996 and 1995
Unrealized
Gain on Deferred
Securities Retention
Additional Available and
Common Paid-in Retained for Sale, Recognition
Stock Capital Earnings Net Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $14,115 $10,599,090 $8,195,028 $ -- $(343,598) $18,464,635
Net change in unrealized gain
on securities available for
sale, net of taxes $11,870 -- -- -- 17,801 -- 17,801
Vesting of shares of stock of
retention and recognition
plan (Note 10) -- -- -- -- 77,932 77,932
Net income -- -- 632,356 -- -- 632,356
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 14,115 10,599,090 8,827,384 17,801 (265,666) 19,192,724
Net change in unrealized gain
on securities available for
sale, net of taxes ($3,611) -- -- -- (5,417) -- (5,417)
Vesting of shares of stock of
retention and recognition
plan (Note 10) -- -- -- -- 75,972 75,972
Net income -- -- 74,730 -- -- 74,730
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 $14,115 $10,599,090 $8,902,114 $12,384 $(189,694) $19,338,009
===================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 74,730 $ 632,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 90,291 78,145
Amortization of RRP 75,972 77,932
Provision for loan losses 10,000 6,151
Stock dividend on stock in Federal Home Loan Bank (23,600) --
Loss on investment in Limited Partnerships 17,717 --
Net (accretion) of investment and mortgage-backed securities
premiums and discounts (34,791) (21,465)
Deferred taxes (205,000) 30,000
Loss on sale of equipment -- 7,738
(Gain) on sale of foreclosed real estate -- (14,964)
Amortization of loan fees (32,274) (38,957)
Change in assets and liabilities:
Decrease in accrued interest receivable 43,345 48,309
Decrease in income tax refund claim receivable -- 3,038
(Increase) decrease in other assets 9,349 (54,505)
Increase in income taxes payable 36,913 12,059
Increase in accrued expenses and other liabilities 713,757 287,653
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 776,409 1,053,490
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity 6,500,000 4,000,000
Purchase of securities held to maturity (6,500,000) (1,500,000)
Purchase of securities available for sale (499,700) (598,329)
Principal collected on mortgage-backed securities 10,203,547 6,831,051
Purchase of mortgage-backed securities (2,480,362) --
Net (increase) in loans receivable (9,876,065) (6,186,705)
Purchase of premises and equipment (1,003) (36,801)
Proceeds from sale of equipment -- 425
Proceeds from sale of foreclosed real estate 22,220 32,900
Purchase of investment in limited partnership -- (250,000)
Purchase of real estate acquired for investment (12,871) (49,622)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,644,234) 2,242,919
- -----------------------------------------------------------------------------------------------------------------------------------
(CONTINUED)
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30, 1996 and 1995
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in deposits $ (81,357) $(1,475,550)
Increase (decrease) in advances from borrowers for taxes and insurance (161,695) 26,720
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (243,052) (1,448,830)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,110,877) 1,847,579
CASH AND CASH EQUIVALENTS
Beginning 4,396,941 2,549,362
- -----------------------------------------------------------------------------------------------------------------------------------
Ending $ 2,286,064 $ 4,396,941
===================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $5,589,869 $ 4,895,390
Income taxes 225,299 333,712
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to foreclosed real estate $ -- $ 22,220
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Marshalltown Financial Corporation (the Company), located in
Marshalltown, Iowa, owns 100% of the outstanding common stock
issued by Marshalltown Savings Bank (the Bank), in connection with
its conversion from a federally chartered mutual institution to a
federally chartered stock institution. The only significant assets
are investment securities and stock of the Bank.
The Bank provides a full range of banking services to individual
and corporate customers from its office located in Marshalltown,
Iowa and branches located in Marshalltown and Toledo, Iowa.
MSL Financial Corporation, the Bank's wholly-owned subsidiary,
offers annuities to the Bank's customers and members of the
general public.
Principles of consolidation:
The consolidated financial statements include the accounts of
Marshalltown Financial Corporation and its wholly-owned
subsidiaries, Marshalltown Savings Bank and MSL Financial
Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Accounting estimates and assumptions:
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets
and liabilities as of the date of the financial statements and
revenues and expenses for the period. Actual results could differ
from those estimates.
Cash and cash equivalents:
Cash and cash equivalents consists of cash on hand and
interest-bearing and noninterest-bearing deposits in banks.
Securities held to maturity:
Securities which management has the intent and the Company has the
ability to hold to maturity are carried at cost, adjusted for
purchase premiums or discounts. Purchase premiums or discounts are
recognized in interest income using the interest method over the
period to maturity.
<PAGE>
Securities available for sale:
Securities to be held for indefinite periods of time, including
debt securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to
increase regulatory capital or other similar factors, are
classified as available for sale. Securities available for sale
are carried at fair value. Unrealized gains or losses, net of the
related deferred tax effect, are reported as increases or
decreases in stockholders' equity. Realized gains and losses are
determined using the specific identification method of specific
securities sold and are included in earnings. Premiums or
discounts are recognized in interest income using the interest
method over the period to maturity.
Loans receivable:
The Bank grants real estate loans, consumer and other loans to
customers meeting board-approved underwriting guidelines. Most of
these loans are made on properties in Marshall County or the
western half of Tama County, Iowa.
Loans receivable that management has the intent and ability to
hold for the foreseeable future, or until maturity or payoff, are
stated at unpaid principal balances less the allowance for loan
losses, loans in process, any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
The allowance for loan losses is increased by provisions charged
to income and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the adequacy of the allowance
is based on past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and
current economic conditions.
