Business of the Company and the Bank
On November 23, 1994 Perry County Savings Bank converted its charter to a
federally chartered savings bank and changed its name to Perry County Savings
Bank, FSB (Bank). On February 10, 1995, Perry County Savings Bank, FSB
converted from mutual to stock form and became a wholly-owned subsidiary of
a newly formed Missouri holding company, Perry County Financial Corporation
(Company). The Company issued 856,452 shares of common stock at $10 per share in
conjunction with the offering. Net proceeds from the sale of common stock in
the offering were $7,267,041, after deduction of conversion costs of
$612,319, and unearned compensation related to shares issued to the Employee
Stock Ownership Plan (ESOP). The Company retained 50% of the net conversion
proceeds, less the funds used to originate a loan to the ESOP for the
purchase of shares of common stock, and used the balance of the net proceeds
to purchase all of the stock of the Bank in the conversion.
The Company has no significant assets other than common stock of the Bank, and
the loan to the ESOP, and net proceeds retained by the Company following the
conversion. The Company's principal business is the business of the Bank.
The Bank's deposit accounts are insured up to a maximum of $100,000 by the
Savings Association Insurance Fund (SAIF), which is administered by the Federal
Deposit Insurance Corporation (FDIC). The Bank's primary business, as conducted
through its office located in Perryville, Missouri, is the origination of
mortgage loans secured by one- to four-familyresidences located primarily in
Perry County. Lending activities are funded through attraction of deposit
accounts, consisting of certificate accounts, money-market deposit accounts,
savings accounts and NOW accounts. To a lesser extent, the Bank also
originates mortgage loans on commercial real estate, construction loans on
single-family residences and commercial properties, and loans secured by deposit
accounts.
Common Stock
The common stock of Perry County Financial Corporation is traded on the NASDAQ
Small Cap Market under the symbol "PCBC". The following table sets forth the
market price and dividend information on the Company's common stock:
Quarter Ended High Low Dividend
December 31, 1997 $25.00 $20.50 $.00
March 31, 1998 $24.50 $23.25 $.50
June 30, 1998 $24.13 $22.75 $.00
September 30, 1998 $22.94 $18.00 $.00
December 31, 1998 $20.75 $19.50 $.00
March 31, 1999 $21.50 $19.88 $.50
June 30, 1999 $21.50 $19.63 $.00
September 30, 1999 $20.13 $19.00 $.00
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in note 10 of
the Notes to Consolidated Financial Statements. As of December 1, 1999, the
Company had approximately 400 stockholders of record (which includes nominees
for beneficial owners holding shares in "street name").
1
Selected Financial Highlights
Financial Condition Data:
At September 30,
1999 1998 1997 1996 1995
(Dollars in Thousands)
Assets $ 96,617 96,807 84,135 81,149 76,421
Cash and cash equivalents
and securities $ 41,051 45,821 38,565 38,150 36,377
Mortgage-backed securities $ 36,492 34,129 30,631 29,819 31,190
Loans receivable, net $ 16,601 15,764 13,910 11,718 7,810
Deposits $ 67,747 64,151 61,071 62,712 60,178
Advances from FHLB $ 15,000 15,000 6,500 2,500 -
Stockholders' equity $ 13,217 16,879 16,049 15,072 15,683
Full service offices open 1 1 1 1 1
Operating Data:
For the Year Ended September 30,
1999 1998 1997 1996 1995
(Dollars in Thousands)
Interest income $ 6,463 5,970 5,533 5,295 4,839
Interest expense (4,166) (3,754) (3,239) (3,121) (2,859)
Net interest income 2,297 2,216 2,294 2,174 1,980
Provision for loan losses (5) - - (15) -
Net interest income after
provision for loan losses 2,292 2,216 2,294 2,159 1,980
Noninterest income 139 39 170 145 50
Noninterest expense (935) (922) (889) (1,552) (862)
Earnings before income taxes 1,496 1,333 1,575 752 1,168
Income taxes (580) (526) (600) (296) (432)
Net earnings $ 916 807 975 456 736
Diluted earnings per share $ 1.22 1.03 1.26 .58 (1)
Dividends per share $ .50 .50 .40 .30 .00
(1)Diluted earnings per share is not meaningful since common stock was issued
on February 10, 1995.
2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The business of the Bank has been that of a financial intermediary consisting
primarily of attracting deposits from the general public and using such
deposits to originate mortgage loans secured by one-to four-family residences
and, to a lesser extent, commercial real estate loans, real estate construction
loans and loans secured by deposit accounts. The Bank's revenues are derived
principally from interest earned on loans, investments, and mortgage-backed
securities (MBSs). The operations of the Bank are influenced significantly
by general economic conditions and by policies of financial institution
regulatory agencies, including the Office of Thrift Supervision (OTS) and the
Federal Deposit Insurance Corporation (FDIC). The Bank's cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered.
Certain statements in this report which relate to the Company's plans,
objectives or future performance may be deemed to be forward-looking
statements within the meaning of Private Securities Litigation Act of 1995.
Such statements are based on management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting the Company's business and prospects is
contained in periodic filings with the Securities and Exchange Commission.
Asset and Liability Management and Market Risk
The Bank's net interest income is dependent primarily upon the difference or
spread between the average yield earned on MBSs, loans and securities and the
average rate paid on deposits and advances from the Federal Home Loan Bank
(FHLB), as well as the relative amounts of such assets and liabilities. The
Bank, as other thrift institutions, is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
times, or on a different basis, than its interest-earning assets.
Qualitative Disclosures of Market Risk
The Bank's principal financial objective is to achieve long-term profitability
while limiting its exposure to fluctuating interest rates. The Bank has an
exposure to interest rate risk, including short-term U.S. prime interest
rates. The Bank has employed various strategies intended to limit the adverse
effect of interest rate risk on future operations by providing a better match
between the interest rate sensitivity of its assets and liabilities, or
maintaining the interest rate spread.
Although the Bank has originated adjustable rate mortgage loans (AMLs) in the
past, during the years ended September 30, 1999, 1998 and 1997, the Bank
originated $6.6 million, $6.9 million and $5.2 million, respectively, of
long-term fixed-rate, mortgage loans. The Bank also purchased $11.3 million
during 1999 and $10.0 million during 1998 of long-term, fixed rate MBSs.
The Bank expanded the "leveraged investment" program during the year ended
September 30, 1999. Long-term Federal agency obligations, which are callable
in the near term, are purchased with intermediate-term FHLB advances (or
other available funds). All investment securities at September 30,1999 are
callable. The Bank is able to earn a higher interest rate spread since the
market prices callable obligations differently than noncallable obligations
with otherwise identical terms. Leveraged investments usually result in
increased interest rate risk. The effect on net interest income is positive
unless rates change significantly. If rates rise substantially, the long-
term security is usually not called. Interest rates increased during the
fiscal year. Because of market pricing, the Bank recorded unrealized
3
losses of $2.4 million, net of tax, even though the interest rate spread
remains positive. The Bank expects to purchase short and intermediate term
securities and MBSs in the future, and reduce purchases of long-term
financial instruments.
Quantitative Disclosures of Market Risk
The Bank does not purchase derivative financial instruments or other financial
instruments for trading purposes. Further, the Bank is not subject to any
foreign currency exchange rate risk, commodity price risk or equity price
risk. The Bank is subject to interest rate risk.
The OTS provides a net market value methodology to measure the interest rate
risk exposure of thrift institutions. This exposure is a measure of the
potential decline in the net portfolio value (NPV) of the institution based
upon the effect of an assumed 200 basis point increase or decrease in interest
rates. NPV is the present value of the expected net cash flows from the
institution's financial instruments (assets, liabilities and off-balance
sheet contracts). Loans, deposits, advances and investments are valued
taking into consideration similar maturities, related discount rates and
applicable prepayment assumptions. 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).
