SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is only a summary and you should read it in
conjunction with our financial statements and notes contained in this Annual
Report.
At or For the Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
(In Thousands)
Selected Financial Condition Data:
Total assets............................ $ 544,523 $469,515 $458,695 $434,389 $402,708
Loans receivable, net................... 442,787 398,146 399,290 378,290 345,738
Investment securities:
Available-for-sale, at market value... 29,599 14,208 12,370 11,765 12,509
Held-to-maturity...................... 12,449 11,004 10,167 8,997 13,470
Total deposits.......................... 364,604 365,999 344,860 330,235 312,218
Total borrowings........................ 74,898 52,462 66,255 61,109 50,783
Total stockholders' equity.............. 96,712 43,846 39,660 35,479 32,864
Selected Operations Data:
Total interest income................... $ 34,811 $ 34,474 $ 34,085 $ 32,427 $ 29,915
Total interest expense.................. 19,242 19,690 19,082 17,851 16,429
---------- -------- -------- -------- --------
Net interest income.................. 15,569 14,784 15,003 14,576 13,486
Provision for loan losses............... 760 1,265 700 570 650
---------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................ 14,809 13,519 14,303 14,006 12,836
---------- -------- -------- -------- --------
Fees and service charges................ 1,728 1,544 1,316 1,132 933
Gain (loss) on sales of loans,
mortgage-backed securities and
investment securities.................. 32 807 188 12 23
Other non-interest income............... 1,091 1,077 579 763 875
---------- -------- -------- -------- --------
Total non-interest income............... 2,851 3,428 2,083 1,907 1,831
Salaries and benefits................... 7,236 6,115 5,548 5,258 5,238
Charitable contributions................ 4,570 97 69 63 52
Other expenses.......................... 4,870 4,547 4,474 6,626 4,407
---------- -------- -------- -------- --------
Total non-interest expense.............. 16,676 10,759 10,091 11,947 9,697
---------- -------- -------- -------- --------
Income before taxes..................... 984 6,188 6,295 3,966 4,970
Income tax provision.................... 138 2,049 2,160 1,266 1,545
---------- -------- -------- -------- --------
Net income.............................. $ 846 $ 4,139 $ 4,135 $ 2,700 $ 3,425
========== ======== ======== ======== ========
1
At or For the Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other
Data:
Performance Ratios:
Return on average assets (ratio of net
income to average total assets)(1).. 0.17% 0.89% 0.93% 0.64% 0.87%
Return on average equity (ratio of
net income to average equity)(1).... 1.83 9.83 11.36 7.79 10.92
Interest rate spread (average during
period).............................. 3.24 3.21 3.34 3.42 3.39
Net interest margin(2)................ 3.41 3.42 3.58 3.66 3.63
Ratio of operating expense to average
total assets(1)..................... 3.35 2.31 2.28 2.84 2.46
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 104.05 104.56 105.18 105.48 105.87
Efficiency ratio(1)(3)................ 90.53 59.08 59.06 72.48 63.31
Asset Quality Ratios:
Non-performing assets to total assets
at end of period..................... 0.30 0.29 0.62 0.49 0.59
Non-performing loans to total
loans............................... 0.17 0.28 0.19 0.40 0.60
Allowance for loan losses to non-
performing loans..................... 467.61 307.36 406.71 193.65 129.60
Allowance for loan losses to loans
receivable, net...................... 0.82 0.85 0.77 0.78 0.79
Capital Ratios:
Equity to total assets at end of
period.............................. 17.76 9.34 8.65 8.17 8.16
Average equity to average assets...... 9.29 9.06 8.22 8.24 7.95
Other Data:
Number of full-service offices........ 13 12 12 11 11
- ---------------------
<FN>
(1) Excluding the effect of the $4.5 million contribution to the charitable
foundation, return on average assets would have been .76%, return on
average equity would have been 8.23%, operating expenses to average assets
would have been 2.45% and the efficiency ratio would have been 66.23%.
(2) Net interest income divided by average interest earning assets.
(3) Total non-interest expense divided by net interest income plus total
non-interest income.
</FN>
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
MFS Financial, Inc., a Maryland corporation, is a savings and loan holding
company which has as its wholly-owned subsidiary Mutual Federal Savings Bank.
MFS Financial was formed in September 1999 to become the holding company of
Mutual Federal in connection with Mutual Federal's conversion from mutual to
stock form of organization on December 29, 1999. The words "we," "our" and "us"
refer to MFS Financial and Mutual Federal on a consolidated basis, except that
references to us prior to December 29, 1999 refer only to Mutual Federal.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and in a
variety of consumer loans. We also originate loans secured by commercial and
multi-family real estate, commercial business loans and construction loans
secured primarily by residential real estate. We are headquartered in Muncie,
Indiana and have 13 retail offices primarily serving Delaware, Randolph and
Kosciusko counties in Indiana. We also originate mortgage loans in contiguous
counties and we originate indirect consumer loans throughout Indiana and western
Ohio.
The following discussion is intended to assist your understanding of our
financial condition and results of operations. The information contained in this
section should be read in conjunction with our consolidated financial statements
and the accompanying notes to our consolidated financial statements.
Our results of operations depend primarily on our net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans and mortgage-backed and investment
securities, and interest expense on interest-bearing liabilities, which
principally consist of deposits and borrowings. Our results of operations also
are affected by the level of our noninterest income and expenses and income tax
expense.
FORWARD-LOOKING STATEMENTS
This discussion contains various forward-looking statements which are based
on assumptions and describe our future plans and strategies and our
expectations. These forward-looking statements are generally identified by words
such as "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar words. Our ability to predict results or the actual effect of future
plans or strategies is uncertain. Factors which could cause actual results to
differ materially from those estimated include, but are not limited to, changes
in interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of our
loan and investment portfolios, demand for our loan products, deposit flows, our
operating expenses, competition, demand for financial services in our market
areas and accounting principles and
3
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and you should not rely too much on these statements.
MANAGEMENT STRATEGY
Our strategy is to operate as an independent, retail oriented financial
institution dedicated to serving customers in our market areas. Our commitment
is to provide a broad range of products and services to meet the needs of our
customers. As part of this commitment, we are looking to increase our emphasis
on commercial business products and services. We are also in the process of
creating a fully interactive transactional website. In addition, we are
continually looking at cost-effective ways to expand our market area.
Financial highlights of our strategy include:
o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in
diversifying our loan portfolio to reduce our reliance on any one type
of loan. Since 1994, approximately 32% of our loan portfolio has
consisted of consumer, multi-family and commercial real estate and
commercial business loans.
o CONTINUING AS A LEADING ONE- TO FOUR-FAMILY LENDER. We are one of the
largest originators of one- to four-family residential loans in our
three county market area. During 1999, we originated $71.3 million of
one- to four-family residential loans.
o CONTINUING OUR STRONG ASSET QUALITY. Since 1994, our ratio of
non-performing assets to total assets has not exceeded .62% and at
December 31, 1999 this ratio was .30%.
o CONTINUING OUR STRONG CAPITAL POSITION. As a result of our
conservative risk management and consistent profitability, we have
historically maintained a strong capital position. At December 31,
1999, our ratio of stockholders' equity to total assets was 17.8%.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Accordingly, our results
of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is our most
significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt to
manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate
risk, we continually analyze and manage assets and
4
liabilities based on their payment streams and interest rates, the timing of
their maturities, and their sensitivity to actual or potential changes in market
interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we adopted
asset and liability management policies to better match the maturities and
repricing terms of our interest-earning assets and interest-bearing liabilities.
Mutual Federal's board of directors sets and recommends our asset and liability
policies which are implemented by the asset and liability management committee.