Uncollectible interest on loans that are contractually 90 days
past due is charged off or an allowance is established based on
management's periodic evaluation. The allowance is established by
a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent
cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal
payments is no longer in doubt, in which case the loan is returned
to accrual status.
Loan fees and certain direct loan origination costs are
capitalized, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the
contractual life of the loans, adjusted for prepayments when they
occur.
<PAGE>
Foreclosed real estate:
Real estate properties acquired through loan foreclosure are to be
sold and are initially recorded at the lower of cost (loan value
of real estate acquired in settlement of loans plus incidental
expenses) or fair value less estimated selling expenses at the
date of foreclosure. Costs relating to development and improvement
of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management. If the
carrying value of a property exceeds its estimated fair value less
estimated selling expenses, an allowance for losses is established
or the property's carrying value is reduced by a charge to income.
Premises and equipment:
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards. Deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the difference between the reported
amounts of assets and liabilities and their income tax bases.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
Recognition and Retention Plan (RRP):
Deferred RRP is carried as a reduction of stockholders' equity.
The deferred RRP is being amortized as it is earned.
Earnings per share:
Earnings per share is calculated by dividing net income by the
weighted-average number of common shares and common equivalent
shares outstanding. The weighted-average number of shares
outstanding for the calculation of earnings per share for the
years ended September 30, 1996 and 1995 was 1,411,475 and
1,469,822, respectively.
Fair value of financial instruments:
The Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
<PAGE>
available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents approximates fair value.
Securities available for sale and securities held to maturity:
Fair values for securities, excluding restricted equity
securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments. The carrying value of restricted equity
securities approximates fair value.
Investment in limited partnership:
The fair value of investment in limited partnerships
approximates its carrying value.
Loans receivable, net:
For variable-rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values
are based on carrying values. Fair values for all other loans
are estimated based on discounted cash flows analysis, using
interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality.
Accrued interest receivable:
The fair value of accrued interest receivable approximates its
carrying amount.
Deposits:
Fair values disclosed for demand, savings and money market
deposits equal their carrying amounts, which represent the
amount payable on demand. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to a schedule of aggregate expected monthly
maturities on time deposits.
<PAGE>
Off-balance sheet instruments:
Fair values for off-balance sheet instruments (guarantees,
letters of credit, and lending commitments) are based on
quoted fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Note 2: Debt and Equity Securities
Debt and equity securities have been classified in the
consolidated statements of financial condition according to
management's intent. The carrying amount of securities and their
approximate fair values at September 30, 1996 and 1995 are
summarized below:
<TABLE>
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Obligations of U.S. Government
corporations and agencies $ 8,490,707 $ 6,118 $ (90,804) $ 8,406,021
Obligations of state and political
subdivisions 993,799 2,451 -- 996,250
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9,484,506 $ 8,569 $ (90,804) $ 9,402,271
===================================================================================================================================
Mortgage-backed securities $47,513,070 $320,833 $(803,996) $47,029,907
===================================================================================================================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Federal Home Loan Mortgage
Corporation, Preferred Stock A $ 221,829 $ 15,671 $ -- $ 237,500
Federal Home Loan Mortgage
Corporation, Preferred Stock 376,500 4,125 -- 380,625
Federal National Mortgage
Association, Preferred Stock A 249,700 300 -- 250,000
Federal National Mortgage
Association, Preferred Stock B 250,000 547 -- 250,547
Federal Home Loan Bank Stock 1,195,500 -- -- 1,195,500
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,293,529 $ 20,643 $ -- $2,314,172
===================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury securities $ 494,870 $ 286 $ -- $ 495,156
Obligations of U.S. Government
corporations and agencies 7,986,857 22,327 (29,965) 7,979,219
Obligations of state and political
subdivisions 991,606 7,456 -- 999,062
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9,473,333 $ 30,069 $ (29,965) $ 9,473,437
===================================================================================================================================
Mortgage-backed securities $55,212,637 $651,614 $ (532,306) $55,331,945
===================================================================================================================================
<CAPTION>
September 30, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Federal Home Loan Mortgage
Corporation, Preferred Stock A $ 221,829 $ 18,046 $ -- $ 239,875
Federal Home Loan Mortgage
Corporation, Preferred Stock 376,500 11,625 -- 388,125
Federal Home Loan Bank Stock 1,171,900 -- -- 1,171,900
- ---------------------------------------------------------------------------------------------------------------------------------
$1,770,229 $ 29,671 $ -- $1,799,900
=================================================================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale
and held to maturity as of September 30, 1996 by contractual
maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties. Maturities will differ from contractual maturities in
mortgage-backed securities because mortgages underlying the
securities may be called or repaid without call or prepayment
penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary. Equity
securities have also been excluded from the maturity table because
they do not have contractual maturities associated with debt
securities.
<PAGE>
<TABLE>
Securities Available for Sale Securities Held to Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after one year through five years $ -- $ -- $ 8,492,570 $ 8,412,427
Due after five to ten years -- -- 991,936 989,844
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- 9,484,506 9,402,271
Equity securities 2,293,529 2,314,172 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
$2,293,529 $2,314,172 $ 9,484,506 $ 9,402,271
===================================================================================================================================
Mortgage-backed securities $ -- $ -- $47,513,070 $47,029,907
===================================================================================================================================
</TABLE>
Investment securities with carrying amounts of $6,348,045 at
September 30, 1996 are pledged as collateral on public deposits
and for other purposes as required by law. There were $563,897 of
public deposits at September 30, 1996.