The following table sets forth as of September 30, 1999 the OTS estimated
changes in fair value of equity based on the indicated interest rate
environments:
Change NPV as % of PV
(In Basis Points) Estimated Net Portfolio Value of Assets
in Interest Rates $ Amount $ Change % Change NPV Ratio BP Change
(Dollars in Thousands)
+300 $ 1,043 $ (14,300) (93)% 1.28% (1,430)
+200 5,323 (10,200) (65)% 6.13% (945)
+100 10,125 (5,218) (34)% 10.95% (463)
0 15,343 15.57%
(100) 15,896 553 4 % 16.13% +56
(200) 15,987 644 4 % 16.23% +66
(300) 16,026 685 5 % 16.27% +70
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 AML 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
likely deviate significantly from those assumed in calculating the table.
The Bank sold approximately $2.0 million of fixed-rate securities in November
1999, at a nominal profit, and expects to sell additional available for sale
assets in the future, subject to market conditions.
4
Average Balances, Interest and Average Yields and Rates
The following table presents for the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were
made. All average balances are monthly average balances. Nonaccruing loans have been included in
the table as loans carrying a zero yield.
Year Ended September 30,
1999 1998 1997
Average Average Average
Average Yield/Average Yield/ Average Yield/
BalanceInterest Cost Balance Interest Cost BalanceInterest Cost
(Dollars in thousands)
Interest-earning
assets:
Loans receivable $16,005 1,219 7.62% 15,201 1,207 7.94% 12,729 1,014 7.97%
Mortgage-backed
securities 35,716 2,310 6.47% 30,815 2,051 6.65% 29,451 1,989 6.75%
Securities 37,597 2,541 6.76% 34,177 2,360 6.91% 33,479 2,294 6.85%
FHLB stock 750 48 6.34% 583 39 6.76% 602 42 7.00%
Other interest-
earning assets 7,564 345 4.55% 6,200 313 5.05% 3,875 194 5.00%
Total interest-
earning assets 97,632 6,463 6.62% 86,976 5,970 6.86% 80,136 5,533 6.90%
Interest-bearing
liabilities:
Savings deposits 4,128 114 2.75% 4,051 111 2.75% 4,308 118 2.74%
Demand and MMDA
deposits 12,839 517 4.03% 11,057 433 3.91% 11,501 402 3.49%
Certificate
accounts 49,888 2,698 5.41% 47,541 2,720 5.72% 45,983 2,520 5.48%
Advances from
FHLB 15,000 837 5.58% 8,538 490 5.74% 3,346 199 5.95%
Total interest-
bearing
liabilities $81,855 4,166 5.09% 71,187 3,754 5.27% 65,138 3,239 4.97%
Net interest income
before provision
for loan losses $ 2,297 2,216 2,294
Interest rate spread 1.53% 1.59% 1.93%
Net earning
assets $15,777 15,789 14,998
Net yield on
average interest-
earning assets 2.35% 2.55% 2.86%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 119.27% 122.18% 123.02%
5
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes in volume (changes in volume multiplied
by prior year's rate), rates (changes in rate multiplied by prior year's
volume) and rate/volume (changesin rate multiplied by the changes in volume).
Year Ended September 30,
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due To Increase (Decrease) Due To
Rate/ Rate/
Volume Rate Volume Total Volume Rate VolumeTotal
(Dollars in Thousands)
Interest income:
Loans receivable $ 64 (49) (3) 12 197 (3) (1) 193
Mortgage-backed
securities 326 (58) (9) 259 92 (29) (1) 62
Securities 236 (49) (5) 182 47 18 1 66
FHLB stock 11 (2) (1) 8 (1) (2) - (3)
Other interest-
earning assets 69 (31) (7) 31 116 2 1 119
Total interest-
earning assets 706 (189) (25) 492 451 (14) - 437
Interest expense:
Deposits 219 (144) (10) 65 42 180 2 224
Advances from FHLB 371 (14) (10) 347 309 (7) (11) 291
Total interest-
bearing liab-
ilities $590 (158) (20) 412 351 173 (9) 515
Net interest
income $ 80 (78)
Year 2000 Readiness Disclosure
The Bank is reviewing computer applications with its outside data processing service bureau and other
software vendors to ensure operational and financial systems are not adversely affected by "year 2000"
software failures. All major customer applications are processed through an outside service bureau
which recently completed proxy testing. Other major systems have been tested. Connectivity testing
between Bank and vendor systems to ensure continued compatibility has been completed. The Bank
developed a written contingency plan which includes a ledger card system for loan and deposit
accounts. The Bank identified certain of its hardware and software that would not be year 2000
compliant and purchased newer equipment and software amounting to $63,000 in 1998. Management
is unable to estimate any additional expense related to this issue. Any year 2000 compliance failure
could result in additional expense to the Bank.
Liquidity and Capital Resources
The Bank's principal sources of funds are cash receipts from deposits, loan
repayments by borrowers, proceeds from maturing securities, advances from the
Federal Home Loan Bank and net earnings. The Bank has an agreement with the
FHLB of Des Moines to provide cash advances, should the Bank need additional
funds. For regulatory purposes, liquidity is measured as a ratio of cash and
certain investments to withdrawable deposits and short-term borrowings. The
minimum level of liquidity required by regulation is presently 4%. The
Bank's liquidity ratio at September 30, 1999, was substantially higher than
the required ratio. The Bank maintains a higher level of liquidity than
required by regulation as a matter of management philosophy in order to more
closely match interest-sensitive assets with interest-sensitive liabilities.
The Bank has $40.2 million in certificates due within one year and $17.7
million in other deposits without specific maturity at September 30, 1999.
Management
6
estimates that most of the deposits will be retained or replaced by new
deposits.
Financial Condition
Total assets decreased from $96.8 million at September 30, 1998 to $96.6 million
at September 30, 1999. Maturing securities, loan repayments, customer deposits
and cash and cash equivalents were used to originate loans as well as fund
the purchase of securities and MBSs. Loans receivable, net increased as the
Bank continued to promote fixed rate mortgage loan originations in the Bank's
market area. Accrued interest on loans, MBSs and investment securities
increased due to higher portfolio balances. Advances from borrowers for
taxes and insurance increased due to customer deposits of
insurance proceeds from a recent hailstorm.
During 1999, treasury stock of the Company increased by $1.6 million. The
Company repurchased 82,181 shares in the open market at an average price of
$19.66 per share. While the purchase of treasury stock is believed to be
beneficial to the Company and our shareholders, the purchase of treasury
stock reduces interest-earning assets of the Company. Capital of the Bank is
also reduced to the extent treasury stock purchases are funded by dividends from
the Bank to the Company.
Commitments to originate mortgage loans are legally binding agreements to lend
to the Bank's customers. Commitments at September 30, 1999 to originate
fixed rate mortgage loans and fund loans in process were $474,000. Loan
commitments expire in 180 days or less.
Results of Operations
Comparison of the Years Ended September 30, 1999 and September 30, 1998
Net Earnings
Net earnings for the year ended September 30, 1999 were $916,000 compared with
$807,000 for the year ended September 30, 1998, an increase of $109,000. The
increase relates primarily to gains on sale of MBSs and higher net interest
income, partially offset by higher noninterest expense and income taxes.
Net Interest Income
Net interest income was $2.2 million for 1998 and $2.3 million for 1999. The
interest rate spread decreased from 1.59% for 1998 to 1.53% for 1999.