The asset and liability management committee is chaired by the chief financial
officer and is comprised of members of our senior management. The purpose of the
asset and liability management committee is to communicate, coordinate and
control asset/liability management consistent with our business plan and board
approved policies. The asset and liability management committee establishes and
monitors the volume and mix of assets and funding sources taking into account
relative costs and spreads, interest rate sensitivity and liquidity needs. The
objectives are to manage assets and funding sources consistent with liquidity,
capital adequacy, growth, risk and profitability goals. The asset and liability
management committee generally meets monthly to review, among other things,
economic conditions and interest rate outlook, current and projected liquidity
needs and capital position, anticipated changes in the volume and mix of assets
and liabilities and interest rate risk exposure limits versus current
projections pursuant to net present value of portfolio equity analysis and
income simulations. At each meeting, the asset and liability management
committee recommends appropriate strategy changes based on this review. The
chief financial officer or his designee is responsible for reviewing and
reporting on the effects of the policy implementations and strategies to the
board of directors, at least quarterly.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have sought to:
o originate and purchase adjustable rate mortgage loans and commercial
business loans,
o originate shorter-term consumer loans,
o manage our deposits to establish stable deposit relationships,
o acquire longer-term borrowings at fixed interest rates, when
appropriate, to offset the negative impact of longer-term fixed rate
loans in our loan portfolio, and
o limit the percentage of fixed-rate loans in our portfolio.
Depending on the level of general interest rates, the relationship between long-
and short-term interest rates, market conditions and competitive factors, the
asset and liability management committee may increase our interest rate risk
position somewhat in order to maintain our net interest margin. We intend to
increase our emphasis on the origination of relatively short-term and/or
adjustable rate loans. In addition, in an effort to maintain our limit on the
percentage of fixed-rate
5
loans, in 1998, we sold $35.1 million of fixed-rate, one- to four-family
mortgage loans in the secondary market.
The asset and liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by our board of directors.
The Office of Thrift Supervision provides Mutual Federal with the
information presented in the following tables. The tables present the change in
our net portfolio value at December 31, 1999 and 1998 that would occur upon an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, but without effect to any steps that management might take to
counteract that change.
December 31, 1999
- ------------------------------------------------------------------------------------------------------
Change in
Interest Rates in Net Portfolio Value
Basis Points ("bp") Net Portfolio Value as % of PV of Assets
(Rate Shock ------------------------------------------------- --------------------------
in Rates)(1) $ Amount $ Change % Change NPV Ratio Change
- ----------------- --------------- --------------- --------------- --------- ----------
+300 bp 41,797 (29,979) (42) 8.40 (498)
+200 bp 52,208 (19,568) (27) 10.23 (316)
+100 bp 62,435 (9,341) (13) 11.92 (147)
0 bp 71,776 --- --- 13.39 ---
-100 bp 79,142 7,366 10 14.48 109
-200 bp 84,484 12,709 18 15.21 182
-300 bp 88,638 16,862 23 15.74 236
December 31, 1998
- ------------------------------------------------------------------------------------------------------
Change in
Interest Rates in Net Portfolio Value
Basis Points ("bp") Net Portfolio Value as % of PV of Assets
(Rate Shock ------------------------------------------------- --------------------------
in Rates)(1) $ Amount $ Change % Change NPV Ratio Change
- ----------------- --------------- --------------- --------------- --------- ----------
+300 bp 31,509 (15,656) (33) 7.04 (292)
+200 bp 37,901 (9,264) (20) 8.29 (167)
+100 bp 43,368 (3,797) (8) 9.30 (66)
0 bp 47,165 --- --- 9.96 ---
-100 bp 48,863 1,698 4 10.20 24
-200 bp 49,910 2,745 6 10.31 35
-300 bp 52,273 5,109 11 10.65 69
- -----------
<FN>
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
</FN>
6
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the tables.
FINANCIAL CONDITION AT DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
GENERAL. Our total assets increased by $75 million, or 16%, to $544.5
million at December 31, 1999 from $469.5 million at December 31, 1998. The
increase was mainly due to an increase in net loans of $44.6 million, or 11.2%,
an increase in investment securities of $16.8 million, or 66.8%, and an increase
in cash for Y2K preparation of $7.8 million, or 69%. These increases were funded
primarily by an increase of $22.4 million in borrowed funds and the net proceeds
of $49.9 million from our stock offering as part of the Bank's mutual-to-stock
conversion.
LOANS. Our net loan portfolio increased from $398.1 million at December 31,
1998 to $442.8 million at December 31, 1999. The increase in the loan portfolio
over this time period was due to continued strong loan demand caused by a
combination of a strong economy and low interest rates. The loan portfolio
increased most in the one- to four-family category, from $264.5 million at
December 31, 1998 to $286.6 million at December 31, 1999 and in the RV/Boat loan
category from $42.7 million at December 31, 1998 to $58.0 million at December
31, 1999.
SECURITIES. Investment securities amounted to $25.2 million at December 31,
1998 and $42.0 million at December 31, 1999. The increase of $16.8 million, or
66.7%, was primarily due to the investment of a portion of the conversion
proceeds.
LIABILITIES. Our total liabilities increased $22.1 million, or 5.2%, to
$447.8 million at December 31, 1999 from $425.7 million at December 31, 1998.
This increase was due primarily to an increase in borrowed funds of $22.4
million.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $52.9 million from
$43.8 million at December 31, 1998 to $96.7 million at December 31, 1999. The
increase was primarily due to net proceeds from our stock offering of $49.9
million, stock contributed to the charitable foundation of $2.2 million and net
income for 1999 of $846,000. These increases were partially offset by a decrease
in the unrealized gains (losses) on securities available for sale of $328,000.
7
FINANCIAL CONDITION AT DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
GENERAL. Our total assets increased by $10.8 million, or 2.4%, to $469.5
million at December 31, 1998 from $458.7 million at December 31, 1997, despite
the sale of $35.1 million of loans during 1998 and the use of a portion of the
proceeds from this sale to pay down Federal Home Loan Bank advances.
LOANS. Our net loan portfolio decreased from $399.3 million at December 31,
1997 to $398.1 million at December 31, 1998. The decrease in the loan portfolio
over this time period was due to the sale of $35.1 million of one- to
four-family fixed-rate long term loans during the year for asset/liability
management purposes. Loan origination volume for 1998 exceeded volume for 1997
by $47.3 million.
SECURITIES. Investment securities amounted to $22.5 million at December 31,
1997, and $25.2 million at December 31, 1998. The increase of $2.7 million, or
11.9%, was primarily a result of the reinvestment of some of the proceeds from
the loan sales discussed above.
LIABILITIES. Our total liabilities increased $6.7 million, or 1.6%, to
$425.7 million at December 31, 1998 from $419.0 million at December 31, 1997.
This increase was due primarily to an increase in deposits of $21.1 million,
partially due to aggressively marketing our money market accounts. In November
1997, we acquired $14.1 million in deposits and an insignificant amount of loans
and other assets as part of an acquisition of a branch facility of another bank
in Albany, Indiana. This increase was partially offset by a $13.8 million
decrease in borrowed funds, which were paid off through the proceeds from the
loan sales.