There were no sales of securities in the years ended September 30,
1996 and 1995 and therefore no realized gains or losses.
<PAGE>
Note 3. Loans Receivable
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one to four-family residences $52,685,102 $44,273,226
Secured by other property 5,618,684 5,148,570
Construction loans 700,000 328,500
- -----------------------------------------------------------------------------------------------------------------------------------
59,003,786 49,750,296
Less:
Undisbursed portion of construction loans (205,744) (384,113)
Net deferred loan origination fees (302,690) (297,322)
- -----------------------------------------------------------------------------------------------------------------------------------
Total first mortgage loans 58,495,352 49,068,861
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer and other loans:
Principal balances:
Home equity and second mortgage 1,869,212 1,309,981
Other 113,525 204,907
- -----------------------------------------------------------------------------------------------------------------------------------
1,982,737 1,514,888
Less loans in process (81,314) (95,313)
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer and other loans 1,901,423 1,419,575
- -----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (112,500) (102,500)
- -----------------------------------------------------------------------------------------------------------------------------------
$60,284,275 $50,385,936
===================================================================================================================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows
for the years ended September 30:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning $ 102,500 $102,500
Charge-offs -- (6,151)
Provision charged to income 10,000 6,151
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, ending $ 112,500 $102,500
===================================================================================================================================
</TABLE>
The Company had no impaired loans as of September 30, 1996 and
1995 and interest related to nonaccrual loans was not material for
the years then ended.
<PAGE>
Note 4. Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
unpaid principal balances of these loans at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans underlying FHLMC pass-through securities $2,481,676 $ 3,354,380
Mortgage loan portfolios serviced for
the Iowa Housing Finance Authority 704,211 776,991
- -----------------------------------------------------------------------------------------------------------------------------------
$3,185,887 $ 4,131,371
===================================================================================================================================
</TABLE>
Custodial escrow balances maintained in connection with the
foregoing loan servicing were approximately $10,327 and $131,712
at September 30, 1996 and 1995, respectively.
Note 5. Premises and Equipment
Premises and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
At cost:
Land and land improvements $ 135,517 $ 135,517
Buildings 800,826 800,826
Leasehold improvements 23,378 23,378
Furniture and equipment 497,386 501,118
- -----------------------------------------------------------------------------------------------------------------------------------
1,457,107 1,460,839
Accumulated depreciation 1,021,571 948,631
- -----------------------------------------------------------------------------------------------------------------------------------
$ 435,536 $ 512,208
===================================================================================================================================
</TABLE>
<PAGE>
Note 6. Deposits
The scheduled maturities of certificate accounts are as follows as
of September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
September 30:
1997 $56,861,695
1998 13,466,044
1999 4,623,107
2000 2,209,944
2001 1,758,761
Thereafter 2,761,844
- --------------------------------------------------------------------------------
$81,681,395
================================================================================
</TABLE>
Certificate of deposit accounts with balances of $100,000 and
above totaled $4,369,073 and $4,715,941 at September 30, 1996 and
1995, respectively.
Note 7. Income Taxes
Under existing provisions of the Internal Revenue Code and similar
sections of the Iowa income tax law, the Bank may deduct a portion
of its earnings as bad debt deductions for income tax purposes in
arriving at taxable income if certain conditions are met. If, in
the future any of the accumulated bad debt deductions are used for
any purpose other than to absorb bad debt losses, gross taxable
income will be created and income taxes may be payable. Retained
earnings, at September 30, 1996 and 1995, includes a bad debt
deduction of approximately $2,240,000 which was deducted for
income tax purposes. The unrecorded deferred income tax liability
on the above amount for financial statements is approximately
$805,000 at September 30, 1996 and 1995.
<PAGE>
Net deferred tax asset (liability) consists of the following
components as of September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Capital loss carryover $ -- $ 3,000
Deferred loan fees -- 8,000
SAIF special assessment 245,000 --
Other 31,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
276,000 11,000
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends (100,000) (92,000)
Unrealized gain on securities available for sale, net (8,259) (11,870)
Premises and equipment (31,000) (39,000)
Other (79,000) (19,000)
- -----------------------------------------------------------------------------------------------------------------------------------
(218,259) (161,870)
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 57,741 $(150,870)
===================================================================================================================================
</TABLE>
Income tax expense for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 262,212 $ 348,809
Deferred (205,000) 30,000
- -----------------------------------------------------------------------------------------------------------------------------------
$ 57,212 $ 378,809
===================================================================================================================================
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to income before
income taxes as a result of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes at federal income tax rate $ 44,860 34.0% $343,796 34.0%
State tax, net of federal income tax benefit 4,400 3.3 29,627 2.9
Nondeductible expenses 34,153 25.9 -- --
Tax credits from housing projects (30,475) (23.1) -- --
Other 4,274 3.3 5,386 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
Federal and state income taxes $ 57,212 43.4% $378,809 37.5%
==================================================================================================================================
</TABLE>
<PAGE>
Note 8. Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures, established by regulation to ensure capital
adequacy, require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total, Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined),
of Tier I capital (as defined) to average assets (as defined) and
tangible capital to adjusted assets. Management believes, as of
September 30, 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Minimum For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Total capital (to risk weighted assets) $14,312 33.7% $3,395 8.0% $4,244 10.0%
Tier 1 Capital (to risk weighted assets) 14,316 33.7 1,698 4.0 2,546 6.0
Tier 1 (Core) Capital
(to adjusted assets) 14,316 12.0 3,590 3.0 5,984 5.0
Tangible capital (to adjusted assets) 14,316 12.0 1,795 1.5 -- --
As of September 30, 1995:
Total capital (to risk weighted assets) 14,157 36.8 3,093 8.0 3,866 10.0
Tier 1 Capital (to risk weighted assets) 14,228 36.8 1,546 4.0 2,320 6.0
Tier 1 (Core) Capital (to adjusted assets) 14,228 12.0 3,560 3.0 5,934 5.0
Tangible capital (to adjusted assets) 14,228 12.0 1,780 1.5 -- --
</TABLE>
<PAGE>
Note 9. Employee Benefit Plan
The Bank has a profit-sharing plan for eligible employees. The
annual contribution to the plan is the amount allowed under
Internal Revenue Service regulations which at the present time is
15% of gross salary. The Bank can terminate the plan with a
written notice to the trustee. The Bank's expense under this plan
amounted to $119,950 and $117,818 the years ended September 30,
1996 and 1995, respectively.