Interest rates paid on deposits decreased due to local market conditions in
1998. Total interest income increased $493,000 from $6.0 million for 1998 to
$6.5 million for 1999. The weighted-average yield on interest-earning assets
decreased from 6.86% for 1998 to 6.62% for 1999 due to loan refinances, MBS
prepayments and calls of investment securities. Interest on loans receivable
increased as a result of higher average loans outstanding for 1999.
Management has placed renewed emphasis on origination of loans, primarily fixed-
rate loans.
Interest on securities, MBSs and other interest-earning assets increased due to
higher average balances, offset by lower yields. Components of interest-
earning assets change from time to time based on the availability, interest
rates and other terms of loans, investments and MBSs. Interest expense
increased $412,000 from $3.8 million for 1998 to $4.2 million for 1999 due to
higher average balances of deposits and FHLB advances, offset by a lower
average rate on deposits. The weighted-average rate on total interest-
bearing liabilities decreased from 5.27% for 1998 to 5.09% for 1999.
Provision for Loan Losses
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
loan losses based on prior loss experience, known and inherent risks in the
portfolio, adverse situations which may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. Management also considers other factors relating to the
collectibility of the Bank's loan portfolio. The provision for loan
7
losses was $5,000 for the year ended September 30, 1999. No provision for
loan losses was recorded for the year ended September 30, 1998. There were
no non-accrual loans at September 30, 1999 or 1998.
Noninterest Income
Noninterest income increased by $100,000 from $39,000 for 1998 to $139,000 for
1999. This increase resulted primarily from net gains on sales of MBSs of
$4,000 in 1998 compared to $106,000 in 1999. Gains on sales of assets are
not stable sources of income and there is no assurance that the Company will
generate such gains in the future.
Noninterest expense
Noninterest expense increased by $13,000 from $922,000 for 1998 to $935,000 for
1999. Compensation and benefits increased due to cost of living salary
increases, offset by lower ESOP expenses. ESOP expense was $103,000 and
$94,000 for 1998 and 1999, respectively. ESOP expense is affected by changes in
the market price of the Company's stock. Equipment and data processing
expense increased as a result of full-year depreciation expense on equipment
additions placed in service during 1998 compared with half-year depreciation
in 1998. Other noninterest expense decreased due to lower supervisory and
professional fees.
Income Taxes
Income taxes increased $54,000 from $526,000 in 1998 to $580,000 in 1999 due to
higher earnings before income taxes.
Comparison of the Years Ended September 30, 1998 and September 30, 1997
Net Earnings
Net earnings for the year ended September 30, 1998 were $807,000 compared
with $975,000 for the year ended September 30, 1997, a decrease of $168,000.
The decrease relates primarily to substantially lower gain on sale of MBSs
and lower interest rate spread. Noninterest expense increased due to higher
employee stock ownership plan (ESOP) expenses, offset by lower SAIF deposit
insurance premium.
Net Interest Income
Net interest income was $2.3 million for 1997 and $2.2 million for 1998. The
interest rate spread decreased from 1.93% for 1997 to 1.59% for 1998.
Interest rates paid on deposits increased due to local market competition.
Total interest income increased $438,000 from $5.5 million in 1997 to $6.0
million for 1998. Although the weighted-average yield on interest-earning
assets decreased from 6.90% for 1997 to 6.86% for 1998, average interest-
earning assets increased from $80.1 million for 1997 to $87.0 million for
1998. Interest on loans receivable increased as a result of higher average
loans outstanding for 1998. Management has placed renewed emphasis on
origination of loans, primarily fixed-rate loans. Interest on MBSs increased
due to a higher average balance, offset by a slightly lower yield. Interest
on securities increased due to a higher balance and yield. Interest on other
interest-earning assets increased largely as a result of a higher average
balance. Components of interest-earning assets change from time to time
based on the availability, interest rates and other terms of loans,
investments and MBSs. Interest expense increased $515 0 from $3.2 million for
1997 to $3.8 million for 1998 largely due to a higher average balance of FHLB
advances and, to a lesser extent, a higher average rate on deposits. The
weighted-average rate on total interest-bearing liabilities increased from
4.97% for 1997 to 5.27% for 1998, reflecting an increasingly competitive market
for retail deposits.
8
Provision for Loan Losses
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level considered adequate by management to provide for
loan losses based on prior loss experience, known and inherent risks in the
portfolio, adverse situations which may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. Management also considers other factors relating to the
collectibility of the Bank's loan portfolio. No provision for loan
losses was recorded for the years ended September 30, 1997 and 1998. There
were no non-accrual loans at September 30, 1998 compared to $11,000 at
September 30, 1997.
Noninterest Income
Noninterest income decreased by $131,000 from $170,000 for 1997 to $39,000 for
1998. This decrease resulted from net gains on sales of securities and MBS
of $4,000 in 1998 compared to $135,000 in 1997. Gains on sales of assets are
not stable sources of income and there is no assurance that the Company will
generate such gains in the future.
Noninterest expense
Noninterest expense increased by $33,000 from $889,000 for 1997 to $922,000 for
1998. Compensation and benefits increased due to higher ESOP expenses and
slightly higher salaries. ESOP expense was $87,000 and $103,000 for 1997 and
1998, respectively. ESOP expense is affected by changes in the market price
of the Company's stock. SAIF deposit insurance premiums decreased as a
result of a lower assessment rate.
Income Taxes
Income taxes decreased by $74,000 from $600,000 in 1997 to $527,000 in 1998 due
to lower earnings before income taxes.
Impact of Inflation
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Bank is reflected in increased operating
costs. Unlike most industrial companies, virtually all of 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 does inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In the current interest rate environment, liquidity and the
maturity structure of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
9
MICHAEL TROKEY & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
10411 CLAYTON ROAD
ST. LOUIS, MO 63131
(314) 432-0996
Report of Independent Auditors
The Board of Directors
Perry County Financial Corporation
Perryville, Missouri
We have audited the accompanying consolidated balance sheets of Perry County
Financial Corporation and subsidiary (Company), as of September 30, 1999 and
1998 and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perry County
Financial Corporation and subsidiary as of September 30, 1999 and 1998, and
e results of their operations and their cash flows for each of the three years
in the period ended September 30, 1999 in conformity with generally accepted
accounting principles.
St. Louis, Missouri MICHAEL TROKEY & COMPANY P.C.
December 1, 1999
10
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1999 and 1998
Assets 1999 1998
Cash and cash equivalents $ 2,702,394 11,796,514
Securities available for sale,
at market value (amortized
cost of $40,689,812 and $33,174,361) 37,598,925 33,274,100
Federal Home Loan Bank Stock 750,000 750,000
Mortgage-backed securities available
for sale, at market value (amortized
cost of $37,243,056 and $33,695,252) 36,491,591 34,128,765
Loans receivable, net 16,600,996 15,764,398
Premises and equipment, net 311,740 333,323
Accrued interest receivable:
Securities 497,458 430,289
Mortgage-backed securities 203,805 189,193
Loans receivable 79,191 74,955
Deferred tax asset 1,325,803 -
Other assets 55,047 65,149
Total assets $ 96,616,950 96,806,686
Liabilities and Stockholders' Equity
Deposits $ 67,747,445 64,150,713
Accrued interest on deposits 151,751 144,081
Advances from FHLB of Des Moines 15,000,000 15,000,000
Advances from borrowers for taxes and insurance 288,846 182,209
Other liabilities 89,218 53,980
Accrued income taxes 122,812 71,835
Deferred income tax liability - 325,170
Total liabilities 83,400,072 79,927,988
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value;
1,000,000 shares authorized; shares
issued and outstanding - none - -
Common stock, $.01 par value; 5,000,000 shares
authorized; 856,452 shares issued 8,565 8,565
Additional paid-in capital 8,220,541 8,170,765
Common stock acquired by ESOP (455,275) (501,246)
Common stock acquired by MRP (141,056) (189,030)
Unrealized (loss) gain on securities
available for sale, net (2,420,682) 335,950
Treasury stock, at cost, 114,524 and
34,055 shares (2,193,325) (608,815)
Retained earnings - substantially restricted 10,198,110 9,662,509
Total stockholders' equity 13,216,878 16,878,698
Total liabilities and stockholders' equitY $ 96,616,950 96,806,686
See accompanying notes to consolidated financial statements.