EQUITY. Total equity amounted to $43.8 million, or 9.3% of total assets, at
December 31, 1998 and $39.7 million, or 8.7% of total assets, at December 31,
1997. This increase in equity was due to continued profitable operations.
8
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
Year Ended December 31,
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- ------- -------
Interest-Earning Assets:
Interest-bearing deposits.......................... $ 3,664 $ 161 4.39% $ 7,330 $ 358 4.88%
Trading account securities......................... 1,134 67 5.91 337 20 5.93
Mortgage-backed securities:
Available-for-sale.............................. 5,006 323 6.45 4,575 329 7.19
Investment securities
Available-for-sale.............................. 8,294 470 5.67 7,001 416 5.94
Held-to-maturity................................ 12,365 733 5.93 9,642 584 6.06
Loans receivable................................... 422,611 32,739 7.75 399,982 32,488 8.12
Stock in FHLB of Indianapolis...................... 3,926 318 8.10 3,612 279 7.72
--------- ------- -------- -------
Total interest-earning assets(1)................... 457,000 34,811 7.62 432,479 34,474 7.97
------- -------
Non-interest earning assets, net of allowance for
loan losses and unrealized gain/loss................ 40,162 32,362
--------- --------
Total assets....................................... $ 497,162 $464,841
========= ========
Interest-Bearing Liabilities:
Demand and NOW accounts............................. $ 54,122 553 1.02 $ 49,646 745 1.50
Savings deposits.................................... 42,709 853 2.00 41,332 1,038 2.51
Money market accounts............................... 29,299 1,056 3.60 16,442 560 3.41
Certificate accounts................................ 252,452 13,392 5.30 250,953 14,100 5.62
--------- ------- -------- -------
Total deposits...................................... 378,582 15,854 4.19 358,373 16,443 4.59
Borrowings.......................................... 60,620 3,388 5.59 55,234 3,247 5.88
--------- ------- -------- -------
Total interest-bearing liabilities................. 439,202 19,242 4.38 413,607 19,690 4.76
------- -------
Other liabilities................................... 11,767 9,115
--------- --------
Total liabilities.................................. 450,969 422,722
Stockholders' equity................................ 46,193 42,119
--------- --------
Total liabilities and stockholders' equity........ $ 497,162 $464,841
========= ========
Net earning assets................................... $ 17,798 $ 18,872
========= ========
Net interest income.................................. $15,569 $14,784
======= =======
Net interest rate spread............................. 3.24% 3.21%
====== =====
Net yield on average interest-earning assets......... 3.41% 3.42%
====== =====
Average interest-earning assets to
average interest-bearing liabilities................ 104.05% 104.56%
======= =======
Year Ended December 31, 1997
---------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
----------- -------- -------
Interest-Earning Assets:
Interest-bearing deposits.......................... $ 3,908 $ 217 5.55%
Trading account securities......................... 603 39 6.47
Mortgage-backed securities:
Available-for-sale.............................. 4,498 334 7.43
Investment securities
Available-for-sale.............................. 8,164 486 5.95
Held-to-maturity................................ 8,995 478 5.31
Loans receivable................................... 389,731 32,242 8.27
Stock in FHLB of Indianapolis...................... 3,470 289 8.33
-------- -------
Total interest-earning assets(1)................... 419,369 34,085 8.13
-------
Non-interest earning assets, net of allowance for
loan losses and unrealized gain/loss................ 23,849
--------
Total assets....................................... $443,218
========
Interest-Bearing Liabilities:
Demand and NOW accounts............................. $ 44,803 719 1.60
Savings deposits.................................... 40,224 1,114 2.77
Money market accounts............................... 12,888 391 3.03
Certificate accounts................................ 239,311 13,179 5.51
-------- -------
Total deposits...................................... 337,226 15,403 4.57
Borrowings.......................................... 61,491 3,679 5.98
-------- -------
Total interest-bearing liabilities................. 398,717 19,082 4.79
-------
Other liabilities................................... 8,086
--------
Total liabilities.................................. 406,803
Stockholders' equity................................ 36,415
--------
Total liabilities and stockholders' equity........ $443,218
========
Net earning assets................................... $ 20,652
========
Net interest income.................................. $15,003
=======
Net interest rate spread............................. 3.34%
=====
Net yield on average interest-earning assets......... 3.58%
=====
Average interest-earning assets to
average interest-bearing liabilities................ 105.18%
=======
- ----------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
</FN>
9
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
Changes attributable to both rate and volume which cannot be segregated have
been allocated proportionately to the change due to volume and the change due to
rate.
Year Ended December 31,
------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ ----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
-------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ ---------- ------ ---- ----------
Interest-earning assets:
Interest-bearing deposits.................. $ (164) $ (33) $(197) $ 170 $ (29) $ 141
Trading accounting securities.............. 47 --- 47 (16) (3) (19)
Mortgage-backed securities................. 29 (35) (6) 6 (11) (5)
Investment securities:
Available-for-sale...................... 74 (20) 54 (69) (1) (70)
Held-to-maturity......................... 162 (13) 149 36 70 106
Loans receivable........................... 1,791 (1,540) 251 839 (593) 246
Stock in FHLB of Indianapolis.............. 25 15 40 12 (22) (10)
------ ------- ----- ----- ----- ------
Total interest-earning assets............ $1,964 $(1,626) 338 $ 978 $(589) 389
====== ======= ----- ===== ===== ------
Interest-bearing liabilities:
Demand and NOW accounts.................... $ 62 $ (254) (192) $ 75 $ (49) 26
Savings deposits........................... 36 (309) (273) 30 (106) (76)
Money market accounts...................... 462 34 496 117 52 169
Certificate accounts....................... 83 (703) (620) 650 271 921
Borrowings................................. 306 (165) 141 (369) (63) (432)
------ -------- ----- ----- ----- -------
Total interest-bearing liabilities....... $ 949 $(1,397) (448) $ 503 $ 105 608
====== ======= ----- ===== ===== -------
Net interest income......................... $ 786 (219)
===== ======
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Net income for year ended December 31, 1999 decreased $3.3 million
to $846,000 compared to $4.1 million for the year ended December 31, 1998. The
decline in net income was primarily due to a one-time nonrecurring $4.5 million
contribution to the Mutual Federal Savings Bank Charitable Foundation, Inc. made
in connection with the stock conversion.
10
NET INTEREST INCOME. Net interest income increased $786,000, or 5.3%, to
$15.6 million for 1999 from $14.8 million for 1998 reflecting a $448,000 or 2.3%
decrease in interest expense and a $338,000 or 1% increase in interest income.
Our interest rate spread increased to 3.24% for 1999 from 3.21% for 1998. In
addition, the ratio of average interest earning assets to average interest
bearing liabilities decreased to 104.05% for 1999 from 104.56% for 1998.
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1999 was due to an increase in the average balance of interest
earning assets partially offset by a lower yield. The average balance of the
loan portfolio increased $22.6 million or 5.7% to $422.6 million for 1999 from
$400 million for 1998 due to continued strong loan demand. The average yield on
our loan portfolio decreased from 8.12% in 1998 to 7.75% in 1999 primarily due
to continued refinancing activity resulting from lower market rates of interest.
INTEREST EXPENSE. The decrease in interest expense during the year ended
December 31, 1999 was primarily due to a reduction in the average rate paid on
deposits and borrowed funds from 4.76% in 1998 to 4.38% in 1999. This was
partially offset by an increase in the average balances of borrowings and
deposits from $413.6 million in 1998 to $439.2 million in 1999.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1999, the
provision for loan losses amounted to $760,000 compared to a provision for loan
losses in 1998 of $1.3 million. The decrease was primarily due to a $500,000
provision for loans in litigation in 1998 with no corresponding provision in
1999.
OTHER INCOME. Other income amounted to $2.9 million and $3.4 million for
the years ended December 31, 1999 and 1998, respectively. For the year 1999,
service charges and fee income was $1.7 million compared to $1.5 million for
1998 representing an increase of $200,000 or 13.3%. This increase was primarily
due to higher fees collected as a result of increased volumes in checking
account activity. Net gains on loan sales in 1998 were $806,000; there were no
loan sales in 1999.
OTHER EXPENSES. Exclusive of the $4.5 million contribution to the
foundation, total operating expenses increased to $12.2 million for 1999
compared to $10.8 million for year 1998 representing an increase of $1.4 million
or 13%. This increase was primarily attributed to a $1.1 million increase in
salaries and employee benefits due to a full year of expense for the employee
stock ownership plan in the fourth quarter, an increased bank-wide incentive
bonus, increased retirement benefit cost and staff expansion in branches and
business banking activity. Additionally, equipment expenses increased to
$829,000 for 1999 from $613,000 for 1998 primarily due to a change in the
estimated useful life of certain data processing equipment.
INCOME TAX EXPENSE. Income tax expense decreased $1.9 million, or 93.3%,
from 1998 to 1999. This variation in income tax expense is directly related to
taxable income and the low income housing income tax credits earned during those
years. The effective tax rate was 14% and 33.1% for 1999 and 1998, respectively.
The effective rate declined in 1999 as compared to 1998 because the low-income
housing income tax credits remained relatively constant while the level of
income declined. The effective tax rate is expected to increase in future
periods.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
GENERAL. We reported net income of $4.1 million for the years ended
December 31, 1998 and 1997.
