As filed with the Securities and Exchange Commission on January 19, 1999
Registration No. 333-69191
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PFSB BANCORP, INC.
(Name of Small Business Issuer in its Certificate of Incorporation)
MISSOURI 6035 Being applied for
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
123 W. Lafayette Street 123 W. Lafayette Street
Palmyra, Missouri 63461 Palmyra, Missouri 63461
(573) 769-2134 (573) 769-2134
(Address and Telephone Number of (Address of Principal Place of Business
Principal Executive Offices) or Intended Principal Place of Business)
Eldon R. Mette
Executive Vice President and Director
Palmyra Saving and Building Association, F.A.
123 W. Lafayette Street
Palmyra, Missouri 63461
(573) 769-2134
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Paul M. Aguggia, Esquire
Victor L. Cangelosi, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of proposed sale to public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. /______/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /___/
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of each Class of Amount to Offering Price Aggregate Offering Amount of
Securities to be Registered be Registered Per Unit Price (1) Registration Fee
=========================================================================================================
Common Stock
$.01 par Value 991,875 Shares $10.00 $9,918,750 (2)
=========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The Registration fee of $2,758 was previously paid upon the initial filing
of the Form SB-2 on December 18, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
PROSPECTUS [LOGO]
PFSB BANCORP, INC.
(Proposed Holding Company for Palmyra Savings)
862,500 Shares of Common Stock
Palmyra Saving and Building Association, F.A. is converting from the mutual form
to the stock form of organization. As part of the conversion, Palmyra Saving
will become a wholly-owned subsidiary of PFSB Bancorp, Inc., which was formed in
November 1998, and will change its name to "Palmyra Savings." PFSB Bancorp is
offering its common stock to the public under the terms of its Plan of
Conversion which must be approved by a majority of the votes eligible to be cast
by the members of Palmyra Saving. The conversion will not go forward if Palmyra
Saving does not receive this approval or if PFSB Bancorp does not sell at least
the minimum number of shares.
OFFERING SUMMARY
Price Per Share: $10.00
Expected Trading Market: OTC Bulletin Board
Minimum Midpoint Maximum Maximum, as adjusted
---------- ---------- ---------- --------------------
Number of shares: 637,500 750,000 862,500 991,875
Gross offering proceeds: $6,375,000 $7,500,000 $8,625,000 $9,918,750
Estimated underwriting commissions
and other offering expenses: $ 535,000 $ 535,000 $ 535,000 $ 535,000
Estimated net proceeds: $5,840,000 $6,965,000 $8,090,000 $9,383,750
Estimated net proceeds per share: $9.16 $9.29 $9.38 $9.46
Trident Securities, Inc. will use its best efforts to assist PFSB Bancorp in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Trident Securities is not obligated to purchase any shares
of common stock in the offering. Trident Securities intends to make a market in
the common stock.
The subscription offering will end at 12:00 Noon, Central Time, on
______________, 1999. If the conversion is not completed by _________, 1999,
and the Office of Thrift Supervision gives Palmyra Saving more time to complete
the conversion, PFSB Bancorp will give all subscribers the opportunity to
increase, decrease or cancel their orders. No single extension may exceed 90
days and all extensions may not go beyond __________, 2001. PFSB Bancorp will
hold all funds received from subscribers in an interest-bearing savings account
at Palmyra Saving until the conversion is completed or terminated. All funds
will be returned promptly if the conversion is terminated.
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THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE __.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
For additional information about the conversion and the stock offering, please
refer to the more detailed information in this prospectus. For assistance,
please contact the stock information center at (573) 769-2655.
TRIDENT SECURITIES, INC.
The date of this prospectus is ___________, 1999
TABLE OF CONTENTS
Page Page
---- ----
Summary......................................... Business of Palmyra Saving................
Risk Factors.................................... Management of PFSB Bancorp................
Selected Consolidated Financial Information.... Management of Palmyra Saving..............
Use of Proceeds................................. Regulation................................
Dividend Policy................................. Taxation..................................
Market for Common Stock......................... The Conversion............................
Capitalization.................................. Restrictions on Acquisition
Historical and Pro Forma........................ of PFSB Bancorp.........................
Regulatory Capital Compliance................. Description of Capital Stock
Pro Forma Data.................................. of PFSB Bancorp.........................
Shares to be Purchased by Management Registration Requirements.................
Pursuant to Subscription Rights................. Legal and Tax Opinions....................
Palmyra Saving and Building Association, Experts...................................
F.A. Consolidated Statements of Income......... Change in Accountants.....................
Management's Discussion and Additional Information....................
Analysis of Financial Condition Index to Consolidated
and Results of Operations...................... Financial Statements....................
Business of PFSB Bancorp.........................
[Map of Missouri showing county borders, with enlargement of Marion, Clark and
Lewis Counties showing the location of the towns of Palmyra, Kahoka and Canton
appears here]
SUMMARY
The following summary explains the significant aspects of the
conversion. Because this is a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus carefully
before you decide to invest. For assistance, please contact the stock
information center at (573) 769-2655.
THE COMPANIES
PFSB Bancorp, Inc. Palmyra Saving formed PFSB Bancorp to become the
123 West Lafayette Street holding company for Palmyra Saving. To date, PFSB
Palmyra, Missouri 63461 Bancorp has only conducted organizational
(573) 769-2134 activities. After the conversion, PFSB Bancorp
will own all of Palmyra Saving's capital stock and
will direct, plan and coordinate Palmyra Saving's
business activities. After the conversion, PFSB
Bancorp might become an operating company or
acquire or organize other operating subsidiaries,
including other financial institutions, although
it currently has no specific plans or agreements
to do so.
Palmyra Saving and Palmyra Saving's business strategy is to operate
Building Association, F.A. as a traditional, community-oriented savings
123 West Lafayette Street association dedicated to financing home ownership
Palmyra, Missouri 63461 and providing quality customer service. Palmyra
(573) 769-2134 Saving operates out of three offices in northeast
Missouri located in the towns of Palmyra (Marion
County), Canton (Lewis County) and Kahoka (Clark
County). Palmyra Saving considers Marion, Lewis
and Clark Counties as its primary market area for
making loans and attracting deposits. Palmyra
Saving's principal business is attracting deposits
from the general public and using those funds to
originate residential mortgage loans. Palmyra
Saving also purchases participation interests in
residential, multi-family and commercial real
estate loans, generally secured by properties
located outside of its primary market area. At
September 30, 1998, Palmyra Saving had total
assets of $59.5 million, deposits of $52.7 million
and total equity of $6.0 million. For a
discussion of Palmyra Saving's business strategy
and recent results of operations, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." For a
discussion of Palmyra Saving's business
activities, see "BUSINESS OF THE ASSOCIATION."
THE CONVERSION
What is the Conversion The conversion is a change in Palmyra Saving's
(page ___) legal form of organization. As a mutual savings
association, Palmyra Saving currently has no stock
or stockholders. Instead, Palmyra Saving operates
for the mutual benefit of its depositors who elect
its directors and vote on other important matters.
Through the conversion, Palmyra Saving will become
a stock savings association and will be owned and
controlled by the holder of its stock, PFSB
Bancorp. Voting rights in PFSB Bancorp will
belong to its stockholders. Palmyra Saving is
conducting the conversion under the terms of its
Plan of Conversion. The OTS has approved the
conversion with the condition that Palmyra
Saving's members approve the Plan of Conversion.
Palmyra Saving has called a special meeting for
_________, 1999 for the purpose of voting on the
Plan of Conversion.
Reasons for the Conversion By converting to the stock form of organization,
(page ___) Palmyra Saving will be structured in the form used
by commercial banks, most business entities and a
large number of savings institutions. The
conversion will be important to Palmyra Saving's
future growth and performance by:
. providing a larger capital base from which it
can operate,
. enhancing its ability to attract and retain
qualified management through stock-based
compensation plans,
. enhancing its ability to diversify into other
financial services related activities, and
. expanding its ability to service the public.
Presently, Palmyra Saving does not have any
specific plans or arrangements for diversification
or expansion.
Benefits of the Conversion PFSB Bancorp and Palmyra Saving intend to adopt
to Management (page __) the following benefit plans and employment
agreements:
. Employee Stock Ownership Plan. This plan
intends to purchase 8% of the shares issued in
the conversion. The shares will be allocated to
employees over a period of years in proportion
to their compensation.
. Stock Option Plan. Under this plan, PFSB
Bancorp may award stock options to key
employees and directors. The number of options
available under this plan will be equal to 10%
of
2
the number shares sold in the conversion.
This plan will require shareholder approval.
. Management Recognition and Development Plan.
Under this plan, PFSB Bancorp may award shares
of restricted stock to key employees and
directors at no cost to the recipient. The
number of shares available under this plan will
equal 4% of the number of shares sold in the
conversion. This plan will require shareholder
approval.
. Employment Agreements with Palmyra Saving's
Executive Vice President, and Vice President
and Treasurer. These agreements will provide
for severance benefits if the executive is
terminated following a change in control of
PFSB Bancorp or Palmyra Saving.
. Employee Severance Compensation Plan. This plan
will provide severance benefits to eligible
employees if there is a change in control of
PFSB Bancorp or Palmyra Saving.
For a discussion of certain risks associated
with these plans and agreements, see "RISK
FACTORS -- The Implementation of Benefit Plans
Will Increase Future Compensation Expense" and
"-- Employment Agreements and Severance Plan
Could Discourage Takeover Attempts."
THE OFFERING
Subscription Offering Palmyra Saving has granted subscription
(page ___) rights in the following order of priority to:
1. Persons with $50 or more on deposit at Palmyra
Saving as of June 30, 1997.
2. The Palmyra Saving Employee Stock Ownership
Plan.
3. Persons with $50 or more on deposit at Palmyra
Saving as of December 31, 1998.
4. Palmyra Saving's depositors as of January 31,
1999 and borrowers of Palmyra Saving as of
June 1, 1995 whose loans continue to be
outstanding as of January 31, 1999.
To ensure that Palmyra Saving properly identifies
your subscription rights, you must list all of
your savings accounts
3
and loans as of the eligibility dates on the stock
order form. If you fail to do so, your subscription
may be reduced or rejected if the offering is
oversubscribed.
Subscription rights are not transferable, and
persons with subscription rights may not subscribe
for shares for the benefit of any other person.
If you violate this prohibition, you may lose your
right to purchase shares and may be subject to
criminal prosecution and/or other sanctions.
The subscription offering will end at 12:00 Noon,
Central time, on ________, 1999. If the offering
is oversubscribed, shares will be allocated in
order of the priorities described above under a
formula contained in the Plan of Conversion.
Community Offering PFSB Bancorp may offer shares not sold in the
(Page__) subscription offering to the general public in a
community offering. People and trusts of people
who are residents of Marion, Lewis and Clark
Counties, Missouri will have first preference to
purchase shares in a community offering. If
shares are available, PFSB Bancorp expects to
offer them to the general public immediately after
the end of the subscription offering, but may
begin a community offering at any time during the
subscription offering.
PFSB Bancorp and Palmyra Saving may reject orders
received in the community offering either in whole
or in part. If your order is rejected in part,
you cannot cancel the remainder of your order.
Purchase Price The purchase price is $10.00 per share. The
Boards of Directors of PFSB Bancorp and Palmyra
Saving consulted with Trident Securities in
determining it. You will not pay a commission to
buy any shares in the conversion.
Number of Shares to be PFSB Bancorp will sell between 637,500 and 862,500
Issued (page ___) shares of its common stock in this offering. With
regulatory approval, PFSB Bancorp may increase the
number of shares to 991,875.
The amount of common stock being offered in the
conversion is based on an independent appraisal of
the estimated pro forma market value of PFSB
Bancorp and Palmyra Saving. RP Financial, L.C.,
the independent appraiser, has estimated that, in
its opinion, as of December 11, 1998, the estimated
pro forma market value ranged between $6,375,000
and $8,625,000, with a midpoint of $7,500,000. The
appraisal was based in part on Palmyra Saving's
financial condition and operations and the effect
on Palmyra Saving of the additional capital raised
by the sale of common stock in this offering. The
independent appraisal will be updated before the
conversion is completed.
4
Purchase Limitations The minimum purchase is 25 shares.
(page __) The maximum purchase by any person or group of
persons through a single deposit account is
$60,000 of common stock, which equals 6,000 shares.
The maximum purchase by any person in the community
offering is $60,000 of common stock, which equals
6,000 shares.
The maximum purchase in the conversion by any
person, related persons or persons acting together
is $100,000 of common stock,which equals 10,000
shares.
How to Purchase Common If you want to subscribe for shares, you must
Stock (page ___) complete an original stock order form and send it
together with full payment to Palmyra Saving in
the postage-paid envelope provided. You must sign
the certification that is part of the stock order
form. Palmyra Saving must receive your stock
order form before the end of the subscription
offering.
You may pay for shares in any of the following
ways:
. IN CASH if delivered in person.
. BY CHECK OR MONEY ORDER made payable to PFSB
Bancorp, Inc.
. BY WITHDRAWAL from an account at Palmyra
Saving. To use funds in an IRA at Palmyra
Saving you must transfer your account to an
unaffiliated institution or broker. Please
contact the stock information center at least
one week before the end of the subscription
offering for assistance.
Palmyra Saving will pay interest on your
subscription funds at the rate it pays on passbook
accounts from the date it receives your funds
until the conversion is completed or terminated.
All funds authorized for withdrawal from deposit
accounts with Palmyra Saving will earn interest at
the applicable account rate until the conversion
is completed. There will be no early withdrawal
penalty for subscriptions paid for by withdrawal
from certificates of deposit.
After Palmyra Saving receives your order, you
cannot cancel or change it without Palmyra Saving's
consent. If PFSB Bancorp intends to sell fewer than
637,500 shares or more than 991,875 shares, all
subscribers will be notified and given the
opportunity to change or cancel their orders.
5
Use of Proceeds PFSB Bancorp will pay 50% of the net offering
(page ___) proceeds to Palmyra Saving to buy all of the
common stock of Palmyra Saving. Palmyra Saving
will use these funds to originate and purchase
loans and purchase investments similar to the
kinds it currently holds. PFSB Bancorp will loan
an amount equal to 8% of the gross proceeds of the
offering to Palmyra Saving's employee stock
ownership plan to fund its purchase of common
stock and will keep the remainder of the net
proceeds for general corporate purposes. These
purposes may include, for example, paying cash
dividends or buying back shares of common stock.
PFSB Bancorp and Palmyra Saving may also use the
proceeds of the offering to expand and diversify
their businesses, although they have no specific
plans to do so at this time.
Purchases by Officers and Palmyra Saving's directors and executive officers
Directors (page ___) intend to subscribe for 40,325 shares, which
equals 4.2% of the shares issued at the maximum of
the offering range. Directors and executive
officers will pay the same $10.00 per share price
as all other persons who purchase shares in the
conversion.
Market for Common Stock PFSB Bancorp intends to list the common stock
(page ___) over-the-counter through the OTS Bulletin Board or
the National Daily Quotation System "Pink Sheets"
published by the National Quotation Bureau, Inc.
Trident Securities intends to be a market maker in
the common stock. After shares of the common
stock commence trading, you may contact a stock
broker to buy or sell shares. PFSB Bancorp cannot
assure you that there will be an active trading
market for the common stock. See "RISK FACTORS --
Possible Limited Market for PFSB Bancorp's Common
Stock May Negatively Affect Market Price."
Dividend Policy (page ___) PFSB Bancorp intends to adopt a policy of paying
regular cash dividends, but has not yet decided on
the amount or frequency of payments.
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RISK FACTORS
Before investing in PFSB Bancorp's common stock please carefully
consider the matters discussed below. The common stock is not a savings account
or deposit and is not insured by the Federal Deposit Insurance Corporation or
any other government agency.
PALMYRA SAVING'S BUSINESS DEPENDS HEAVILY ON ECONOMIC CONDITION OF ITS PRIMARY
MARKET AREA AND WEAK MARKET AREA DEMOGRAPHICS LIMITS GROWTH PROSPECTS
Palmyra Saving focuses on serving customers in the rural northeastern
Missouri counties of Marion, Lewis and Clark, which currently have an aggregate
population of approximately 45,000 distributed among approximately 18,000
households. The average unemployment rate for these three counties was
approximately 5.1% in July 1998, which exceeded both the Missouri rate of 4.4%
and the U.S. rate of 4.7%. The average median household income for the three
counties was approximately $31,000, which is less than the Missouri average of
approximately $36,100 and the U.S. average of approximately $38,100.
Furthermore, the average per capita income for the three counties was
approximately $14,000, which is also less than the Missouri average of
approximately $17,300 and the U.S. average of approximately $18,400. Because a
substantial portion of Palmyra Saving's borrowers and depositors live in these
counties and because substantially all of Palmyra Saving's real estate
collateral is located there, a downturn in the economy of Palmyra Saving's
primary market area could increase the risk of loan losses. In addition,
because Palmyra Saving operates in a rural market area with a small population
that is not growing significantly, Palmyra Saving's ability to increase its loan
portfolio and deposit base is limited. See "BUSINESS OF THE ASSOCIATION --
Market Area."
PURCHASED LOANS MAKE PALMYRA SAVING'S LOAN PORTFOLIO MORE RISKY
Palmyra Saving purchases participation interests in one- to- four-
family mortgage loans, multi-family loans and commercial real estate loans,
generally secured by properties located outside of Palmyra Saving's primary
market area. Many of the participation interests in one- to- four family
mortgage loans are secured by non-owner occupied duplex properties, principally
located in Columbia, Missouri because of the housing demand generated by the
state university located there. At September 30, 1998, purchased loans amounted
to $8.6 million, or 21.2% of net loans, of which $6.9 million were one- to- four
family mortgage loans, $806,000 were participation interests in multi-family
loans and $863,000 were participation interests in commercial real estate loans.
Purchased loans are more difficult to underwrite and monitor than loans
originated by Palmyra Saving because of the higher probability of lack of
personal contact with the borrower and the distant location of the collateral,
among other reasons. In addition, loans secured by non-owner occupied
properties pose additional risk, such the borrowers' ability to earn enough
rental income on the property to pay the underlying mortgage debt. See "BUSINESS
OF THE ASSOCIATION --Lending Activities."
LOSS OF KEY PERSONNEL MAY HURT PALMYRA SAVING'S OPERATIONS
Eldon R. Mette, Palmyra Saving's Executive Vice President, and Ronald
L. Nelson, Palmyra Saving's Vice President and Treasurer, have been instrumental
in managing the business affairs of Palmyra Saving for over 25 years. The loss
of either individual could have a material adverse impact on the operations of
Palmyra Saving. Palmyra Saving does not have an established management
succession plan. Accordingly, should Palmyra Saving lose the services of Mr.
Mette and Mr. Nelson, the Board of Directors would have to search outside of
Palmyra Saving for qualified, permanent replacements. This search may be
prolonged and Palmyra Saving cannot assure you that it will be able to locate
and hire qualified replacements. Neither Palmyra Saving nor PFSB Bancorp has
any plans to obtain a "key man" life insurance policy for either individual.
For a discussion of Palmyra Saving's management, see "MANAGEMENT OF THE
ASSOCIATION."
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PALMYRA SAVING'S INTEREST RATE SPREAD IS LOW BECAUSE OF LARGE RESIDENTIAL
MORTGAGE LOAN PORTFOLIO
Historically, Palmyra Saving's principal lending activity has been
making one- to four-family mortgage loans for long-term investment purposes. At
September 30, 1998, approximately 61.8% of Palmyra Saving's assets were
residential mortgage loans, which represented 88.9% of the total loan portfolio
at that date. While generally considered to involve less risk than other types
of lending, such as commercial mortgage loans, commercial business loans and
consumer loans, Palmyra Saving generally earns less interest income on
residential mortgage loans than these other types of loans. Palmyra Saving
expects that one- to four-family residential mortgage loans will continue to be
its primary lending activity for the foreseeable future.
YEAR 2000 DATA PROCESSING PROBLEMS COULD INTERRUPT AND HURT PALMYRA SAVING'S
OPERATIONS
Computer programs that use only two digits to identify a year could
fail or create erroneous results by or at the year 2000. All of the material
data processing of the Bank is performed by a third party service bureau. If
the service bureau is unable to complete its Year 2000 adjustments in a timely
fashion, or if it does not successfully make all the necessary Year 2000
adjustments, then resulting computer malfunctions could interrupt the operations
of Palmyra Saving and have a significant adverse impact on Palmyra Saving's
financial condition and results of operations. Palmyra Saving has developed a
Year 2000 Action Plan to analyze how the Year 2000 will impact its operations
and to monitor the status of its vendors and commercial borrowers. Currently,
the total pre-tax costs associated with required modifications and conversions
of Palmyra Saving's hardware and software in order to achieve year 2000
compliance is not expected to exceed $75,000. This estimate is based on
assumptions regarding the continued availability of various resources, third-
party modification plans and other factors. Accordingly, actual expenses may be
different from estimates. To date, Palmyra Saving has spent approximately
$59,000 on Year 2000 compliance issues. For further discussion of Palmyra
Saving's Year 2000 compliance program, see "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000 Issues."
RISING INTEREST RATES COULD HURT PALMYRA SAVING'S PROFITS
Like most financial institutions, Palmyra Saving's ability to make a
profit depends largely on its net interest income, which is the difference
between interest income it receives from its loans and investment securities and
interest it pays on deposits and borrowings. If interest rates rise, Palmyra
Saving anticipates that its net interest income would decline as interest paid
on deposits would increase more quickly than the interest earned on loans and
investment securities. In addition, rising interest rates may adversely affect
Palmyra Saving's earnings because rising rates may cause a decrease in customer
demand for loans and a reduction in value of Palmyra Saving's securities
available for sale. For further discussion of how changes in interest rates
could impact Palmyra Saving, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
PALMYRA SAVING'S RETURN ON EQUITY WILL BE BELOW AVERAGE AFTER CONVERSION BECAUSE
OF HIGH CAPITAL LEVELS
Return on equity, which equals net income divided by average equity,
is a ratio used by many investors to compare the performance of a particular
company with other companies. In recent years, Palmyra Saving's return on
average equity has been below the average return on equity for publicly held
savings associations and banks of comparable size. As a result of the
additional capital that will be raised in this offering, PFSB Bancorp expects
that its return on average equity will continue to be below average after the
offering. In addition, compensation expense will increase as a result of the
new benefit plans. Over time, PFSB Bancorp intends to use the net proceeds from
this offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. This goal could take a
number of years to achieve, and PFSB Bancorp cannot assure you that this goal
can be attained. Consequently, you
8
should not expect a competitive return on equity in the near future. See "PRO
FORMA DATA" for an illustration of the financial effects of this stock offering.
IMPLEMENTATION OF BENEFIT PLANS WILL INCREASE FUTURE COMPENSATION EXPENSE
Palmyra Saving will recognize additional material employee
compensation and benefit expenses that stem from the shares purchased or granted
to employees and executives under new benefit plans. Palmyra Saving cannot
predict the actual amount of these new expenses because applicable accounting
practices require that they be based on the fair market value of the shares of
common stock at specific points in the future. Palmyra Saving would recognize
expenses for its Employee Stock Ownership Plan when shares are committed to be
released to participants' accounts and would recognize expenses for the
Management Recognition and Development Plan over the vesting period of awards
made to recipients. These expenses have been reflected in the pro forma
financial information under "PRO FORMA DATA" assuming the $10.00 per share
purchase price as fair market value. Actual expenses, however, may be higher or
lower. Recently proposed accounting rules would also require PFSB Bancorp to
recognize compensation expense for stock options awarded to non-employee
directors. For further discussion of these plans, see "MANAGEMENT OF THE BANK -
- - Benefits ."
ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY LOWER YOUR OWNERSHIP INTEREST
If stockholders approve the new stock-based benefit programs, PFSB
Bancorp intends to issue shares to its officers and directors through these
plans. If the shares for the Management Recognition and Development Plan are
issued from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the shares for the Stock Option Plan
are issued from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 9.09%. See "PRO FORMA DATA."
POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES MAY DISCOURAGE TAKEOVER
ATTEMPTS
The shares of common stock that Palmyra Saving's directors and
executive officers intend to purchase in the conversion, when combined with the
shares that may be awarded or sold to participants under the Palmyra Saving's
Employee Stock Ownership Plan and PFSB Bancorp's stock-based benefit plans,
could ultimately result in management and employees controlling a significant
percentage of PFSB Bancorp's common stock. If these individuals were to act
together, they could have significant influence over the outcome of any
stockholder vote. This voting power may discourage takeover attempts that you
would like see happen. In addition, the total voting power of management and
employees could reach in excess of 20% of PFSB Bancorp's outstanding stock.
That level would enable management and employees as a group to defeat any
stockholder matter that requires an 80% vote. For information about
management's intended stock purchases and the number of shares that may be
awarded under new benefit plans, see "SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS," "MANAGEMENT OF THE ASSOCIATION -- Executive
Compensation" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS COULD DISCOURAGE TAKEOVER
ATTEMPTS
Provisions in PFSB Bancorp's Articles of Incorporation and Bylaws, the
corporation law of the state of Missouri, and federal regulations may make it
difficult and expensive to pursue a takeover attempt that management opposes.
These provisions may discourage or prevent takeover attempts that you would like
to see happen. These provisions will also make the removal of the current board
of directors or management of PFSB Bancorp, or the appointment of new directors,
more difficult. These provisions include: limitations on voting rights of
beneficial owners of more than 10% of PFSB Bancorp's common stock; supermajority
voting requirements for certain business combinations; the election of directors
to staggered terms of three years; the elimination of cumulative voting for
directors; and the removal of directors without cause only upon the vote of
holders of 80% of the outstanding voting shares. The Articles of Incorporation
of PFSB Bancorp also contain provisions regarding the timing and content of
stockholder proposals and nominations and limiting the calling of special
meetings. For
9
further information about these provisions, see "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY."
EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN COULD DISCOURAGE TAKEOVER ATTEMPTS
The employment agreements of senior officers of PFSB Bancorp and
Palmyra Saving provide for cash severance payments and/or the continuation of
health, life and disability benefits if the executive is terminated following a
change in control of PFSB Bancorp or Palmyra Saving. If a change in control had
occurred at September 30, 1998, the aggregate value of the severance benefits
available to these executive officers under the agreements would have been
approximately $356,000. In addition, if a change in control had occurred at
September 30, 1998 and all eligible employees had been terminated, the aggregate
payment due under the Severance Plan would have been approximately $_______.
These arrangements may have the effect of increasing the costs of acquiring PFSB
Bancorp, thereby discouraging future attempts to take over PFSB Bancorp or
Palmyra Saving. For information about the proposed employment and severance
agreements and Severance Plan, see "MANAGEMENT OF THE ASSOCIATION -- EXECUTIVE
COMPENSATION."