11
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
Interest income:
Loans receivable $ 1,219,136 1,207,200 1,014,312
Mortgage-backed securities 2,310,106 2,050,704 1,989,129
Securities 2,589,063 2,399,372 2,335,572
Other interest-earning assets 344,408 313,014 193,720
Total interest income 6,462,713 5,970,290 5,532,733
Interest expense:
Deposits:
NOW 78,258 72,783 74,139
Passbook accounts 113,732 111,277 118,166
Money market deposit accounts 439,222 360,078 327,758
Certificates 2,697,518 2,719,639 2,519,594
Advances from FHLB 837,055 489,964 199,036
Total interest expense 4,165,785 3,753,741 3,238,693
Net interest income 2,296,928 2,216,549 2,294,040
Provision for loan losses 5,000 - -
Net interest income after
provision for loan losses 2,291,928 2,216,549 2,294,040
Noninterest income:
Service charges on NOW accounts 24,397 29,283 27,339
Gain (loss) on sale of securities
available for sale - - (17,010)
Gain on sale of mortgage-backed
securities available for sale 106,287 3,760 152,429
Other 8,337 5,860 7,359
Total noninterest income 139,021 38,903 170,117
Noninterest expense:
Compensation and benefits 607,544 595,638 559,006
Occupancy expense 29,508 31,169 27,996
Equipment and data processing expense 94,339 84,704 78,592
SAIF deposit insurance premium 38,643 38,209 55,264
Other 164,993 172,525 167,922
Total noninterest expense 935,027 922,245 888,780
Earnings before income taxes 1,495,922 1,333,207 1,575,377
Income taxes:
Current 611,935 525,826 462,836
Deferred (32,000) 670 137,370
Total income taxes 579,935 526,496 600,206
Net earnings $ 915,987 806,711 975,171
Basic earnings per common share $ 1.23 1.04 1.27
Diluted earnings per common share $ 1.22 1.03 1.26
See accompanying notes to consolidated financial statements.
12
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1999, 1998 and 1997
Unrealized
Common Common Gain (Loss)
AdditionalStock Stock on Securities Total
Common Paid-in Acquired Acquired Available Treasury Retained Stockholders'
Stock Capital by ESOP by MRP For Sale Stock Earnings Equity
Balance at
September 30, 1996 8,565 8,034,660 (593,186) (335,359) (540,409) (68,977) 8,567,132 15,072,426
Net earnings - - - - - - 975,171 975,171
Unrealized gain on
securities available
for sale, net - - - - 531,256 - - 531,256
Comprehensive
earnings 1,506,427
Amortization of
MRP awards - - - 78,090 - - - 78,090
Cash dividends
of $.40 per share - - - - - - (299,667) (299,667)
Amortization of ESOP
awards - 40,666 45,970 - - - - 86,636
Treasury stock
purchased - - - - - (802,121) - (802,121)
Exercise of
stock options - 35,526 - - - 371,283 - 406,809
Balance at
September 30, 1997 8,565 8,110,852 (547,216)(257,269) (9,153)(499,815) 9,242,636 16,048,600
Net earnings - - - - - - 806,711 806,711
Unrealized gain on
securities available
for sale, net - - - - 345,103 - - 345,103
Comprehensive
earnings 1,151,814
Shares issued
under MRP - 3,312 - (12,062) - 8,750 - -
Amortization of MRP
awards - - - 80,301 - - - 80,301
Cash dividends
of $.50 per share - - - - - - (386,838) (386,838)
Amortization of ESOP
awards - 56,601 45,970 - - - - 102,571
Treasury stock
purchased - - - - - (117,750) - (117,750)
Balance at
September 30, 1998 $8,565 8,170,765 (501,246)(189,030) 335,950 (608,815)9,662,509 16,878,698
Net earnings - - - - - - 915,987 915,987
Unrealized loss on
securities
available for
sale, net - - - - (2,756,632) - - (2,756,632)
Comprehensive loss (1,840,645)
Shares issued
under MRP - 1,318 - (32,528) - 31,210 - -
Amortization of MRP
awards - - - 80,502 - - - 80,502
Cash dividends
of $.50
per share - - - - - - (380,386) (380,386)
Amortization of ESOP
awards - 48,458 45,971 - - - - 94,429
Treasury stock
purchased - - - - - (1,615,720) - (1,615,720)
Balance at
September 30, 1999 $8,565 8,220,541 (455,275) (141,056) (2,420,682) (2,193,325) 10,198,110 13,216,878
See accompanying notes to consolidated financial statements.
13
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
Cash flows from operating activities:
Net earnings $ 915,987 806,711 975,171
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation expense 28,026 18,068 14,581
Provision for loan loss 5,000 - -
ESOP expense 94,429 102,571 86,636
MRP expense 80,502 80,301 78,090
Amortization of premiums,
discounts and loan fees, net (509,013) (318,244) (58,962)
Gain on sale of mortgage-backed securities
available for sale (106,287) (3,760) (152,429)
Loss (gain) on sale of securities
available for sale - - 17,010
Decrease (increase) in:
Accrued interest receivable (86,017) 14,560 54,853
Deferred tax asset - - 15,548
Other assets 10,102 (32,971) 38,238
Increase (decrease) in:
Accrued interest on deposits 7,670 21,925 (8,692)
Other liabilities 35,238 28,344 (402,666)
Accrued income taxes 50,977 (15,846) (71,761)
Deferred income tax liability (32,000) 670 121,821
Net cash provided by (used for)
operating activities 494,614 702,329 707,438
Cash flows from investing activities:
Loans originated, net of principal collections (836,864) (1,854,251) (2,186,712)
Mortgage-backed securities available for sale:
Purchased (16,802,234)(10,036,213) (9,614,645)
Principal collections 9,162,197 5,944,652 3,767,551
Proceeds from sale 4,195,315 901,069 5,518,486
Securities available for sale:
Purchased (21,157,634)(27,477,856) (14,033,931)
Proceeds from maturity or call 14,149,666 29,377,989 11,500,000
Proceeds from sale - 800,000 1,982,990
Purchase of FHLB stock, net of redemption - (148,500) -
Purchase of premises and equipment (6,443) (63,896) (1,412)
Net cash provided by (used for)
investing activities (11,295,997) (2,557,006) (3,067,673)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits 3,596,732 3,079,639 (1,640,435)
Advances from borrowers for taxes and insurance 106,637 23,973 11,319
Advances from FHLB - 18,000,000 6,500,000
Repayment of advances from FHLB - (9,500,000) (2,500,000)
Exercise of stock options - - 406,809
Purchase of treasury shares (1,615,720) (117,750) (802,121)
Dividends paid to stockholders (380,386) (386,838) (299,667)
Net cash provided by (used for)
financing activities 1,707,263 11,099,024 1,675,905
Net increase (decrease) in cash and cash equivalents (9,094,120) 9,244,347 (684,330)
Cash and cash equivalents at beginning of year 11,796,514 2,552,167 3,236,497
Cash and cash equivalents at end of year $ 2,702,394 11,796,514 2,552,167
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits $ 3,321,060 3,241,852 3,048,349
Interest on advances from FHLB 837,055 489,964 199,036
Federal income taxes 503,481 476,320 499,893
State income taxes 57,476 65,352 46,673
See accompanying notes to consolidated financial statements.