NET INTEREST INCOME. Net interest income decreased $219,000, or 1.5%, to
$14.8 million for 1998 from $15.0 million for 1997, reflecting a $608,000, or
3.2%, increase in interest expense, partially offset by a $389,000, or 1.1%,
increase in interest income. Our interest rate spread decreased to 3.21% for
1998 from 3.34% for 1997. In addition, the ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 104.6% for 1998 from
105.2% for 1997.
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1998 was primarily due to an increase in the average balance of
interest-earning assets offset by a lower yield. The average balance of the loan
portfolio increased $10.3 million, or 2.6%, to $400.0 million for 1998 from
$389.7 for 1997, due to increased loan demand. The average yield earned on our
loan portfolio decreased from 8.27% in 1997 to 8.12% in 1998, primarily due to
refinancing activity resulting from a general decrease in market rates of
interest.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 1998 was primarily due to the increase of $21.1 million, or 6.3%,
in the average balance of deposits, primarily due to the acquisition of $14.0
million in deposits at the end of 1997. This was partially offset by a decrease
in the average balance of borrowings. The average rate paid on deposits
increased slightly from 4.57% in 1997 to 4.59% in 1998, due to an increase in
the average rate paid on certificate accounts. The average rate paid on
borrowings decreased from 5.98% in 1997 to 5.88% in 1998.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1998, the
provision for loan losses amounted to $1.3 million compared to a provision for
loan losses in 1997 of $700,000. The increase was primarily due to a $500,000
provision for loans in litigation.
OTHER INCOME. Other income amounted to $3.4 million and $2.1 million for
the years ended December 31, 1998 and 1997, respectively. The increase consisted
primarily of a $806,000 gain from the sale of mortgage loans in 1998 compared to
a $184,000 gain in 1997, as well as a growth in transaction accounts.
OTHER EXPENSES. Other expenses increased $668,000, or 6.6%, to $10.8
million for the year ended December 31, 1998 compared to the year ended December
31, 1997. This increase was primarily due to a $567,000 or 10.2% increase in
personnel expenses and a $27,000 or 4.5% increase in occupancy costs resulting
from the purchase of a full service branch office late in 1997.
LIQUIDITY AND COMMITMENTS
Mutual Federal is required to maintain minimum levels of investments that
qualify as liquid assets under Office of Thrift Supervision regulations.
Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on
12
loans. Historically, we have maintained liquid assets at levels above the
minimum requirements imposed by Office of Thrift Supervision regulations and
above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to ensure that adequate liquidity is maintained.
At December 31, 1999, our regulatory liquidity ratio, which is our liquid assets
as a percentage of net withdrawable savings deposits with a maturity of one year
or less and current borrowings, was 9.93%.
Our liquidity, represented by cash and cash equivalents, is a product of
our operating, investing and financing activities. Our primary sources of funds
are deposits, amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities, maturities of investment securities and other
short-term investments and funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-backed securities and
maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. In
addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements. We also generate cash through
borrowings. We utilize Federal Home Loan Bank advances to leverage our capital
base and provide funds for our lending and investment activities, and to enhance
our interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-backed securities and investment securities. At December
31, 1999, the total approved loan origination commitments outstanding amounted
to $11.0 million. At the same date, the unadvanced portion of construction loans
was $4.7 million. At December 31, 1999, unused home equity lines of credit
totaled $26.0 million and outstanding letters of credit totaled $3.6 million. As
of December 31, 1999, certificates of deposit scheduled to mature in one year or
less totaled $158.5 million, and investment and mortgage-backed securities
scheduled to mature in one year or less totaled $2.1 million. Based on
historical experience, management believes that a significant portion of
maturing deposits will remain with us. We anticipate that we will continue to
have sufficient funds, through deposits and borrowings, to meet our current
commitments.
CAPITAL
Consistent with our goals to operate a sound and profitable financial
organization, Mutual Federal actively seeks to remain a "well capitalized"
institution in accordance with regulatory standards. Total stockholders' equity
of MFS Financial, Inc. was $96.7 million at December 31, 1999, or 17.76% of
total assets on that date. As of December 31, 1999, Mutual Federal exceeded all
capital requirements of the Office of Thrift Supervision. Mutual Federal's
regulatory capital ratios at December 31, 1999 were as follows: core capital
13.6%; Tier I risk-based capital, 20.7%; and total risk-based capital, 21.7%.
The regulatory capital requirements to be considered well capitalized are 5.0%,
6.0% and 10.0%, respectively.
13
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. The Statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Statement is
effective for our financial statements for all fiscal quarters for the fiscal
year ending December 31, 2001. The adoption of this Statement is not expected to
have a material impact on our consolidated financial statements.
IMPACT OF INFLATION
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. These principles require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates affect our performance more than general levels of inflation.
Interest rates, however, do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturity structure of our assets and liabilities are critical to
the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
increases because of inflation. Inflation also may increase the dollar value of
the collateral securing loans that we have made. We are unable to determine the
extent to which properties securing our loans have appreciated in dollar value
due to inflation.
14
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain quarterly results for the years
ended December 31, 1999 and 1998. Earninga per share information for the periods
before Mutual Federal's conversion to a stock savings bank on December 29, 1999
is not meaningful and is therefore not provided in the table below.
Interest Interest Net Interest Provision for
Quarter Ended Income Expense Income Loan-Losses Net Income
- ------------------------------------------------------------------------------------------------------------------------
1999
March $ 8,247 $ 4,604 $ 3,643 $ 190 $ 967
June 8,499 4,647 3,852 190 956
September 8,570 4,837 3,733 190 951
December 9,495 5,154 4,341 190 (2,028)
------- ------- ------- ------- -------
Total $34,811 $19,242 $15,569 $ 760 $ 846
======= ======= ======= ======= =======
1998
March $ 8,715 $ 4,960 $ 3,755 $ 191 $ 1,096
June 8,825 5,013 3,812 192 1,135
September 8,459 4,883 3,576 391 1,057
December 9,475 4,834 3,641 491 851
------- ------- ------- ------- -------
Total $34,474 $19,690 $14,784 $ 1,265 $ 4,139
======= ======= ======= ======= =======
15
MFS FINANCIAL, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998 and 1997
MFS Financial, Inc. and Subsidiary
Table of Contents
Page
- --------------------------------------------------------------------------------
Independent Auditor's Report 1
Financial Statements
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
Independent Auditor's Report
Board of Directors
MFS Financial, Inc. and Subsidiary
Muncie, Indiana
We have audited the accompanying consolidated balance sheet of MFS
Financial, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of MFS Financial, Inc. and subsidiary as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Olive LLP
Indianapolis, Indiana
February 4, 2000
MFS Financial, Inc. and Subsidiary
Consolidated Balance Sheet
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 19,217,186 $ 11,368,571
Interest-bearing demand deposits 765,945 1,569,531
-----------------------------------
Cash and cash equivalents 19,983,131 12,938,102
Trading assets, at fair value 1,234,884
Investment securities
Available for sale 29,598,800 14,207,620
Held to maturity (fair value of $12,016,000 and $11,021,000) 12,449,013 11,003,674
-----------------------------------
Total investment securities 42,047,813 25,211,294
Loans, net of allowance for loan losses of $3,652,073 and $3,423,650 442,786,919 398,146,043
Premises and equipment 7,800,460 7,728,569
Federal Home Loan Bank stock 5,338,500 3,612,400
Investment in limited partnerships 5,274,840 5,265,796
Cash surrender value of life insurance 10,806,957 9,350,000
Foreclosed assets 728,737 45,911
Interest receivable 2,652,959 2,186,552
Core deposit intangibles and goodwill 1,466,928 1,702,465
Deferred income tax benefit 2,670,886 1,024,450
Other assets 1,730,426 2,303,843
-----------------------------------
Total assets $544,523,440 $469,515,425
===================================
Liabilities
Deposits
Noninterest bearing $ 14,360,929 $ 14,884,904
Interest bearing 350,243,469 351,114,505
-----------------------------------
Total deposits 364,604,398 365,999,409
Securities sold under repurchase agreements 840,000
Federal Home Loan Bank advances 72,289,384 50,632,307
Note payable 1,768,354 1,829,711
Advances by borrowers for taxes and insurance 1,289,179 1,260,298
Interest payable 2,153,475 2,327,966
Other liabilities 4,866,330 3,619,938
-----------------------------------
Total liabilities 447,811,120 425,669,629
-----------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--5,000,000 shares
Common stock, $.01 par value
Authorized--20,000,000 shares
Issued and outstanding--5,819,611 shares 58,196
Additional paid-in capital 56,740,190
Retained earnings 44,647,767 43,801,385
Accumulated other comprehensive income (loss) (284,047) 44,411
Unearned employee stock ownership plan (ESOP) shares (4,449,786)
-----------------------------------
Total stockholders' equity 96,712,320 43,845,796
-----------------------------------
Total liabilities and stockholders' equity $544,523,440 $469,515,425
===================================
See notes to consolidated financial statements.