COMPETITION HAS HURT PALMYRA SAVING'S NET INTEREST INCOME
Palmyra Saving faces intense competition both in making loans and
attracting deposits. This competition has made it more difficult for Palmyra
Saving to make new loans and has forced it to offer amongst the highest deposit
rates in its market area. This competition for loans and deposits has
contributed to a narrow interest rate spread, which has hurt net interest
income. Palmyra Saving expects that the competition for loans and deposits will
continue to be intense. For more information about the Palmyra Saving's market
area and the competition it faces, see "BUSINESS OF THE ASSOCIATION -- Market
Area" and --- Competition."
POSSIBLE LIMITED MARKET FOR PFSB BANCORP'S COMMON STOCK MAY LOWER MARKET PRICE
Because PFSB Bancorp has never issued capital stock, PFSB Bancorp does
not know whether an active trading market will develop. Because of the
relatively small size of the offering, it is highly unlikely that an active and
liquid market for the common stock will develop. As a result, you may not be
able to sell all of your shares on short notice and the sale of a large number
of shares all at once could temporarily lower the market price. Therefore, you
should consider the potentially illiquid and long-term nature of an investment
in the common stock. Furthermore, PFSB Bancorp cannot guarantee anyone who
purchases shares in the conversion that they will be able to sell their shares
at or above the $10.00 purchase price. For further information on the expected
trading market for PFSB Bancorp's common stock, see "MARKET FOR COMMON STOCK."
PALMYRA SAVING COULD HOLD YOUR SUBSCRIPTION FUNDS FOR AN EXTENDED TIME PERIOD IF
COMPLETION OF THE CONVERSION IS DELAYED
If the conversion is not completed by __________, 1999 as a result of
changes that lead to a material revision in the independent appraisal of Palmyra
Saving and the Office of Thrift Supervision consents to an extension of time to
complete the conversion, PFSB Bancorp would conduct a resolicitation offering.
Federal regulations permit the Office of Thrift Supervision to grant one or more
time extensions, none of which may exceed 90 days. Extensions may not go beyond
__________, 2001. In the resolicitation offering, PFSB Bancorp would mail a
supplement to this prospectus to you if you subscribed for stock to let you
confirm, modify or cancel your subscription. If you fail to respond to the
resolicitation offering, it would be as if you had canceled your order and all
subscription funds, together with accrued interest, would be returned to you.
If you authorized payment by withdrawal of funds on deposit at Palmyra Saving,
that authorization would terminate. If you affirmatively confirm your
subscription order during the resolicitation offering, PFSB Bancorp and Palmyra
Saving would continue to hold your subscription funds until the end of the
resolicitation offering. Your resolicitation order would be irrevocable without
the consent of PFSB Bancorp and Palmyra Saving until the conversion is completed
or terminated.
10
BANKING REFORM LEGISLATION MAY REDUCE PFSB BANCORP'S AND PALMYRA SAVING'S POWERS
In 1998 the U.S. Congress considered legislation that was intended to
modernize the financial services industry. Under the proposed legislation,
newly formed unitary savings and loan holding companies would not be permitted
to exercise the broad powers currently available to these companies. Previous
proposals would have eliminated the federal savings association charter by
requiring that all federal savings associations convert to national banks or
other banking charters, but such provision was not included in the final
legislation that was considered. Palmyra Saving is a federal savings
association and PFSB Bancorp, upon completion of the conversion, will be a
unitary savings and loan holding company. PFSB Bancorp does not know whether
federal legislation will be enacted that affects the federal savings association
charter or unitary savings and loan holding companies, or if such legislation is
enacted, what form this legislation might take. Accordingly, management of
Palmyra Saving and PFSB Bancorp cannot predict what effect, if any, banking
reform legislation would have on the activities and operations of Palmyra Saving
and PFSB Bancorp.
11
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the financial
position and results of operations of the Association at the dates and for the
periods indicated. This information should be read in conjunction with the
Financial Statements and Notes thereto presented elsewhere in this prospectus.
AT SEPTEMBER 30,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets............................... $59,476 $58,433 $57,223
Cash and cash equivalents.................. 2,268 2,146 1,732
Investment securities available for sale... 7,087 8,509 6,245
Investment securities held to maturity..... 5,589 5,093 7,198
Mortgage-backed securities held to
maturity................................. 2,584 2,828 3,280
Loans receivable, net...................... 40,513 38,394 37,259
Deposits................................... 52,724 51,412 51,391
FHLB advances.............................. 500 1,000 200
Total equity, substantially restricted..... 6,048 5,715 5,302
YEAR ENDED
SEPTEMBER 30,
------------------------
1998 1997 1996
-------- ------ ------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income............................ $4,164 $4,133 $3,982
Interest expense........................... 2,685 2,626 2,598
------ ------ ------
Net interest income........................ 1,479 1,507 1,384
Provision (benefit) for loan losses........ 25 21 87
------ ------ ------
Net interest income after provision
for loan losses......................... 1,454 1,486 1,297
Noninterest income......................... 75 63 85
Noninterest expense (1).................... 1,104 1,035 1,368
------ ------ ------
Income before income taxes................. 425 514 14
Income tax expense (benefit)............... 149 182 (8)
------ ------ ------
Net income................................. $ 276 $ 332 $ 22
====== ====== ======
_____________________________
(1) Includes a one-time SAIF assessment of $305,000 in 1996.
12
AT SEPTEMBER 30,
---------------------------
1998 1997 1996
-------- -------- -------
SELECTED OTHER DATA:
Number of:
Mortgage loans outstanding.................... 1,221 1,244 1,295
Deposit accounts.............................. 7,761 7,678 7,716
Full-service offices.......................... 3 3 3
AT OR FOR THE
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------ ------ ------
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on average assets(1).................... 0.47% 0.57% 0.04%
Return on average equity(2).................... 4.64 6.49 0.41
Interest rate spread(3)........................ 2.24 2.34 2.18
Net interest margin(4)......................... 2.62 2.70 2.54
Noninterest expense as a
percent of average total assets............... 1.88 1.79 2.43
Average interest-earning assets to
average interest-bearing liabilities.......... 107.87 107.66 107.62
Capital Ratios:
Tangible....................................... 10.13 9.82 9.43
Core........................................... 10.13 9.82 9.43
Risk-based..................................... 22.30 22.25 21.46
Average equity as a percent of average assets.. 10.20 9.66 9.75
Asset Quality Ratios:
Nonperforming loans as a percent
of loans receivable, net(5)................... 0.54 0.47 2.39
Nonperforming assets as a
percent of total assets(6).................... 0.37 0.31 1.56
Allowance for loan losses as a percent
of gross loans receivable..................... 0.68 0.54 0.62
Allowance for loan losses as a
percent of nonperforming loans................ 127.85 140.88 26.32
Net charge-offs as a percent of
average outstanding loans..................... -- -- --
- ---------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets
and weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(6) Nonperforming assets consist of nonaccrual loans. See "BUSINESS OF
THE ASSOCIATION -- Lending Activities --Nonperforming Assets and
Delinquencies."
13
USE OF PROCEEDS
The net proceeds from the sale of the common stock offered hereby are
estimated to range from $5.8 million to $8.1 million, or up to $9.4 million if
the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for the
assumptions used to arrive at such amounts. The Holding Company has received
conditional OTS approval to purchase all of the capital stock of the Association
to be issued in the conversion in exchange for 50% of the net proceeds of the
conversion.
The following table presents the estimated net proceeds of the offering
based on the number of shares set forth below together with the amount to be
retained by the Holding Company and the amount to be contributed to the
Association.
637,500 750,000 862,500 991,875
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
---------- --------- --------- ---------
(IN THOUSANDS)
Gross proceeds................ $ 6,375 $ 7,500 $ 8,625 $ 9,919
Less: estimated expenses..... (535) (535) (535) (535)
-------- -------- -------- --------
Net proceeds.................. $ 5,840 $ 6,965 $ 8,090 $ 9,384
======== ======== ======== ========
Amount to be retained by
the Holding Company........ $ 2,920 $ 3,482 $ 4,045 $ 4,692
Amount to be contributed to
the Association............ $ 2,920 $ 3,483 $ 4,045 $ 4,692
Receipt of 50% of the net proceeds of the sale of the common stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, lending
and investment in short-term U.S. Government and agency obligations. Depending
on local loan demand, the Association may consider using a portion of the
conversion proceeds to purchase loan participation interests of the type it has
purchased in the past and/or for investment in mortgage-backed securities.
In connection with the conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of common stock sold in the conversion. The Holding Company's loan
to fund the ESOP may range from $510,000 to $690,000 based on the sale of 51,000
shares to the ESOP (at the minimum of the Estimated Valuation Range) and 69,000
shares to the ESOP (at the maximum of the Estimated Valuation Range),
respectively, at $10.00 per share. If 15% above the maximum of the Estimated
Valuation Range, or 991,875 shares, are sold in the conversion, the Holding
Company's loan to the ESOP would be approximately $793,500 (based on the sale of
79,350 shares to the ESOP). It is anticipated that the ESOP loan will have a
15-year term with interest payable at the prime rate as published in The Wall
Street Journal on the closing date of the conversion. The loan will be repaid
principally from the Association's contributions to the ESOP and from any
dividends paid on shares of common stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially will
be invested primarily in short-term U.S. Government and agency obligations.
Such proceeds will be available for additional contributions to the Association
in the form of debt or equity, to support future diversification or acquisition
activities, as a source of dividends to the stockholders of the Holding Company
and for future repurchases of common stock to the extent
14
permitted under Missouri law and federal regulations. The Holding Company will
consider exploring opportunities to use such funds to expand operations through
acquiring or establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any expansion activities.
Following consummation of the conversion, the Board of Directors will have
the authority to adopt plans for repurchases of common stock, subject to
statutory and regulatory requirements. Since the Holding Company has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based. The facts and circumstances upon
which the Board of Directors may determine to repurchase stock in the future
would include but are not limited to: (i) market and economic factors such as
the price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the book
value and/or earnings per share of the remaining outstanding shares, and the
ability to improve the Holding Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Holding Company and its stockholders. Any stock repurchases will be subject to
a determination by the Board of Directors that both the Holding Company and the
Association will be capitalized in excess of all applicable regulatory
requirements after any such repurchases and that capital will be adequate,
taking into account, among other things, the Association's level of
nonperforming and classified assets, the Holding Company's and the Association's
current and projected results of operations and asset/liability structure, the
economic environment and tax and other regulatory considerations. For a
discussion of the regulatory limitations applicable to stock repurchases, see
"THE CONVERSION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Holding Company's Board of Directors intends to adopt a policy of
paying regular cash dividends after the consummation of the conversion, but has
not decided the amount that may be paid or when the payments may begin. In
addition, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations
or payments of any dividends (regular and special) will be subject to
determination by the Holding Company's Board of Directors, which will take into
account the amount of the net proceeds retained by the Holding Company, the
Holding Company's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions that affect the payment
of dividends by the Association to the Holding Company discussed below. Under
Missouri law, the Holding Company is prohibited from paying a cash dividend when
its net assets are less than its stated capital or when the payment of the
dividend would reduce its net assets below its stated capital. In order to pay
such cash dividends, however, the Holding Company must have available cash
either from the net proceeds raised in the conversion and retained by the
Holding Company, borrowings by the Holding Company, dividends received from the
Association or earnings on Holding Company assets. No assurances can be given
that any dividends, either regular or special, will be declared or, if declared,
what the amount of dividends will be or whether such dividends, if commenced,
will continue.
CURRENT RESTRICTIONS
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Association because the Holding Company initially will have
no source of income other than dividends from the Association and earnings from
the investment of the net proceeds from the offering retained by the Holding
Company. OTS regulations require the Association to give the OTS 30 days'
advance notice of any proposed declaration of dividends to the Holding Company,
and the OTS has the authority under its supervisory powers to prohibit the
payment of dividends to the Holding Company. The OTS imposes certain
limitations on the payment of dividends from the Association to the Holding
Company which utilize a three-tiered approach that permits various levels of
distributions based primarily upon
15
a savings association's capital level. The Association currently meets the
criteria to be designated a Tier 1 association, as hereinafter defined, and
consequently could at its option (after prior notice to and no objection made by
the OTS) distribute up to 100% of its net income during the calendar year plus
50% of its surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. In addition, the Association may
not declare or pay a cash dividend on its capital stock if the effect thereof
would be to reduce the regulatory capital of the Association below the amount
required for the liquidation account to be established pursuant to the
Association's Plan of Conversion. See "REGULATION -- Federal Regulation of
Savings Associations -- Limitations on Capital Distributions," "THE
CONVERSION-- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association -- Liquidation Account" and Note N of the Notes to Consolidated
Financial Statements included elsewhere herein.
Additionally, in connection with the conversion, the Holding Company and
the Association have committed to the OTS that during the one-year period
following consummation of the conversion, the Holding Company will not take any
action to declare an extraordinary dividend to stockholders that would be
treated by recipients as a tax-free return of capital for federal income tax
purposes.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Association
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Association to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Association at the then
current income tax rate on the amount deemed distributed, which would include
the amounts of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note I of the Notes to Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Association that would result in a recapture of the
Association's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
Because the Holding Company has never issued capital stock, there is no
existing market for the common stock. The Holding Company intends to list the
common stock over-the-counter through either the National Daily Quotation System
"Pink Sheets" published by the National Quotation Bureau, Inc. or the OTC
Bulletin Board and to request Trident Securities to undertake to match buy and
sell orders for the shares. Trident Securities has agreed to make a market in
the common stock following the consummation of the conversion, although it has
no obligation to do so. However, there can be no assurance that timely and
accurate quotations will be regularly available. The development of a liquid
public market depends on the existence of willing buyers and sellers and their
existence is not within the control of the Holding Company, the Association or
any market maker. Because of the small size of the offering, it is highly
unlikely that an active and liquid market for the common stock will develop and
the number of active buyers and sellers at any particular time is expected to be
limited. Under such circumstances, investors in the common stock could have
difficulty disposing of their shares on short notice and should not view the
common stock as a short-term investment. Furthermore, there can be no assurance
that purchasers will be able to sell their shares at or above the $10.00 per
share purchase price or that published quotations will be regularly available.
16
CAPITALIZATION
The following table presents the historical capitalization of the
Association at September 30, 1998, and the pro forma consolidated capitalization
of the Holding Company after giving effect to the assumptions set forth under
"PRO FORMA DATA," based on the sale of the number of shares of common stock at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The shares that would be issued at the maximum, as adjusted,
of the Estimated Valuation Range would be subject to receipt of OTS approval of
an updated appraisal confirming such valuation. A CHANGE IN THE NUMBER OF
SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT PRO FORMA
CONSOLIDATED CAPITALIZATION.
HOLDING COMPANY
PRO FORMA CONSOLIDATED CAPITALIZATION
BASED UPON THE SALE OF
---------------------------------------------------
637,500 750,000 862,500 991,875
CAPITALIZATION SHARES AT SHARES AT SHARES AT SHARES AT
AS OF $10.00 $10.00 $10.00 $10.00
SEPTEMBER 30, 1998 PER SHARE(1) PER SHARE(1) PER SHARE(1) PER SHARE(1)
------------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Deposits(3)............................. 52,724 $ 52,724 $ 52,724 $ 52,724 $ 52,724
FHLB-Des Moines advances................ 500 500 500 500 500
------- -------- -------- -------- --------
Total deposits and borrowings........... $53,224 $ 53,224 $ 53,224 $ 53,224 $ 53,224
======= ======== ======== ======== ========
PREFERRED STOCK:
1,000,000 shares, $.01 par value
per share, authorized; none issued
or outstanding.................... $ -- $ -- $ -- $ -- $ --
COMMON STOCK:
5,000,000 shares, $.01 par value
per share, authorized; specified
number of shares assumed to be
issued and outstanding(4)......... -- 6 8 9 10
Additional paid-in capital.............. -- 5,834 6,958 8,081 9,374
Total equity(5)......................... 6,048 6,048 6,048 6,048 6,048
Less:
Common stock to be acquired
by ESOP(6)........................ -- (510) (600) (690) (794)
Common stock to be acquired
by MRP(7)......................... -- (255) (300) (345) (397)
------- -------- -------- -------- --------
Total stockholders' equity.............. $ 6,048 $ 11,123 $ 12,113 $ 13,103 $ 14,242
======= ======== ======== ======== ========
(footnotes on following page)
17
- ------------------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of operations
of the Association or changes in market conditions or general financial,
economic and regulatory conditions, or the issuance of additional shares
under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of common stock issued in the
conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) The Association's authorized capital will consist solely of 1,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
conversion.
(5) Total equity is substantially restricted by applicable regulatory capital
requirements. Additionally, the Association will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of the
Association's Eligible Account Holders and Supplemental Eligible Account
Holders at the time of the conversion and adjusted downward thereafter as
such account holders reduce their balances or cease to be depositors. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Liquidation Account."
(6) Assumes that 8% of the common stock sold in the conversion will be acquired
by the ESOP in the conversion with funds borrowed from the Holding Company.
Under GAAP, the amount of common stock to be purchased by the ESOP
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to ESOP participants'
accounts, a corresponding reduction in the charge against capital will
occur. Since the funds are borrowed from the Holding Company, the borrowing
will be eliminated in consolidation and no liability or interest expense
will be reflected in the consolidated financial statements of the Holding
Company. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share, pursuant to the
proposed MRP, of a number of shares equal to 4% of the shares of common
stock issued in the conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of common stock for the MRP from authorized but
unissued shares would dilute the ownership interest of stockholders by
3.85%. The shares are reflected as a reduction of stockholders' equity.
See "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs," "PRO
FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management
Recognition Plan." The MRP is subject to stockholder approval, which is
expected to be sought at a meeting to be held no earlier than six months
following consummation of the conversion.
18
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at September 30, 1998.
The amount of capital infused into the Association for purposes of the following
table is 50% of the net proceeds of the offering. For purpose of the table
below, the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the MRP is deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO
FORMA DATA." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to the Association, see "REGULATION -- Federal Regulation
of Savings Associations -- Capital Requirements."
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
-------------------- ------------------- ------------------- -------------------
637,500 Shares 750,000 Shares 862,500 Shares 991,875 Shares
September 30, 1998 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------- -------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ ---------- ------ ----------- ------ -----------
(Dollars in thousands)
GAAP capital........... $6,048 10.17% $8,203 13.20% $8,631 13.77% $9,058 14.34% $9,550 14.97%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible capital....... $6,017 10.13% $8,172 13.16% $8,600 13.74% $9,027 14.30% $9,519 14.94%
Tangible capital
requirement........... 891 1.50 931 1.50 939 1.50 947 1.50 956 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess................. $5,126 8.63% $7,241 11.66% $7,661 12.24% $8,080 12.80% $8,563 13.44%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core capital........... $6,017 10.13% $8,172 13.16% $8,608 13.74% $9,027 14.30% $9,519 14.94%
Core capital
requirement(2)........ 1,783 3.00 1,863 3.00 1,878 3.00 1,894 3.00 2,549 4.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess................. $4,234 7.13% $6,309 10.16% $6,722 10.74% $7,133 11.30% $6,970 10.94%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total capital(3)....... $6.297 22.30% $8,452 29.38% $8,880 30.75% $9,307 32.12% $9,799 33.68%
Risk-based
capital requirement... 2,259 8.00 2,302 8.00 2,310 8.00 2,318 8.00 2,328 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess................. $4,038 14.30% $6,150 21.38% $6,570 22.75% $6,989 24.12% $7,471 25.68%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- -------------------------
(1) Based upon total adjusted assets of $59.4 million at September 30, 1998 and
$62.1 million, $62.7 million, $63.2 million and $63.8 million at the
minimum, midpoint, maximum and maximum, adjusted, of the Estimated Valuation
Range, respectively, for purposes of the tangible and core capital
requirements, and upon risk-weighted assets of $28.2 million at September
30, 1998 and $28.8 million, $28.9 million, $29.0 million and $29.1 million
at the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, for purposes of the risk-based
capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that carry
a 20% risk-weighting.
19
PRO FORMA DATA
Under the Plan of Conversion, the common stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Association as converted, based upon an independent valuation. The Estimated
Valuation Range as of December 11, 1998 is from a minimum of $6,375,000 to a
maximum of $8,625,000 with a midpoint of $7,500,000. At a price per share of
$10.00, this results in a minimum number of shares of 637,500, a maximum number
of shares of 862,500 and a midpoint number of shares of 750,000. The actual net
proceeds from the sale of the common stock cannot be determined until the
conversion is completed. However, net proceeds set forth on the following table
are based upon the following assumptions: (i) Trident Securities will receive a
fixed management fee of $135,000 (see "THE CONVERSION -- Plan of Distribution
for the Subscription, Direct Community and Syndicated Community Offerings);
(ii) all of the common stock will be sold in the Subscription and Direct
Community Offerings; and (iii) conversion expenses, excluding the fixed
management fee paid to Trident Securities, will total approximately $400,000 at
each of the minimum, midpoint, maximum and 15% above the Estimated Valuation
Range. Actual expenses may vary from this estimate, and the fees paid will
depend upon the percentages and total number of shares sold in the Subscription
Offering, Direct Community Offering and Syndicated Community Offering and other
factors.
The following table summarizes the historical net income and retained
income of the Association and the pro forma consolidated net income and
stockholders' equity of the Holding Company at and for the year ended September
30, 1998, based on the minimum, midpoint and maximum of the Estimated Valuation
Range and based on a 15% increase in the maximum of the Estimated Valuation
Range. The pro forma consolidated net income of the Association for the year
ended September 30, 1998 has been calculated as if the conversion had been
consummated at the beginning of the period and the estimated net proceeds
received by the Holding Company and the Association had been invested at 4.39%
at the beginning of the period, which represents the one-year U.S. Treasury Bill
yield as of September 30, 1998. While OTS regulations provide for the use of a
yield representing the arithmetic average of the weighted average yield earned
by the Association on its interest-earning assets and the rates paid on its
deposits, the Holding Company believes that the U.S. Treasury Bill yield
represents a more realistic yield on the investment of the conversion proceeds.
As discussed under "USE OF PROCEEDS," the Holding Company expects to retain 50%
of the net proceeds of the offering from which it will fund the ESOP loan. A
pro forma after-tax return of 2.77% is used for both the Holding Company and the
Association for the period, after giving effect to an incremental combined
federal and state income tax rate of 37.0%. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
number of shares of common stock indicated in the footnotes to the table. Per
share amounts have been computed as if the common stock had been outstanding at
the beginning of the period or at September 30, 1998, but without any adjustment
of per share historical or pro forma stockholders' equity to reflect the
earnings on the estimated net proceeds.
No effect has been given to: (i) the shares to be reserved for issuance
under the Holding Company's Stock Option Plan, which is expected to be voted
upon by stockholders at a meeting to be held no earlier than six months
following consummation of the conversion; (ii) withdrawals from deposit accounts
for the purpose of purchasing common stock in the conversion; (iii) the issuance
of shares from authorized but unissued shares to the MRP, which is expected to
be voted upon by stockholders at a meeting to be held no earlier than six months
following consummation of the conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Stock Option Plan" and "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GAAP. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED
TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS
AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET
VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
20
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
991,875
637,500 750,000 862,500 SHARES SOLD AT
SHARES SHARES SOLD AT SHARES SOLD AT $10.00
SOLD AT $10.00 $10.00 $10.00 PER SHARE (15%
PER SHARE PER SHARE PER SHARE ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (1)
-------------- -------------- -------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross Proceeds......................................... $ 6,375 $ 7,500 $ 8,625 $ 9,919
Less: estimated expenses.............................. (535) (535) (535) (535)
-------- -------- -------- --------
Estimated net proceeds................................. 5,840 6,965 8,090 9,384
Less: Common Stock acquired by ESOP................... (510) (600) (690) (794)
Common Stock to be acquired by MRP................. (255) (300) (345) (397)
-------- -------- -------- --------
Net investable proceeds............................... $ 5,075 $ 6,065 $ 7,055 $ 8,194
======== ======== ======== ========
Consolidated net income:
Historical............................................ $ 276 $ 276 $ 276 $ 276
Pro forma income on net proceeds(2)................... 140 168 195 227
Pro forma ESOP adjustments(3)......................... (32) (38) (43) (50)
Pro forma MRP adjustments(4).......................... (32) (38) (43) (50)
-------- -------- -------- --------
Pro forma net income................................ $ 352 $ 368 $ 385 $ 403
======== ======== ======== ========
Consolidated net income per share(5)(6):
Historical............................................ $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma income on net proceeds...................... 0.24 0.24 0.24 0.25
Pro forma ESOP adjustments(3)......................... (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments(4).......................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income per share...................... $ 0.61 $ 0.54 $ 0.49 $ 0.45
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical............................................ $ 6,048 $ 6,048 $ 6,048 $ 6,048
Estimated net proceeds................................ 5,840 6,965 8,090 9,384
Less: Common stock acquired by ESOP.................. (510) (600) (690) (794)
Less: Common stock to be acquired by MRP(4).......... (255) (300) (345) (397)
-------- -------- -------- --------
Pro forma stockholders' equity(7).................. $ 11,123 $ 12,113 $ 13,103 $ 14,242
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6)......................................... $ 9.49 $ 8.06 $ 7.01 $ 6.10
Estimated net proceeds................................ 9.16 9.29 9.38 9.46
Less: Common stock acquired by ESOP.................. (0.80) (0.80) (0.80) (0.80)
Less: Common stock to be acquired by MRP(4).......... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9)......... $ 17.45 $ 16.15 $ 15.19 $ 14.36
======== ======== ======== ========
Purchase price as a percentage of pro forma............ 57.31% 61.92% 65.83% 69.64%
stockholders' equity per share....................... ======== ======== ======== ========
Purchase price as a multiple of pro forma.............. 16.39x 18.52x 20.41x 22.22x
net income per share................................ ======== ======== ======== ========
(footnotes on following page)
21
- ---------------------------------
(1) Gives effect to the sale of an additional 129,375 shares in the conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Association as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance of
such additional shares will be conditioned on a determination by RP
Financial that such issuance is compatible with its determination of the
estimated pro forma market value of the Holding Company and the Association
as converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. Since funds on deposit
at the Association may be withdrawn to purchase shares of common stock
(which will reduce deposits by the amount of such purchases), the net amount
of funds available to the Association for investment following receipt of
the net proceeds of the conversion will be reduced by the amount of such
withdrawals.