14
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes Consolidated Financial Statements
September 30, 1999 and 1998 and
Years ended September 30, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
Perry County Savings Bank converted from a state-chartered mutual savings and loan association
to a Federally-chartered mutual savings bank, Perry County Savings Bank, FSB, on November 23,
1994. On February 10, 1995, Perry County Savings Bank, FSB (Bank) completed its conversion
from mutual to stock form and became a wholly-owned subsidiary of a newly formed Missouri
holding company, Perry County Financial Corporation (Company). The following comprise the
significant accounting policies which the Company and Bank follow in preparing and presenting
their consolidated financial statements:
a. The consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiary, Perry County Savings Bank, FSB. The Company has no significant assets
other than common stock of the Bank, the loan to the ESOP, and net proceeds retained by
the Company following the conversion. The Company's principal business is the business
of the Bank. All significant intercompany accounts and transactions have been eliminated.
b. For purposes of reporting cash flows, cash and cash equivalents include cash and due from
depository institutions and interest-bearing deposits in other depository institutions with
original maturities of three months or less. Interest-bearing deposits in other depository
institutions were $2,450,022 and $11,650,815 at September 30, 1999 and 1998,
respectively.
c. Securities and mortgage-backed securities which the Bank has the positive intent and ability
to hold to maturity are classified as held to maturity securities and reported at cost, adjusted
for amortization of premiums and accretion of discounts over the life of the security using
the interest method. Securities and mortgage-backed securities not classified as held to
maturity securities are classified as available for sale securities and reported at fair value,
with unrealized gains and losses excluded from net earnings and reported in a separate
component of stockholders' equity. The Bank does not purchase securities and mortgage-
backed securities for trading purposes. The cost of securities sold is determined by specific
identification.
Collateralized mortgage obligations (CMOs) are mortgage derivatives and the type owned by
the Bank are classified as "low-risk" under regulatory guidelines. CMOs are subject to the
effects of interest rate risk. The Bank does not purchase CMOs at any significant premium
over par value to limit certain prepayment risks, and purchases only CMOs issued by U.S.
government agencies in order to minimize credit risk. During 1997, the Bank sold its CMOs.
d. Loans receivable, net are carried at unpaid principal balances, less loans in process, net deferred
loan fees, and allowance for 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.
15
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
e. Specific valuation allowances are established for impaired loans for the difference between the
loan amount and the fair value of collateral less estimated selling costs under the provisions
of 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."
The Bank considers a loan to be impaired when, based on current information and events,
it is probable that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. The types of loans for which
impairment is measured under SFAS No. 114 and No. 118 include nonaccrual income
property loans (excluding those loans included in the homogenous portfolio which are
collectively reviewed for impairment), large, nonaccrual single family loans and troubled debt
restructurings. Such loans are placed on nonaccrual status at the point they become
contractually delinquent more than 90 days. Impairment losses are recognized through an
increase in the allowance for loan losses. There were no impaired loans under SFAS No. 114
and No. 118 at September 30, 1999 or 1998.
f. Allowance for losses are available to absorb losses incurred on loans receivable and represents
additions charged to expense, less net charge-offs. Increases to the allowance are charged
to the provision for loan losses. Charge-offs to the allowance are made when all, or a
portion, of the loan is confirmed as a loss based upon management's review of the loan or
through repossession of the underlying collateral. Recoveries are credited to the allowance.
The allowance for losses is established based on management's assessment of trends in the
loan portfolio and management's periodic review of the loans in the portfolio. In determining
the allowance for losses to be maintained, management evaluates current economic
conditions, past loss and collection experience, fair value of the underlying collateral and risk
characteristics of the loan portfolio. Management believes that allowance for losses on loans
receivable is adequate. The Bank is subject to periodic examination by regulatory agencies
which may require the Bank to record increases in the allowance based on their evaluation
of available information. There can be no assurance that the Bank's regulators will not
require further increases to the allowance.
g. Premises and equipment, net are carried at cost, less accumulated depreciation. Depreciation
of premises and equipment is computed using the straight-line method based on the
estimated useful lives of the related assets. Estimated lives are generally thirty to fifty years
for building and improvements, and five to ten years for furniture and equipment.
h. Interest on securities, mortgage-backed securities and loans receivable is accrued as earned.
Interest on loans receivable contractually delinquent more than ninety days is excluded from
income until collected.
i. Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount that will more likely than not
be realized. Income tax expense is the tax payable or refundable for the period plus or minus
the net change in the deferred tax assets and liabilities.
16
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
j. During 1998 the Bank adopted SFAS No. 128, "Earnings per Share." Earnings per share are
based upon the weighted-average shares outstanding. ESOP shares which have been
committed to be released are considered outstanding, and stock options to the extent
dilutive.
k. The Bank has adopted the disclosure requirements under SFAS No. 123, but will continue to
recognize compensation expense for stock-based employee compensation plans under APB
No. 25.
The Bank reports compensation expense equal to the average fair value of the ESOP shares
committed to be released in accordance with the provisions of Statement of Position 93-6.
l. The following paragraphs summarize the impact of new accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement establishes standards for accounting and reporting of
derivative instruments, including derivative instruments embedded in another type of contract
and for hedging activities. The statement further requires that all derivatives should be
recognized as either assets or liabilities and measured at the fair value. The accounting for
changes in the fair value, or gains or losses, of a derivative depends on the use of the
derivative and resulting designation. The statement supersedes or modifies certain other
accounting pronouncements. The statement, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to affect the
financial position or results of the operations of the Bank.
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." The statement amends SFAS No. 65 and No. 115. The statement requires that
after the securitization of a mortgage loan held for sale, any retained mortgage-backed
securities must be classified under the provisions of SFAS No. 115. Mortgage banking
enterprises must classify as trading any retained mortgage-backed securities that it commits
to sell before or during the securitization process. The statement is effective for the first
fiscal quarter of the fiscal year beginning after December 15, 1998. SFAS No. 134 is not
expected to affect the financial position or results of operations of the Bank.
(2) Risks and Uncertainties
The Bank is a community oriented financial institution which provides traditional financial services
within the areas it serves. The Bank is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate one- to four-family residential real
estate loans located primarily in Perry County, Missouri. Senior management of the Bank
monitors the level of net interest income and noninterest income from various products and
services. Further, operations of the Bank are managed and financial performance is evaluated
on an industry-wide basis. As a result, all of the Bank's operations are considered by
management to be aggregated in one reportable operating segment.
The consolidated financial statements have been prepared in conformity with generally accepted
accounting principles. In preparing the consolidated financial 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
17
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
results could differ significantly from these estimates and assumptions.
The Bank's operations are affected by interest rate risk, credit risk, market risk and regulations by
the Office of Thrift Supervision (OTS). The Bank is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice more rapidly, or on a different basis, than its
interest-earning assets. The Bank uses a net market value methodology provided by the OTS to
measure its interest rate risk exposure. Net portfolio value is the expected discounted cash flows
from the institution's assets, liabilities and off-balance-sheet contracts. This exposure is a
measure of the potential decline in the net portfolio value of the Bank based upon the effect of
an assumed increase or decrease in interest rates in 100 basis point increments. Credit risk is
the risk of default on the Bank's loan portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments. Market risk reflects changes in the value
of collateral underlying loans receivable and the valuation of real estate held by the Bank. The
Bank is subject to periodic examination by regulatory agencies which may require the Bank to
record increases in the allowances based on their evaluation of available information. There can
be no assurance that the Bank's regulators will not require further increases to the allowances.