Note 10. Recognition and Retention Plan (RRP)
In conjunction with the stock conversion, the Company established
a RRP as a method of providing directors, officers and other key
employees of the Company with a proprietary interest in the
Company in a manner designed to encourage such persons to remain
with the Company. Eligible directors, officers and other key
employees of the Company will earn (i.e., become vested in) shares
of common stock covered by the award at a rate of 20% per year
starting one year from the date of the grant. The maximum number
of shares with respect to which awards may be made under the RRP
is 4% of the total shares sold in the conversion. A total of
47,725 shares were issued under the RRP. Expenses of $75,792 and
$77,932 were recorded for the RRP for the years ended September
30, 1996 and 1995, respectively.
<PAGE>
Note 11. Marshalltown Financial Corporation (Parent Company Only) Financial
Information
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 856,488 $ 1,169,053
Securities held to maturity 1,491,936 1,488,222
Securities available for sale 1,006,172 514,375
Mortgage-backed securities held to maturity 845,314 946,534
Investment in limited partnerships 482,283 500,000
Investment in subsidiaries 14,319,130 14,231,951
Other assets 352,526 373,517
- -----------------------------------------------------------------------------------------------------------------------------------
$19,353,849 $19,223,652
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 15,840 $ 30,928
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, at par value 14,115 14,115
Additional paid-in capital 10,599,090 10,599,090
Retained earnings 8,902,114 8,827,384
Unrealized gain on securities available for sale, net 12,384 17,801
Less deferred recognition and retention plan (189,694) (265,666)
- -----------------------------------------------------------------------------------------------------------------------------------
19,338,009 19,192,724
- -----------------------------------------------------------------------------------------------------------------------------------
$19,353,849 $19,223,652
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Equity in net income of subsidiaries $ 87,854 $ 634,719
Interest 269,432 239,545
Other 26,921 29,458
- -----------------------------------------------------------------------------------------------------------------------------------
384,207 903,722
Operating expenses 360,167 256,361
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,040 647,361
Income taxes (credits) (50,690) 15,005
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 74,730 $ 632,356
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 74,730 $ 632,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (87,854) 615,281
Amortization 75,972 77,932
Loss on investment in limited partnerships 17,717 --
Net (accretion) of investment and mortgage-backed
securities premiums and discounts (6,511) (13,777)
(Increase) decrease in other assets and liabilities, net 21,515 (20,375)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 95,569 1,291,417
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (1,500,000) --
Purchase of securities available for sale (499,700) (49,160,555)
Maturities of securities held to maturity 1,500,000 --
Purchase of investment in limited partnership -- (250,000)
Principal collected on mortgage-backed securities 104,017 39,669
Purchase of real estate acquired for investment (12,451) (58,021)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investment activities (408,134) (49,428,907)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (312,565) 531,460
CASH AND CASH EQUIVALENTS
Beginning 1,169,053 637,593
- -----------------------------------------------------------------------------------------------------------------------------------
Ending $ 856,488 $ 1,169,053
===================================================================================================================================
</TABLE>
<PAGE>
Note 12. Fair Values of Financial Instruments
The carrying amount and estimated fair values of the Company's
financial instruments as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,286 $ 2,286
Securities available for sale 2,314 2,314
Securities held to maturity 9,485 9,402
Mortgage-backed securities held to maturity 47,513 47,030
Investment in limited partnerships 482 500
Loans receivable, net 60,284 58,925
Accrued interest receivable 748 748
Financial liabilities:
Deposits 103,040 103,385
Off balance sheet financial instruments:
Commitments to extend credit -- --
</TABLE>
Note 13. Financial Instruments With Off-Statement of Financial Condition
Risk
The Company is a party to financial instruments with off-statement
of consolidated financial condition risk in the normal course of
business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend
credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized
in the statement of consolidated financial condition. The Company
uses the same credit policies in making commitments and
conditional obligations as it does for on-statement of financial
condition instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual
notional amount of those instruments. The Company uses the same
credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Company requires collateral or other
security to support financial instruments with credit risk.
At September 30, 1996, the Company had outstanding loan
commitments totaling $677,000. The outstanding loan commitments
consisted of $505,000 of fixed rate loans with rates ranging from
6.75% to 8.625%, and $172,000 of adjustable rate loan commitments
with rates ranging from 6.25% to 7.50%.
<PAGE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the commitment letter. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a
fee. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held
varies but normally includes real estate.