(3) It is assumed that 8% of the shares of common stock offered in the
conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
conversion, which rate is currently 8.00%) from the net proceeds from the
conversion retained by the Holding Company. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine estimated
net investable proceeds. The Association intends to make contributions to
the ESOP in amounts at least equal to the principal and interest requirement
of the debt. As the debt is paid down, stockholders' equity will be
increased. The Association's payment of the ESOP debt is based upon equal
installments of principal over a 10-year period, assuming a combined federal
and state income tax rate of 37.0%. Interest income earned by the Holding
Company on the ESOP debt offsets the interest paid by the Association on the
ESOP loan. No reinvestment is assumed on proceeds contributed to fund the
ESOP. Applicable accounting practices require that compensation expense for
the ESOP be based upon shares committed to be released and that unallocated
shares be excluded from earnings per share computations. The valuation of
shares committed to be released would be based upon the average market value
of the shares during the year, which, for purposes of this calculation, was
assumed to be equal to the $10.00 per share purchase price. See "MANAGEMENT
OF THE ASSOCIATION -- Benefits --Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the $10.00 per share purchase price, that 20% of the amount
contributed was an amortized expense during such period, and that the
combined federal and state income tax rate is 37.0%. The issuance of
authorized but unissued shares of the common stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.85% and pro forma net income per share would be $0.58,
$0.52, $0.48 and $0.43 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended September 30,
1998, respectively, and pro forma stockholders' equity per share would be
$17.16, $15.91, $14.99 and $14.19 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range at September 30, 1998,
respectively. Shares issued under the MRP vest 20% per year and for
purposes of this table compensation expense is recognized on a straight-line
basis over each vesting period. In the event the fair market value per
share is greater than $10.00 per share on the date shares are awarded under
the MRP, total MRP expense would increase. The total estimated MRP expense
was multiplied by 20% (the total percent of shares for which expense is
recognized in the first year) resulting in pre-tax MRP expense of $51,000,
$60,000, $69,000 and $79,350 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range for the year ended September
30, 1998, respectively. No effect has been given to the shares reserved for
issuance under the proposed Stock Option Plan.
(5) Per share amounts are based upon shares outstanding of 589,050, 693,000,
796,950 and 916,493 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended September 30,
1998, respectively, which includes the shares of common stock sold in the
conversion less the number of shares assumed to be held by the ESOP not
committed to be released within the first year following the conversion.
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Association's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the conversion,
or the federal income tax consequences of the restoration to income of the
Association's special bad debt reserves for income tax purposes which would
be required in the unlikely event of liquidation. See "THE CONVERSION --
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association" and "TAXATION." The amounts shown for book value do not
represent fair market values or amounts distributable to stockholders in the
unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 637,500, 750,000,
862,500 and 991,875 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of the
common stock.
22
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the approximate
purchases of common stock by each director and executive officer of the
Association, including their associates, as defined by applicable regulations.
No individual has entered into a binding agreement with respect to such intended
purchases, and, therefore, actual purchases could be more or less than indicated
below. Directors and officers of the Association and their associates may not
purchase in excess of 35% of the shares sold in the conversion. For purposes of
the following table, it has been assumed that sufficient shares will be
available to satisfy subscriptions in all categories. Directors, officers,
their associates and employees will pay the same price as all other subscribers
for the shares for which they subscribe.
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares to be Purchased (1) Amount to be Purchased Valuation Range Valuation Range
-------- -------------------------- ---------------------- ---------------- ----------------
L. Edward Schaeffer 5,000 $ 50,000 0.8% 0.5%
Chairman of the Board
and President
Eldon R. Mette 4,000 40,000 0.6 0.4
Executive Vice President,
Secretary and Director
Glenn J. Maddox 5,000 50,000 0.8 0.5
Vice President of the Board
and Director
Ronald L. Nelson 3,000 30,000 0.5 0.3
Vice President and Treasurer
Albert E. Davis 8,625 100,000 1.4 1.0
Director
Robert M. Dearing 2,700 27,000 0.4 0.3
Director
James D. Lovegreen 4,000 40,000 0.6 0.4
Director
Donald L. Slavin 8,000 80,000 1.2 0.8
Director ------ -------- --- ---
Total 40,325 $403,250 6.3% 4.2%
====== ======== === ===
- ----------------------------
(1) Does not include any shares to be awarded pursuant to the ESOP and MRP or
options to acquire shares pursuant to the Stock Option Plan.
23
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Palmyra Saving and
Building Association, F.A. for the fiscal years ended September 30, 1998 and
1997 have been audited by Moore, Horton & Carlson, P.C., independent auditors,
whose report thereon appears elsewhere in this prospectus. These statements
should be read in conjunction with the Consolidated Financial Statements and
related Notes included elsewhere herein.
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
INTEREST INCOME:
Mortgage loans........................................ $3,048,539 $2,927,976
Consumer and other loans.............................. 34,982 36,057
Investment securities................................. 809,753 877,944
Mortgage-backed securities............................ 193,808 219,819
Interest-bearing deposits............................. 76,791 70,977
---------- ----------
Total Interest Income............................. 4,163,873 4,132,773
INTEREST EXPENSE:
Deposits -- Note G.................................... 2,669,858 2,619,925
Advances from FHLB.................................... 15,337 5,853
---------- ----------
Total interest expense............................. 2,685,195 2,625,778
---------- ----------
Net interest income................................ 1,478,678 1,506,995
Provision for Loan Losses -- Note D....................... 25,000 20,813
---------- ----------
Net interest income after provision for loan losses... 1,453,678 1,486,182
NONINTEREST INCOME (LOSS):
Service charges and other fees........................ 65,149 60,106
Loss on sale of investments........................... (2,056) (14,015)
Gain (loss) on disposal of premises and equipment..... 1,205 (731)
Other................................................. 10,534 17,419
---------- ----------
Total Noninterest Income.......................... 74,832 62,779
NONINTEREST EXPENSE:
Employee salaries and benefits........................ 560,020 524,262
Occupancy costs....................................... 134,977 125,670
Advertising........................................... 36,611 29,737
Data processing....................................... 107,463 78,715
Federal insurance premiums............................ 32,249 47,956
Other................................................. 232,636 228,727
---------- ----------
Total Noninterest Expense......................... 1,103,956 1,035,067
---------- ----------
INCOME BEFORE INCOME TAXES................................ 424,556 513,894
Income taxes -- Note I.................................... 149,000 182,000
---------- ----------
NET INCOME................................................ $ 275,554 $ 331,894
========== ==========
See accompanying Notes to Consolidated Financial Statements.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Association. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
prospectus.
OPERATING STRATEGY
The Association's business consists principally of attracting retail
deposits from the general public and using these funds to originate and purchase
mortgage loans secured by one- to four-family residences generally located in
Missouri. To a lesser extent, the Association also originates and purchases
multi-family and originates commercial real estate loans, land loans,
residential construction loans and loans secured by savings accounts. The
Association funds its assets primarily with retail deposits, although it
occasionally uses advances from the FHLB-Des Moines as a supplemental source of
funds.
The Association's business strategy is to operate as a traditional,
community-oriented savings association dedicated to financing home ownership and
providing quality customer service. Historically, the Association has
emphasized the origination and purchase of loans secured by real estate and has
retained for its portfolio all of the loans that it originates. To supplement
loan demand in its primary market area, the Association purchases participation
interests in one- to- four family mortgage loans (primarily non-owner-occupied
duplex properties, multi-family loans and commercial real estate loans generally
secured by properties located in Missouri. Historically, virtually all of the
mortgage loans originated by the Association have been three- and five-year
balloon loans based on an interest rate established by the Association and that
is fixed during the balloon term. The Association funds its loan originations
primarily with deposits, although advances form the FHLB-Des Moines are used as
a supplemental source of funds. The Association does not intend to change its
business materially after the conversion. However, in order to offer more
product variety to its customers, the Association intends to explore offering
traditional ARM loans with an interest rate tied to a nationally recognized
index such as the U.S. Treasury Bill rate, fixed-rate residential mortgage
loans, and, to a limited extent, direct mobile home loans without the security
of the underlying property. Implementation of these planned new loan programs
will be gradual so that personnel can be trained adequately and the necessary
delivery systems can be implemented.
The conversion will increase the consolidated capital of the Holding
Company by the amount of the net proceeds. Funds withdrawn from deposit
accounts will decrease interest-bearing liabilities, and new funds used to
purchase shares will increase interest-earning assets. While the Holding
Company expects these changes to increase its net interest income, the Holding
Company also expects that the adoption of the MRP and the additional costs of
operating as a public company will increase its non-interest expenses. For
additional information regarding the effects of this offering, see "RISK FACTORS
- -- Expenses Associated with ESOP and MRP" and "PRO FORMA DATA."
25
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
At September 30, 1998, total assets were $59.5 million compared to $58.4
million at September 30, 1997. This increase is primarily the result of a $2.1
million increase in loans, which was offset by declines in investment securities
and mortgage-backed securities. The increase in loans primarily reflected
residential mortgage loan refinancing in the current low interest rate
environment, rather than new loan originations. The current low interest rate
environment also contributed to the decline in investment securities and
mortgage-backed securities as a result of prepayments.
Premises and equipment increased from $491,000 at September 30, 1997 to
$562,000 at September 30, 1998 as a result of a decrease in building and
improvements from $581,000 to $569,000, offset by an increase in furniture and
equipment from $354,000 to $380,000. Building and improvements decreased from
$581,000 to $569,000 due to the write-off of a remodeling study of the Kahoka
branch office calling for the Association to occupy the entire building. Rather
than occupying the entire building, the Association plans to sell and leaseback
its office until a new branch building is constructed. See "BUSINESS OF THE
ASSOCIATION -- Properties" for further information. Furniture and equipment
increased due to the purchase of new computer systems for each office.
At September 30, 1998, deposits were $52.7 million compared to $51.4
million at September 30, 1997. Management attributes the increase, which
occurred primarily in certificates of deposit, to normal growth.
Total equity increased from $5.7 million at September 30, 1997 to
$6.0 million at September 30, 1998 as a result of retained earnings and a prior
period adjustment of $87,000 for deferred income taxes relating to the allowance
for loan losses. See Note O to the Notes to Consolidated Financial Statements
for further discussion of this prior period adjustment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME. Net income was $276,000 in 1998 compared to $332,000 in 1997.
Lower net interest income after provision for loan losses and higher noninterest
expense in 1998 compared to 1997 were the primary reasons for the decline in net
income.
NET INTEREST INCOME. Net interest income was unchanged at $1.5 million for
both years. Total interest income increased from $4.1 million in 1997 to $4.2
million in 1998 primarily as a result of a higher average balance of loans,
which offset lower average balances of investments and mortgage-backed
securities caused by repayments and maturities. Total interest expense
increased from $2.6 million in 1997 to $2.7 million in 1998 primarily as a
result of higher average deposit balances. Interest expense on FHLB-Des Moines
advances was $15,000 in 1998 compared to $6,000 in 1997 primarily as a result of
higher average rates paid on advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. The provision for loan
losses was $25,000 in 1998 compared to $21,000 in 1997. The allowance for loan
losses was $280,000 at September 30, 1998 and $255,000 at September 30, 1997.
Management deemed such allowance as adequate at both dates. Although management
uses the best information available, future adjustments to the allowance may be
necessary due to changes in economic, operating, regulatory and other conditions
that may be beyond the Association's control. While the Association maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for estimated losses, there can be no assurance that further additions
will not be made to the allowance for loan losses and that actual losses will
not exceed the estimated amounts. See "BUSINESS OF THE ASSOCIATION -- Lending
Activities -- Allowance for Loan Losses" for further information.
26
NONINTEREST INCOME. Noninterest income increased from $63,000 in 1997 to
$75,000 in 1998. Service charges and other fees increased primarily as a result
of higher numbers of loans outstanding and deposit accounts. Other noninterest
income consists primarily of miscellaneous operating income and commissions on
credit life insurance policies that the Association's service corporation sells
to the Association's borrowers. Other noninterest income decreased primarily as
a result of the absence of dividend income in 1998. The Association's data
processing provider, a business cooperaive of which the Association was a
member, was sold to another company in 1997.
NONINTEREST EXPENSE. Noninterest expense increased from $1.0 million in
1997 to $1.1 million in 1998. Employee salaries and benefits increased as a
result of a part-time employee converting to full-time status and the hiring of
an additional employee at the Palmyra main office. Occupancy costs increased
primarily as a result of higher depreciation expense associated with new
computer equipment. Advertising expense increased due to increased advertising
to promote savings growth. Data processing expenses increased as a result of
the purchase of teller station software that is charged based on the number of
teller stations rather than as a flat fee. Federal deposit insurance premiums
decreased due to the lower premium rates implemented after the SAIF
recapitalization in 1996. Other noninterest expenses consists primarily of fees
paid to directors, OTS assessment fees, professional fees, telephone and postage
and other miscellaneous items. The increase in other noninterest expenses
between 1998 and 1997 is primarily the result of normal inflationary increases.
INCOME TAXES. Income taxes decreased between 1997 and 1998 as a result of
lower income before income taxes in 1998.
27
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances were derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances causes any material differences in the
information presented.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST
-------- --------- ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans receivable, net(1).................... $39,233 $3,084 7.86% $37,525 $2,964 7.90%
Investment securities....................... 12,544 780 6.22 13,277 844 6.36
Mortgage-backed securities.................. 2,804 194 6.91 3,053 220 7.20
FHLB stock.................................. 431 29 6.82 480 34 7.00
Interest-bearing deposits................... 1,495 77 5.14 1,461 71 4.86
------- ------ ------- ------
Total interest-earning assets......... 56,507 4,164 7.37 55,796 4,133 7.41
Noninterest earning assets.................. 2,185 1,973
------- -------
Total average assets.................. $58,692 $57,769
======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts(3)......................... $11,271 329 2.92 $11,694 342 2.93
Certificates of deposit..................... 40,844 2,341 5.73 40,007 2,278 5.69
------- ------ ------- ------
Total average deposits.................... 52,115 2,670 5.12 51,701 2,620 5.07
FHLB advances............................... 269 15 5.70 123 6 4.76
------- ------ ------- ------
Total interest-bearing liabilities........ 52,384 2,685 5.13 51,824 2,626 5.07
------ ------
Noninterest-bearing liabilities.............. 366 366
------- -------
Total average liabilities................. 52,750 52,190
Average total equity......................... 5,942 5,579
------- -------
Total liabilities and retained earnings..... $58,692 $57,769
======= =======
Net interest income.......................... $1,479 $1,507
====== ======
Interest rate spread......................... 2.24% 2.34%
===== =====
Net interest margin.......................... 2.62% 2.70%
===== =====
Ratio of average interest earning assets
to average interest-bearing liabilities.. 107.87% 107.66%
======= =======
- ------------------------------------
(1) Average loans receivable includes nonperforming loans. Interest income does
not include interest on loans 90 days or more past due.
28
YIELDS EARNED AND RATES PAID
The following table sets forth at the date and for the periods indicated
the weighted average yields earned on the Association's assets and the weighted
average interest rates paid on the Association's liabilities, together with the
Association's interest rate spread and net interest margin.
YEARS ENDED SEPTEMBER 30, AT SEPTEMBER 30,
--------------------------- -----------------
1998 1997 1998
-------------- ----------- -----------------
Weighted average yield earned on:
Loans receivable, net.......................... 7.86% 7.90% 7.85%
Investment securities.......................... 6.22 6.36 6.18
Mortgage-backed securities..................... 6.91 7.20 6.98
FHLB stock..................................... 6.82 7.00 6.81
Interest-earning deposits...................... 5.14 4.86 5.18
Total interest-earning assets................ 7.37 7.41 7.39
Weighted average rate paid on:
Savings accounts............................... 2.92 2.93 3.05
Certificates of deposit........................ 5.73 5.69 5.56
Total average deposits....................... 5.12 5.07 5.02
FHLB advances.................................. 5.70 4.76 5.74
Total interest-bearing liabilities........... 5.13 5.07 5.02
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities)......................... 2.24 2.34 2.37
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)..................... 2.62 2.70 N/A
29
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Association. Information is
provided with respect to: (i) effects attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) effects attributable to changes in
rate (changes in rate multiplied by prior volume; and (iii) effects attributable
to changes in rate and volume (changes in rate multiplied by changes in volume).
YEAR ENDED SEPTEMBER 30, 1998
COMPARED TO
YEAR ENDED SEPTEMBER 30, 1997
INCREASE (DECREASE)
DUE TO
-----------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net............... $(14) $135 $(1) $120
Investment securities............... (18) (47) 1 (64)
Mortgage-backed securities.......... (9) (18) 1 (26)
FHLB stock.......................... (2) (3) -- (5)
Interest-earning deposits........... 4 2 -- 6
---- ---- --- ----
Total net change in income
On interest-earning assets...... (39) 69 1 31
Interest-bearing liabilities:
Savings accounts.................... (1) (12) -- (13)
Certificates of deposits............ 15 48 -- 63
---- ---- --- ----
Total average deposits............. 14 36 -- 50
FHLB advances....................... 1 7 1 9
---- ---- --- ----
Total net change in expense
on interest-bearing liabilities... 15 43 1 59
---- ---- --- ----
Net change in net interest income.... $(54) $ 26 $ -- $(28)
==== ==== ====== ====
MARKET RISK ANALYSIS
GENERAL. The Association's profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Association's profitability is also affected by the level of income and
expenses. Non-interest income includes service charges and fees and gain on
sale of investments. Non-interest expenses primarily include compensation and
benefits, occupancy and equipment expenses, deposit insurance premiums and data
processing expenses. The Association's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
30
QUANTITATIVE ASPECTS OF MARKET RISK. The Association does not maintain a
trading account for any class of financial instrument nor does it engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Association is not subject to foreign currency exchange rate risk or
commodity price risk. For information regarding the sensitivity to interest
rate risk of the Association's interest-earning assets and interest-bearing
liabilities, see the tables under "BUSINESS OF THE ASSOCIATION-- Lending
Activities -- Maturity of Loan Portfolio," "-- Investment Activities" and "--
Deposit Activities and Other Sources of Funds -- Deposit Accounts -- Time
Deposits by Maturities."
QUALITATIVE ASPECTS OF MARKET RISK. The Association has sought to reduce
the exposure of its earnings to changes in market interest rates by attempting
to manage the mismatch between asset and liability maturities and interest
rates. The principal element in achieving this objective is to increase the
interest-rate sensitivity of the Association's interest-earning assets by
originating for its portfolio loans with interest rates subject to periodic
adjustment to market conditions. The Association relies on retail deposits as
its primary source of funds. Management believes retail deposits, compared to
brokered deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the risk-
based capital rules. Using data compiled by the OTS, the Association receives a
report which measures interest rate risk by modeling the change in NPV (net
portfolio value) over a variety of interest rate scenarios. This procedure for
measuring interest rate risk was developed by the OTS to replace the "gap"
analysis (the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a specific time period). NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The calculation is intended to illustrate the change in NPV
that will occur in the event of an immediate change in interest rates of at
least 200 basis points with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Under OTS
regulations, an institution with a greater than "normal" level of interest rate
risk is subject to a deduction from total capital for purposes of calculating
its risk-based capital. The OTS, however, has delayed the implementation of
this regulation. An institution with a "normal" level of interest rate risk is
defined as one whose "measured interest rate risk" is less than 2.0%.
Institutions with assets of less than $300 million and a risk-based capital
ratio of more than 12.0% are exempt. The Association is exempt because of its
asset size. Based on the Association's regulatory capital levels at September
30, 1998, the Association believes that, if the proposed regulation was
implemented at that date, the Association's level of interest rate risk would
have caused it to be treated as an institution with greater than "normal"
interest rate risk.
The following table is provided by the OTS and sets forth the change in the
Association's NPV at September 30, 1998, based on OTS assumptions, that would
occur in the event of an immediate change in interest rates, with no effect
given to any steps that management might take to counteract that change.
NET PORTFOLIO AS % OF
NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
---------------------------------- ------------------------------
BASIS POINT ("BP")
CHANGE IN RATES $ AMOUNT $ CHANGE (1) % CHANGE NPV RATIO (2) CHANGE (BP) (3)
- ------------------ ---------------------------------- ------------------------------
400 $6,958 $559 9% 11.57% 112
300 6,856 457 7 11.34 90
200 6,719 320 5 11.07 62
100 6,527 128 2 10.71 26
0 6,399 -- -- 10.45 --
(100) 6,412 13 -- 10.39 (5)
(200) 6,475 76 1 10.41 (4)
(300) 6,536 137 2 10.42 (2)
(400) 6,559 160 3 10.38 (7)
- -------------------------
(1) Represents the increase of the estimated NPV at the indicated change in
interest rates compared to the NPV assuming no change in interest rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio, assuming no
change in interest rates.
31
The following table is provided by the OTS and is based on the calculations
in the above table. It sets forth the IRR capital component that will be
deducted from risk-based capital in determining the level of risk-based capital.
At September 30, 1998, the change in NPV as a percentage of portfolio value of
total assets is positive 1.0%, which is less than 2.0%, indicating that the
Association has a "normal" level of interest rate risk.
AT AT AT
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1998 1997
------------- -------- -------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets...... 10.45% 11.62% 12.40%
Exposure Measure: Post-Shock NPV Ratio............. 10.41 11.49 11.79
Sensitivity Measure: Change in NPV Ratio........... 4bp 13bp 61bp
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations were utilized in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under differing interest rate
scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are maturities and prepayments
of investment securities, customer deposits, proceeds from principal and
interest payments on loans and FHLB-Des Moines advances. While investment
securities maturities and scheduled amortization of loans are a predictable
source of funds, deposit flows, investment securities prepayments and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Association must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Association generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At September 30,
1998, cash and interest-bearing deposits totaled $2.3 million, or 4.0% of total
assets, and investment securities classified as available-for-sale totaled $7.1
million. At September 30, 1998, the Association had outstanding advances of
$500,000 under an available credit line of $16.7 million with the FHLB-Des
Moines.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 4.0%
of the average daily balance of its net withdrawals deposits and short-term
borrowings. The Association's actual liquidity ratio at September 30, 1998 was
13.4%. See "-- Comparison of Financial Condition at September 30, 1998 and
1997" and "BUSINESS OF THE ASSOCIATION -- Investment Activities."
The Association's primary investing activity is the origination and
purchase of one- to- four family mortgage loans. During the years ended
September 30, 1998 and 1997, the Association originated $8.7 million and
$9.4 million of such loans, respectively, and purchased $2.7 million and
$1.0 million, respectively. At September 30, 1998, the
32
Association had loan commitments (including undisbursed portions of mortgage
loans) totaling $1.3 million. The Association anticipates that it will have
sufficient funds available to meet current loan commitments. Certificates of
deposit that are scheduled to mature in less than one year from September 30,
1998 totaled $22.3 million. Historically, the Association has been able to
retain a significant amount of its deposits as they mature. In addition,
management of the Association believes that it can adjust the offering rates of
certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Association, the Association would be able to utilize FHLB-
Des Moines advances to fund deposit withdrawals, which would result in an
increase in interest expense to the extent that the average rate paid on such
advances exceeds the average rate paid on deposits of similar duration.
OTS regulations require the Association to maintain specific amounts of
regulatory capital. As of September 30, 1998, the Association complied with all
regulatory capital requirements as of that date with tangible, core and risk-
based capital ratios of 10.1%, 10.1% and 22.3%, respectively. For a detailed
discussion of regulatory capital requirements, see "REGULATION -- Federal
Regulation of Savings Associations -- Capital Requirements." See also
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
YEAR 2000 ISSUES
The Association is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000 issue.
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Association's year 2000 committee consists of the entire Board of
Directors and Ronald L. Nelson, the Association's Vice President and Treasurer,
who is chairman of the committee. Mr. Nelson makes a monthly progress report to
the Board of Directors. The committee has developed and is implementing a
comprehensive plan to make all information and non-information technology assets
year 2000 compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Association's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase was completed as
of December 31, 1998.
3. Renovation - Review of vendor and service providers responses to the
Association's year 2000 inquiries and development of a follow-up plan
and timeline. This phase was completed as of December 31, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Association is currently in this phase of its plan. The
Association has replaced all in-house equipment (teller station
equipment, etc.) with year 2000 compliant equipment. A third-party
service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. The Association is
relying on the results of proxy testing by its third-party service
bureau. The proxy testing, which involved five financial institutions
(not including the Association), tested the results of transactions at
various different test dates before and after the year 2000 date change
and cover all of the applications used by the Association. This proxy
testing was completed in November 1998. With the completion of the proxy
testing, the Association will conduct connectivity testing during
February 1999. Connectivity testing, which is scheduled to last
approximately two to three days, involves the Association and its third-
party service bureau each rolling forward their computer systems to the
year 2000 so that the Association may process its own data files under
simulated year 2000 conditions using all applications. In the event that
connectivity testing reveals that the third-party systems are not year
2000 compliant, the Association's service bureau intends to either
transfer the Association to other systems that are year 2000 compliant
or provide additional remedial
33
resources. Other parties whose year 2000 compliance may effect the
Association include the FHLB-Des Moines, brokerage firms, the operator
of the Association's ATM network and the Association's pension plan
administrator. These third parties have indicated their compliance or
intended compliance. Where it is possible to do so, the Association has
scheduled testing with these third parties. Where testing is not
possible, the Association will rely on certifications from vendors and
service providers.
5. Implementation - Replacement or repair of non-compliant technology. As
the Association progresses through the validation phase, the Association
expects to determine necessary remedial actions and provide for their
implementation. The Association has already implemented a new year 2000
compliant computerized teller system and has verified the year 2000
compliance of its computer hardware and other equipment containing
embedded microprocessors. The Association's plan provides for year 2000
readiness to be completed by June 30, 1999.
The Association estimates its total cost to replace computer equipment,
software programs or other equipment containing embedded microprocessors that
were not year 2000 compliant to be $75,000, of which $59,000 has been incurred
as of September 30, 1998. System maintenance or modification costs are charged
to expense as incurred, while the cost of new hardware, software or other
equipment is capitalized and amortized over their estimated useful lives. The
Association does not separately track the internal costs and time that its own
employees spend on year 2000 issues, which are principally payroll costs.
Because the Association depends substantially on its computer systems and
those of third parties, the failure of these systems to be year 2000 compliant
could cause substantial disruption of the Association's business and could have
a material adverse financial impact on the Association. Failure to resolve year
2000 issues presents the following risks to the Association: (1) the Association
could lose customers to other financial institutions, resulting in a loss of
revenue, if the Association's third party service bureau is unable to properly
process customer transactions; (2) governmental agencies, such as the FHLB-Des
Moines, and correspondent institutions could fail to provide funds to the
Association, which could materially impair the Association's liquidity and
affect the Association's ability to fund loans and deposit withdrawals;
(3) concern on the part of depositors that year 2000 issues could impair access
to their deposit account balances could result in the Association experiencing
deposit outflows prior to December 31, 1999; and (4) the Association could incur
increased personnel costs if additional staff is required to perform functions
that inoperative systems would have otherwise performed. Management believes
that it is not possible to estimate the potential lost revenue due to the year
2000 issue, as the extent and longevity of any potential problem cannot be
predicted. Because substantially all of the Association's loan portfolio
consists of loans to individuals rather than commercial enterprises, management
believes that year 2000 issues will not impair the ability of the Association's
borrowers to repay their debt.
There can be no assurances that the Association's year 2000 plan will
effectively address the year 2000 issue, that the Association's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of the Association or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
the Association's business, financial condition or results of operations.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting method are required
to disclose in a footnote to the financial statements pro forma net income and,
if presented, earnings per share, as if this statement had been adopted. The
accounting requirements of this statement are effective for transactions entered
into in fiscal years that begin after December 15, 1995; however, companies are
required to disclose information for awards granted
34
in their first fiscal year beginning after December 15, 1994. Management expects
to use the financial statement footnote disclosure option upon consummation of
the conversion and the adoption of stock based benefit plans.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. The standards
are based on consistent application of a financial-components approach that
focuses on a control period. Under the approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. Adoption of this
statement on January 1, 1997 did not have a material impact on the Association's
financial position or results of operations.