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments generally
include commitments to originate mortgage loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The Bank's maximum exposure to credit loss in the event of nonperformance by
the borrower is represented by the contractual amount and related accrued interest receivable
of those instruments. The Bank minimizes this risk by evaluating each borrower's
creditworthiness on a case-by-case basis. Generally, collateral held by the Bank consists of a
first or second mortgage on the borrower's property. The amount of collateral obtained is based
upon an appraisal of the property. The Bank offers adjustable-rate loans and fixed-rate loans.
Commitments at September 30, 1999 to originate fixed-rate mortgage loans and fund loans in
process were $474,000 expiring in 180 days or less.
The Bank originates residential real estate loans, and to a lesser extent, commercial real estate
loans, primarily to customers located in Perry County, Missouri.
18
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Securities:
Securities are summarized as follows:
1999
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for sale:
Debt securities - Federal
agency obligations $ 40,689,812 - (3,090,887) 37,598,925
Weighted-average rate 6.92%
1998
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for sale:
Debt securities - Federal
agency obligations $ 33,174,361 105,081 (5,342) 33,274,100
Weighted-average rate 6.77%
Securities with a market value of $1,957,500 were pledged as collateral to secure advances from
the FHLB of Des Moines.
Maturities of debt securities available for sale, all of which are callable by the issuers, are
summarized as follows:
1999
Amortized Market
Cost Value
Due after five years through ten years $ 2,500,000 2,422,500
Due after ten years through fifteen years 28,205,445 26,416,925
Due after fifteen years through twenty years 6,217,261 5,417,250
Due after twenty-five through thirty years 3,767,106 3,342,250
$ 40,689,812 37,598,925
Proceeds from sales of securities available for sale and gross realized gains
and losses on these sales are summarized as follows:
1999 1998 1997
Proceeds from sale $ - 800,000 1,982,990
Gross realized gains $ - - -
Gross realized losses - - (17,010)
Net gains (losses) $ - - (17,010)
19
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Mortgage-backed Securities:
Mortgage-backed securities are summarized as follows:
1999
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for sale:
Mortgage-participation certificates:
FHLMC $ 463,926 - (8,133) 455,793
GNMA 30,699,022 33,475 (655,665) 30,076,832
FNMA 6,080,108 11,840 (132,982) 5,958,966
$ 37,243,056 45,315 (796,780) 36,491,591
Weighted-average rate 6.54%
1998
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for sale:
Mortgage-participation certificates:
FHLMC $ 3,213,827 53,562 (8,076) 3,259,313
GNMA 19,555,160 255,304 (44,043) 19,766,421
FNMA 10,926,265 230,966 (54,200) 11,103,031
$ 33,695,252 539,832 (106,319) 34,128,765
Weighted-average rate 6.70%
Mortgage-backed securities with a market values of $4,647,341, and $2,008,297 were pledged
as collateral to secure advances from FHLB of Des Moines and certain deposits, respectively, at
September 30, 1999. Adjustable-rate mortgage and balloon loans included in mortgage-backed
securities at September 30, 1999 and 1998 were approximately $9,187,000 and $10,801,000,
respectively.
Proceeds from sales of mortgage-backed securities available for sale and gross
realized gains and losses on these sales are summarized as follows:
1999 1998 1997
Proceeds from sale $ 4,195,315 901,069 5,518,486
Gross realized gains $ 106,287 10,267 192,362
Gross realized losses - (6,507) (39,933)
Net gains (losses) $ 106,287 3,760 152,429
20
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Loans Receivable, Net
Loans receivable, net are summarized as follows:
1999 1998
Real estate loans:
Single, 1-4 family units $ 14,379,196 13,496,676
Multi-family, 5 or more units 26,892 41,887
Construction 1,029,840 689,900
Land 637,905 578,827
Commercial 617,844 726,933
Loans secured by deposit accounts 279,953 454,154
16,971,630 15,988,377
Loans in process (329,405) (190,165)
Deferred loan fees (11,229) (8,814)
Allowance for losses (30,000) (25,000)
$ 16,600,996 15,764,398
Weighted-average rate 7.51% 7.70%
Real estate construction loans at September 30, 1999, are secured primarily by
single, 1-4 family units. Adjustable-rate loans included in the loan
portfolio amounted to $504,000 and $1,013,000 at September 30, 1999 and 1998,
respectively.
Following is a summary of activity in allowance for losses:
1999 1998 1997
Balance, beginning of year $ 25,000 25,000 25,000
Provision charged to expense 5,000 - -
Balance, end of year $ 30,000 25,000 25,000
There were no nonaccrual loans at September 30, 1999 or 1998.
Following is a summary of loans in excess of $60,000 to directors and executive
officers for the year ended September 30, 1999:
Balance, September 30, 1998 $ 242,297
Refinance 260,000
Repayments (246,573)
Balance, September 30, 1999 $ 255,724
These loans were made on substantially the same terms as those
prevailing at the time for comparable transactions with unaffiliated persons.
21
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Premises and Equipment, Net
Premises and equipment, net are summarized as follows:
1999 1998
Land $ 46,972 46,972
Building and improvements 350,356 350,356
Furniture, fixtures and equipment 175,504 169,062
572,832 566,390
Less accumulated depreciation 261,092 233,067
$ 311,740 333,323
Depreciation expense for the years ended September 30, 1999, 1998 and 1997 was
$28,026, $18,068 and $14,581, respectively.
(7) Deposits
Deposits are summarized as follows:
Description and interest rate 1999 1998
Noninterest-bearing checking $ 59,200 81,340
NOW accounts, 2.25% 3,467,695 3,014,860
Savings accounts, 2.75% 4,075,051 4,003,898
Money market deposit accounts, 4.72% and
4.69%, respectively 10,045,753 8,217,769
Total transaction accounts 17,647,699 15,317,867
Certificates:
2.01 - 3.00% 120,000 116,837
3.01 - 4.00% - -
4.01 - 5.00% 13,790,019 630,626
5.01 - 6.00% 34,680,622 43,634,556
6.01 - 7.00% 1,509,105 4,450,827
Total certificates, 5.29% and 5.66%, respectively 50,099,746 48,832,846
Total deposits $ 67,747,445 64,150,713
Weighted-average rate - deposits 4.98% 5.19%
Certificate maturities at September 30, 1999 are summarized as follows:
October 1, 1999 to September 30, 2000 $ 40,186,232
October 1, 2000 to September 30, 2001 7,663,364
October 1, 2001 to September 30, 2002 1,357,492
October 1, 2002 to September 30, 2003 415,661
October 1, 2003 to September 30, 2004 476,997
$ 50,099,746
22
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Certificates of deposits of $100,000 or more at September 30, 1999 are
summarized as follows:
Maturing in:
Three months or less $ 3,129,484
Over three through six months 2,609,065
Over six through twelve months 1,979,442
$ 7,717,991
(8) Advances from FHLB of Des Moines
Advances from Federal Home Loan Bank of Des Moines are summarized as
follows:
Interest
Maturity Date Rate Initial Call Date 1999 1998
May 8, 2008 5.62% May 8, 2003 $ 5,500,000 5,500,000
July 15, 2008 5.52% July 15, 2003 8,000,000 8,000,000
September 11, 2008 4.99% September 11, 2001 1,500,000 1,500,000
$ 15,000,000 15,000,000
Advances from Federal Home Loan Bank of Des Moines were secured by FHLB stock,
certain mortgage-backed securities and single-family mortgage loans of $13,655,251.