(2)
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Income
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Loans receivable $32,739,166 $32,488,310 $32,241,792
Trading account securities, at fair value 66,535 19,983 39,203
Investment securities
Mortgage-backed securities 323,266 329,093 334,605
Federal Home Loan Bank stock 317,938 277,765 288,838
Other investment securities 1,203,727 999,945 964,289
Deposits with financial institutions 160,812 358,346 216,646
-----------------------------------------------
Total interest and dividend income 34,811,444 34,473,442 34,085,373
-----------------------------------------------
Interest Expense
Deposits 15,854,093 16,442,842 15,403,164
Federal Home Loan Bank advances 3,350,567 3,223,168 3,647,970
Other interest expense 37,598 23,685 31,421
-----------------------------------------------
Total interest expense 19,242,258 19,689,695 19,082,555
-----------------------------------------------
Net Interest Income 15,569,186 14,783,747 15,002,818
Provision for loan losses 760,000 1,265,000 700,000
-----------------------------------------------
Net Interest Income After Provision for Loan Losses 14,809,186 13,518,747 14,302,818
-----------------------------------------------
Other Income
Service fee income 1,728,487 1,544,398 1,315,902
Net realized gains on sales of available-for-sale securities 32,326 1,000 3,000
Net trading assets profit (loss) (189,741) 24,922 31,173
Equity in losses of limited partnerships (11,702) (14,435) (311,874)
Commissions 486,706 420,414 504,193
Net gains on loan sales 805,676 184,828
Increase in cash surrender value of life insurance 490,957 383,856 240,000
Other income 314,817 262,302 115,701
-----------------------------------------------
Total other income 2,851,850 3,428,133 2,082,923
-----------------------------------------------
Other Expenses
Salaries and employee benefits 7,235,933 6,115,471 5,548,356
Net occupancy expenses 655,494 636,396 609,199
Equipment expenses 829,058 613,329 680,395
Data processing fees 472,621 479,001 477,643
Advertising and promotion 412,604 462,632 401,419
Charitable contributions 4,569,937 97,116 68,743
Other expenses 2,501,003 2,354,715 2,305,010
-----------------------------------------------
Total other expenses 16,676,650 10,758,660 10,090,765
-----------------------------------------------
Income Before Income Tax 984,386 6,188,220 6,294,976
Income tax expense 138,004 2,049,000 2,160,000
-----------------------------------------------
Net Income $ 846,382 $ 4,139,220 $ 4,134,976
===============================================
See notes to consolidated financial statements.
(3)
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
Common Stock Accumulated
----------------------- Other
Additional Comprehensive Unearned
Shares Paid-in Comprehensive Retained Income ESOP
Outstanding Amount Capital Income Earnings (Loss) Shares Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1997 $35,527,189 $ (47,800) $35,479,389
Comprehensive income
Net income $4,134,976 4,134,976 4,134,976
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 45,295 45,295 45,295
------------
Comprehensive income $4,180,271
-----------------------------------============---------------------------------------------------
Balances, December 31, 1997 39,662,165 (2,505) 39,659,660
Comprehensive income
Net income $4,139,220 4,139,220 4,139,220
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 46,916 46,916 46,916
------------
Comprehensive income $4,186,136
-----------------------------------============---------------------------------------------------
Balances, December 31, 1998 43,801,385 44,411 43,845,796
Comprehensive income
Net income $846,382 846,382 846,382
Other comprehensive
loss, net of tax
Unrealized losses on
securities, net of
reclassification
adjustment (328,458) (328,458) (328,458)
------------
Comprehensive income $517,924
============
Stock issued in
conversion, net of
costs 5,595,780 $55,958 $54,510,552 54,566,510
Stock contributed to
charitable foundation 223,831 2,238 2,236,072 2,238,310
Contribution of
unearned ESOP shares $(4,655,680) (4,655,680)
ESOP shares earned (6,434) 205,894 199,460
----------------------------------- ------------------------------------------------
Balances, December 31, 1999 5,819,611 $58,196 $56,740,190 $44,647,767 $(284,047) $(4,449,786$96,712,320
=================================== ================================================
See notes to consolidated financial statements.
(4)
MFS Financial, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 846,382 $ 4,139,220 $ 4,134,976
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 760,000 1,265,000 700,000
Common stock contributed to charitable foundation 2,238,310
Securities gains (32,326) (1,000) (3,000)
Net loss on disposal of premise and equipment 19,301
Net loss on sale of real estate owned 58,676 137,112
Securities amortization (accretion), net (15,813) (26,390) 90
ESOP shares earned 199,460
Equity in losses of limited partnerships 11,702 14,435 311,874
Amortization of net loan origination costs 1,371,722 842,251 840,125
Amortization of core deposit intangibles and goodwill 235,537 246,194 33,078
Depreciation and amortization 802,486 570,184 616,787
Deferred income tax (1,418,864) 282,942 (269,454)
Loans originated for sale (16,295,533) (5,706,313)
Proceeds from sales on loans held for sale 35,447,044 5,743,831
Gains on sales of loans held for sale (548,491) (37,518)
Change in
Trading account securities (1,234,884) 454,732
Interest receivable (466,407) 192,210 (47,054)
Other assets 573,417 (847,971) 106,847
Interest payable (174,491) (141,538) 33,975
Other liabilities 1,246,392 (542,445) 405,047
Increase in cash surrender value of life insurance (490,957) (383,856) (240,000)
Other adjustments 6,646 258,439
--------------------------------------------
Net cash provided by operating activities 4,510,342 24,375,315 7,336,462
--------------------------------------------
Investing Activities
Purchases of securities available for sale (25,866,267) (7,016,986) (10,828,305)
Proceeds from maturities and paydowns of securities available for sale 1,711,883 2,150,076 894,391
Proceeds from sales of securities available for sale 8,252,785 4,115,510 9,415,998
Purchases of securities held to maturity (8,463,897) (11,793,604) (5,684,297)
Proceeds from maturities and paydowns of securities held to maturity 7,021,088 10,973,718 4,505,500
Net change in loans (47,744,581) (20,685,925) (24,212,540)
Purchases of premises and equipment (874,377) (1,461,965) (903,571)
Proceeds from real estate owned sales 266,798 1,565,489 52,425
Purchase of FHLB of Indianapolis stock (1,726,100) (241,700)
Purchase of interest in limited partnership (2,085,000)
Distribution from (to) limited partnership (20,746) 55,074 137,098
Purchases of insurance contracts (966,000) (3,000,000) (300,000)
Cash received on branch acquisition 309,413 11,903,914
Other investing activities (36,319) (22,778) 118,676
--------------------------------------------
Net cash used by investing activities (68,445,733) (26,896,978) (15,142,411)
--------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 1,275,554 23,571,794 (9,259,396)
Certificates of deposits (2,670,565) (2,784,446) 9,811,301
Securities sold under repurchase agreements 840,000 (1,400,000)
Repayment of note payable (61,357) (25,566)
Proceeds from FHLB advances 157,000,000 53,700,000 113,195,000
Repayment of FHLB advances (135,342,923) (69,322,214) (106,649,421)
Net change in advances by borrowers for taxes and insurance 28,881 (28,351) (83,756)
Proceeds from sale of common stock, net of costs 49,910,830
--------------------------------------------
Net cash provided by financing activities 70,980,420 5,111,217 5,613,728
--------------------------------------------
Net Change in Cash and Cash Equivalents 7,045,029 2,589,554 (2,192,221)
Cash and Cash Equivalents, Beginning of Year 12,938,102 10,348,548 12,540,769
--------------------------------------------
Cash and Cash Equivalents, End of Year $19,983,131 $12,938,102 $10,348,548
============================================
Additional Cash Flows Information
Interest paid $19,416,749 $19,831,233 $19,048,580
Income tax paid 1,716,402 2,524,700 2,449,536
Transfers from loans to foreclosed real estate 971,983 128,288 1,873,356
Note payable issued for investment in limited partnership 1,855,277
Loans transferred to loans held for sale 18,603,020
Mortgage servicing rights capitalized 257,185 146,828
Common stock issued to ESOP leveraged with an employee loan 4,655,680
See notes to consolidated financial statements.