Note 14. Stock Option Plan
The Company has adopted a qualified stock option plan with 122,730
shares of common stock reserved for the grant of options to key
employees. These options were granted at a price of $8 per share,
which approximated the market value at the date of the grant. As
of September 30, 1996, options had been granted for 122,730 shares
of common stock and are currently exercisable through January,
2005. No options have been exercised at September 30, 1996 and
1995 and no compensation has been recognized for the options.
Note 15. Agreement to Merge and Plan of Reorganization
On November 3, 1995, the Company signed an "Agreement to Merge and
Plan of Reorganization" (the Agreement) with BancSecurity
Corporation, a bank holding company headquartered in Marshalltown,
Iowa. The Agreement calls for Company stockholders to receive
$16.75 in cash for each outstanding share of common stock.
Individual holders of options to purchase Company stock at $8 per
share will have the right to receive $8.75 in cash for each option
share held at the effective date of the Agreement. The Agreement
is subject to regulatory approval and is cancelable only if
certain conditions are met, as specified in the Agreement.
On November 8, 1996, BancSecurity Corporation and the Company
signed a forbearance agreement which provides additional time for
BancSecurity Corporation to seek approval from the Federal Reserve
Board for this merger. Under the terms of this Forbearance
Agreement, if the transaction is consummated, stockholders will
receive the original consideration of $16.75 in cash for each
outstanding share of common stock, plus interest at a stated rate
of 6% per annum from September 30, 1996 through the date of
closing.
The forbearance agreement also provides that if the transaction is
not consummated for any reason, except for breach by the Company,
that BancSecurity will pay $75,000 to the Company. In exchange the
Company has agreed not to terminate the definitive agreement until
December 13, 1996, unless BancSecurity has received approval from
the Federal Reserve by such date, in which case the Company has
agreed not to terminate until January 15, 1997. Furthermore,
BancSecurity agreed in the Forbearance Agreement not to terminate
the agreement until January 15, 1997.
<PAGE>
Also on November 3, 1995, the Company entered into a "Stock Option
Agreement" with BancSecurity Corporation which grants BancSecurity
Corporation the option to purchase 130,120 shares (or 9.2%) of the
Company common stock at $14.75 per share in the event a "Purchase
Event" occurs. A "purchase event" is specifically defined in the
Stock Option Agreement, but is generally an event in which 1) a
party, other than BancSecurity Corporation, acquires or announces
an intention to acquire 10% or more of the Company's voting common
stock or 2) the Company agrees to merge with another party, agrees
to issue, sell, or otherwise dispose of 15% or more consolidated
assets or 10% of voting common shares.
Note 16. Pending Accounting Pronouncements and Regulations
Accounting Pronouncements. The Financial Accounting Standards
Board has approved, effective for years beginning after December
15, 1995, Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
Statement No. 122, "Accounting for Mortgage Servicing Rights" and
Statement No. 123, "Accounting for Stock-Based Compensation" and
for transactions after December 31, 1996, Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." FASB Statements No. 121, 122, 123
and 125 are not expected to have a material effect on the
Company's financial statements when adopted.
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company and the Bank is
incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Stockholders of the Company to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Executive Officers Who Are Not Directors
Information concerning the Executive Officers of the Company and the
Bank who are not also Directors is contained in Part I of this Form 10-KSB under
the caption "Executive Officers Who Are Not Directors" and incorporated herein
by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1996, the
Company complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the definitive proxy statement for the Annual Meeting of
Stockholders of the Company to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Item 11. 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 definitive proxy
statement for the Annual Meeting of Stockholders of the Company to be held in
1997, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Stockholders of the Company to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
- ---------------------------------------------------------------------------------------------
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Agreement to Merge and Plan of Reorganization
and Plan of Merger *
BancSecurity Option *
3(i) Articles of Incorporation **
3(ii) By-Laws **
4 Instruments defining the rights of security holders, **
including debentures
9 Voting Trust Agreement None
10 Material contracts *
Employment Agreements of Richard Rathke,
William Gross, Judy Roberts, John Harmer,
Wanda Evans and Kathy Baker
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders Not required
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule Not required
99 Additional Exhibits Not required
* Included as exhibits to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995 filed on December 18, 1995.
All of such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-B.
** Included as exhibits to the Company's Form S-1 registration statement
(File No. 33-73142) filed on December 17, 1993 pursuant to Section 5
of the Securities Act of 1933. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-B.
</TABLE>
(b) Reports on Form 8-K
On August 6, 1996, the Company filed a Current Report on Form 8-K
dated July 23, 1996 containing a press release announcing third quarter
earnings.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 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.