See also notes 3 and 4. All advances at September 30, 1999 are subject to call at the
dates indicated and every three months thereafter.
(9) Income Taxes
The Company and Bank file separate federal income tax returns on a calendar year basis.
The Bank's tax bad debt reserves in excess of the 1987 tax year level are subject to
recapture as a result of legislation enacted in 1996. The recapture is payable in equal
amounts over six years in tax years beginning January 1, 1998 and thereafter. The
Bank was able to defer the recapture of its applicable excess tax bad debt reserves for
two years by having met a residential loan requirement. The Bank is permitted to
make additions to the tax bad debt reserve using the experience method.
Income taxes are summarized as follows:
1999 1998 1997
Current:
Federal $ 541,860 462,655 408,526
State 70,075 63,171 54,310
611,935 525,826 462,836
Deferred:
Federal (34,000) 1,639 119,857
State 2,000 (969) 17,513
(32,000) 670 137,370
$ 579,935 526,496 600,206
23
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Total income tax expense is different than the amounts computed by applying the
federal rate of 34% in the years ending September 30, 1999, 1998 and 1997 to
earnings before taxes as a result of the following:
1999 1998 1997
Expected income tax expense
at Federal tax rate $ 508,613 453,291 535,628
ESOP compensation expense 16,475 19,244 13,827
State income tax, net of Federal tax benefit 45,718 41,664 48,083
Other 9,129 12,297 2,668
$ 579,935 26,496 600,206
Effective tax rate 38.8% 39.5% 38.1%
The provisions of SFAS No. 109 require the Bank to establish a liability for the tax effect
of the tax bad debt reserves over amounts at December 31, 1987. The Bank's tax
bad debt reserves at December 31, 1987 were approximately $1,354,000. The
estimated deferred tax liability on such amount is approximately $460,000, which has
not been recorded in the accompanying consolidated financial statements. If these tax
bad debt reserves are used for other than loan losses, the amount used will be subject
to Federal income taxes at the then prevailing corporate rate.
The components of the net deferred tax asset (liability) are summarized as follows:
1999 1998
Deferred tax asset:
Allowance for loan losses $ 11,100 9,250
Unrealized loss on securities and
MBSs available for sale 1,421,670 -
Book over tax ESOP and MRP expense, net 42,224 39,088
Deferred tax asset 1,474,994 48,338
Deferred tax liability:
Tax bad debt reserves arising after
December 31, 1987 (144,825)(171,839)
Unrealized gain on securities and
MBSs available for sale - (197,303)
FHLB stock dividend (4,366) (4,366)
Deferred tax liability (149,191) (373,508)
Net deferred tax asset (liability) $ 1,325,803 (325,170)
(10) Stockholders' Equity and Regulatory Capital
On February 10, 1995, Perry County Savings Bank, FSB converted from mutual to stock
form and became a wholly-owned subsidiary of a newly formed Missouri holding
company, Perry County Financial Corporation. The Company issued 856,452 shares
of common stock at $10 per share in conjunction with the offering. Net proceeds
from the sale of common stock in the offering were $7,267,041, after deduction of
conversion costs of $612,319, and unearned compensation related to shares issued
to the Employee Stock Ownership Plan. The Company retained 50% of the net
conversion proceeds, less the funds used to originate a loan to the Bank's ESOP for
the purchase of shares of common stock, and used the balance of the net proceeds
to purchase all of the stock of the Bank in the conversion.
24
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can result in
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to quantitative judgments by the regulators about
components, risk-weightings and other factors. At September 30, 1999, the Bank
met all capital adequacy requirements. The Bank is also subject to the regulatory
framework for prompt corrective action. The most recent notification from the
regulatory agencies categorized the Bank as well capitalized. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the following table. There are no conditions
or events since the dates of the aforementioned notifications that management
believes have changed the Bank's category.
The Bank's actual and required capital amounts and ratios at September 30, 1999 are
as follows:
Minimum Required Minimum Required
for Capital to be "Well
Actual Adequacy Capitalized"
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Consolidated stockholders'
equity $13,217
Stockholders' equity of Company (1,596)
Unrealized loss on securities 2,421
Tangible capital 14,042 14.4% $ 1,461 1.5%
General valuation allowance 30
Total capital to risk-
weighted assets $14,072 68.6% $ 1,640 8.0% $2,051 10.0%
Tier 1 capital to risk-
weighted-assets $14,042 68.5% $ 820 4.0% $1,230 6.0%
Tier 1 capital to
total assets $14,042 14.4% $ 3,896 4.0% $4,870 5.0%
Deposit account holders and borrowers do not have voting rights in the Bank. Voting
rights were vested exclusively with the stockholders of the holding company. Deposit
account holders continue to be insured by the SAIF. A liquidation account was
established at the time of conversion in an amount equal to the capital of the Bank as
of the date of the latest balance sheet contained in the final prospectus. Each eligible
account holder or supplemental eligible account holder is entitled to a proportionate
share of this account in the event of a complete liquidation of the Bank, and only in
such event. This share will be reduced if the account holder's or supplemental eligible
account holder's deposit balance falls below the amounts on the date of record and
will cease to exist if the account is closed. The liquidation account will never be
increased despite any increase in the related deposit balance.
An OTS regulation restricts the Bank's ability to make capital distributions, including
paying dividends. The regulation does not permit cash dividend payments if the Bank's
capital would be reduced below the amount of the minimum capital requirements or
the liquidation account established at the time of conversion to stock form. The OTS
may impose other restrictions on payment of dividends.
25
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following is a summary of basic and diluted earnings per common share for
the year ended September 30, 1999, 1998 and 1997:
1999 1998 1997
Net earnings $915,987 806,711 975,171
Weighted-average shares - Basic EPS 746,260 775,325 767,940
Stock options - treasury stock method 2,883 8,352 3,474
Weighted-average shares - Diluted EPS 749,143 783,677 771,414
Basic earnings per common share $ 1.23 1.04 1.27
Diluted earnings per common share $ 1.22 1.03 1.26
26
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Employee Benefits
The Company established a tax-qualified employee stock ownership plan (ESOP) in
connection with the conversion from mutual to stock form. The Plan covers
substantially all employees who have attained age 21 and completed one year of
service. The ESOP purchased 68,516 shares of the Company's common stock at $10
per share with a loan from the Company. The Bank makes semi-annual contributions
equal to the ESOP's debt service less dividends on unallocated shares used to repay
the loan. Dividends on allocated ESOP shares will be paid to participants of the ESOP.
The ESOP shares are pledged as collateral on the ESOP loan. The Plan provides that
shares are released from collateral and allocated to participating employees based on
the proportion of loan principal and interest repaid, and compensation of the
participants. Since the Plan was considered a top heavy plan under the Internal
Revenue Code, actual shares released were less than allowed under the Plan.
Dividends on allocated shares are charged to stockholders' equity. Dividends on
unallocated shares are recorded as a reduction to the ESOP loan. ESOP expense for
1999, 1998 and 1997 was $94,429, $102,571 and $86,636, respectively. The
number of ESOP shares were as follows:
1999 1998
Allocated shares 17,834 13,237
Shares released for allocation 4,597 4,597
Unreleased shares 45,528 50,125
Total ESOP shares 67,959 67,959
26
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The fair value of unreleased ESOP shares based on market price of the Company's
stock was $899,178 at September 30, 1999.