(5)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of MFS Financial, Inc. (Company) and its
wholly owned subsidiary, Mutual Federal Savings Bank (Bank) and the Bank's
wholly owned subsidiaries, First MFSB Corporation and Third MFSB Corporation,
conform to generally accepted accounting principles and reporting practices
followed by the thrift industry. The more significant of the policies are
described below.
During 1998, Kosciusko Service Corporation, a formerly wholly owned subsidiary
of the Bank, was merged into the Bank.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership of the Bank. The Bank operates under a federal thrift charter and
provides full banking services. As a federally chartered thrift, the Bank is
subject to regulation by the Office of Thrift Supervision, and the Federal
Deposit Insurance Corporation.
The Bank generates mortgage, consumer and commercial loans and receives deposits
from customers located primarily in Delaware, Kosciusko, Randolph and
surrounding counties. The Bank's loans are generally secured by specific items
of collateral including real property, consumer assets and business assets.
First MFSB sells various insurance products. Third MFSB offers tax deferred
annuities and long-term health care and life insurance products.
Consolidation--The consolidated financial statements include the accounts of the
Company and the Bank after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity, or included in the trading
account and marketable equity securities not classified as trading, are
classified as available for sale. Securities available for sale are carried at
fair value with unrealized gains and losses reported separately in accumulated
other comprehensive income, net of tax. Trading account securities are held for
resale in anticipation of short-term market movements and are valued at fair
value. Gains and losses, both realized and unrealized, are included in other
income.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
(6)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Company
considers its investmen in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual maturity of the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1999, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 3 to 50 years. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Investment in limited partnerships is recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
(7)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Intangible assets are being amortized primarily on a straight-line and
accelerated basis over a period of 15 years. Such assets are periodically
evaluated as to the recoverability of their carrying value.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share will be computed based upon the weighted average common and
potential common shares outstanding during the period subsequent to the Bank's
conversion to a stock savings bank on December 29, 1999. Net income per share
for the periods prior to the conversion is not meaningful.
Reclassifications of certain amounts in the 1998 and 1997 consolidated financial
statements have been made to conform to the 1999 presentation.
Note 2 -- Conversion
On December 29, 1999, the Bank completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings bank and the
formation of the Company as the holding company of the Bank. As part of the
conversion, the Company issued 5,595,780 shares of common stock at $10 per
share. Net proceeds of the Company's stock issuance, after costs of $1,391,000
and excluding the shares issued for the ESOP, were $49,911,000, of which
$27,284,000 was used to acquire 100% of th stock and ownership of the Bank. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests. In connection with the Conversion, the
Company contributed 223,831 shares of common stock and cash of $2,238,000 to
Mutual Federal Savings Bank Charitable Foundation, Inc. (the Foundation), a
charitable foundation dedicated to community development activities in the
Company's market areas. This resulted in the recognition of an additional
$4,477,000 charitable contribution expense for the year ended December 31, 1999.
Note 3 -- Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1999, was
$2,925,000.
(8)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Investment Securities
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities $ 9,517 $25 $(155) $ 9,387
Collateralized mortgage obligations 4,584 (48) 4,536
Federal agencies 2,416 (34) 2,382
Corporate obligations 7,781 (74) 7,707
Marketable equity securities 5,781 (194) 5,587
-----------------------------------------------------------------
Total available for sale 30,079 25 (505) 29,599
-----------------------------------------------------------------
Held to maturity
Federal agencies 10,200 (413) 9,787
Corporate obligations 2,099 (20) 2,079
Municipal obligation 150 150
-----------------------------------------------------------------
Total held to maturity 12,449 (433) 12,016
-----------------------------------------------------------------
Total investment securities $42,528 $25 $(938) $41,615
=================================================================
1998
-----------------------------------------------------------------
Gross Grosss
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities $ 5,129 $171 $ (3) $ 5,297
Federal agencies 1,244 42 1,286
Marketable equity securities 7,761 (136) 7,625
-----------------------------------------------------------------
Total available for sale 14,134 213 (139) 14,208
-----------------------------------------------------------------
Held to maturity
Federal agencies 6,220 13 (13) 6,220
Corporate obligations 4,634 22 (5) 4,651
Municipal 150 150
-----------------------------------------------------------------
Total held to maturity 11,004 35 (18) 11,021
-----------------------------------------------------------------
Total investment securities $25,138 $248 $(157) $25,229
=================================================================
Marketable equity securities consist of shares in mutual funds which invest in
government obligations and mortgage-backed securities.
(9)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
1999
-------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------------------------------------------
Amortized Fair Amortized Fair
December 31 Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
Within one year $ 1,862 $ 1,854
One to five years $ 8,283 $ 8,197 5,944 5,778
Five to ten years 970 956 3,493 3,336
After ten years 501 500 1,150 1,048
-------------------------------------------------------------------
9,754 9,653 12,449 12,016
Mortgage-backed securities 9,517 9,387
Collateralized mortgage obligations 4,584 4,536
Small Business Administration 443 436
Marketable equity securities 5,781 5,587
-------------------------------------------------------------------
Totals $30,079 $29,599 $12,449 $12,016
===================================================================
Securities with a carrying value of $30,159,000 and $12,803,000 were pledged at
December 31, 1999 and 1998 to secure FHLB advances.
Proceeds from sales of securities available for sale during the years ended
December 31, 1999, 1998 and 1997 were $8,253,000, $4,116,000 and $9,416,000.
Gross gains of $79,000, $1,000 and $3,000 were realized on those sales in 1999,
1998 and 1997. Gross losses of $47,000 were recognized on those sales in 1999.
Trading account securities at December 31, 1999 consisted of U. S. Government
bonds with a fair value of $1,235,000. Unrealized holding losses of $212,000
were included in earnings for the year ended December 31, 1999 and there were no
unrealized holding gains or losses on trading securities included in earnings in
1998 and 1997. Trading account securities with a carrying value of $823,000 were
pledged at December 31, 1999 to secure repurchase agreements.
(10)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Loans and Allowance
December 31 1999 1998
- -----------------------------------------------------------------------------------------
Loans
Real estate loans
One-to-four family $286,578 $264,461
Multi family 5,544 6,282
Commercial 14,559 10,293
Construction and development 12,470 11,805
----------------------------------
319,151 292,841
----------------------------------
Consumer loans
Auto 19,887 17,820
Home equity 10,585 10,253
Home improvement 14,588 12,108
Mobile home 12,305 15,466
Recreational vehicles 25,629 19,100
Boats 32,374 23,608
Credit cards 2,180 2,281
Other 2,374 3,472
----------------------------------
119,922 104,108
Commercial business loans 10,764 7,285
----------------------------------
449,837 404,234
Undisbursed portion of loans (4,844) (3,353)
Deferred loan fees, and costs, net 1,446 689
Allowance for loan losses (3,652) (3,424)
----------------------------------
Total loans $442,787 $398,146
==================================
(11)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $3,424 $3,091 $2,990
Provision for losses 760 1,265 700
Recoveries on loans 119 106 91
Loans charged off (651) (1,038) (690)
---------------------------------------------
Balances, December 31 $3,652 $3,424 $3,091
=============================================
Information on impaired loans is summarized below.