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement. This statement is effective for financial
statements issued for periods after December 15, 1997 including interim periods;
earlier applications are not permitted. This statement requires restatement of
all prior period EPS data presented.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board ("APB") Opinions No. 10, "Omnibus Opinion - 1966," and No. 15, "Earnings
Per Share," and SFAS No. 47, "Disclosure of Long-Term Obligations," for entities
that were subject to those standards. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 contains no
change in disclosure requirements for entities that were previously subject to
the requirements of APB Opinion Nos. 10 and 15 and SFAS No. 47.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presenting of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
DISCLOSURE ABOUT SEGMENTS. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," issued in June 1997, establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS No. 131 becomes effective for the
Association's fiscal year ending September 30, 1999, and requires that
comparative information from earlier years be restated to conform to its
requirements.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," issued in February 1998, standardizes disclosure requirements for
pensions and other postretirement benefits and requires additional disclosure on
changes in benefit obligations and fair values of plan assets in order to
facilitate financial analysis. SFAS No. 132 is effective for fiscal
35
years beginning after December 15, 1997, with earlier application encouraged.
The adoption of SFAS No. 132 will have no impact on the Association's results of
operations and financial condition as this statement relates to disclosure
requirements. The Association adopted SFAS No. 132 on October 1, 1998, and its
adoption did not significantly affect the Association's financial reporting.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," issued in
June 1998, standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under SFAS No. 133,
entities are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the fair value
(i.e., gains and losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, on
the reasons for holding it. If certain conditions are met, entities may elect
to designate a derivative instrument as a hedge of exposures to changes in fair
value, cash flows or foreign currencies. See Note A of the Notes to Consolidated
Financial Statements for further information. SFAS No. 133 is effective for
financial statements issued for periods beginning after June 15, 1999.
Currently, the Association is evaluating the effects of SFAS No. 133.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION
OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," issued in
October 1998, amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," and SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," for years beginning after December 15, 1998. Currently,
neither the Holding Company nor the Association conduct any mortgage banking
activities.
EFFECT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation is reflected in the increased
cost of the Association's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as a Missouri business corporation at the
direction of the Association in November 1998 for the purpose of becoming the
holding company for the Association upon completion of the conversion. As a
result of the conversion, the Association will be a wholly-owned subsidiary of
the Holding Company and all of the issued and outstanding capital stock of the
Association will be owned by the Holding Company.
BUSINESS
Before the completion of the conversion, the Holding Company will not
engage in any significant activities other than of an organizational nature.
Upon completion of the conversion, the Holding Company's sole business activity
will be the ownership of the outstanding capital stock of the Association. In
the future, the Holding Company may acquire or organize other operating
subsidiaries, although there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Association with
the payment of appropriate rental fees, as required by applicable law and
regulations.
36
Since the Holding Company will only hold the outstanding capital stock of
the Association upon consummation of the conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Association. See "BUSINESS OF THE ASSOCIATION -- Competition."
BUSINESS OF THE ASSOCIATION
GENERAL
The Association was founded in 1887 as a state-chartered mutual savings
association and converted to a federal mutual savings association charter
effective June 1, 1995. The Association is regulated by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"). The Association's deposits have
been federally-insured since 1938 and are currently insured by the FDIC under
the Savings Association Insurance Fund ("SAIF"). The Association has been a
member of the Federal Home Loan Bank-System since 1937.
The Association operates as a traditional savings association, specializing
in single-family residential mortgage lending and savings deposits. The
Association's business consists primarily of attracting retail deposits from the
general public and using those funds to originate and purchase real estate
loans. The Association holds its loans for long-term investment purposes. See
"-- Lending Activities."
MARKET AREA
The Association conducts business from its main office in Palmyra (Marion
County) and two branch offices located in Canton (Lewis County) and Kahoka
(Clark County). Substantially all of the Association's depositors live in
Lewis, Clark and Marion Counties and most of the Association's loans are secured
by properties located in these counties. Lewis, Clark and Marion Counties are
rural counties that historically have had higher unemployment and lower income
than the rest of Missouri and the U.S. Service industries represent the largest
group of employers in Lewis and Marion Counties, while farm-related businesses
were the largest employers in Clark County. Manufacturing employment is most
significant in Marion County. Industries located in the region include
chemicals, automobile parts, electric utilities, and state and local government.
The Association faces intense competition for deposits and loan
originations from the other financial institutions conducting business within
its market area. See "-- Competition" and "RISK FACTORS -- Competition."
LENDING ACTIVITIES
GENERAL. At September 30, 1998, the Association's net loans receivable
totaled $40.5 million, or 68.1% of total assets. The Association has
concentrated its lending activities on one- to four-family mortgage loans, with
such loans amounting to 88.9% of loans at September 30, 1998. The Association
also originates multi-family, commercial real estate, land and residential
construction loans, as well as loans secured by savings accounts. In addition,
the Association purchases participation interests in residential mortgage loans
(primarily non-owner secured by non-owner-occupied duplex properties), multi-
family and commercial real estate loans. Such purchased loan interests amounted
to $8.6 million, or 21.2% of net loans, at September 30, 1998. A substantial
portion of the Association's mortgage loan portfolio is secured by real estate
located in Missouri.
37
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Association's loan portfolio at the dates indicated. The Association had no
concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
AT SEPTEMBER 30,
-------------------------------------
1998 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family....... $36,801 88.91% $34,580 87.42%
Multi-family.............. 806 1.95 958 2.42
Commercial................ 2,073 5.01 1,834 4.64
Construction.............. 876 2.12 1,452 3.67
Land...................... 420 1.01 290 0.74
------- ------ ------- ------
Total mortgage loans.... 40,976 99.00 39,114 98.89
Consumer loans:
Education loans........... 98 0.24 124 0.31
Savings account loans..... 305 0.74 304 0.77
Other..................... 10 0.02 13 0.03
------- ------ ------- ------
Total consumer loans.... 413 1.00 441 1.11
------- ------ ------- ------
Total loans, gross...... 41,389 100.00% 39,555 100.00%
====== ======
Less:
Undisbursed loan funds.... 592 899
Allowance for loan losses. 280 255
Deferred loan fees........ 4 7
------- -------
Loan receivable, net.... $40,513 $38,394
======= =======
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The Association's primary lending
activity is the origination of loans secured by one- to four-family residences
located in its market area. The Association also purchases participation
interests in one- to four-family mortgage loans (primarily secured by non-owner-
occupied duplex properties) secured primarily by properties located in other
areas of Missouri. At September 30, 1998, $36.8 million, or 88.9%, of the
Association's total loans consisted of one- to four-family loans, of which
$6.9 million were purchased loans. All one-to four-family mortgage loans are
held in the Association's portfolio for long-term investment.
The Association's residential mortgage loans are structured as either
three- or five-year balloon loans with terms up to 30 years (20 years for non-
owner occupied properties). The interest rate, fixed for the balloon term, is
established by the Association after an assessment of rates offered by
competitors. The borrower is notified in writing 30 days before the end of the
balloon term of the new interest rate that will be effective at the maturity of
the balloon term. If the borrower accepts the new rate, a modification
agreement is executed for another balloon term with an amortization schedule
equal to the original amortization term less the prior balloon term(s). The
Association's residential mortgage loans do not have any annual interest rate
adjustment limits, but are subject to a lifetime interest rate adjustment limit
of 6%. The Association charges a prepayment penalty of 2% of the outstanding
principal balance if a loan that has been outstanding five years or less is paid
off before maturity. Missouri law prohibits the Association from charging a
prepayment penalty on a loan that has been outstanding for more the five years.
The Association's residential mortgage loans are generally underwritten, but not
documented, according to secondary market guidelines.
To a limited extent, the Association originates mortgage loans secured by
owner occupied residential properties. These loans are generally secured by
second residences located on or near a recreational lake located in
38
southern Clark County, Missouri, which is located approximately 12 miles
northwest of Canton. Such loans are made on the same general terms as loans
secured by owner occupied properties, except that loan-to-value ratios are
limited to up to 65% and the terms are limited to up to 20 years.
The retention of balloon loans in the Association's loan portfolio, which
through the use of modification agreements function like ARM loans, helps reduce
the Association's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the borrower. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower. In
addition, although ARM loans allow the Association to increase the sensitivity
of its asset base to changes in interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations the Association has no assurance that
yields on ARM loans will be sufficient to offset increases in the Association's
cost of funds. The Association believes these risks, which have not had a
material adverse effect on the Association to date, generally are less than the
risks associated with holding fixed-rate loans in portfolio during a rising
interest rate environment.
The Association generally requires an acceptable attorney's opinion on the
status of its lien on all loans where real estate is the primary source of
security. The Association also requires that fire and casualty insurance (and,
if appropriate, flood insurance) be maintained in an amount at least equal to
the outstanding loan balance.
The Association's one- to four-family residential mortgage loans typically
do not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Association's Board of Directors, the
Association can lend up to 95% of the appraised value of the property securing a
one- to- four family residential loan. Generally, the Association self insures
the portion of the principal amount between 80% and 90% of the appraised value
of the security property and requires private mortgage insurance on the portion
of the principal amount that exceeds 90% of the appraised value of the security
property. An independent certified appraiser appraises all non-owner occupied
properties and properties located outside of the Association's primary market
area. Otherwise appraisals are performed by either Eldon R. Mette, the
Association's Executive Vice President, or L. Edward Schaeffer, the
Association's Chairman of the Board and President. Only Mr. Schaeffer is a
certified appraiser. If Mr. Mette or Mr. Schaeffer performs the property
appraisal, he will abstain from voting on the loan application.
Currently, the Association does not offer fixed-rate residential mortgage
loans. The Association originates only ARM loans and most of the residential
mortgage loans that it purchases are also ARM loans. After the conversion, the
Association plans to implement a program for offering longer term fixed-rate
mortgage loans as well as traditional ARM loans with interest rates tied to a
nationally recognized index such as the U.S. Treasury Bill rate. The
Association intends to hold fixed-rate mortgage loans for long-term investment.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. The Association
occasionally originates and purchases mortgage loans for the acquisition and
refinancing of multi-family and commercial real estate properties. At September
30, 1998, $806,000, or 2.0%, of the Association's total loans consisted of loans
secured by multi-family residential property (all of which are purchased
participation interests secured by properties located in Missouri), and
$2.1 million, or 5.0%, of the Association's total loans consisted of loans
secured by commercial real estate ($863,000 of which are purchased participation
interests). All purchased participation interests are underwritten according to
the same standards that the Association would use if it were originating the
underlying loans. The Association has no written or oral commitments with any
institution to purchase a predetermined number or type of participation
interests.
At September 30, 1998, the Association's commercial real estate loans are
secured by churches, storefrontsand a restaurant, all located in Missouri, and a
strip shopping center located in Florida. At September 30, 1998, the
Association's largest multi-family or commercial real estate loan that the
Association originated was $119,000 and is secured by a restaurant. The largest
purchased multi-family or commercial real estate participation interest had an
outstanding balance of $414,000 at September 30, 1998 and is secured by a strip
shopping center located in Port Richey, Florida. At September 30, 1998, this
loan was designated "special mention." See "-- Asset Classification" for
further information.
39
All multi-family loans and commercial real estate loans originated by the
Association are three- or five-year adjustable rate balloon loans with terms of
up to 20 years. Multi-family loans and commercial real estate loans purchased
by the Association are also adjustable rate loan generally indexed to the prime
rate and with terms of up to 25 years. The Association requires appraisals of
all properties securing multi-family loans and commercial real estate loans. If
the property is located outside of the Association's primary market area,
appraisals are performed by an independent appraiser designated by the
Association, all of which are reviewed by management. Otherwise, appraisals are
prepared by either Mr. Mette or Mr. Schaeffer as described above.
Multi-family and commercial real estate lending affords the Association an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually are greater in amount and are more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by income
producing properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Association seeks to
minimize these risks by limiting the maximum loan-to-value ratio to up to 80%
for multi-family loans (75% for commercial real estate loans) and strictly
scrutinizing the financial condition of the borrower, the cash flow of the
project, the quality of the collateral and the management of the property
securing the loan. The Association also obtains loan guarantees from
financially capable parties based on a review of personal financial statements.
RESIDENTIAL CONSTRUCTION LOANS. The Association originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence. At September 30,
1998, residential construction loans amounted to $876,000, or 2.1% of the
Association's total loans.
The Association's construction loans to builders generally have fixed
interest rates and are for a term of six months. Such loans to builders are
typically made with a maximum loan to value ratio of 80%. These loans are
usually made on a speculative (unsold) basis. The Association lends to
approximately eight builders with whom it has long standing relationships and
limits each builder to no more than three homes under construction at a time.
At September 30, 1998, the largest amount of construction loans outstanding to
one builder was $102,000, all of which was for speculative construction.
Construction loans to individuals are made on the same terms as the
Association's one- to four-family mortgage loans, but provide for the payment of
interest only during the construction phase, which is usually six months. At
the end of the construction phase, the loan converts to a permanent mortgage
loan.
Prior to making a commitment to fund a construction loan, the Association
requires an appraisal of the property by a staff appraiser. The Association
also reviews and inspects each project prior to disbursement of funds during the
term of the construction loan. Loan proceeds are disbursed after inspection of
the project based on percentage of completion.
Construction lending affords the Association the opportunity to earn higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Association may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Association may
be confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between borrowers
and builders and by the failure of builders to pay subcontractors. Loans to
builders to construct homes for which no purchaser has been identified carry
more risk because the payoff for the loan is dependent on the builder's ability
to sell the property prior to the time that the construction loan is due.
The Association has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to residential properties. It
is also the Association's general policy to obtain regular financial statements
from builders so that it can monitor their financial strength.
40
LAND LOANS. The Association occasionally originates loans secured by
unimproved land, including small residential subdivisions in the Association's
primary market area. These loans have terms of three to 20 years and generally
have adjustable interest rates. At September 30, 1998, land loans totaled
$420,000, or 1.0% of total loans. The largest land loan at that date was
$101,000.
CONSUMER LOANS. Historically, the Association's consumer lending
activities have been limited to guaranteed education loans and savings account
loans. At September 30, 1998, consumer loans amounted to $413,000, or 1.0% of
total loans. The Association does not expect to become an active consumer
lender, but intends to begin engaging, to a limited extent, in direct mobile
home lending without the security of the underlying real estate. Currently, the
Association engages in a limited amount of direct mobile home lending but only
with the security of the underlying real estate.
The Association originates insured education loans to out-of-state
residents attending school in Missouri or to Missouri residents attending school
outside of Missouri under federally sponsored programs. The Association
receives quarterly interest payments from the U.S. government on the outstanding
loan while the borrower is attending school. When the borrower is required to
repay the loan after graduation, the Association sells the loan at par to the
Missouri Higher Education Loan Authority.
The Association also offers loans secured by savings deposits at the
Association. Generally, these loans are made at an interest rate that is 3%
above the account rate for up to 90% of the account balance and for a term of up
to five years. If the loan is secured by a certificate of deposit, the loan
term is generally matched with remaining term on the certificate.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
LOANS TO ONE BORROWER. The maximum amount that the Association may lend to
one borrower is limited by federal regulations. At September 30, 1998, the
Association's regulatory limit on loans to one borrower was $944,000. At such
date, the Association's largest amount of loans to one borrower (including the
borrower's related interests) was $582,000 and consisted of residential mortgage
loans.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at September 30, 1998, regarding the dollar amount of loans maturing
in the Association's portfolio based on their contractual terms to maturity, but
does not include potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
becoming due within one year. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loans losses.
For purposes of the table, the contractual maturities of the Association's
three- and five-year balloon mortgage loans are reported over their respective
amortization periods(up to 30 years) rather than as maturing at the end of the
3-year or 5-year balloon term. Given the Association's experience with its
borrowers, the Association believes this presentation is appropriate.
41
AFTER AFTER AFTER
ONE YEAR 3 YEARS 5 YEARS
WITHIN THROUGH THROUGH THROUGH BEYOND
ONE YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
-------- ----------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family.... $1,768 $3,189 $3,195 $8,095 $20,554 $36,801
Multi-family........... 25 58 68 225 430 806
Commercial............. 237 460 208 492 676 2,073
Construction........... 876 -- -- -- -- 876
Land................... 256 22 20 115 77 420
Consumer loans:
Education.............. 65 33 -- -- -- 98
Savings account loans.. 144 49 38 31 43 305
Other.................. 3 6 1 -- -- 10
------ ------ ------ ------ ------- -------
Total................. $3,374 $3,817 $3,530 $8,888 $21,780 $41,389
====== ====== ====== ====== ======= =======
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
FLOATING- OR
FIXED- ADJUSTABLE-
RATE RATES
------ ------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family................ $382 $34,651
Multi-family....................... -- 780
Commercial......................... 274 1,563
Land............................... 2 162
Consumer loans:
Education.......................... 33 --
Savings account loans.............. 161 --
Other.............................. 7 --
---- -------
Total............................. $859 $37,156
==== =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Association the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of a mortgage loan tends to increase, however, when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and, conversely, tends to decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
LOAN SOLICITATION AND PROCESSING. The Association's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Association's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, referrals and existing customers.
The Association does not utilize mortgage brokers or other third-party
originators. All loans are approved by the Association's Board of Directors
except for savings account loans which may be approved by a branch manager.
42
LOAN ORIGINATIONS, PURCHASES AND SALES. The Association primarily
originates three- and five-year balloon mortgage loans with amortization terms
of up to 30 years. Occasionally, the Association originates fully amortizing
fixed rate loans with terms of less than five years.
The Association generally retains for its portfolio all of the loans that
it originates and purchases. Occasionally, the Association purchases
participation interests in one- to- four family mortgage loans (primarily
secured by non-owner-occupied duplex properties), multi-family loans and
commercial real estate loans. Generally, the Association limits its
participation interest in a loan to up to 80%. In the case of participations in
one- to- four family mortgage loans, the Association participates 80% and the
lead lender retains the servicing rights. The Association pays no fee on the
loans it purchases.
The Association holds all loans for long-term investment purposes, except
for government guaranteed student loans which are sold to the Missouri Higher
Education Loan Authority at par when the borrower is required to begin repaying
the loan.
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
YEARS ENDED SEPTEMBER 30,
--------------------------
1998 1997
-------- --------
(IN THOUSANDS)
Total loans receivable, net, at beginning of period...... $ 38,394 $ 37,259
Loans originated:
Mortgage loans:
One- to four family..................................... $ 8,742 $ 9,367
Commercial.............................................. 408 206
Construction............................................ 1,010 1,778
Land.................................................... 192 48
-------- --------
Total mortgage loans................................... 10,352 11,399
Consumer loans:
Education............................................... 89 73
Savings account loans................................... 181 171
Other................................................... 13 20
-------- --------
Total consumer loans................................... 283 264
-------- --------
Total loans originated................................ 10,635 11,663
Loans purchased:
One- to four-family..................................... 2,654 925
Multi-family............................................ 83 --
Construction............................................ 51 179
-------- --------
Total loans purchased.................................. 2,788 1,104
Loans sold:
Education loans...................................... (114) (124)
Principal repayments..................................... (11,475) (11,001)
Increase (decrease) in other items, net.................. 285 (507)
-------- --------
Net increase (decrease) in loans receivable, net......... 2,199 1,135
-------- --------
Total loans receivable, net, at end of period............ $ 40,513 $ 38,394
======== ========
43
LOAN COMMITMENTS. The Association issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 30 days from
approval. At September 30, 1998, the Association had loan commitments totaling
$630,000 (not including undisbursed portions of mortgage loans and consumer
loans of $620,000). See Note L of the Notes to Consolidated Financial
Statements.
LOAN FEES. In addition to interest earned on loans, the Association
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
The Association charges loan origination fees for fixed-rate loans which
are calculated as a percentage of the amount borrowed. In accordance with
applicable accounting procedures, loan origination fees and discount points in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. At September 30, 1998, the Association had $4,000 of deferred loan fees.
The Association recognized $3,000 and $3,600 of deferred loan fees during the
years ended September 30, 1998 and 1997, respectively, in connection with loan
refinancings, payoffs, sales and ongoing amortization of outstanding loans.
NONPERFORMING ASSETS AND DELINQUENCIES. All loan payments are due on the
first day of each month. When a borrowers fails to make a required loan
payment, the Association attempts to cure the deficiency by contacting the
borrower and seeking the payment. A late notice is mailed on the fifth day of
the month and a second late notice is mailed on the 15/th/ day of the month. In
most cases, deficiencies are cured promptly. If a delinquency continues beyond
the 25/th/ day of the month, additional contact is made either through
additional notices or other means and the Association will attempt to work out a
payment schedule. While the Association generally prefers to work with
borrowers to resolve such problems, the Association will institute foreclosure
or other proceedings, as necessary, to minimize any potential loss.
The Association's Board of Directors is informed monthly of the amounts of
loans delinquent more than 60 days, all loans in foreclosure and all foreclosed
and repossessed property owned by the Association.
The Association ceases accruing interest on mortgage loans when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Association does not accrue
interest on mortgage loans past due 90 days or more when the estimated value of
collateral and collection efforts are deemed insufficient to ensure full
recovery. In the case of consumer loans, the Association continues to accrue
interest even if the loan is past due 90 days or more as the risk of loss to the
Association is minimal because the Association's consumer loan portfolio
consists primarily of government guaranteed education loans and savings account
loans.
44
The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. The Association had
no restructured loans within the meaning of SFAS No. 15 at the dates indicated.
AT SEPTEMBER 30,
---------------------
1998 1997
-------- --------
(IN THOUSANDS)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family................................... $ 196 $ 181
Commercial............................................ 23 --
Total mortgage loans................................. 219 181
Consumer loans......................................... -- --
----- -----
Total................................................. 219 181
Accruing loans contractually past due 90 days or more.. -- --
----- -----
Total of nonaccrual and 90 days past due loans......... 219 181
Real estate owned...................................... -- --
----- -----
Total nonperforming assets.......................... $ 219 $ 181
===== =====
Nonaccrual and 90 days or more past due loans.......... 0.54% 0.47%
as a percentage of loans receivable, net
Nonaccrual and 90 days or more past due loans.......... 0.37% 0.31%
as a percentage of total assets
Nonperforming assets as a percentage of total assets... 0.37% 0.31%
Interest income that would have been recorded for 1998 had nonaccruing
loans been current in accordance with their original terms amounted to $22,000.
The amount of interest included in interest income in 1998 on such loans
amounted to $7,000.
REAL ESTATE OWNED. Real estate acquired by the Association as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at
the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At September 30, 1998, the Association had no real estate owned.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and are monitored by the
Association.
45
The aggregate amounts of the Association's classified and special mention
assets at the dates indicated were as follows:
At September 30,
-----------------
1998 1997
------ ------
(In thousands)
Classified assets:
Loss....................... $ -- $ --
Doubtful................... -- --
Substandard................ 219 181
Special mention............ 432 459
----- -----
$ 651 $ 640
===== =====
At September 30, 1998, assets designated substandard consisted of eight
one- to- four family mortgage loans ($196,000) and one commercial real estate
loan ($23,000) and assets designated as special mention consisted of a one-to-
four family mortgage loan ($17,000) and a purchased commercial real estate loan
participation interest ($415,000).
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Association
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's evaluation
of of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions.
At September 30, 1998, the Association had an allowance for loan losses of
$280,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. Furthermore, while the
Association believes it has established its existing allowance for loan losses
in accordance with GAAP, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Association's
financial condition and results of operations.
46
The following table sets forth an analysis of the Association's allowance
for loan losses.
Years Ended September 30,
---------------------------
1998 1997
------------- ------------
(Dollars in thousands)
Allowance at beginning of period............... $ 255 $ 234
Provision for loan losses...................... 25 21
Recoveries..................................... -- --
Charge-offs.................................... -- --
------- -------
Allowance at end of period.................. $ 280 $ 255
======= =======
Allowance for loan losses as a percentage
of total loans outstanding at the end of the
period........................................ 0.68% 0.64%
Net charge-offs (recoveries) as a percentage
of average loans outstanding during the
period........................................ -- --
Allowance for loan losses as a percentage
of nonperforming loans at end of period....... 127.85% 140.88%
For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Comparison of Operating Results for the Years Ended
September 30, 1998 and 1997 -- Provision for Loan Losses."
The following table sets forth the breakdown of the allowance for loan losses
by loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any other
category.
At September 30,
------------------------------------------
1998 1997
-------------------- --------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ------------ ------ ------------
(Dollars in thousands)
Mortgage loans:
One- to four-family.................. $ 145 88.91% $ 134 87.42%
Multi-family......................... 8 1.95 10 2.42
Commercial........................... 38 5.01 35 4.64
Construction......................... 2 2.12 3 3.67
Land................................. 2 1.01 2 0.74
Consumer................................ -- 1.00 -- 1.11
Unallocated............................. 85 -- 71 --
----- ------ ----- ------
Total allowance for loan losses.. $ 280 100.00% $ 255 100.00%
===== ====== ===== ======
47
INVESTMENT ACTIVITIES
The Association is permitted under federal law to invest in various types
of liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Des Moines, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Association may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Association are also
required to maintain an investment in FHLB stock. The Association is required
under federal regulations to maintain a minimum amount of liquid assets. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Association does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported (net of deferred taxes) as a separate
component of equity.
All of the Association's investment securities are subject to market risk
insofar as increases in market rates of interest may cause a decrease in their
market value. They are also subject to prepayment risk insofar as they may be
called prior to maturity in times of low market interest rates, so that the
Association may have to invest the funds at a lower interest rate. The
Association's investment policy does not permit engaging directly in hedging
activities or purchasing high risk mortgage derivative products. Investments
are made based on certain considerations, which include the interest rate,
yield, settlement date and maturity of the investment, the Association's
liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments). The effect that the proposed
investment would have on the Association's credit and interest rate risk and
risk-based capital is also considered. The Association purchases investment
securities to provide necessary liquidity for day-to-day operations. The
Association also purchases investment securities when investable funds exceed
loan demand.
48
The following table sets forth the amortized cost and fair value of the
Association's securities, by accounting classification and by type of security,
at the dates indicated.
AT SEPTEMBER 30,
------------------------------------
1998 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
U.S. Government agency securities....... $ 7,087 $ 7,087 $ 8,509 $ 8,509
------- ------- ------- -------
Total available for sale.............. 7,087 7,087 8,509 8,509
------- ------- ------- -------
HELD TO MATURITY:
U.S. Government agency securities....... 4,959 4,995 4,403 4,405
Municipal............................... 630 645 690 702
Mortgage-backed securities.............. 2,584 2,624 2,828 2,871
------- ------- ------- -------
Total held to maturity................ 8,173 8,264 7,921 7,978
------- ------- ------- -------
Total................................. $15,260 $15,351 $16,430 $16,487
======= ======= ======= =======
The Association purchases mortgage-backed securities when investable funds
exceed loan demand. All of the Association's mortgage-backed securities are
issued or guaranteed by agencies of the U.S. Government. Accordingly, they
carry lower credit risk than mortgage-backed securities of a private issuer.