MARSHALLTOWN FINANCIAL
CORPORATION
By: /s/ Richard A. Rathke
---------------------
Richard A. Rathke, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Richard A. Rathke /s/ Richard C. Grossman
- --------------------- -----------------------
Richard A. Rathke, President and Richard C. Grossman, Director
Chief Executive Officer
(Principal Executive Officer)
Date: December 27, 1996 Date: December 27, 1996
/s/ William J. Bestmann /s/ David U. Norris
- ----------------------- -------------------
William J. Bestmann, Director David U. Norris, Director
Date: December 27, 1996 Date: December 27, 1996
/s/ Donald H. Thompson /s/ W. Hugh Davis
- ---------------------- -----------------
Donald H. Thompson, Director W. Hugh Davis, Director
Date: December 27, 1996 Date: December 27, 1996
/s/ Rex J. Ryden /s/ William C. Gross
- ---------------- --------------------
Rex J. Ryden, Director William C. Gross, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: December 27, 1996 Date: December 27, 1996
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
Marshalltown Financial Corporation Marshalltown Savings Bank, FSB 100% Federal
Marashalltown Savings Bank, FSB MSL Financial Corporation 100% Iowa
</TABLE>
<PAGE>
EXHIBIT 23
Consents of Experts and Counsel
<PAGE>
McGLADREY & PULLEN, LLP
- --------------------------------------------------------------------------------
Cetified Public Accountants and Consultants
To the Board of Directors
Marshalltown Financial Corporation
Marshalltown, Iowa 50158
We consent to the incorporation by reference in the Marshalltown Financial
Corporation Registration Statements on Form S-8 (No. 33-91168 and No. 33-98218)
of Marshalltown Financial Corporation, pertaining to the Marshalltown Financial
Corporation 1994 Stock Option and Incentive Plan, and the Marshalltown Financial
Corporation 1994 Registration and Retention plan, respectively, of our report
dated October 15, 1996, except for Note 15 as to which the date is November 8,
1996, which appears in the annual report on Form 10-KSB of Marshalltown
Financial Corporation and subsidiaries for the year ended September 30, 1996
/s/ McGLADREY & PULLEN LLP
--------------------------
McGLADREY & PULLEN LLP
Des Moines, Iowa
December 24,1996
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
Commission File Number 0-23352
MARSHALLTOWN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 42-1413971
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
303 WEST MAIN STREET, MARSHALLTOWN, IOWA 50158
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(515 754-6000
-------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,411,475
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION
INDEX
Part I. Consolidated Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1997
and September 30, 1996
Consolidated Statements of Operations for the
three months and nine months ended June 30, 1997
and 1996
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II. Other information
Signatures
Exhibits
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1997 1996
(unaudited)
ASSETS
- ------
<S> <C> <C>
Cash $ 5,896,103 $ 2,286,064
Investment securities held to maturity 10,992,712 9,484,506
Investment securities available for sale 2,407,313 2,314,172
Investment in limited partnerships 447,153 482,283
Mortgage-backed securities held to maturity 42,680,765 47,513,070
Loans receivable, net 63,406,893 60,284,275
Accrued interest receivable 809,295 747,918
Office properties and equipment, net 393,702 435,536
Income tax refund receivable 36,463 57,741
Real estate acquired for investment 396,691 406,187
Other assets 60,699 171,340
----------- -----------
TOTAL ASSETS $127,527,789 $124,183,092
============ ============
LIABILITIES
- -----------
Deposits $106,405,931 $103,039,698
Advances from borrowers for taxes
and insurance 259,982 22,870
Accrued interest payable 385,754 886,528
Accounts payable and accrued expenses 148,555 847,015
Income taxes:
Current 0 48,972
Deferred 253,855 0
------------ ------------
TOTAL LIABILITIES $107,454,077 $104,845,083
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $ 14,115 $ 14,115
Additional paid-in capital 10,599,090 10,599,090
Retained earnings, substantially restricted 9,568,694 8,902,114
Less deferred Recognition and
Retention Plan (132,716) (189,694)
Unrealized gain on securities available
for sale, net 24,529 12,384
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 20,073,712 $ 19,338,009
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $127,527,789 $124,183,092
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
ended June 30, ended June 30,
1997 1996 1997 1996
---------- ---------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,224,190 $ 1,099,732 $ 3,620,531 $ 3,230,034
Mortgage-backed
securities 718,260 833,163 2,226,946 2,581,181
Investment securities 214,549 179,036 608,998 512,973
Other 51,601 69,380 157,439 246,750
---------- ---------- ---------- -----------
TOTAL INTEREST INCOME $ 2,208,600 $ 2,181,311 $ 6,613,914 $ 6,570,938
Interest expense:
Deposits $ 1,361,923 $ 1,380,266 $ 4,094,964 $ 4,200,153
----------- ----------- ----------- -----------
NET INTEREST INCOME $ 846,677 $ 801,045 $ 2,518,950 $ 2,370,785
Provision for losses on
loans 2,500 2,500 7,500 7,500
----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOSSES ON LOANS $ 844,177 $ 798,545 $ 2,511,450 $ 2,363,285
Noninterest income:
Fees and service charges 12,515 17,429 41,710 46,805
Other, net 18,584 50,567 130,358 75,696
----------- ----------- ----------- -----------
TOTAL NONINTEREST
INCOME $ 31,099 $ 67,996 $ 172,068 $ 122,501
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
ended June 30, ended June 30,
1997 1996 1997 1996
---------- ---------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Noninterest expense:
Compensation and benefits $ 331,286 $ 328,975 $ 1,025,942 $ 999,668
Occupancy and equipment 46,802 47,776 145,237 148,466
SAIF deposit insurance
premiums 17,130 60,201 74,080 178,713
Data processing services 24,250 24,857 76,190 78,704
Other 125,497 120,776 449,740 533,662
----------- ----------- ---------- -----------
TOTAL NONINTEREST
EXPENSE $ 544,965 $ 582,585 $ 1,771,189 $ 1,939,213
INCOME BEFORE INCOME
TAXES $ 330,311 $ 283,956 $ 912,329 $ 546,573
Income tax expense 126,600 82,153 245,749 225,928
----------- ----------- ----------- -----------
NET INCOME $ 203,711 $ 201,803 $ 666,580 $ 320,645
=========== =========== =========== ===========
Earnings per common share $ 0.14 $ 0.14 $ 0.45 $ 0.22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 666,580 $ 320,645
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation ................................. 63,674 67,710