December 31 1998
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loans with an allowance $504
===============
Allowance for impaired loans included in the Company's allowance for loan losses $100
===============
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $429 $517 $949
Interest income recognized on impaired loans 9 56
Cash-basis interest included above 9 56
There were no impaired loans at December 31, 1999 and 1997.
Note 6 -- Premises and Equipment
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cost
Land $1,691 $1,557
Buildings and land improvements 8,269 8,213
Equipment 5,236 4,635
------------------------------
Total cost 15,196 14,405
Accumulated depreciation (7,396) (6,676)
------------------------------
Net $7,800 $7,729
==============================
(12)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Investment In Limited Partnerships
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Pedcor Investments 1988-V (98.97 percent ownership, equity method of accounting) $ 522 $ 523
Pedcor Investments 1990-XIII (99.00 percent ownership, equity method of accounting) 683 696
Pedcor Investments 1990-XI (19.79 percent ownership, at amortized cost) 96 107
Pedcor Investments 1997-XXVlll (99.00 percent ownership, equity method of accounting) 3,974 3,940
-------------------------------
$5,275 $5,266
===============================
The limited partnerships build, own and operate apartment complexes. The Company
records its equity in the net income or loss of the Pedcor Investments 1988-V,
1990-XIII, and 1997-XXVIII based on the Company's interest in the partnerships.
The Company has recorded its investment in Pedcor Investments 1990-XI, which
represents less than a 20 percent ownership, at amortized cost and records
income when distributions are received. In addition, the Company has recorded
the benefit of low income housing credits of $262,000 for 1999, 1998 and 1997.
Condensed financial statements for Pedcor Investments 1988-V, 1990-XIII, and
1997-XXVIII recorded under the equity method of accounting are as follows:
December 31 1999 1998
- --------------------------------------------------------------------------------------------
Condensed statement of financial condition
Assets
Cash $ 313 $ 198
Land and property 22,401 18,664
Other assets 1,694 6,303
-------------------------------
Total assets $24,408 $25,165
===============================
Liabilities
Notes payable $22,656 $23,021
Other liabilities 820 1,020
-------------------------------
Total liabilities 23,476 24,041
-------------------------------
Partners' equity (deficit)
General partners (2,423) (2,194)
Limited partners 3,355 3,318
-------------------------------
Total partners' equity 932 1,124
-------------------------------
Total liabilities and partners' equity $24,408 $25,165
===============================
(13)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Condensed statement of operations
Total revenue $2,497 $2,389 $2,418
Total expenses 2,499 2,377 2,418
-----------------------------------------
Net income $ (2) $ 12 $ 0
=========================================
Note 8 -- Deposits
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 14,361 $ 14,885
Interest-bearing demand 38,199 42,354
Regular passbook 37,601 39,418
90-day passbook 2,191 2,824
Money market savings 42,091 33,686
Certificates and other time deposits of $100,000 or more 44,804 36,148
Other certificates 185,357 196,684
-----------------------------------
Total deposits $364,604 $365,999
===================================
Certificates including other time deposits of $100,000 or more maturing in years
ending December 31:
2000 $158,502
2001 55,516
2002 7,848
2003 4,535
2004 3,760
----------------
$230,161
================
Note 9 -- Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements consist of obligations of the
Company to other parties. The obligations are secured by U. S. Treasury bonds
and such collateral is held in trust at a financial services company.
There was one outstanding agreement of $840,000 at December 31, 1999 maturing
January 13, 2000 and none at the end of 1998 nor were there any outstanding
agreements at any month-end during 1998. The maximum amount of outstanding
agreements at any month-end during 1999 and 1997 totaled $895,000 and $875,000
respectively. The monthly average of such agreements totaled $400,000, $2,000
and $20,000 for the years ended December 31, 1999, 1998 and 1997.
(14)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- Federal Home Loan Bank Advances
Weighted
Average
Maturities Year Ending December 31 Rate Amount
- ------------------------------------------------------------------------------
2000 5.89% $45,205
2001 5.23 1,000
2002 5.91 2,000
2003 5.09 8,131
2004
Thereafter 5.43 15,953
----------------
5.69% $72,289
================
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances and outstanding letters of credit both qualifying first
mortgage loans and investment securities in an amount equal to at least 170
percent of these advances and letters of credit. Advances are subject to
restrictions or penalties in the event of prepayment.
Note 11 -- Note Payable
The Bank has a noninterest-bearing, unsecured term note payable to Pedcor
Investments 1997-XXVIII, L.P. of $1,768,000 at December 31, 1999 and $1,830,000
at December 31, 1998 payable in semiannual installments through January 1, 2010.
At December 31, 1999 and 1998, the Bank was obligated under an irrevocable
direct pay letter of credit for the benefit of a third party in the amount of
$1,254,000 relating to this note and the financing for an apartment project by
Pedcor Investments 1997-XXVIII L.P. (see Note 7).
Note
Payable
Maturities Year Ending December 31 Pedcor
- --------------------------------------------------------------------------------
2000 $ 61
2001 61
2002 61
2003 61
2004 61
Thereafter 1,463
---------------
$1,768
===============
(15)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 -- Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of these loans consist of the
following:
December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Mortgage loan portfolio serviced for
Freddie Mac $22,128 $26,906 $16,785
Fannie Mae 9,977 14,520 908
Other investors 311 882 904
--------------- ---------------- --------------
$32,416 $42,308 $18,597
=============== ================ ==============
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1999, 1998 and 1997 is based on comparable market values and expected cash
flows, with impairment assessed based on portfolio characteristics including
product type, investor type, and interest rates.
No valuation allowance was necessary at December 31, 1999, 1998 and 1997.
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $339,904 $128,298
Servicing rights capitalized 257,185 $146,828
Amortization of servicing rights (60,735) (45,579) (18,530)
----------------- --------------- ----------------
Balances, December 31 $279,169 $339,904 $128,298
================= =============== ================
(16)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 -- Income Tax
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $1,088 $1,308 $1,837
State 469 458 592
Deferred
Federal (1,408) 216 (212)
State (11) 67 (57)
----------------------------------------------
Total income tax expense $ 138 $2,049 $2,160
==============================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 335 $2,104 $2,140
Effect of state income taxes 302 347 353
Low income housing credits (262) (262) (262)
Tax exempt income--increase in cash surrender value (167) (131) (81)
Other (70) (9) 10
----------------------------------------------
Actual tax expense $ 138 $2,049 $2,160
==============================================
Effective tax rate 14.0% 33.1% 34.3%
==============================================
(17)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The components of the deferred asset are as follows:
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Allowance for loan losses $1,485 $1,342
Deferred compensation 1,205 1,075
Charitable contribution carryover 1,390
Unrealized loss on securities available for sale 198
Other 193 110
------------------------------
Total assets 4,471 2,527
------------------------------
Liabilities
FHLB stock (165) (165)
Depreciation (116) (84)
State income tax (92) (88)
Loan fees (1,125) (811)
Increase in tax bad debt reserve over base year (92) (115)
Unrealized gain on securities available for sale (30)
Mortgage servicing rights (119) (144)
Investments in limited partnership (91) (66)
------------------------------
Total liabilities (1,800) (1,503)
------------------------------
$2,671 $1,024
==============================
The Company has a charitable contribution carryover of $4,570,000 that expires
in the year ending December 31, 2005.
Income tax expense attributable to securities gains was $12,800, $400 and $1,200
for the years ended December 31, 1999 and 1998 and 1997.
Retained earnings include approximately $6,443,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts was approximately $2,552,000.