However, mortgage-backed securities are subject to market risk (the risk that
increases in market interest rates may cause a decrease in market value) and
prepayment risk (the risk that the securities will be repaid prior to maturity
and that the Association will have to reinvest the funds at a lower interest
rate).
Occasionally, the Association invests in municipal obligations of local
entities, such as the water authority, school districts, firehouses and jail.
Generally, these obligations are not rated by a nationally recognized credit
rating service.
At September 30, 1998, the Association did not own any securities (other
than U.S. Government and agency securities) which had an aggregate book value in
excess of 10% of the Association's retained earnings at that date.
49
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Association's debt securities at September 30, 1998, all of which are available
for sale. Certain U.S. Government agency obligations and municipal obligations
are exempt from state taxation, but their yields have not been computed on a tax
equivalent basis for purposes of the table.
Less Than One to After Five After
One Year Five Years to Ten Years Ten Years Totals
------------------- ------------------- ------------------ ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- -------- -------- --------- -------- ---------
(Dollars in thousands)
U.S. Government agency
securities............. $635 5.60% $4,317 6.01% $7,094 6.42% $ -- --% $12,046 6.23%
Municipal................ 60 4.60 365 5.06 205 5.55 -- -- 630 5.18
Mortgage-backed
securities.............. -- -- 337 6.65 23 8.90 2,224 7.02 2,584 6.98
---- ------ ------ -------- -------
Total............. $695 5.52% $5,019 5.98% $7,322 6.41% $2,224 7.02% $15,260 6.31%
==== ====== ====== ======== =======
50
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the
Association's lending and other investment activities. In addition, the
Association also generates funds internally from loan principal repayments and
prepayments and maturing investment securities. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and money
market conditions. The Association may use borrowings from the FHLB-Des Moines
to compensate for reductions in the availability of funds from other sources.
Presently, the Association has no other borrowing arrangements.
DEPOSIT ACCOUNTS. Nearly all of the Association's depositors reside in
Missouri. The Association's deposit products include money market accounts,
passbook accounts, and term certificate accounts. Deposit account terms vary
with the principal difference being the minimum balance deposit, early
withdrawal penalties and the interest rate. The Association reviews its deposit
mix and pricing weekly. The Association does not utilize brokered deposits, nor
has it aggressively sought jumbo certificates of deposit.
The Association believes it is competitive in the interest rates it offers
on its deposit products. The Association determines the rates paid based on a
number of factors, including rates paid by competitors, the Association's need
for funds and cost of funds, borrowing costs and movements of market interest
rates.
In the unlikely event the Association is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the
Association.
The following table sets forth information concerning the Association's
time deposits and other interest-bearing deposits at September 30, 1998.
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM OF TOTAL
RATE TERM CATEGORY AMOUNT BALANCE DEPOSITS
- ---------- --------- ----------------------------- ------- ------- ----------
(IN THOUSANDS)
3.03% None Passbook accounts $ 10 $ 8,422 15.97%
2.53 None NOW accounts 300 1,792 3.40
3.91 None Money market deposit accounts 1,000 1,275 2.42
Certificates of Deposit
-----------------------------
4.48 90 days Fixed-term, fixed-rate 500 551 1.04
4.96 182 days Fixed-term, fixed-rate 1,000 5,040 9.56
5.30 365 days Fixed-term, fixed-rate 1,000 113 0.21
5.35 12 months Fixed-term, fixed-rate 1,000 12,834 24.34
5.25 18 months Fixed-term, fixed-rate 1,000 3 0.01
5.56 30 months Fixed-term, fixed-rate 1,000 7,053 13.38
6.15 60 months Fixed-term, fixed-rate 1,000 15,641 29.67
------- ------
$52,724 100.00%
======= ======
51
The following table indicates the amount of the Association's jumbo
certificate accounts by time remaining until maturity as of September 30, 1998.
Jumbo certificate accounts have principal balances of $100,000 or more.
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
- --------------- -------------
(IN THOUSANDS)
Three months or less....................... $ 442
Over three through six months.............. 213
Over six through twelve months............. 113
Over twelve months......................... 1,398
------
Total................................... $2,166
======
DEPOSIT FLOW. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Association between the dates indicated.
AT SEPTEMBER 30,
------------------------------------------------
1998 1997
----------------------------- -----------------
PERCENT PERCENT
OF INCREASE OF
AMOUNT TOTAL (DECREASE) AMOUNT TOTAL
------- -------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
Passbook accounts...................... $ 8,422 15.97% $ 220 $ 8,202 15.95%
NOW accounts........................... 1,792 3.40 (90) 1,882 3.66
Money market deposits.................. 1,275 2.42 246 1,029 2.00
Fixed-rate certificates maturing:
Within 1 year....................... 22,269 42.24 (1,917) 24,186 47.05
After 1 year, but within 2 years.... 5,930 11.25 2,157 3,773 7.34
After 2 years, but within 5 years... 13,036 24.72 696 12,340 24.00
------- ------ ------- ------- ------
Total........................... $52,724 100.00% $ 1,312 $51,412 100.00%
======= ====== ======= ======= ======
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of
time deposits in the Association categorized by maturities at September 30,
1998.
AMOUNT DUE
------------------------------------------------------
LESS THAN 1 - 2 2 - 3 3 - 4 AFTER
ONE YEAR YEARS YEARS YEARS 4 YEARS TOTAL
--------- ------ ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS:
4.00 - 4.99%....... $ 3,148 $ -- $ -- $ -- $ -- $ 3,148
5.00 - 5.99%....... 19,109 3,685 5,725 1,039 1,251 30,809
6.00 - 6.99%....... 12 2,245 2,028 1,364 1,629 7,278
------- ------ ------ ------ ------ -------
Total.......... $22,269 $5,930 $7,753 $2,403 $2,880 $41,235
======= ====== ====== ====== ====== =======
52
TIME DEPOSITS BY RATES
The following table sets forth the time deposits in the Association
classified by rates as of the dates indicated.
AT SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
4.00 - 4.99%............. $ 3,148 $ 444
5.00 - 5.99%............. 30,809 24,478
6.00 - 6.99%............. 7,278 15,377
------- -------
Total................. $41,235 $40,299
======= =======
DEPOSIT ACTIVITY. The following table sets forth the deposit activity of
the Association for the periods indicated.
YEAR ENDED SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Beginning balance............ $51,412 $51,391
Net withdrawals
before interest credited... (613) (1,974)
Interest credited............ 1,925 1,995
------- -------
Net increase in deposits..... 1,312 21
------- -------
Ending balance............... $52,724 $51,412
======= =======
BORROWINGS. The Association has the ability to use advances from the FHLB-
Des Moines to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Des Moines functions as a central reserve
bank providing credit for savings associations and certain other member
financial institutions. As a member of the FHLB-Des Moines, the Association is
required to own capital stock in the FHLB-Des Moines and is authorized to apply
for advances on the security of such stock and certain of its mortgage loans and
other assets (principally securities that are obligations of, or guaranteed by,
the U.S. Government or agencies thereof) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based on the financial condition of the member institution and the adequacy of
collateral pledged to secure the credit. At September 30, 1998, the Association
had an available credit line of $16.7 million from the FHLB-Des Moines under
which the Association had outstanding advances of $500,000.
53
The following tables sets forth certain information regarding the
Association's use of FHLB advances during the periods and at the dates
indicated.
YEAR ENDED SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Maximum amount of borrowings
outstanding at any month end:
FHLB advances................................. $1,000 $1,000
Approximate average short-term
borrowings outstanding with respect to:
FHLB advances................................. 269 123
Approximate weighted average rate
paid on:
FHLB advances................................. 6.08% 3.93%
AT SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Balance outstanding at end of period:
FHLB advances................................. $ 500 $1,000
Weighted average rate paid on:
FHLB advances................................. 5.74% 6.10%
COMPETITION
The Association faces intense competition in its primary market area for
the attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from the several commercial banks operating in the Association's primary
market area and, to a lesser extent, from other financial institutions, such as
brokerage firms and insurance companies. Particularly in times of high interest
rates, the Association has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Association's competition for loans comes primarily
from the commercial banks operating in its primary market area. Such
competition for deposits and the origination of loans may limit the
Association's growth in the future. See "RISK FACTORS -- Competition."
SUBSIDIARY ACTIVITIES
Under OTS regulations, the Association generally may invest up to 3% of its
assets in service corporations, provided that at least one-half of investment in
excess of 1% is used primarily for community, inner-city and community
development projects. In 1981 the Association formed PSA Service Corporation as
a wholly-owned subsidiary to sell mortgage life insurance to the Association's
borrowers. The corporation also offers safe deposit box services in the
Association's Canton branch office.
54
PROPERTIES
The following table sets forth information relating to the Association's
offices as of September 30, 1998.
NET BOOK OWNED/ APPROXIMATE
LOCATION YEAR OPENED VALUE(1) LEASED SQUARE FOOTAGE
- -------- ----------- -------- ------ --------------
Main Office 1975 $208,500 Owned 2,816
- -------------------------
123 W. Lafayette Street
Palmyra, Missouri
Branch Offices 1992 243,700 Owned 2,904
- -------------------------
600 Washington Street(2)
Canton, Missouri
103 E. Commercial Street 1976 108,500 Owned(3) 4,096(3)
Kahoka, Missouri
_______________________________
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
(2) Location of an automated teller machine.
(3) The Kahoka branch office occupies approximately 1,696 square feet of the
building located at 103 E. Commercial Street. The remaining space is
vacant. The Association has contracted to sell the building and leaseback
the branch for three years at $500 per month. The lease provides for one-
year renewal options. The lease term is expected to begin on January 1,
1999. The Association plans to lease the existing facility until a new
branch office is constructed on real estate that the Association owns
located at the corner of Johnson and Exchange Streets in Kahoka. Currently,
the Association does not have any definitive plans or timetable for
beginning construction.
PERSONNEL
As of September 30, 1998, the Association had 18 full-time employees and
four part-time employees, none of whom is represented by a collective bargaining
unit. The Association believes its relationship with its employees is good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Association, such as claims to enforce liens, condemnation proceedings on
properties in which the Association holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Association's business. The Association is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Association.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of seven persons divided into
three classes, each of which containing approximately one third of the Board.
One class, consisting of James D. Lovegreen, Eldon R. Mette and Donald L.
Slavin, has a term of office expiring at the first annual meeting of
stockholders after their initial election by stockholders; a second class,
consisting of L. Edward Schaeffer and Robert M. Dearing, has a term of office
expiring at the second annual meeting of stockholders after their initial
election by stockholders; and a third class, consisting of Glenn J. Maddox and
Albert E. Davis, has a term of office expiring at the
55
third annual meeting of stockholders after their initial election by
stockholders. The Holding Company anticipates that its first annual meeting of
stockholders will be held in January 2000.
The executive officers of the Holding Company are elected annually and
serve at the Board's discretion. The executive officers of the Holding Company
are:
NAME POSITION
---- -----------------------------
L. Edward Schaeffer....... Chairman of the Board
Eldon R. Mette............ President
Ronald L. Nelson.......... Vice President, Treasurer and
Secretary
MANAGEMENT OF THE ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Association is presently composed of seven
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Association. The
executive officers of the Association are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the directors and executive officers of the
Association.
DIRECTORS
DIRECTOR TERM
NAME AGE(1) POSITION HELD WITH THE ASSOCIATION SINCE EXPIRES
- ------ ------ ------------------------------------------------ -------- -------
L. Edward Schaeffer........ 68 Chairman of the Board and President 1964 2001
Eldon R. Mette............. 62 Executive Vice President, Secretary and Director 1988 2000
Glenn J. Maddox............ 72 Vice President of the Board 1978 1999
Albert E. Davis............ 62 Director 1990 1999
Robert M. Dearing.......... 49 Director 1977 2001
James D. Lovegreen......... 65 Director 1971 2000
Donald L. Slavin........... 72 Director 1962 2000
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
NAME AGE(1) POSITION HELD WITH THE ASSOCIATION
- ------ ------ ------------------------------------------------
Ronald L. Nelson........... 45 Vice President and Treasurer
- --------------------------------
(1) As of September 30, 1998.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Association. Unless otherwise stated, each director
and executive officer has held his current occupation for the last five years.
There are no family relationships among or between the directors or executive
officers.
56
L. Edward Schaeffer is a blacksmith.
Eldon R. Mette has been employed with the Association since 1969. He
became Executive Vice President in September 1969.
Glenn J. Maddox is a retired supermarket proprietor.
Albert E. Davis is a retired manufacturing firm executive.
Robert M. Dearing is a farmer and stockman.
James D. Lovegreen owns an automobile dealership.
Donald L. Slavin is a retired Chief Engineer of an electric utility.
Ronald L. Nelson has been employed with the Association since 1973. He has
served as Vice President and Treasurer since 1978.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Association is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended September 30, 1998, the Board of Directors held 24 regular meetings and
one special meeting. No director attended fewer than 75% of the total meetings
of the Board of Directors and of committees on which such director served.
The full Board of Directors acts as an Audit Committee to receive and
review all reports prepared by the Association's external auditor. The Board of
Directors met once in its capacity as Audit Committee during 1998.
The full Board of Directors acts as a Budget Review Committee to review
the Association's annual operating budget. The Board of Directors met once in
its capacity as Budget Review Committee in 1998.
The full Board of Directors acts as a Nominating Committee for the annual
selection of management's nominees for election as directors. The Board of
Directors met once in its capacity as Nominating Committee during 1998.
DIRECTORS' COMPENSATION
Each director of the Association, other than the Chairman of the Board of
the Association, receives a monthly fee of $250 plus $195 per meeting attended.
The President receives a monthly fee of $250 and $200 per meeting attended.
Following consummation of the conversion, directors' fees will continue to be
paid by the Association and, initially, no separate fees are expected to be paid
for service on the Holding Company's Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for Mr.
Mette for the year ended September 30, 1998. No executive officer of the
Association received salary and bonus of $100,000 or more during the year ended
September 30, 1998.
57
Annual Compensation(1)
-------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation Compensation
- ---------------- -------- --------- ------ -------------- --------------
Eldon R. Mette 1998 $78,022 $3,572 $13,129(2) $6,087(3)
Executive Vice
President
- ---------------------------------
(1) Compensation information for the years ended September 30, 1997 and 1996
has been omitted as the Association was not a public company nor a
subsidiary thereof at such time.
(2) Consists of directors' fees of $7,785 and appraisal fees of $5,344. Does
not include the aggregate amount of perquisites and other personal
benefits, which was less than 10% of the total annual salary and bonus
reported.
(3) Consists of employer 401(k) contribution of $1,489, employer paid medical
insurance premiums of $4,064, employer paid disability insurance premiums
of $519 and employer paid term life insurance premiums of $15.
EMPLOYMENT AGREEMENTS. In connection with the conversion, the Holding
Company and the Association (collectively, the "Employers") plan to enter into
three-year employment agreements ("Employment Agreements") with Eldon R. Mette
and Ronald L. Nelson. Under the Employment Agreements, the initial salary
levels for Messrs. Mette and Nelson will be $77,250 and $51,500, respectively,
which amounts will be paid by the Association and may be increased at the
discretion of the Board of Directors or an authorized committee of the Board.
On each anniversary of the commencement date of the Employment Agreements, the
term of the agreements may be extended for an additional year at the discretion
of the Board. The agreements are terminable by the Employers at any time, by
the executive if he is assigned duties inconsistent with his initial position,
duties, responsibilities and status, or upon the occurrence of certain events
specified by federal regulations. In the event that the executive's employment
is terminated without cause or upon the executive's voluntary termination
following the occurrence of an event described in the preceding sentence, the
Association would be required to honor the terms of the agreement through the
expiration of the current term, including payment of current cash compensation
and continuation of employee benefits.
The Employment Agreements also provide for a severance payment and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. A severance payment also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, the executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of the Holding Company's
common stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of the Holding Company representing 25% or more of the
combined voting power of the Holding Company's then outstanding securities, (c)
the membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the Employment Agreement
is 2.99 times the executive's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount"). The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the executive's
base amount. Assuming that a change in control had occurred at September 30,
1998 and that Messrs. Mette and Nelson each elected to receive a lump sum cash
payment, Mr. Mette would have been entitled to payments of approximately
$214,000 and Mr. Nelson would have been entitled to approximately $142,000.
Section 280G of the Internal Revenue Code provides that severance payments that
equal or exceed three times the individual's base amount are deemed to be
58
"excess parachute payments" if they are contingent upon a change in control.
Individuals receiving excess parachute payments are subject to a 20% excise tax
on the amount of such excess payments, and the Employers would not be entitled
to deduct the amount of such excess payments.
The Employment Agreements restrict the executive's right to compete against
the Employers for a period of one year from the date of termination of the
agreement if he voluntarily terminates employment, except in the event of a
change in control.
EMPLOYEE SEVERANCE COMPENSATION PLAN. In connection with the conversion,
the Association's Board of Directors intends to adopt the Palmyra Savings
Employee Severance Compensation Plan to provide benefits to eligible employees
in the event of a change in control of the Holding Company or the Association.
Eligible employees are those with a minimum of ____ years of service with the
Association. Generally, all such eligible employees (other than officers who
will enter into separate employment agreements with the Holding Company and the
Association) will be eligible to participate in the severance plan. Under the
severance plan, in the event of a change in control of the Holding Company or
the Association, eligible employees who are terminated or who terminate
employment (but only upon the occurrence of events specified in the severance
plan) within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with the Association with a
maximum payment equal to ____ weeks of compensation, which would be earned after
___ years of service. In addition, officers of the Association (____ persons)
and branch managers (_____ persons) would be eligible to receive a minimum
severance payment equal to 12 and six months, respectively, of their current
compensation. Assuming that a change in control had occurred at September 30,
1998, and the termination of all eligible employees, the maximum aggregate
payment due under the severance plan would be approximately $________.
BENEFITS
GENERAL. The Association currently pays 75% of the premiums for medical,
dental, life and disability insurance benefits for full-time employees, subject
to certain deductibles.
401(k) PLAN. The Association maintains the 401(k) Salary Reduction Plan
and Trust ("401(k) Plan") for the benefit of eligible employees of the
Association. The 401(k) Plan is intended to be a tax-qualified plan under
Sections 401(a) and 401(k) of the Internal Revenue Code. Employees of the
Association who have completed one year of service and who have attained age 21
are eligible to participate in the 401(k) Plan on the January 1 next following
the date such requirements are satisfied. Participants may contribute up to the
applicable Internal Revenue Service limits ($10,000 in 1999) to the 401(k) Plan
through a salary reduction election. The Association matches participant
contributions at the rate of 50% of the first 4% of the participant's annual
contributions.
In addition to employer matching contributions, the Association may
contribute a discretionary amount to the 401(k) Plan in any plan year which is
allocated to individual participants in the proportion that their annual
compensation bears to the total compensation of all participants during the plan
year. Participants are at all times 100% vested in all salary reduction
contributions. Employer matching and profit-sharing contributions vest at the
rate of 100% per year beginning with the completion of three years of service.
For the year ended September 30, 1998, the Association incurred total
contribution-related expenses of $9,000 in connection with the 401(k) Plan.
Generally, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the conversion, the investment options
available to participants will be expanded to include the opportunity to direct
the investment of up to 100% of their 401(k) Plan account balance to purchase
shares of the Holding Company's common stock. A participant in the 401(k) Plan
who elects to purchase common stock in the conversion through the 401(k) Plan
will receive the same subscription priority and be subject to the same
individual purchase limitations as if the participant had elected to make such
purchase using other funds. See "THE CONVERSION -- Limitations on Purchases of
Shares."
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EMPLOYEE STOCK OWNERSHIP PLAN. The Association's Board of Directors has
authorized the adoption of an ESOP for employees of the Association to become
effective upon the completion of the conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Internal
Revenue Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Full-time employees of the Holding Company and the Association who
have been credited with at least 1,000 hours of service during a 12-month period
and who have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the common stock to be sold in
the conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the common stock. The loan to the ESOP will be repaid principally from the
Association's contributions to the ESOP and dividends payable on common stock
held by the ESOP over the anticipated 10-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the conversion. See "PRO FORMA DATA." To
the extent that the ESOP is unable to acquire 8% of the common stock sold in the
offering, it is anticipated that such additional shares may be acquired
following the conversion through open market purchases.
In any plan year, the Association may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of two years of service. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Association's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
It is anticipated that members of the Association's Board of Directors will
serve as trustees of the ESOP. Under the ESOP, the trustees must vote all
allocated shares held in the ESOP in accordance with the instructions of plan
participants and unallocated shares and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Pursuant to applicable accounting requirements, compensation expense for a
leveraged ESOP is recorded at the fair market value of the ESOP shares when
committed to be released to participants' accounts. See "PRO FORMA DATA."
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Association
intends to request a determination letter from the IRS regarding the tax-
qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Association expects that a
favorable determination letter will be received by the ESOP.
STOCK OPTION PLAN. The Board of Directors of the Holding Company intends
to adopt the Stock Option Plan and to submit the Stock Option Plan to the
stockholders for approval at a meeting held no earlier than six months following
consummation of the conversion. Under current OTS regulations, the approval of
a majority vote of the
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Holding Company's outstanding shares is required for implementation of the Stock
Option Plan within one year of the consummation of the conversion. The Stock
Option Plan will comply with all applicable regulatory requirements. However,
the Stock Option Plan will not be approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Association, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive
stock options ("ISOs") intended to comply with the requirements of Section 422
of the Code and for nonqualified stock options ("NQOs"). Upon receipt of
stockholder approval of the Stock Option Plan, stock options may be granted to
key employees of the Holding Company and its subsidiaries, including the
Association. Unless sooner terminated, the Stock Option Plan will continue in
effect for a period of ten years from the date the Stock Option Plan is approved
by stockholders.
A number of authorized shares of common stock equal to 10% of the number of
shares of common stock issued in connection with the conversion will be reserved
for future issuance under the Stock Option Plan (86,250 shares based on the
issuance of 862,500 shares at the maximum of the Estimated Valuation Range).
Shares acquired upon exercise of options will be authorized but unissued shares
or treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, the number of shares of common stock under the Stock
Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted by the Committee (as defined
below) to reflect the increase or decrease in the total number of shares of
common stock outstanding.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee"). Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of common stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the conversion, (i) no officer or
employees could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option Plan is implemented within the first year following
consummation of the conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Association to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Association.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
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Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of common stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the common stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the common stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Association anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations. The
size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
MANAGEMENT RECOGNITION PLAN. Following the conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Association,
and to submit the MRP to the stockholders for approval at a meeting held no
earlier than six months following consummation of the conversion. The MRP will
enable the Holding Company and the Association to provide participants with a
proprietary interest in the Holding Company as an incentive to contribute to the
success of the Holding Company and the Association. The MRP will comply with
all applicable regulatory requirements. However, the MRP will not be approved
or endorsed by the OTS. Under current OTS regulations, the approval of a
majority vote of the Holding Company's outstanding shares is required for
implementation of the MRP within one year of the consummation of the conversion.
The MRP expects to acquire a number of shares of the Holding Company's
common stock equal to 4% of the common stock issued in connection with the
conversion (34,500 shares based on the issuance of 862,500 shares in the
conversion at the maximum of the Estimated Valuation Range). Such shares will
be acquired on the open market, if available, with funds contributed by the
Holding Company or the Association to a trust which the Holding Company may
establish in conjunction with the MRP ("MRP Trust") or from authorized but
unissued shares or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Association to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of common stock will revert to the
Holding Company.
Shares of common stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under OTS regulations, if
the MRP is implemented within the first year following consummation of the
conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRDP)
of the Holding Company or the Association to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the MRP is implemented prior
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to the first anniversary of the conversion, vesting may not be accelerated upon
a change in control of the Holding Company or the Association.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of common stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
common stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Association anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the MRP is implemented within one year of the
consummation of the conversion, (i) no officer or employees could receive an
award covering in excess of 25%, (ii) no nonemployee director could receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. The
size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
TRANSACTIONS WITH THE ASSOCIATION
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Association's policy is not to make any new
loans or extensions of credit to the Association's executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to such person and his
related interests, are in excess of the greater of $25,000 or 5% of the
Association's capital and surplus (up to a maximum of $500,000) must be approved
in advance by a majority of the disinterested members of the Board of Directors.
See "REGULATION -- Federal Regulation of Savings Associations -- Transactions
with Affiliates." The aggregate amount of loans by the Association to its
executive officers and directors was $59,000 at September 30, 1998, or
approximately 0.5% of pro forma stockholders' equity (based on the issuance of
shares at the maximum of the Estimated Valuation Range).
REGULATION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Association's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Association's mortgage documents. The Association
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must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and the
FDIC to review the Association's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Association and
its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Association, as a
member of the FHLB-Des Moines, is required to acquire and hold shares of capital
stock in the FHLB-Des Moines in an amount equal to the greater of (i) 1.0% of
the aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Des Moines. The
Association is in compliance with this requirement with an investment in FHLB-
Des Moines stock of $373,500 at September 30, 1998. Among other benefits, the
FHLB-Des Moines provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Des Moines.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the
Association's deposits, the FDIC has examination, supervisory and enforcement
authority over the Association.
The Association's accounts are insured by the SAIF to the maximum extent
permitted by law. The Association pays deposit insurance premiums based on a
risk-based assessment system established by the FDIC. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Association, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for
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the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0%
or has a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized,
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significantly undercapitalized or critically undercapitalized. Immediately upon
becoming undercapitalized, an institution shall become subject to various
mandatory and discretionary restrictions on its operations.
At September 30, 1998, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may require
the Association to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the association shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1998, the Association was in compliance with the QTL test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less
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(i) any intangible assets, except for certain qualifying intangible assets;
(ii) certain mortgage servicing rights; and (iii) equity and debt investments
in subsidiaries that are not "includable subsidiaries," which is defined as
subsidiaries engaged solely in activities not impermissible for a national bank,
engaged in activities impermissible for a national bank but only as an agent for
its customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and non-includable
subsidiaries. Institutions that fail to meet the core capital requirement would
be required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of less
than 4% (3% for institutions receiving the highest CAMEL examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation of Savings Associations -- Prompt
Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines
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otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis.
Under certain circumstances, a savings association may request an adjustment to
its interest rate risk component if it believes that the OTS-calculated interest
rate risk component overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount. The OTS has postponed the date that the
component will first be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Association's historical amounts and
percentages at September 30, 1998 and pro forma amounts and percentages based
upon the assumptions stated therein.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Association currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. See "BUSINESS OF THE ASSOCIATION -- Lending
Activities -- Loans to One Borrower" for further information.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain preapproved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary
or elects to
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conduct any new activity through a subsidiary that the association controls, the
savings association must notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance with
existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Association to an affiliate must be secured by
collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Association may make to such persons based, in part, on the
Association's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are also subject to the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the savings association's record
in meeting the credit needs of the community serviced by the savings
associations, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, such assessment is required of any savings associations which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution. The Association received a "satisfactory" rating as a result of
its most recent OTS examination.