Provision for loan losses .................... 7,500 7,500
Net amortization of premiums and discounts ... (40,184) (44,726)
Deferred income taxes ........................ 22,500 48,000
Amortization of loan fees .................... (20,062) (25,749)
Amortization of RRPs ......................... 56,979 56,979
FHLB Stock dividend .......................... 0 (23,600)
Gain on sale of FHLMC stock .................. (2,237) 0
Loss on limited partnership .................. 0 16,052
Change in assets and liabilities
(Increase) decrease in accrued
interest receivable ........................ (61,377) 2,619
Decrease in Limited Partnership .............. 25,530 0
Decrease in other assets ..................... 110,610 71,289
Increase (decrease) in income
taxes payable ............................... 181,780 (12,059)
(Decrease) in accrued expenses
and other liabilities ...................... (1,199,234) (782,241)
(Increase) decrease in income tax
refund claim receivable .................... 21,278 (6,768)
----------- -----------
Net cash (used in) operating
activities ................................ $ (166,663) $ (304,349)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities on investments ....... $ 1,378,737 $ 6,500,000
Purchase of investment securities & stock ..... (2,569,358) (5,977,500)
Purchase of FHLMC & FNMA stock ................ (375,000) (499,700)
Net (increase) in loans receivable ............ (3,120,654) (6,948,198)
Principal collected on mortgage-backed
securities .................................. 6,390,826 7,844,289
Purchase of mortgage-backed securities ........ (1,528,422) (2,474,076)
Purchase of premises and equipment ............ (12,467) (1,003)
Proceeds from sale of premises and equipment .. 694 0
Purchase of real estate acquired for investment (599) (5,320)
Cash distribution on limited partnership ...... 9,600 0
----------- -----------
Net cash provided by (used in)
investing activities ....................... $ 173,357 $(1,561,508)
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARSHALLTOWN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ...................... $ 3,366,233 $ 1,922,325
Increase (decrease) in advances from
borrowers for taxes and insurance ............ 237,112 85,792
----------- -----------
Net cash provided by financing
activities ............................... $ 3,603,345 $ 2,008,117
----------- -----------
Increase in cash ........................... $ 3,610,039 $ 142,260
CASH
Beginning ..................................... 2,286,064 4,396,941
----------- -----------
Ending ........................................ $ 5,896,103 $ 4,539,201
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest .................................... $ 4,095,849 $ 4,190,412
Income taxes ................................ 38,900 188,129
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES ...................... 0 0
</TABLE>
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The consolidated financial statements for the three and nine months ended June
30, 1997 are unaudited. In the opinion of management of Marshalltown Financial
Corporation (the Company) these consolidated financial statements reflect all
adjustments, consisting only of normally recurring accruals, necessary to
present fairly these consolidated financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
Operating results for the three- and nine-month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the fiscal
year ended September 30, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
Marshalltown Savings Bank, FSB (the Bank) and the Bank's wholly owned
subsidiary, MSL Financial. All significant intercompany balances and
transactions have been eliminated in consolidation.
REGULATORY CAPITAL REQUIREMENTS
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), savings institutions must meet three separate minimum
capital-to-asset requirements. The following table summarizes, as of June 30,
1997 the capital requirements of the Bank under FIRREA and its actual capital
ratios. As of June 30, 1997, the Bank substantially exceeded all current
regulatory capital standards.
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
--------------------
Amount Percent
-------- -------
(Dollars in Thousands)
(unaudited)
<S> <C> <C>
Tangible Capital:
Capital level $14,829 12.12%
Requirement 1,835 1.50
------ -----
Excess $12,994 10.62%
------ -----
Core Capital:
Capital level $14,829 12.12%
Requirement 3,670 3.00
------ -----
Excess $11,159 9.12%
------ -----
Fully Phased-In Risk-Based Capital:
Capital level $14,832 33.14%
Requirement 3,581 8.00
------ -----
Excess $11,251 25.14%
------ -----
</TABLE>
EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of shares of
common stock outstanding for the three- and nine-month periods ended June
30, 1997 and June 30, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Marshalltown Financial Corporation (the "Company") was formed on December 9,
1993 by Marshalltown Savings Bank, FSB (the "Bank") to become the holding
company of the Bank. The acquisition of the Bank by the Company was completed on
March 30, 1994 in connection with the Bank's conversion from mutual to stock
form (the "Conversion"). All references to the Company prior to March 30, 1994,
except where otherwise indicated, are to the Bank and its subsidiaries on a
consolidated basis.
The principal business of the Company has historically consisted of attracting
deposits from the general public and making loans secured by residential real
estate and, to a lesser extent, other kinds of real estate. The Company also
invests in mortgage-backed securities and investment grade securities. The
operations of the Bank are significantly affected by prevailing economic
conditions as well as by government policies and regulations relating to
monetary and fiscal affairs and financial institutions.
The Company's results of operations are primarily dependent on the difference or
"spread" between the average yield earned on loans, mortgage-backed securities
and investments, and the average rate paid on deposits and borrowings. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. The Company, like
other thrift institutions, is subject to interest rate risk to the degree that
its interest-earning assets mature or reprice at different times, or on a
different basis, than its interest-bearing liabilities.
The Company's net income is also affected by, among other things, fee income
received and provisions for possible loan losses. The Company's operating
expenses principally consist of employee compensation and benefits, occupancy
expenses, service bureau expense, federal deposit insurance premiums and other
general and administrative expenses.