(18)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 -- Other Comprehensive Income
1999
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $515 $206 $(309)
Less: reclassification adjustment for gains realized in net income 32 (13) 19
-------------------------------------------------
Net unrealized losses $(547) $219 $(328)
=================================================
1998
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $79 $(31) $48
Less: reclassification adjustment for gains realized in net income 1 1
-------------------------------------------------
Net unrealized gains $78 $(31) $47
=================================================
1997
-------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended December 31 Amount Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $78 $(31) $47
Less: reclassification adjustment for gains realized in net income 3 (1) 2
-------------------------------------------------
Net unrealized gains $75 $(30) $45
=================================================
Note 15 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated statement of
financial condition.
(19)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Financial instruments whose contract amount represents credit risk were as
follows:
December 31 1999 1998
- -------------------------------------------------------------------------------
Loan commitments $41,700 $33,530
Loans sold with recourse 93 165
Standby letters of credit 3,617 2,500
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
Note 16 -- Dividend and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding retained net income for the current calendar year plus
those for the previous two calendar years. The Bank normally restricts dividends
to a lesser amount because of the need to maintain an adequate capital
structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Banks' net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $45,619,000.
At December 31, 1999, the stockholder's equity of the Bank was $74,628,000, of
which approximately $7,966,000 was available for the payment of dividends to the
Company.
(20)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 risk-based
capital, and core leverage ratios. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1999 and 1998,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 1999 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
Required for To Be Well
Actual Adequate Capital(1) Capitalized(1)
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Total risk-based capital 1 (to risk-weighted assets) $76,994 21.7% $28,357 8.0% $35,446 10.00%
Tier 1 risk-based capital 1 (to risk-weighted assets) 73,445 20.7% 14,179 4.0% 21,268 6.00%
Core capital 1 (to adjusted total assets) 73,445 13.6% 16,252 3.0% 27,086 5.00%
Core capital 1 (to adjusted tangible assets) 73,445 13.6% 10,835 2.0% NA NA
Tangible capital 1 (to adjusted total assets) 73,445 13.6% 8,126 1.5% NA NA
As of December 31, 1998
Total risk-based capital 1 (to risk-weighted assets) $45,243 15.27% $23,710 8.0% $29,637 10.0%
Tier 1 risk-based capital 1 (to risk-weighted assets) 42,100 14.21% 11,855 4.0% 17,782 6.0%
Core capital 1 (to adjusted total assets) 42,100 9.03% 13,992 3.0% 23,320 5.0%
Core capital 1 (to adjusted tangible assets) 42,100 9.03% 9,328 2.0% NA NA
Tangible capital 1 (to adjusted total assets) 42,100 9.03% 6,996 1.5% NA NA
(1) As defined by regulatory agencies
(21)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 -- Employee Benefits
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The contributions are discretionary and determined
annually. For the years ended December 31, 1999, 1998 and 1997, the Company
matched employees' contributions at the rate of 50% for the first $600
participant contributions to the 401(k) and made a contribution to the profit
sharing plan of 7% of qualified compensation. The Company's expense for the plan
was $286,000, $284,000 and $252,500 fo the years ended December 31, 1999, 1998
and 1997.
The Company has a supplemental retirement plan and deferred compensation
arrangements for the benefit of certain officers. These arrangements are funded
by life insurance contracts which have been purchased by the Company. The
Company's expense for the plan was $214,000, $188,000 and $164,000 for the years
ended December 31, 1999, 1998 and 1997.
The Company has deferred compensation arrangements with certain directors
whereby, in lieu of currently receiving fees, the directors or their
beneficiaries will be paid benefits for an established period following the
director's retirement or death. These arrangements are funded by life insurance
contracts which have been purchased by the Company. The Company's expense for
the plan was $106,000, $117,000 and $105,000 for the years ended December 31,
1999, 1998 and 1997.
As part of the conversion in 1999, the Company established an ESOP covering
substantially all its employees. The ESOP acquired 465,568 shares of the Company
common stock at $10 per share in the conversion with funds provided by a loan
from the Company. Accordingly, the $4,655,680 of common stock acquired by the
ESOP is shown as a reduction of stockholders' equity. At December 31, 1999, the
Company had 444,979 unearned ESOP shares with a fair value of $4,339,000. Shares
are released to participants proportionately as the loan is repaid. Dividends on
allocated shares are recorded as dividends and charged to retained earnings.
Dividends on unallocated shares, which may be distributed to participants, or
used to repay the loan are treated as compensation expense. Compensation expense
is recorded equal to the fair market value of the stock when contributions,
which are determined annually by the Board of Directors of the Company and Bank,
are made to the ESOP. Expense under the ESOP for the year ended December 31,
1999 was $199,000. At December 31, 1999, the ESOP had no allocated shares,
444,979 suspense shares and 20,589 committed-to-be released shares.
In connection with the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Award Plan (RAP). The Plans are subject to
stockholders' approval. Under the stock option plan, stock options covering
shares representing an aggregate of up to 10% of the common stock issued in the
conversion may be granted to directors and executive officers. Restricted stock
awards covering up to 4% of the common stock issued in the conversion may be
awarded to directors and executiv officers under the RAP.
(22)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 19 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Securities and Mortgage-Backed Securities--Fair values are based on quoted
market prices.
Loans--The fair value for loans are estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Securities Sold Under Repurchase Agreements--Securities sold under repurchase
agreements are short-term borrowing arrangements. The rates at December 31,
1999, approximate market rates, thus the fair value approximates carrying value.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt for periods comparable to the remaining terms to maturity of these
advances.
Note Payable to Pedcor--The fair value of this note is estimated using a
discount calculation based on current rates.
Advances by Borrowers for Taxes and Insurance--The fair value approximates
carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair values of
such commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amount of these investments are
reasonable estimates of the fair value of these financial statements.
(23)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
1999 1998
----------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $19,983 $19,983 $12,938 $12,938
Trading account securities 1,235 1,235
Securities available for sale 29,599 29,599 14,208 14,208
Securities held to maturity 12,449 12,016 11,004 11,021
Loans 442,787 433,630 398,146 402,455
Stock in FHLB 5,339 5,339 3,612 3,612
Interest receivable 2,653 2,653 2,187 2,187
Liabilities
Deposits 364,604 365,566 365,999 366,377
Securities sold under repurchase agreements 840 840
FHLB Advances 72,289 72,304 50,632 50,988
Note payable--Pedcor 1,768 986 1,830 919
Interest payable 2,153 2,153 2,328 2,328
Advances by borrowers for taxes and insurance 1,289 1,289 1,260 1,260
Note 20 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1999
- --------------------------------------------------------------------------------
Assets
Short-term noninterest-bearing deposit with subsidiary $20,470
Investment in common stock of subsidiary 74,628
Deferred income tax 1,393
Other assets 343
----------
Total assets $96,834
==========
Liabilities--other $ 122
Stockholders' Equity 96,712
----------
Total liabilities and stockholders' equity $96,834
==========
(24)
MFS Financial, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Interest expense $ 40
Charitable contribution 4,477
---------------------------------------
Loss before income tax benefit and equity in undistributed income of subsidiary
4,517
Income tax benefit 1,536
---------------------------------------
Loss before equity in undistributed income of subsidiary (2,981)
Equity in undistributed income of subsidiary 3,827 $4,139 $4,135
---------------------------------------
Net Income $ 846 $4,139 $4,135
=======================================
Condensed Statement of Cash Flows
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 846 $4,139 $4,135
Adjustments to reconcile net income to net cash used by operating activities
Earned ESOP shares 199
Charitable contribution of Company's common stock 2,238
Deferred income tax benefit (1,393)
Undistributed income of subsidiary (3,827)
Other (221) (4,139) (4,135)
---------------------------------------
Net cash used by operating activities (2,158)
Investing Activity--capital contribution to subsidiary (27,283)
Financing Activity--proceeds from sale of common stock, net of costs 49,911
---------------------------------------
Short-Term Interest-Bearing Deposit with Subsidiary at End of Year $20,470 $ 0 $ 0
=======================================
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employee loan $ 4,656
(25)