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SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions under the
HOLA. If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations --Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Association will report their income
using the accrual method of accounting and will be subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Association's reserve for bad debts discussed below.
The Holding Company's and the Association's tax year will end on September 30 of
each year. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Holding Company.
BAD DEBT RESERVE. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
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The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Association has no post-1987 reserves
subject to recapture. For taxable years beginning after December 31, 1995, the
Association's bad debt deduction will be determined under the experience method
using a formula based on actual bad debt experience over a period of years. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Association makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable
income created from an Excess Distribution is an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, if, after the conversion, the Association makes a "nondividend
distribution," then approximately one and one-half times the Excess Distribution
would be includable in gross income for federal income tax purposes, assuming a
34% corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the
Association. The Association does not intend to pay dividends that would result
in a recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax
on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carry-overs. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its
income 100% of dividends received from the Association as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Association will not file a consolidated
tax return, except that if the Holding Company or the Association owns more than
20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
AUDITS. The IRS has not audited the Association's federal income tax
returns for the past five years.
MISSOURI TAXATION
Missouri-based thrift institutions, like the Association, are subject to a
special financial institutions tax at the rate of 7% of net income, without
regard to net operating loss carryforwards. This tax is in lieu of certain
other state taxes on thrift institutions, on their property, capital or income,
except taxes on tangible personal property owned by the Association and held for
lease or rental to others and on real estate, contributions paid to the
Unemployment
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Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, the Association is entitled to a credit against this tax for all
taxes paid to the State of Missouri or any political subdivision, except taxes
on tangible personal property owned by the Association and held for lease or
rental to others and on real estate, contributions paid pursuant to the
Unemployment Compensation Law of Missouri, social security taxes, sales and use
taxes, and taxes imposed by the Missouri Financial Institutions Tax Law.
Missouri thrift institutions are not subject to the regular corporate income
tax. The Association's state income tax returns have not been audited for the
past five years.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE
MEMBERS OF THE ASSOCIATION ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF
CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On September 24, 1998, the Board of Directors of the Association
unanimously adopted the Plan of Conversion, pursuant to which the Association
will be converted from a federally chartered mutual savings and loan association
to a federally chartered stock savings bank to be held as a wholly-owned
subsidiary of the Holding Company, a newly formed Missouri corporation. THE
FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A TO THE
ASSOCIATION'S PROXY STATEMENT AND IS AVAILABLE TO MEMBERS OF THE ASSOCIATION
UPON REQUEST. The Plan of Conversion is also filed as an exhibit to the
Registration Statement. See "ADDITIONAL INFORMATION." The OTS has approved the
Plan of Conversion subject to its approval by the members of the Association
entitled to vote on the matter at a Special Meeting called for that purpose to
be held on ________, 1999 and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval.
The conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. As part of the conversion, the Association will issue all of its
newly issued capital stock (1,000 shares of common stock) to the Holding Company
in exchange for 50% of the net proceeds from the sale of common stock by the
Holding Company.
The Plan of Conversion provides generally that: (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the common stock will be offered by
the Holding Company in the Subscription Offering to persons having subscription
rights; (iii) if necessary, shares of common stock not subscribed for in the
Subscription Offering will be offered in a Direct Community Offering to certain
members of the general public, with preference given to natural persons and
trusts of natural persons residing in the Local Community, and then to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers pursuant to selected dealers agreements;
and (iv) the Holding Company will purchase all of the capital stock of the
Association to be issued in connection with the conversion. The conversion will
be effected only upon completion of the sale of at least $6,375,000 of common
stock to be issued pursuant to the Plan of Conversion.
As part of the conversion, the Holding Company is making a Subscription
Offering of its common stock to holders of subscription rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of June 30, 1997); (ii) the Association's ESOP; (iii) Supplemental
Eligible Account Holders (depositors with $50.00 or more on deposit as of
December 31, 1998); and (iv) Other Members (depositors of the Association as of
__________, 1999 and borrowers of the Association with loans outstanding as of
June 1, 1995 which continue to be outstanding as of __________, 1999).
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Shares of common stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering. The Direct Community
Offering, if one is held, is expected to begin immediately after the expiration
of the Subscription Offering, but may begin at any time during the Subscription
Offering. Shares of common stock not sold in the Subscription and Direct
Community Offerings may be offered in the Syndicated Community Offering.
Regulations require that the Direct Community and Syndicated Community Offerings
be completed within 45 days after completion of the fully extended Subscription
Offering unless extended by the Association or the Holding Company with the
approval of the regulatory authorities. If the Syndicated Community Offering is
determined not to be feasible, the Board of Directors of the Association will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The Plan of
Conversion provides that the conversion must be completed within 24 months after
the date of the approval of the Plan of Conversion by the members of the
Association.
No sales of common stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offering unless the
Plan of Conversion is approved by the members of the Association.
The completion of the offering, however, is subject to market conditions
and other factors beyond the Association's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Association as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the common stock. In the event the conversion is terminated, the
Association would be required to charge all conversion expenses against current
income.
Orders for shares of common stock will not be filled until at least 637,500
shares of common stock have been subscribed for or sold and the OTS approves the
final valuation and the conversion closes. If the conversion is not completed
within 45 days after the last day of the fully extended Subscription Offering
and the OTS consents to an extension of time to complete the conversion,
subscribers will be given the right to increase, decrease or rescind their
subscriptions. Unless an affirmative indication is received from subscribers
that they wish to continue to subscribe for shares, the funds will be returned
promptly, together with accrued interest at the Association's passbook rate from
the date payment is received until the funds are returned to the subscriber. If
such period is not extended, or, in any event, if the conversion is not
completed, all withdrawal authorizations will be terminated and all funds held
will be promptly returned together with accrued interest at the Association's
passbook rate from the date payment is received until the conversion is
terminated.
REASONS FOR THE CONVERSION
The Board of Directors and management believe that the conversion is in the
best interests of the Association, its members and the communities it serves.
The Association's Board of Directors has formed the Holding Company to serve as
a holding company, with the Association as its subsidiary, upon the consummation
of the conversion. By converting to the stock form of organization, the Holding
Company and the Association will be structured in the form used by holding
companies of commercial banks, most business entities and by a growing number of
savings institutions. Management of the Association believes that the
conversion offers a number of advantages which will be important to the future
growth and performance of the Association. The capital raised in the conversion
is intended to support the Association's current lending and investment
activities and may also support possible future expansion and diversification of
operations, although there are no current specific plans, arrangements or
understandings, written or oral, regarding any such expansion or
diversification. The conversion is also expected to afford the Association's
management, members and others the opportunity to become stockholders of the
Holding Company and participate more directly in, and contribute to, any future
growth of the Holding Company and the Association. The conversion will also
enable the Holding Company and the Association to raise additional capital in
the public equity or debt markets should the need arise, although there are no
current specific plans, arrangements or understandings, written or oral,
regarding
73
any such financing activities. The Association, as a mutual savings and loan
association, does not have the authority to issue capital stock or debt
instruments, other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE
ASSOCIATION
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted Association or the Holding Company and therefore will not be able
to elect directors of the Association or the Holding Company or to control their
affairs. Currently, these rights are accorded to savings members of the
Association. Subsequent to the conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Association and the
holders of the common stock as to matters pertaining to the Holding Company.
Each holder of common stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of common stock owned.
SAVINGS ACCOUNTS AND LOANS. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the conversion. Furthermore, the conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
TAX EFFECTS. The Association has received an opinion from Muldoon, Murphy
& Faucette, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that:
(i) no gain or loss will be recognized to the Association in its mutual
or stock form by reason of the conversion;
(ii) no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in the Association immediately after the
conversion, in the same dollar amounts and on the same terms and conditions
as their accounts at the Association in its mutual form plus interest in
the liquidation account;
(iii) the tax basis of account holders' accounts in the Association
immediately after the conversion will be the same as the tax basis of their
accounts immediately prior to conversion;
(iv) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
(v) the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for such stock will commence at the
date of purchase; and
(vi) no gain or loss will be recognized to account holders upon the
receipt or exercise of subscription rights in the conversion, except to the
extent subscription rights are deemed to have value as discussed below.
Unlike a private letter ruling issued by the IRS, an opinion of counsel is
not binding on the IRS and the IRS could disagree with the conclusions reached
therein. In the event of such disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of subscription rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the subscription rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Association, whose findings are not binding on the IRS, has issued a letter
indicating that the subscription rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right only
to purchase shares of the common stock at a price equal to its estimated fair
market value, which will be the same price paid by
74
purchasers in the Direct Community Offering for unsubscribed shares of common
stock. If the subscription rights are deemed to have a fair market value, the
receipt of such rights may only be taxable to those Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members who exercise their
subscription rights. The Association could also recognize a gain on the
distribution of such subscription rights. Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are encouraged to consult with their
own tax advisors as to the tax consequences in the event the subscription rights
are deemed to have a fair market value.
The Association has also received an opinion from Moore, Horton & Carlson,
P.C., Mexico, Missouri, that, assuming the conversion does not result in any
federal income tax liability to the Association, its account holders, or the
Holding Company, implementation of the Plan of Conversion will not result in any
Missouri income tax liability to such entities or persons.
The opinions of Muldoon, Murphy & Faucette and Moore, Horton & Carlson,
P.C. and the letter from RP Financial are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the conversion, holders of withdrawals deposit(s) in the Association,
including certificates of deposit ("Savings Account(s)"), shall not be entitled
to share in any residual assets in the event of liquidation of the Association.
However, pursuant to OTS regulations, the Association shall, at the time of the
conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
herein.
The liquidation account shall be maintained by the Association subsequent
to the conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Association.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Association subsequent to June 30, 1997, or December 31, 1998
is less than the lesser of (i) the deposit balance in such Savings Account at
the close of business on any other annual closing date subsequent to June 30,
1997 or December 31, 1998 or (ii) the amount of the "qualifying deposit" in such
Savings Account on June 30, 1997 or December 31, 1998, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
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In the event of a complete liquidation of the Association (and only in such
event) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance(s) for
Savings Account(s) then held by such holder before any liquidation distribution
may be made to stockholders. No merger, consolidation, bulk purchase of assets
with assumptions of Savings Accounts and other liabilities or similar
transactions with another federally insured institution in which the Association
is not the surviving institution shall be considered to be a complete
liquidation. In any such transaction the liquidation account shall be assumed
by the surviving institution.
In the unlikely event the Association is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the
Association.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion,
nontransferable subscription rights to purchase the common stock have been
issued to persons and entities entitled to purchase the common stock in the
Subscription Offering. The amount of the common stock which these parties may
purchase will be subject to the availability of the common stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the common stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Association as of June 30, 1997 will receive nontransferable
subscription rights to subscribe for up to the greater of $40,000 of common
stock (4,000 shares), one-tenth of one percent of the total offering of common
stock or 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription
rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription rights received by officers and directors in this category based on
their increased deposits in the Association in the one year period preceding
June 30, 1997 are subordinated to the subscription rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable subscription rights to purchase up to 8% of the shares
of common stock issued in the conversion. The ESOP intends to purchase 8% of
the shares of common stock issued in the conversion. In the event the number of
shares offered in the conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the common stock. If the ESOP's subscription is not filled in its
entirety, the ESOP may purchase shares in the open market or may purchase shares
directly from the Holding Company.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1998 will receive nontransferable
subscription rights to subscribe for up to the greater of $40,000 of common
stock (4,000 shares), one-tenth of one percent of the total offering of common
stock or 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be
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allocated among subscribing Supplemental Eligible Account Holders so as to
permit each Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation equal
100 shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Association as of the
Voting Record Date (__________, 1999) and each borrower with a loan outstanding
on June 1, 1995 which continues to be outstanding as of the Voting Record Date
will receive nontransferable subscription rights to purchase up to $40,000 of
common stock (4,000 shares) in the conversion to the extent shares are available
following subscriptions by Eligible Account Holders, the Association's ESOP and
Supplemental Eligible Account Holders. In the event of an oversubscription in
this category, the available shares will be allocated proportionately based on
the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE
HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER
OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE ASSOCIATION AND THE HOLDING COMPANY.
The Holding Company and the Association will make reasonable attempts to
provide a prospectus and related offering materials to holders of subscription
rights. However, the Subscription Offering and all subscription rights under
the Plan of Conversion will expire at 12:00 Noon, Central Time, on the
__________, 1999, whether or not the Association has been able to locate each
person entitled to such subscription rights. ORDERS FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE ASSOCIATION AFTER THAT TIME WILL
NOT BE ACCEPTED. The Subscription Offering may be extended by the Holding
Company and the Association up to ________, 1999 without the OTS's approval.
OTS regulations require that the Holding Company complete the sale of common
stock within 45 days after the close of the Subscription Offering. If the
Direct Community Offering and the Syndicated Community Offerings are not
completed within such period all funds received will be promptly returned with
interest at the Association's passbook rate and all withdrawal authorizations
will be canceled. If regulatory approval of an extension of the time period has
been granted, all subscribers will be notified of such extension and of the
duration of any extension that has been granted, and will be given the right to
increase, decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled). No
single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Any shares of common stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in Marion, Lewis and Clark Counties, Missouri. Purchasers in the Direct
Community Offering are eligible to purchase up to $40,000 of common stock (4,000
shares). In the event an insufficient number of shares are available to fill
orders in the Direct Community Offering, the available shares will be allocated
on a pro rata basis determined by the amount of the respective orders. The
Direct Community Offering, if held, may be concurrent with, during or promptly
after the Subscription Offering. The Direct Community Offering may terminate on
or at any time subsequent to the Expiration Date, but no later than 45 days
after the close of the Subscription Offering, unless extended by the Holding
Company and the Association, with approval of the OTS. If regulatory approval
of an extension of the time period has been granted, all subscribers will be
notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned
77
with interest. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE DIRECT
COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE HOLDING COMPANY AND
THE ASSOCIATION TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. IF AN
ORDER IS REJECTED IN PART, THE PURCHASER DOES NOT HAVE THE RIGHT TO CANCEL THE
REMAINDER OF THE ORDER. THE HOLDING COMPANY PRESENTLY INTENDS TO TERMINATE THE
DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES
AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the common stock offered in the Subscription Offering is
subscribed for, no common stock will be available for purchase in the Direct
Community Offering.
SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that, if
necessary, all shares of common stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be formed and managed by Trident
Securities acting as agent of the Holding Company. THE HOLDING COMPANY AND THE
ASSOCIATION HAVE THE RIGHT TO REJECT ORDERS, IN WHOLE OR PART, IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Trident Securities nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the common stock in the Syndicated Community Offering; however,
Trident Securities has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering also will be sold at the
$10.00 purchase price. See "-- Stock Pricing and Number of Shares to be
Issued." No person will be permitted to subscribe in the Syndicated Community
Offering for shares of common stock with an aggregate purchase price of more
than $40,000 (4,000 shares) of common stock. See "-- Plan of Distribution for
the Subscription, Direct Community and Syndicated Community Offerings" for a
description of the commission to be paid to the selected dealers and to Trident
Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit indications of
interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock.
When and if Trident Securities and the Holding Company believe that enough
indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the conversion, Trident Securities will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations to such customers on the next business day after the Order
Date. Selected dealers may debit the accounts of their customers on a date
which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit. After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Association's
passbook rate until the completion of the offering. At the completion of the
conversion, the funds received will be used to purchase the shares of common
stock ordered. The shares issued in the conversion cannot and will not be
insured by the FDIC or any other government agency. In the event the conversion
is not consummated as described above, funds with interest will be returned
promptly to the selected dealers, who, in turn, will promptly credit their
customers' brokerage accounts.
The Syndicated Community Offering may terminate no more than 45 days after
the expiration of the Subscription Offering, unless extended by the Holding
Company and the Association, with approval of the OTS.
In the event the Association is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Association, if feasible. Such other arrangements
will be subject to the approval of the OTS. The OTS may grant one or more
extensions of the offering period, provided that (i) no single extension exceeds
90 days, (ii) subscribers are given the right to increase, decrease
78
or rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan of Conversion. If the conversion is not completed within 45
days after the close of the Subscription Offering, either all funds received
will be returned with interest (and withdrawal authorizations canceled) or, if
the OTS has granted an extension of time, all subscribers will be given the
right to increase, decrease or rescind their subscriptions at any time prior to
20 days before the end of the extension period. If an extension of time is
obtained, all subscribers will be notified of such extension and of their rights
to modify their orders. If an affirmative response to any resolicitation is not
received by the Holding Company from a subscriber, the subscriber's order will
be rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Association
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan of Conversion reside. However, the Holding Company and the Association
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to subscribe
for shares of common stock reside in such state or (ii) the Holding Company or
the Association determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request or requirement that the Holding Company and the Association
or their officers, directors or trustees register as a broker, dealer, salesman
or selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the subscription rights or common
stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Holding Company and the Association will base their decision as to whether
or not to offer the common stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Association and the Holding Company have retained Trident Securities to
consult with and advise the Association and to assist the Association and the
Holding Company, on a best efforts basis, in the distribution of shares in the
offering. Trident Securities is a broker-dealer registered with the Securities
and Exchange Commission ("SEC") and a member of the NASD. Trident Securities
will assist the Association in the conversion as follows: (i) it will act as
marketing advisor with respect to the Subscription Offering and will represent
the Association as placement agent on a best efforts basis in the sale of the
common stock in the Direct Community Offering if one is held; (ii) it will
conduct training sessions with directors, officers and employees of the
Association regarding the conversion process; and (iii) it will assist in the
establishment and supervision of the Association's stock information center and,
with management's input, will train the Association's staff to record properly
and tabulate orders for the purchase of common stock and to respond
appropriately to customer inquiries.
Based upon negotiations between Trident Securities on the one hand and the
Holding Company and the Association on the other hand concerning fee structure,
Trident Securities will receive a fixed management fee of $135,000. Trident
Securities and selected dealers participating in the Syndicated Community
Offering may receive a commission in the Syndicated Community Offering in a
maximum amount to be agreed upon by the Holding Company and the Association to
reflect market requirements at the time of the allocation of shares in the
Syndicated Community Offering. Fees and commissions paid to Trident Securities
and to any selected dealers may be deemed to be underwriting fees, and Trident
Securities and such selected dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out-of-pocket expenses not
to exceed $12,500 and its legal fees not to exceed $30,000. Trident Securities
has received an advance of $10,000 towards its reimbursable expenses. For
additional information, see "-- Stock Pricing and Number of Shares to be Issued"
and "USE OF PROCEEDS."
79
Subject to certain limitations, the Holding Company and the Association
have also agreed to indemnify Trident Securities against liabilities and
expenses (including legal fees) incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the common stock or with regard to allocations of
shares (in the event of oversubscription) or determinations of eligibility to
purchase shares.
DESCRIPTION OF SALES ACTIVITIES
The common stock will be offered in the Subscription Offering and Direct
Community Offering principally by the distribution of this prospectus and
through activities conducted at the Association's stock information center at
its main office facility. The stock information center is expected to operate
during normal business hours throughout the Subscription Offering and Direct
Community Offering. It is expected that at any particular time one or more
Trident Securities employees will be working at the stock information center.
Such employees of Trident Securities will be responsible for mailing materials
relating to the offering, responding to questions regarding the conversion and
the offering and processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Association may participate in
the offering in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the order form. Management of the Association may answer questions regarding the
business of the Association when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives.
The management and employees of the Holding Company and the Association have
been instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock.
No officer, director or employee of the Association or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the conversion.
None of the Association's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
The Association's personnel will assist in the above-described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Exchange Act. Rule 3a4-1 generally provides
that an "associated person of an issuer" of securities shall not be deemed a
broker solely by reason of participation in the sale of securities of such
issuer if the associated person meets certain conditions. Such conditions
include, but are not limited to, that the associated person participating in the
sale of an issuer's securities not be compensated in connection therewith at the
time of participation, that such person not be associated with a broker or
dealer and that such person observe certain limitations on his or her
participation in the sale of securities. For purposes of this exemption,
"associated person of an issuer" is defined to include any person who is a
director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To purchase shares in the Subscription Offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Association (which may be given by completing the
appropriate blanks in the order form), must be received by the Association by
12:00 Noon, Central Time, on the Expiration Date. Order forms that are not
received by such time or are executed defectively or are received without full
payment (or without appropriate withdrawal instructions) are not required to be
accepted. The Holding Company and the Association have the right to waive or
permit the correction of incomplete or improperly executed order forms, but do
not represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Association of the terms and
conditions of the Plan of Conversion and of the order form will be final. In
order to purchase shares in the Direct
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Community Offering, the order form, accompanied by the required payment for each
share subscribed for, must be received by the Association prior to the time the
Direct Community Offering terminates, which may be on or at any time subsequent
to the Expiration Date. Once received, an executed order form may not be
modified, amended or rescinded without the consent of the Association unless the
conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (December 31, 1998) and/or
the Voting Record Date (__________, 1999) must list all accounts on the order
form giving all names in each account, the account number and the approximate
account balance as of such date. Failure to list an account could result in
fewer shares allocated in the event of an oversubscription than if all accounts
had been disclosed.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Association's stock information center, (ii) by check, bank draft,
or money order, or (iii) by authorization of withdrawal from deposit accounts
maintained with the Association. Appropriate means by which such withdrawals
may be authorized are provided on the order form. No wire transfers will be
accepted. Interest will be paid on payments made by cash, check, bank draft or
money order at the Association's passbook rate from the date payment is received
at the stock information center until the completion or termination of the
conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the conversion (unless the certificate matures after the date of
receipt of the order form but prior to closing, in which case funds will earn
interest at the passbook rate from the date of maturity until consummation of
the conversion), but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the conversion.
At the completion of the conversion, the funds received in the offering will be
used to purchase the shares of common stock ordered. THE SHARES OF COMMON STOCK
ISSUED IN THE CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY. In the event that the conversion is not consummated for any
reason, all funds submitted will be promptly refunded with interest as described
above.
If a subscriber authorizes the Association to withdraw the amount of the
aggregate purchase price from his or her deposit account, the Association will
do so as of the effective date of conversion, though the account must contain
the full amount necessary for payment at the time the subscription order is
received. The Association will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Association's passbook rate.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of common stock
subscribed for at the $10.00 purchase price upon consummation of the conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Holding
Company to lend to the ESOP, at such time, the aggregate purchase price of the
shares for which it subscribed.
IRAs maintained in the Association do not permit investment in the common
stock. A depositor interested in using his or her IRA funds to purchase common
stock must do so through a self-directed IRA. Since the Association does not
offer such accounts, it will allow such a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Holding Company's
common stock in the offering. There will be no early withdrawal or IRS interest
penalties for such transfers. The new trustee would hold the common stock in a
self-directed account in the same manner as the Association now holds the
depositor's IRA funds. An annual administrative fee may be payable to the new
trustee. Depositors interested in using funds in an Association IRA to purchase
common stock should contact the stock information center as soon
81
as possible so that the necessary forms may be forwarded for execution and
returned prior to the Expiration Date. In addition, the provisions of ERISA and
IRS regulations require that officers, directors and 10% shareholders who use
self-directed IRA funds to purchase shares of common stock in the Subscription
Offering, make such purchases for the exclusive benefit of IRAs.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed order forms or to the last address of such persons appearing
on the records of the Association as soon as practicable following consummation
of the sale of all shares of common stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. PURCHASERS
MAY NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY PURCHASED UNTIL
CERTIFICATES FOR THE COMMON STOCK ARE AVAILABLE AND DELIVERED TO THEM, EVEN
THOUGH TRADING OF THE COMMON STOCK MAY HAVE COMMENCED.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus. The Association will accept
for processing only orders submitted on original order forms. The Association
is not obligated to accept orders submitted on photocopied or telecopied order
forms. ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE
CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of the Holding Company and the Association as converted (i.e.,
----
taking into account the expected receipt of proceeds from the sale of securities
in the conversion), as determined by an independent appraisal. The Association
and the Holding Company have retained RP Financial to prepare an appraisal of
the pro forma market value of the Holding Company and the Association as
converted, as well as a business plan. RP Financial will receive a fee expected
to total approximately $25,000 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal. The Association has agreed to indemnify RP
Financial under certain circumstances against liabilities and expenses
(including legal fees) arising out of, related to, or based upon the conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Association as converted taking into
account the formation of the Holding Company as the holding company for the
Association. For its analysis, RP Financial undertook substantial
investigations to learn about the Association's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed the
Association's Form AC Application for Approval of Conversion and the Holding
Company's Form SB-2 Registration Statement. Furthermore, RP Financial visited
the Association's facilities and had discussions with the Association's
management and its special conversion legal counsel, Muldoon, Murphy & Faucette.
No detailed individual analysis of the separate components of the Holding
Company's or the Association's assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Association as converted, as required by applicable regulatory guidelines, RP
Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. RP Financial placed
the greatest emphasis on the P/E and P/B methods in estimating pro forma market
value. In applying these procedures, RP Financial reviewed, among other
factors, the economic make-up of the Association's primary market area, the
Association's financial performance and condition in relation to publicly-traded
institutions that RP Financial deemed comparable to the Association, the
specific terms of the offering of the Holding Company's common stock, the pro
forma impact of the additional capital raised in the conversion, conditions of
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securities markets in general, and the market for thrift institution common
stock in particular. RP Financial's analysis provides an approximation of the
pro forma market value of the Holding Company and the Association as converted
based on the valuation methods applied and the assumptions outlined in its
report. Included in its report were certain assumptions as to the pro forma
earnings of the Holding Company after the conversion that were utilized in
determining the appraised value. These assumptions included estimated expenses
and an assumed after-tax rate of return on the net conversion proceeds as
described under "PRO FORMA DATA," purchases by the ESOP of 8% of the common
stock sold in the conversion and purchases in the open market by the MRP of a
number of shares equal to 4% of the common stock sold in the conversion at the
$10.00 purchase price. See "PRO FORMA DATA" for additional information
concerning these assumptions. The use of different assumptions may yield
different results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Association that, in its opinion, as of December 11, 1998, the aggregate
estimated pro forma market value of the Holding Company and the Association as
converted and, therefore, the common stock was within the valuation range of
$6,375,000 to $8,625,000 with a midpoint of $7,500,000. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $6,375,000 to $8,625,000 with a
midpoint of $7,500,000. Assuming that the shares are sold at $10.00 per share
in the conversion, the estimated number of shares would be between 637,500 and
862,500 with a midpoint of 750,000. The purchase price of $10.00 was determined
by discussion among the Boards of Directors of the Association and the Holding
Company and Trident Securities, taking into account, among other factors (i) the
requirement under OTS regulations that the common stock be offered in a manner
that will achieve the widest distribution of the stock, and (ii) desired
liquidity in the common stock subsequent to the conversion. Since the outcome
of the offering relates in large measure to market conditions at the time of
sale, it is not possible to determine the exact number of shares that will be
issued by the Holding Company at this time. The Estimated Valuation Range may
be amended, with the approval of the OTS, if necessitated by developments
following the date of such appraisal in, among other things, market conditions,
the financial condition or operating results of the Association, regulatory
guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of the Holding Company and the
Association as converted, as of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the offering or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares discussed herein. In the
event the total amount of shares issued is less than 637,500 or more than
991,875 (15% above the maximum of the Estimated Valuation Range), for aggregate
gross proceeds of less than $6,375,000 or more than $9,918,750, subscription
funds will be returned promptly with interest to each subscriber unless he
indicates otherwise. If RP Financial establishes a new valuation range, it will
be subject to approval by the OTS.