On January 16, 1996, the stockholders of Perry County Financial Corporation ratified the
1995 Stock Option and Incentive Plan (Stock Option Plan). Of the 85,645 shares
reserved for issuance under the Stock Option Plan, 70,798 shares were awarded in
January, 1996, and the remainder are available for future awards. The stock options
were awarded at $19 per share which was equal to the market value of the
Company's common stock at the date of grant. During 1997, 21,411 shares of
common stock were issued under the stock option plan. At September 30, 1999,
1998 and 1997, there were 49,387 shares outstanding. At September 30, 1999
there were 29,632 shares exercisable. The Bank has estimated the fair value of
awards granted under its stock option plan utilizing the Black-Scholes pricing model.
Had the Company determined compensation expense based on the fair value of its
stock options at the grant date under SFAS No. 123, the Company's net earnings and
diluted earnings per common share would have been reduced to the proforma amounts
indicated below:
1999 1998 1997
Reported net earnings $ 915,987 806,711 975,171
Proforma net earnings $ 881,950 772,674 897,800
Reported diluted earnings per
common share $ 1.22 1.03 1.26
Proforma diluted earnings per
common share $ 1.18 .99 1.16
The fair value of each stock option granted during 1996 was $5.47, using a risk-
free interest rate of 5.49%, expected volatility of 34%, expected dividend
yield of 4% and expected life of the stock options of 7 years.
On January 16, 1996, the stockholders ratified the Management Recognition and
Retention Plan (MRP). Of the 34,258 shares reserved for issuance under the
MRP, 29,114 shares were awarded in January, 1996, to directors, executive
officers and employees and an additional 500 shares were awarded in November,
1997 and 1,712 in November, 1998. The remainder are available for future
awards. Compensation expense in the amount of the fair market value of the
common stock at the date of grant is recognized pro rata over a five year
period following the date of grant of the award. The Plan provides for
accelerated vesting under certain circumstances. MRP expense for 1999,
1998 and 1997 was $80,502, $80,301 and $78,090, respectively.
27
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) Condensed Parent Company Only Financial Statements
The following condensed balance sheets and condensed statements of earnings and
cash flows for Perry County Financial Corporation should be read in
conjunction with the consolidated financial statements and the notes thereto.
BALANCE SHEETS
September 30,
Assets 1999 1998
Cash and cash equivalents $ 1,129,331 1,549,375
Securities available for sale - 1,000,000
ESOP note receivable 515,961 551,798
Accrued interest receivable - 11,625
Other assets 24,376 37,744
Investment in subsidiary 11,621,356 13,768,466
Total assets $13,291,024 16,919,008
Liabilities and Stockholders' Equity
Other liabilities $ 74,146 40,310
Total liabilities 74,146 40,310
Stockholders' equity 13,216,878 16,878,698
Total liabilities and
stockholders' equity $13,291,024 16,919,008
STATEMENTS OF EARNINGS
Year Ended September 30,
1999 1998 1997
Equity in earnings of the Bank $ 434,591 303,598 547,705
Dividend from Bank 428,226 428,226 342,581
Interest income 135,199 190,918 200,861
Interest expense - - (3,196)
Loss on sale of securities
available for sale - - (5,000)
Other income - 2,300 76
Other expenses (54,639) (79,753) (62,404)
Income taxes (27,390) (38,578) (45,452)
Net earnings $ 915,987 806,711 975,171
28
PERRY COUNTY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
Year Ended September 30,
1999 1998 1997
Cash flows from operating activities:
Net earnings $ 915,987 806,711 975,171
Adjustments to reconcile net earnings
to net
cash provided by (used for) operating
activities:
Equity in earnings of the Bank (862,817) (731,824) (890,286)
Dividend from Bank 428,226 428,226 342,581
Loss on sale of securities
available for sale - - 5,000
Other, net 58,829 24,461 12,337
Net cash provided by (used for)
operating activities 540,225 527,574 444,803
Cash flows from investing activities:
Principal collected on loan to ESOP 35,837 33,565 31,436
Purchase of securities available for sale - (1,000,000) -
Securities available for sale - matured 1,000,000 1,000,000 -
Securities available for sale - sold - 800,000 995,000
Net cash provided by (used for)
investing activities 1,035,837 833,565 1,026,436
Cash flows from financing activities:
Repayment of advance from Bank - - (355,000)
Exercise of stock options - - 406,809
Treasury stock purchased (1,615,720) (117,750) (802,121)
Dividends paid (380,386) (386,838) (299,667)
Net cash provided by (used for)
financing activities (1,996,106) (504,588)(1,049,979)
Net increase (decrease) in cash
and cash equivalents (420,044) 856,551 421,260
Cash and cash equivalents
at beginning of year 1,549,375 692,824 271,564
Cash and cash equivalents
at end of year $1,129,331 1,549,375 692,824
(13) Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments are
summarized as follows:
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Non-trading instruments and
nonderivatives:
Cash and cash equivalents $ 2,702,394 2,702,394 11,796,514 11,796,514
Securities available for sale 37,598,925 37,598,925 33,274,100 33,274,100
Stock in FHLB of Des Moines 750,000 750,000 750,000 750,000
Mortgage-backed securities
available for sale 36,491,591 36,491,591 34,128,765 34,128,765
Loans receivable, net 16,600,996 16,371,902 15,764,398 16,088,962
Deposits 67,747,445 67,537,475 64,150,713 64,530,000
Advances from FHLB of
Des Moines 15,000,000 15,031,000 15,000,000 15,294,000
The following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and cash equivalents are valued at their carrying amounts due to the
relatively short period to maturity of the instruments.
Fair values of securities and mortgage-backed securities are based on quoted
market prices or, if unavailable, quoted market prices of similar securities.
Stock in FHLB of Des Moines is valued at cost, which represents redemption value
and approximates fair value.
Fair values are computed for each loan category using market spreads to treasury
securities for similar existing loans in the portfolio and management's
estimates of prepayments.
Deposits with no defined maturities, such as NOW accounts, savings accounts and
money market deposit accounts, are valued at the amount payable on demand at
the reporting date.
The fair value of certificates of deposit and advances from FHLB of Des Moines
is computed at fixed spreads to treasury securities with similar maturities.
29
CORPORATE INFORMATION
OFFICERS
LEO J. ROZIER
chairman of the board
and president
JAMES K. YOUNG
secretary
STEPHEN C. ROZIER
assistant vice-president
DIRECTORS
LEO J. ROZIER
chairman of the board
and president
STEPHEN C. ROZIER
assistant vice-president
MILTON A. VOGEL
retired owner/operator of
automobile agency
JAMES K. YOUNG
retired owner/operator of
funeral home
THOMAS L. HOEH
attorney
CORPORATE OFFICES
14 North Jackson Street
Perryville, Missouri 63775
Telephone (573) 547-4581
LEGAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
STOCK TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
AUDITORS
Michael Trokey & Company, P.C.
Certified Public Accountants
10411 Clayton Road
St. Louis, Missouri 63131
ANNUAL MEETING
The annual meeting of Perry County Financial Corporation will be held
January 19, 2000, at 9:30 a.m., at the Walnut Room, American Legion Hall, 98
Grand Avenue, Perryville, Missouri.
FORM 10-KSB
A COPY OF FORM 10-KSB, INCLUDING FINANCIAL STATEMENT SCHEDULES AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO
STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY,
PERRY COUNTY FINANCIAL CORPORATION, 14 NORTH JACKSON STREET,
PERRYVILLE, MISSOURI 63375-1334.
31