On July 1, 1997, Marshalltown Financial Corporation entered into a definitive
agreement to merge with HMN Financial, Inc. (NASDAQ:HMNF). Under the agreement,
HMN will acquire in a cash transaction valued at $25.9 million, or $17.51 per
share, all outstanding shares of Marshalltown Financial's common stock. The
agreement is subject to regulatory approval by the Office of Thrift Supervision,
as well as approval of Marshalltown Financial's shareholders, a process that is
expected to be completed by the end of the year.
FINANCIAL CONDITION
Total assets increased by $3.3 million for the nine months ended June 30, 1997
to $127.5 million due to an increase in cash, investments and loans receivable
partially offset by an decrease in mortgage-backed securities. As loans and
mortgage-backed securities prepaid, some of the cash was used for loan
originations and the purchase of participations and investments.
<PAGE>
Total liabilities increased $2.6 million for the nine months ended June 30,
1997. The increase was primarily a result of a $3.4 million increase in deposit
accounts offset by a $501,000 reduction in accrued interest payable and a
$698,000 reduction in accounts payable which related to the payment of the
special assessment imposed by the Federal Deposit Insurance Corporation (FDIC)
to recapitalize the Savings Association Insurance Fund.
RESULTS OF OPERATIONS
Recently released earnings statements show earnings improved from one year ago.
The increase for the three months ended June 30, 1997 is the result of an
increase in net interest income and a decrease in noninterest expense, due
mainly to lower FDIC insurance premiums. For the nine months ended June 30,
1997, the increase is a result of an increase in net interest income and a
decrease in noninterest expense, due mainly to lower FDIC insurance premiums and
legal fees.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1997 AND 1996.
Net interest income increased by $46,000 and $148,000 for the three and nine
months ended June 30, 1997 compared to the three and nine months ended June 30,
1996. The Company's average spread increased to 1.95% and 1.93% respectively for
the three- and nine-month periods ended June 30, 1997 from 1.82% and 1.78% for
the same period a year ago. The Company's net interest margin increased to 2.73%
and 2.71% for the three- and nine-month period ended June 30, 1997 from 2.60%
and 2.57% for the three- and nine-month period ended June 30, 1996. These
increases were primarily the result of a decrease in the Company's cost of
funds.
Noninterest income, which is generated primarily from prepayment charges on
loans, fee income from NOW accounts and rent from real estate decreased to
$31,000 from $68,000 for the three months ended June 30, 1997 compared to the
three months ended June 30, 1996. In the 1996 period, a gain from the sale of
the Company's interest in a regional service bureau was realized. For the
nine-month period ended June 30, 1997 noninterest income increased to $172,000
from $123,000 for the nine months ended June 30, 1996. This increase was mainly
due to a payment from BancSecurity Corporation ("BancSecurity")of $75,000
associated with the termination by the Company of the Agreement to Merge and
Plan of Reorganization between the Company and BancSecurity. The termination was
a result of the denial of the merger contemplated by such agreement by the Board
of Governors of the Federal Reserve System.
Noninterest expense showed a decrease of $38,000 and $168,000 for the three and
nine months ended June 30, 1997 in comparison to the same periods in fiscal
1996. This decrease was due primarily to a reduction in the rate of the FDIC
insurance premium and legal fees.
At June 30, 1997 the Company had no nonperforming assets. Total allowance for
losses on loans was $120,000. The Bank will continue to monitor and adjust its
allowance for losses on loans as management's analysis of its loan portfolio and
economic conditions dictate.
LIQUIDITY
The Bank's liquidity ratio at June 30, 1997 was 36.64%. This excess of 31.64%
over the 5% liquidity ratio requirement imposed on all federal savings
associations is a result of having $24.4 million in mortgage-backed securities
which mature within five years.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
None
ITEM 2. CHANGES IN SECURITIES
---------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-----------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 11. Statement re: Computation of Per Share Earnings
(b) Exhibit 27. Financial Data Schedule
(c) Reports on Form 8-K
On July 10, 1997 a current report on Form 8-K was filed to report that a press
release had been issued on July 1, 1997 announcing that Marshalltown Financial
Corporation had entered into a definitive agreement to merge with HMN Financial,
Inc.
On July 23, 1997 a current report on Form 8-K was filed to report that a press
release had been issued on July 23, 1997 announcing the quarterly earnings of
Marshalltown Financial Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALLTOWN FINANCIAL
CORPORATION
Date: August 5, 1997 /s/ William C. Gross
--------------------
William C. Gross
Executive Vice President and
Chief Financial Officer
Date: August 5, 1997 /s/ Judy L. Roberts
-------------------
Judy L. Roberts
Vice President and
Treasurer
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EXHIBIT 11
(a) Exhibit 11. Statement re: Computation of Per Share
Earnings
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
1997 1997
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<S> <C> <C>
Primary:
Net income applicable to common stock and
common stock equivalents .................... $ 203,711 $ 666,580
========== ==========
Average number of common stock shares
outstanding ................................. 1,411,475 1,411,475
Common stock equivalents on stock
options ..................................... 58,557 57,773
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Total ................................ 1,470,032 1,469,248
========== ==========
Earnings per share ................... $ 0.14 $ .45
========== ==========
Fully dilutive:
Net income applicable to common stock
and common stock equivalents ................. $ 203,711 $ 666,580
========== ==========
Average number of common stock
shares outstanding ........................... 1,411,475 1,411,475
Common stock equivalents on stock
options ...................................... 59,385 59,385
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Total ................................. 1,470,860 1,470,860
========== ==========
Earnings per share .................... $ 0.14 $ 0.45
========== ==========
</TABLE>