83
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Association and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Association furnished to it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of such information
and did not independently verify the financial statements and other data
provided by the Association and the Holding Company or independently value the
assets or liabilities of the Holding Company and the Association. THE APPRAISAL
BY RP FINANCIAL IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE PLAN
OF CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE
APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO TIME,
THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION
WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE
PRICE.
LIMITATIONS ON PURCHASES OF SHARES
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of common stock issued in the conversion, the Plan of Conversion provides for
the following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase shares of common stock with an aggregate purchase
price of more than $40,000 (4,000 shares), (ii) no person may purchase in the
Direct Community Offering, if any, or in the Syndicated Community Offering, if
any, shares of common stock with an aggregate purchase price of more than
$40,000 (4,000 shares), and (iii) no person, either alone or together with
associates of or persons acting in concert with such person, may purchase in the
aggregate more than the overall maximum purchase limitation of 1% ($86,250, or
8,625 shares, based on the maximum of the Estimated Valuation Range) of the
total number of shares of common stock issued in the conversion (exclusive of
any shares issued pursuant to an increase in the Estimated Valuation Range of up
to 15%). For purposes of the Plan of Conversion, the directors are not deemed
to be acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
The Association's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of common stock sold in the conversion, provided that
orders for shares which exceed 5% of the shares of common stock sold in the
conversion may not exceed, in the aggregate, 10% of the shares sold in the
conversion. The Association and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above, persons who
subscribed for the maximum number of shares of common stock will be, and other
large subscribers in the discretion of the Holding Company and the Association
may be, given the opportunity to increase their subscriptions accordingly,
subject to the rights and preferences of any person who has priority
subscription rights.
The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common
84
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts
in concert with another party shall also be deemed to be acting in concert with
any person who is also acting in concert with that other party. THE HOLDING
COMPANY AND THE ASSOCIATION MAY PRESUME THAT CERTAIN PERSONS ARE ACTING IN
CONCERT BASED UPON, AMONG OTHER THINGS, JOINT ACCOUNT RELATIONSHIPS AND THE FACT
THAT SUCH PERSONS MAY HAVE FILED JOINT SCHEDULES 13D WITH THE SEC WITH RESPECT
TO OTHER COMPANIES.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Association or a
majority-owned subsidiary of the Association) of which such person is an officer
or partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
plans); and (iii) any relative or spouse of such person, or any relative of such
spouse, who either has the same home as such person or who is a director or
officer of the Association or any of its parents or subsidiaries. For example,
a corporation of which a person serves as an officer would be an associate of
such person and, therefore, all shares purchased by such corporation would be
included with the number of shares which such person could purchase individually
under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Association, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common stock purchased pursuant to the conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association and the Holding Company and by NASD members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director. Furthermore, repurchases of
any common stock are prohibited if the effect thereof would cause the
association's regulatory capital to be reduced below (a) the amount required for
the liquidation account or (b) the regulatory capital requirements imposed by
the OTS. Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and that the repurchase would not
adversely affect the financial condition of the institution. Any repurchases of
common stock by the Holding Company would be subject to these regulatory
restrictions unless the OTS would provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of common stock purchased in the offering by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the conversion, except in the event of the death of the
stockholder or in any exchange of the common stock in connection with a merger
or acquisition of the Holding Company. Shares of common stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
conversion are not subject to this restriction. Accordingly, shares of common
stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's common stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted common stock shall be subject to the same
restrictions.
85
Purchases of outstanding shares of common stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding common stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the SECURITIES ACT for the registration of the common stock to be issued
pursuant to the conversion. The registration under the Securities Act of shares
of the common stock to be issued in the conversion does not cover the resale of
such shares. Shares of common stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Missouri corporate law, as well as the Articles of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of the Holding
Company contained in the Registration Statement filed with the SEC. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
86
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquirer has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquirer also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquirer being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
ANTI-TAKEOVER PROVISIONS IN THE HOLDING COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS AND IN MISSOURI LAW
A number of provisions of the Holding Company's Articles of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Holding Company's Articles of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Articles of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to
obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Holding
Company provides that in no event shall any record owner of any outstanding
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of common
stock ("Limit") be entitled or permitted to any vote in respect of the shares
held in excess of the Limit, unless permitted by a resolution adopted by a
majority of the board of directors. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules
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and Regulations of the Exchange Act and includes shares beneficially owned by
such person or any of his or her affiliates (as defined in the Articles of
Incorporation), shares which such person or his or her affiliates have the right
to acquire upon the exercise of conversion rights or options and shares as to
which such person and his or her affiliates have or share investment or voting
power, but shall not include shares beneficially owned by the ESOP or directors,
officers and employees of the Association or Holding Company or shares that are
subject to a revocable proxy and that are not otherwise beneficially, or deemed
by the Holding Company to be beneficially, owned by such person and his or her
affiliates.
BOARD OF DIRECTORS. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's Articles
of Incorporation provides that the size of the Board shall be as set forth in
the Bylaws. The Bylaws currently set the number of directors at seven. The
Articles of Incorporation provides that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors, shall be
filled by a vote of a majority of the directors then in office and any director
so chosen shall hold office for a term expiring at the next annual meeting of
stockholders. The classified Board is intended to provide for continuity of the
Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Articles of Incorporation of the Holding Company provides that a
director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
CUMULATIVE VOTING; SPECIAL MEETINGS. The Bylaws do not provide for
cumulative voting for any purpose. The Bylaws also provide that special meetings
of stockholders of the Holding Company may be called only by the President or by
the Board of Directors of the Holding Company.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance
of 5,000,000 shares of common stock and 1,000,000 shares of preferred stock.
The shares of common stock and preferred stock were authorized in an amount
greater than that to be issued in the conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of
the ability to fix voting rights for a series of preferred stock, the Board has
the power, to the extent consistent with its fiduciary duty, to issue a series
of preferred stock to persons friendly to management in order to attempt to
block a tender offer, merger or other transaction by which a third party seeks
control of the Holding Company, and thereby assist members of management to
retain their positions. The Holding Company's Board currently has no plans for
the issuance of additional shares, other than the issuance of shares of common
stock upon exercise of stock options and in connection with the MRP.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Articles of
Incorporation applies to any
88
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Holding Company with or into any Related Person; (ii) any
sale, lease, exchange, mortgage, transfer, or other disposition of 25% or more
of the assets of the Holding Company or combined assets of the Holding Company
and its subsidiaries to a Related Person; (iii) any merger or consolidation of a
Related Person with or into the Holding Company or a subsidiary of the Holding
Company; (iv) any sale, lease, exchange, transfer, or other disposition of 25%
or more of the assets of a Related Person to the Holding Company or a subsidiary
of the Holding Company; (v) the issuance of any securities of the Holding
Company or a subsidiary of the Holding Company to a Related Person; (vi) the
acquisition by the Holding Company or a subsidiary of the Holding Company of any
securities of a Related Person; (vii) any reclassification of common stock of
the Holding Company or any recapitalization involving the common stock of the
Holding Company; or (viii) any agreement or other arrangement providing for any
of the foregoing.
Under Missouri law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of two-thirds of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Missouri law
to the majority approval requirement applies to stockholders owning 20% or more
of the common stock of a corporation for a period of less than five years. Such
20% stockholder, in order to obtain approval of a business combination, must
obtain the approval of a majority of the outstanding stock, excluding the stock
owned by such 20% stockholder, or satisfy other requirements under Missouri law
relating to board of director approval of his or her acquisition of the shares
of the Holding Company. The increased stockholder vote required to approve a
business combination may have the effect of foreclosing mergers and other
business combinations which a majority of stockholders deem desirable and
placing the power to prevent such a merger or combination in the hands of a
minority of stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Holding Company's Articles of Incorporation must be approved by a majority vote
of its Board of Directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Articles of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 66% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of the Holding Company
require a stockholder who intends to nominate a candidate for election to the
Board of Directors, or to raise new business at a stockholder meeting to give
not less than 60 nor more than 90 days' advance notice to the Secretary of the
Holding Company; provided, however, that if less than 71 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice, to be timely, must be received no later than the close of business on
the 10/th/ day following the date on which notice was mailed to shareholders or
other public disclosure was made. The notice provision requires a stockholder
who desires to raise new business to provide certain information to the Holding
Company concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide the Holding
Company with certain information concerning the nominee and the proposing
stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS. The Board of Directors of the Association believes
that the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions that
have not been negotiated with and approved by its Board of Directors. These
provisions will also assist the Holding Company and the Association in the
orderly deployment of the conversion proceeds into productive assets during the
initial period after the conversion. The Board of Directors believes these
provisions are in the best interest of the Association and the Holding Company
and its stockholders. In the judgment of the Board of Directors, the Holding
Company's Board will be in the best
89
position to determine the true value of the Holding Company and to negotiate
more effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest of
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of the Holding Company and
that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
Despite the belief of the Association and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Articles
of Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by the Holding
Company's Board, but pursuant to which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of the
Holding Company's Board of Directors and of management more difficult. The Board
of Directors of the Association and the Holding Company, however, have concluded
that the potential benefits outweigh the possible disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, the Holding Company may adopt additional
anti-takeover charter provisions or other devices regarding the acquisition of
its equity securities that would be permitted for a Missouri business
corporation.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws of the Holding
Company and in Federal and Missouri law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
90
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 5,000,000 shares of common stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 865,000 shares of common stock (unless increased to 991,875 shares
of common stock sold) and no shares of preferred stock in the conversion. Each
share of the Holding Company's common stock will have the same relative rights
as, and will be identical in all respects with, each other share of common
stock. Upon payment of the purchase price for the common stock, in accordance
with the Plan of Conversion, all such stock will be duly authorized, fully paid
and nonassessable.
THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of common stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the common stock with respect to
dividends.
VOTING RIGHTS. Upon conversion, the holders of common stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Missouri law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of common
stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon conversion. Subsequent to conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, all of which will be owned by the Holding Company, and voted at the
direction of the Holding Company's Board of Directors. Consequently, the
holders of the common stock will not have direct control of the Association.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Association, the Holding Company, as holder of the Association's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "THE CONVERSION"), all assets of the Association available
for distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Holding Company available for distribution. If Holding
Company preferred stock is issued, the holders thereof may have a priority over
the holders of the common stock in the event of liquidation or dissolution.
91
PREEMPTIVE RIGHTS. Holders of the common stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the authorized Holding Company preferred stock will
be issued in the conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
RESTRICTIONS ON ACQUISITION
Acquisitions of the Holding Company are restricted by provisions in its
Articles of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company has registered the common stock with the SEC pursuant
to Section 12(g) of the Exchange Act and will not deregister its common stock
for a period of at least three years following the completion of the conversion.
As a result of such registration, the proxy and tender offer rules, insider
trading reporting and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for the Holding
Company by Muldoon, Murphy & Faucette, Washington, D.C. The federal tax
consequences of the offering have been opined upon by Muldoon, Murphy & Faucette
and the Missouri tax consequences of the offering have been opined upon by
Moore, Horton & Carlson, P.C. Muldoon, Murphy & Faucette and Moore, Horton &
Carlson, P.C. have consented to the references herein to their opinions.
Certain legal matters will be passed upon for Trident Securities by Housley
Kantarian & Bronstein, P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of the Association at September 30,
1998 and 1997 and for each of the years ended September 30, 1998 and 1997
included in this prospectus have been audited by Moore, Horton & Carlson, P.C.,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Association setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Association as converted and
its letter with respect to subscription rights and to the use of its name and
statements with respect to it appearing herein.
92
CHANGE IN ACCOUNTANTS
Prior to the fiscal year ended September 30, 1998, the Association's
consolidated financial statements were audited by Wade, Stables, Schanbacher &
Walker, P.C. The former accountant was replaced by Moore, Horton & Carlson,
P.C., which was engaged on August 20, 1998 and continues as the independent
auditors of the Association. The decision to change auditors was approved by the
Board of Directors on August 20, 1998. The Association's consolidated financial
statements included in this Prospectus were audited by Moore, Horton & Carlson,
P.C.
For the fiscal years ended September 30, 1997 and 1996 and up to the date
of the replacement of the Association's former accountant, there were no
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to the satisfaction of the former accountant, would have
caused it to make a reference to the subject matter of the disagreement in
connection with its reports. The independent auditors' report on the
consolidated financial statements for the fiscal years ended September 30, 1997
and 1996 did not contain an adverse opinion or a disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
SB-2 (File No. 333-_____) under the Securities Act with respect to the common
stock offered in the conversion. This prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Room of the SEC at
450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The Registration Statement also is available through the SEC's World Wide
Web site on the Internet (http://www.sec.gov).
The Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Association's Special Meeting
and certain other information. This prospectus omits certain information
contained in such Application. The Application, including the proxy materials,
exhibits and certain other information included in the Application, may be
inspected, without charge, at the offices of the OTS, 1700 G Street, NW,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the Midwest Regional Office of the OTS, 122 W. John Carpenter Freeway, Suite
600, Irving, Texas 75039.
93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PALMYRA SAVING & BUILDING ASSOCIATION, F.A.
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 1998 and 1997............. F-2
Consolidated Statements of Income for the Years Ended September 30,
1998 and 1997........................................................... 24
Consolidated Statements of Equity for the Years Ended September 30,
1998 and 1997........................................................... F-3
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998 and 1997........................................................... F-4
Notes to Consolidated Financial Statements................................ F-6
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Financial Statements or related Notes.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
94
[LETTERHEAD OF MOORE, HORTON & CARLSON, P.C.]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Palmyra Saving and Building Association, F.A.
Palmyra, Missouri
We have audited the accompanying consolidated statements of financial condition
of Palmyra Saving and Building Association, F.A. ("Association") as of September
30, 1998 and 1997, and the related consolidated statements of income, changes in
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Association'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 referred to above present
fairly, in all material respects, the financial position of the Association as
of September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
November 18, 1998
F-1
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30
1998 1997
------------ ------------
ASSETS
Cash (includes interest-bearing deposits of $1,003,689 and
$878,254, respectively) $ 2,268,166 $ 2,145,689
Investment securities--Note B
Available-for-sale, at fair value 7,086,677 8,508,981
Held-to-maturity (fair value of $5,639,849 and $5,106,899, respectively) 5,589,029 5,093,378
Mortgage-backed securities held-to-maturity (fair value of $2,623,999
and $2,870,571, respectively)--Note C 2,584,376 2,827,532
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 373,500 480,400
Loans receivable--Note D 40,512,748 38,394,460
Accrued interest receivable--Note E 443,909 446,955
Premises and equipment--Note F 562,365 491,251
Other assets 55,532 44,555
----------- -----------
TOTAL ASSETS $59,476,302 $58,433,201
=========== ===========
LIABILITIES AND EQUITY
Liabilities
Deposits--Note G $52,723,768 $51,411,814
Advances from FHLB--Note H 500,000 1,000,000
Advances from borrowers for property taxes and insurance 50,219 53,688
Other liabilities 154,338 252,208
----------- -----------
TOTAL LIABILITIES $53,428,325 $52,717,710
Commitments and contingencies--Note L and M
Equity--Notes I and J
Retained earnings - substantially restricted 6,017,345 5,741,791
Unrealized gain (loss) on securities 30,632 (26,300)
----------- -----------
TOTAL EQUITY $ 6,047,977 $ 5,715,491
----------- -----------
TOTAL LIABILITIES AND EQUITY $59,476,302 $58,433,201
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
UNREALIZED
GAIN (LOSS)
RETAINED ON TOTAL
EARNINGS SECURITIES EQUITY
---------- ----------- ----------
Balance at September 30, 1996, as originally reported $5,322,897 $(108,198) $5,214,699
Prior-period adjustment--Note O 87,000 --- 87,000
---------- --------- ----------
Balance as restated 5,409,897 (108,198) 5,301,699
Net income 331,894 --- 331,894
Change in unrealized gain (loss) on securities --- 81,898 81,898
---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1997 5,741,791 (26,300) 5,715,491
Net income 275,554 --- 275,554
Change in unrealized gain (loss) on securities --- 56,932 56,932
---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1998 $6,017,345 $ 30,632 $6,047,977
========== ========= ==========
See accompanying notes to consolidated financial statements.
F-3
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 276,027 $ 331,894
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 56,275 41,133
Amortization of premiums and discounts (7,294) (12,908)
Loan fee amortization and payoffs (2,988) (3,590)
Provisions for loan losses 25,000 20,813
Deferred income taxes (10,000) (11,500)
Loss on sale of investments 2,056 14,015
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable 3,046 24,111
Other assets (10,977) 10,097
Other liabilities (121,465) (55,672)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 209,680 358,393
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities,
held-to-maturity (2,994,688) (1,845,000)
Proceeds from maturities and calls of investment
securities, held-to-maturity 2,510,000 3,950,000
Purchase of investment securities,
available-for-sale (3,993,213) (3,094,813)
Proceeds from maturities and calls of investment
securities, available-for-sale 5,500,000 950,000
Purchase of mortgage-backed securities (374,863) ---
Principal collected on mortgage-backed securities 618,338 453,989
Proceeds from redemption of FHLB stock 106,900 ---
Loans originated, net of repayments 532,316 (172,945)
Purchase of mortgage loans (2,787,237) (1,103,683)
Proceeds from sale of education loans 114,148 124,247
Purchase of premises and equipment (127,389) (53,465)
Net book value of premises and
equipment disposals --- 24,274
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (895,688) (767,396)
F-4
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
YEAR ENDED SEPTEMBER 30
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 1,311,954 $ 20,838
Advances from FHLB
Borrowings 500,000 1,000,000
Repayments (1,000,000) (200,000)
Net increase (decrease) in advances for
taxes and insurance (3,469) 2,115
----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 808,485 822,953
----------- ----------
NET INCREASE IN CASH 122,477 413,950
CASH, BEGINNING OF PERIOD 2,145,689 1,731,739
----------- ----------
CASH, END OF PERIOD $ 2,268,166 $2,145,689
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $ 2,672,539 $2,620,334
=========== ==========
Interest on FHLB advances $ 9,422 $ 4,833
=========== ==========
Income tax (refund) $ 284,174 $ (48,355)
=========== ==========
See accompanying notes to consolidated financial statements.
F-5
PALMYRA SAVING AND BUILDING ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of Palmyra Saving and Building
Association, F.A. conform to generally accepted accounting principles ("GAAP")
and to prevailing practices within the thrift industry. A summary of the more
significant accounting policies follows:
NATURE OF OPERATIONS: The Association provides a variety of financial services
- --------------------
to individual and corporate customers through its headquarters located in
Palmyra, Missouri and its branch locations in Canton and Kahoka, Missouri. The
Association's primary deposit products are interest-bearing checking and savings
accounts and certificates of deposit. Its primary lending products are one- to
four-family residential loans.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
- ---------------------------
accounts of the Association and its wholly-owned subsidiary, PSA Service
Corporation, whose activities consist principally of selling mortgage redemption
insurance and safe deposit box rental to the Association's customers.
Significant intercompany balances and transactions have been eliminated in
consolidation.
INVESTMENT SECURITIES: Investment securities are classified as held-to-
- ---------------------
maturity, which are recorded at amortized cost, or available-for-sale.
Securities designated as available-for-sale, provide the investor with certain
flexibility in managing its investment portfolio. Such securities are reported
at fair value; net unrealized gains and losses are excluded from income and
reported net of applicable income taxes as a separate component of equity.
Gains or losses on sales of securities are recognized in operations at the time
of sale and are determined by the difference between the net sales proceeds and
the cost of the securities using the specific identification method, adjusted
for any unamortized premiums or discounts. Premiums or discounts are amortized
or accreted to income using the interest method over the period to maturity.
STOCK IN FEDERAL HOME LOAN BANK OF DES MOINES: Stock in the FHLB is stated at
- ---------------------------------------------
cost and the amount of stock held is determined by regulation. No ready market
exists for such stock and it has no quoted market value.
LOANS RECEIVABLE: Loans receivable are carried at unpaid principal balances,
- ----------------
less the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred and amortized to interest
income over the contractual life of the loan using the interest method.
The Association's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The adjustable-rate
mortgage is the Association's primary loan investment. Consumer loans consist
principally of loans secured by savings deposits and insured education loans.
Mortgage loans are placed on nonaccrual status when principal or interest is
delinquent for 90 days or more. Uncollectible interest on loans is charged off
or an allowance established by a charge to income equal to all interest
previously accrued. Interest is subsequently recognized only to the extent cash
payments are received until delinquent interest is paid in full and in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal in which case the loan is returned to
accrual basis. Interest on consumer loans continues to accrue even if the loan
is 90 days or more past due and is reversed when management determines the
interest to be uncollectible.
F-6
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
- -------------------------
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-
offs, net of recoveries.
IMPAIRED LOANS: The Association accounts for impaired loans in accordance with
- --------------
Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures, an amendment of
SFAS No. 114". These statements address the accounting by creditors for
impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of small-
balance homogeneous loans that are collectively evaluated for impairment, loans
measured at fair value or at lower of cost or fair value, leases, and debt
securities. The Association considers all one- to four-family residential
mortgage loans, construction loans, and all consumer and other loans to be
smaller homogeneous loans.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired. Impaired loans are
assessed individually and impairment identified when the accrual of interest has
been discontinued, loans have been restructured or management has serious doubts
about the future collectibility of principal and interest, even though the loans
are currently performing. Factors considered in determining impairment include,
but are not limited to, expected future cash flow, the financial condition of
the borrower and current economic conditions. The Association measures each
impaired loan based on the fair value of its collateral and charges off those
loans or portions of loans deemed uncollectible. Management has elected to
continue to use its existing nonaccrual methods for recognizing interest income
on impaired loans.
PREMISES AND EQUIPMENT: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
respective assets, which range from five to fifty years.
FORECLOSED REAL ESTATE: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences, attributable to differences between the financial statement
carrying amounts of existing assets and labilities and their respective income
tax bases. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENTS OF CASH FLOWS: For purposes of the cash flows, cash and amounts due
- ------------------------
from depository institutions and interest-bearing deposits in other banks with a
maturity of three months or less at date of purchase are considered cash
equivalents.
F-7
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
RISK AND UNCERTAINTIES: The Association is a community-oriented financial
- ----------------------
institution which provides traditional financial services within the areas it
serves. The Association is engaged primarily in the business of attracting
deposits from the general public using these funds to originate one- to four-
family residential mortgage loans located primarily in Northeastern Missouri.
The Association's principal market area consists of rural communities and
substantially all of the Association's loans are to residents of or secured by
properties located in its principal lending area. Accordingly, the ultimate
collectibility of the Association's loan portfolio is dependent upon market
conditions in that area. This geographic concentration is considered in
management's establishment of the allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the periods covered. Actual results could
differ significantly from these estimates and assumptions.
In the normal course of its business, the Association encounters two significant
types of risk, economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The
Association is subject to interest rate risk to the degree that its interest-
bearing liabilities mature or reprice more or less rapidly, or on a different
basis, than its interest-earning assets. Credit risk is the risk of default on
the Association's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Association.
The Association is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Association also undergoes periodic examinations by the regulatory agencies,
which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances and operating restrictions resulting from
the regulators' judgements based on information available to them at the time of
their examination.
NEW ACCOUNTING STANDARDS: In June 1997, the Financial Accounting Standards
- ------------------------
Board ("FASB") issued SFAS No. 130, Reporting of Comprehensive Income and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in a full set of general purpose financial statements. An enterprise
shall continue to display an amount for net income but will also be required to
display other comprehensive income, which includes other changes in equity.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, to revise present disclosure
requirements applicable to those benefits. Although the standard does not
change the measurement or recognition requirements for postretirement benefit
plans, it standardizes the disclosure requirements; requires additional
information on changes in benefit obligations and fair values of plan assets;
and eliminates certain present disclosure requirements.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Association in the
year ending September 30, 1999. Management does not expect that these standards
will significantly affect the Association's financial reporting.
F-8
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 standardizes the accounting for Derivative
instruments, including certain derivative instruments embedded in other
contracts, Under SFAS No. 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of the other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the
accounting for fair value and cash flow hedges. If the derivative instrument is
not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
SFAS No. 133 is effective for the financial statements issued for periods
beginning after June 15, 1999. The Association is currently evaluating the
effects of SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise. SFAS 134 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities and No. 115, Accounting for Certain
Investments in Debt and Equity Securities for years beginning after December 15,
1998. The Association currently conducts no mortgage-banking activities.
NOTE B--INVESTMENT SECURITIES
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
---------- ----------- ------- ----------
Available-for-sale:
U.S. Government agency obligations
September 30, 1998 $7,037,978 $48,699 $ --- $7,086,677
========== ======= ======= ==========
September 30, 1997 $8,550,809 $19,936 $61,764 $8,508,981
========== ======= ======= ==========
Held-to-Maturity:
September 30, 1998
U.S. Government agency obligations $4,959,029 $35,900 $ --- $4,994,929
State and local obligations 630,000 14,920 --- 644,920
---------- ------- ------- ----------
$5,589,029 $50,820 $ --- $5,639,849
========== ======= ======= ==========
September 30, 1997
U.S. Government agency obligations $4,403,378 $20,080 $18,435 $4,405,023
State and local obligations 690,000 11,876 --- 701,876
---------- ------- ------- ----------
$5,093,378 $31,956 $18,435 $5,106,899
========== ======= ======= ==========
F-9
NOTE B--INVESTMENT SECURITIES - CONT'D
The scheduled contractual maturities of debt securities at September 30, 1998,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Amounts maturing:
One year or less $ --- $ --- $ 695,114 $ 697,036
After one year through five years 3,296,925 3,318,965 1,362,780 1,383,784
After five years through ten years 3,741,053 3,767,712 3,531,135 3,559.029
---------- ---------- ---------- ----------
$7,037,978 $7,086,677 $5,589,029 $5,639,849
========== ========== ========== ==========
During 1998 and 1997, securities available-for-sale were called for redemption
with proceeds of $2,300,000 and $200,000, respectively, resulting in gross
realized losses of $3,670 and $1,180 in 1998 and 1997, respectively.
During 1998 and 1997, securities held-to-maturity were called for redemption
with proceeds of $950,000 and $500,000, respectively, resulting in a gross
realized gain of $1,614 in 1998 and a gross realized loss of $12,835 in 1997.
Investment securities were pledged to secure deposits as required or permitted
by law, with an amortized cost of $1,399,344 and fair value of $1,407,749 at
September 30, 1998.
NOTE C--MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held-to-maturity consist of the following:
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
---------- --------- ------- ----------
September 30, 1998
GNMA $ 460,807 $16,747 $ --- $ 477,554
FNMA 1,522,667 14,856 11,135 1,526,388
FHLMC 572,339 21,264 --- 593,603
SBA 28,563 --- 2,109 26,454
---------- ------- ------- ----------
$2,584,376 $52,867 $13,244 $2,623,999
========== ======= ======= ==========
September 30, 1997
GNMA $ 583,162 $27,118 $ --- $ 610,280
FNMA 1,380,429 12,646 21,317 1,371,758
FHLMC 803,687 25,534 --- 829,221
SBA 60,254 --- 942 59,312
---------- ------- ------- ----------
$2,827,532 $65,298 $22,259 $2,870,571
========== ======= ======= ==========
F-10
NOTE C--MORTGAGE-BACKED SECURITIES - CONT'D
The amortized cost and fair value of mortgage-backed securities at September 30,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
---------- ----------
Amounts maturing:
After one year through five years $ 337,380 $ 342,174
After five through ten years 22,863 24,015
After ten years 2,224,133 2,257,810
---------- ----------
$2,584,376 $2,623,999
========== ==========
Mortgage-backed securities were pledged to secure deposits as required or
permitted by law, with an amortized cost of $854,291 and fair value of $871,958
at September 30, 1998.
NOTE D--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
1998 1997
----------- -----------
Mortgage loans:
One- to four-family residences $36,801,348 $34,580,609
Multi-family 806,042 958,167
Commercial 2,072,984 1,833,741
Construction 875,915 1,452,446
Land 419,577 289,684
----------- -----------
40,975,866 39,114,647
Less undisbursed portion of mortgage loans 592,430 898,685
----------- -----------
40,383,436 38,215,962
Consumer and other loans:
Savings 305,287 303,853
Education 97,975 123,720
Other 10,237 13,100
----------- -----------
413,499 440,673
----------- -----------
40,796,935 38,656,635
Less:
Net deferred loan-origination fees 4,187 7,175
Allowance for loan losses 280,000 255,000
----------- -----------
284,187 262,175
----------- -----------
Loans receivable $40,512,748 $38,394,460
=========== ===========
F-11
NOTE D--LOANS RECEIVABLE - CONT'D
In the normal course of business, the Association has made loans to its
directors and officers. In the opinion of management, related party loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of loans outstanding to directors, officers and
employees total approximately $756,000 and $572,000 at September 30, 1998 and
1997, respectively.
The Association had loans serviced by others amounting to $8,568,593 and
$8,410,910 at September 30, 1998 and 1997, respectively.
Allowance for loan losses are as follows:
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997
----------- ----------
Balance, beginning of period $255,000 $234,187
Provision for loan losses 25,000 20,813
-------- --------
BALANCE, END OF PERIOD $280,000 $255,000
======== ========
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at September 30, 1998 and 1997, was $-0- and $12,165,
respectively. The average recorded investment in impaired loans during the year
ended September 30, 1998 and 1997 was $12,165 and $130,772, respectively. The
related interest income that would have been recorded had the loans been current
in accordance with their original terms amounted to approximately $2,000 and
$34,000 at September 30, 1998 and 1997, respectively. The amount of interest
included in interest income on such loans for the year ended September 30, 1998
and 1997, amounted to approximately $-0- and $34,000, respectively.
NOTE E--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at September 30:
1998 1997
-------- --------
Loans $243,378 $234,682
Investments securities 181,689 191,005
Mortgage-backed securities 18,842 21,268
-------- --------
$443,909 $446,955
======== ========
F-12
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at September 30:
1998 1997
---------- ----------
Land $ 82,132 $ 82,132
Building and improvements 569,052 580,651
Furniture and equipment 380,078 353,579
---------- ----------
1,031,262 1,016,362
Less accumulated depreciation and amortization 468,897 525,111
---------- ----------
$ 562,365 $ 491,251
========== ==========
NOTE G--DEPOSITS
Deposit account balances are summarized as follows at September 30:
WEIGHTED
AVERAGE RATE 1998 1997
AT SEPTEMBER 30, -------------------- ----------------------
1998 AMOUNT % AMOUNT %
---------------- ---------- -------- ----------- --------
NOW 2.53% 1,791,576 3.4 1,882,369 3.7
Money Market 3.91 1,275,154 2.4 1,028,585 2.0
Passbook savings 3.03 8,421,794 16.0 8,201,646 15.9
----------- ----- ----------- -----
3.05 11,488,524 21.8 11,112,600 21.6
Certificates of deposit:
4.00 to 4.99% 4.74 3,148,195 6.0 444,405 .9
5.00 to 5.99% 5.46 30,808,573 58.4 24,478,037 47.6
6.00 to 6.99% 6.36 7,278,476 13.8 15,376,772 29.9
----------- ----- ----------- -----
5.56 41,235,244 78.2 40,299,214 78.4
----------- ----- ----------- -----
5.02% $52,723,768 100.0% $51,411,814 100.0%
==== =========== ===== =========== =====
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $2,166,000 and $1,653,000 at September 30, 1998 and
1997, respectively. Deposits over $100,000 are not federally insured.
The Association held deposits of approximately $1,649,000 and $1,556,000 for its
directors, officers and employees at September, 1998 and 1997, respectively.
F-13
NOTE G--DEPOSITS - CONT'D
At September 30, 1998, contractual maturities of certificates of deposit are as
follows:
STATED YEAR ENDED SEPTEMBER 30
INTEREST RATE 1999 2000 2001 2002 2003
- --------------- ----------- ---------- ---------- ---------- ----------
4.00 to 4.99% $ 3,148,195 $ --- $ --- $ --- $ ---
5.00 to 5.99% 19,108,800 3,685,099 5,724,534 1,039,357 1,250,783
6.00 to 6.99% 11,992 2,245,170 2,028,311 1,364,091 1,628,912
----------- ---------- ---------- ---------- ----------
$22,268,987 $5,930,269 $7,752,845 $2,403,448 $2,879,695
=========== ========== ========== ========== ==========
Interest expense on deposits are as follows:
YEAR ENDED SEPTEMBER 30
1998 1997
---------- ----------
NOW, Money Market and
Passbook savings accounts $ 328,833 $ 342,098
Certificate accounts 2,341,025 2,277,827
---------- ----------
$2,669,858 $2,619,925
========== ==========
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB, with weighted average interest rates and scheduled
maturities, consist of the following at September 30:
1998 1997
-------- ----------
6.10% due on or before September 24, 1998 $ --- $1,000,000
5.74% due on or before January 6, 1999 500,000 ---
-------- ----------
$500,000 $1,000,000
======== ==========
Maturities of FHLB advances are all due within one year.
The Association has signed a blanket pledge agreement with the FHLB under which
it can draw advances of unspecified amounts. The Association must hold an
unencumbered portfolio of eligible one- to four-family residential mortgages
with a book value of not less than 150% of the indebtedness.
F-14
NOTE I--INCOME TAXES
Components of income tax expense are as follows:
YEAR ENDED SEPTEMBER 30
1998 1997
--------- ---------
Current $159,000 $193,500
Deferred benefit (10,000) (11,500)
-------- --------
$149,000 $182,000
======== ========
In addition, the Association recorded deferred income tax to equity relating to
unrealized gains and losses on investment securities available-for-sale of
$33,595 and $40,167 for the years ended September 30, 1998 and 1997,
respectively.
The provision for income taxes as shown on the consolidated statements of income
differs from amounts computed by applying the statutory federal income tax rate
of 34% to income before taxes as follows:
YEAR ENDED SEPTEMBER 30
1998 1997
-----------------------------------
Income tax expense at statutory rates $144,348 34.0% $174,724 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 14,414 3.4 17,190 3.3
Tax exempt income, net of related expenses (9,549) (2.2) (9,221) (1.8)
Other, net (213) (.1) (693) (.1)
-------- ---- -------- ----
$149,000 35.1% $182,000 35.4%
======== ==== ======== ====
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities included in other
liabilities at September 30 are as follows:
1998 1997
--------- ---------
Deferred tax assets
Allowance for loan losses $ 37,100 $ 15,000
Deferred loan fees 1,600 2,600
Unrealized loss on available-for-sale securities --- 15,528
Deferred tax liabilities
Depreciation (35,030) (23,965)
FHLB stock dividend (45,200) (45,200)
Unrealized gain on available-for-sale securities (18,067) ---
-------- --------
NET DEFERRED TAX LIABILITY $(59,597) $(36,037)
======== ========
F-15
NOTE I--INCOME TAXES - CONT'D
During 1996, the Small Business Job Protection Act (the "Act") was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions
for thrift institutions for tax years beginning after December 31, 1995. The
Act provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture
over a six year period. The Association has provided for deferred income taxes
for the reserve recapture after 1987; therefore the impact of this legislation
will not have a material effect on the Association's financial statements.
Prior to the enactment of the Act, the Association at September 30, 1998,
accumulated approximately $1,053,000 for which no deferred income tax liability
has been recognized. This amount represents an allocation of income to bad debt
deductions for income tax purposes only. If any of this amount is used other
than to absorb loan losses (which is not anticipated), the amount will be
subject to income tax at the current corporate rates.
NOTE J--REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Association
capital amounts and classification are also subject to qualitative judgement by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth below)
of total and Tier I capital to risk-weighted assets, and Tier I capital to
average assets (all as defined in the regulations). Management believes, as of
September 30, 1998, that the Association meets all capital adequacy requirements
to which it is subject.
Based on its regulatory capital ratios at September 30, 1998, the Association is
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. The Association's actual capital amounts and ratios
also presented in the table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
As of September 30, 1998
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) $6,297 22.30% or equal to) 2,259 8.0% or equal to) 2,824 10.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets 6,017 21.31 or equal to) 1,130 4.0 or equal to) 3,566 6.0
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 6,017 10.13 or equal to) 1,783 3.0 or equal to) 2,971 5.0
Tangible Capital (greater than (greater than
(to Adjusted Assets) 6,017 10.13 or equal to) 891 1.5 or equal to) N/A N/A
F-16
NOTE J--REGULATORY CAPITAL REQUIREMENTS - CONT'D
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
As of September 30, 1997
Total Risk-Based Capital (greater than (greater than
(to Risk Weighted Assets) $5,997 22.25% or equal to) 2,156 8.0% or equal to) 2,695 10.0%
Tier 1 Capital (greater than (greater than
(to Risk Weighted Assets 5,742 21.30 or equal to) 1,078 4.0 or equal to) 3,509 6.0
Tier 1 Capital (greater than (greater than
(to Adjusted Assets) 5,742 9.82 or equal to) 1,754 3.0 or equal to) 2,924 5.0
Tangible Capital (greater than (greater than
(to Adjusted Assets) 5,742 9.82 or equal to) 877 1.5 or equal to) N/A N/A
NOTE K--EMPLOYEE BENEFITS
The Association has a 401(k) salary reduction plan that covers all employees
meeting specific age and length of service requirements. Under the plan, the
Association matches participant contributions at the rate of 50% up to 4% of the
participants' annual compensation. Pension costs recognized under the plan
totalled $8,903, and $8,660 for the years ended September 30, 1998 and 1997,
respectively.
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet customer financing needs. These
financial instruments consist principally of commitments to extend credit. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Association's
exposure to credit loss in the event of nonperformance by the other party is
represented by the contractual amount of those instruments. The Association
does not generally require collateral or other security on unfunded loan
commitments until such time that loans are funded.
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. The
Association evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Association upon
extension of credit, is based on management's credit evaluation of the
counterparty. Such collateral consists primarily of residential properties.
The Association had the following outstanding commitments at September 30, 1998:
Undisbursed portion of mortgage loans $ 592,430
Commitments to originate mortgage loans with variable or pending interest rates 502,700
Commitments to originate mortgage loans with fixed interest rates ranging
from 7.00% to 7.50% 126,750
Undisbursed portion of nonmortgage loans 27,847
----------
TOTAL $1,249,727
==========
F-17
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - CONT'D
At September 30, 1998, the Association had amounts on deposit at banks and
federal agencies in excess of federally insured limits of approximately
$2,245,000.
NOTE M--PLAN OF CONVERSION
On September 24, 1998, the Association's Board of Directors adopted a plan of
conversion ("Plan") to convert from a federally chartered mutual savings bank to
a federally chartered stock savings bank, subject to approval by the
Associations' members. The Plan, which includes the formation of a Holding
Bank, is subject to approval by the OTS and includes the filing of a
registration statement with the Securities and Exchange Commission.
The Plan is expected to be accomplished by the sale of common stock of the
Holding Bank and the acquisition of all of the capital stock of the Association
by the Holding Bank in exchange for a portion of the net proceeds of the
conversion. The Holding Bank's common stock will be offered to various eligible
account holders, to the Association's Employee Stock Ownership Plan, to other
supplemental eligible depositors and to other members of the Association in a
subscription offering. Shares of the Holding Bank's common stock not subscribed
for in the subscription offering, if any, may be offered for sale in a community
offering, as determined by the Board of Directors of the Association.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its retained earnings as reflected in the latest statement
of financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders (collectively,"eligible depositors") who
continue to maintain their deposit accounts in the Association after conversion.
In the event of a complete liquidation of the Association (and only in such
event), eligible depositors who continue to maintain accounts shall be entitled
to receive distribution from the liquidation account before any liquidation may
be made with respect to common stock.
The Association may not declare or pay a cash dividend if the effect thereof
would cause its equity to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements imposed by the OTS.
Conversion costs will be deducted from the proceeds of sale of common stock and
recorded as a reduction to equity. If the conversion is not completed, all costs
will be charged to expense. As of September 30, 1998, the Association has
incurred costs related to the conversion of $18,655.
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No, 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of estimated fair value for financial instruments held by the
Association. Fair value estimates of the Association's financial instruments as
of September 30, 1998 and 1997, including methods and assumptions utilized, are
set forth below.
The following methods and assumptions were used by the Association in estimating
fair values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts approximate
fair value.
F-18
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
Investment and mortgage-backed securities: Fair value is determined by
reference to quoted market prices.
Stock in FHLB: This stock is a restricted asset and its carrying value is a
reasonable estimate of fair value.
Loans receivable: The fair value of fixed rate first mortgage loans is
estimated by using discounted cash flow analyses, using interest rates currently
offered by the Association for loans with similar terms to borrowers of similar
credit quality. The carrying value of variable rate first mortgage loans
approximate fair value. The fair value of consumer loans is calculated by using
the discounted cash flow based upon the current market for like instruments.
Fair values for impaired loans are estimated using discounted cash flow
analyses.
Accrued interest receivable: The carrying value approximates fair value.
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from borrowers for taxes and insurance: The carrying value
approximates fair value.
All other liabilities: The carrying value approximates fair value.
Off-balance sheet instruments: The fair value of a loan commitment and a letter
of credit is determined based on the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreement and
the present credit worthiness of the counterparties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Association's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
The valuation techniques employed above involve uncertainties and are affected
by assumptions used and judgements regarding prepayments, credit risk, discount
rates, cash flows and other factors. Changes in assumptions could significantly
affect the reported fair value.
In addition, the fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Also, the fair value estimates do not include
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market. The amounts
at September 30, 1998 and 1997, are as follows:
F-19
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
1998 1997
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from depository institutions $ 2,268 $ 2,268 $ 2,146 $ 2,146
Investment securities - Available for sale 7,087 7,087 8,509 8,509
Investment securities - Held-to-maturity 5,589 5,640 5,093 5,107
Mortgage-backed securities - Held-to-maturity 2,584 2,624 2,828 2,871
Stock in FHLB 374 374 480 480
Loans receivable, net 40,513 40,522 38,394 38,398
Accrued interest receivable 444 444 447 447
LIABILITIES
Transaction accounts 11,489 11,489 11,113 11,113
Certificates of deposit 41,235 41,365 40,299 40,403
Advances from Federal Home Loan Bank 500 500 1,000 1,000
Advances from borrowers for property taxes
and insurance 50 50 54 54
NOTE O--PRIOR-PERIOD ADJUSTMENT
The Association retroactively changed its method of computing deferred income
taxes to include the allowances for loan losses as a component of deferred
income taxes. The effect of this adjustment was to record a deferred income tax
asset and an increase in equity of $87,000.
F-20
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by PFSB Bancorp, Inc. or Palmyra Saving and Building Association,
F.A. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby to any person or in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of PFSB Bancorp, Inc. or Palmyra Saving and Building
Association, F.A. since any of the dates as of which information is furnished
herein or since the date hereof.
[Logo for PFSB Bancorp, Inc.]
(Proposed Holding Company for
Palmyra Saving and Building Association, F.A.,
to be known as Palmyra Savings)
637,500 to 862,500 Shares of
Common Stock
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
______ __, 1999
UNTIL THE LATER OF _______, 1999, OR 90 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS THAT BUY,
SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In accordance with the General and Business Corporations Law of the State of
Missouri (being Chapter 351 of the Missouri Statutes), Article IX of the
Registrant's Articles of Incorporation provide as follows:
ARTICLE IX - INDEMNIFICATION
9.1 The Corporation shall and does hereby indemnify any person who is or
was a Director or executive officer of the Corporation or any subsidiary against
any and all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement and reasonably incurred by such person in connection with any
threatened, pending or completed civil, criminal, administrative or
investigative action, suit, proceeding or claim (including any action by or in
the right of the Corporation or a subsidiary) by reason of the fact that such
person is or was serving in such capacity; provided, however,, that no such
-------- --------
person shall be entitled to any indemnification pursuant to this Article IX on
account of (i) conduct which is finally adjudged to have been knowingly
fraudulent or deliberately dishonest or to have constituted willful misconduct,
or (ii) an accounting for profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934, as amended from time to time, or pursuant to a successor
statute or regulation.
9.2 The Corporation may, to the extent that the Board of Directors deems
appropriate and as set forth in a Bylaw or authorizing resolution, indemnify any
person who is or was a non-executive officer, or employee or agent of the
Corporation or any subsidiary or who is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including an employee
benefit plan) against any and all expenses (including attorneys' fees),
judgements, fines and amounts paid in settlement and reasonably incurred by such
person in connection with any threatened, pending or completed civil, criminal,
administrative or investigative action, suit, proceeding or claim (including an
action by or in the right of the Corporation or a subsidiary) by reason of the
fact that such person is or was serving in such capacity; provided, however,
-------- -------
that no such person shall be entitled to any indemnification pursuant to this
Section 9.2 on account of (i) conduct which is finally adjudged to have been
knowingly fraudulent or deliberately dishonest or to have constituted willful
misconduct, or (ii) an accounting for profits pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended from time to time, or pursuant to a
successor statute or regulation.
9.3 The Corporation may, to the extent that the Board of Directors deems
appropriate, make advances of expenses, including attorneys' fees, incurred
prior to the final disposition of a civil, criminal, administrative or
investigative action, suit, proceeding or claim (including an action by or in
the right of the Corporation or a subsidiary) to any person to whom
indemnification is or may be available under this Article IX; provided, however,
-------- -------
that prior to making any advances, the Corporation shall receive a written
undertaking by or on behalf of such person to repay such amounts advanced in the
event that it shall be ultimately determined that such person is not entitled to
such indemnification.
9.4 The indemnification and other rights provided by this Article IX shall
not be deemed exclusive of any other rights to which a person to whom
indemnification is or otherwise may be available (under these Articles of
Incorporation or the Bylaws or any agreement or vote of shareholders or
disinterested Directors or otherwise), may be entitled. The Corporation is
authorized to purchase and maintain insurance on behalf of the Corporation or
any person to whom indemnification is or may be available against any liability
asserted against such person in, or arising out of, such person's status as
Director, officer, employee or agent of the Corporation, any of its subsidiaries
or another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan) which such person is serving at the request
of the Corporation.
9.5 Each person to whom indemnification is granted under this Article IX
is entitled to rely upon the indemnification and other rights granted hereby as
a contract with the Corporation and such person and such person's heirs,
executors, administrators and estate shall be entitled to enforce against the
Corporation all indemnification and other rights granted to such person by
Sections 9.1 and 9.3 and this Article IX. The indemnification and other rights
granted by Sections 9.1 and 9.3 and this Section 9.5 shall survive amendment,
modification or repeal of this Article IX, and no such amendment, modification
or repeal shall act to reduce, terminate or otherwise adversely affect the
rights to indemnification granted hereby, with respect to any expenses,
judgments, fines and
amounts paid in settlement incurred by a person to whom indemnification is
granted under this Article IX with respect to an action, suit, proceeding or
claim that arises out of acts or omissions of such person that occurred prior to
the effective date of such amendment, modification or repeal.
Any indemnification granted by the Board of Directors pursuant this Article
IX shall inure to the person to whom the indemnification is granted and such
person's heirs, executors, administrators and estate; provided however, that
-------- -------
such indemnification may be changed, modified or repealed, at any time or from
time to time, at the discretion of the Board of Directors, and the survival of
such indemnification shall be in accordance with terms determined by the Board
of Directors.
9.6 For the purposes of this Article IX, "subsidiary" shall mean any
corporation, partnership, joint venture, trust or other enterprise of which a
majority of the voting power, equity or ownership interest is directly or
indirectly owned by the Corporation.
Item 25. Other Expenses of Issuance and Distribution.
SEC filing(1)................................................ $ 2,758
OTS filing fee............................................... 8,400
NASD filing fee(1)........................................... 1,490
Printing, postage and mailing................................ 75,000
Legal fees and expenses (including underwriter's
counsel)................................................ 160,000
Accounting fees and expenses................................. 70,000
Appraisers' fees and expenses (including
business plan).......................................... 30,000
Marketing fees and selling commissions....................... 135,000
Underwriter's expenses....................................... 12,500
Conversion agent fees and expenses........................... 5,000
Certificate printing......................................... 1,500
Miscellaneous................................................ 28,352
--------
TOTAL........................................................ $535,000
========
______________________
(1) Unless otherwise noted, based upon the registration and issuance of 991,875
shares at $10.00 per share.
Item 26. Recent Sales of Unregistered Securities.
None.
Item 27. Exhibits.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Palmyra Saving and Building Association, F.A. and
Trident Securities, Inc.**
1.2 Draft Form of Agency Agreement*
2.0 Plan of Conversion (including the Stock Charter and Bylaws of Palmyra
Savings)**
3.1 Articles of Incorporation of PFSB Bancorp, Inc.**
3.2 Bylaws of PFSB Bancorp, Inc.**
3.3 Stock Charter and Bylaws of Palmyra Savings
(See Exhibit 2.0 hereto)**
4.0 Draft Stock Certificate of PFSB Bancorp, Inc.**
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality **
8.1 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters **
8.2 Draft Opinion of Moore, Horton & Carlson, P.C. re: State Tax Matters **
10.1 Form of Palmyra Savings Employee Stock Ownership Plan and Trust Agreement
**
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents **
10.3 Form of Palmyra Savings and PFSB Bancorp, Inc. Employment Agreement **
10.4 Form of Palmyra Savings Employee Severance Compensation Plan **
16.0 Letter on change in certifying accountant **
23.1 Consent of Muldoon, Murphy & Faucette **
23.2 Consent of Moore, Horton & Carlson, P.C.**
23.4 Consent and Subscription Rights Opinion of R.P. Financial, LC.**
24.1 Powers of Attorney **
27.0 Financial Data Schedule **
99.1 Appraisal Report of R.P. Financial, LC. (P)
- --------------------------------------
*To be filed by amendment
** Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
Item 28. Undertakings.
The small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration state ment of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Palmyra,
State of Missouri, on December __, 1998.
PFSB Bancorp, Inc.
By:
----------------------------------------------------
Eldon R. Mette
President and Director
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Name Title Date
---- ----- ----
President and Director December __, 1998
- ------------------------------ (principal executive
Eldon R. Mette officer)
Vice President, Secretary December __, 1998
- ---------------------------- and Treasurer
Ronald L. Nelson (principal accounting and
financial officer)
Chairman of the Board December __, 1998
- --------------------------
L. Edward Schaeffer
Director December __, 1998
- ----------------------------
Glenn J. Maddox
Director December __, 1998
- -------------------------------
Albert E. Davis
Director December __, 1998
- ---------------------------
Robert M. Dearing
Director December __, 1998
- --------------------------
James D. Lovegreen
Director December __, 1998
- -----------------------------
Donald L. Slavin
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amended
Registration Statement to be signed on its behalf by the undersigned, in the
City of Palmyra, State of Missouri, on January 19, 1999.
PFSB Bancorp, Inc.
/s/ Eldon R. Mette
By: ________________________________________
Eldon R. Mette
President and Director
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Name Title Date
---- ----- ----
/s/ Eldon R. Mette President and Director January 19, 1999
- -------------------------- (principal executive
Eldon R. Mette officer)
* Vice President, Secretary
- -------------------------- and Treasurer
(principal accounting and
financial officer)
* Chairman of the Board
- --------------------------
* Director
- --------------------------
* Director
- -------------------------
*
- ------------------------- Director
*
- ------------------------- Director
*
- ------------------------- Director
- ---------------------
*Pursuant to the Power of Attorney filed as Exhibit 24.1 to the Registration
Statement on Form SB-2 for PFSB Bancorp, Inc. on December 18, 1998.
/s/ Eldon R. Mette
- ------------------------- President and Director January 19, 1999
Eldon R. Mette
As filed with the Securities and Exchange Commission on January 19, 1999
Registration No. 333-69191
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
PFSB BANCORP, INC.
(Exact name of registrant as specified in its certificate of incorporation)
================================================================================
TABLE OF CONTENTS
List of Exhibits (filed herewith unless otherwise noted)
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Palmyra Saving and Building Association,
F.A. and Trident Securities, Inc.**
1.2 Draft Form of Agency Agreement*
2.0 Plan of Conversion (including the Stock Charter and Bylaws of Palmyra
Savings)**
3.1 Articles of Incorporation of PFSB Bancorp, Inc.**
3.2 Bylaws of PFSB Bancorp, Inc.**
3.3 Stock Charter and Bylaws of Palmyra Savings
(See Exhibit 2.0 hereto)**
4.0 Draft Stock Certificate of PFSB Bancorp, Inc.**
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality **
8.1 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax
Matters **
8.2 Draft Opinion of Moore, Horton & Carlson, P.C. re: State Tax
Matters **
10.1 Form of Palmyra Savings Employee Stock Ownership Plan and Trust
Agreement **
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents **
10.3 Form of Palmyra Savings and PFSB Bancorp, Inc. Employment Agreement **
10.4 Form of Palmyra Savings Employee Severance Compensation Plan **
16.0 Letter on change in certifying accountant **
23.1 Consent of Muldoon, Murphy & Faucette **
23.2 Consent of Moore, Horton & Carlson, P.C.**
23.4 Consent and Subscription Rights Opinion of R.P. Financial, LC.**
24.1 Powers of Attorney **
27.0 Financial Data Schedule **
99.1 Appraisal Report of R.P. Financial, LC. (P)
- --------------------------------------
* To be filed by amendment
** Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.